Century Aluminum Company

Ladies and gentlemen, thank you for standing by and welcome to the Century Aluminum Company second quarter 2020 earnings conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require any further assistance, please press star then zero. I would now like to hand the conference over to your speaker today, Peter Trpkovski. Thank you. Please go ahead.

Thank you, Brandi. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Mike Bless, Sentry's President and Chief Executive Officer, Craig Conte, 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 at www.centuryaluminum.com. We use our website as a means of disclosing material information about the company and for complying with regulation at the D. 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. With that, I'll hand the call over to Mike.

Thanks, Pete. And as usual, thanks for 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 of the last couple 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 plant. 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 US generally. The public health environment in the Iceland and the Netherlands is a bit better, but we're still erring towards caution at each of Grindertangi and Vlusingen. Consistent with this operating discipline, we've maintained a 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 okay a few modest projects with very quick paybacks in a matter of months type of paybacks. This operating discipline contributed to strong Q2 financial results that were consistent with our expectations. In a couple 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 here in late April, as the last month of the quarter, as you recall, remained unpriced at that time, as it always does. And as you'll also recall, May prices, LME prices remained very low in 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. In capex, 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 that change 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, but the current commodity prices of companies' 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 the 1st of July, so obviously it's not reflected on the quarter-end balance sheet. Obviously, 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. The terms of the new notes are attractive for early redemption, assuming conditions continue to improve. In just a minute, Pete will provide you 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 US generally. as you know, that's driven largely by the automotive and certain parts of the building and construction sectors. Same is true in Europe. They were seeing a good pickup in billet, foundry, wire rod, other markets. Obviously, in all these markets, the recovery is still uneven. You've obviously seen activity in China looking broadly encouraging. All this said, customers, particularly in the US, do remain somewhat cautious. Our run rate of value-added product orders in the third quarter Thus far, it's showing only marginal pickup from Q2. However, there's been kind of 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, obviously, 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 7 cents a pound. That was essentially zero at the height of the crisis. The Midwest premium also improved from as low as 8 cents to its current level at just shy of 12 cents. 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 of course is 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% 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 very straightforward. The cause of it is 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 US smelters restarted with all the associated jobs and economic activity. US production was up 60% versus 2018, that's 19 over 18. And there was no harm of any type to any downstream industry. Job losses, 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 re-imposition of the tariff on Canadian imports. And 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 Mount 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, has marched on, and the next couple months will be key in determining the future of this plant. As a reminder, Mount 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 it's got 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 Mount Holly purchase 25% of our power requirements from them. The natural gas-fired power that we buy from the market, that 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. And thus the weighted average of that 75% and that 25% is on the margin of the third and fourth quartiles of the global cost curve to smelters, making this plant unnecessarily uneconomic. He remained absolutely 100% 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 Mount Holly to operate at full capacity, both pipelines, as it should. And with that, I will give you over to Pete for some comments on the industry.