Q1 2022 Century Aluminum Co Earnings Call
[music].
Good afternoon. Thank you for attending today's century aluminum company first quarter earnings call. My name is to me and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you will.
I'd like to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to our host Peter Tobolski with century aluminum. Please go ahead.
Thank you Tony and good afternoon, everyone and welcome to the conference call.
I'm joined here today by Jesse Gary Centurys, President and Chief Executive Officer, and Shelly Harrison Senior Vice President of Finance and Treasurer.
After our prepared comments, we'll be happy to take your questions.
As a reminder, today's presentation is available on our website at www dot century aluminum dotcom we.
We use our website as a means of disclosing material information about the company and for complying with regulation FD.
Turning to slide one please take a moment to review the cautionary statement shown here with respect to forward looking statements.
And non-GAAP financial measures contained in today's discussion.
I'll hand, the call over to Jesse.
Thanks, Pete and thanks to everyone for joining.
I'll start today by reviewing the highlights from our record first quarter results and then discussing the constructive market conditions in which we're operating.
Kelly will then take you through the details of the first quarter results provide some insight on our expectations for Q2.
I'll finish with a review of the status of the <unk> project and our progress towards our capital allocation targets.
Okay. Starting on page three we're very proud to announce that we achieved record quarterly adjusted EBITDA of over $105 million in the first quarter, a 30% increase over Q4.
This was matched with a 14% increase in net sales for the quarter.
This performance is a reflection of the hard work completed by our century teams across locations over the past several years, bringing on additional production and increasing our proportion of value added products.
We're very pleased to be seeing the returns from these past investments come to fruition.
To that end, our quarterly shipments increased by 5% from Q4, reflecting our highest level since 2015.
Increase was mostly driven by our expansion projects at both Mount Holly and hospital, both of which are now substantially complete.
We should expect additional volume gains about 10000 metric tons in Q2 as the newly restarted path at Mount Holly produced over a full quarter and perhaps come back online is undertaking.
We achieved these production levels despite power curtailments in Iceland decrease in crude and how your shipments by approximately 3000 metric tons in the quarter.
As discussed on our last call. These curtailments were driven by low reservoir levels in Iceland, which have now begun to retail and return to more normal levels.
The power Curtailments ended earlier this month and we are currently in the process of putting 36 curtailed back into production.
We expect the smelter to return to full production sometime in May.
Please note that these parts and these parts are returned to production, we will have a onetime increase in our <unk> costs reflected in Q2, Opex, which did not continue in future quarters.
Kelly will cover the details on this in a bit.
Across our assets, we remain focused on consistent and cost disciplined operation.
Over the past year, we've made significant progress improving the stability and consistency of our smelters, which allows us to operate as efficiently as possible.
Could you talk to your steady execution through the first quarter power Curtailments is a good example of that.
In the U S. The teams increased shipments over 13000 metric ton. Despite dealing with continued threat supply chain that resulted in the deferral of several major maintenance project previously scheduled for the quarter.
This deferral along with the deferred hotline included hungry I discussed earlier resulted in approximately $15 million and Opex cost savings in Q1 that will now be pushed into Q2.
Finally, I'd like to take a moment to commend our operators across our assets for the significantly improved safety performance over the quarter.
Safety is a core value for century, and we work hard to improve each and every day.
All of our employees should feel proud of the progress they've made.
Okay, turning to page four you can see the market fundamentals for our business remain robust.
We continue to forecast that the global aluminum market will remain in an over 1 million ton deficit in 2022.
With the shortfall being increasingly centered in our markets in the U S and Europe .
We are forecasting $4 3 million ton deficit in the U S and a $3 seven 900 deficit in Europe for the year.
Global deficit has shifted west Chinese smelters have begun to restart capacity, new non quantity that was curtailed over the winter.
These restarts appear to be progressing in line with our expectations.
And the West However, production growth was nearly at a halt as theres not been any further retarded announcements and previously announced restarts in Brazil, and elsewhere have experienced delays due to supply chain disruptions and other events.
We do not foresee any restarts in Europe over the next two years, but instead remains a risk of further curtailment as energy prices and remaining production countries continue to price above $250 per megawatt into 2024.
Western inventories have continued to decline with that let me start reaching their lowest level since 2005.
And with continued high freight costs across the world. These dynamics continue to support strong regional premiums in the Western Europe .
For the European duty paid premium is reached record highs of $610 per metric ton in the Midwest premium remains near record highs of $870 per metric ton.
Our geographic footprint with a short supply chain into both of these markets continue to prove advantageous in capturing these premiums.
Turning to page five you can see that the LNG price of aluminum remained strong in Q1.
With LNG prices, averaging 3200, 30 to $170 in the first quarter and averaging that same price so far in Q2.
On the demand side, we have experienced strong demand for all of our productivity to date.
We continue to expect World ex China demand growth will land between two five and three 5% range that we discussed in March.
Our U S market remains, especially robust, which we expect will outpace Europe for the year.
Well the warrant Ukraine remains the rest of the European growth, we've not experienced any significant war related demand destruction to date.
Pellet demand remains another highlight.
With premiums at all time highs as we enter Q2.
In addition, our bill customers continue to order and add new extrusion presses, which we believe will underpin continued below demand growth for the long term.
Given the strength of the U S built market, we've decided to move forward with several Debottlenecking project and the Sebree and Mt Holly catch ups.
We expect the first phases of these projects should be complete by the end of 2022.
And should increase our capacity by over 10000 metric tons in 2023 and beyond.
With these project along with other smaller investment projects across our asset.
We now expect 2022 investment capex to be about $10 million for the year.
These are all very quick payback projects and fall within our return requirements.
On the cost side, we saw continued upward pressure across key inputs with a notable exception of recent weakness in the aluminum price.
The most significant of these increases have been in energy prices.
Although first quarter energy prices taken as a whole were relatively flat from Q4 levels.
We have more recently seen significant price increases in MISO, driven by high global coal prices and spiking U S natural gas prices, which seem to be driven by lower than average use storage levels and strong U S industrial demand.
While these markets remain dynamic and continue to trade at significant degradation. We now expect higher use energy prices over Q2 by about $25 per megawatt.
Shelly will walk you through the expected impact for Q2.
Coke and pitch prices also continued to increase so far during the second quarter Ethan.
These increasing about 17% over Q1.
We are well supplied for both materials, but this is one area that has been impacted by the war in Ukraine, which is a supplier of feedstock for both commodities.
On the other hand alumina has been much more constructive this month after peaking at $530 per metric ton immediately following the curtailment of the Ukrainian alumina refinery due to the war.
The early concerns following the closure of the Nicolai of refinery appears to have been displaced as the market seems to be well supplied with final alumina trading about $370 per metric ton today.
As a reminder, alumina prices flow through our results on a three to four month lag.
Which means that Q2 realized aluminum prices are expected to be flat quarter over quarter.
With that we will expect to benefit from current low pricing beginning in Q3.
Kelly I'll now walk you through the financial results.
Thanks, Jesse let's turn to slide six and I'll take you through our results for the quarter.
On a consolidated basis Q1 shipments were up about 5% quarter over quarter, primarily driven by Mt. Holly as the restart project is now substantially complete.
Realized prices were up 8% compared to prior quarter as a result of higher lagged <unk> prices and value added product premiums.
The combination of higher shipments in realized selling prices drove a 14% increase in sequential net sales.
Looking at operating results adjusted EBITDA was $105 million in Q1, and adjusting items. This quarter included $3 3 million for share based compensation.
Liquidity from available cash and credit facilities was $154 million at the end of Q1, which is the $54 million increase from prior quarter.
Turning to slide seven here, we will go through the $23 million sequential increase in adjusted EBITDA.
And the forecast on our last call. The Q1 realized <unk> of $2762, a ton or about $158 versus prior quarter, while realized Midwest and European delivery premiums were relatively flat at 32 cents per pound and $343 a ton respectively.
Indy hub power prices in Q1 averaged $50 a megawatt hour, which is down about 9% versus Q4, while Nord pool prices averaged $122 a megawatt hour were up 11% versus prior quarter.
The impact of these two changes roughly offset each other.
Lagged alumina index prices were up $85 per ton versus prior quarter, and coke and pitch prices continued their upward trend with realized prices increasing about 15% for each.
Value added premiums added 15 million to Q1, EBITDA and we're now benefiting from higher billet prices in our California contracts.
Lastly, we had a volume benefit of about $8 million related to higher shipments as well as a $15 million benefit for lower operating costs in Q1.
As Jesse mentioned the operating cost savings were a result of different a number of our planned maintenance projects into Q2 as well as some deferred part relating it ruined your target due to the temporary power curtailments that have now been lifted.
Okay, let's turn to slide eight and we'll take a quick look at cash flow.
Our cash position remained relatively flat going from $29 million at 12, 31 to 27 million at $3 31.
Capex spending was $26 million in Q1 with about $10 million of that relating to the restart at Mount Holly and $10 million related to the <unk> tapped out.
Cash paid for our hedge settlements was $17 million for the quarter.
Finally, working capital was also use of cash in the quarter as higher volumes in aluminum price increases drove higher receivable values, partially offset by higher payables.
Importantly, we were able to hold inventory levels reasonably flat quarter over quarter with lower days on hand, offsetting the impact of higher prices.
Now, let's turn to slide nine I'll give you some insight into our expectations for the second quarter.
For Q2, the lagged <unk> of $3160 a ton is expected to be up about $400 a ton versus Q1 realized prices.
The Q2 lagged Midwest premium is forecast to be $870, a ton an increase of 160 <unk>.
The European delivery premium is expected at $5 five per ton also an increase of $150 a ton.
Taken together these aluminum price increases are expected to increase Q2, EBITDA by about $100 million versus Q1 level.
Lagged API based alumina is expected to be $415, a ton, which is flat with Q1 prices.
While realized alumina prices will remain high for us in Q2, the API has come down significantly and we expect to see the benefit of lower spot prices and our Q3 results.
From a power perspective factoring in the recent forwards along with our realized quarter to date cost. We expect an overall increase in total energy costs versus Q1 with domestic prices up about 50% and Nord pool prices relatively flat.
This increase in energy costs would equate to about $45 million decrease in EBITDA versus Q1.
This $45 million includes the impact of one month of our new power capacity prices for our Kentucky, smelters, which will go into effect on June one.
The capacity price increase reflects roughly a $12 million increase per quarter that will fully materialize in Q3.
Capacity charges are payable in addition to our base energy costs and prices are reset by lifestyle at auction every 12 months.
Coke and pitch prices have been on the rise since mid 2021, and we expect that trend to continue with the Q2 increase of about 20% versus the first quarter.
These price increases are expected to drive a $15 million EBITDA decreased versus the prior quarter.
As Jeff mentioned, we expect an additional 10000 tonnes in Q2, which will contribute about $10 million of additional EBITDA.
Going the other way, we expect a quarter over quarter increase in operating expenses of 25% to $35 million as we complete the maintenance and part results that were deferred from Q1.
In total we expect all of these items taken together will equate to an approximate EBITDA increase of $15 million to $25 million from Q1 levels for Q2 result of about $120 million to $130 million.
From a hedge standpoint, we expect a realized loss of about 20% to $25 million in the second quarter, and we expect a tax expense of approximately $10 million.
As a reminder, both of these impacts will be below EBITDA geographically and will affect adjusted net income.
And with that I'll turn the call back to Jesse.
Thanks Kelly.
Okay, if youll turn to page 10, I'll conclude the call with a quick update on our <unk> project and our capital allocation plans for the year.
The council's projects garnered hanmi is off to a great start with major engineering work completed and material equipment contracts in place.
That work has commenced and we continue to expect that will delivered the project on budget and on schedule ready to sell <unk> into the 2024 markets.
Turning to capital allocation, we made good progress towards our liquidity and net debt targets over the quarter, finishing with liquidity of $154 million and net debt, including the 220 <unk> kept up a $388 million.
As discussed earlier, we now expect to spend approximately $10 million for the year on investment Capex projects, primarily relating to the cast house Debottlenecking projects at Sebree and Mt. Holly.
<unk> capex for the year should fall within the $30 million to $35 million range, we discussed on our Q4 call.
Given the constructive market environment, we continue to expect that we will reach our targeted net debt and liquidity levels sometime in the second half of this year.
And with that we'll turn it over to questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question Press Star One appears to me todays call. Please dial in and interest are one as a reminder, if you are using.
A speaker phone please remember to pick up your handset before asking a question we will pause briefly as questions are registered.
The first question is from the line of Timna Tanners with Wolfe Research. Your line is open.
Yeah, Hey, good afternoon.
I wanted to.
Start out and ask some high level questions I wanted to get Jesse stats on that.
Aluminum markets nice to hear from Michelle you hope you're well, but.
But with that aluminum market I was interested in your comments on <unk>.
China, just wanted a little bit more color on some of the restarts there in China might be ramping up exports to capitalize on high prices I know that's a risk just wanted your take on it and interested in your comments that there wasn't new capacity coming on in Europe .
Europe I think there's a Spanish smelter, we know of restarting and some talk of wind power. So just thought it'd be interesting to get your take on that end and a further delay on restart commentary.
Sure, Yes, so in China, specifically.
After we saw the shutdowns over the winter early in the fall due to some water and sort of other power tightness issues in China of course, we knew that come spring as the reservoirs, we felt immuno oncology that we would start to see some of these restart and we have seen those come on and then sort of in line with what we had expected so no real.
Surprise there in terms of.
<unk> coming online in China.
With respect to exports I mean, we haven't seen this yet of course, they're having issues in the ports and so.
Through all of the gives and takes there.
But we haven't really seen that pressure yet coming into our markets at least.
And in Europe of course, there's been some announcements, but they're usually pretty far needed announcements.
Just looking at the forward power curves in Europe .
Do you see really heavy.
Energy prices continuing into 2024.
And of course recent news over the past.
It's hard to even remember if it was yesterday or today.
With gasify, some rush happening further curtailed or interrupted.
As pressure to what can happen in Europe and.
Sort of the medium term here.
Okay. Thank you that's helpful and then I just wanted to think conceptually.
Based on what we know now and thinking into the second half so all else equal, which I know is that never happens, but alumina prices falling aluminum prices at these levels, assuming some of these outage costs roll off.
What do we think about the second half and is that a fair way to think about the market or there are there other things around the corner that we know are they.
Given given where we sit today are there other items that you could flag for us.
Yes, I think thats, a pretty good start in Canada.
We know that the power interruption in Iceland.
Have stopped and so we will have those tons coming back online or greater autonomy.
As I mentioned is about 36 pot, we're already in that process and so we should exit the quarter across the system at basically full run rates that we communicated to you earlier in the year.
There are some gives and takes of course, we do have high energy prices in Europe , we have a little bit of exposure to that.
In Iceland remember, we are a Nord pool link for a portion of that Icelandic power almost 60% of that is hedged.
Theres, just a little bit of exposure to Europe , there and then in the U S. We have seen some higher energy costs.
So we're watching that closely those are mostly driven by the gas price also some high coal prices.
But those will be partially offset at least by falling alumina prices. So I think you sort of Edison noticed maybe filling out a couple of other pieces there.
Okay Super I'll hand up there thanks.
Great. Thank you Ms Tanner.
The next question is from David Gagliano with BMO. Your line is open.
Yes.
Hi, Thanks for taking my questions.
I missed some of the beginning here I apologize, but can you explain a little bit more I or reiterate a rehash the deferred opex in the first quarter, that's coming back in the second quarter, what was that about again I missed that part.
Yes, sure. So it's mainly on the USA, David but as we focus our.
There are two things going on there as we focus on bringing on Pos at Mount Holly and then we thought we did see some supply chain disruptions coming through that we just made the decision to defer some of the major maintenance projects that had been scheduled for Q1 into Q2. So no increase overall in the sort of what we thought we would be annually, but just a little bit of timing moves.
They're from Q1 into Q2, and then there is another piece in there which is just as the Icelandic power interruption.
What's going on of course, we werent, bringing parts on during that time period, and so as we bring those popcorn in Q2, instead youll see a spike in realigning costs that will be one time in Q2.
Okay. So that's okay, so and I believe you said.
In the prepared remarks, the Q1 deferral into Q2 from the.
The U S side was $15 million right is that right.
Yes, it'll be it'll be 15 in total, including both the Icelandic realigning and the deferred opex from the U S.
Okay, and then in slide nine the deferred opex for <unk> as a total of.
At the midpoint increase of $30 million.
So yes all of that.
Because because.
No. It's just when you compare sequentially, David Obviously Q1 was $15 million lower and then when you move that into Q2, you get there are $15 15 or 30.
Okay.
Okay.
Okay, and I'll just leave it at that I will turn it over somebody else playing catch up on the slides.
Okay. Thank you.
Thank you Mr Gagliano.
The next question is from the line of John Tumazos with John Tumazos very independent research. Your line is open.
Thank you for taking my call My question.
Jesse could you describe.
How the board determines your compensation bonus.
Yeah.
I'm just curious.
Curious how you are.
And shattered.
You're referring to the record results I presume that's EBIT.
The stock price record was $80 eight.
And it was $30 2014 and earlier this year, so from a shareholders' perspective.
And feel like a record movement.
Yes, I was referring to EBITDA John of course, we'd like to see the stock price higher as well my compensation is very similar to other public companies.
Compensation, you will see that there is significant portion of that at risk and it's heavily weighted to stock price performance.
Jesse I'm kidding, a little bit now.
Chuck.
I Miss football coach used to say the new treaty reporters like mushrooms custom in the dark.
It would be better.
If you're a full 10-K was disclosed before the call and we have all the hedge data.
And background ask better questions and understand things better the press release I saw at 423 of the slides after five o'clock.
Some of those arent smart enough to figure it out ourselves.
I just wanted to I remember talking with you.
I remember technical John I also remembered technology group Seahawk fan so above that same era, but if you just turn to page 17 of the slides you'll see the hedge side that we've been including for the past several quarters no change there quarter over quarter.
Thank you.
Thank you Mr exactly Yana.
Thank you Mr. Tommaso. The next question is from the line of Lucas pipes with B Riley. Your line is open.
Thank you very much for taking my question then.
Just a quick one from me I would like to understand Icelandic power.
Better.
How.
Yes, I'm, sorry to kind of get a little bit of an education on the on the Icelandic power markets, but how is that linked to the kind of the broader European price trends.
So if we were to see further escalation for example.
Natural gas cut off to the more than just Poland in Bulgaria.
With dead Ricochet back up to the North pole. Thank you very much sure. Yes, it's a really good question Lucas So just to start at the top level.
Looking at page 16, you will see the breakdown of our energy costs. So Iceland is 70% lemme linked and 30% linked to Nord pool to Nord pool as the market.
For Norway.
There are other countries sort of in northern Europe .
And the contract physical energy contract that we have with land broken in Iceland is linked to the Nord pool system pricing power. So you can see that kind of Nord pool.
And see what that system price of power.
That market is heavily.
Hydro generation.
They also have some interconnectors into Europe , and so while you don't see the full impact of the gas prices reflected in normal pricing for instance.
Yeah.
Like you see in Germany, or France, or some of the other smelter based countries in Europe , you do see some elevated prices due to those interconnectors into the mainland.
If you look actually we have a pretty good slide on page.
Blip here.
Yes on page four Lucas.
So the bottom right hand quarter here, you can see the Orange line, which is representing mainland Europe power prices and also the forward prices in mainland Europe , which as you can see are quite elevated and above.
$250 for most of the period.
Whereas you see in the dark blue lines, the sort of Nord pool forward prices. So you see there is a quite a bit of disconnections in power prices.
I appreciate that very much. Thank you that's all my questions.
Sorry, maybe to add on one more thing just to understand the whole exposure, we do have 60% of our exposure hedged for the current year.
So when youre looking at EBITDA. These hedges are actually financial hedges, so they'll fall below EBITDA, you'll see the full impact of Nord pool for that 30% running through EBITDA, but then below EBITDA when you get to cash flow. We do have a hedge in place for 60% of that exposure, yes. That's a good point Kelly and that hedge is at 24 euros per megawatt so.
Right.
<unk> hedged and then just as a reminder, we're 80% hedged for that link in 2023, and then starting in 2024 that linkage Nordic power markets goes away and the land certain contract converts to a fixed price contract.
Very helpful. Thanks.
Thank you both very much for this.
Hey, great Thanks and Goodbye.
Again to ask a question press star one.
The next question is a follow up from Timna Tanners with Wolfe Research. Your line is open.
Yeah, Hey, guys I thought I'd capitalize on having you on the line to ask you about slide four that the one with the primary aluminum consumption days of inventory I've been watching that and kind of I'm surprised that that does just thought I'd ask if there's any implication or comments because the inventory it's been shrinking even as the aluminum price has been falling but wanted to get your thought.
On that and then.
If I could I check the capital allocation Slide you mentioned M&A a couple of times. So if you wouldn't mind reminding us I see three mentioned here. So I thought I should ask you know a little bit more color on what you're thinking what size you know what area of the market et cetera.
Sure No thats great Thats good to know two good questions I'll start with the first one so yes, we do still see strong deficits and we expect those to continue for some time beyond what we show here on the slide.
Of course, now let me price.
To do with global balances, sometimes you'll see inventories most efficiently reflected in regional premiums and so when you look at Midwest and you look at Edp, both are at basically at record highs, reflecting those tight tight inventory level in the short markets. So sometimes.
Inventory will be more sort of sufficiently reflected in the delivery premiums then and that will reprice of course overall the LNG price is there it can just be a little bit more.
Forward looking than the regional premiums, which are specifically looking at those inventories.
Yeah.
So on the M&A piece.
Yes of course for of course, as we look at areas of growth. We look at both sort of organic growth and then any potential M&A growth. There's no specific area that we're targeting.
But if you did see us do anything you'd probably see it.
Reflection of the markets, where we're strong and in the U S and Europe .
And to sort of looking to fill any sort of growth gaps that we could.
But no specific targets in mind.
Just reflected there as an option.
Okay. Thank you.
Great.
Thank you Ms Turner.
The next question is a follow up from David Gagliano with BMO. Your line is open.
Alright, thanks for taking my follow ups.
Shelley I know you mentioned on the call.
Power contract reset in the U S.
And I think it's $12 million, a quarter higher of which $4 million, we see in the second quarter.
I believe that's right.
What does that reset and are there any others coming up.
No David what that is is in the U S. In MISO, specifically, your payables and energy price and a capacity price.
And for the past 567 years that capacity prices basically been de Minimis.
That capacity prices determined for the entire MISO system and the auction that occurs in April .
And this year, a significant amount of capacity did not bid and which drove up that capacity price that we're paying for energy for capacity in the micro market.
It was unexpected within MISO, you can see their own commentary on it.
Although we do not expect it declared these levels.
I think when you look at potential causes I think the market has been affected and people have sort of an.
As in many other areas of unexpected been surprised a bit by the strength of industrial demand across the U S and that could be a driver that we saw this year.
Nothing else on the energy price that's out there.
Similar to the.
Okay. So that's the only reset.
And so I'd say the term incorrectly I apologize, but thats the only type of.
Exposure to this sort of thing until next April is that right. That's the idea here.
That's right, yes, thats right okay.
And will occur again next April and set the price for then June 'twenty.
<unk> three through June 24, this prices from June 'twenty, two 'twenty three.
Okay, and I got those numbers right right. So the incremental 8 million in the third quarter versus two curves cracks 12 month and total quarterly.
That's right correct.
Okay and somewhere in that bridge to the 1000 to 130 I'm, assuming in the Powerpc, which only calls out I think Nord pool, where is that.
I don't want to I'm, just wondering where is the hidden that bridge the $1 130, EBITDA guide for the second quarter.
Is it in that power piece somewhere.
Yes.
Yes, so it's in the 45 million quarter over quarter increase in power cost that includes the $4 million for the capacity charge.
Okay got it thanks.
Thank you Mr Gagliano.
There are no additional questions waiting at this time I will now turn the conference over to management for any closing remarks.
Thanks to everybody for joining and we look forward to talking to you for the Q2 call. Thanks everybody.
That concludes the century aluminum company first quarter earnings call. Thank you for your participation you may now disconnect your line.