Century Aluminum : Transcript (

CENTURY ALUMINUM COMPANY: 3rd Quarter 2022 Earnings Call

November 7, 2022/4:00 p.m. CDT

SPEAKERS

Jesse Gary, President, Chief Executive Officer & Director

Peter Trpkovski, Vice President, Head of Investor Relations & Director of Financial Planning and Analysis

Gerald Bialek, Executive Vice President and Chief Financial Officer

ANALYSTS

David Gagliano, Analyst

John Tumazos, Analyst

Lucas Pipes, Analyst

Timna Tanners, Analyst

PRESENTATION

Operator

Good afternoon. Thank you for attending today's Century Aluminum Company's Third Quarter 2022 Earnings Conference Call. My name is Timna, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. (Operator Instructions)

It is now my now my pleasure to pass the conference over to your host, Peter Trpkovski. Please proceed.

Peter Trpkovski

Thank you, Timna. 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 Shelly Harrison, Senior Vice President of Finance and Treasurer. After our prepared comments, we'll 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 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

Thank you, Pete, and thanks to everyone for joining. I'll start off today by discussing the current macro environment and our operational performance. And then Jerry will take you through our Q3 results and Q4 outlook, before I wrap-up.

Market conditions remain quite complex in Q3 with the war in Ukraine, and Russia's curtailment of natural gas flows to Europe, causing significant turmoil across commodity markets. The resulting high energy prices and lower aluminum prices significantly impacted our results in Q3, driving a third quarter adjusted EBITDA loss of $36 million.

In this challenging environment, our team continues to take prudent measures to guide Century through the short-term macro headwinds, while remaining focused on the stability of our operations and our long-term strategies. We made substantial progress during the quarter to lower our cost structure, reduce our exposure to spot energy prices and increase our sources of liquidity. I'll provide additional details on each of these measures in a bit.

Despite current headwinds, the long-term demand fundamentals for aluminum remain excellent. And we continue to execute on our existing project to expand our value-added product lines with our Grundartangi casthouse project and U.S. casthouse debottlenecking programs all progressing on plan and on budget.

As a reminder, we expect the first phase of our debottlenecking program to be completed by year-end, enabling an additional 10,000 metric tonnes of billet to be sold into the 2023 market. We will also enter the U.S. slab market for the first time next year and expect to sell around 10,000 metric tonnes of slab. This is an excellent area of long-term growth for Century, as U.S. rolling mill demand continues to expand. Our Grundartangi casthouse project also remains on scheduled to be completed by year-end 2023.

Turning to Slide 4, you can see that despite near-term turbulence, global aluminum supply and demand remains roughly balanced. While high energy costs have reduced European demand this winter, this has been offset by the significant contraction of Europe's aluminum supply base. High energy prices have now caused more than 50% of Europe smelters to curtail with additional closures expected at year-end.

In fact, as you can see in the chart on the upper right-hand corner of the slide, the loss of aluminum production caused by Russia's actions have created the largest deficit for aluminum in the history of the European market. Ironically, this European deficit is now being increasingly filled by Russian produced aluminum, creating a situation where Russia is benefiting from the very problem that is created. Increased Russian imports will make it difficult for the European smelter base to ever fully recover. For this reason, we believe it's critical that Europe, the U.S. and our allies take urgent action including sanctions to address these unfair Russian actions and protect this critical industry. While aluminum pricing will likely remain volatile in the short-term.

Longer-term macro trends towards electric vehicles, renewable energy and sustainable packaging continue to support strong value-added premiums.

While we've seen some softness in the building and construction markets. Automotive demand has continued to improve and we anticipate continued strong renewable energy demand, especially as the effects of the recent inflation reduction act, further incentivize renewable energy and electrical vehicle build out in the U.S. All told, we expect to sell out our value-added product portfolio in 2023. Including the increased volumes from debottlenecking projects with pricing levels roughly unchanged from 2022.

Turning to Page 5. You can see that Russian curtailments natural gas flows to Europe, have continued to drive record high energy prices in Germany, France and other regions. With winter forwards over EUR700 per megawatt-hour. High Mainland European energy prices have been turn put upward pressure on pricing in Nord Pool.

In Q3, Nord Pool energy prices average about EUR175 per megawatt-hour up about EUR50 versus Q2. Unfortunately, most market prognosticators now expect the European energy crisis to persist for several years. While Europe has successfully filled gas storage near capacity this year. Russian energy flows to Europe have continued to decline, and the recent destruction of the Nord Stream natural gas pipeline has created a situation that means Europe will likely remain significantly short energy for at least the next couple of years. Considering the expected continuation of this crisis, we decided to take action in Q3 to eliminate the remaining unhedged Nord Pool market exposure from our Icelandic Energy contracts.

If you turn to Slide 6, I'll walk you through the details. Prior to taking this action, about 30% of our Icelandic energy contracts were pegged to the Nord Pool price. With the remaining energy provided under long-term LME linked power contracts. Due to the extreme volatility on the Nord Pool market, we worked with our energy supplier to convert the majority of our remaining unhedged Nord Pool exposure to a fixed price more in line with pre-COVID Nord Pool pricing levels.

Following this amendment to our power contract, we entered into additional financial hedging transactions to balance the remainder of our Nord Pool exposure. Including unwinding excess 2023 financial Nord Pool hedges at a net gain of approximately EUR16 million. The benefit from the unwound hedges will settle in cash evenly over 2023.

Finally, as is our normal practice when we enter into fixed price energy contracts, we also sold forward a small amount of LME creating an effective LME linked price for the energy. You will see those hedges reflected on our hedging side in the appendix. All told, we were pleased to be able to eliminate our remaining unhedged exposure to Nord Pool and remove this volatility from Grundartangi's bottom line results.

Turning to the U.S., Domestic energy markets remained elevated over the summer, resulting in average Indiana Hub energy prices around $90 per megawatt-hour in Q3. As we enter Q4, strong domestic renewable energy and natural gas production, paired with recovering coal

production led October Indiana Hub to fall and average about $60 per megawatt hour for the month. We are cautiously hopeful that these trends will continue with forward Indiana Hub prices now averaging around $65 for the remainder of Q4.

As expected, tight energy markets also continue to impact the power provider to our Mt. Holly facility, where a force majeure event from their largest coal supplier has left the utility to cover shortages in their coal generation with market power purchases. We've started to see Mt. Holly energy prices decline in Q4, as U.S. energy market conditions have improved.

Moving to our other cost inputs. API alumina prices averaged $340 per tonne in Q3 and a fall into spot price of $310 per tonne today. On the other hand, carbon prices remain historical highs as we enter Q4. While we did see the first signs of declining coal prices in Q3, the commodity remains stubbornly high and pitch prices have yet to abate. Stepping back, when you combine the effects of the global energy crisis with historic high carbon prices and other inflationary pressures, we estimate that about half of global aluminum production is loss making at current market pricing. Judging from past cycles, loss making this decent of the cost curve has typically not been sustainable for an extended length of time. Over the long run, LME prices have instead averaged around the 90% of the global cost curve, which would require a significant improvement in current conditions, either on the cost side or price side in order to reach a stable equilibrium.

Turning to operations, all of our sites are operating well and in full production. I'd like to commence the teams at each site for achieving this result, while also executing on the capital and cost reduction programs we discussed in our last call. As a reminder, in response to market conditions our teams have implemented programs to reduce planned CapEx and OpEx in 2022 by over $40 million, including headcount reductions and other efficiencies.

We remain on track to achieve these savings, which are reflected in our outlook on page 10 in the appendix. Most importantly, we have remained focused on improving our health and safety, and our ultimate goal to achieve an injury free workplace. These efforts span a wide range of programs from leadership to behaviors, to technology. And I'm pleased to say that we are seeing the benefits from these efforts with workplace injuries across Century decreasing by nearly 15% year-to-date. As we remain focused on consistent and cost discipline operations, we finished the quarter with liquidity of $215 million, and remain well- situated to continue to operate our facilities at full production through this portion of the aluminum cycle.

In order to further solidify our position, we have also added a new $90 million credit facility secured by our Vlissingen assets. This new facility will be incremental to our existing U.S. and Icelandic credit facilities, and additive to our quarter end liquidity position. Combined with our cost cutting measures and already strong liquidity, this new facility should leave us well placed to continue to execute on our long-term strategies.

And with that, I'll turn it over to Jerry to walk you through the financials.

Gerald "Jerry" Bialek

Thanks, Jesse. Let's turn to Slide 7, I'll walk you through the results for the quarter. On a consolidated basis Q3 shipments were down about 19% sequentially, primarily driven by the curtailment of our Hawesville facility. Realized prices were down 14% compared to prior quarter as a result of lower lagged LME prices and lower regional premiums. The combination of lower shipments and lower realized selling prices drove over 26% decrease in sequential net sales. Looking at operating results, adjusted EBITDA was at $36 million loss for the quarter. Adjusting items include the removal of $5 million for Hawesville curtailment costs and the removal of $6 million for lower cost or NRV impact on inventory.

Moving on to liquidity. As of September 30, we have liquidity from available cash and credit facilities of just over $250 million. We took actions to strengthen liquidity during the quarter including initiating a new EUR14 million term facility secured by the Nord Pool in-the-money hedge unwound. This facility remained unwound as of quarter-end and is included in our total liquidity of $215 million. Additionally, in November we agreed to a new $90 million credit facility secured by our Vlissingen assets. This credit facility will be available beginning in December 2022, and we'll further increase liquidity by $90 million beyond the $215 million we had at end of quarter.

Turning the Slide 8, to discuss adjusted EBITDA. Again, for the third quarter adjusted EBITDA was at $36 million loss, a decrease of $123 million from the prior quarter. This change was driven by lower LME and regional premiums as well as higher energy and other raw material costs, which were partially offset by the curtailment of our Hawesville facility. The quarter three realized LME of $3,636 per tonne was down $425 versus the prior quarter. While realized Midwest premium of $643 per tonne was down $201. Lagged European delivery premiums were up $117 at $578 per tonne. Indiana Hub power prices in Q3 average $90 per megawatt hour, which is up to 15% versus Q2. While Nord Pool prices averaged $177 per megawatt- hour, up more than 37% versus prior quarter. As Jesse noted, Indiana Hub energy prices have decreased significantly since the end of Q3, averaging around $55 per megawatt-hour quarter four to date. Excuse me, the realized price of alumina was up $57 per tonne verses prior quarter.

While we saw signs of spot price softening, our realized Coke and Pitch prices increased about 10% and 19% respectively. Finally, as discussed during our last call, we realized a combined $20 million incremental benefit from curtailing our Hawesville facility and our global cost reduction initiatives, along with more normalized maintenance and pot relining spend levels.

Okay. Let's turn to Slide 9, we'll take a quick look at cash flow. Cash position increased going from $30 million at June 30th, to $65 million at September 30th. As we offset the negative impact from adjusted EBITDA and the use of cash for capital expenditures with borrowing on our revolving credit facilities, working capital improvements and gains in hedge settlements. Total capital expenditures were $18