Q2 2023 Century Aluminum Company Earnings Call

Good afternoon, and thank you for attending today's century aluminum company second quarter 2020 earnings Conference call. My name is Jason and I'll be the 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'd like to ask a question. Please press star one on your telephone keypad.

I'll now pass the conference over to our host Ryan Crawford.

Thank you operator.

Afternoon, everyone and welcome to the conference call.

Joining here today by Jesse Gary Centurys, President and Chief Executive Officer.

Jerry <unk> Executive Vice President and Chief Financial Officer, and Peter Chip Koskey Senior Vice President of Finance and Treasurer. After our prepared comments, we will take your questions.

As a reminder, today's presentation is available on our website at www dot century aluminum dot com.

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 statements shown here with respect to forward looking statements and non-GAAP financial measures contained in today's discussion.

And with that I'll hand, the call to Jesse.

Thanks, Brian and thanks to everyone for joining.

I'll start today by reviewing our second quarter financial and operational performance before discussing the current market conditions.

Jerry will then take you through the financial results and I'll wrap up before turning it over for questions.

Turning to slide three continued strong operational performance and falling input prices in our smelters.

Drove a Q2 adjusted EBITDA of $30 million.

Which was an improvement of about $6 million over Q1.

We made significant progress over the last several months welcoming our new <unk> colleagues and beginning to integrate the <unk> operations into the century system.

We are encouraged by the quality of the people that you're melco and perhaps most especially by their excellent safety culture.

<unk> has a long history of prioritizing the safety of its workforce.

Sustainability of its operations with excellent systems in place to ensure that people will return home safely each day.

We had some nice opportunities to import some of the <unk> safety systems and procedures into the rest of century's operations.

She melco did suffer an adverse weather event in early June when lightning strikes damage to the local grid. This caused a complete disruption of powered at the refinery for several days and resulted in damage to several key pieces of equipment.

The outage, resulting instability and staged restarted the plant resulted in loss production in June .

The refinery returned to full on stable operations in July after gradually returning to targeted production levels over the course of June .

Jerry will cover the financial impact on Q2 and a bit.

As we discussed on our last call. We are in the process of implementing a series of operational improvements and investments that youre melco to restore the refinery to its design capacity of one 4 million tonnes over the course of the next several years.

We expect to see some of those volume gains begin to appear in Q3 and Q4 this year.

Which should allow the refinery to reach an annualized run rate of $1 2 million tons by the end of the year.

We will provide additional detail on 2024 and beyond on our Q4 call.

On the smelter side, our teams have done an excellent job of operating each of our plants through some very high temperature days over the past several months.

Operational performance at each smelter with stable and at targeted levels across the quarter.

We are pleased to see that operational improvement programs. We began implementing two years ago really paying off with the excellent stability that smelters have seen over the past several quarters.

We expect that these programs will continue to pay dividends as we move into 2024.

Turning to the market environment on page four you can see the global supply and demand remains roughly balance since we entered the third quarter, although Chinese supply gains and some short term demand weakness have moved the market from a slight deficit last quarter to a slight surplus this quarter.

In Q2, the three months aluminum price averaged $2286 per ton down about $150 from Q1 levels.

Regional delivery premiums declined in the quarter as well, but remain elevated from historical levels.

In general the aluminum market in the second quarter reflected the uncertainty in the broader economy.

Persistent inflation and rising interest rates have coal demand in the short term.

This is most evident in our value added product sales were billet demand remained slow during Q2.

This was most acute among our building and construction customers, while automotive and renewable energy markets remained a bright spot.

In this environment, we remain focused on disciplined cost management and executing our improvement programs to best position ourselves for the eventual market rebound.

Turning to the supply side previously curtailed production in Yunnan begin to restart in the quarter as power availability in the province improved.

These restarts more than offset curtailment consist one and brought the overall Chinese markets closer to balance.

Well you know on hydro power production did benefit from recent rainfall reservoir levels in the province remain below normal levels.

Leaving at a risk of a third straight season of production cuts what's dry season returns this fall.

Overall, our global supply and demand have returned to near balanced levels Global days of inventory remained near 50 days.

Inventories have remained at these relatively low levels. Despite a growing number of global consumers no longer accepting Russian metal following the Russian invasion of Ukraine.

This means that while overall global inventories have remained low they are increasingly made up of Russian origin metal.

In fact, Russian metal now makes up around 80% LNG inventories up from just 10% prior to the war in Ukraine.

With inventories at these historically low levels <unk> prices and regional premiums should respond swiftly once demand conditions improve.

As you can see from our energy chart on page five EU energy prices remain significantly elevated leaving remaining European smelter margins challenged.

With forward energy prices remaining above $150 per megawatt hour, we do not anticipate any significant European sculpture restarts in the near term.

Turning to page six we can see that smelting costs have come down across the board most significantly on the energy side, where Q2 Indy hub and Nord pool, both reflect an over 50% reduction from a year ago levels.

Energy supply and demand fundamentals remain constructive with U S natural gas reserves sitting 22% above year ago levels, and 12% above the five year average.

Utility coal stockpiles are also for nearly 60% above a year ago.

These high level of U S gas and coal reserves should help to ensure power prices remain constructive over the next six months.

Turning to raw materials Coke and pitch prices have finally begun to fall with coke prices, averaging $582 in the quarter down almost 25% from year ago levels pitch prices also moderated.

On the refining side of our business, Jim Alcoa's primary outside raw material inputs, our caustic soda LNG, which is priced off of reference Henry hub and H F O.

Most of these input costs have declined over the first half with U S natural gas prices, averaging $2 15 per annum Btu in Q2 down over 70% from year ago levels, and H F O averaging $63 a barrel down about a third from Q2 2022.

Caustic prices have also been falling precipitously down over 50% from last year.

With that I'll turn it over to Gerry to walk you through the financial results and our Q3 outlook.

Thank you Jesse let's turn to slide seven and I'll walk you through the results for the second quarter.

Consolidated Q2 global shipments were 174000 tons slightly down sequentially related to normal variation in order and shipment cutoffs.

Realized metal prices were in line with expectations, helping to deliver net sales for the quarter of $576 million, a 4% increase sequentially.

Looking at Q2 operating results adjusted net income was $16 million or <unk> 16 per share.

This was an improvement of $27 million compared with prior quarter.

The adjusting items for the second quarter were add backs of $6 $6 million for lower of cost or net realizable value on inventory.

$3 $6 million related to the final capacity charged for the hardcore curtailment.

$1 6 million for share based compensation.

700000 for Jim Maco acquisition costs.

<unk>, partially offset by a deduction of $4 $3 million in unrealized gains on forward contracts.

Adjusted EBITDA attributable to century was $30 million, an improvement of $6 million sequentially.

Note. This includes our 55% share of the <unk> JV in Jamaica.

Liquidity remains strong at $231 million at the end of the quarter, consisting of $51 million in cash and $181 million available on our credit facilities.

Please note that we now expect our Mount Holly's land sale transaction will close in the third quarter with an expected final sale price of approximately $25 million.

Turning to slide eight to explain the $6 million second quarter sequential improvement in adjusted EBITDA.

On balance realized lagged LNG prices and delivery premiums were in line with the outlook, we provided during our last call.

Second quarter realized <unk> was $2371 per ton up $21 versus the prior quarter, while realized U S. Midwest premium of $563 per ton was down $10 and realized European delivery premium of $299 per ton was up $9.

These reflecting our one to three month lags and realized metal prices.

Together these factors contributed to a $3 million benefit in the quarter.

Our costs were down from prior quarter due to a 33% reduction in Nord pool market prices as well as favorability in the cost of service rate for our Mt. Holly operations.

The remaining benefit was attributable to the year over year reduction in the MISO capacity charge for sebree.

As a reminder, MISO holds an annual capacity auction every spring that sets the price for capacity for the subsequent 12 months period.

This year's auction saw capacity prices returned towards normalized levels, which will reduce our capacity costs by approximately $20 million year over year. This change went into effect June one and will remain in place until May 31 2024.

Q2 realized alumina cost was $400 per tonne $11 higher on a sequential basis.

Recall, there is a three to four month lag for alumina costs to work through our income statement.

Realized coke prices decreased 10% and realized pitch prices decreased 1%.

Together <unk> and other raw material costs resulted in a $1 million improvement in EBITDA.

Opex mix and other were slightly below expectations, primarily due to slightly lower billet premiums and an unfavorable sales mix, we incurred a $6 million loss at <unk> due to downtime and lost production output caused by the weather event mentioned by Jesse in his opening comments.

Moving forward, Jim <unk> performance will be consolidated into our total century results and forecast.

To our smelters in carbon anode facility.

You will be able to sensitize it to the appropriate raw materials is provided in the appendix of today's presentation.

Overall, adjusted EBITDA for the second quarter improved sequentially by $6 million, reaching $30 million.

Let's turn to slide nine for a look at cash flow.

We started the quarter with $30 million in cash and added $30 million and adjusted EBITDA.

Borrowings increased this quarter, primarily to offset our semiannual interest payments and ongoing capex projects, mainly for the construction of our new cast house in Iceland.

These changes resulted in Q2 ending cash of $51 million.

Now, let's move to slide 10 for insight into our expectations for the third quarter.

For Q3, the lagged <unk> of $2240 per ton is expected to be down about $131 versus Q2 realized prices.

Q3, lagged U S. Midwest premium is forecast to be $505 per ton down $58 per tonne and the European delivery premium is expected to be $320 per ton are up about $21 per ton compared with the second quarter.

Taken together the <unk> and delivery premiums are expected to decrease Q3, EBITDA by approximately 20% to $25 million compared with Q2 levels.

Energy costs are expected to be in line with Q2 with slightly higher seasonal Indy hub prices offset by lower Nord pool market prices.

We also expect the benefit of a reduction in the capacity charge for sebree to be offset by a slightly higher cost of service based rates for Mt. Holly.

Note on the refinery side, we have added additional reference prices related to <unk> energy mix. We have now also added sensitivities for these prices in the appendix to allow you to sensitize our results to these additional markets going forward.

Looking at our other key raw materials lagged realized alumina cost is expected to be $390 per ton down slightly.

Jim <unk> will supply about 40% of our aluminum <unk> for the remainder of this year.

We also expect favorable impacts from lower coke and pitch prices.

Caustic soda prices are down approximately 50% from year ago levels with current spot prices in the mid three hundreds.

In the appendix we have also introduced the sensitivity for caustic soda and note. It takes five to six months for spot prices to flow through our P&L.

All in we expect lower raw material costs to contribute between $5 million to $10 million to EBITDA compared with the second quarter.

We expect volume gains and operating cost improvements to offset continued headwinds for value added premium sales mix.

All factors considered our Q3 outlook for adjusted EBITDA is expected to be in a range of between $10 million to $20 million.

Just a few more points to make from a hedge impact standpoint, we expect a realized gain of between zero to $5 million in the third quarter.

We expect tax expense to be approximately zero.

As a reminder, both of these items fall below EBITDA and impact adjusted net income.

One last comment about the <unk> acquisition.

As discussed in note two of our current quarter 10-Q, we are currently working through the purchase accounting, which requires the acquired assets and liabilities to be reported at fair value as of the acquisition date.

We have up to 12 months from the acquisition date to perform the necessary work to finalize the fair value and based on our preliminary fair value estimates, we've reported a deferred gain as a current liability on the balance sheet as of June 30.

And now I'll turn the call back over to Jesse.

Thanks, Gary Despite a complex macro environment centuries focus on cost discipline and operational performance has put us in a good position to continue to deliver results throughout this portion of the cycle and beyond.

The operational improvement programs gruner, good dose and begin implementing when you took over our global operations two years ago are consistently delivering strong performance in our smelters.

Our major capital investment program and the <unk> project is nearing completion and on track to deliver our first sales of low carbon natural ability to European customers in the first quarter of next year.

Paired with our ongoing U S cast house Debottlenecking programs, the good or tongue cast house that will give us the ability to sell 80% century's total production value added product in the form of billet.

Lab foundry alloys, or naturelle low carbon aluminum.

Our new dual Melco operations have derisk the supply chain for our most critical raw material and provides a meaningful opportunity for value creation as we execute our planned capital and operational improvement programs to return this asset to its full potential.

All in all we remain focused on what is in front of us and excited about our future.

Thank you and I'll now turn the call over to the operator for questions.

If you'd like to ask a question. Please press star followed by one when your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question. It is star one.

Our first question is from Lucas pipes with B Riley. Your line is now open.

Thank you very much operator, good afternoon, everyone. Thank you for taking my question.

My first question is on <unk> I think last quarter, you mentioned, an expectation that at spot price at that time.

That would be accretive to the financial results.

Starting I think this quarter the third quarter. So I wondered if you could comment on that whether that is still your expectation and if you could maybe quantify.

The impact that would I would appreciate that thank you very much.

Thanks, Lucas it's Jesse Thanks for joining thanks for the question.

Yeah, so going back to the last call I think you stated the question correctly that at spot prices at that time, we did expect that yanacocha would be accretive to the financial results in Q3.

And.

<unk> had that continued to be the case that statement would remain true.

But as Jerry stated going forward, what we'll do is we'll just include the <unk> results in the guide.

And so you have that 490 days, it's within that $10 million to $20 million that you have in front of you.

But just for context at.

That statement remains true.

Spot prices remain the same.

Okay.

Thanks, Thanks for that.

<unk>.

Switching topics for now.

Ah.

You mentioned that MISO auction drying.

I think that will happen during the second quarter.

Could you remind us kind of what what.

Details of that auction and the implications for your business.

And.

Any any read through to a potential hassel restart. Thank you for your perspective on that.

Sure Lucas Thanks, Ken Good question.

Yes, so the MISO capacity auction do you remember, we pay for power and basically three portions within our Kentucky bolt, Kentucky plants portion of that is capacity of course energy.

Energy a portion of that delivery and so the capacity auction takes place every April and May.

And this year the capacity auction returned to normalized levels you may remember.

A year ago, we saw capacity prices within MISO.

But large surprise to the upside capacity prices were up quite significantly.

This year capacity prices return to this normalized levels and so that impact that youll have now this is sebree specific.

We will be about $20 million benefit for the for that.

The 12 month period.

Hum.

From the year ago period, so about a month of that came through in the Q2 results and Youll see about $5 million benefit in Q3 results.

And obviously that will impact Huntsville as well.

<unk>.

But.

And you would see similar benefit if youre purchasing energy at the same levels at Huntsville.

But overall with respect to the household restart we're still in the same place. We are when we spoke last quarter, we continue to.

We continue to monitor market conditions.

And both on the <unk>.

Revenue side and the cost side.

And we'll come back to you once we made that decision.

Thank you and a quick follow up the capacity.

Price I think it's quoted in Ma.

Megawatts.

Okay.

<unk>.

Can you share kind of what the.

The prices that you.

Locked in on that on that auction.

Sure.

Yeah.

So they do.

I think they actually clearing on.

On a monthly basis, but we can give it to you in a megawatt databases.

It's less than $10 a megawatt day for the upcoming 12 months period.

Okay.

Okay.

Aye.

I appreciate that I'll turn it over thank you very much and best of luck.

Thanks Lucas.

There are no more questions. So I'll pass the call back over to the management team for closing remarks.

Let's repo business and when the time please.

If you'd like to ask a question. Please press star one on your telephone keypad.

Okay. Thank you very much everyone for joining the call and we look forward to talking to you in Q3.

That concludes the conference call. Thank you for your participation you may now disconnect your lines.

In Q3.