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Bonjour. Good morning ladies and gentlemen. Let me begin this morning by adding my own words of welcome to Alcan's 101st annual meeting of shareholders.
Two years ago I first addressed this body as Alcan's CEO. In my remarks that day I spoke about Alcan's imperative to not just create value but to maximize value. This morning I would like to outline for you the great progress we have made from this beginning and then speak about the path ahead, for we are determined to build on our successes.
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In early 2001 we were deeply into completing the algroup/Alcan merger. We had expectations that the markets we serve would be strengthening, we were starting up our newest smelter at Alma and in the midst of realizing the potential of recent investments in Korea. Even with all of this on our plate, we realized that we must also address the future, looking for the best paths to develop our businesses and building the capabilities needed for success in our competitive markets. This led us to embrace our governing objective, Maximizing Value, and to the most significant investment in training Alcan people that we have ever made. Of course, as we now know, our expectations of stronger markets were not realized. We accomplished much in 2001, but ended the year experiencing very difficult business conditions.
Sixteen months ago, at the start of 2002, we had completed much of the work of integrating Alcan and algroup but were just beginning to see the financial benefits. So optimizing the merger synergies was one of our key objectives. In addition, we implemented a significant restructuring of operations to enable us to remain competitive in the markets we serve. Together, these initiatives were aimed at achieving $400 million dollars in annual savings.
As Yves Fortier and I stated in our message to shareholders in this year's annual report, it can be said that at times when business conditions are difficult, the benefits of value-based management become most apparent, separating superior performers from the also-rans. We believe that our performance in 2002 has begun to set Alcan apart.
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2002 Performance
Against the backdrop of weakening markets and a 6% decline in the price of aluminum, Alcan's 2002 earnings per share, excluding non-recurring items and the effects of foreign currency translation, rose almost 10% to $1.64, compared to $1.50 in 2001. Operating cash-flow was $1.6 billion, a record, and up nearly 16% from a year earlier.
The improved results for 2002 reflect the diligence of Alcan people around the world in meeting their challenges. Through their actions we beat the objectives set for merger synergies and restructuring benefits. Furthermore, the enhanced scope and scale and decidedly more diversified nature of the Company's activities brought new opportunities. As well as building on our solid foundations in aluminum, today's Alcan is a leading global supplier of packaging solutions and has an expanding presence in advanced-technology composite materials.
Two thousand and two could be characterized as a pivotal year. Having developed our value agenda, in 2002 we began shifting our focus to the execution of that agenda — to demonstrating how our disciplined approach to Maximizing Value actually delivers. Month-by-month as the year developed we took a number of important steps.
One of these was the acquisition — in two stages — of a 40% equity interest in Aluminerie Alouette, which operates a modern aluminum smelter in Sept-Îles, Quebec. As you may recall, our first 20% stake was acquired in February of 2002 from SGF (Société générale de financement du Québec), and was mentioned in my remarks at last year's annual meeting. Then, in September 2002, we completed the acquisition of an additional 20% interest from Corus Group plc on similar terms.
As I have stated previously, our opportunity in Alouette has several dimensions. First, it is one of the finest operating smelters in the world. Second, Alouette's smelting technology is the same as that utilized by Alcan's new Alma smelter, which was officially inaugurated during 2002. This increases the potential to leverage value-creating synergies within our Quebec smelter system. And third, Alouette emerged as the winning bidder in a competition by Quebec authorities for a block of energy that will facilitate a cost-effective, brown-field expansion, doubling the facility's annual capacity to 550,000 tonnes. This expansion was launched last fall, with the new capacity to come on line in 2005.
Alcan's more diversified makeup enabled another major initiative at the end of last year. During the fourth quarter of 2002, we signed a definitive agreement to purchase VAW Packaging, or FlexPac, from Norsk Hydro for approximately $370 million U.S. European Union regulators quickly cleared the way for completion of this purchase. We expect the transaction to close in a few days, at month end.
With 14 plants in eight countries, FlexPac has 5,400 employees and consolidated sales of some $680 million U.S. at current exchange rates. This acquisition will markedly enhance Alcan's global position in packaging, expanding our footprint technologically and regionally — particularly in the developing markets of Asia. With world-class flexible packaging operations spanning Europe, Asia and the Americas, Alcan will be able to better serve its customers as they expand globally.
Like Alouette, FlexPac demonstrates our ability to be selective in acquisitions. And it reinforces Alcan's commitment to profitably grow the packaging business, which also saw the opening of two new U.S. plants during 2002.
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Success stories — new products, growing markets
Over the course of last year we worked hard to leverage the Company's strengths in a number of particularly promising areas that involve high-value-added markets such as mass transportation, automotive and packaging.
The September debut of Jaguar's all-new XJ sedan at the Paris Auto Show represented a milestone for Alcan as well as for the automaker. The new XJ made history as the first volume-production vehicle with a unibody structure manufactured predominantly of aluminum sheet — an advance made possible by Alcan's pioneering automotive technology. In addition to the frame, all of the landmark vehicle's "hang-on" body parts — hood, doors, fenders and trunk lid — are produced of aluminum as well, further contributing to weight reduction and improved performance. Alcan supplies the entire aluminum sheet for the XJ. Our Rolled Products Europe plant in Nachterstedt, Germany provides laser-cut "blanks" of specially treated automotive sheet directly to Jaguar's stamping presses at Castle Bromwich, in the United Kingdom.
The curb weight of the new XJ is some 200 kilograms — or 440 pounds — less than that of its predecessor, despite being larger and packed with advanced electronics and luxury features. So Jaguar customers, thanks in large part to Alcan know-how, will benefit from a car that delivers excellent performance in fuel economy, emissions, handling, safety, and driving pleasure. And what a beautiful automobile it is too! This car truly represents 'the art of performance' in aluminum.
We continue to collaborate with other major automakers on both sides of the Atlantic to expand the use of aluminum in the automotive market. You might be interested to know that today we are providing aluminum sheet for use on over 50 automotive platforms in production around the world. And this is in addition to many other "non-sheet" automotive applications of aluminum that we provide.
While I am on the subject of transportation, I should note, too, that energy-saving lightweight structures conceived by Alcan Mass Transportation Systems — part of Engineered Products — are making inroads in the global marketplace. For example, U.K. coachbuilder East Lancs recently produced its 1,000th double-decker bus utilizing Alcan "Hybrid System" technology. Other recent projects undertaken by Mass Transportation Systems include the design and manufacture of interiors for the X'trapolis, a new generation of commuter trains being built by France's ALSTOM to serve Melbourne, Australia. These transportation applications make extensive use of lightweight, advanced composites developed and produced by Alcan Composites in Altenrhein, Switzerland.
In October 2002, Composites opened its first South American production facility. Situated in Brazil's Bahia State, the plant is a joint venture of Alcan and the NJK Group of Brazil. It produces Alucobond®, an aluminum composite that incorporates expertise from our rolling and composites businesses. Alucobond® is used primarily as exterior cladding on commercial buildings.
Elsewhere, Alcan Packaging specialists, working closely with the research institute in Neuhausen, Switzerland, developed our proprietary N'CRYPT® technology to assist pharmaceutical companies and other brand owners in their fight against counterfeiters. N'CRYPT® incorporates a variety of sophisticated, high-security printing techniques as well as additional features found in bank notes, passports and other security documents. It is applied as an addition to the usual blister-foil designs and requires no change to the packaging process on the part of the customer.
There were many other success stories during 2002, involving virtually every division and every aspect of Alcan's worldwide operations. They ranged from providing a cost-effective solution to the problem of arsenic-contaminated well water in South Asia to an extraordinary effort by employees at Alcan Taihan Aluminium (ATA) in Korea who, within 12 short months, succeeded in qualifying ATA can stock at an unprecedented 28 can manufacturing plants in eight different countries!
When it comes to advancing our value agenda, no aspect of Alcan's operations is overlooked. We have undertaken a number of cost-driven, cross-business initiatives in the areas of logistics and procurement, which have yielded savings of some $100 million to date.
We also continue to make substantial investments in employee training, to ensure that Alcan people continue to have the opportunity to grow and develop.
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A leader in sustainability
Sustainability is another area we regard as being key to Maximizing Value. Let me be clear here. Alcan operates in a manner intended to optimize financial returns. But we know that increasing the social and economic benefits and reducing the environmental impacts of our activities — the three pillars of sustainability — are also prerequisites in terms of safeguarding our "license to operate and grow". Furthermore, the long-term economic benefits of having the best EHS practices have been demonstrated in case after case.
During 2002, the Company's commitments to sustainability and ethical behaviour were embodied in Alcan's first-ever Corporate Sustainability Report — the electronic version of which is being updated for 2003. That report highlights the significant commitment that Alcan has always had to "doing the right thing" but it is our internal activities that make this commitment real. Among other notable accomplishments in that regard last year, we updated Alcan's pioneering Code of Conduct. Incidentally, the Code is available on our web site in eight languages, making our standards clear to all.
We also have moved ahead with the design and deployment of a new integrated Environmental Health and Safety Management System. EHS FIRST is currently being rolled out throughout the Company. This is one of several major initiatives that comprise our Integrated Business Management System. The others are Maximizing Value and Continuous Improvement.
Of course, we have had EHS programs in place for a long time and we have much to be proud of, but we are committed to doing even better. EHS FIRST amounts to reinventing our approach to these vital areas. It seeks to foster a culture of meaningful employee involvement and continuous EHS improvement at every Alcan site. The realization of these goals is the responsibility of Alcan line managers everywhere. To underscore our support for this vital initiative, I recently joined my colleagues on the senior management team in adding our signatures to the "EHS Commitment".
EHS FIRST requires excellent processes and practices as well as management skills and strengths. The significance of this new approach extends far beyond EHS, given that the same tools and techniques for problem identification, analysis, resolution and execution of action plans are broadly applicable to all business challenges from product quality to cost improvement and operational issues.
On the environment front, an initiative of particular interest here in Quebec was Alcan Primary Metal's move to raise the bar in terms of greenhouse-gas (GHG) reduction objectives. In October 2002, a voluntary agreement was struck with the government of Quebec committing Alcan to reducing GHG emissions from its Quebec smelters. Starting from 1999 levels, we undertook to reduce emissions by an average of 285,000 tonnes before the end of 2003. The pact with Quebec runs through 2007, with new objectives for further voluntary reductions to be determined each year. This performance-based agreement, subject to independent audit, is in line with Alcan's TARGET program, a worldwide GHG reduction initiative launched in 2000. And it builds on a long-standing effort that already has achieved cuts of some two million tonnes of GHG emissions in Quebec over the past decade.
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I am pleased to note that Alcan's efforts in the area of sustainability have recently won plaudits from the UN Environment Program, the International Chamber of Commerce and Innovest Strategic Value Advisors, an internationally known investment-research and advisory firm that specializes in sustainability and strategic-governance issues. In September 2002, Alcan was added to the Dow Jones Sustainability World Index, which tracks the performance of sustainability-driven organizations worldwide. And just last month, we were named one of the "World's Most Admired Companies", finishing a strong second in the international-metals category of Fortune magazine's global survey on corporate reputations. This is the first year Alcan has met the size, annual revenue and other requirements set out by Fortune for consideration on the World's Most Admired Companies list. So we are particularly pleased to have made this exclusive roster at the first opportunity.
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Q1 2003 results and highlights
Having touched on our 2002 accomplishments I'd like to briefly review the results for the first quarter of 2003 that we announced last week.
Alcan's sales and operating revenues for the first three months of 2003 were 11% higher than the same period in 2002. Our first quarter operating earnings at 38 cents per share improved even more, up 15%, despite weak economic conditions and low metal prices. Alcan's Primary Metal, Rolled Products Europe and Packaging businesses performed particularly well.
These results marked Alcan's fourth consecutive quarter of improved year-over-year operating earnings, achieved in the face of sustained economic headwinds. I am very pleased that we've been able to keep delivering stronger results under adverse conditions. The steps we've taken to increase profitability have kept us on track to build long-term value throughout volatile markets.
As 2003 began, we also forged ahead with execution of our Maximizing Value agenda and took additional steps to position Alcan for the future.
Recently announced initiatives include a definitive feasibility study into the expansion of alumina production capacity at Alcan Gove in Australia. The proposed Gove expansion would increase capacity of the refinery by 75%, providing us with overall alumina production costs below the world average, while having a positive impact on environmental performance. A decision on whether or not to proceed with this project will likely come towards the end of 2004.
On March 5th, we announced that Alcan has entered into agreements to acquire New York-based Baltek Corporation, the world's leading supplier of balsa-based structural-core materials, for approximately $35 million U.S. The transaction, which is subject to approval by Baltek shareholders, already has received the approval of Baltek's board of directors and indications of support from its major shareholders. We expect to complete the acquisition during this quarter. The combination of Alcan Composites' product range with the high-performance materials from Baltek will further enhance Alcan's' offering to the rapidly growing composites market.
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Closer to home, we have undertaken a series of initiatives to further develop aluminum business opportunities and other value-added activities in Quebec. These include construction of a new $60-million potlining centre adjacent to our Alma smelter; a new mission for the Dubuc Works in the Saguenay, which will involve production of engineered cast products; and a significant, computer-services outsourcing contract. Together, these projects are expected to create as many as 420 new jobs in the Saguenay — Lac-Saint-Jean region.
Acknowledgements
Our ability to meet the challenges of 2002 — and those that undoubtedly lie ahead in 2003 — has been greatly enhanced by the support received from Alcan's Board of Directors, for which we are grateful. I would also like to take this opportunity, on behalf of the entire senior management team, to thank Alcan employees everywhere for their hard work and commitment.
Nathanael V. Davis Awards
At last year's historic 100th annual meeting, I announced the establishment of the Nathanael V. Davis Awards. Named in honour of the man who oversaw Alcan's growth and development for almost four decades, the awards are designed to recognize employees, or groups of employees, whose efforts have made significant contributions to Alcan or to the communities where we operate — people who've truly made a difference.
Earlier this year, at a black-tie ceremony, we honoured the first winners of the Nathanael V. Davis Awards. In addition to trophies, each winner — individual or team — received a cash prize of $25,000 U.S.
The winners, chosen from nearly 130 nominations representing all six business groups, were:
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· Simon Frank, a mechanical engineer with Alcan's Engineered Products group in Singen, Germany, for his pioneering work in the development of aluminum automobile components and the processes for manufacturing them;
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· Mauricio Martins, from the Ouro Preto works in Brazil, whose tireless championing of worthwhile causes — including Project Smiles, which provides free dental care to 5,000 children in need — provides a stellar example of the commitment of Alcan, and Alcan people, to the community;
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· A seven-person team of researchers from the Arvida Research and Development Centre here in Quebec, for their development of breakthrough "rotary flux injection" technology, a chlorine-free process for furnace metal treatment that conveys substantial environmental benefits; and, finally,
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· A second, seven-person team from the Arvida Research and Development Centre, whose development of new "low pitch" technology was key to the very significant reductions in hydrocarbon emissions from Alcan's four Söderberg-equipped plants here in Quebec that I mentioned earlier.
We are proud of the accomplishments of these outstanding Alcan men and women — and pleased to have found a suitable way to recognize and reward their achievements.
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Outlook and priorities for balance of 2003
I would like to turn now to the outlook and agenda for the balance of 2003.
From an industry perspective, we are beginning to see signs of improvement in the aluminum supply-demand balance, despite the current low LME metal price. However, there remains a considerable degree of uncertainty regarding the global economic and geopolitical environment. In the guidance we provided to analysts and investors last week we said that we expected operating earnings in the 37 to 47 cents per share range for the second quarter of 2003.
As the year develops our management focus includes a number of initiatives. I have already outlined one important initiative — the rollout of our new EHS management system, which is now under way. Later in the year, we will be launching an Alcan-wide continuous-improvement (CI) program. It is designed to pull together the wide range of existing CI initiatives that have been in place for many years at our various businesses, using a common lexicon and a common approach that will work in two different ways to enhance our performance. First, the Alcan-wide program will make available even broader tool sets than the ones we apply in our businesses today. And second, the use of common terms and techniques will make the transfer of best practices throughout the corporation that much easier to achieve.
We also are continuing the ongoing review of businesses and business portfolios including internal investment opportunities and the evaluation of prospective acquisitions. This means examining rigorously our opportunities to continue to grow the value of Alcan. We want to be prepared to take full advantage of suitable investment opportunities that might arise.
One of our major undertakings this year will be the successful integration of FlexPac. Work on the preliminary planning of the integration is well under way and, with the closing expected in a few days, this will clearly be an important near-term activity.
Finally, we are committed to maintaining our focus on financial discipline, particularly in relation to our capital spending and capital structure. We have seen the positive impact of this discipline in last year's results, and we are continuing to see it as 2003 unfolds.
The bottom line is that our disciplined approach is paying off in terms of improved performance and a healthy balance sheet. Capital expenditures remain below depreciation, we have had good cash-flow performance and, even as we have been making acquisitions, Alcan's balance sheet continues to strengthen, with debt to total capital now standing at 30%.
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Looking even farther forward
I began my remarks this morning by recalling that two years ago we embraced Maximizing Value as our imperative, our governing objective. This step and the actions that flow from it have allowed us to begin to differentiate ourselves. Our plans are now in place and we are deploying the tools to ensure our progress. The path we have identified is clear and the benefits are significant.
Over the past two years I have met with many of our owners. Frankly, while our progress has been noted and is increasingly applauded, I am often asked "what exactly does Maximizing Value mean?" A full answer to that question would require much more time. But simply stated, it means managing the operations of the business and the value of the business, continually striving for the best choices to improve both at every level throughout Alcan. With this framework, we have developed business plans with the objective of doubling value every five years.
Managing for value isn't just about making progress on one measure, but indeed on a number of fronts, each of which contributes to increasing the financial strength and increasing the range of options available to the business.
Just as I have spoken at earlier shareholder meetings about our plans and future objectives, I thought that I would close this morning by expanding on our financial objectives for the period ahead. Improvements in earnings per share, cash-flow and returns on investment through 2006 are the anticipated result of the path to maximizing value we have developed.
Our objective for operating earnings per share growth is to achieve at least 15% growth per year. Over five years this would amount to doubling value.
Our objective for cash-flow is a minimum of $400 million in free cash-flow each year. While Alcan's Board of Directors is ultimately responsible for the allocation of these funds, management will recommend the use of part of these funds for investments in good business opportunities and also that a portion be returned to shareholders. The balance obviously will depend on the range of opportunities we identify.
As we grow and increase our earnings, we will strengthen our economic returns, achieving positive Economic Value Added (another important milestone) by 2006. At that time, our after-tax return on capital will be greater than 8% and we will be on a path to 10% returns.
Taken together these objectives are comprehensive and they are the manifestation of the pursuit of our governing objective, Maximizing Value.
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Concluding remarks
We are committed not only to setting Alcan apart from our direct competitors, but also to elevating Alcan to a spot among the top rank of companies worldwide in terms of performance and value creation.
In other words, we intend to carry on with the job of building an even better Alcan.
Thank you very much. Merci
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