Century Aluminum Company

Ladies and gentlemen, thank you for standing by and welcome to the Century Lumen Company third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would like to now hand the conference over to your speaker today, Peter Tchaikovsky. Thank you. Please go ahead, sir.

Peter Tchaikovsky Thank you very much, April.

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 Conte, our Executive Vice President and Chief Financial Officer, and Shelly Harrison, our Senior Vice President of Finance and Treasurer. After our prepared comments, we'll take your questions. As a brief 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 SB. 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 to Mike. Thanks, Pete. Thanks to all of you for joining us this afternoon. We appreciate your time, as always. If we could just flip to page three, please. I'll take you through a quick rundown of the last couple months. At first, we plan to continue to operate without any interruption. Most importantly, the safety performance has been really good across the whole company during the last couple months. and we're really pleased and proud of this achievement. Running these plans safely and sustainably is always more challenging in an environment that's different than people are accustomed to. Even the daily scheduling and execution of the work needs to be done consistent with our health and safety protocols. And human nature says that simply people are at risk of focusing on too many other things versus a job at hand in a complex environment like we're dealing with today. All that means is that we'll continue to remain vigilant every day. And bottom line, the health environment and all the location remains under control. That said, we've got no intention at all to throttle back in the foreseeable future on any of the protocols we put in place back in March and April. In fact, as you would expect, we're prepared at any time to tighten things up as the public health situation near any of our operations. In just a couple of minutes, Pete's going to give you some detail on the industry balance, pricing, and other fundamentals, but let me just make a couple of quick comments now on what we're seeing directly on the ground. Our end markets in the U.S. have continued to improve over the summer and into the fall. Most of the sectors are near or even above their levels of January and February, obviously before the impact of the health crisis. For example, the automotive and durable goods and machinery markets have fully recovered. This is all consistent with the data that you've seen more broadly. Packaging and consumer sectors have remained quite strong. Construction, on the other hand, is a bit further to go, with residential quite strong and relatively weaker activity on the commercial side. In Europe, we're seeing more or less the same trends, yet, as you've seen, the general recovery is behind that of the U.S. It goes without saying that all of this is at risk of development on the public health situation over the coming months. Looking at our own specific customers, we see similar trends. If you take our six largest value-added product customers, for example, that group has broad exposure to automotive, to construction, to communications, amongst other sectors. As we previously told you, the daily sales rate for that group of customers was down 35% in Q2 over Q1. In Q3, it was up 45%. over Q2. And thus far, order rates for October and November are up a further 10% versus Q3. So we're now moving at a rate that's up 60% over the Q2 low and actually up 5% over the first quarter. You obviously had some degradation towards the end of the first quarter as the pandemic began to have effect. Moving along, our third quarter financial performance came in as we expected. As we forecast, the lower realized metal prices coupled with higher seasonal power prices drove the vast majority of the drop in quarter to quarter EBITDA. As you well know, our sales contracts are priced on a two- to three-month lag, and in that context, the realized cash LME during the quarter was $1,550 per ton. As I said, seasonal power prices were higher as usual over the summer. More than the rest of the decline in EBIT came from our decision to start catching up on the relining of sales at the Kentucky plants. As you'll recall, we ceased all relining activity at these plants during the first few months of the pandemic. And a variety of other items taken altogether actually improved profit a bit. The financial picture, of course, is much stronger at current commodity prices, and Craig will go into detail on all this in just a couple minutes. Let me just make some remarks about Mount Holly. You've obviously seen the war notice we were regrettably forced to issue last week. We were shocked to see the South Carolina courts ruling in the litigation between the city of Goose Creek and Sandy Cooper. We've talked to you about this, of course, over the year. First, our analysis indicated that Goose Creek had every right under both federal and state law to form a utility and to serve Mount Holly. And then FERC agreed fully in its order issued in August And importantly, the determination in its order said it was made with reference to both federal and state law. Lastly, the actual hearing in front of the judge strongly suggested, in our opinion, that Goose Creek's position was the correct one. When the court's order was finally issued two weeks ago, it said regrettably the opposite. The city has asked the judge to reconsider the ruling, and if that's not granted, Goose Creek has informed us that they plan to appeal. The city has told us they'll ask the court to move quickly, but the appeal process would likely take at least a year to fully play out. Just to go back, most of you who've been following the company know all this, but as a reminder, under the arrangements we've had over the last couple of years, Mount Holly's been buying 75% of its electric power requirements from the competitive wholesale market and 25% from Sandy Cooper's on resources. Mount Holly also paid Sandy Cooper a transmission fee for the power brought in from the third parties. The third party rate for the 75% of the plant's power requirement is very competitive, as we've said. It's frankly just on par with what we pay at the Kentucky plants. The 25% we buy from Sandy Cooper is regrettably the killer. It comes at two times the delivered price of the third party power, and thus the weighted average price is simply uncompetitive. The evidence that the market price is competitive can easily be seen in the status of the Kentucky plants. As you know, we've doubled the capacity of Hawesville and added billet capacity in Seabree during the last two years, double investment of over $100 billion. And at 100% market power and at full capacity, Mount Holly's cost structure and revenue profile would be actually superior to that of the Kentucky plants. Regrettably, the opposite, of course, is true with the current blended power prices, to give you a sense. Mount Holly's year-to-date nine-month EBITDA has been a $10 million loss, and the plant will also be unprofitable in the fourth quarter. Looking at next year, importantly, the loss would be worse. On the one year, the average metal price, of course, should be higher, at least if you look at today's forward prices. But this is much more than overcome by the requirement to begin relining cells, even to maintain production at 50% of capacity. As you know, given the uncompetitive power price, we haven't relined any sales at Mount Holly for over four years. Over the last several weeks, we've been in direct discussions with Sandy Cooper, and we're also speaking with all the relevant constituencies, including local, state, and federal authorities. We're really hopeful now that all the parties can come together and find a commonsensical solution that's fair to all. First and foremost, this includes no harm done to any other Sandy Cooper customer. At stake here are 300 direct jobs and 600 to 700 additional jobs currently supported by the plant, along with a half a billion dollars of annual economic activity in South Carolina. That's what the plant is at its current half capacity. So achievement of that competitive price would allow us to restart the second hotline and rebuild the line that's been continuously operating, which, as I said, needs a rebuild. It would not only preserve the current jobs, but of course it would add a further 300 jobs and an additional 600 to 700 support jobs, and then you get to realize the full billion-dollar annual economic impact in South Carolina. It's obviously a complex situation, but one that can truly be solved overnight with a rational, logical approach. And with that, I will turn it back to Pete. Thanks, Mike. If you can move on to slide four, please. I'll briefly take you to the current state of the global aluminum market. The cash LME price averaged just over $1,700 per ton in the third quarter, which was up approximately 14% or about $215 per ton from the second quarter as we saw a strong recovery on the global economy in the quarter. Industry conditions continue to improve, and the LME price has averaged approximately $1,800 per ton for the month of October and that is right about where the current price is sitting. In the third quarter, regional premiums averaged approximately 13 cents per pound in the U.S., a 5% increase quarter over quarter, and approximately $120 per ton in Europe, an increase of 2% in the prior quarter. Current spot prices are around 13 cents per pound in the U.S., Midwest, and about $130 per ton in Europe. In the third quarter of 2020, global aluminum demand was down about 3.5% compared to the third quarter of 2019. In the world, excluding China, we saw demand contraction of approximately 11.5% from the prior year quarter. This was a significant recovery from what we saw in the second quarter as manufacturing activity in the US and Europe continued to improve. In China, we saw demand grow up to 3% as compared to the prior year quarter. Global production was up approximately 2% in the third quarter as compared to the previous year. We saw approximately 4.5% production growth in China versus the same quarter last year, which was offset by about 1.5% decline from the rest of the world in the same period. As demand continues to strengthen in our markets, we've seen the LME price continue to rally to levels pre-pandemic. We continue to see strength and support in the LME price, driven by a weaker U.S. dollar, low interest rates, and global manufacturing expansion led by the U.S., China, and Europe. Briefly looking at our key raw materials, the Illumina index price averaged approximately $275 per ton in the third quarter, which is right about where the spot price is today. And with that, I'll hand the call over to Craig.