Century Aluminum Company

Good afternoon. Thank you for attending today's Century Aluminum Company fourth quarter 2022 earnings call. My name is Megan, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Peter Cherkowski, with Century Aluminum. Peter, please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to the conference call. I'm joined here today by Jesse Gary, Sentry's President and Chief Executive Officer, Jerry Bialik, 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.sentryaluminum.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 Jesse.

Thanks, Pete, and thanks to everyone for joining. I'll start today by quickly reviewing our 2022 performance before discussing the improving market conditions we have seen so far in 2023. Jerry will then take you through the details of the fourth quarter and full year results, and then I'll finish with an update on our Grinder-Tonge cast house project. Turning to slide three, 2022 was a very volatile year in the commodity markets. Aluminum prices reached 30-year highs in the spring, driving strong financial performance across centuries businesses in Q1 and Q2. However, market conditions deteriorated over the back half of the year as high global inflation was met with rising interest rates, resulting in a significant strengthening in the U.S. dollar and pressuring aluminum prices downward. At the same time, the war in Ukraine and resulting energy crisis drove power prices to unsustainable levels across the world. All told, Century produced adjusted EBITDA of $144 million last year. In Q4, adjusted EBITDA was a loss of $12 million, which was an improvement of approximately $24 million over Q3, as the benefits of improving energy markets and cost-cutting measures across our business improved results. We finished the year with strong liquidity of $245 million. Our team completed several long-term projects last year. including the restart program at Mount Holly, which returned the smelter to 75% of capacity. We also completed the first phases of our U.S. casthouse debottlenecking programs, which increased our capacity to produce value-added products by 20,000 tons. To mitigate record high energy prices, we made the difficult decision in June to curtail our Hawesville smelter. Since the curtailment, the team at Hawesville has done a good job reducing holding costs while maintaining the assets in a condition that would allow for restart in the future. In assessing whether the conditions for restart have been met, we intend to be disciplined in our approach and will wait to see energy costs and LME prices reach and sustain levels that will enable the profitable operation of the smelter for the long term. Finally, we continue to focus on our most important priority, to return our employees home safely at the end of each and every day. While we will never be satisfied until we achieve zero workplace injuries, our team should be proud to have reduced injuries by 10% over 2021 levels. We hope to significantly improve on this trend in the coming year. Market conditions for Century's businesses have improved significantly so far in Q1 and continue to trend in a positive direction as we emerge from winter. If you turn to slide 4, you can see that global supply and demand balances remained in deficit last year. This was driven most significantly by another year of energy-driven production curtailments in China, where low hydro reservoirs drove curtailments in several provinces. Global aluminum balances have now been in deficit for the last five years, with the COVID-impacted year in 2020 the only exception. We currently estimate that approximately 2.5 million tons of Chinese capacity is offline due to energy curtailments in Yunnan, Sichuan, and Guizhou with an additional 500,000 to 1 million tons of capacity at risk in the near term due to continued water shortages. This is now the third year in a row of significant winter energy shortages in China, suggesting that Chinese production may be subject to increasing seasonality going forward, as the country seems to be consistently short energy across the winter months. Given these continued Chinese production headwinds, we expect global markets to remain in deficit this year. with risk leaning towards larger deficits should further remove capacity cuts and union materialize, or restarts in Sichuan and Guizhou continue to be delayed. With global inventories averaging below 50 days, LME prices should respond favorably if additional supply curtailment is confirmed. In our markets in the U.S. and EU, supply deficits widened last year, as high energy prices drove smelter curtailments, especially in Europe, where 50% of remaining capacity has been curtailed due to high energy costs. Fortunately, a relatively warm European winter has allowed EU energy prices to moderate somewhat. But while lower prices have helped sustain downstream aluminum demand, both spot and forward EU energy prices remain well above levels needed to drive widespread smelter restarts. As you can see from the graph on slide five, EU energy prices remain in contango above $150 per megawatt hour, with significantly higher prices expected to return later in the year. While one of our Icelandic energy contracts does have some exposure to EU energy prices through Nordpool, we have hedged 95% of the remaining exposure at €30. From 2024 onward, we do not have any Nordpool or other EU energy market exposure. Iceland energy markets remain well-supplied in 2023, with hydro reservoirs near average levels across the Icelandic system. U.S. energy prices moderated in Q4, with IndyHub averaging around $60, a 30% reduction over Q3. Price declines have accelerated significantly so far this year, as record U.S. natural gas production, paired with increasing renewable generation and recovering coal production, have combined with a warmer-than-average winter to drive energy prices significantly lower. IndieHub prices are now back below pre-crisis levels, with January averaging $37 per megawatt hour and February averaging $29 a month to date. While spot prices have declined significantly, IndieHub forward prices remain in contango, with the forward strip approximating $41 for the balance of 2023. Significantly improved supply and demand fundamentals have recently driven forward prices lower, with U.S. natural gas reserves and utility coal stockpiles now respectively sitting 17% and 40% above year-ago levels. Increasing natural gas reserves and continued record production could continue to pressure forwards down towards spot levels and begin to make power price hedging more attractive as we move into spring. Turning to regional premiums, strong aluminum demand in both the EU and US have driven premiums higher so far this quarter. With the spot Midwest premium above 29 cents per pound, 40% increase over Q4 levels and EU duty paid premium returning to levels above $300 per ton. This trend is continued affirmation of our long-term strategy to focus our production in these two short markets, which allow us to better serve our customers and benefit from these strong premiums. As a reminder, all of our remaining Midwest premium hedges matured in Q4. So we will realize the full cash benefit of increasing premiums in both the U.S. and Europe this quarter and going forward. One area of relative weakness in the market has been in spot billet demand. While annual contract prices have remained well above historic levels, we did experience a measurable decline in spot billet orders in November and December as our customers looked to destock their inventories. This has been buffered somewhat by relative strength in our HVAC markets and continued resilience in automotive demand. This destocking process appears to have bottomed in January, as we have seen increasing month-over-month orders in both February and March. We anticipate further improvement in April orders. The expected impact of this destocking process is included in our Q1 outlook on slide 9, and Jerry will walk you through the impact on our Q4 results in a minute. Despite these near-term headwinds, we continue to anticipate very constructive long-term billet demand trends in both the U.S. and Europe, as electric vehicle substitution drives increasing aluminum consumption. As we've discussed in the past, electric vehicles use 200 pounds more aluminum on average than an internal combustion vehicle, with an even larger increase in primary aluminum consumption as the secondary-based internal combustion engine block is replaced by value-added primary aluminum-intensive components like battery trays, HVAC, and crash systems. We expect this trend to support significant long-term demand expansion for primary aluminum billet and slab in the EU and U.S. During the operations, we saw strong and stable performance across our smelters in Q4, while also exceeding expectations on our cost and headcount reduction programs. This strong operating performance, combined with production creep programs at Seabree and Grundertangi, and completion of the Mount Holly expansion project, allowed us to offset a significant amount of the production loss from the Haasville curtailment, with total shipments last year down just 15,000 tons from 2021 levels. In the U.S., we finished our first stages of our cast-house debottlenecking projects, increasing our billet and flat capacity by approximately 10,000 tons each. We will start the next phase of these programs in 2023, which we expect will expand our total billet and flat capacity by an additional 10,000 tons each by the end of 2024. Paired with the expected completion of the Grundertage billet casthouse by the end of this year, we should enter 2024 with the ability to sell approximately 80% of Century's total production as value-added product in the form of billet, slab, foundry alloys, or natural low-carbon aluminum. On the raw material side, we continue to see slow decreases in Coke prices in Q4, while pitch prices remain stubbornly elevated in both the US and Europe. We do expect Coke prices to slowly moderate over the course of this year, as Chinese supply is expected to increase following relaxation of COVID protocols. Jerry will now walk you through the quarter and our Q1 outlook.