Oct 29, 2015
Executives
Peter Trpkovski - Senior Corporate Financial Analyst Mike Bless - President and CEO Rick Dillon - EVP and CFO Shelly Harrison - SVP, Finance and Treasurer
Analysts
David Gagliano - BMO Capital Markets Michael Gambardella - JPMorgan John Tumazos - Very Independent Research Paul Massoud - Stifel
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Third Quarter 2015 Earnings Conference Call.
At this time, all participants are in a listen-only mode later we will conduct a question-and-answer session. [Operator Instructions] And also as a reminder today's teleconference is being recorded.
At this time I will turn the conference call over to your host, Mr. Peter Trpkovski.
Please go ahead sir.
Peter Trpkovski
Thank you, Tony. Good afternoon everyone and welcome to the conference call.
Today’s presentation is available on our Web site at www.centuryaluminum.com. We use our Web site as a means of disclosing material information about the company and for complying with Regulation FD.
I would also 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 condition. 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 Web site. And now, I’d like to introduce Mike Bless, Century’s President and Chief Executive Officer.
Mike Bless
Thanks Pete and thanks to all of you for joining us as usual this afternoon. If you could move to Slide 4 please, we’ll get right to it.
Shelly in just a couple minutes is going to give you a full update on the market environment obviously a critical issue for this call and otherwise, but just to put the comments I’ll make here in context. Let me just make a couple quick observations.
The trends that we talk to about back in July on the same call that continued if anything that become more pronounced as you know. Dynamics in the market outside of China continue to be favorable for this sector.
Demand development continues to look good and still we’re seeing no new capacity coming on ex-China and we firmly believe this won’t change. The net result currently is a deficit outside of China of about a million tons per year.
Of course all this and more is wiped out with the metal that's currently coming out of China. The issue with regard in China has not abated.
Domestic demand is weak. We share the point of view which you’ve read that it’s actually meaningfully weaker than it’s been publically reported.
Capacity is not coming off nearly fast and in fact it's much the opposite as we continue to see uneconomic plans propped up by huge subsidies in various forms. The export of highly subsidized metal to develop markets has continued both directly and is secured.
Products are being shipped in intermediate locations and then backward integrated i.e. melted down into primary metal as obviously no economic rationale for that type of activity.
Our assessment is that this behavior is not accidental, but is delivered and decided strategy and that must be dealt with through various political provinces. Some of these are shorter term oriented with the objectives to draw attention to the problem and to stop the most degraded practices.
Ultimately, we believe the solution will require government to government dialogue and agreements. As you know this type of thing has happened in the past in this and another sectors and we're working aggressively with industry groups and others towards this end.
Turning in within the meantime we’ve set the company up to rise through what could be a prolonged ugly environment. We will only run each of our operations in a manner that yields nominally at breakeven results even in the current depressed environment.
We’ve got no interest in impairing our liquidity to fund losses. As you know the company has a strong capital structure with ample liquidity and low financial leverage with no near-term maturities.
The other leg on this stool is our insistence that no operation can or will put the other operations or certainly the total company at risk. Strategy to accomplishments is relatively straight forward.
On the one hand we will continue to make modest investments that dollar or even assuming these market conditions persist for some period of time. On the other hand we're reconfiguring the other operations to be viable in the current environment.
First at Grundartangi we'll continue the capacity project there that produces good returns even in the current commodity environment. In 2016 this plan will be running at greater than 50,000 metric tons per year above its rated capacity that’s over 20% above its rated capacity.
Plans are running well and continue to improve what’s already an excellent production efficiency and as you know this plant has a very competitive cost structure. Turning to the Kentucky plants, if you look at market power prices over the Midwest recently, those dictate that these plants should run in all but the most extreme and protracted scenarios.
They're very favorable to power prices. We've developed an operating configuration at these plants that works even in today's metal prices.
We'll give you our detail assumption for our annual plan as usual when we report our fourth quarter results in February. We will give you just a sense now of what it's looking like based on the operating structures that we've developed for the Kentucky plants and the product premiums as we see them for 2016, these two Kentucky plants will run at a combined EBITDA break even, even at a current commodity prices.
And this will convince -- can be sustained for a reasonably prolonged period of time. We've brought down the consolidated company’s cost structure and breakeven considerably and Rick will provide you some data on this in just a few moments.
Okay. Moving along now, as we announced during the third quarter we are moving to dispose of the West Virginia plants in the related site.
This was truly a regrettable decision, but we simply came to the conclusion that the hill here was just too high to climb. Bottom line we've set the company up to be strong and sustainable in what could be a prolonged downturn and we also know where what’s required if we were to see a significant additional sustained deterioration in market conditions.
Of course the other key issue facing us now is Mt. Holly, here is the only issue is power with simply and competitive power price, this plant should always be the last man standing in the U.S.
As a reminder we've announced already we have successfully procured from a third party all the power required to run this plant. It's a high quality provider with the power coming from neighboring regions.
With proposal to pay the standard transmission rates to the local power company, to transmit that power from its boarder to the plant, regrettably thus the local utility has declined to do this and thus we were forced last week as you saw to notify our employees that the plant will close at the end of December if we can’t find a solution. As a reminder, the present contract was put in place in 2012 power contract of course and it expires this December.
Let me just remind you for a moment the basis of our decision to purchase our partner's share in the plant at the end of last year. First Mt.
Holly is the newest during the U.S. thus the most efficient and productive.
As a part owner we had high regard for the Management Team and employees and as we've gotten to know them up close they've exceeded our expectations. There is skill combined with the modern technology of the plant, yields are very low converging cost to facility.
In addition, most of the production is in the form of premium products that are sold to an excellent customer base. And lastly, we can say after the last year of owning the plant outright, that South Carolina is a terrific place to do business in a whole range of ways.
For these and other regions it was the real tragedy as the parties were unable to find the solution here. As you would expect we're looking at all ranges of alternatives and considering every option.
It is difficult to predict at this time how this will result itself, but given the attractiveness of this plant we're far, far from ready to even begin giving up. And with that I'll turn it over to Shelly who will take you through a review of the market.
Shelly Harrison
Thanks Mike, if we move on Slide 5 please. I'll provide some comments to you on the industry environment.
The cash LME price averaged $1,590 per ton in Q3. This reflect an additional $180 decline from Q2 and prices today are well below $1,500 per ton at the levels we haven’t seen since 2009 during the heart of the global financial crisis.
Regional premiums continue to fall quarter over quarter, but it appears to have found some stability and have even ticked up a bit in the past few weeks both in the U.S. and in Europe.
The Midwest premium is currently sitting at $0.075 per pound and the European duty paid premium is around $160 per ton. In the Western world we continue to see good demand growth driven primarily by our robust transportation sector.
Aluminum used in Q3 grew by 2.6% in North America and 1.2% in Europe. Chinese aluminum demand continued to soften along with the broidery economic and grew at rate of 8% in Q3.
While this still appears to be good demand growth on a very large base these levels are well below the low double digit growth rate we've seen out of China over the last decade. On a global basis demand growth showed a healthy 4.7% increase in Q3 but the real driver of our market right now is on the supply side.
As we discussed last quarter oversupply coming out of China continues to weigh heavily on the aluminum market despite a significant decline at aluminum prices and premium over the last several quarters, we are not seeing any significant reduction in supply growth out of China and in Q3 Chinese production was actually up 12% as compared to the same period in 2014. The lack of smelter curtailments in China and continued supply expansion is being driven by what we believe to be unfair trade subsidies.
These subsidies are coming in many forms, including land grants, power prices, taxes, interest rate and other state support that result in overcapacity and unfair trade practices which must be corrected through government action. Western world supply growth was essentially flat in Q3 with some modest curtailments offsetting new capacity from planned project startup.
On a worldwide basis, global supply was up just under 7% in the quarter. Overall the aluminum market is expected to generate up modest surplus this year, which is entirely attributable to excess capacity from China.
Excluding China, the aluminum market would be in a deficit of over one million tons in 2015. Okay.
Just a couple of quick comments on the Alumina market before I hand it back to Mike. Alumina prices have traded down sharply over the last several months.
The Australian index price is currently around $250 per ton just down about a $100 from the beginning of the year. Rick will talk about this more in a minute, but I wanted point out here that there will be a lag between the timing of falling Alumina prices and when that benefit will be reflected in our financial statement.
Pricing for Atlantic Alumina continue to trade at a discount of $5 to $10 per ton to the Australian index price. And overall the global Alumina market is expected to be in a surplus position from the balance of 2015.
And with that I'll hand it back it to Mike.
Mike Bless
Thanks Shelly, if we could turn to Slide 6 please, let me just take you through a quick review of the quarter that just ended. For Grundartangi you see we had a mixed performance on safety this quarter.
First and foremost I should say how proud we are of the excellent performance at Hawesville given the situation at the plant. Just to review as you remember, we came out of the way obviously in June going into the quarter and the difficult situation that came out of that.
Then of course we had uncertainty and significant work required to move the plant down to 40% of capacity as we announced a couple of weeks ago. And in this very difficult environment that the Management and employees work to keep themselves in each other’s faith and this should be absolutely commended for that.
We also had a lot going to especially activities around returning the cash test to more normal operations and so in that context performance there was terrific as well. Uncharacteristically we had slightly worse performance quarter to quarter from Mt.
Holly and Grundartangi on the safety side. Going down the chart here you can see production at Hawesville, no surprises there of course as we were working through the quarter to take the plant down to where it sits today at 40% of capacity and as you see the other plants were flattish quarter to quarter.
Production efficiencies again moving down the chart here as you can see generally stable, again a commendable performance at Hawesville given the situation there and I would say the same about Mt. Holly given the growing uncertainty on the status of the power contracts.
At the bottom of the page on conversion cost as you see Hawesville was essentially no change from a conversion cost quarter to quarter. Let me make a couple of comments to put that into context.
As you remember if you go back to Q2 we had very high cost at Hawesville, as it's a direct cost for labor dispute and then in Q3m there was some of those costs were trailing plus of course we were operating in an environment where we were bringing the production capacity down significantly to the 40% level. That resulted in Q3 costs as you see here essentially equal to the cost that we had in Q2.
We've now got the cost structure setup with the reduced production level and thus the significant unabsorbed fixed cost we saw in Q3 are largely behind us with a small amount that will be trailing in Q4. We also have a very different product mix now.
We're now producing only high purity aluminum and Molten and thus this produces a much higher weighted average product premium. So we see some very different results from this plant going forward and Rick will make some comments about the fixed cost absorption during the quarter.
At Sebree and Mt. Holly you see a reasonably consistent performance on the cost side quarter to quarter.
And now I'll now hand it over to Rick.
Rick Dillon
Thanks Mike, if we turn to Slide 7 of the presentation I’ll provide a few additional details on our financial performance in the third quarter. Our net sales were down 13% from the second quarter, reflecting the unfavorable market conditions we've discussed and lower sales volume at our North American operations.
Looking at the market impact the two month lag basis the average cash LME price was down 5% and the Midwest transaction price was down 15% sequentially. Realized prices in the U.S.
were down 12% in the third quarter reflecting the two-month lag pricing. Actual Midwest transaction price have declined approximately 12% since the end of the second quarter and the balance of this further decline will show up and realized prices in our fourth quarter results.
For Iceland the all in two-month lag LME and European duty paid premium decreased approximately 13% in the third quarter consistent with the decline realized prices. On a consolidated basis, global shipments were down 1% in the third quarter of 2015 versus the second quarter.
Iceland shipments were up 7% in the third quarter inclusive of 4,000 tons of finished goods that were awaiting shipment in Iceland at the end of second quarter due to the timing of sales costs. North American shipments were down 5% from the second quarter .
The decrease is attributable to the decision to reduce operations at Hawesville resulting in lower shipments of approximately 9500 tons. Turning our attention to operating profit, we are reporting an adjusted EBITDA loss this quarter of $25 million a decrease of $76 million when compared to the $51 million adjusted EBITDA in the second quarter of 2015.
The adjustments include approximately $3 million in cost related to partial curtailment of Hawesville operations. Additional costs in the third quarter directly attributable to the Hawesville labor disruption, which ended late in the second quarter as well as non-cash adjustments to the carrying value of our inventories which reflects the further decline in market prices at the end of the quarter.
The Hawesville partial curtailment costs of $3 million include liquidated damagers under certain take a pay raw material contract and employee severance costs. Lower all in prices, including the impact of the declining LME, declining regional premiums and net of the impact of the LME on our power and certain aluminum cost, all combined to reduce EBITDA by $67 million during the quarter 2015.
The impact of lower sales volume on EBITDA at our U.S. operations was offset by increased volume in Iceland.
As Shelly noted we have seen the market prices of alumina decline sharply over the last several months. As we noted on our last call given the high inventory levels due to reduce production activities we did not realize favorable alumina pricing in this quarter.
As we stated previously we will take one or two more quarters for us to start realizing the lower prices of alumina currently held in our inventory. Increased operating cost per ton at Hawesville and lower fixed costs absorption negatively impacted EBITDA on $9 million.
In summary lower market prices during the quarter and lower fixed cost absorption drew over $76 million decrease in EBITDA resulting in adjusted earnings per share $0.48 a decrease of $0.73 from the second quarter of 2015. Moving on to liquidity, there are no outstanding borrowings under our revolver other than the letters of credit.
As noted in our release at the end of the quarter our available liquidity was at $223 million consisting of $122 million in cash and a $100 million of net availability under our revolving credit facilities. Now let's turn Slide 8.
Cash decrease during the quarter by $44 million after consideration of the loss of $25 million on an adjusted EBITDA basis. Capital spending during the quarter were $16 million with year-to-date spending at $48 million.
We anticipate annual spending in 2015, of approximately $60 million consistent with our previous communication. The favorable impact of receivable collections and inventory reductions during the quarter was fully offset by tray payables to provide the timing of payment of alumina receipts.
Our preliminary estimate of our consolidated cash flow breakeven for 2016 at current premium levels is at approximately $1,525 per metric ton, which is a direct comparative to the LME. This is excluding Mt.
Holly and assumed as Mike noted that we have configured our remaining U.S. plants to operate at or near breakeven at the plant level.
The consolidated breakeven point represents cash flow at the sustaining capital expenditures cash taxes, interest expenses, SG&A expenses and pension contributions everything excluding any discretionary capital spending. We will provide an update on this and more details on 2016 on our next call.
With that I’ll now turn call back to Mike.
Mike Bless
Thanks Rick. If you could just turn to Slide 9 please just like to give you a quick sense of what we'll be focusing on here over the next couple of months and then we’ll get right to your questions.
So obviously critical to keep pushing the ball forward on attacking the significant issues playing in the sector on an overall basis. The price to us is obvious given the attractive demand picture in the sector.
We’re convinced that a fair global market based upon economic realities would be a very attractive environment for primary aluminum producers over the coming years. At Mr.
Holly as I said the situation is very fluid and thus it's difficult to predict what terms it might take here over the coming weeks. Again I want to say we’re absolutely committed to finding a solution to maintain operations at this truly excellent plant.
Last we’ll continue to take actions necessary to set the company up as Rick was saying for a protracted weak environment. We got no intention to drive down on our liquidity to find losses at these plants.
We're in a good position based upon current market conditions and even at somewhat lower commodity prices. And lastly we know well what needs to be done if we were to see further meaningful deterioration that we believe was going to sustained.
And with that, Pete I think we can move to questions.
Peter Trpkovski
Thanks Mike. Tony if you could go ahead and queue up the Q&A session please?
Operator
Thank you very much. [Operator Instructions] First question will come from David Gagliano with BMO Capital Markets.
Please go ahead.
David Gagliano
Hi, great. Thanks for taking my question.
I actually just wanted to ask a quick question on this free cash flow breakeven number that you just mentioned. I think you said it was $0.69 a pound.
So I actually had two questions, one how long will it take to get to that number and the second question I just want to clarify, does that include or exclude the premium I couldn’t quite understand what you said there?
Mike Bless
So let me take it David. Thanks its Mike.
It includes -- it's an LME equivalent number and the assumption is current premium, so about $160 bucks both Europe or $150 is in for both Europe and the USA. So it assume those premiums unless that $0.15, $0.25 your $0.69 sounds right is a direct LME comparable number.
On your second question the Kentucky plants are largely where they need to be today. As I said there will be some additional reconfiguration that's taking place in the fourth quarter as well, but we’re almost there right now.
David Gagliano
So beginning of 2016 we should be at that…
Mike Bless
Before that but most defiantly.
David Gagliano
Okay, all right great. That’s all I had thanks.
Mike Bless
Okay, thanks David.
Operator
Thank you. [Operator Instructions] Next in queue is Michael Gambardella with JPMorgan.
Please go ahead.
Michael Gambardella
Yes, good afternoon. I just have a question on Slide 7 what caused the revolver availability to decline from $123,000 to $100,000 over last quarter?
Shelly Harrison
Yeah, Mike there were several things that contributed to that. Obviously lower prices and premiums will impact our receivables and inventory as well as lower production will impact it as well.
One of the big drivers this quarter thought was it was at the absolute low point in the receivable cycle. Quarter end was actually the day we get paid on and so that can change from quarter to quarter, so that was also a contributing factor this quarter.
Michael Gambardella
Should you anticipate that to move back up in the fourth quarter?
Shelly Harrison
There will be one extra day in the payable cycle mix this quarter. So there is a little bit of movement there obviously a lot of variables go into that depends on prices and other things, but just based on the payment cycle there should be a small improvement.
Michael Gambardella
And what’s the duration on the revolver?
Shelly Harrison
The revolver goes through 2018.
Michael Gambardella
2020.
Shelly Harrison
2020 yeah.
Michael Gambardella
2020 you said
Shelly Harrison
2020. Yes.
Michael Gambardella
Okay. Thank you.
Operator
Thank you. [Operator Instructions] I actually do have a question coming in from [Jimmy] with Deutsche Bank.
Please go ahead.
Unidentified Analyst
Hi, good afternoon. Thank you for taking the call.
Do you guys have any update as to the cost reductions you introduced last quarter you had $40 million to $64 million at the time, but I don’t see any update on this quarter.
Mike Bless
It's a good question thanks. Those are all proceeding exactly.
I guess there are two parts, those actions that we had implemented at that time and described to you on the July call was an important addition, I will get that in a sec, our proceedings exactly as we had expected. Of course the major change here is we have taken Hawesville down to a lower production level and so that the changes of basis of that whole presentation if you will or calculation but all of those actions about which -- those were all implemented in those in either done or in execution phase and so there has been no change there other than as I said that the change on the configuration of Hawesville.
Unidentified Analyst
Alright thank you.
Mike Bless
Thank you.
Operator
Thank you. And the next question in queue will come from John Tumazos and you line is open.
[Operator Instructions] open please proceed.
John Tumazos
Thank you, with the effective the different cost reduction actions, would you estimate your profit and loss breakeven will be by the March to June quarter.
Mike Bless
Rick, hi John it’s Mike, Rick gave you the EBITDA breakeven pardon me in terms of accounting profit and loss adding in depreciation and without what’s specially you are asking and I will try to answer that.
John Tumazos
Earnings per share account, profit and loss.
Mike Bless
We haven’t put that out John. I think you can work that from EBITDA you know the cost below the EBITDA line just to go over for everybody I guess Shelly or Rick will tell me if I get this wrong we obviously have interest expense of about $20 million on an annual basis.
Depreciation is let's see here about $70 million annual thanks Rick, $70 million annualized, taxes are an estimated this at these LME levels, you're not paying many, many tax Shelly go ahead and
Shelly Harrison
Especially in the U.S. and around breakeven levels that’s not going to be much in it either so assume zero for taxes and in Rick’s number got it cash covered interest.
Nearly depreciation is going to be the big not in Rick’s number.
Mike Bless
Thank you of course she gives a cash break even number thank you for that.
John Tumazos
Thank you.
Mike Bless
Thanks John.
Operator
Thanks at this time there is no additional questions in the queue, please continue. And actually as I speak we do have another one coming in from Paul Massoud with Stifel.
Please go ahead.
Paul Massoud
Hi, thanks for taking my last minute question I am just curious you know given me the eliminated run rate Grundartangi does that change maintenance CapEx rate going into the next year.
Mike Bless
No, that is the good thanks Paul that’s a good question now that you asked we will just you know maintenance CapEx as we have said before and we have obviously confirmed this in discussion with all the plants recently as you would hope and expect are relatively low at these plants especially Grundartangi which is our newest plant. And so the answer to your question is no and I could expand maintenance CapEx for 2016 just strictly maintenance if were to make a decision to stop all discretionary CapEx you're talking about well under $50 million for the consolidated company.
Paul Massoud
Thanks.
Mike Bless
Thanks
Operator
Thank you and presenters there is no additional questions at this time. Please continue.
Mike Bless
Okay. Well then we do appreciate everybody's time again and we look forward to talking with you over the coming months.
Take care.
Operator
Thank you. And ladies and gentlemen that does conclude your conference call for today.
We do thank you for your participation and for using AT&T executive teleconference. You may now disconnect.