Century Aluminum Co Q2 FY2024 Earnings Call

Good afternoon. Thank you for joining us for the Century Aluminum Company Second Quarter 2024 Earnings Conference Call. My name is Forum, and I will be your moderator. It is now my pleasure to hand the conference over to our host, Ryan Crawford with Century Aluminum. Mr. Crawford, you may begin.

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 1, 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, Ryan, and thanks to everyone for joining. I'll start the call by reviewing our second quarter performance and sharing some thoughts on the current market and environment before handing it over to Jerry for the detailed financial results and then taking your questions. Our team delivered strong results in the second quarter with adjusted EBITDA of $34 million. Jerry will provide the full details here, but we are very pleased with the consistent strong operating performance across our plants. Overall, rising aluminum prices, both at the LME and regional premium level, enhanced profitability in the quarter and will also positively impact our third quarter financial results as the strong LME prices observed in the second quarter start to affect our lagged contractual pricing and financial outcomes. We also reduced our outstanding debt by nearly $50 million during the quarter, resulting in strong liquidity of over $340 million. Looking at aluminum prices, they increased in the second quarter due to stronger global demand, particularly in China, with both LME and regional premiums rising. Demand is especially robust in sectors related to the green economy, notably solar energy and other renewable applications. However, more recently, aluminum prices have declined as broad macro concerns have influenced markets. Long-term, we are confident that global trends towards electrification and lightweighting will continue to boost aluminum demand. With inventory levels remaining near historical lows and limited expected growth in aluminum supply over the next several years, it is clear why aluminum markets are in steep contango, and we believe our assets are well-positioned to benefit from tight aluminum markets in the U.S. and Europe. Regarding alumina, the API saw a significant increase during the quarter, with Q2 prices averaging 19% higher than Q1 levels and surpassing $500 per ton in June. These prices demonstrate a continuing tight market for alumina, as production issues in Australia and China resulted in a lack of available spot cargoes and drove prices higher. Alumina prices have remained near their highs so far in the third quarter due to constrained supply. Given the tight alumina market, we were very satisfied with Jamalco's strong operational performance in the second quarter. As previously mentioned, our Jamalco operations are generally net neutral to API pricing thanks to our long-term commercial contracts linked to aluminum prices. Jamalco achieved its targeted production rate of 1.2 million tons per annum in the second quarter. Over the longer term, while we expect global alumina prices to largely track aluminum prices, we anticipate that alumina will remain subject to supply-driven volatility, particularly for refineries without a dedicated source of bauxite, which are at risk from the Sebree and bauxite markets and supply from geopolitically challenging locations. Additionally, Chinese regulators announced earlier this year that alumina refineries in China would face stricter energy and emission efficiency standards, which we believe will limit growth in Chinese alumina production in the near to medium term. In the global trading environment, both U.S. and EU governments took further actions towards nearshoring industrial and strategic mineral production during the quarter, which will affect global aluminum flows and supply in our key markets. In May, I joined President Biden at the White House, where he announced an expansion of Section 301 tariffs on billions of dollars of Chinese goods, including many aluminum products. Similarly, in June, the EU announced additional tariffs of up to 38% on Chinese electric vehicles. In July, the U.S. introduced a new requirement for smelted and cast aluminum that ensures materials from Russia, China, and certain other countries cannot be transformed into downstream aluminum products in Mexico to avoid the 10% Section 232 duties. Additionally, as we anticipated in our previous call, in May, the U.S. Department of Commerce imposed significant anti-dumping duties on aluminum extrusions coming into the U.S. from 14 countries, including China, Mexico, Colombia, and Vietnam. These duties, which took effect immediately, have started to bolster domestic extrusion demand and subsequently domestic billet demand. As a reminder, we held back some second-half billet volumes for spot sales this year in anticipation of improved conditions in the U.S. market and a more favorable pricing environment. We have begun to see some increase in demand and expect this will positively influence U.S. billet pricing for the rest of the year and into 2025. These trade actions, especially when considered in conjunction with the substantial trade measures already in place in U.S. and EU markets, including Section 232 tariffs and the EU carbon border adjustment mechanism, underscore the significant advantages of Century's U.S. and EU-based production footprint. This positions us well to offer short supply chains and improved service to our customers while also benefiting from favorable pricing environments. In terms of operations, we experienced strong and stable performance across all our locations during the second quarter. In Iceland, the previously announced 20-megawatt energy curtailment was lifted as expected, allowing Grundartangi to return to full production by the end of the quarter. Our team performed exceptionally in quickly and efficiently restoring production once the power curtailment ended. As we have seen in many smelters worldwide, restoring production following a curtailment can be challenging. I would like to commend the Grundartangi team for their excellent work. We anticipate normal production levels from Grundartangi in Q3. At the Grundartangi cast house, we continued trials and qualification of our new natural green billets with our key customers during Q2 and Q3. We are eager to start supplying this much-needed low carbon billet in the European market. In the U.S., energy prices remain favorable, influenced by natural gas prices near $2. Operations at Sebree and Mt. Holly have remained stable, demonstrating the capability of our operating teams during the hot summer months. At Jamalco, as previously announced, we were impacted by Hurricane Beryl when the Category four storm hit near our port facilities in early July. The hurricane caused heavy storm surge, significant rainfall, and high winds affecting our operations and local communities, and we are collaborating with local officials to assist those in need. Fortunately, we did not experience significant injuries or damage to refinery operations, but we did temporarily curtail refinery operations as part of our standard hurricane preparedness. Jamalco's team excelled in restoring operations once the storm passed, and the refinery has now returned to full production levels. While Jamalco’s production facilities sustained no major damage, the storm did impact the port facility, damaging a portion of the alumina conveyor, which is currently under repair. While repairs are ongoing, Jamalco has arranged alternative port solutions to ensure uninterrupted alumina shipments to its customers. Lastly, we made good progress on our growth projects during the second quarter. Although we do not have significant updates at this moment, we continue to diligently evaluate each project and expect to share further updates in our third-quarter call.

Thank you, Jesse. Let's turn to Slide 7 to review second quarter results. On a consolidated basis, second quarter global shipments were approximately 168,000 tons, slightly lower than last quarter due to typical timing fluctuations. Realized prices increased versus prior quarter, driven by higher metal prices and regional delivery premiums resulting in net sales of $561 million, a 15% increase sequentially. Looking at Q2 operating results, adjusted EBITDA attributable to Century was $34 million. This was a sequential increase of $9 million, mainly driven by higher realized metal prices and regional premiums. Adjusted net income was $1 million or $0.01 per share. The main adjusting items were add-backs of $4 million for share-based compensation and $2 million for the unrealized impact of forward contracts, partially offset by a $2 million deduction per lower of cost or net realizable value on inventory. We improved liquidity to $343 million by the end of the quarter. This is the strongest liquidity position in nearly a decade and consists of $41 million in cash and $302 million available on our credit facility. Turning to Slide 8 to explain the second quarter sequential improvement in adjusted EBITDA. In total, adjusted EBITDA for the second quarter was $34 million. Realized LME of $2,288 per ton was up $98 versus prior quarter, while realized U.S. Midwest premium of $416 per ton was up $7 and European delivery premium of $284 per ton was up $61. Together, higher metal prices and regional premiums contributed an incremental $22 million compared with the prior quarter. Aluminum production costs were mixed as higher LME market prices increased power costs for our Iceland smelter by $4 million. As a reminder, the power expense for our Iceland smelter is mostly linked to LME prices. Realized coke prices decreased $31 per ton and realized pitch prices decreased $35 per ton, together other raw material prices improved by $3 million helping offset the power headwind. The lower shipment volume was a $7 million headwind to adjusted EBITDA. The decreased volume was due to normal fluctuations in shipment timing. We expect these shipments in Q3 and therefore no change to our full year buying expectations. As discussed last quarter, we completed the deferred potlining activities related to the ice and power curtailment. These activities drove an incremental $5 million of expense in Q2 that will not repeat. With that, let's turn to Slide 9 for a look at cash flow. We began the quarter with $93 million in cash. Adjusted EBITDA contributed $34 million. Capital expenditures totaled $16 million, $11 million of which relates to the completion of the Grundartangi Casthouse project. We reduced short-term borrowings on our revolving credit facilities with both our U.S. and Iceland Revolvers paid down to zero balance at quarter end and we experienced normal working capital flows. At the end of quarter 2, we had $41 million in cash. Let's turn to Slide 10 and I'll give you some insight into our expectations for the third quarter. For Q3, the lagged LME of $2,440 per ton is expected to be up about $153 versus Q2 realized prices. The Q3 lagged U.S. Midwest Premium is forecast to be $425 per ton, up $10. The European Delivery premium is expected at $320 per ton or up about $35 per ton versus the second quarter. Taken together, the LME and delivery premium changes are expected to increase Q3 EBITDA by approximately $30 to $40 million versus Q2 levels. We expect power prices to be a $5 million headwind. Collectively, we expect our key raw materials to be about flat. The previously discussed timing of shipment volume will be a quarter-over-quarter tailwind of approximately $10 million. Finally, we expect a headwind of about $5 million related to summer seasonality and administrative expenses as we continue to progress on our growth projects. All factors considered, our outlook for Q3 adjusted EBITDA is expected to be in a range of between $65 million to $75 million. The financial impact of Hurricane Beryl will be adjusted in results and is reflected as such in our Q3 outlook. We look forward to your questions today and we'll now turn the call over to the operator.

Our first question comes from Lucas Pipes with B. Riley Securities. Lucas, your line is now open.

Thank you very much, operator. Good afternoon, everyone. Jesse, I wanted to get your perspective on the power markets. There's been a lot of excitement out there on the need for power in AI. We saw a very constructive PJM auction last week. You are long power at Hawesville with about 500 megawatts and so, I wondered how you think about the optionality around that power infrastructure today and if there has been any interest from third parties. Thank you very much.

Yes, hi Lucas. Thanks for the question. Obviously, we as you know, we're constantly looking at the power markets, both here in the U.S. and Europe and really around the world, watching for trends and what's going on out there. Obviously, we are aware of a lot of the storyline around the AI build-out and really quite substantial estimates of energy required to power all of that. With our own assets of course, we're always looking at all alternatives, especially with our curtailed assets in order to figure out how we maximize value. So I guess what I would just say with Hawesville, we continue to think it's a great adoption on higher aluminum prices in the future. But in the end, we'll maximize the value of that asset and whatever form that may come in is what we'll pursue.

Jesse, I appreciate that insight. Thank you. I'll follow up on 45X. There hasn't been much additional guidance from Treasury. Do you have any updates to share regarding a timeline for more guidance? Additionally, there has been increased focus on the new smelter development. Can you proceed with that project without complete clarity from Treasury on what will be covered under 45X? Thank you very much.

Sure. Thanks, Lucas. Yes, as you might imagine, we continued to engage with the administration on 45X and in many of the same ways that we talked about on previous calls. You know we think both the timing of the ultimate final regulations as well as the inclusion of raw materials and the ultimate calculations are very important for the U.S. industry. And so we've continued to have those discussions. I don't really have an updated timeline for you at this time. But I would just say we continue to be very engaged and we're very thankful from the administration for their continued engagement on this matter. I think everyone recognizes the importance of the aluminum industry in the United States and moving forward with that in mind.

All right. We'll stay tuned. Jesse, I'll try to squeeze one last one in with the Mt. Holly restart of the last 25%. Can you speak a little bit to the margin profile of those incremental volumes? Would those be kind of above below in line with your current EBITDA margin profile? Thank you very much.

Sure. Good question, Lucas. And as I mentioned in my prepared remarks, we continue to do work on that project and we continue to monitor macro conditions as well and put all of those things together in terms of looking at the timing of that restart. But to your specific question on margins, as we probably talked about in the past, those last tons, those incremental tons out of smelter are always the most profitable tons. If you continue to spread what are really, compared to other industries, pretty large fixed costs over those incremental tons and get the benefit from a margin perspective. So as I said in the past, it's really a project we would like to do. And it's one that we continue to get ready for and when the time is right we remain confident in our ability to execute that.

Jesse, I appreciate the call. I'll turn it over for now. All the best of luck.

Thanks, Lucas.

Thank you for your question. Our next question comes from the line of Katja Jancic with BMO. Katja, your line is now open.

Hi, thank you for taking my questions. Maybe starting on Jamalco there were some reports that the refinery declared force majeure. Can you talk a bit more if that is correct and why would that be if the volumes or the shipments are normal?

Yes, that is correct Katja. And of course you declare force majeure for a variety of reasons. As we said, our main port of export, which is Rocky Point, is out of commission right now and we are running through an alternative port right now. And so the force majeure really related to that setup going forward. But as I said, the plant is back to full production and we continue to have those alternative port solutions in place and to export Alumina off island.

So shipments are going as normal right now?

Yes, we don't expect a material impact to our results or to not with results going forward. You can't say they're exactly as normal when they're running out of an alternative port but we're continuing to make exports from the island.

Okay. To follow up on Lucas' question regarding Hawesville, have you considered the power situation? Is there a possibility for a different option from that perspective? Would the utility or your agreement with the utility allow for that?

Yes, I do might recall Katja both Kentucky plants have fairly unique energy arrangements where through a variety of contractual arrangements we have access to what is essentially the wholesale markets in MISO. And so that's been a very advantageous arrangement for us and sporadically with a lot of flexibility over time. And so if we look at both the future of possible from a variety of perspectives, we continue to think that flexibility will be an advantage for us no matter what the outcome ultimately is.

Okay. Thank you very much.

Thanks, Katja.

Thank you for your question. Our next question comes in the line of Timna Tanners with Wolf Research. Timna, your line is now open.

Yeah. Thank you, and good afternoon. Why don't you ask a little bit more about the situation at Jamalco? Is it entirely benign, like doesn’t have an impact on Q3, and is there any insurance collectible on an issue like this? I’m just wondering a little more color.

Sure, yeah. I mean, we were definitely impacted, right? That's what we said in the press release and that's what we've said on this phone call. As we said, a portion of the alumina conveyor at the port was blown away. At the plant itself, we really haven’t had any impact other than sort of taking the plant down as part of our hurricane preparations and then bringing it back up. But, like I said, we're back at full production today. So, while we, of course, would've preferred that the hurricane skirted the island to the south more than it did, I think the team has really done a good job making it work while we get the repairs done at our port at Rocky Point and sort of making these alternative shipping arrangements work. There is, of course, some impact. We lost some volume while we took the plant down for a few days and while we brought it back up. But it’s really not material overall to our financial results.

Okay. Thank you for that. Back to Mt. Holly, is it fair to say that if we're here past the middle of the year and you're still mulling it over, that you probably wouldn’t see a restart imminently? Or can you give us a little bit more color about what you're looking for to make that decision?

As with any restart anywhere in the world, we evaluate several factors, including whether the market has reached the necessary volume, the return profile on the capital expenditure needed to enable the restart, global aluminum prices, the Midwest premium, and value-added premiums. It's a complex analysis. Our focus has been on reducing the time needed to restart once we make the decision. We've previously discussed shortening supply chains for necessary materials, ensuring we have the workforce available, and securing energy supplies—all of which we've been working on in recent months. When the timing is right, we will be prepared to move forward. However, as I mentioned in the last call, regardless of the decision made, I don't anticipate significant capital expenditure from us on that project in 2024.

Got it. Thanks. And if I could just ask one high-level question, I’m just curious about your thinking on the broader aluminum markets. I know you had some prepared remarks on this, but it’s been really baffling that aluminum goes up and straight back down, while aluminum continues to march forward. And it’s a great thing that you have the Jamalco as a hedge now, but I mean, how sustainable is this or what have we seen in the past about how long this lasts? If I recall, it’s not usually that long, but I’m just wondering if there could be any action to see a change in the dynamic here that’s so unusual.

Yeah. It’s a good point. We haven’t seen this relatively high alumina price to aluminum price, which is somewhere in the mid-20% today on what we call an LME percentage basis. And so, we do think that should be supportive of the aluminum price from here. The shortage in the aluminum market is quite real today. It is quite tight out there, and that’s really what’s been driving up the price, and that’s for some structural reasons. We’ve seen shutdowns in Australia. We’ve seen increasing regulation of alumina production in China. And so, the market is relatively tight for alumina. Over time, as I said, we’re in the mid-20% now in the relationship of alumina to aluminum. Traditionally, that’s more in the mid-teens. So it really is quite a high relationship and really should be supportive of the aluminum price from here.

Okay. That’s it for me. Thanks for the thoughts.

Great.

Thanks, Timna.

Thank you for your question. There are no questions waiting at this time, so I will pass back for any closing remarks. Thank you.

Thanks, everybody, for joining the call.

This concludes today's Century Aluminum Company's Second Quarter 2024 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.