Century Aluminum Co (CENX) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Century Aluminum fourth quarter, 2003 earnings conference call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. If you should require any further assistance, please press star, then 0. As a reminder, this conference is being recorded. I would loo now like to turn the conference over to the Director of Communications, Mr. Posti. Please go ahead, sir.

Good morning. This is Al Posti at Century Aluminum. Welcome to our earnings conference call covering the fourth quarter of 2003.

Before we begin, let me read the following brief disclaimer. This conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions that such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties. Actual results may vary materially from those expressed or implied in the forward-looking statements as a result of various factors.

With that, let's begin the conference call. Here is Century's Chairman and Chief Executive, Craig Davis.

Thank you, Al, and welcome to all of you to the fourth quarter and year end conference call. We are in Monterey today except for Jack Gates, who will join us from Hawesville.

On balance, 2003 was a successful year for Century. We were able to realize substantial value with the later years of our long-term metal sales contract. We acquired the remaining 20% of the Hawesville facility, which is our lowest cost plant. And at the operating level, our plants continue to improve. In addition, we've continued to generate cash flow from operations.

The economy and metal prices improved throughout the year. And as such, our results from operations for the fourth quarter were the strongest in that quarter over the year. Our realized price in the fourth quarter rose to 72 cents a pound. The upward trend in pricing has continued into 2004, as you are all aware, and as such our realized prices are improving. We are well positioned to participate in the improved pricing environment that has prevailed thus far in 2004.

At this point, I will turn it over to David, who will discuss our financial results in more detail, and then Jack Gates will follow with a discussion of the operations. David?

Thank you, Craig.

Century reported a net lot of 6.7 million, or 32 cents a common share after preferred dividends for the fourth quarter 2003. As indicated in the release, the fourth quarter includes net after-tax charges of 6.3 million, or 30 cents a share, comprising three items. First, is an after-tax charge of 8 million, or 38 cents a share for marking to market certain financial instruments, principally the 110 million annual physical delivery contract for 2003 and '04, that do not qualify for cash flow hedge accounting. Second, an after-tax charge of 2 million, or 9 cents a share, resulting from the departure of an executive. And, finally, an after-tax credit of 3.7 million, or 17 cents a share, for a lower cost-to-market inventory adjustments.

With respect to selling, general, and administrative expenses, they are 5 million higher than the fourth quarter of the prior year. Three million of that is related to the executive departure, and two million relates to an increase in incentive compensation associated with improved performance in 2003, versus 2002. As Craig indicated, the Company continued to be cash flow positive from operations -- operating activities during the fourth quarter, 2003.

During the first quarter of 2004, the market price for primary aluminum has been quite strong. We have done some forward selling in this market, consistent with our policy of selling forward in markets where we can equal or exceed our view of the long-term price of aluminum. Entering the year 2004, we were 45% hedged. This includes the 110 million pound contract, other forward sales, and the percentage LME alumina contracts, which effectively hedged 25% of our production.

As of today, February 25th, we are about 60% priced in 2004. The increase is principally book business in the first quarter of 2004, at attractive prices. For 2005, our forward sales at alumina hedge account for 48% of production. We have no -- we've done no forward selling in 2006.

At this point, I will turn it over to Jack Gates, who will talk about our operating performance during the quarter and year.

Thank you, David.

Operations al all three smelters continued to improve with the fourth quarter 2003, producing 4.4 million pounds more than the same period last year. This increase is an apples-to-apples comparison, as I've adjusted the production numbers to compensate for the added 20% capacity at Hawesville that we purchased in November of 2002. We continue to stress production costs, and hot metal conversion costs in the fourth quarter 2003 was down from the same period a year ago. The premature pop failure problem we experienced early in 2003 at Mt. Holly appears to be behind us, and the plant has made a very successful adjustment to the higher amperage. Safety continues to be a very high priority in the Century system, and we continue to devote a lot of capital and energy to be world class.

Performance at Ravenswood slipped slightly in the fourth quarter, but still had a record year in 2003. Hawesville continues to improve, and the plant recently completed 500,000 man hours without a lost-time accident. Mt. Holly's performance continues good. The new cast house at Ravenswood is now operational, and we are now pouring sows for the sheet metal next door, as well as for ourselves. Installation of the last [ano] setting crane at the Ravenswood smelter is on schedule for early 2004, which will improve both labor productivity and safety.

In the marketplace, demand and prices continue to improve. The rod and cable and common alloy sheet business continue strong, and general engineering plate is now in allotment. Billet demand is strong after the normal seasonal decline in December, and just the last few days we're also experiencing an increased demand for the Hawesville smelters high purity metal. Scrap remains tight, squeezing the spread between it and prime. The midwest premium is now between 5 1/2 and 6 cents a pound, up from December's 4.4 cents, and the 2003 average of 3.75 cents.

Now, I'll turn it back over to Craig. Thank you, Jack. Lee, we now will entertain questions.

Ladies and gentlemen, if you would like to ask a question, please press star then 1 on your touch-tone phone. You will hear a tone indicating you been placed in queue, and you may remove yourself from queue at any time by depressing the pound key. Once again, if do you have a question, please press star then 1 on your touch-tone phone. Our first question is from the line of [Daniel Rawling] from Merrill Lynch. Please go ahead.

Gee, thanks. I didn't think I would get in this quick. Looking at the alumina market, it continues to be tight. I know that you all have good solid contracts tied to the LME price, but where -- when do those contracts roll off is the first question? And second question, are you still interested in integrating further upstream?

Dan, this is Craig. The contracts start to expire I think in 2006. End of '06, so we are solid through '06. We clearly are experiencing some spikes in alumina pricing. Historically, when you've had that, it has lasted -- especially at the high levels we are seeing today for a very short period of time. This may well go on a little longer than has been the case historically, due to the demands in China. However, we think we are in good shape there, in terms of our contracts -- at the end of 2006 would be the first time we would be seeking any new alumina by contract.

In terms of integrating upstream, so to speak, yes, we continue to have an interest in that, and as we have stated over the last few conference calls, we continue to explore opportunities in that area. Obviously, as the market has tightened up, people tend to see their alumina assets in a bit of a different light than maybe they did a year and a half ago. But we will continue to pursue that area.

And a follow-up. If alumina assets remain expensive, would you consider building another alumina -- or not building, but acquiring and/or building an aluminum smelter?

Yes, our principal focus has been on primary aluminum. And we think there will continue to be value in that area. I would have to say we would not want to be out trying to buy alumina for a new smelter today. But I don't anticipate that that would be the case.

Thank you.

And our next question is from the line of Kevin Cohen. Please state your company, followed by your question.

Hi, Kevin Cohen from Credit Suisse First Boston. I'm wondering if you could talk a little bit more about demand and where you've seen improvements, and what sectors are doing relatively better, and if you're seeing particular weakness in any other sectors?

I think Jack should take that on in terms of he sees a more day to day demand and where we're getting most of our -- most of our demand requests. Jack?

It's pretty well spread across the board. I mean we're seeing it in just almost every segment. There was -- there was a slow down slightly in December in a couple of areas, probably the small foundry -- ingot is probably not still where we would like to see it, but really it's across the board. And we stress high purity in our system, and as I said earlier, the demand for high purity is beginning to pick up, so it's pretty much evenly across the board.

And what we've seen, Jack, is that in the broad sheet areas, in the commodity sheet, things are tightening up quite a bit. Lead times are changing and so on. So in that sense it is pretty much across the board.

Right. And on the cost savings front, do you guys have a target for '04 in terms of reducing cash cost per pound, an updated number?

I don't think we have anything updated over where we've been. David, do you have --

I will comment on that. Basically, in putting together our business plans, we're hoping to hold even. In other words, we're going to try to offset our inflationary increases and hold our cost structure fairly even.

And then lastly, if you could you tell me what revolver availability at year end was?

65 million.

We have not drawn anything on our revolver.

Great.

Availability is about 65 million.

Thanks a lot, guys.

Our next question is from the line of Victor Lazarovici from BMO Nesbitt Burns. Please go ahead.

Thank you. A couple of questions. Just to make sure, I think I know the answer, but do you any alumina supply contracts with Kaiser.

Yes, we do.

And have they been challenged at all?

Nope. They're performing and they were assumed at bankruptcy.

Sorry, they were assumed --

Assumed, in other words, you go through a process, where one can, at the beginning or after the filing, they could have rejected the contracts, which they did not do, they assumed them, so they have in essence a step up over a general contract that hasn't been assumed in bankruptcy. So they are performing.

Okay. So are you at all concerned that given the presence of them filing to invalidate four other contracts that they may come after you next?

I mean, one always has to have a concern I think to be fair, but I don't think we're particularly concerned about the outcome. We understand that in the [Elpart] case, the court has now decided one of those, and decided in favor of the customer. There are a couple of others that are yet to be decided, and I think one has been taken off the table. But we feel in the work we've done, that our contracts are very solid, very supportable, and it would be very unlikely that anything would happen to them.

Can you give us an idea of how much of your supply is from Kaiser?

They supply Hawesville.

All of Hawesville?

Just under 50% of our aluminum [inaudible].

Under 50%. All of Hawesville.

Okay. The other question has to do with accounting. And I guess David is going to take it.

Most likely.

Sorry?

Most likely.

I would think so. In the credit you had in the quarter for the inventory adjustment to loan, cost to market, that strikes me as a little bit unusual. Can you explain how you kick out a credit?

Yes, I will, Victor. We happen to be on the LIFO inventory method and when LIFO was established for the company, aluminum prices were quite high. If you go back over our history, when we've had weak prices, we've usually taken a charge to our P&O for a lower cost-to-market inventory adjustments. When prices start rising, we reverse those charges and end up crediting it back into the P&L.

I will tell you this, that we are seriously looking later this year, switching to the FIFO inventory method, because we have -- if you look back at our quarterly results, we've typically had charges and credits that are very difficult to model, and we think that one way of making it go away is just by switching our inventory accounting method. So we likely will do that sometime in 2004. So hopefully that will go away in the future.

Right. I guess one of the reasons I was confused, I thought it might be LIFO adjustments, but you referred to it as a lower cost-to-market rather than LIFO gain --

That's correct.

-- which is more common terminology.

Yeah and it's a situation where when we had weaker prices, we had to take charges. Under the LIFO method you have to basically restore those charges when the prices increase. Under the FIFO method you don't do that. If you take a write down, it's a permanent write down, and so regrettably, as long as we're on the LIFO method, with the swings in aluminum price, you can expect to see, you know, lower cost-to-market inventory adjustments, charges or credits. You will have charges in a weaker -- a weakening market. You will have credits in a strengthening market.

Okay. Thanks.

And ladies and gentlemen, once again, if do you have any questions, please press star 1. And we move on to a question from the line of Ken Silver from CRT Capital. Please go ahead.

Hi, good afternoon. I got on the call late, so if you covered this I apologize. Can you talk at all about what you're seeing in terms of customer, the levels of customer inventories, and what that might mean for short-term demand of your products?

Well, I mean again, we basically sell the commodities, so it's more a question of price usually rather than demand for it. The demand is there, we sell 100% of everything we make, but I think if you missed Jack's comments, what he basically stated was that across the board, we are seeing strong demand in the fabricating businesses for primary aluminum.

Okay. Any change in aerospace use, demand?

Jack, have we seen much change there?

See a little change there. It's not picked up like some of the other businesses have, but it seems to be some slight improvements in that area. The other area I would mention, Craig, is that the rod and cable business, with Southwire being one of our major suppliers next door, we hear from them that their business is really growing, both in aluminum and copper, so.

Okay. Great. Thanks, guys.

Okay.

And we have a question from the line of Caglar Somek from Credit Suisse First Boston. Please go ahead.

I apologize in advance if my questions are answered. I couldn't bow in earlier. I had a quick question regarding the inventory spike on the balance sheet. If you could give some, you know, color on that, I would appreciate it.

Charley, we -- our finished goods inventories are a probably a little higher than they normally would be, and simply a reflection of the people in the market here have just held on, we're only talking three to four million pounds, and with the idea that we'll sell it to a rising market. So that's something that is not unusual.

Okay. Just another question, it's related to actually the SG&A line, on the income statement. In addition to -- I don't know if you covered that topic, if you did, I will just listen to the recording. The [inaudible] line, the $2 million spike, when do you think it is going to be cash? You know, it is going to be monetized?

Well, you know, I will repeat what the five million increase is: 3 million is for the departure of an executive, the other 2 million is related to incentive compensation. And the incentive compensation will be principally paid in stock, probably in the beginning of the second quarter.

The rest over time. Monetized over time. The balance is over time. The cash outflow on the balance is over a protracted period of time.

Okay. I assume you already gave the information on hedging updates.

Yes, I did.

We did.

Okay. Did you talk about the average hedging price?

We don't typically do that. I think we said in the past that we seek to be equal or greater than what we've used in the long-term price of aluminum -- in our hedging strategy.

Okay. Thank you.

You're welcome.

We move on to a question from the line of Mike Churchill from Churchill Research. Please go ahead.

Hi, thanks. The last fellow may have already elicited your answer on this, but I'm trying to model the expected realized price per pound for '04 and '05, and I just want to see if my general thinking is accurate on this. So for the fourth quarter, it was 72 cents, and if you've already priced 60% of the '04 aluminum, and the current spot is like 82 or 83, I mean when I take -- you know, 40% of the difference between 72 cents and 83 cents, is that a fair way of to do it or am I missing something all together.

, No the portion of our business that's priced is priced, and it's -- and the portion that is not priced, the 40%, will be a function of what the future aluminum prices are during the year.

I'm just assuming -- let's just say flat lining through the rest of the year. Do you normally -- because it seemed like fourth quarter was pretty close to [comac] spot. Is that a fair --

I think you have to be a little careful there. First of all, remember that a big piece of our hedge is alumina -- 25%, basically is the natural hedge we have buying alumina, with percentage LME. The balance of it, we will achieve the Midwest price, I think your spot price is a bit high right now, but --

Okay.

But if it is, I mean it's on the screen. We will achieve generally the Midwest price for the material we sell. There is a lag in everything we do, usually a month, at least, because of the way our contracts that are unpriced, the way they price in.

And we also will be selling some premium product which will be at at premium to the U.S. Midwest. So you really have to -- in order to try to model that, you have to factor in, I think you're right in taking the unsold portion and trying to factor that in against your view of the future aluminum price, but taking into account both the Midwest premium and any premium product we have, which is what may be -- what percentage of the sales? 25? Roughly?

It's an estimate, though.

Okay, 10 or 15% then would be at a premium to the Midwest price, huh?

Okay. That's very helpful. So I guess I'm still slightly -- so you were saying before earlier in the call that the Midwest premium's like 5 or 6 cents at the moment?

Today -- the spot premium today, but, again, if you're looking at forwards, the -- that there's a discount always to that premium, it goes back more towards traditional levels.

I see.Okay. And then stop me if this is either a dumb question or one you can't answer, but it seemed to me that Q4 was pretty close to spot as far as the realized prices. So it doesn't seem to reflect a premium either for the premium product or for the Midwest premium, or am I just doing something wrong?

You know, without having -- without going back and analyzing it, I can't answer your question technically, but we will -- we do sell on the basis we've described. In other words, if you take the alumina out, what you will be looking at in terms of the metal sales, they will reflect the U.S. Midwest price.

Okay.

But there's always a lag in there. And if you're in a moving market, sometimes the differences could be, you know, fairly significant.

Yeah. Okay. Great, thank you.

Okay.

And we have a question from the line of Anthony Rizzuto from Bear Stearns. Please go ahead.

Hi, gentlemen.

How are you?

Good. Just -- perhaps it would be helpful if you guys could review for us maybe your EPS sensitivity. I think in the past you've talked about within different bands and how that might change at various levels of aluminum ingot pricing on sale LME or Midwest, whatever way you want to look at it. Possible to do that?

Sure, I'd be happy to do it, Tony. If we're 60% price, as an example, including our alumina hedges, then in terms of EPS sensitivity, 40% of our annual volume ties to whatever price you want to, you know, factor in, or, you know, pay per pound, divided by roughly 21.1 million shares will give you our EPS sensitivity. And in 2005, the portion that we're hedged is about 48%, so again, you have -- 52% of our volume is going to vary with where the LME goes.

Obviously, what you're doing is that you're removing some of the upside leverage here, on just trying to provide some type of floor, but I'm wonder -- if you could give us -- have your views on normalized pricing changed at all?

No.

And Craig, could you just refresh me with what that -- what that level is?

I think what we have said in the past is LME-based, 1500, 1550.

Okay. And the other question I had, was just a follow-up regarding this whole Kaiser situation. Let's play devil's advocate, and let's assume that Kaiser's attempt to abrogate this alumina contract proves to be successful -- obviously, worst case basis. First of all, what would be your recourse here, your course of action? And I suppose that if the status quo was maintained, and Kaiser was forced to honor the contract, they could conceivably sell the facility, would that then force you guys to buy the plant?

I think it probably is not prudent of me to discuss some of the technical legal considerations,Tony, about the Kaiser contract, but suffice it to say that we've looked very closely at it, and we feel that it is highly unlikely under all of the conditions that apply in a Chapter 11 proceeding that our contracts would not be honored. I mean it has to -- it has to go to the court, and the court has a series of guidelines, and you know, legal precedence, whatever you want to call it, to look at in making such a decision. And since they've already -- we're already taken to the court and assumed, it's very likely that the court is going to say, "Well we did this once. Why would we change this?"

But in any case, we think it's not likely that going through the considerations that exist, our contracts would be abrogated. In the event they were, the -- you know, we would have some rather significant claims, obviously, in the estate. And I've now forgotten the second part of your question.

The second part, obviously, I mean, you've -- if you did get to that situation, obviously, it could be a situation, you would have claims, obviously.

Yeah.

Conceivably it could be tied up I guess in the court system for --

Conceivably. It is not an ideal situation. Nobody likes to have claims. People like to have performance, obviously. But --

Right.

But as I think it's clearly been made public, Kaiser has been looking at selling most of its asset, frankly, everything accept their downstream, semi-fabricated businesses, and I think we have also stated that while we don't talk about what we are looking at buying, or acquiring, clearly that is a consideration that we have -- we have to look at.

Sure and I guess it is also true, too, that if they are not successful in changing the terms of that contract, then the value placed on that facility wouldn't be very high, therefore, that would be beneficial if it did come to a situation where you had to buy the assets.

I think that that's fair to say. I mean some of the speculation on assets -- we've had this -- in this conference call, alumina in the near term is quite high, and it's in the spot price, but you have to be able to real hedge that spot price.

Right.

And I don't think most people are looking at buying long-term assets based on a -- what could be a one or maybe -- on a good day, two-year price. So it definitely is reflected in the value of the assets. And I think that's where it comes out.

All right. Thanks, Craig. I appreciate it.

You're welcome.

And ladies and gentlemen, once again, if do you have any questions, please press star 1 at this time. We do have a question from the line of Timothy Hayes from BB&T Capital Markets. Please go ahead.

Good morning.

Good morning.

A question on, you know, with all the cash that you're generating, if you do not find any acquisitions, what might you do with that cash, and when would you possibly put that cash to other uses?

We -- how should I answer that? We intend to find good uses for the cash. We are working hard at that. It is still very much our view that the right approach for the company is to expand its position in primary aluminum and reduce our overall cash cost position and to consider upstream assets. So that's our -- that would be our -- that is our principal focus on the use of the cash that we're generating. If we are not successful on that, and at this point, we would not like to accept the fact that we won't be successful, if that were to occur, we then have to look at what we do with it and one of the possibilities in the future, not immediately, would be to reduce our high cost debt.

When does that become feasible to reduce that debt, given the call provision?

I think April of next year.

Okay. Thank you.

You're welcome.

And we have no further questions. You may continue.

Well, that concludes our part. We appreciate your interest and look forward to next quarter's conference call. And I hope we have some more positive news based on what we see in the market to report for the next quarter. Thank you very much.

And ladies and gentlemen, this conference is available for replay after 5:30 p.m. Eastern time today, February 25th, through Friday, February 27, at midnight. You may access the AT&T Executive Replay by dialing 1-800-475-6701, and enter the access code of 717812. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, with the access code of 717812. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.