Century Aluminum Company (NASDAQ:CENX) Q3 2023 Earnings Call Transcript

Century Aluminum Company (NASDAQ:CENX) Q3 2023 Earnings Call Transcript November 8, 2023

Century Aluminum Company misses on earnings expectations. Reported EPS is $-0.45455 EPS, expectations were $-0.19.

Operator: Good afternoon, and thank you for attending today’s Century Aluminum Third Quarter Earnings Call. My name is Jason, and I’ll be the moderator for the call today. [Operator Instructions]. I would now like to pass the conference over to your host, Ryan.

Ryan Crawford: Thank you, operator. Good afternoon, everyone, and welcome to the conference call. I’m joined here today by Jesse Gary, Century’s President and Chief Executive Officer; Gerry Bialek, Executive Vice President and Chief Financial Officer; and Peter Trpkovski. 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 1, please take a moment to review the cautionary statements 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 to Jesse.

Jesse Gary : Thanks, Ryan, and thanks to everyone for joining. It was a busy quarter with lots to discuss, so I’ll get right into it. Turning to Slide 3. Lower LME and regional premiums were the primary drivers of reduced Q3 adjusted EBITDA of $9 million. While we were able to offset a significant portion of the fall in metal prices with lower input prices, higher-than-expected Mt. Holly power costs resulted in our Q3 results falling a bit below expectations. We expect Mt. Holly energy prices to return to normal in Q4. And as we recently announced, we entered into a new power contract from Mt. Holly that will become effective on January 1. I’ll provide some additional detail on the new contract in a bit. In general, the macro environment for aluminum remains complex.

As you can see on Page 4, the global market remains roughly balanced, with Chinese deficits largely offsetting a small surplus in the rest of the world. Turning to China specifically, Chinese demand has benefited from strong solar and electric vehicle demand, with China Solar demand alone up around 1.5 million tonnes from last year. Recent stimulus announcements in China should drive further recovery in building and construction demand as the Chinese economy continues to recover from COVID lockdowns. Reports have also recently emerged the Chinese smelters in Yunnan will again have to curtail around 1 million tonnes of capacity due to low reservoir levels in their hydroelectric schemes. Once confirmed, this third straight season of Chinese production cuts would add to the Chinese deficit shown on Slide 4.

Overall, while realized LME prices fell to average $2,155 in Q3, global updates of inventory remained below 50 days. With inventories at these historically low levels, LME should be poised to recover quickly on any positive demand recovery or any further supply side disruptions as we saw following the announcement of the Yunnan seasonal curtailments. While we wait for the macro cycle to improve, we have implemented programs across the company to lower costs, increase efficiency and free up cash, where possible. One example of this is the renewed focus on working capital management that Gerry will discuss with you in a minute. These efforts will help us remain robust during this portion of the cycle without interrupting our long-term investments and strategies.

Turning to Slide 6. We can see that falling input prices have also helped to offset the decline in metal prices. Indiana hub and Nord Pool have both remained constructive, while coke and caustic prices have continued to fall towards normalized levels. Natural gas inventories in both the U.S. and Europe remain well above five-year averages, making repeat of the high energy prices from last winter, less likely. Turning to operations. We made significant progress on a number of our longer-term initiatives during the quarter. At Mt. Holly, we were very excited to announce late last month that we reached a new three-year power contract with Sante Cooper through 2026. The agreement represents extensive work between the Century and Sante teams to structure a mutually beneficial arrangement.

This agreement allows us to continue to invest in this excellent plant, preserved approximately 470 jobs for our employees and continue to contribute to the economic success of the surrounding community. Under the new arrangement, Mt. Holly will be less exposed to changing fuel costs, including a fixed all-in 2024 energy rate that is below our 2023 realized rates. Mt. Holly also has the right under the agreement to increase the amount of energy provided under the contract, should we decide to return the smelter to full production when market conditions warrant. In Iceland, operational performance is strong, continuing to reflect the excellent team we have built there. The Grundartangi casthouse project is nearing completion and remains on track to deliver our first sales of low-carbon natural billet to European customers early next year.

We will provide you with additional details of the expected benefits of this value-added production on our Q4 call. In Jamaica, the first major project and our project restart CapEx program has been nearing completion. — with the recommissioning of one of the plants high-efficiency boilers set to be completed by the end of Q4. This boiler will increase the efficiency of the refinery’s steam generation systems while also driving improved stability in the plant’s powerhouse. A second high-efficiency boiler is expected to be recommissioned in late March. These projects should begin lowering Jamalco’s cost of production beginning in Q1. We Today, the cost of these programs are coming in on the low end of our expected CapEx spending into Melco for 2023.

In September, Jamalco separated power disruption resulting from an equipment failure in the same power generation unit responsible for the disruption in Q2. This caused the refinery to operate at partial production levels for a portion of September and all of October. We believe the refinery has now returned to full and stable operations. Without these disruptions, Jamalco would have operated at roughly breakeven in the third quarter at spot aluminum prices. Given the magnitude of these disruptions, we have submitted these claims to our insurers and expect to recover those losses under our insurance policies. In line with our past practice, we will adjust out both the impact of the outage and the future recovery of insurance proceeds from our results.

Gerry will cover this more in his remarks. Jerry?

Jerry Bialek : Thank you, Jesse. Let’s turn to Slide 7, and I’ll walk you through the results for the third quarter. Consolidated Q3 global shipments were 172,000 tonnes, down about 1% sequentially, and Realized metal prices were down nearly 6% for the quarter, with net sales at $545 million, down 5% sequentially. Looking at Q3 operating results, adjusted net loss was $14 million or $0.13 per share. This was a decrease of $29 million compared with prior quarter. The major adjusting items for the third quarter were add-backs of $22 million in unrealized losses on forward contracts $9 million in costs associated with the Jamalco equipment failure and $1 million for share-based compensation. These partially offset by a $4 million deduction for lower of cost or net realizable value on inventory.

Adjusted EBITDA attributable to Century, which includes our 55% share of the Jamalco JV in Jamaica was $9 million, a decrease of $20 million from the prior quarter. Liquidity improved by $75 million compared with prior quarter to $306 million, consisting of $70 million in cash, $23 million in restricted cash and $212 million available on our credit facilities. Net debt on September 30 was $424 million, down $83 million from prior quarter. During my first year at Century, we’ve focused on optimizing working capital and improving liquidity and are beginning to see significant progress. I’ll talk more about this in a moment when I have cash flow. Turning to Slide 8 to explain the third quarter sequential adjusted EBITDA bridge. Realized LME was $2,237 per ton, down $134 versus the prior quarter.

while realized U.S. Midwest premium of $493 per ton was down $69 and realized European delivery premium of $323 per ton was up $24. These reflecting our one month to three-month lags in realized metal prices. Together, these factors resulted in a $28 million decrease in EBITDA in the quarter. Power costs were down slightly from prior quarter, with that 51% reduction in Northern pool market prices being partially offset by a 4% increase in MISO Indy Hub exposure and higher cost of service rates at Mt. Holly netting to a $3 million benefit to EBITDA. Q3 realized alumina cost was $396 per ton, $4 lower on a sequential basis. Remember, there’s a three month to four-month lag for alumina cost to work through our income statement. Realized coke prices decreased 17% and realized pitch prices decreased 8%, and Together, alumina and other raw material costs resulted in a $4 million improvement in EBITDA.

Volume OpEx improved EBITDA by $3 million. Unfavorable sales mix was a $3 million headwind. Overall, adjusted EBITDA was $9 million for the third quarter. Note the impact of downtime and lost production and I’ll put it Jamalco that Jesse mentioned in his opening remarks, has been adjusted from the results presented here as Century has filed an insurance claim and expect that losses less estimated deductibles will be covered under its insurance policies. You can see the full reconciliation to GAAP in the appendix on Slide 13. Now let’s turn to Slide 9 for a look at cash flow. We started the quarter with $51 million in cash. During the quarter, we completed the transaction to sell certain excess land at our Mt. Holly site, generating cash of $26 million.

CapEx, primarily for the construction of our new cast house in Iceland, used $26 million. As part of our working capital optimization efforts, we monetize excess European emissions allowances to generate an additional $34 million. In case you are not familiar with the European Union Emissions Trading System, the ETS is a cap and trade system aimed at decreasing emissions over time in line with the EU’s climate target. Each year, Century receives free emission allowances or EUAs for our Grundartangi smelter in Iceland. These allowances must be surrendered in the following year to offset emissions from the smelter. Historically, we have held these units until they become due. As an ongoing source of liquidity, this year, we implemented an EUA monetization program to sell the excess units and to repurchase EUAs at a future fixed price to settle the EUA obligation when due.

Similar to other working capital optimization efforts, this program allows Century to utilize the interim value of the credits more effectively, improving liquidity and lowering leverage. I’m also excited about the progress we’re making, driving optimization in the cash conversion cycle across all our sites. During the quarter, we realized working capital savings totaling $76 million, with $7 million coming from moving to more favorable vendor payment terms at our Jamalco refinery and the balance from various actions that are smelters. We expect to retain $20 million to $30 million of these working capital benefits going forward through aggressive inventory targets and other working capital optimizations. The remainder of these savings were related to the timing of material flows, which we expect to reverse in Q4.

Finally, we used $68 million to pay down our revolvers. These actions resulted in Q3 ending cash and restricted cash of $93 million, a $42 million improvement compared to the second quarter. Now let’s move to Slide 10 for insight into our expectations for the fourth quarter. For Q4, the lagged LME of $2,161 per ton is expected to be down $76 versus Q3 realized prices. The Q3 lagged U.S. Midwest premium is forecast to be $425 per ton, down $68. And the European delivery premium is expected to be $279 per ton are down about $44 compared with the third quarter. Taken together, the LME and delivery premiums are expected to decrease Q4 EBITDA by approximately $20 million to $25 million compared with Q3 levels. Note, LME prices closed yesterday about $100 higher than our expected realized prices for Q4.

As you can see from our sensitivities on Slide 16, should these spot levels hold, we would expect this change alone to increase EBITDA by around $10 million to $15 million per quarter. Looking at our other key raw materials, lagged realized alumina cost is expected to be $385 per ton, down slightly. We expect a favorable impact from lower coking pitch. Caustic soda prices were also down slightly. But as it takes five months to six months for caustic spot prices to flow through our P&L, most of this benefit will be realized in Q1 2024. All in, we expect lower raw material costs to contribute between $10 million to $15 million to EBITDA compared with third quarter. We expect volume gains and operating cost improvements to add about $5 million to EBITDA in the fourth quarter.

All factors considered, our Q4 outlook for adjusted EBITDA is expected to be in a range of between $0 million and $10 million. And finally, we expect a realized gain of about $10 million in the fourth quarter from hedging activity and tax expense of between $0 million to $5 million. As a reminder, both of these items fall below EBITDA and impact adjusted net income. An update on the purchase accounting for our Jamalco acquisition. As discussed in Note 2 of our current quarter 10-Q, we continue to work through the purchase accounting, which requires the acquired assets and liabilities to be reported at fair value as of the acquisition date. We have up to 12 months from the acquisition date to perform the necessary work to finalize the fair value.

And based on our preliminary fair value estimates, we’ve recorded a deferred gain as a current liability on the balance sheet as of September 30. And now back over to you, Jesse.

Jesse Gary : Thanks, Jerry. While we find ourselves in a challenging portion of the commodity cycle with LME and delivery premiums reaching two and half-year lows in the third quarter, we remain focused on operating the business as efficiently as possible. We are proud of the progress we made on our long-term initiatives during the quarter, including the extension of the Mt. Holly power contract nearing completion of our first major capital investment at Jamalco and completion of the Grundartangi cast house early next year. We are also pleased with the continued optimization of our balance sheet, including completion of the Mt. Holly land sale and progressing working capital optimization program, leaving us well positioned with significant liquidity to continue our long-term investments during this portion of the cycle.

All in all, despite a challenging macro environment, we are managing the business to continue to provide positive EBITDA and unlock additional liquidity and cash. Long-term macro trends towards decarbonization and electrification are beginning to play out and grow stronger as government stimulus funds in China and Inflation Reduction Act funds in the U.S. are beginning to be distributed. Our plants are running well in a claim production levels, leaving us well positioned to benefit as the commodity cycle improves. We look forward to your questions today. Operator?

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Q&A Session

Operator: [Operator Instructions]. Our first question is from Lucas Pipes with B. Riley Securities. Your line is now open.

Lucas Pipes : Thank you, very much, Operator. Good afternoon everyone. In your final comments there in your prepared remarks, you mentioned — I think you mentioned the IRA and the benefits for demand. But then if I understand it correctly, there are also provisions in the IR specifically for primary aluminum production. I think it’s Section 45X, and it relates to credit of 10% of the production cost. And obviously, on the surface, this appears pretty material. So, I wondered if you could maybe speak to that and where that currently stands.

Jesse Gary : Lucas, thanks. Very good question. So, you’re correct that aluminum is listed as a critical mineral under Section 45X of the Inflation Reduction Act. Maybe just to back up, Section 45X is a provision that, amongst other things, is intended to incentivize U.S. production of critical minerals here domestically. We’re obviously very excited about the potential benefits that we might receive under Section 45X, but the U.S. Treasury Department has not yet issued guidance for the provision, given that it’s a bit difficult at this point to quantify what the potential benefits might be for Century. But the Treasury Department has come out publicly and said that they expect to issue that guidance before the end of the year.

So, what we intend to do is once that guidance has been released, we plan to hold a follow-up call to further discuss and quantify what those benefits might be to Century. And until we have a guidance so it’s hard to provide too much more information for now.

Lucas Pipes : And — but at this point, there haven’t been any I guess, it would be an accrual essentially, potentially, given that I think this credit would — started at Jan 1, 23. You said there would be a benefit for this year, right?

Jesse Gary : Yes. The — while we await the guidance, the provision did become effective. Obviously, the law has passed. But — and the version did become effective January 1, 2023. But until we have that guidance, it’s tough to really say more than that. But you’re correct that the law itself does mention that it would apply beginning on January 1, 2023.

Lucas Pipes : Yes. Really, really appreciate that. And in terms of the guidance or clarification needed. Can you elaborate on what exactly you’re waiting for? And I know this can be technical, but could you maybe comment on what guidance, specifically, you’re waiting for?

Jesse Gary : Sure. I’ll try to keep it relatively high level since — until we have the guidance. It’s really hard to comment on what will be in the guidance. But that said, your summary was well done. Section 45X does provide for a production tax credit for critical minerals. And that production tax credit applies to what the law calls cost of production. What the law does not do is provide any guidance as to how that cost of production should be calculated. So, you can imagine a bunch of different provisions that may be included or not included in cost of production. For instance, one example might be whether depreciation is included in cost of production. So, without further guidance from the Treasury Department, after talking with our advisers, outside advisers, discussing internally with our team, we thought it was too early to record anything on our financial statements and difficult to do, again, without any guidance on what the quantum of those benefits might be.