Century Aluminum Co (CENX) 2016 Q2 法說會逐字稿

Welcome to the second-quarter 2016 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Peter Trpkovski. Please go ahead.

Thank you very much, Ernie, and good afternoon, everyone, and welcome to the conference call. Today's presentation is available on our website, www.centuryaluminum.com. We use our website as a means of disclosing material information about the Company as we are complying with regulation FD.

I would like to remind you that today's discussion will contain forward-looking statements related to future events and expectations, including our expected future financial performance, results of operations, and financial conditions. These forward-looking statements involve important known and unknown risks and uncertainties which could cause our actual results to differ materially from those expressed in our forward-looking statements. Please review the forward-looking statements disclosure in today's slides and press release for a full discussion of these risks and uncertainties.

In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in the appendix to today's presentation and on our website.

And now I'd like to introduce Mike Bless, Century's President and Chief Executive Officer.

Thanks very much, Pete, and thanks to all of you for joining us this afternoon. If we could please turn to slide 4 in your deck, I'll give you a quick summary of what we've been working on here over the last couple months.

First, during this period, we've seen market conditions and trends that have remained reasonably consistent. Shelly is going to give you an overview of the industry in just a moment. But I'd like to just make a couple comments to put my comments about the business into context.

Demand as we've seen in most major markets has remained generally stable? We've seen no major changes since we last spoke with you in April. The short-term spending by the Chinese government that's been aimed, as you've read, at stimulating their general economic conditions, is coming to an end for sure. At the same time, we are seeing potential tiring in some end markets in developed regions. We think these could be just seasonal in nature, but obviously we are watching very closely for any more structural trends.

On the supply side, production in China remained relatively stable during the first part of the year. This is exactly as was expected. That having been said, production has increased in each of the last several months, and the market is still anticipating a significant build during the second half; this from a combination of restarts and the addition of new capacity.

Bottom line, the first half of this year saw the largest deficit in the primary aluminum business that we've seen in some time. But this is expected to reverse significantly due to the coming production increases in China, and we are expecting to see that over the coming months.

Again, Shelly will give you some more detail on the market fundamentals and I'll also address the trade picture in just a few moments.

We had a very good quarter in the operations. As you'll recall, we took significant restructuring actions in our US operations in the back half of last year. Since then, we've been consistently on track with the cost structure, the financial performance, and the cash flow targets we set for each of the facilities. All of the plans have achieved their objectives, and I'll discuss this in more detail in just a few minutes.

It goes without saying, no one here is satisfied about the absolute level of profitability of the business at this time. But we are confident we can operate this Company successfully in the current environment. We can run the plant very tightly while maintaining the necessary investments in their future viability.

At the same time, we've achieved an operational stability that has enabled us to produce the portfolio of value-added products that are required by our customers. And as Rick will detail, we've maintained a conservative balance sheet and very good liquidity.

Moving on, as you saw us announce a couple of weeks ago, we've now committed to a new purchase of competitive market power for our plant at Mt. Holly. This is a term of September 2016 through December of 2017, so obviously it will pick up as soon as the current contract expires at the end of August.

It's similar to the contract now in place, and that is for 75% of the plant's power requirements. We do have the right to terminate it with 60 days' notice if we find ourselves needing to curtail the plant's operations. And as you know, this is the same rate that we have in the contract for the remaining 25%.

Regrettably, we've been unable to produce any changes in the current structure. That structure, as you know, requires us to purchase 25% of our power at Mt. Holly from the in-state power company. We remain absolutely convinced the facts support the various proposals that we made in South Carolina. Those would leave the local power company in the same or better position than if the plant were to shut, and those would have no other customer harmed in any way.

For some reason, thus far, the facts have been unable to prevail. The requirement hasn't changed one bit. We must achieve different structure or the plants simply can't be viable over the longer term. We think the path of least resistance here is for Mt. Holly to be allowed to buy 100% of its power from the free market. But we made a range of other proposals and put forth a range of other options, and we remain committed to work creatively to find a solution.

We've talked to you about this before. But let me just remind you of the economics here, so that you can get a sense of where we are. And you'll get a sense that it's only due to the competitive nature of these power markets that's allowed us to continue to operate Mt. Holly.

This is despite the requirement that we have to pay two transmission fees to get the power all the way to the plant. One fee is paid to an out-of-state transmission company to get the power from its source to the South Carolina state border. And then of course the other fee is paid to the in-state power company to get the power from the state border all the way to the plant.

Even when this duplicative fee, if we were buying 100% of the power from the market, what we are trying to achieve, the fully delivered cost of that power at the plant would put us at about the median on the global power cost curve for smelters, of course. The delivered cost of the in-state power, as we've talked about before, is double the delivered cost of the competitive market power, literally 2X.

And, thus, when you put those two together -- 75% of the power coming from out of state from the competitive market, and the 25% coming from in-state -- the a weighted average cost that we are bearing today puts the plant at the 78th percentile on the global power cost curve.

For this reason, we are forced to run the plant in a manner which is simply not sustainable for the long-term. So now it's easy for you to understand why this isn't a long-term solution, and we need to change it.

We'll continue to run Mt. Holly safely and efficiently, continue to produce their products that are in high demand by our customers in the US. Employees of this plant have done a tremendous job. And the quality of this workforce as a reminder every day of why this plant has always been considered one of the finest in North America -- of course, other than the power price.

We're absolutely determined to find a way to achieve a power structure that works for the plant and that would also enable us to restart that second pot line and rehire the 300 folks with whom we very regrettably had to part company last December.

Lastly, the fair trade efforts on which we've been working for the better part of a year, we believe are reaching a decision point. We continue to be very confident that facts and circumstances support a textbook illegal subsidies case in front of the WTO.

As we discussed before, the primary aluminum industry in China is massively subsidized, both directly and indirectly, in many different forms. It receives huge financial support ultimately from state-owned financial institutions; subsidies on power tariffs; free and subsidized land; and countless other measures. The material damage of course to the US industry is evident. As you know, there's only a handful of smelters remaining in this country.

Metal continues to pour into the US markets due to the huge amount of production in China, which without the illegal subsidization, wouldn't be viable.

So the situation is very clear. And we and all the mainstream experts that have looked at this situation believe strongly that the facts are inarguable. The timing is now acute. If no action is taken, we could easily find ourselves in a situation where it's too late in a very short period of time.

And with that, I'll ask Shelly to provide some more comments on the industry environment. Shel?

Thanks, Mike. If we could move along to slide 5, please, I'll provide some comments here on the industry environment. The cash LME price averaged $1,571 per ton in Q2. This reflects a 3.6% increase over Q1. Price has been fairly volatile recently, with spot reaching a high of $1,670 in mid-July, but then falling to the current price, right around $1,600 per ton.

Regional premiums continued to show weakness in Q2. Premiums fell by about 10% quarter-over-quarter both in the US and in Europe. Today the Midwest premium is $6.75 per pound, and European duty paid a premium is $118 per ton. For the first six months of 2016, the global alumina market recorded a deficit of 0.5 million tons. This is the largest first-half deficit in well over a decade.

The concerns about the increasing Chinese supply and slowing demand in second half continue to be an overhang on the aluminum market. Global primary production was up by just 1.5% in the second quarter. Over the back half of the year, it's expected to see much higher supply growth with new smelter projects and delayed restarts coming back online in China.

Global aluminum demand grew at a rate of 5.2% in Q2 as compared to the year-ago period. We saw healthy Chinese consumption growth in the second quarter, driven by government stimulus spending. Chinese demand is expected to soften in the second half as government support begins to ease. Most industry experts continue to expect the global aluminum market to be reasonably well-balanced in 2016, with a large surplus in China resulting in significant exports to the Western world.

Just a couple quick comments on the alumina market before I hand it back over to Mike. Alumina prices peaked at about $260 per ton around the time of our Q1 call, and then declined to their current level of $235 million on the back of Chinese restarts and declining -- Chinese refinery restarts and declining LME prices from when we last spoke in April.

And with that, I'll hand it back to Mike.

Thanks, Shelly. If we could turn to slide 6 please -- just a couple comments on the operations. Starting from the top, we had a mixed quarter in safety over the last couple of months. It's important to remember that all our plants continue to perform significantly better than industry norms. But as you see, we did lose a little bit of momentum in a couple of key places.

First and foremost, the Kentucky plants continued their excellent performance this year, and we are extraordinarily proud of the commitment of the folks there and the results that they are producing. Grundartangi also continues to perform at a high level in safety; that's only one more incident that we recorded in Q2 over Q1.

Mt. Holly did see far too high a number of incidents in May and June, versus their history and versus our expectations. Most of these were careless, and they are evidence to me of the stress of our people in this uncertain situation.

We remain committed to an environment of zero serious injuries in this Company; and, thus, we are continuing to invest in this most important area. For example, we recently brought on board a very talented individual with a long history in the primary aluminum business, and he's now leading our US efforts.

Moving down the page to production, as you can see, generally good progress here across the board. As we discussed with you in April, Hawesville had been working to reach a full pot count after we took the three pot lines down in the latter half of last year. That situation has been aggressively managed. And as you can see, the results here have been quite good.

The same is true with Mt. Holly, as we told you about in April, when we took that pot line down at the end of last year. We did see some stability in the first couple of months of this new year. And as you can see, that's also been corrected. So excellent work there.

Moving down to KPIs or production metrics, again as you can see, very good across the operations. As I said, Hawesville especially has come back nicely and is showing excellent improvement. Effectively all cells are now operating online at Hawesville; that of course is in the two pot lines that are running. The efficiency metrics have improved, and the pot rooms have reached a very high level of stability. And this is important in that it's enabling us to produce high purity metal at a very strong rate.

Lastly, on the cost side, as you can see, performance is generally good with Grundartangi, Hawesville and Mt. Holly all flat to lower, Q2 over Q1. That increase that you see there at Sebree is primarily due to a higher power price, Q2 versus Q1, as we started to see some higher market power prices in June due to the hot weather. That trend has continued a little bit in July. It's coming off a little bit now, so it's getting a little bit better. But we are watching it very carefully.

Hawesville, of course, has faced the same issue in the second quarter on hotter temperatures, but was able to offset that increase -- the improvement in other areas.

Again, we are really pleased with the performance of the operations and really proud of our folks. What they are doing is allowing us to preserve the value of these plants during these tough conditions.

And with that, I'll turn it over to Rick.

Thanks, Mike. If we turn to slide 7 of the presentation, I will provide some details on our financial performance for the second quarter. Our net sales were up almost 3% from the first quarter, reflecting favorable market conditions. On a two-month lag basis, the average cash LME price was up over 4% in the second quarter. However, the Midwest premium decreased 5%, resulting in a Midwest transaction price increase of approximately 3% quarter-over-quarter. Our realized prices in the US were up almost 3%, reflecting that increase in the Midwest transaction price. It is important to note here that the average two-month lag LME price for the second quarter was approximately $1,544 per ton.

Shelly spoke earlier of the recent volatility in the LME prices and the favorable spot pricing we have seen in July. The average two-month lag LME price to date for the third quarter is a most $1,600 per ton. As a result, we should realize more net favorable pricing in Q3.

For Iceland, the all-in two-month lag LME and European duty paid premium increased approximately 2% in the second quarter, consistent with our realized price increase.

On a consolidated basis, global shipments were up 2% in the second quarter of 2016, while production levels were essentially flat quarter-over-quarter.

Turning our attention to operating profit, we reported an adjusted EBITDA this quarter of $21 million, an increase of $19 million compared to the $2 million of adjusted EBITDA reported for the first quarter.

Just a few things to call out here. Lower raw material costs increased EBITDA by approximately $16 million during the quarter, led by a significant decline in the realized cost of alumina in the second quarter. As a reminder, there is a one- to two-month lag on alumina cost realization depending on timing of shipments and inventory levels.

Higher all-in pricing, net of the impact of the rising LME on Iceland power, increased EBITDA by approximately $7 million from the first quarter of 2016.

Power costs at our Kentucky operations increased by $3 million from the first quarter. However, these costs still remain at historically low levels. The increase was driven by hot temperatures and more seasonal in nature, as Mike noted.

Just a reminder: every dollar per megawatt hour impacts EBITDA from our Kentucky operations by approximately $5 million per year, assuming our current configuration; Hawesville at 40%; and Sebree at 100% capacity. Power costs at Mt. Holly were favorable to the first quarter by almost $1 million. As we discussed last quarter, our first-quarter costs included the impact of purchasing 100% of our Mt. Holly's power requirements from the local power company generation in the month of January as we transition to our new arrangement.

In the second quarter, we had a 75% market and 25% local power company generation mix for the entire quarter, which resulted in lower cost unfavorable natural gas prices.

Collectively, all of these items resulted in an adjusted loss per share of 5%, an increase of $0.18 when compared to the $0.23 adjusted loss per share reported in the first quarter.

Moving on to liquidity, there were no outstanding borrowings under our revolver, other than letters of credit. We ended the quarter with $129 million in cash and $89 million of availability under our revolving credit facilities. Our facilities are secured by both accounts receivable and inventories. And availability under the revolver will fluctuate as our working capital levels will move during the year.

Please turn to slide 8 and we'll take a look at cash during the quarter. Cash increased during the quarter by $3 million, as the $21 million in adjusted EBITDA was more than enough to cover CapEx, taxes, and interest during the quarter. Capital expenditures were $4 million during the quarter, which brings our year-to-date capital spending to $8 million. We continue to expect spending for the year to be between $20 million to $25 million, as we indicated in our 2016 items, which means back-half spending is expected to be heavier than the front half.

We made estimated tax payments of $4 million in the quarter, and we also made our semiannual interest payment of approximately $10 million. Working capital increased slightly during the quarter, driven primarily by increased alumina inventory in Iceland, as the toll -- the last of our tolling contracts expired.

Now, if we visit our consolidated cash breakeven point. When we last spoke, we gave you our estimated consolidated breakeven point of $1,550 per ton. As an update, our current estimate for the consolidated breakeven increased by $20 to approximately $1,570 per ton. This increase corresponds to the decrease of about $20 per ton in regional premiums.

As a reminder, the consolidated breakeven assumes the benefit of premiums we receive above the LME price. So when these premiums go down, our LME equivalent breakeven price goes up.

The recent decrease in alumina costs were offset by increases in power costs we discussed earlier. As we have noted before, the consolidated cash breakeven point is the LME equivalent number, and represents cash flow after maintenance capital, expenditures, cash taxes, interest expense, SG&A, and pension contributions, which is pretty much everything excluding any discretional capital spending.

So with that, I'll turn the call back over to Mike.

Thanks, Rick. And I think, Pete, we can move pretty quickly to questions. Please be assured we're going to be focused hard here over the coming months, as we always are, on operational execution and product quality. Our folks know very well that there is absolutely no room for self-inflicted wounds or anything like that in these difficult market conditions.

From a strategic perspective, we've got sort of two major issues here on the docket over the next couple of months. The first again is to pursue a structure that will work for Mt. Holly long-term, and, importantly, will allow us to restart the second pot line. And then, second, we need to get to the finish line finally, or I supposed push the ball over the finish line, on the fair trade efforts.

With that, Pete, I think we can move to questions.

Thanks Mike. Ernie, at this time, can you go ahead and please kick off the Q&A session?

(Operator Instructions). Jorge Beristain, Deutsche Bank.

I just wanted to ask Mike maybe about the -- well, two things -- your efforts you are saying in terms of fair trade, pushing it over the finish line. And you did mention, in your comments, you are very close there. Could you just talk exactly what you mean? And obviously we've seen the benefits play out in steel, so I'm just trying to wonder if we could expect something similar in terms of tariff protection.

Yes sure, Jorge. So over the last couple of months we -- if there's one thing that surprised me, given my dearth of experience in this kind of thing, it's just the amount of data that's required. It's an enormously analytic process and there's just literally reams and reams of data; most of which, or much of which, has had to be translated from Mandarin.

So it's just -- the last efforts here really have been producing those data that are required. Because of course if a case is brought, the case needs to be a strong one, so it's nothing more -- it's nothing more complex than that. As I said, we are optimistic that we are close here and -- but it's not in our hands, ultimately. That goes without saying.

In terms of tariffs brought, just to kind of touch on that, the first step here is just that the administration would bring the case. And that just sets in motion a process that can take some time. And so, any remedies, whether they are tariffs, quotas, combinations thereof, other things, would be sometime in coming. But the world would know that the cases have been brought. That would be obviously very public upon inception.

Got it. So it sounds like this is still a ways off, then, in terms of any time -- tariffs sound like they might be more of a 2018 type of outcome.

I think any tangible thing -- remedies in the jargon of the practice, Jorge, I think that's -- whether [18] is right or not, it's not in the next quarter or two or three, like that. But our view again is -- as we've said before -- is we think the bringing of the case is an extraordinarily important milestone. Because that signifies to all market participants that the government believes that there is a strong case to be brought; and that it's because if you look at the history of cases aren't brought that don't get -- that don't proceed and ultimately win. And so we think that it's a very important signal that the case itself is brought, even, as you said correctly, if a tangible -- you didn't use that word, but I will -- a tangible remedy is some time away.

Okay. And then just on the recent news that Glencore was pulling out of its marketing of Sebree product, can you just expand on that? And should we read anything into that? Is there going to be an incremental cost for you guys to market your own product? And then does that have any impact on your alumina a relationship with Glencore?

I think the easy answer to that question is, you ought to be careful what rumors and innuendo and scuttlebutt you listen to.

Okay, I'll have to stop reading American Metals Market, than. (laughter)

That's -- we were scratching our heads, to be quite honest.

Okay. Then I thought I had another question, but I guess I'll just to get back in queue. Thanks.

David Gagliano, BMO Capital Markets.

Just a follow-up on Jorge's question a minute ago on the trade side. Are you working in conjunction with other aluminum producers in bringing this case? Or is this on your own?

It wouldn't be -- David, technically, we wouldn't bring it. The government brings it. So the government is talking to lots of different industry participants about the case. As you know, our consortium itself, our -- the China Trade Task Force -- there's only a few members of that. It's ourselves; Brazeway, which is a major billet producer in the US; and of course, the United Steelworkers. We believe that there will be other members announced quite soon in the next couple of weeks.

But in terms of the case itself, it's the government that brings it. And we are well aware that the government is talking to lots of different industry participants.

Okay that's helpful. Thank you. And then just on the Mt. Holly side, I was wondering if you could drill down -- similar line of questioning there. What are really specifically the next steps that we should be looking for, milestones, things like that for a decision regarding Mt. Holly?

From a decision standpoint, David, you know we -- and then I will answer the question I think maybe you're asking. From a decision standpoint, we've procured this power. So we own it through the end of 2017. It's market-based; same kind of pricing and terms as the contract that's expiring. And we intend to run Mt. Holly. And we are happy about that.

And we are entering the commercial season here that will be starting in earnest at the end of the summer into the fall, with full confidence in the way that we are confident our customers will have full confidence, that Mt. Holly is going to run; is going to be a major billet supplier as it has been for years and years and years. So in that, there's really no decision to be made for the next year and a half, sitting here today.

The issue is a longer-term issue, and barring any precipitous or draconian fall in the market, of course. And that's why we needed to negotiate 60 day out just to mitigate that kind of risk. But barring that, the issue that needs to be solved is a longer-term issue. And it's because, number one, at some point in time we're not going to be able to run the plant on the basis we are running it today, just from operational sustainability standpoint, cost structure standpoint.

And, two, is at some point in time -- I don't have to tell you. You've been following commodities long enough. If you are at the 78th percentile on your major cost, you are going to get pushed off there at some point in time. It is just how the -- I don't have to tell you -- it's how the market works.

Okay. So it's -- but you are still -- it's the other 25% of the power I'm trying to (multiple speakers).

That's it. Yes. It's the other -- okay, [then] I'm sorry. I said I was going to answer the question I thought you are asking, and then I proceeded to not.

No; it's fine. It's fine.

I apologize. So, in the next couple of months I think you should not expect to see anything there. Although we will be having a lot of private discussions and strategizing discussions with people involved in the situation; including, we hope, with the power company itself, because their portfolio is always changing. Their situation is changing. And so we intend to engage in a constructive dialogue with them.

They've always been willing to engage in a constructive dialogue. We always haven't seen eye to eye about what the results ought to be. But they've always been more than willing to meet and talk and listen to ideas, and all that kind of stuff. So that will be the next couple of months.

Then going into next year, another legislative session, who knows where it may be? But I wouldn't look for anything tangible coming out of us on that 25%, as you say, over the next, say, at least the next quarter.

Okay. And then just really quickly, last question. I just missed it. What was the updated cash flow breakeven number again, LME number?

It is $1,570.

Okay, great. Thanks.

(Operator Instructions). John Tumazos. Would you please state your company, please?

John Tumazos, Very Independent Research. What is your best judgment as to the increase in Chinese output, second half of this year, compared to first half?

Yes, that's a good question. It's interesting. You look at the range of results there which was pretty tight -- I was just looking at this the other day -- that was pretty tight, three or four months ago. The dispersion of those results has really widened out. I guess that's no great surprise.

It's going to be, Shelly, at least in the high single digits, if not higher year-over-year. Maybe higher, higher, higher than that?

Right, right. It's got a bunch of restarts that people have been anticipating. And they've been slower than expected coming back online, but the expectation is that you'll see those restarts in the second half, as well as a significant amount coming online from new projects.

So John -- you could be as high as -- some of the estimates that I've seen -- I wouldn't say this is the most outlier, but maybe towards the outlier of the spectrum -- have talked about full-year production growth average of course in that high single digits. So in order to get there, you'd have to be in the high-double-digits percent for the second half. So we'll see.

It seems to be changing every day as the market has a better opinion on whether a particular plan. I think most of the variability in the expectations, Shel, is on the restarts more than the new capacity adds.

That's right.

It's coming. It's going to be a wave. The only question is whether it's a huge wave or a two-time -- huge wave times two.

Super. Thank you very much.

Jorge Beristain, Deutsche Bank.

I just wanted to drill down on what was happening with Sebree. You had flattish volume quarter-on-quarter, but you saw a 7% jump in the unit costs. So what's behind that, and should we expect things to normalize going forward?

Sure, Jorge. The volume wasn't a big surprise. As you know, Sebree is producing at capacity; in fact a little nicely above its rating capacity. So with all three lines chugging away, we wouldn't in a normal quarter expect much.

There was actually -- we don't talk about this -- actually that is on a per-day basis we give that. Right, Pete? So that does adjust for the one fewer day. So that is a clean estimate.

On the power, as I said, Jorge, the -- specifically of that amount, 5 of those percentage points of that increase was just an increase in the power cost, the power price. And that was due, as you know, to June heating up; and, thus, the MISO prices starting to increase.

To answer your question, regrettably, over the first couple of weeks of July, as we all know in the Northeast -- those of us who are in the Midwest or the Northeast -- it's been hot. I guess it's been hot over most of the country. And those prices have stayed at those levels. Now, we've started to see it nicely dissipate, come back down over the last couple days. We hope to put some more data points behind that over the next couple days.

But as Rick said, we could -- you could see reasonably higher power costs, Q3 over Q2, in the Kentucky plants. And all you have to do there, Jorge, is -- you just can see it on your Bloomberg screen -- is look at Indiana Hub, MISO prices at the Indiana Hub. And we pay generally a little bit less than that. We have generally, at both plants, a positive basis or a positive differential.

Negative.

Negative. Pardon me; thank you, Pete. So we are paying less than that; negative basis. But it's within, let's say, $1 a megawatt hour. At Mt. Holly, on the other hand, you want to watch natural gas prices, Henry Hub natural gas prices, because our power floats based on that price.

Got it. Okay, thanks very much.

Thank you. And there are no further questions in queue at this time. Please continue.

We thank you all for participating this afternoon, and we appreciate your interest. And we look forward to talking with you in a couple months' time, if not before. Take care.

Thank you. That does conclude our conference for today. Thanks again for your participation and for using AT&T executive teleconference services. You may now disconnect.