Century Aluminum Company (CENX) Q2 2023 Earnings Call Transcript

Century Aluminum Company (NASDAQ:CENX) Q2 2023 Earnings Conference Call August 9, 2023 5:00 PM ET

Company Participants

Ryan Crawford - Financial Planning & Analysis and IR Manager

Jesse Gary - President and CEO

Jerry Bialek - EVP and CFO

Conference Call Participants

Lucas Pipes - B. Riley

Operator

Good afternoon and thank you for attending today's Century Aluminum Company Second Quarter 2023 Earnings Conference Call. My name is Shesan [ph] 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 question and answers at the end. [Operator Instructions]

I would now like to pass the conference over to our host, Ryan Crawford.

Ryan Crawford

Thank you, operator. Good afternoon everyone and welcome to the conference call. I'm joined here today by Jesse Gary, Century's President and Chief Executive Officer; Jerry Bialek, Executive Vice President and Chief Financial Officer; and Peter Trpkovski, 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.centuryaluminum.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 statement 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.

Jesse Gary

Thanks Ryan. 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 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 Jamalco colleagues and beginning to integrate the Jamalco operations into the Century System. We are encouraged by the quality of the people at Jamalco and perhaps most especially, by their excellent safety culture.

Jamalco has a long history of prioritizing the safety of its workforce and the sustainability of its operations with excellent systems in place, to ensure that people will return home safely each day.

We have some nice opportunities to import some of the Jamalco Safety Systems and procedures into the rest of Century's operations. Jamalco did suffer an adverse weather event in early June when lightning strikes damage the local grid. This caused a complete disruption of power to the refinery for several days and resulted in damage to several key pieces of equipment. The outage resulting in stability and a staged restart of the plant resulted in lost production in June.

The refinery returned to full and stable operations in July after gradually returning to targeted production levels over the course of June. Jerry will cover the financial impact on Q2 in a bit.

As we discussed on our last call, we are in the process of implementing a series of operational improvements and investments at Jamalco to restore the refinery to its design capacity of 1.4 million over the course of the next several years.

We expect to see some of those volume gains begin to appear in Q3 and Q4 of 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'll provide additional detail on 2024 and beyond on our Q4 call.

On the smelter side, our teams have done an excellent job operating each of our plants through some very high temperature days over the past several months. Operational performance at each smelter was 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 the 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 balanced as we enter 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-month aluminum price averaged $2,286 per ton, down about a $150 from Q1 levels. Regional of 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 cooled demand in the short-term.

This is most evident in our value added product sales where build [ph] demand remains low during Q2. This is most acute among our building and constructing 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 began to restart in the quarter as power availability in the province improved. These restarts more than offset curtailments in Sichuan and brought the overall Chinese markets closer to balance.

While Yunnan 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 once dry season returns this fall.

Overall, while global supply and demand have returned to near balance levels, global days of inventory remain 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% felony inventories, up from just 10% prior to the war in Ukraine. With inventories at these historically low levels, LME 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 a $150 per megawatt-hour, we do not anticipate any significant European smelters 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 Indi Hub and Nord Pool both reflect an over 50% reduction from year ago levels.

Energy supply and demand fundamentals remain constructive with US natural gas reserves sitting 22% above year ago levels and 12% above the five year average. Utility cold stockpiles are also full, nearly 60% above a year ago. These high level of US 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 now 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, Jamalco's primary outside raw material inputs are caustic soda, LNG, which is priced off of reference to Henry Hub, and HFO. Most of these input costs have declined over the first half with US natural gas prices averaging $2.15. for MMBtu in Q2, down over 70% from year ago levels, and HFO 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 Jerry to walk you through the financial results and our Q3 outlook. Jerry?

Jerry Bialek

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 174,000 tons, slightly down sequentially related to normal variation in quarter end 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 $0.16 per share. This was an improvement of $27 million compared with prior quarter. The adjusting items for the second quarter were add back of $6.6 million for lower up cost or net realizable value on inventory; $3.6 million related to the final capacity charge for the Hawesville curtailment, $1.6 million for share-based compensation, and $700,000 for Jamalco acquisition costs. These 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 Jamalco JV in Jamaica. Liquidity remains wrong 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 expect our Mt. 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 LME prices and delivery premiums were in line with the outlook we provided during our last call. Second quarter realized LME was $2,371 per ton, up $21 versus the prior quarter, while realized US Midwest premium of $563 per ton was down $10 and realized European delivery premium of $299 per ton was up $9. These reflecting are one to three month lags in realized metal prices. Together, these factors contributed to a $3 million benefit in the quarter.

Power 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-month period. This year's auction saw capacity prices return towards normalized levels, which will reduce our capacity costs by approximately $20 million year-over-year. This change went into effect June 1st and will remain in place until May 31st of 2024.

Q2 realized alumina cost was $400 per ton, $11 higher on a sequential basis. Recall, there is a three to four months lag for alumina costs to work through our income statement. Realized coke prices decreased 10% and realized pitch prices decreased 1%.

Together, alumina 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 Jamalco due to downtime and lost production output caused by the weather event mentioned by Jesse in his opening comments. Moving forward, Jamalco's performance will be consolidated into our total Century results and forecast similar to our smelters and carbon anode facility.

You will be able to sensitize to the appropriate raw materials as provided in the appendix of today's presentation. Overall, adjusted EBITDA for 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 in adjusted EBITDA. Borrowings increased this quarter, primarily to offset our semi-annual interest payments and ongoing CapEx projects, mainly for the construction of our new casthouse in Iceland. These changes resulted in Q2 ending cash of $51 million.

Now, let's move to site 10 for insight into our expectations for the third quarter. For Q3, the lagged LME of $2,240 per ton is expected to be down about $131 versus Q2 realized prices. The Q3 lagged US Midwest premium is forecast to be $505 per ton, down $58 per ton, and the European delivery premium is expected to be $320 per ton, or up about $21 per ton compared with the second quarter.

Taken together, the LME and delivery premiums are expected to decrease Q3 EBITDA by approximately $20 million to $25 million compared with Q2 levels. Energy costs are expected to be in line with Q2 with slightly higher seasonal Indi 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 rate for Mt. Holly. Note, on the refinery side, we have added additional reference prices related to Jamalco's 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. Jamalco will supply about 40% of our aluminum mix 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-$300. 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 a between $0 to $5 million in the third quarter. We expect tax expense to be approximately 0. As a reminder, both of these items fall below EBITDA and impact adjusted net income.

One last comment about the Jamalco acquisition. As discussed in Note 2 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 30th.

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

Jesse Gary

Thanks, Jerry. Despite a complex macro environment, Century's 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 [Indiscernible] and began implementing when we took over our global operations two years ago, are consistently delivering strong performance in our smelters.

Our major capital investment program in the Grundartangi casthouse project is nearing completion and on track to deliver our first sales of low-carbon natural billet to European customers in the first quarter of next year.

Paired with our ongoing US casthouse debottlenecking programs, the Grundartangi casthouse will give us the ability to sell 80% of Century's total production value-added product in the form of billet, slab, foundry alloys, or natural low-carbon aluminum.

Our new Jamalco operations have derisked 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 proven 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.

Question-and-Answer Session

Operator

[Operator Instructions]

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

Lucas Pipes

Thank you very much, operator. Good afternoon, everyone. Thank you for taking my question. My first question is on Jamalco. I think last quarter you mentioned an expectation that at spot prices at that time, Jamalco 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. I would appreciate that. Thank you very much.

Jesse Gary

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 Jamalco would be accretive to the financial results in Q3. And I think 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 Jamalco results in the guide. And so you have that for 90 days. It's within that 10 million to 20 million that you have in front of you. But just for context, that statement would have remained true now had spot prices remain the same.

Lucas Pipes

Okay. Thanks for that. Switching topics for now you mentioned the MISO auction during -- I think that happened during the second quarter. Could you remind us kind of what the details were of that auction and the implications for your business and any read-through to a potential hospital restart? Thank you for your perspective on that.

Jesse Gary

Sure, Lucas. Thanks. Again, good question. Yeah, so the MISO capacity auction, remember we pay for power in basically three portions within our Kentucky -- both Kentucky plants. A portion of that is capacity, a portion of that is energy, and a portion of that is 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 have a large surprise to the upside.

Capacity prices were up quite significantly. This year capacity prices returned to those normalized levels, and so the impact that you'll have -- now, this is Seabreeze specific will be about $20 million benefit for that new 12-month period from the year-ago period.

So about a month of that came through in the Q2 results, and you'll see about $5 million benefit in the Q3 results. Obviously, that will impact Hawesville as well, but you would see similar benefit if you were purchasing energy at the same levels at Hawesville. But overall, with respect to a Hawesville restart, we're still in the same place we are when we spoke last quarter. We continue to monitor market conditions, both on the revenue side and the cost side, and we'll come back to you once we've made that decision.

Lucas Pipes

Thank you. And a quick follow-up. The capacity price, I think it's quoted in, megawatts per day of capacity. Can you share what the prices that you locked in on that auction?

Jesse Gary

Yeah. So, they do -- I think they actually clear on a monthly basis, but we can give it to you on a megawatt-day basis. So, it's less than $10 a megawatt day for the upcoming 12-month period.

Lucas Pipes

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

Jesse Gary

Thanks, Lucas.

Operator

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

Jesse Gary

Let's re-prompt the questions one more time.

Operator

[Operator Instructions]

Jesse Gary

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