Century Aluminum Company (CENX) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Century Aluminum Company Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Chad Rigg, Vice President, Finance and Treasurer. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to the second quarter conference call. I'm joined here today by Jesse Gary, Century's President and Chief Executive Officer; and Peter Trpkovski, Executive Vice President and Chief Financial Officer. 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 2. Please take a moment to review the cautionary statements with respect to forward-looking statements and non-GAAP financial measures in today's discussion. And with that, I'll hand the call to Jesse.

Thank you, Chad, and thanks to everyone for joining. I'll start today by reviewing our second quarter operational performance, including the completion of the Mt. Holly expansion and the restart of Potline 2 at Grundartangi before turning to the continued strong market conditions we are operating in today. Pete will then walk you through our Q2 results and Q3 outlook before I conclude the call with the latest on our new Oklahoma smelter project and on President Trump's important new executive order, incentivizing companies like Century that are building new American aluminum capacity. Before we get into the quarter, I want to thank the Century team across all of our sites for another strong quarter of safety performance. Over the last six months, our teams have executed two major capital projects on two continents, all while welcoming hundreds of new employees into our plants, and they did it safely. That is not luck. It is a product of planning, discipline and a workforce that looks out for one another. Thank you to each of you. Turning to Page 4. When we spoke with you in May, I told you that by the end of July, for the first time in over a decade, all Century assets should be operating at full capacity. I'm very proud to report today that our team has delivered on that commitment. At Mt. Holly, we completed the restart of the final 90 pots in late June on time and on budget, returning the plant to full capacity. This project increases total U.S. primary aluminum production by nearly 10% and has added over 150 full-time American manufacturing jobs to the plant. We were proud to host U.S. Commerce Secretary, Howard Lutnick; and South Carolina Attorney General, Alan Wilson to the plant last week to celebrate this major achievement. At Grundartangi, we completed the restart of Line 2 at the end of July, roughly six months ahead of the time line we first shared with you last October. It is worth taking a step back for a moment. 10 months ago, we had just lost a potline in Iceland following an unprecedented transformer failure and Mt. Holly was running at only 75% capacity. Today, both plants are producing at full capacity into a market that needs every unit we can produce. That turnaround was accomplished by our operations and technical teams working across time zones in parallel on two of the most complex projects this company has undertaken. Congratulations to all of you. This is a remarkable achievement, and you should be proud of it. Staying with Page 4 on operations. We saw strong performance across the portfolio in the second quarter while executing this level of major project work. At Mt. Holly, the ramp-up progressed on schedule throughout the quarter with the plant reaching full production at the end of June. As a reminder, because of the incremental nature of the restart, Q2 reflects only a partial quarter of the expanded run rate. We will see the full benefit of these tonnes for the first time in Q3. Note that we have seen some instability of the plant following the restart. This is not unusual following a restart of this size. The team is working through it and the impact is included in the outlook. Note that we do not expect any impact beyond Q3 and the project remains fully on track to repay its capital cost by the end of 2026. At Grundartangi, the Line 2 restart went smoothly and the plant is now close to full production. As we discussed last quarter, we are running Line 2 at slightly reduced amperage until our new replacement transformers arrive and are installed in the fourth quarter. We are being deliberately conservative here to avoid putting undue stress on the repaired units and the team has managed that balance well. At Jamalco, we brought our new power generation turbine known as TG4 online at the beginning of August. This is an important milestone. TG4 allows us to run Jamalco on entirely self-generated energy, eliminating expensive and as we learned last winter, sometimes unreliable purchases from the Jamaican grid. The full benefit will phase in over the balance of the year and is a significant step change in the Jamalco cost structure. Nice work by the Jamalco team in getting this one across the line. As we discussed last quarter, the refinery does continue to see lower quality bauxite from certain of its mining areas. The team is a revised mining plan in place and is working through it, but we expect this will take another couple of quarters to fully implement. In the meantime, it remains a modest headwind to Jamalco's cost and volumes, and Pete has reflected that in our outlook. Finally, Sebree delivered another excellent quarter. This plant has now strung together quarter after quarter of top-tier operating and financial performance, and it continues to set the standard for the rest of the portfolio. Great work again by the entire Sebree team. Before I hand things to Pete, let's spend a few minutes on the market, starting on Page 5. The short version is that we are bringing these additional tonnes from Mt. Holly and Grundartangi into as strong a market as this industry has seen in a very long time. Following the limited reopening of the Strait of Hormuz, prices have now returned to pre-conflict levels. LME is approximately $3,250 per tonne today. The U.S. Midwest premium is approximately $1.11 per pound and the European duty paid premium is approximately $500 per tonne. The market continues to evaluate what is happening in the Gulf. Research have only been announced at EGA, and that is a welcome development for our friends there. But we have not yet seen restart announcements in Bahrain or Qatar, and I would be careful about assuming that the production levels in the Gulf as a whole will come back quickly. Restarting curtailed potlines is slow and difficult work. We know that better than most, having just done it twice ourselves. And these plants are doing it while their raw material supply chains are still not fully normalized. We do not have good visibility into how long it will take or can any of us say with confidence what further disruption to transit through the Strait would do to those time lines. On the demand side, the U.S. picture is as strong as we have seen in years. Monday's ISM manufacturing report for July came in well above expectations, the seventh consecutive month of expansion and the strongest reading since May of 2022. That is a strong environment our customers are operating in, and we are seeing it directly when we speak with them. Aluminum demand is being driven by the power and data infrastructure build-out by commercial aerospace and by defense and rearmament programs as well as the continued reshoring of extrusion and downstream fabrication following President Trump's April action closing the valuation loopholes in the Section 232 program. When you take the supply and demand picture together, we continue to expect a global deficit of around 1 million tonnes this year, and we would expect deficit conditions to continue in 2027. With Middle Eastern smelters producing material less metal in 2026 than they otherwise would have, a large portion of that shortfall is now locked in no matter how the restarts go from here. You cannot make up lost tons in a market that was already short. The result is visible in inventories. Global days of consumptions held in inventory have now fallen through the post-financial crisis lows we have referenced on prior calls and are approaching all-time lows. With deficits persisting through the balance of this year and into next, we expect that drawdown to continue. There is very little cushion left anywhere in the system. In a market with no slack, the value of secure domestic units goes up. And with the completion of both restarts, Century now has more of them to sell in both the U.S. and EU markets. Pete will now take you through our second quarter financial performance and Q3 outlook.

Thank you, Jesse. I will begin with the review of our Q2 financial performance and provide an update on the Mt. Holly expansion and restart of Grundartangi 1 and 2, along with an update on cash flow for the business. Lastly, I'll share our Q3 outlook. Turning to Slide 8. On a consolidated basis, second quarter shipments totaled approximately 131,000 tonnes, a 6% increase from the prior quarter due to additional production from the restart of Line 2 in Iceland and the Mt. Holly expansion. Net sales for the quarter were $752 million, a $103 million increase sequentially, primarily due to higher realized LME and regional premiums as well as higher shipments. For the quarter, we reported net income of $249 million or $2.39 per share. Our adjusted net income was $257 million or $2.46 per share, excluding exceptional items. Exceptional items included the unrealized gains on our derivative contracts, business interruption losses in Iceland and restart expenses at Mt. Holly. Adjusted EBITDA for the quarter was $327 million, primarily attributable to higher LME and regional premiums and increased volume resulting from expanded output at Mt. Holly. During the quarter, we continued our efforts to enhance the balance sheet. Our cash balance stood at $388 million at the end of June. We continue to prioritize debt reduction with $66 million in debt repayments in the quarter, resulting in no outstanding borrowings on our credit facilities at the end of the quarter. Net debt was reduced to $98 million. And as of the end of July, our cash position exceeded our total debt. More on that in a couple of minutes. Turning to Page 9. Adjusted EBITDA for the second quarter increased $96 million to $327 million. Realized LME was $3,250 per tonne, up $350 versus prior quarter. Our realized U.S. Midwest premium was $2,480 per tonne, up $280 and higher European premium of $450 per tonne was up $140. Taken together, LME and regional premiums pricing contributed an incremental $95 million compared with the prior quarter. Energy costs returned to normalized levels after winter and raw material costs were higher as anticipated. Volume and sales mix were up $8 million over prior quarter. This increased production volume was expected from our expansion at Mt. Holly. However, shipments at quarter end were affected by cutoff timing, which resulted in a sequential increase in finished goods inventory related to the Mt. Holly expansion. We expect that inventory to ship in Q3, and I'll cover that in more detail shortly. As anticipated on our last call, operating expenses increased over prior quarter, driven by the Mt. Holly expansion, reflecting the 100% capacity run rate. Now let's turn to Slide 10 for a look at cash flow. We began the quarter with $332 million in cash. We generated strong cash from operations during the quarter. We continue to accrue 45X tax credits quarterly with cash receipts following the filing of our annual tax return. In Iceland, we continue to have a cash impact as the insurance recoveries on the Line 2 lost profits lag on a quarterly basis. In the quarter, we received $46 million related to previous lost profit margin. Quarterly CapEx totaled $59 million, of which $37 million was related to the investment for the Mt. Holly expansion and our new power generation unit, TG4 at Jamalco. We had $30 million in hedge settlements during the quarter. Cash interest in the quarter was roughly $5 million. We had a working capital build this quarter as the expansion at Mt. Holly increased our working capital back to 100% capacity as well as increased finished good inventory that I mentioned earlier as a result of shipment timing. We expect to recoup cash from some of this finished goods inventory into Q3. We paid down $66 million related to our Icelandic revolver in Q2 and ended the quarter with no borrowings on our revolving credit facilities. We ended Q2 with $388 million in cash and strong liquidity in place. As discussed, many of these items will convert to cash in future quarters. For example, at the end of July, we received $94 million in cash for 45X tax credits outstanding related to fiscal year '25. We also received an additional $19 million in July for the Grundartangi insurance recoveries. Also, Century's balance sheet has never been stronger with all short-term debt repaid. And as of today, Century's cash on hand exceeds its total debt. Going forward, we are expecting even stronger cash flow conversion as investment CapEx related to the Mt. Holly and Grundartangi restarts are now complete, just leaving primarily sustaining CapEx over the second half of the year. Now let's turn to Slide 11, and I'll look ahead to the next 90 days. For Q3, lagged LME of $3,325 per tonne is expected to be up about $75 versus Q2 realized prices. The Q3 lagged U.S. Midwest premium is expected to be $1.09 per pound, down $0.03 versus Q2 realized prices. The European duty paid premium is expected to be approximately $520 per ton in Q3 or up about $70 per ton. Taken together, the lagged LME and delivery premium changes are expected to have a $5 million to $10 million increase to Q3 adjusted EBITDA when compared with Q2 levels. We expect energy headwinds of $10 million to $15 million as we typically see due to warmer summer weather. Looking at our other raw materials, we continue to see moderate increases in our input costs. We see a small headwind of $5 million sequentially. We expect OpEx to be flat in the third quarter. Volume and sales mix is expected to improve $15 million to $25 million with increased production and shipments at Mt. Holly. Also, at expected realized prices, we expect Q3 adjusted EBITDA in the range of $325 million to $345 million. Consistent with prior practice, we also include the estimated hedge and tax impacts to help model our business at the bottom of the page. We expect a $20 million to $25 million headwind from realized hedge settlements and $10 million to $15 million tax expense, both flowing through our Q3 P&L and impacting adjusted net income and adjusted earnings per share. And with that, I'll hand the call back to Jesse.

Thank you, Pete. Before I turn to Oklahoma to finish the call, a brief word on Hawesville, which you can see on Page 21. When we sold the site in February, we received $200 million in cash and retained a 6.8% nondilutive interest in the completed data center. Since then, the project has taken a significant step forward. Our partner, TeraWulf has signed Anthropic as a data center tenant to a 20-year lease that is expected to generate lease revenue of approximately $19 billion in total over its initial term. Energization is still expected in the second half of 2027 and our right to put our share in the data center back to TeraWulf becomes exercisable one year after that. We told you in February that we believe the stake would be worth well in excess of our initial cash proceeds. A signed 20-year lease with two 5-year extensions and a high-quality tenant goes a long way towards proving that out, and Century has no obligation to fund any part of the development cost. The anticipated monetization time line of our 6.8% stake lines up reasonably well with the construction in Oklahoma, making it a further potential source of capital to help fund Century's share of that project if needed. Turning finally to our new Oklahoma smelter project with our joint venture partner, Emirates Global Aluminum. We made further progress in the second quarter. Bechtel continues its detailed engineering work. We advanced negotiations toward a final energy contract, and we made significant progress on the financing for the smelter. Those three items, the final energy contract, detailed engineering and financing are the near-term milestones we are focused on, and we continue to expect FID and groundbreaking by the end of this year, with first hot metal by the end of 2029. That brings me to Page 12 and what I think is the most important policy development of the quarter. On July 20, President Trump issued a new executive order establishing an incentive for companies to build or expand primary aluminum production here in the United States. Under the program, approved companies will be able to annually import primary aluminum up to the amount of the new production they are building at a reduced tariff rate of 25% versus the 50% rate that would otherwise apply to imports. I want to underline what this represents. The Section 232 program first leveled the playing field for American producers and workers. In April, the Trump administration closed the valuation loopholes that importers have been using to get around it. And now with this order, the program goes a step further and actually incentivizes the companies that are putting capital in the ground to build new American capacity. Each step is built on the last and each has been enforced with no exceptions and no exemptions. For Century, the effect is direct. We expect the Oklahoma project to be approved under the program to import up to 750,000 metric tons at the reduced 25% rate beginning in 2027. That will be split 60% to EGA and 40% to Century. That means Century could begin importing up to 300,000 metric tons per year at the reduced rate starting in 2027, and we intend to apply that benefit to help fund Century's share of the Oklahoma project. This is another well-designed piece of policy, and we are grateful to President Trump and his team for their support and commitment to restoring production of American aluminum. Taken together, a balance sheet where our cash now exceeds our total debt, the tariff benefit under the new executive order and the value we have created at Hawesville. Century has real and growing balance sheet capacity to fund its share of the Oklahoma project as well as to pursue other opportunities and priorities to create best-in-class value for our shareholders. To wrap up, earlier this year, we said we would have every asset running full by the end of July, and we did it. Next, we intend to bring the first new American smelter in nearly 50 years out of the ground. No company is investing more to restore American primary aluminum production than Century. We are already the largest producer of aluminum in the United States. We employ more American primary aluminum workers than any other company. And thanks to President Trump's leadership and the Section 232 program, we are investing billions more in new and expanded production in Mt. Holly and in Oklahoma. We are laser-focused on execution. We thank you for your time, and we look forward to taking your questions today.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Nick Giles with B. Riley Securities.

Just first wanted to ask about the executive order, kind of where you'll ultimately source the metal and just how you value this benefit in terms of EBITDA and cash flow.

Yes. As I mentioned, the executive order is very important and provides a nice opportunity for Century and of course, anyone else who's investing in new U.S. aluminum production. For us, there'll be a number of different sources that we believe we will source the metal from. Obviously, our own resources in Iceland, but we anticipate also other sources. But what we'll do is commerce will ultimately promulgate some rules [indiscernible] and we'll wait for those to come out, and then we'll give you the final analysis there. Just to scope the opportunity for us. Again, we'll wait for the final opportunity to give hard numbers here. But you can just simply take that reduced tariff level. So if we're paying 25% versus the 50% kind of quick rule of thumb, if you just take that, chose your LME. So today, we're at $32.50, apply that, that will give you a sense of the benefit per ton. And then Century should be able to import our share of the new production, which is 300,000 tons and you just multiply those together, and you can see it would be quite material, the benefit, should be the same on both the EBITDA and cash flow side.

Got it. That's very helpful. Maybe just on the project itself. I mean, it would be good to get an update on the DOE grant. When you would expect for us to have more information there? And then maybe just on financing sources more broadly. What kind of work is ongoing today in terms of project financing? And you mentioned the stake as well at Hawesville also. Curious for your thoughts there.

Sure. Just a reminder on the DOE grant. So that is secured. Of course, there are a number of milestones that we need to work through for the project and DOE to release that grant. But the grant pays out basically dollar for dollar for investments that we make into the project to release that $500 million. So really no change from what we've told you before. Everything remains in place there, all looks good. On the broader financing picture, we're working on a number of different potential sources. Once those are secured, we'll obviously come out to you with the details. But we're talking with a number of parties, and that includes some potential government sources of financing.

The next question comes from the line of Katja Jancic with BMO Capital Markets.

Jesse, you mentioned multiple -- there are multiple sources of potential cash to finance the smelter. And your free cash flow conversion is expected to improve from here. Can you talk about -- a bit about how you're thinking about shareholder returns at this point, especially with your balance sheet being in a very good place.

Absolutely. So if you just look at Slide 22, as you mentioned, we've had some very strong cash flow generation already. As Pete mentioned, after the quarter, we did receive our $94 million 45X refund as well as another nearly $20 million in insurance recoveries, which puts us in a position where our cash exceeds our total outstanding debt as of the end of July. And you can see also our liquidity at $785 million significantly exceeds our target. So the balance sheet is in a good position, and we anticipate keeping in a very good position, and we've got a lot of opportunity with a lot of cash flow coming in to do so. We did tell you we would come back to you on capital returns once we clear these targets, and we will. But what we've also said is we had a clear priority for capital allocation. Of course, that's to maintain the liquidity through the cycle, then to ensure we have enough sustaining capital. And then we would look for organic growth opportunities. Obviously, the new smelter in Oklahoma falls into that category. And what we just ask is as we're proving out the final details there, as we're working through the final engineering numbers and CapEx numbers and getting to FID, people remain patient with us. But we do fully anticipate that we will find ourselves in a position where we have plenty of cash to finance the smelter, including our equity piece and also to pursue other priorities, whatever those may be, and of course, including capital returns.

And maybe shifting gears a little bit to Iceland. In 4Q, you're going to install the new transformers. Will that impact production volumes? Or how should we think about that?

Yes. So as I said on the call, we're now back to close to full production, but we are being a little bit conservative with the amount of amperage that we're running through the repaired transformers. This is not -- we're not talking huge amounts. We're pretty close to full production. But once we do get those new transformers installed in Q4, you should see us increase the amperage, which will further increase the volume coming out of Grundartangi, and you'll see it return back to that normalized run rate that you saw before the interruption, that full normalized run rate.

And if I just add, Katja, I think maybe your question was when we start installing them and putting those into service, will we have any interruption of production. And because of the redundancy we'll have with the repaired transformers, we'll come back to you in three months and give you our Q4 outlook, but I wouldn't expect sitting here today any interruption to production.

No, no, there shouldn't be any interruption to production.