Century Aluminum Company

Ladies and gentlemen, thank you for standing by and welcome to the first quarter 2020 earnings call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Peter Please go ahead.

Thank you very much, Grace. Good afternoon, everyone, and welcome to the conference call. I'm joined today by Mike Bless, Century's President and Chief Executive Officer, Craig Conti, Executive Vice President and Chief Financial Officer, and Shelly Harrison, our 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.centuryofaluminum.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 of today's presentation, 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 very much, Pete, and thanks as usual to all of you for joining us this afternoon. Before we get started, I do need to report some truly tragic news that's obviously very well known within the Century family and within our broader community. If you've had a chance to look at the press release since it was sent out an hour ago, you've seen we suffered a fatality in the anode manufacturing plant at Seabury in the early hours of the 8th of April. Pardon me. This was really devastating to all of us at Century. It was especially painful given our collective and passionate commitment to keeping each other safe. We're redoubling our efforts to ensure that a similar event never comes close to happening again. And we're sharing our learnings within the company and with others in the industry. Our late colleague's family is and will remain firmly in our thoughts and in our prayers. and with that, if you please turn to page three, let me just give you a quick overview of the current situation. As usual, Craig will provide you some detail in a moment and you'll see that the first quarter financial performance came in quite strong. This is evidence to us that industry conditions before the health crisis were favorable and actually improving. You'll also see that our cost structure resulted in excellent profit and in good cash flow conversion. and this was before the recent further cost reduction actions that we put in in March. All this gives us confidence that we've gone into this period in very good shape. I'll give you some detail on our response to the pandemic in just a moment. As we reported a couple weeks ago, all our plants continue to operate normally and given the present set of facts and circumstances at each of the facilities, we don't see this changing. In a couple minutes, Pete will take you through our current view of the industry environment It obviously goes without saying that any analysis of the conditions in the industry is highly changeable, even at the moment it's given. We did see a significant and almost immediate decline in demand in all of our end markets in the US and in Europe. Thus far, there's little consistent industry-wide data, but based on our discussions with our customers, we believe, pardon me, that there's been average temporary demand destruction on the order of 30%. This has spread unevenly across the end markets. As has been reported widely, the large market most immediately and significantly impacted has been automotive. Others, like construction, are doing somewhat better, so the impact there could lag. And others still are in relatively good shape, for example, utility and certain other infrastructure markets and the defense and military sectors. You've obviously noted some recent announcements of manufacturing plant restarts around the world. Obviously, we've all seen those. So obviously the situation remains very dynamic. But those do give us some cautious relative optimism on the back half of the year. All of this has obviously led to a precipitous drop in the metal price. You've seen that. As is normally the case, aluminum has been a leading or very coincident indicator here. As we stand today, the LME cash price is down about 17% from its beginning of the year level. At its low, it was down about 21%. Regional delivery premiums are also down meaningfully, both the US Midwest and the EU duty paid premium are down 40% from their 2020 highs, obviously just a couple weeks, a couple months ago, pardon me. Let me give you a quick update on the Midwest premium more generally, because we have begun to see that go through a meaningful slide well before the health crisis. In fact, during the second half of the year of 2019, that is, the Midwest premium posted down 20%, The fall began very shortly after Canada was exempted from the Section 232 tariffs. It's quite easy to understand the problem when you compare the period since the exemption with the similar time period just before the exemption. And when you do that analysis, you'll see that total primary aluminum imports from Canada are up 30% since the exemption. That was last May. And more particularly, P1020 imports from Canada are up almost 75%. since the time of the exemption. This is in stark contrast to the commitment by the Canadians that post-exemption imports would not surge. The issue, of course, is well known to U.S. government officials. And as you'll remember, at the time of the exemption, the parties agreed that the tariffs would go back into place if a surge were to occur and not cease. Countering these movements in the metal price, we've seen a decline in the price of the key commodities to which we're exposed. and this was largely continuing trends we saw before the health crisis. The aluminum price index was already coming off in late 2019 due to the rebalance of industry supply that we've discussed at length. And since the beginning of this year, it's traded down a further 13%. Current level of $235 to $240 a ton represents 15 and a half to 16% of the LME price. So a normalized level in our view. US and European wholesale power prices are also down significantly since the beginning of the year. Bottom line, we believe we're well set up to navigate successfully through this difficult environment. The decline in the price of these raw materials, combined with our recently implemented cost reduction actions, have brought our cash break-even level down to very near the current LME price. In addition, we have strong liquidity that provides extra support. I'll give you a sense of all this in just a minute and Craig will give you some further detail. But first, I'd like to give you a quick update on our response to the health crisis and the status of our operations. If you could turn to slide four, please, pardon me. In early March, we implemented a range of preventative and restrictive policies like many companies. These are numerous, so let me just give you a couple examples so you can get a sense. We segregated our employees into the smallest groups required to accomplish the necessary tasks in each department of each plant. We staggered our essential personnel to preserve the required expertise in each plant. We closed non-essential common areas and began frequent deep cleaning of all other areas. We changed policies and procedures around use of shared equipment. And we began requiring all people who enter our facilities to get their temperature measured on the way through the gate and on the way back out. Beginning in March, employees who were able to work from home began doing so and continue to do so today. These are just some examples, but hopefully, as I said, it does give you a sense. And as you're all aware, given the required continuous nature of our production process, we simply can't take any risks here. These changes put a real and extra burden on our people during an already strenuous time. Our folks have taken on these challenges with a strong and positive attitude, and for that we're really, really grateful. They've kept these plants running and kept the quality of our production high despite these tough conditions. We've also put on hold any activity not solely focused on keeping the plants running safely and maintaining the quality of the production. The objective is pretty straightforward. It's to allow our folks to focus only on the essential tasks. Examples of these deferred activities include most non-recurring maintenance, as well as improvement projects of various types. Thus far, these measures have had the intended effect. As of today, we've had only one confirmed COVID-19 case that's across the entire company, including Iceland and the Netherlands. In addition, we have a handful of folks who have been required to quarantine after contact with persons infected or believed to have been infected by the virus. And thus, our plants have continued all to operate without interruption. As you'd expect, we've been in constant contact with our key business partners. All our critical raw materials suppliers have been deemed essential businesses and have thus continued to operate with minimal interruption. The same is true of the logistics providers. All of our production continues to be sold essentially as it's cast, that's as per normal. We do have relatively less exposure to the hardest hit sectors like automotive, for example. That said, some of our customers have asked to reduce their take of value-added products for a couple months, and obviously we're working with them. And we're filling in these gaps with increased production of standard products. Of course, these come with lower premiums. We are, however, seeing some good offsets to these trends. For example, at Hawesville, the plant is producing record amounts of high-purity metal. As I said before, this product continues to be required by the military sectors, and we're really pleased and proud to be doing our part in this regard. and importantly, this is really gratifying confirmation of the success of the technology upgrade at Hawesville and importantly of the skills of our largely new workforce there. We're by no means ready to declare ourselves through the health part of the crisis and we'll continue to operate in this manner until further notice. Lastly, we do have contingency plans ready to implement in the event that the health situation in any of the plants were to take a downturn. With that, let's move on to page five, please. I'll give you a quick summary of our cost position and some comments about the outlook before handing you over to Pete and Craig. In early March, we did begin to get ahead of the falling metal price and premiums, and by mid-March, all of these corrective actions were firmly in place. First, all non-essential spending was ceased and deferred. This includes the types of projects I discussed a couple minutes ago. We instituted a hiring ban, canceled salary increases for higher earning and non-production personnel. We put on hold the vast majority of the capital projects. The most significant of these, obviously, is the rebuild of the last pot line at Oswald. That's obviously the fifth of five pot lines there. The rebuild of the fourth line was completed earlier this year, very early this year. So essentially all of the spending for that project was behind us before the health crisis hit. Thus, the restart of that fourth line is now nearing its completion as planned. That produces incremental cash flow even at the current commodity prices. Further, the fixed cost absorption further improves Haasville's cost structure. For example, the plant's cash operating cost will be down $300 a ton from Q4 to Q2 of the current quarter. As I said, most of these actions were put in place in March, so the positive impact will be realized in the second quarter. And again, we have a next phase of actions ready for implementation if it were to become necessary. Just a couple last comments. As we talked about in our written update in late March, we did make partial drawdowns under our two revolving credit facilities. We see no conceivable need for these funds at any time in the foreseeable future. In that context, let me just give you a quick sketch of the current financial situation and the outlook. And again, Craig will give you some more detail. The performance in the first quarter does give us very good confidence in our expectations for the next couple quarters. The cost side of the equation we have well in hand. We're quite convinced of that. Just at a high level, if you've had a chance to take a quick look, Q1 EBITDA was $15 million higher sequentially on a revenue decline of $14 million. And most of that fall in revenue came from lower premiums, so of course that goes right to the bottom line. We also saw very good conversion of earnings to cash flows. Again, these results were produced by the cost structure we had in place before the recent improvement actions. The realized raw material prices in the first quarter were before the recent additional declines I just talked about, and the results were before the cost reduction actions we put in place in March. As usual, Craig will provide you some detail on the impact of commodity price changes and other factors on forecast sequential quarter-to-quarter EBITDA. Obviously, I'm now talking Q1 to Q2. As you know, most of our revenues and key cost inputs for the current quarter, i.e. Q2, are already priced at this point, so we've got good visibility. And based on this analysis, you'll see decent positive EBITDA and essentially break-even cash flow for Q2. Craig will obviously also give you an update on our cost structure for the second half of the year so you can build your estimates. When he does, you'll see average plant operating costs, this is all cash operating costs, down a further $180 a ton. from the levels we showed you just in February. The premiums have also declined, so the direct LME comparable operating cost is down $110 a ton from the February estimates. And as you recall, the operating cost we showed you in February was already down over $200 a ton from the 2018 level. All this has brought our cash flow break-even level down a further $125 a ton to around $1,550 a ton. As a reminder, this is also a direct LME comparable metric. So it shows at what LME level the company is cash flow break even given current premiums and raw material prices and so forth. And again, as a reminder, redefined cash flow here is net of all items. So debt service costs, taxes, all working capital movements, CapEx, et cetera, et cetera. Backing this up, we've maintained over $200 million in liquidity. So you'll be able to see why we believe we're in a very good position to operate through this environment. And with that, I'll give you to Pete for some additional comments on the industry structure. Pete?