Century Aluminum Co Q2 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Century Aluminum Company's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to our speaker today, Peter Trpkovski. Thank you. Please go ahead.

Thank you, Brandy. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Mike Bless, Century's President and Chief Executive Officer; Craig Conti, Executive Vice President and Chief Financial Officer; and Shelly Harrison, Senior Vice President of Finance and our Treasurer. After our prepared comments, we'll take your questions. As a reminder, today's presentation is available on our website, 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 1, 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. With that, I'll hand the call over to Mike.

Thanks, Pete. And as usual, thanks to all of you for joining us this afternoon. We appreciate the time. If we could just flip over to page three please. Let me just give you a brief overview of the highlights for the last couple of months. First, a quick update on the status of our operations. Obviously still in the context of the continuing health crisis. As we discussed with you a couple months ago in early March, we essentially ceased all activity in the plants not oriented towards safe and sustainable production, and that in addition allowed us increased flexibility as we instituted a variety of measures both inside and outside the plants to keep our folks safe. These measures to date have produced the intended results; thus far we've recorded a small but very manageable number of confirmed infections. It won't surprise you that we don't expect these policies to change in the near term, obviously given the situation in the U.S. generally. The public health environment in Iceland and the Netherlands is a bit better, but we're still erring towards caution at each of our locations. Consistent with this operating discipline, we've maintained strict management of our controllable costs. In essence, all non-required spending remains on hold. That's a change, of course, we made in March. The exception since the beginning has been only for spending related to safety and/or the sustainability of operations. Recently, though, we have begun to approve a few modest projects with very quick paybacks. This operating discipline contributed to strong Q2 financial results that were consistent with our expectations. In a couple of minutes, Craig will provide more detail on the quarter that just ended. When he does that, you'll see that a drop in the LME price plus a drop in regional premiums, principally the midwest premium, of course, reduced EBITDA by $32 million from Q1 so that's LME and premiums combined, $32 million Q1 to Q2 down. That's just a couple million dollars worse than we forecast to you in late April, as the last month of the quarter, as you recall, remained unpriced at that time, as it always does. As you'll also recall, May prices and LME prices remained very low in the midwest. We were able to partially offset this reduction via a $313 million decrease in controllable costs and raw material prices. In addition, cash flow was quite strong. Operating cash flow for the quarter was $37 million and CapEx was only $4 million. Cash on hand increased by $28 million. Craig will also walk you through the expected changes in realized commodity prices Q2 to Q3, obviously the quarter that we're now in, and the impact that those changes will have on our reported financial results in Q3. Obviously, the impact of those very low metal prices in April and May will be felt in the Q3 results due to our normal two to three month lag. Those prices appear now to be behind us. The company's performance is materially better than what the Q3 reported results will look like, and Craig will give you more detail and some data on all of that. Moving along, as I'm sure you saw, we refinanced the debt issue that was due to mature in June of next year; that transaction only closed on July 1, so obviously it's not reflected on the quarter end balance sheet. There's a higher coupon on the new issue, but we believed it was the right thing to do to get this done at this time. In terms of the new notes, they are attractive for early redemption assuming conditions continue to improve. In just a minute, Pete will provide you with our outlook on the sector, including global supply and demand. I'm sure you've noted recent data indicating a decent upturn in global manufacturing activity generally. You all follow the macro data, so I'm not going to spend your time now providing further commentary at that level, but I will make a few brief comments on the trading conditions we're seeing in our specific markets. The last two months have seen an encouraging pickup in extrusion and foundry activity in the U.S. generally, as that's driven largely by the automotive and certain parts of the building and construction sectors. Same is true in Europe. We're seeing a good pickup in billet, foundry, wire rod, and other markets. Obviously, in all these markets, the recovery is still uneven. You've seen activity in China looking broadly encouraging. All this said, customers, particularly in the U.S., do remain somewhat cautious. Our run rate of value-added product orders in the third quarter thus far is showing only marginal pickup from Q2. However, there has been an interesting trend over the last couple of months. We've seen very strong spot orders at the end of the month. To us, that shows that our customers are exercising understandable caution but also that actual conditions are stronger than they're expecting. It goes without saying that the next couple of months will be subject to a lot of uncertainty. The strengthening in these overall conditions is evidenced by an increasing array of product premiums. For example, the U.S. spot commodity billet premium now stands above $0.07 a pound; that was essentially zero at the height of the crisis. The midwest premium also improved from as low as $0.08 to its current level, just shy of $0.12. The free fall in the midwest premium was evident well before the impact from the public health crisis. If you go back to May of last year, May of 2019, that's the day when Canada was exempted from the Section 232 tariff, and you measure the midwest from that point to January, obviously before the impact of the pandemic, the midwest was down 35% from May ‘19 to January of this year. Of course, the impact of the health crisis has brought it down further. The collapse of the midwest is straightforward because of it, due entirely to the surge of imports of primary aluminum from Canada. Canadian imports since the exemption in May of 2019 are up over 80% versus the same period before the exemption. At the same time, Canadian exports to other markets have fallen off a cliff. Exports to Europe have halved from an already low base. Exports to the rest of the world have fallen to nearly zero. This all runs directly counter to the commitment made by Canada at the time of the exemption, specifically that imports wouldn't surge in this manner. As we've discussed at length, the tariff worked precisely as intended when it was effective. Three U.S. smelters restarted with all the associated jobs and economic activity. U.S. production was up 60% versus 2018. There was no harm of any type to any downstream industry. Job losses, no metal shortages, no price inflation. In essence, none of the dire predictions that were heard at the time. In fact, 2019 was a banner year for the downstream industries. The only way to make this program effective again is the reimposition of the tariff on Canadian imports. We hope the administration will act to do this without delay. Lastly, we continue working with the newly formed Goose Creek South Carolina municipal utility on preparations for a new contractual arrangement for the Mt. Holly Smelter. Regrettably, here the state-owned utility continues to obstruct and delay the process, and thus we've got no choice but to engage in several legal courses of action. Time, of course, is marching on, and the next couple of months will be key in determining the future of this plant. As a reminder, Mt. Holly is the newest smelter in the U.S. It's got a well-earned terrific reputation as a quality billet supplier. It's got a truly great team of dedicated long-serving employees and has access to a plentiful supply of natural gas-fired power in the southeastern part of this country. The problem, of course, remains that the legacy power company continues to demand that Mt. Holly purchase 25% of our power requirements from them. The natural gas-fired power that we buy from the market, that's 75%, is priced inside the median global power rate paid by smelters, better than the median. However, the price of the power from the legacy power company remains at over two times the price of the power we buy from the market. That's the weighted average of that 75%, and that 25% is on the margin of the third and fourth quartiles of the global cost structure for smelters, making this plant unnecessarily uneconomic. We remain absolutely committed to finding a way to make this excellent plant viable. Breaking this logjam with the legacy power company is the only thing that stands in the way, and solving this would enable Mt. Holly to operate at full capacity, both pot lines, as it should. And with that, I will give you over to Pete for some comments on the industry.

Thanks, Mike. If we can move on to slide 4 please, I'll take you through the current state of the global aluminum market. The actual cash LME price averaged just under $1,500 per ton in the second quarter, which was down approximately 12% or $200 per ton from the first quarter as COVID-19 weighed heavily on the global economy in the quarter. However, industry conditions continue to improve and the LME prices averaged $1,640 per ton for the month of July, and the current price is just shy of $1,750 per ton. In the second quarter, regional premiums averaged approximately $0.09 per pound in the U.S., down 35% quarter-over-quarter, and approximately $100 per ton in Europe, a decrease of 30% from the prior quarter. Current spot prices are around $0.12 in the U.S. midwest and $120 per ton in Europe. In the second quarter of 2020, global aluminum demand was down about 9% as compared to the second quarter of 2019. China showed strong signs of recovery in many end markets during the quarter as evidenced in demand growth of 5% compared to the prior year quarter. In the world excluding China, we saw a demand contraction of nearly 30% from the prior year quarter. However, there has been a sharp recovery in manufacturing activity in the world excluding China, particularly in the United States as well as Europe. Despite volatile price movements in the sector, global production was flat in the second quarter year-over-year. We saw 2% production growth in China versus the same quarter last year, which was offset by a 1% decline from the rest of the world in the same period. With this backdrop, we've seen the LME price rally to its highest level in nearly six months on the heels of a rising ship aluminum price, a weaker U.S. dollar, and global manufacturing expansion led by the U.S., China, and Europe. Just a quick comment on raw material prices before I hand you over to Craig. The aluminum price index has ticked back up a bit since the low of approximately $240 per ton we saw during the second quarter. Currently, the aluminum price index is about $270 per ton or less than 16% of the LME price today. Okay. With that, I'll hand you the call to Craig.

Thanks, Pete. Let's turn to slide 5, and I'll take you through the results for the second quarter. On a consolidated basis, global shipments were up 4% quarter-over-quarter while realized prices were down 8%, primarily as a result of lower lagged LME and regional premiums. Looking at operating results, adjusted EBITDA was $4.7 million this quarter and we had an adjusted net loss of $18.4 million, $0.19 a share. In Q2, the primary adjusting items were $6.4 million for the net realizable value of inventory and $2.7 million for unrealized impacts on forward contracts. Our liquidity remains strong with $197 million of funds available via a mix of cash on hand and credit facilities. As Mike mentioned earlier, we successfully refinanced our $250 million note on July 1, effectively extending its maturity out into mid-2025. Concurrent with our refinancing, we also extended the maturity of our U.S. revolving credit facility into 2023. Let's turn to slide six, and I can walk you through our quarter-to-quarter bridge of adjusted EBITDA. Decreases in realized LME prices and regional premiums comprise the majority of EBITDA reduction versus Q1 levels. The Q2 realized LME of $1,630 per ton was down $120 per ton from Q1 levels, while realized midwest premiums of $249 per ton were down $55 per ton over the same period. These actual realized values are slightly lower than those we discussed on our last call. Keep in mind that a proportion of our U.S. sales price has a one-month lag, and when we provide these estimates each quarter, there are volumes still unpriced. We generally assume flat pricing for the remainder of the quarter. As you know, the midwest premium, in particular, was extremely weak in May, with an average level about 17% less than when we last spoke in April. Realized aluminum prices were roughly flat quarter-over-quarter. The mix impact from the slowdown of billet and other value-added product demand was about $4 million versus Q1. As Mike mentioned, we've already begun to see the resurgence of this volume in the third quarter. Domestic power prices continually dropped throughout the majority of the second quarter and generated a 7% or about $1.50 per megawatt hour savings versus Q1. As we discussed previously, approximately 30% of our Icelandic power pricing is now based on the Nord Pool index, which was down $11 per megawatt hour, or about 65% from Q1 levels. Finally, our sustained effort in controlling operating costs amid this uncertain environment was the primary driver of $5 million of increased earnings versus the prior quarter. Looking ahead to Q3 specifically, the lagged LME of $1,530 per ton is expected to be down $100 per ton from Q2 realized prices. The Q3 realized U.S. midwest premium is forecast to be $240 per ton, or down about $10 per ton, and the European delivery premium is expected at $100 per ton, down about $40 per ton versus the second quarter. Realized alumina is expected to be $280 per ton, or down about $20 per ton versus the prior quarter. Taken together, the LME, alumina, and delivery premium pricing declines are expected to negatively impact Q3 EBITDA by about $20 million to $25 million versus Q2 levels. Additionally, seasonal power price increases are expected to negatively impact Q3 EBITDA by about $10 million versus Q2. Please keep in mind that we buy on the day ahead market, and we still have two months of unpriced purchases assumed in this incremental impact. In sum, we expect these items in isolation will equate to an approximate EBITDA decrease of $30 million to $35 million from Q2 levels. Let's turn to slide 7, and we'll take a quick look at our cash flow over the last quarter. We started the quarter with $148 million in cash and ended June with $174 million. During the quarter, we had $4 million of CapEx spending, the largest individual component of which was related to the Hawseville restart and represented the final expenditures to support a newly restarted and rebuilt four-line operation. Our normal semi-annual notes interest payment was a usage of $9 million, and working capital was a sizeable inflow for Q2, primarily driven by inventory reductions as a result of lower raw material carrying levels versus the prior quarter. Finally, today I'd like to provide some insight on how the recent trends in LME prices and midwest premiums could impact our business in the future. As Mike mentioned earlier, and as I'm sure you've all seen in your own research, LME prices have continued to increase steadily from their recent low point in mid-April of $1,425 per ton to today's spot price of $1,740 per ton. Midwest premiums have followed the same upward trajectory from their recent low point in early May of $176 per ton to today's spot price of $259 per ton. Keep in mind that the Q3 commodity-based sensitivities we shared earlier were derived using our normal lags across the portfolio, hence creating a timing disconnect from the recent market recovery to the anticipated P&L impacts. In other words, the recent market recovery in LME and midwest premiums will begin to impact our reported results in the fourth quarter. Let's turn to page 8, and I'll take you through a simple analysis we put together to illustrate the potential impact of recent pricing trends on a typical quarter for the company. We began with our Q2 adjusted EBITDA of $5 million. As we discussed earlier, this result includes a realized LME of $1,630 per ton and midwest premium of $249. Updating the LME and midwest premiums to spot prices of $1,740 per ton and $259 per ton respectively resulted in an adjusted EBITDA of about $24 million. Again, this is a representative example of the impact of spot prices on an actual period and is not intended to be used as an outlook for any particular period. Movements in other prices from Q2 levels other than the LME and midwest premium could also affect the sensitivity shown. In short, recent spot pricing, while still depressed versus historical levels, will benefit our P&L materially in the future due to the lag nature of the LME and midwest premium pricing. This concludes our prepared remarks. Thank you for your time and attention. I'd like to turn the call back over to Brandy to begin the question-and-answer session.

[Operator Instructions] Your first question comes from the line of Lucas Pipes with B. Riley FBR.

Hey, good afternoon, everybody. Just a few questions here from my side, and first I wanted to touch on Mt. Holly. It looks like things are moving in the right direction there, slowly but steadily. Can you remind us what the procedural steps are from here on out and how quickly we may have a resolution?

Yes, sure, Lucas. It's Mike. I'll take that one. Thanks for the question. Without getting into the specifics of the various court cases, there are several here that are ongoing that will sort of wind their way through those processes over the coming couple of months. The real date that's in front of us, of course, is December 31, which is the expiry of the current power contract. So I guess, I'd say over the next month or two, we need to develop some confidence as to how the legal posture will look as we look to replace that power contract. So I guess you could say these processes take some time. It's very difficult to predict and thus I won't try whether any of them will or all of them will obviously be resolved over the next couple of months, but we do have other alternatives on which we're working, and we'll be making some of those decisions over the next couple of months. Ultimately, we think we've got a winning hand; it's just a timing issue.

Any additional color you can provide on alternatives?

Very difficult, no very difficult at this point. We want to continue running that plant, and ultimately, Lucas, we want to run both pot lines because that's the way it was designed and that's the way it should run. The demand for the product, the billet itself is certainly there many, many times over. So that's the pot at the end of the rainbow is running the plant's two lines. It's running at one line today, and we're going to, as I said, have to make some decisions coming up as to how we get from where we are now to the end of the rainbow. Specifically on your question, there are a bunch of court cases. There are cases in federal court and there are cases in state court. It's pretty complex. Without being presumptuous, expounding on the details of any of those cases isn't going to do anybody any good.

I understand and I appreciate the color you are able to provide. My second question is I will try to touch on a couple of points in kind of one swoop, but the first is just kind of understanding this price recovery and then as premiums specifically you mentioned demand has declined 30%. North American production is up, you have the import surge from Canada. How do all of these pieces fit together? And then, of course, as it translates to your results, we are looking forward to much stronger Q4, but can you share kind of where we might be shaken out on an adjusted EBITDA basis for the fourth quarter? Thank you for your color.

Sure. In your question, you've got some apples and oranges and maybe a kumquat and a grape, so let me try to dissect it or parse through it. The 30% down in demand, that’s a reference, if I recall from my first quarter call, to the decline in value-added products, the billet and other value-added productivity, et cetera. That wasn't referencing the total momentum of primary aluminum demand; however, people use those synonyms. As you correctly referenced, the significant increase over the last couple of months—frankly, over the last 15 months—has been from Canada. As you look at the import data, it's all up on the commerce's website. So obviously, all that data is there. That's really been the difference: U.S. demand has been bumping along, but the significant proportion of imports that are coming down from Canada have significantly changed the market. I mean, that 80% increase, for example, 12 months over 12 months, has driven the market share of Canada's imports in the U.S. from around 50%, which was an all-time high, to just shy of 80% today. So it's simply a source of where the demand is being fed from as Canadian imports have sourced into the U.S. Does that address your question or should I miss it a bit?

Very helpful for now. I'll let you get to the second part of the question, then I may have a follow-up. Yes. On the EBITDA, would you be able to touch on that before?

EBITDA specifically in what respect? What is your question?

The question is, with the price recovery in LME and the price recovery in the midwest premium, obviously Q3 is going to be weaker, but as we think about Q4, given your base prices, what could that look like?

Go ahead, Craig.

Lucas, we're not going to talk specifically about Q4 today. We'll certainly save that for the next call. But I think a good way to approach that, we did share a sensitivity based on Q2 actual today, which would give you kind of a mark-to-market for two of the largest movers. And in the appendix, we've included our second half sensitivities on EBITDA. So if you were to take your assumptions for LME and midwest premium and add those on to an actual Q2, it would be a relevant range—a good place to start that would give you a sense.

This is exactly one of the reasons many companies in the commodities sector find it difficult to provide guidance and probably should avoid doing so. However, as Craig has pointed out in detail over the last couple of years, given the lag, you can input your own estimates on commodity prices, two to three months on average, as we've said. We've given you the data as to how much of our sales are just one-month lagged, and providing your own estimates for LME prices and delivery premiums—principally midwest, but also the European duty-paid premium—you can work out your own math. The math which Craig took you through is fairly simple. It answers the question simply by taking Q2 and changing nothing but the LME realized price and the midwest realized price to today's spot prices, what would Q2 have looked like ex-post?

I appreciate the color; this is very helpful. Best of luck. I'll jump back in the queue.

Thank you.

Thanks.

Thank you. Thank you for the explanation of the lag in your selling price. Is the lag on your alumina cost the same or is it even longer because the alumina has to be delivered and then work through your work in process?

Great question. Thank you for the inference. On the back of that, I'm going to let Craig answer. The answer is it's kind of the same but you get there in a different way. Go ahead, Craig.

At the highest level, from a book reported perspective, that's going to come through with about a three-month lag. Depending on where inventory levels go, it could be on the lower end—calling it two months, or it could be as long as four months—but on average, about three months. From a cash perspective, as you pointed out, it's on a one-month lag.

So that's the salient point, John, is that, unlike the sales, the vast majority of our alumina is priced. We paid for it on a one-month lag. That's the cash that's actually flowing out the door, but to your very good point via the logistics, i.e. getting the stuff either via ocean-going cargo and/or barges and then depending on how much we have in the silos, to Craig's point, that average is a way to add the weighted average one to two months to that one-month contractual pricing lag. Does that make sense?

Yes. Thank you. If I can ask a second question, you made reference to the rebound in demand. The aluminum association orders for the first six months are down 15.6% from last year. Clearly, housing is recovering really well. Wood prices are at records, 45% higher than in March. Are the aluminum customers liquidating inventory, or why is the rebound sort of not obvious from looking at orders?

Yes. There was some inventory de-stocking. It goes without saying—not just customers, John, but throughout the supply chain. You had a lot of middlemen, whether they're distributors or wholesalers, or depending upon how the specific downstream sector is structured from a commercial standpoint. So clearly, some of that went on. It's really hard to put your hand on how much of this is due to restocking to replace that de-stocking, but look, over the last six months, it's so hard generally in these markets, as you well know, and especially hard given six months like we've just seen, to kind of cite that block of time and infer anything from it. I think we need to all watch it. We need to watch, as you said, we need to watch auto builds; you saw that printed last week. We need to start watching, obviously housing starts or application for new housing permits, all the forward-looking indicators that are good indicators. It's kind of hard to tell. Let's have this discussion; it'll be more interesting a couple of months from now.

Within the aluminum orders, wiring cable was up 24%. Is there a particular reason why electrical transmission or wiring cable might be doing better? Is it more closely tied to housing?

It's housing, but also tied to general infrastructure spending. Wire rod and wiring cable has been reasonably strong, even in the worst of times. If I think of our specific customer base, orders were literally dead on their contractual volumes for the year—some of them exceeding. So at least in our small neck of the woods; referring to broader industry data, that sector never took a pause. I mean, utility spending has continued throughout the pandemic.

94% of my town doesn't have electricity. There has to be a demand for wiring cable out here.

I'm sorry about that. I hope you don't need a roof or someone like that.

No, I just went to the firehouse to charge my devices to hear your call, Mike. It's all good.

I'm glad. That makes us feel good, John. Thanks. Good luck, by the way.

Hi, thanks for taking my questions. Hopefully, you can hear me okay. Good. I wanted to focus in a little bit just on some of the funny math on slide 8. So 2Q adjusted, the spot LME and regional premiums is $24 million of EBITDA, and then the other adjustments I'm assuming are going to be power, which you mentioned is about a $10 million likely drag for the third quarter. And I guess the only other one would be alumina, which would imply maybe a $4 million benefit. So those are the other two main puts and takes or anything else that we should be thinking about?

Yes. Go ahead, Craig.

A couple of things, David. Just to split those topics. So the first one, so we're crystal clear here, on page 8, that was just marking our current quarter. So we took our printed results and just marked them at the spot to give an idea. So I just want to make sure for everybody on the call too we don't confuse that with looking at Q3 go forward. If we go to Q3 forward, the three pieces we talked about—the first, LME and regional premiums—I think you got those. So down about $100 on LME, down $10 on midwest premium, and down $40 on EDPP. Power, you were right about down $10. Alumina per the sensitivity, if we look at it about $20 bucks, it's going to be quite a bit less than $4 million.

David, I think you were asking about other changes that broke to that Q2 pro forma, right? And yes, I mean, power printed in Q2 pretty consistent with a typical Q2 spring shoulder season in the power landscape, etc. There is no reason—if you look at the forwards and whatnot—there's no reason that should be up or down. Obviously, it's up, as Craig correctly said, in Q3, just given the hot summer. In a typical seasonal trend, and then alloy—yes, as we've said before—we've given you the sensitivity, but we have very little exposure for the balance of 2020 to the API. We’re buying almost all on the percentage LME basis, which adjusts itself for those sensitivities.

Okay. Got it. Thanks for clarifying that. And then just on the— you mentioned sort of modest project approvals, or not marginal—sorry, I don't—that's not the right word—but modest project approvals, I believe was a term you used. Is there a pot line restart in that mix or?

No, but you're really hot on it. So the most significant one is, as we told you guys last time when we talked, one of the things that we did, more for sustainability of operations reasons than economic reasons, because even at the lack of commodity prices, a cell building at Grundartangi and Sebree was still measured in a payback—simple cash or cash payback—in under a year. So we've restarted, for example, Sebree, where we had stopped it. We've restarted, normal cell relining activity now, and so it's not a full pot line, but it's just getting a couple cells that, in normal times, would have been relined and back in service within six or seven or eight days on normal turnaround times for when they were cut out or failed via the normal course. It's just getting those patched up and put back in.

Okay. And then just the last question for me, the commentary obviously about midwest premiums and what's driving the run-up. Obviously, you're clearly focused on Canada, which makes logical sense from your perspective. My question is if you could provide us a little more insight into what you think is actually going on right now within the administration regarding that issue. And secondly, fundamentally, if there were to be tariffs re-implemented against Canada, fundamentally, what do you think the midwest premium should go to?

Sure, David. On the first question, the real answer is we don't know. We don't know any better than anyone else, but all we can do is look at what they say. So the most recent tangible stuff that's come out—it's quite goes back now almost a month, perhaps when Ambassador Lighthizer testified in front of Congress, both House Ways and Means and Senate Finance. He talked at length about this specific issue. So they're obviously very aware of it in the U.S. and are focused on it, and they’ve identified a surge. He said a lot of things about that, and so, other than that, we don’t know. We know that they agree it's a surge based on Ambassador Lighthizer's comments and that they're focused on it, and not much else. In terms of where the midwest goes, it's hard to tell. I mean where it was before when the tariff was effective—i.e., before the exemption when the surge started—a month after the exemption, you started to build and build and build, and then, of course, you saw where it was. It was in the sort of $0.16 to $0.18 range, plus category, and then it came down to $0.12, $0.13, and then it came down further, given the pandemic effect, where it began in February coming down to $0.08. Where it goes, some of it is LME dependent, of course, given the circular reference in it, but you can look back at where it was when it was effective and start to draw some inferences.

All right. Thanks. It's helpful. Appreciate it.

Thanks.

Your next question comes from the line of Paretosh Misra with Berenberg.

Thank you. Thanks for taking my questions. So first of all, just wanted to talk about the coke and pitch market. Just curious what you're seeing there; I mean, a lot of us think of coke and pitch just as a derivative of oil. Did those prices follow oil lower in Q2, and could that be a sequential headwind as we look into Q3?

No. I mean, you have two things going on there. Yes, crude prices are down; thanks for the question. But on the other hand, the production of those products, specifically coke, which of course, as you know, we use multiple times more than pitch, four to five times more, is dependent on refinery runs. So when demand for refined products goes down, that's a problem. Obviously, this leads to decreased demand. The answer is coke picked up a little bit but it's now, it's being bid at around $230 delivered.

We just closed the quarter at $230.

Okay. So $230, so it's still way below that. Pitch has been pretty sticky; it's been again this delivery price at $790, give or take. So you could see some movement, but they both have been—there are so many factors. You've got demand down for those products, you've got the price of the raw material down as you correctly cited, but also the supply down due to the first factor, i.e., less demand for refined products. It's a bit of a mishmash effectors that affect those markets. Not a big—there are variances there.

Thanks for the color. That's very useful. Then I just wanted to check; you provided cost guidance for the second half of this year in your last call, so just want to make sure that you still expect to run fairly close to that guidance? I mean, of course, after adjusting for all the sensitivities, but otherwise are you on track?

We are, very much. So I would take that; you're right. So the sensitivity is we're going to see a little bit of a reduction in operating costs, and some of those costs will go down, and obviously you'll use the LME sensitivity on the revenue side. But when you get to SG&A, interest, or CapEx spending, very much in line with what we shared last time.

Got it. And I guess the last one, interest expense; is there any change in that for given after this refinancing?

I'm sorry, interest expense did you say, Paretosh?

Yes, that's right.

Yes, just a new coupon; that's it.

It will be nominally more.

It will be nominally more. I mean, you can do the math now, so $250 million, the coupon is all in, including the paying kind of the two points of paying kind, is 12%. So it will take up $2 million bucks a quarter, just quick math.

Got it. Okay. I think that's all I had. So thank you.

Thank you so much.

Thank you.

[Operator Instructions] And you do have a follow-up question from the line of Lucas Pipes with B. Riley FBR.

Yes. Good afternoon again and thank you for taking the follow-up. I wanted to get a little better sense of where you believe the Canadian imports are ultimately coming from. So has Canadian homemade production picked up as well, or is that the lion's share of increased imports into the U.S. or is there more going forward?

No. Sure. It's twofold. One is yes, of course, there has been production restarted in Canada, just like there's been production curtailed in the U.S. at the same time as the production came on in Canada, but the other is just a redirection of exports from Canada to other markets into the U.S. in order to capture the tariff. Again, this is exactly what was supposed to happen.

So it's a redirection of Canadian exports; it's not that we've seen additional imports into Canada?

No. It's all Canadian production. I'm sorry. Are you getting at—are you asking perhaps I misunderstood, is there product coming from elsewhere through Canada? This is all Canadian production, absolutely. If I missed your question, I'm sorry.

No. It was— you addressed it. I wanted to get a better sense of where it comes from, so.

Canada.

Great. Very helpful. I appreciate it and, again, best of luck.

Thank you, Lucas, for the questions.

[Operator Instructions] And we do have a follow-up question from the line of Paretosh Misra with Berenberg.

Hey guys, thanks for taking another one. Just curious, as we are entering August and typically order books slow down or new orders slow down at this time of the year, are you starting to see that this year or not so much? And if you have any expectations as to how this summer might look versus a typical seasonal slowdown?

Sure. I mean, just to mark back to a, whatever, a typical environment for us i.e., pre-COVID, as you know, the vast majority—90% plus of our production is sold on a long-term contract basis. Long-term, meaning one year plus. And so we just don't have a lot of sales in the spot market, and so the takeaway there is our order patterns, in a normal environment, are pretty stable month to month unless a customer has any specific seasonality, but that's built into our production forecast anyway. Here, as I said, we're actually seeing a little bit of an encouraging uptick where customers, when we were in the depth of it, April, May, even coming through June, sort of indicated where they thought they would be versus their contractual quantities for June/July/August thus far, and we're seeing somewhat better than that; and so, that's why I said I don't blame those manufacturers. They're exercising caution, but business seems to be a bit better than they have planned because we are seeing more spot orders than we would normally see, specifically, of course, for value-added products, we're talking about billet.

Got it. Very clear now. Thanks, guys.

Good. Thank you so much.

And there are no further questions at this time.

We thank you all, as usual, for the time and look forward to talking with you in a couple of months. Take care.

This concludes today's conference call. You may now disconnect.