Century Aluminum Company

Ladies and gentlemen, welcome to the Century Aluminum Company first quarter 2021 earnings conference call. My name is Bethany and I'll be coordinating your call for you today. If you would like to register to ask a question during the Q&A session, please press star followed by one on your telephone keypad at any time. I will now hand the call over to your host Peter Trypkowski to begin. Peter, over to you.

Thank you very much, Bethany. Good afternoon everyone and welcome to the conference call. I'm joined here today by Mike Bluss, Century's President and Chief Executive Officer, Craig Conte, 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 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. And with that, I'll hand the call over to Mike. Thanks, Pete, and thanks to all of you for joining us this afternoon. If we could just flip to page three, please. And before we start on the review of the quarter, I'd like to just provide a brief overview on our various efforts supporting and advancing the sustainability of our business. Hopefully, at this point, most of you have had a chance to go through our sustainability report. If not, it's up on our website, so I'd encourage you to have a look when you have a couple moments. First, those of you who have long followed the company are well familiar with our focus on safety, and this will always remain our highest priority. Our new corporate safety director has made great progress reinvigorating our systems and processes. We're now engaged in delivering enhanced safety leadership training to all the U.S. plants, and the early returns are really encouraging. We'll have a lot more to report to you as we go forward. In addition, we're making very good progress in our various decarbonization efforts. As we reported to you back in February, we're in discussions with multiple potential customers regarding our low-carbon natural product and this follows the agreement that we recently signed with Hammer Industries. In addition, again, as we've discussed, we're looking very closely at adding billet casting capacity at Grindertangi, and this development would allow us to provide the European market with much-desired green billet. As you also know, we've made recent investments at Seabree to enable us to buy scrap from the market and reprocess it. We're seeing increased interest from customers looking for recycled content in their billets. And we're now looking at incremental scrap processing capacity at Seabree as well as at Mount Holly as we return that plant closer to its full capacity. I'll talk about Mount Holly in just a couple of moments. We've also made good progress finalizing the terms for the solar field to be constructed by a third party that will be adjacent to Seabree. As a reminder, we'd be the sole contractual offtaker and would thus enable this investment. This is really exciting for us from multiple vantage points. and we intend to pursue similar structures. Bottom line, we've got a lot of exciting stuff going on, and we look forward to updating you regularly. In just a couple minutes, Pete will provide some detail on the industry environment, but let me make a couple points just to put the rest of my comments into context. Conditions in the sector remain favorable from multiple vantage points. Global inventories are now falling. That's including in China, as you've seen, if you look at the data. Stocks are now at pre-COVID levels and are historically tight, especially when considering the pace of current demand. Forecasts for the next couple of quarters show a basically balanced global market, and we see potential upside as the pandemic continues to abate, especially in developing economies. We're obviously closely watching the supply side. The current metal price provides an environment for consideration of potential capacity additions. However, in most of the Western world, we think it's very unlikely that we'll see new greenfield projects. We believe the industry has learned the lessons of the past. We could see some small restarts, or more likely perhaps the deferral of closures, either ones that have been announced or that are being contemplated. But we're confident these would likely be around the edges. It goes without saying the swing factor remains China. That market is currently just in balance. If you look at the data, they're importing some months and not others. You've obviously seen the discussion of a major policy shift driven by the central government's climate goals. And we do believe that illegally added capacity that puts provinces above their emissions targets will need to be curtailed before a new capacity is added. It's hard to know at this point exactly where all this shakes out. but we do think this development will put some governor on a rate of net capacity additions in China. Again, Pete will give you some data in just a moment. Just to move on, we've made good progress on the operations during the last couple months. Just to give you a couple examples. As you remember, we suffered two major equipment issues at Haasville during the last days of December. One was a freeze-up caused by some very cold weather, and the other was the failure of some key high-voltage equipment. These events resulted in the loss of some production, and in addition, we took a number of cells offline in February and March to mitigate any further risk, and importantly, to hasten the plant's return to stability. That stability was achieved in early April, and we're now in the process of bringing all the cells back online to get back to a full four-line operation. We're also completing some maintenance projects aimed at providing further long-term stability to the plant. We also reached a new agreement with the local union at Hawesville. It was ratified by the membership on the 16th of April. Five-year labor contract provides good stability for the plant. We've got a great young workforce at Hawesville. This requires some extra near-term effort and investment in training and skills development. That said, we're really encouraged by the potential of this group. At Mount Holly, the new power contract was approved by the Sandy Cooper Board. as well as by the appropriate state authorities, and the contract commenced as scheduled on the 1st of April. As a reminder, it's a three-year deal. It goes through the end of 2023, and it gives us the opportunity to build back the 75% of the plant's capacity and get some very much needed high-quality billet back into the U.S. market. It also gives us a chance to work with Sandy Cooper on longer-term structural alternatives for power supply. As a reminder, we've been talking about this for quite some time. No cells at Mount Holly have been rebuilt since 2015, and those cells constituting that entire 75% of production need to be rebuilt. This process is well underway, and Craig will remind you of the schedule for the forecast spending, as well as, importantly, the incremental production we see coming on later in the year. We're really excited to be bringing back this capacity at a time when the market demand is so robust. Those of you who know Mount Holly know that it has a justly earned reputation as a high-quality billet producer, and we're convinced customers are anxious for the incremental supply. As we ramp up here through the year, we have more billet casting capacity than we currently have hot metal production, obviously. And thus, we're being opportunistic in buying some scrap and primary metals to melt and mix with Mount Holly's own prime in order to begin to deliver incremental production to the market. as quickly as possible. Lastly, very quickly, Craig will take you through the specifics of the recently completed debt refinancing, so I won't go into any detail here. The rationale was obvious, to lower the company's weighted average cost of capital, and it also came with a decrease in current cash interest expense. We lengthened the maturity and increased the company's near-term liquidity. Of course, the company's liquidity will otherwise improve markedly beginning in Q2, as we begin to realize recent metal prices. And Craig will give you detail on this and our expectations for cash flow in the coming quarters in just a moment. And with that, I will give you back to Pete for a quick look at the industry. Thanks, Mike. If we can move on to slide four, please, to give you a couple of comments on the global aluminum market. In the first quarter of 21, global aluminum demand was up 16% as compared to the first quarter of 2020, when the pandemic had begun to slow down the economy. In the world excluding China, we saw demand of 5%, and in China, we saw demand growth of 27%. Global production was up 6% in the first quarter of 21, as compared to the same quarter last year. However, global supply growth was flat sequentially. We saw 10% production growth in China versus the same period last year, but no additional supply growth sequentially. In the world excluding China, we saw 1% supply growth versus the same period last year and less than half a percent growth sequentially. As demand continues to outpace supply growth around the world, the global aluminum market is now projected to be in balance for 2021. Along with falling stock inventory levels to pre-pandemic levels, the aluminum price looks to be supported by strong fundamentals going forward. Okay, turning to slide five, please. You can see the major improvement on pricing for LME and premiums here. The cash LME price averaged approximately $2,100 per ton in the first quarter, which was up 10% or $175 per ton sequentially. Currently, we are at a three-year high LME price of $2,450 per ton. In the first quarter, Regional premiums average $0.16 per pound, or approximately $350 per ton in the U.S., up 25% sequentially, and $165 per ton in Europe, an increase of 23% sequentially. Current spot price for the U.S. Midwest premium is at a record high of just over $0.26 per pound, or approximately $575 per ton, a growing demand and tight supply. Prices in Europe are approximately $240 per ton. Finally, pricing for value-added products have also continued to improve. An example here is the US Midwest spot billet prices are also at record highs of approximately $700 per ton. And with that, I'll hand the call over to Craig. Thanks, Pete.

Let's turn to slide six, and I'll take you through the results for the first quarter. On a consolidated basis, global shipments were about flat quarter over quarter. Realized prices increased substantially versus prior quarter as a result of higher lag LME prices and delivery premiums driving a 14% increase in sequential net sales. Looking at operating results, adjusted EBITDA was a loss of $19.7 million this quarter, and we had an adjusted net loss of $52.5 million, or $0.54 a share. In Q1, the adjusting items were $92.7 million for the unrealized impacts of forward contracts, $3.9 million for the net realizable value of inventory, and $1.4 million for the historical Seabury equipment failure. Liquidity at the end of the quarter was $90 million via a mix of cash and credit facilities. This amount increased $50 million to $140 million by the end of April. As we forecast on our last call, the Q1 realized LME of $1,940 per ton was up $210 per ton versus prior quarter, while realized US Midwest premiums of $330 per ton were up $45 per ton over the same period. Realized Illumina was $325 per ton, or $35 per ton greater than prior quarter. As we discussed previously, the majority of our aluminum contracts are priced with an LME reference, and the realized prices will track largely in line with lagged aluminum pricing trends. As expected, the negative impact from power prices, primarily driven by the domestic February polar vortex pricing spike, was $33 million unfavorable versus Q4 globally. Realized poke prices of $300 per ton were up $50 per ton, or 20% versus prior quarter. Restart related spending as forecast at Mount Holly and slightly lower production volumes drove about $12 million of reduced EBITDA sequentially, while a non-cash mark-to-market on stock compensation drove $5 million of reduced EBITDA over the same period. Our Q1 results came in a bit lower than expected. This was largely driven by market price and non-cash accounting impacts occurring at the very end of the quarter. During the last week of March, our share price increased roughly 20% to about $18 per share, causing a sizable negative non-cash mark-to-market impact on our stock compensation plans. Coke and LME-linked power began escalating as well. On balance, the totality of the late Q1 market moves are favorable to Century over the mid and long term. However, the immediate impact to the first quarter was a reduction in expected EBITDA. Looking ahead to Q2 specifically, The lagged LME of $2,150 per ton is expected to be up about $210 per ton versus Q1 realized prices. The Q2 realized U.S. Midwest premium is forecast to be $485 per ton or up $155 per ton. And the European delivery premium is expected at $175 per ton or up $35 per ton versus the first quarter. Realized Illumina is expected to be $330 per ton or up about $5 per ton versus prior quarter. Taken together, the LME, Illumina, and delivery premium pricing moves are expected to increase Q2 EBITDA by about $55 to $60 million versus Q1 level. On power costs, with the Q1 polar vortex related spike behind us, we are seeing a return to more seasonally normal pricing levels. As a result, we expect a $15 to $20 million increase in Q2 EBITDA from declining power prices quarter over quarter. As I noted earlier, in late Q1, we experienced an increase in carbon cost, notably in petroleum coal prices. We expect realized coal prices to be $370 per ton in Q2, or about $70 per ton greater than in Q1, driving a $5 million EBITDA decrease versus prior quarter. Finally, we continue to make significant progress on the Mount Holly restart and the fixes on the year-end equipment issues in Hawesville. As we discussed previously, Q2 will be our largest investment quarter for both of these projects. This investment will be partially offset versus prior quarter by incremental production in Q2. The net impact of sequentially increased production and project spending will decrease EBITDA by about $10 billion. In sum, we expect all of these items taken together will equate to an approximate EBITDA increase of $55 to $65 million from Q1 levels. As we have discussed in the past, we, from time to time and largely in support of long-term investments, manage our exposure to various commodities by entering into forward contracts. Based on our current spot prices, we expect a $30 to $35 million relied loss for the quarter on our various hedges in Q2. This result will be below EBITDA geographically and will impact adjusted net income. We will continue to call this impact out on a quarterly basis as warranted. Let's turn to slide A, and we'll take a quick look at cash flow. We started the quarter with $82 million in cash and ended March with $26 million. A few notable outflows for the quarter included $7 million for CapEx, the vast majority of which was Mount Holly restart related, and our normal semiannual no interest payment. Working capital was an outflow of about $12 million driven by increased receivables from higher sales prices on rising LME levels and a modest inventory bill to support the ongoing restart work. Shifting gears to Q2 and beyond, in early April, As Mike mentioned and as you may have seen, we effectively refinanced our $250 million five-year 12% note, which was due to mature in 2025, for a new $250 million seven-year 7.5% note due to mature in 2028. In addition, we have further enhanced our liquidity by executing a seven-year $86 million convertible note at 2.75%, also due to mature in 2028. From a diluted EPS modeling standpoint, it will be important to include an additional 4 million outstanding shares for Century from Q2 onwards. While we can settle the convert in either cash or shares at our option, our accounting method will require reporting the new instrument on a fully diluted basis. From an interest cost standpoint, adding both of the new $250 million note and the $86 million convertible together results in an annual interest savings of $9 million versus the old note. From an operation standpoint, we continue to make solid progress on the ongoing Mont Holly restart. As a reminder, we will invest about $75 million over the course of the next two to three years to bring this melter to a 1.5-line operation, which will allow it to produce at 75% of capacity, or about 170,000 tons per year. This project will be completed in two phases. For Phase 1, which occurs throughout 2021, we will invest about $50 million of restart capital, over half of which will be spent in the second quarter, and expect total year production of about 140,000 tons as we ramp up the facility. This output will be about 20% greater than 2020. By the end of 2021, Mount Holly will be running the full 1.5-line complement. Phase two begins in 2022, and the remaining $25 million of capital will be deployed to rebuild continuously operating legacy components, which will be beyond their useful lives. We expect 2022 and 2023 production to be around the 170,000 ton per year level. Finally today, I'd like to provide some perspective on what the second half of 2021 would look like for Century at current spot prices. As both Mike and Pete detailed earlier, the conditions in our industry are favorable, and Sentry's ability to add capacity, particularly in the U.S., is a key differentiator for the company. Using the revenue and cost items we detailed on our last call, adjusting only for the reduced interest costs from our refinancing, provides a good look at the earnings power of our business at current spot pricing levels. At the spot L&E of $2,450 per ton, and the spot Midwest premium of $570 per ton, Century will generate about $270 million of second half 2021 EBITDA and about $160 million of second half 2021 cash flow. This concludes our prepared remarks. Thank you for your time and attention. I'd like to turn the call back over to Bethany to begin the question and answer session. Bethany?