Century Aluminum Company (NASDAQ:CENX) Q1 2024 Earnings Call Transcript

Century Aluminum Company (NASDAQ:CENX) Q1 2024 Earnings Call Transcript May 1, 2024

Century Aluminum Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Century Aluminum Company misses on earnings expectations. Reported EPS is $-0.39 EPS, expectations were $-0.19.

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Century Aluminum Company First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference call over to our host, Ryan Crawford. Please go ahead.

Ryan Crawford: Thank you, operator. Good morning, everyone, and welcome to the conference call. I’m joined here today by Jesse Gary, Century’s President and Chief Executive Officer; Jerry Bialek, Executive Vice President and Chief Financial Officer; and Peter Trpkovski, Senior Vice President of Finance and Treasurer. After our prepared comments, we will 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 statement shown here with respect to the 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. We made lots of progress this quarter with some exciting new initiatives. So I’ll start today by quickly reviewing the improving market environment and the strong operating performance from each of our plants. Jerry will then take you through the details of our excellent first quarter results, and then I’ll finish with an update on our new U.S. greenfield smelter project and our recently announced secondary joint venture with MX Holdings. Overall, strong operational performance and declining costs drove adjusted EBITDA of $25 million in the first quarter. Jerry will give you the full details here, but we are really proud of the job our team did across our locations to operate safely and efficiently through the quarter.

We have seen a real improvement in the safety culture across our plants, which is reflective of strong plant leadership and the commitment that all of our employees have made to operate safely. Turning to Slide 3. Market conditions remain broadly balanced in the first quarter before an improving demand picture in the U.S. and Europe paired with continued strong demand in China drove LME prices substantially higher in April. This pickup in demand was evident in regional premiums as well with the European premium increasing most notably over the course of the quarter to be up nearly 50% from year-end levels. Alumina markets also rose during the quarter with Q1 Atlantic alumina prices up about 10% from Q4 levels driven by supply curtailments in Australia.

In April, spot alumina prices have followed LME higher as production disruptions in India and elsewhere have made for a tight market. In rising alumina markets like these, we can see that most clearly the strategic value of our Jamalco acquisition and the captive supply of high-quality alumina and bauxite that it now provides for our smelters. Combined with our long-term commercial contracts, the Jamalco acquisition makes us roughly net neutral to APAI pricing as a company. Production at Jamalco also improved through Q1, and I’m pleased to say the refinery returned to profitability in March. Of course, the team is not resting on this achievement, and we plan to continue to drive additional efficiencies and operational improvement through the balance of the year.

Turning to the global trading environment. As you can see on Slide 4, global inventories remain at post-financial crisis lows with the vast majority of the available metal around the world being comprised of Russian stocks, including over 90% of all LME inventories. Long-term global trends towards near-shoring strategic mineral production, including aluminum, continued to accelerate this month with new government actions announced in the U.S., U.K. and Mexico that will impact global aluminum flows and supply into our key markets in the U.S. and Europe. Most broadly, the U.S. and U.K. announced earlier this month new sanctions on Russian aluminum and other metals, including a ban on physical import of Russian metal into the U.S. and U.K. produced after April 13.

The sanctions further restrict the ability of the London Metal Exchange and Chicago Mercantile Exchange to accept delivery of Russian metal into licensed warehouses. We would like to thank the U.S. and U.K. administration for taking this necessary action. We firmly believe that this was the right step, and we urge the EU to take action as well to ensure a consistent approach across Western markets. Elsewhere in North America, Mexico announced last week the immediate imposition of new tariffs on a number of industrial goods, including primary aluminum and other aluminum products. The new tariffs, including a 35% duty on P1020, a 20% duty on value-added products and 25% to 35% duties on aluminum extrusions will apply to all countries with whom Mexico does not have a free trade agreement, including countries that exported over 700,000 metric tonnes of P1020 and value-added aluminum products into Mexico last year.

While the full details of the program are not yet clear, including the applicability of exemptions and products reexported from Mexico, the actions are expected to be supportive of U.S. delivery and value-added product premiums. In the U.S., we continue to expect that pending antidumping and countervailing duty trade case against extrusion imports will have a significant positive impact on domestic U.S. billet demand beginning in the second half of this year. In March, the Department of Commerce granted U.S. extruders an early victory by imposing preliminary duties of the subsidy portion of the case. And in May, we continue to believe that commerce will also impose additional antidumping duties on 14 countries. If so, the duties would go immediately into effect and are expected to add strong support to the U.S. extrusion and billet markets.

As a reminder, we did hold back some second half billet volumes for spot sales in anticipation of improving U.S. market conditions and a more constructive pricing environment. Finally, we continue to discuss with the U.S. Treasury Department the potential to add direct and indirect material costs as eligible costs under Section 45X of the Inflation Reduction Act. In late February, I testified at the joint Treasury and IRS hearing regarding this issue, noting specifically the essential nature of these material costs to aluminum production. Our position is in line with testimony and comments submitted from a broad set of industry participants, ranging from critical mineral producers to our downstream customers, including automotive companies seeking to ensure stable domestic supply chains.

If direct and indirect material costs are ultimately added as eligible costs, we expect to recognize an additional annual benefit of $50 million to $55 million for 2023 and similar amounts for 2024 and going forward. Any increases in future production at our existing or new U.S. smelting sites would also be eligible for the production tax credit and would be expected to increase our annual benefit on a roughly pro rata basis to the amount of increased production. Turning to operations. We saw a strong and stable performance across our smelters in the first quarter. And our Jamalco refinery returned to stable operations and reached profitability in March. In Iceland, the previously announced 20-megawatt energy curtailment did drive lower volumes from Grundartangi in Q1 as expected.

When the power curtailments were initially announced, they’re expected to be finished by the end of April, but we now expect that they will continue until the end of May as Iceland has continued to experience an abnormally cold spring leading to lower snow pack net loss and reservoir levels. This impact is included in our Q2 guidance. In better news at Grundartangi, we did cast our first billet out of our new green billet casthouse earlier this month. We are now producing trial orders for our European customer base and expect to qualify with our key customers over Q2 and Q3 before ramping production for normal commercial sales in the fourth quarter and beyond. We’re very excited to begin supplying the much-needed natural low-carbon billet into the European marketplace.

Finishing out the energy picture, energy prices in the U.S. continue to be constructive driven by a moderate spring and natural gas prices below $2. Given the continued constructive energy markets and recent uptick in LME, we did make the decision to derisk our Sebree energy exposure a bit and hedge forward a small portion of Sebree power price exposure as well as the corresponding amount of metal price exposure over the next 12 months. On the raw material side, we have finally begun to see many of our raw material imports with pre-pandemic price levels with coke and caustic soda prices both falling below $400 per metric tonne. Due to our contractual and physical inventory lags, the benefits of these price decreases will take some time to roll through our results, which Jerry will give you a bit of more detail on in a bit.

Finally, at Mt. Holly, we made good progress during the quarter towards completing the necessary engineering and procurement plans to enable the potential restart of the remaining 25% of production that is not operating today. As we’ve discussed before, our experience with these research projects that it’s best to be thorough in the planning stage rather than to rush the research and potentially create operational and cost issues down the line. We are hopeful that we will have additional updates for you on our Q2 call later this summer, but we do not expect that we’ll have any significant capital or cash requirements for the restart over the course of 2024. Jerry will now walk you through the quarter and our Q2 outlook.

Jerry Bialek: Thank you, Jesse. Let’s turn to Slide 7 to review first quarter results. On a consolidated basis, first quarter global shipments were approximately 175,000 tonnes, up slightly from prior quarter despite the power curtailments in Iceland. Realized prices, however, decreased versus prior quarter due to lower value-added and regional delivery premiums, resulting in net sales of $490 million, a 4% decrease sequentially. Looking at Q1 operating results, adjusted EBITDA attributable to Century was $25 million. This was a sequential decrease of $32 million primarily driven by the recognition of the full year 2023 IRA Section 45X credit during the fourth quarter compared with 1 quarter of 2024 credit recorded in the current period.

Normalizing for the timing of the recognition of the Section 45X benefit in the prior quarter, adjusted EBITDA improved due to lower energy and raw material costs, which were partially offset by the anticipated lower value-added product premiums. During the period, we finalized purchase accounting for the Jamalco acquisition and recorded a bargain purchase gain of $246 million. Adjusted net loss was $3 million or $0.03 per share. The main adjusting item is the deduction of $246 million related to the bargain purchase gain. As a result of finalizing purchase accounting, we have now updated our 2024 outlook for depreciation and amortization to between $100 million and $110 million for the year, as you can see on Slide 19. We maintained strong liquidity of $302 million at the end of the quarter, consisting of $93 million in cash and $209 million available on our credit facilities.

Now turning to Slide 8 to explain first quarter sequential improvement in adjusted EBITDA on a normalized basis. In total, adjusted EBITDA for the first quarter was $25 million. Realized LME of $2,190 per tonne was up $8 versus prior quarter, while realized U.S. Midwest premium of $409 per tonne was down $16. And European delivery premium of $223 per tonne was down $57. Together, LME and delivery premiums amounted to a $4 million headwind in the quarter. Power costs decreased by $4 million. Realized coke prices decreased $71 per tonne, and realized pitch prices decreased $163 per tonne. Together, raw material costs resulted in a $13 million improvement in EBITDA. Lower value-added premiums created a headwind of $9 million. OpEx was $9 million better than prior period, including the OpEx efficiencies we identified in last quarter’s outlook and in addition, some deferred pot relining expense related to the Iceland power curtailment that will now be incurred in the second quarter.

With that, let’s turn to Slide 9 for a look at cash flow. We began the quarter with $89 million in cash. Adjusted EBITDA contributed $25 million. Capital expenditures totaled $30 million, $17 million of which relates to the Grundartangi [indiscernible] project. We increased short-term borrowings to fund normal working capital flows, as I pointed out last quarter. At the end of quarter one, we had $93 million in cash. Let’s turn to Slide 10, and I’ll give you some insight into our expectations for the second quarter 2024. For Q2, the lagged LME of $2,265 per tonne is expected to be up about $75 versus Q1 realized prices. The Q2 lagged U.S. Midwest premium is forecast to be $417 per tonne, up $8. The European delivery premium is expected at $270 per tonne or up about $47 per tonne versus the first quarter.

Taken together, the LME and delivery premium changes are expected to increase Q2 EBITDA by approximately $15 million versus Q1 levels. We expect power prices to be in a range between flat to a $5 million benefit. Collectively, we expect our key raw materials to be about flat. We expect volume to be flat to a slight headwind, given normal summer seasonality at our U.S. smelters. Finally, we expect a headwind of about $10 million related to pot relining expense deferred from Q1 because of the power curtailment in Iceland. All factors considered, our outlook for Q2 adjusted EBITDA is expected to be in a range of between $25 million to $35 million. I want to take a moment to demonstrate the earnings potential of the business at current market conditions.

As we have discussed, historically, rising LME prices take time to roll through our results due to contractual lags with our customers. If we were simply to adjust the outlook range to current LME spot prices only, the business could generate $75 million to $85 million of quarterly adjusted EBITDA. And improvements in regional and value-added premiums would add additional upside. The work that we’ve done to stabilize operations and drive efficiencies, along with favorable market conditions, provide exciting opportunities for the business. And now I’ll turn the call back over to Jesse.

Jesse Gary: Thanks, Jerry. Turning to Slide 11. I’m pleased to present our 2 new exciting growth projects that we announced this quarter. One of our core strategies at Century is to capitalize on our position as the largest user of primary aluminum in the U.S. market, which is the shortest target for aluminum in the world. Our production footprint in the U.S. is close to our customer base, allowing us to offer unmatched flexibility and service to our customers while benefiting from strong regional premiums and long-term trends towards near-shoring supply chains and critical mineral production. Both Sebree and Mt. Holly are well known in the marketplace as Tier 1 suppliers of billets and other value-added products. Demand for aluminum products in the U.S. has continued to grow as long-term trends towards renewable energy and electrification called for increasing amounts of advanced aluminum alloys and green aluminum products.

And in order to capitalize on these trends, we have looked for ways to build on our leading position and meet this ever-increasing demand from our customer base. Turning to Slide 12. The first of those opportunities is to make a more substantial foray into secondary aluminum production. This has long been a priority for us. And as we’ve discussed in the past, we have engaged in some small amounts of secondary production in our existing U.S. casthouses. Through this experience, we were engaged with our customers and see the growing demand for green recycled billet production in the U.S. Given the differences in supply chain and operational expertise necessary to build and operate a secondary casthouse, we quickly realized finding a partner with experience in this space would be key to successfully entering this new line of business.

And as we announced in March, we were thrilled to find the perfect partner in MX Holdings, a longtime operator of secondary casthouse and scrap procurement and trading businesses in the U.S. MX Holdings’ strategy and expertise complement our own. And we have quickly found that the 2 organizations share a common set of values and people-centric culture. Together with MX, we are far advanced in our plans to construct a new 250 million-pound secondary billet casthouse in the Ohio Valley region. The casthouse is being designed with cutting-edge casting and postconsumer scrap processing equipment. When paired with our combined advanced technical expertise, billet produced by the joint venture will deliver exceptional quality and performance and enable our customers to achieve their sustainability objectives for next-generation extrusion products.

Engineering work and supply chain planning is near completion, and we expect to be in a position to make the final investment decisions in the third quarter. Upon completion in 2026, the casthouse would be the largest American-owned secondary billet casthouse. The joint venture will be complementary to our smelters by offering our existing extrusion customers a complete suite of primary and secondary value-added products as well as the potential for a closed-loop supply chain solution through scrap tolling arrangements. We expect we will be able to provide you with more details on those projects on our Q2 call in August. Okay. Turning to Page 13. We were thrilled to announce late last month our plan to build a new state-of-the-art green aluminum smelter here in the U.S. The green aluminum smelter project will nearly double the size of the existing U.S. industry and build on our leading market position to fulfill the ever-growing strategic need for secure domestic U.S. supplier of low-carbon primary aluminum alloys and value-added products.

The new green aluminum smelter would provide our U.S. customer base with a secured domestic source of low-carbon and military-grade primary aluminum as well as a full suite of value-added products produced with best-in-class technology. We’ve been working on this project for quite some time. And we’re extremely proud and grateful to be selected by the U.S. Department of Energy to receive up to $500 million in funding as part of the industrial demonstrations program. The selection process for the DOE grant was extremely competitive. And for our project to be selected for this historic investment is confirmation of both the strategic need for domestic primary aluminum production and the viability of the project. Combined with the Section 45X production tax credits, this generous grant from DOE shows a significant commitment that the Biden administration has made to ensuring that this critical industry and its workers will be producing the strategic metal in the U.S. long into the future.

I’d also like to thank Dave and our colleagues at the United Steelworkers for their help and shared commitment towards making this project a reality. The green aluminum smelter is expected to create more than 1,000 full-time direct jobs represented by the United Steelworkers and over 5,500 construction jobs. Of course, this new aluminum smelter is a tremendous undertaking and one that will take years to complete. As detailed on our announcement of the project, we’ve already begun engineering work, energy procurement and site selection focused on the Ohio and Mississippi River Valleys and have narrowed the potential location of the smelter to 3 states. Our next immediate steps on the project will be completion of the site selection and energy supply negotiations, finalization with the Department of Energy regarding the terms and timing of the $500 million grant and completion of our second phase of engineering work.

We expect to make significant progress on each of these initiatives over the next several months, and we’ll provide updates on each on our next call. I can’t tell you how proud we are to be announcing these 2 projects and helping to ensure the future of the U.S. aluminum industry. We look forward to your questions today, and we’ll turn the call over now to the operator.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Lucas Pipes of B. Riley Securities.

Lucas Pipes: Congratulations on your progress on many fronts. One of them is starting production in Iceland with the casthouse. And it sounds like you’ll be ramping up over the course of this year. In Q2, I would imagine you’re probably still losing money as you ramp up. And I wondered if you could maybe articulate that so I can fine-tune my model and get a better sense for the impact, especially as the facility ramps.

Jesse Gary: Sure, Lucas. Thanks for the question. You’re right that over Q2 and Q3, the casted volumes will be fairly limited, mainly consisting of trial loads for our customer base in Europe. And so most of those volumes will come over the course of Q2, sent into Europe where they will be trialed over Q2 and Q3. And then you’ll actually start to see the volumes ramp in Q4, as we mentioned, and should be going full out in Q1. In terms of the cost structure, that will all be included in the guidance that we gave. So there won’t be anything incremental to that. It won’t be significant over that period. And then you’ll start to see the additional upside for the business of those billet sales starting to hit in Q4 and then full out in Q1 of ’25.

Lucas Pipes: Got it. So the big step up would come not in Q3, it’s really kind of in Q4 versus Q3 where we would see that kind of quarter-over-quarter step-up in EBITDA, thanks to this asset.

Jesse Gary: That’s correct, Lucas. There will be some sales in Q2 and Q3, but those are really pretty small and really just trial loads into the customers.

Lucas Pipes: Any way to quantify the potential impact in Q4 versus Q3?

Jesse Gary: We’ll, of course, give that guidance on our Q3 call. And what I would just say for now is there will still be a ramp-up period in Q4 as you start to sell into that customer base. So it won’t be the full out quarter’s worth of volume that will hit in Q1 of ’25, but it will be substantially higher than what you’ll see in Q2 and Q3, yes.

Lucas Pipes: I appreciate that. And then on your new — on the projects you outlined in the U.S., first, congratulations on that. Very exciting on many different levels. On the new casthouse, it sounds like if I read it right, we will start in 2026. And I wondered if you could maybe give us a sense for the economics around that project? What’s the capital intensity? How would spending be paced over the next 2 years? And anything you could share on the return thresholds would be very helpful.

Jesse Gary: Sure. Sure, Lucas. Yes, you’re right. We’re really excited about this project. We’ve been talking for a long time about our aspirations to enter this portion of the business. And we’re indeed seeing a lot of increased demand for secondary aluminum, both here in the U.S. and also in Europe and elsewhere. So it’s a really good opportunity for us to enter the space. We think it’s going to be very well received by the market. And as I mentioned, it’s actually very complementary to our existing billet business in the U.S. because we are able to offer closed-loop supply chains to our existing billet customers. And we’ll be able to offer that — sort of that full suite of both primary and secondary products to all — to the customer base.

So we do expect that we’ll be in a position to make an investment decision, hopefully, in Q2 and Q3. And once we do make that decision, we will provide everyone with an update on exactly what the project looks like and what the expected returns are at that time. We are continuing to sort of finalize the engineering work as I mentioned on the project, working with our partner at MX on that. But we’re really far advanced on this one and excited about it. I think it’s going to be a good project. Just in terms of very high level on spending profile and return profiles, we do think this will be an asset that we’re able to secure some pretty attractive financing on. And then, of course, it is a joint venture, 51-49, with us on the small minority side.

And so that will decrease the cash requirements from our side. And we think with the financing structures we’re looking at, we shouldn’t have much cash requirements to the project over the balance of 2024. So that gives you a little bit of sense on the timing. And we’ll, of course, give more detail there going forward. And then in terms of return perspective, we talked a little bit — without getting into specifics, we haven’t finalized engineering work on the project, but we talked a little bit about our return requirements in the past when we were talking about the Iceland casthouse. And just remember there, we said we are looking for unlevered IRRs in the mid-teens. And so that gives you some sense of how we look at these projects going forward.

And then finally, just one other consideration that we really like about this business and complementary to the rest of our business is the secondary business is really LME independent because purchasing scrap at a discount to LME in the marketplace and then converting it and selling it at LME prices to your customer base. So it really becomes a processing and margin business, which will be independent from the rest of our business, which is LME-exposed.

Lucas Pipes: Very helpful. And just a follow-up on the financing. Should I expect the vast majority of the capital project-level loan of either secured or unsecured?

Jesse Gary: Yes. We do expect that this will be project-level financing.

Operator: The next question comes from Katja Jancic of BMO Capital Markets.

Katja Jancic: On the green aluminum smelter, can you talk a bit about how much you think this smelter would cost in total?

Jesse Gary: Thanks. Yes, as I said on the call, we’re really excited about the green smelter. This has been — for someone who’s worked in the U.S. industry for over 15 years, it’s really rewarding to be talking about growth. And when you look at the overall supply situation in the U.S., it’s over 4 million tonnes short. It’s very clear that something like this is needed. And I think the grant that we got from DOE is really recognition that, that’s recognized all the way up to the national and federal level, the importance of aluminum as a critical mineral to the supply chain. In terms of process going forward for the smelter and to your question specifically, Katja, we are focused on the process ahead of us. As I mentioned on the call, a portion of that in the near term will be site selection and also securing the energy contract.