Alcoa Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2023

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to the Alcoa Corporation Second Quarter 2023 Earnings Presentation and Conference Call. All participants will be in listen only mode. Followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note This event is being recorded.

Operator

I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, and good day, everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer and Molly Behrman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Roy and Molly. As a reminder, today's discussion will contain forward looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings.

Speaker 1

In addition, we have included some non GAAP financial measures in this presentation. For historical non GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's With respect to our outlook, we have not presented a quantitative reconciliation of certain forward looking non GAAP financial measures to their most directly comparable GAAP financial measures because it is impractical to forecast certain special items without unreasonable efforts due to the variability and complexity associated with predicting the occurrence and financial impact of such special items as described in today's presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website. With that, here's Roy.

Speaker 2

Thank you, Jim, and thanks to everyone for joining our call. I'm happy to be here today with Molly Behrman, our Executive Vice President and Chief Financial Officer. She'll soon provide a detailed review of the financial results, but let's start first with safety. We always strive to protect our employees, contractors and visitors from injuries. This is the expectation in all of our daily And it is particularly important when we consider any modifications to our processes or when upset conditions occur.

Speaker 2

Every quarter, we report during this call any serious incidents that we would classify as an FSIA, which stands I'm disappointed to report that an employee at our Icelandic smelter lost partial vision in one eye from an injury that happened when he was sampling molten metal. We have investigated the incident and we are working to prevent it from recurring at any of our locations. In the Q2, our overall injury rates continued to decline. We also are seeing positive trends in leading indicators showing Identifying and correcting potential risks before they result in injuries. We are focused on continued improvement.

Speaker 2

Any injury is unacceptable and we expect our teams to be constantly learning and adapting. Now, let me turn to our financial results. We generated slightly higher sequential revenue in the quarter of $2,680,000,000 We increased shipments, which outweighed lower average realized pricing. Still, as you can see, this quarter's challenging market conditions and operational disruptions led and we finished the quarter with $1,000,000,000 in cash. We also continued to strengthen the balance sheet by reducing risk from pension plans.

Speaker 2

This was accomplished via another amortization, our 6th such transaction. This one was for certain retirees and beneficiaries in Canada, providing them the same benefits while removing the liabilities and corresponding assets from our books. No cash funding was required for this transaction. Operationally, in the Q2, we were also pleased to reach a new labor agreement with the United Steelworkers that covers more than 800 employees at 2 of our smelters in the United States, Warrick in the state of Indiana and Messina in the state of New York. Also, we were pleased to announce in May a major sales contract with Emirates Global Aluminium to supply smelter grade alumina from Western Australia.

Speaker 2

This is an 8 year deal beginning in 2024 and will represent a significant portion of our 3rd party aluminum sales. We will be EGA's largest third party supplier supplementing their own production at their refinery in Abu Dhabi. We appreciate the confidence that this customer places in us and the many others we serve. Before I hand it over to Molly, I'd like to outline our most critical steps to drive improved performance. Importantly, I am pleased to see improving stability Across our operations, we have a united team focused on taking action on items most critical to our success.

Speaker 2

Let me quickly highlight some areas of attention for us in the coming weeks. First, we are focused on securing our approvals for bauxite mining in Western Australia. This is a key priority. In the meantime, we are currently using bauxite with lower grade and our global centers of excellence are working to optimize our refining Our Q3 outlook to be covered in detail by Molly shows that operational stability drives financial improvements. Our leaders are focused on spending even more time on the shop floor, setting clear stability criteria and moving towards proactive maintenance to prevent emergency break We ended the 2nd quarter with good improvement and have seen a strong start to the 3rd quarter.

Speaker 2

3rd, we are watching the ongoing developments in our markets, so we can adapt our programs, product portfolio and operations to today's conditions, but also to emerging demands from our customers. Aluminum is a critical part of a decarbonized world and our portfolio of low carbon customer centric value add products will help us to continue to be a supplier of choice. And finally, we are continuously focused on ensuring that we are operating our We continuously review all of our facilities to be sure we are operating the right portfolio of assets for current and expected conditions. With that, I'll turn it over to Molly to talk about the results, a few key emerging trends and our outlook for the Q3. Holly, please go ahead.

Speaker 3

Thank you, Roy. While both alumina and aluminum third party realized prices Attributable to Alcoa improved $129,000,000 to $102,000,000 or $0.57 per share, primarily due to the non recurrence of charges taken in the Q1, the $101,000,000 intalco smelter closure charge and a $41,000,000 utility settlement charge at Moden. On an adjusted basis, The net loss was $62,000,000 or $0.35 per share and adjusted EBITDA excluding special items declined $103,000,000 to $137,000,000 Let's look more closely at the key drivers of adjusted EBITDA. The 3 largest drivers of the $103,000,000 sequential decline were higher production costs, Lower metal prices and lower volume, which together totaled $167,000,000 The alumina segment was the primary source of the increased production costs and lower volume with $45,000,000 related to lower Australia bauxite grades, better than expected as the full impact of lower grades was not realized in the quarter and with the remainder due to higher maintenance outages and related costs at the Alumar and Wazrop refineries. Production costs in the aluminum segment were favorable $14,000,000 led by improvements at both Norway operations and Alumar.

Speaker 3

The remainder of the bridge factors net to a $64,000,000 improvement. Highlights here include lower raw material costs in both segments as well as higher API, partially offset by unfavorable product mix, primarily in the Illumina segment. Outside the segments, there was a sequential improvement of $41,000,000 with inter segment eliminations providing the lion's share, A sequential benefit of $39,000,000 as less profit was held from earnings when inter segment volumes declined and alumina And cost increased. Transformation cost increased $9,000,000 coming more in line with expected levels And other corporate spending improved $11,000,000 Now let's turn to other financial metrics and cash flow. While year to date return on equity is negative 4%, we again paid our $0.10 per share dividend in the 2nd quarter totaling $18,000,000 Year to date free cash flow less net NCI distributions was negative $274,000,000 of which negative $108,000,000 was in the 2nd quarter, a $58,000,000 sequential improvement.

Speaker 3

Cash ended the period at $1,000,000,000 and proportional adjusted net debt rose to $1,500,000,000 Year to date, the 3 largest uses of cash were income taxes, capital expenditures and working capital. We expect cash taxes to be a smaller use of cash in the second half of the year. The $246,000,000 included $173,000,000 of prior period taxes $73,000,000 of current year taxes. We expect working capital to continue to improve as well. Days working capital decreased one day to 55 days.

Speaker 3

While working capital was a $216,000,000 use of cash in the Q1, it was a modest $32,000,000 source in the 2nd quarter, and we expect it to be a larger source of cash in the second half of the year. Let's take a deeper look at this quarter's cash flow and working capital. Similar to the year to date cash flow chart, the sequential quarter chart shows that cash income taxes and capital expenditures or 2 large uses of cash in the quarter. Tax payments are expected to decline in the 3rd quarter. Of the $155,000,000 of cash $115,000,000 or for prior periods with current period taxes only $40,000,000 and we expect little or no payments for prior period taxes in the second half of the year.

Speaker 3

Conversely, we expect capital expenditures to remain As we noted earlier, the working capital change shifted from a use of cash in the Q1 to a source of cash in the 2nd quarter. Payables have stabilized as capital expenditures picked up and offset continued price declines and purchased raw materials. Accounts receivable declined slightly in the 2nd quarter and lowered overall working capital. While raw material inventory values notably in the quarter on lower cost, quantities of in process and finished goods were up at quarter end, but we do expect improvements as we move through the year. Cash flow again was helped by a net non controlling interest contribution of $20,000,000 Speaking of inventories and purchase costs, we continue to see purchase prices for key raw materials decline.

Speaker 3

And as noted on the EBITDA bridge, we are starting to see improvements flow through to the income statement. The 3 key raw materials Our caustic soda for our aluminum segment and calcined petroleum coke and coal tar pitch for our aluminum segment. Looking at quarterly average market index prices, all three commodities declined again in the 2nd quarter. Year over year, we are seeing approximately 44% improvement in caustic prices, approximately 30% improvement in quoted prices for coke and even pitch is down albeit very slightly from year ago levels. We also saw lower spot prices at quarter end and expect to see further purchase price improvements.

Speaker 3

These purchase price improvements flow into evaluation and can take 1 to 2 quarters before the improvement starts to flow through COGS and hit the income and cash flow statements. That said, should these raw material price trends continue, we expect to be rewarded with lower inventory valuations, Lower COGS related to raw materials and improved cash flow. Now let's turn to our expectations for the year and the Q3. Our only change in the full year outlook is to decrease capital expenditures by a total of $60,000,000 as some project timelines are extending. Return seeking capital spending is expected to be approximately $90,000,000 for the year and sustaining capital $450,000,000 Regarding sequential changes for the Q3, in the Illumina segment, we expect an $10,000,000 unfavorable impact from lower bauxite grades in Australia with impacts now expected to continue through at least mid-twenty 24.

Speaker 3

We expect to face the full impact of the lower grade as higher quality bauxite inventories have now been depleted. That means an increase from a $45,000,000 impact in the 2nd quarter to $55,000,000 in the 3rd quarter before identified cost savings initiatives take effect and reduce this number in future quarters. In the aluminum segment, we expect a net improvement of approximately $25,000,000 unfavorable raw materials and lower production costs, partially offset by unfavorable price mix, primarily due to softer billet demand. Finally, we expect aluminum costs in the aluminum segment to be favorable by $5,000,000 Below the EBITDA line, other expense in the Q2 included an unusually large Favorable foreign currency impact of $40,000,000 due to recent changes in the value of the U. S.

Speaker 3

Dollar, this gain may not recur. Based on recent pricing, the company expects 3rd quarter operational tax expense to approximate $10,000,000 to $20,000,000 Now I will turn it back to Roy.

Speaker 2

Thanks, Molly. Next, I'd like to provide some updates from our operations across the globe, Beginning with Western Australia. As I said last quarter, we're continuing to work with a host of government agencies on the approvals process for our annual mine plans. Our Mine Management Programs or MMPs are normally approved annually on a 5 year basis. Separately, the Western Australian Environmental The resolution of our mine approvals does not have a fixed timetable, but we are working to constructively address stakeholder needs and This is a key priority for our company and we're focused on doing what is necessary to secure approvals.

Speaker 2

We are increasing controls to protect drinking water sources, further stepping up mine site rehabilitation and enhancing the management of social impacts. This requires discussion and action with various government agencies. So to give this complex Regulatory process appropriate time, we are now mining lower grade bauxite in previously approved areas. As Molly just pointed out, using lower grade bauxite has a cost. It means using more raw materials and producing less alumina per ton of bauxite.

Speaker 2

In the Q2, this unfavorably impacted alumina segment adjusted EBITDA by $45,000,000 This is better than we originally expected due to slightly higher bauxite grades and good operational practices. As we look to future quarters, Bauxite grades will continue to vary. We expect that it could take 9 to 12 months to transition to new mine areas once approved and improve the bauxite quality sent to our refineries. Thus, the expected impact of these lower bauxite grades will stretch into at least mid-twenty 24. Next, let me provide some more detail on what we're awaiting from the EPA.

Speaker 2

The authority has indicated it could decide by the end of this month whether to proceed to the next stage in its consideration process, which would be a public comment period. If that occurs, The EPA would then decide whether to conduct additional environmental reviews on all or part of our MMPs and if so, at what level. We support the authority's process for future major mine extensions, but we believe the current statutory process for our MMPs provides appropriate environmental and social I want to stress that I am very proud of how our team has been operating through different and difficult conditions. We have some of the world's most highly skilled people and we have Strong operating processes. We are working together to operate safely, stably and efficiently, and we are pooling our collective knowledge to secure our approvals, and we will strive to reduce the impact of lower grade bauxite in the coming quarters.

Speaker 2

Now, let's turn to some key operational items across our 2 segments. First, in Illumina, some may recall that we had a failure in the Q1 on a ship to shore conveyance system that unloads bauxite for the Alumar refinery in Brazil. Our teams worked to successfully make repairs and restore bulk site flows. I was impressed by how our team quickly and safely recovered. Then in June, we proactively began a project to replace a large bearing on the alumina ship loader at the same location.

Speaker 2

This 4 meter bearing supported the 820 metric ton structure. With much planning and coordination, the teams Safely executed this major repair in 8 days working with a specialized contractor. This well coordinated effort enabled the loading of Illumina ships to quickly resume. We didn't miss any customer shipments because of this work and to demonstrate our push to move to proactive rather than reactive measures to keep our facilities at peak capacity. Meanwhile in Spain, we continue to work to find the optimum production levels at Considering market conditions, it is currently operating at about 50% of its capacity.

Speaker 2

In the second quarter, A modest increase in production at this facility partially offset some reduced production at Alumar and in Western Australia, where our Kwinana Refinery is operating 4 of its 5 digesters and where we finished a major maintenance project at Wagerup. In our aluminum segment, 6 of our smelters are operating at full capacity with high production levels. Meanwhile, the smelters that have reduced production Volume due to partial curtailments, Lista in Norway, Portland in Eastern Australia and Warwick in the United States are all running stably at those levels. Meanwhile, the ongoing restart of the Alumar smelter is progressing with Total capacity operating and we're also continuing to invest per our agreements to support the phased restart of the Sansepian smelter beginning next year. As I said earlier, we are enabling our operational leaders to spend more time in the field.

Speaker 2

This will bring an increased focus on safety, more fruitful dialogue and interactions with our employees and a renewed drive to find productivity and efficiency improvements. Now, let me provide our current view of the overall market for aluminum and discuss Alcoa's position as a producer of choice, both today and in the future. The global aluminum market is currently showing some mixed signals with limited supply growth and divergent demand trends depending on specific end markets. In China, some previously curtailed capacity is restarting in Yunnan province, but there are questions about hydroelectric In the rest of the world, conditions are still not favorable for restarts and there is very little new capacity ramping up. On the demand side, China is expected to see growth this year for aluminum used in electrical grid investments and vehicle production.

Speaker 2

The country's weaker real estate market, however, has slowed demand for aluminum in the construction sector. In the rest The long term outlook remains positive as the world will need more aluminum from both primary and recycled sources for existing uses as well as Global decarbonization efforts, including the transition to renewable energy, more electric vehicles and recyclable packaging. Recovery is expected in the construction market long term as developing markets see interest rates stabilize with continued urbanization trends. While more aluminum will be needed, China is still expected to continue to enforce its 45,000,000 metric ton per year capacity cap, which it will approach in the next year or 2. Also, China's existing low carbon capacity is likely to face ongoing challenges related to Market conditions are expected to be favorable for aluminum in the future and Alcoa will also remain well positioned as a low carbon primary aluminum producer of choice in key regions.

Speaker 2

We are a domestic producer in North America and Europe, which are both deficit regions where customers preferred domestically and responsibly produced metal. Now, I'd like to return to an issue that we discussed in prior quarterly earnings calls, the continued risk for the London Metal Exchange or LME related to Russian origin aluminum. In the past 2 years, we've seen customers move away from Russian metal, particularly in Europe and North America. Also in Asia, many banks that traders use are not financing Russian metal. Many of these customers in this region are served by these small local traders.

Speaker 2

The dynamic regarding Russian origin aluminum should raise alarm As we previously stressed at our last earnings call in April, the situation has since worsened. Russian stocks in LME warehouses recently reached an all time high concentration representing 80% of total LME aluminum stocks as of the end of June. The physical stocks in LME warehouses are the basis of the published LME aluminum price, which is widely used as a price reference in global aluminum contracts. Because those stocks are now predominantly Russian origin metal, which is unwanted by much of the world, it is difficult to have Confidence that the LME exchange price matches the true physical price for non Russian aluminum that customers largely require. We have continued to reiterate our position to the LME that it should take immediate action to delist Russian origin metal.

Speaker 2

There is a real risk here that if the LME delays acting, a stockpile of metal that is under extremely punitive tariffs and or self sanctioned We'll continue to build up. That would then cause this unwanted metal to inappropriately influence the global benchmark on pricing, damaging the integrity and relevance of the LME's aluminum contract. Returning to Alcoa, We continue to see growing sales in our SUSTAINA product portfolio as customers seek metal made with lower carbon emissions to reach their own sustainability goals. This year, we expect to see our sales of our Equilume brand to reach 40% of our total European production, which would be a 60% annual increase. We also offer a wide range of value add aluminum products that serve a diverse end market, And we have seen the same demand trends that I discussed earlier play out in our order book.

Speaker 2

Our participation in a variety of end markets allows us to from diverging trends as we can flex our value add production to adapt to different market conditions across the various end markets. Now, let me discuss opportunities for our business. While we are currently working through challenging market conditions, we look forward to recovery and the expectation of And as we look toward this future, I'd like to stress not only the value of our current products such as our SUSTENNA offerings in alumina and aluminum, but the value that is embedded in Alcoa as a pure play, innovations focused aluminum company. We are well positioned as the world moves to a decarbonized economy. The future requires more aluminum, which is a material of choice due to its lightweight, recyclability, Durability and strength.

Speaker 2

And with customers increasingly focused on the need for responsible production, Alcoa is the Company to deliver due to our environmental, social and governance practices. We know all metal is not created equally And our focus on sustainability is what will differentiate us from other global competitors. That's why we're working so diligently to adapt to increased expectations in Western Australia, which will allow us to optimize our bauxite mines and return to higher grade ore as soon as possible. And this focus on community engagement This can also be applied globally across our mines, refineries, smelters and cast houses. Developing these systems not only helps us Meanwhile, we're focused on finishing some key projects, including returning the Alumar Refinery to normal production after the repair and maintenance projects I discussed earlier, And our focus on driving simple yet effective and proactive maintenance programs will ensure we are operating stably across our portfolio.

Speaker 2

We are also continuing to increase production via operational improvements that allow us to creep our capacity and we're investing in next generation Cast House technology to grow our value add product capabilities and capacity. 2 recent examples of this include a new casting line at Dechambeau to cast smaller ingots that will allow We're working to install technology that will improve the surface quality of slabs, helping customers improve their recovery of finished products. It will also help us attract new customers, specifically in the packaging and automotive markets. For our production levels, I noted earlier that we're progressing with the Alumar restart and we're investing for the phased restart of the Sansepian smelter in Europe And it's 228,000 metric tons of aluminum capacity currently idled. We also have some other curtailed capacity both in refining and smelting and we have options that will continue to evaluate should market factors and overall economics improve.

Speaker 2

Finally, We continue to work on next generation technologies that have the potential to further differentiate our products from our competitors. These three projects, Elesys, our Refinery of the Future initiative and the Astraea Scrap Purification process are all part of our technology roadmap. These remain under development and will help us on our journey to decarbonize and achieve our net 0 2,050 ambition. As you recall, Elesys is a partnership company based on process innovations that Alcoa first developed at the Alcoa Technical Center outside of Pittsburgh. The process eliminates all direct greenhouse gas emissions, replacing those with pure oxygen.

Speaker 2

Elesys is currently working to ramp up this technology to commercial scale, including the development of larger smelting cells that would operate at 4 50 kiloamperes at the end of an existing pipeline in Quebec. Also, unlike some competing technologies, the Elesys process has already produced commercial grade aluminum at research scale and has been used in end products from such brands as Audi and Apple. We also know that the final carbon footprint of aluminum is not only determined by the electrolysis process itself, but also by the energy source and the alumina that is used to feed those smelting ponds. That's why we're also working on the refinery of the future, which will help to improve a refinery's carbon footprint, reduce water usage and reduce bauxite residue. This includes electric calcination, mechanical vapor recompression and other developing technologies.

Speaker 2

Meanwhile, we're also continuing our R and D work on our AUSTRAYA technology, a proprietary scrap We are focused on continued improvement and we have a strong balance sheet with $1,000,000,000 of cash, allowing us to drive improvements during that challenging market and to focus on operational excellence. Our priorities are clear: securing our mine approvals in Western Australia, driving stability across our operations, Adapting to a volatile aluminum market and ensuring we operate the right portfolio for today and tomorrow. Also, we remain a supplier of choice and we're proud that customers come to us for solutions, including our recently announced contract with Emirates Global Aluminium. We not only sell low carbon metal through our sustainer line, but we are the only producer in the aluminum industry that also markets and sells a low carbon alumina brand. These products, which include Ecolume, Ecodura and Ecosource can help producers lower their carbon footprint by switching to our material.

Speaker 2

Ecolum is our low carbon aluminum, Ecodura contains recycled content and Ecosource is our low carbon alumina. We are encouraged to see demand and sales growth in this brand family, albeit still a small percentage of our overall sales. Still, the growth demonstrates the rising demand for low carbon technologies. This shows strong potential and value in the work we're doing to bring forward Operator, who do we have on the line with our first question today?

Operator

The first question is from Alex Hacking with Citi. Please go ahead.

Speaker 4

Yes. Good evening, everyone, and thank you for the call. I have a couple of questions, but I guess the first question would be on the environmental permitting in WA. Maybe I'm misinterpreting your comments, but it seems like you're a bit more conservative now than on the last call and Anticipating that this process might be a bit more onerous than you previously anticipated. I mean, is that Is my interpretation fair or is the process going kind of as you expected?

Speaker 2

Yes. Alex, I think I wouldn't interpret it as More onerous or really all that different from what we talked about the last time we went through earnings. I think it's we certainly had hoped it would be solved this last quarter. And so it is taking longer in the timeline and we reiterate The timeline is uncertain. However, I would continue to say that we're working collaboratively with the Australian regulators.

Speaker 2

We do have we did have The Western Australian Environmental Protection Agency, EPA, said that by the end of this month, they believe that they'll give a decision about whether the referral is valid. I was pleased with particularly how our Pinjarra refinery, which is our largest refinery in the system Western Australia was able to perform with bauxite grades as they were coming through. And so that's something where we can actively work as we go through this period That facility and Quenon as well, which has the same bauxite source, the less impact that we have both financially and operationally. So really it's a very similar situation to what we found ourselves last quarter. It wasn't meant to look more conservative, But rather to say, hey, this is 3 months further delayed than what we had seen the last time we talked.

Speaker 4

Okay, thanks. That's clear and I appreciate the clarification. And then I guess on the second question, The smelters where you're operating kind of at reduced production levels, Lister, Warwick, Portland. I know Warrick has its own power source, but for Listor and Portland, are you involved in negotiations For power costs next year, is there any flexibility there? And if there isn't flexibility, is there potential that Production there could be further reduced if aluminum prices don't improve?

Speaker 4

Thank you.

Speaker 2

Yes. Thanks, Alex. And I think The answer is going to be, it varies and it depends as is always the case and each facility has a different situation. So take Liista as an example. We decided to bring Liista down simply because spot energy prices had climbed so high.

Speaker 2

And we were able We find a power contract that covered part of that facility and that was able to allow us to drive it back into profitability, which is Not an easy thing to do in Europe right now given where energy prices stand. And so we have the option of course to further curtail it as we go into this next Round of power contracts or we also will have the opportunity to bring it back up again. The European market of course is Slower than it has been, but it continues to have strong premiums and we continue to see a lot of customer demand, particularly for green and low carbon aluminum, which is something that Leesa certainly does and also has a very highly value added cast out. Take Portland sort of out the other side of that. Portland, we really had to bring back down because of some instability happening in the production of anodes.

Speaker 2

So that's one where we Have the power available, we can scale that back up again, but we're not going to do that until we are certain that we have stability. And then of course, we'll make the decision about whether that's financially Viable, whether we continue to whether we consume that energy or we sell it into the open market. Works a little bit different, of course, because we do have our own power source. That's one where we're really trying to work through what are the strategic plans for that facility, what do we want to do as far as long term power source and how do we make sure that we're operating that smartly and efficiently. So that's one really that we have full control whether we So I'll back up some of the pots that are idled, or what we choose to do that going forward.

Speaker 2

I'd also remind you, we've got the Sun Siprion smelter that will start to come back at the beginning of 2024. Now that will be relatively modest production capacity at the beginning, We do have a commitment by October of 2025 to have that fully restarted and it's about 228,000 tons. And I would remind you that is our lowest cost So we are working very hard to find a way to get those Costs down as low as we can, including the renewable power contracts that we've signed starting really as we progress over these next couple of years.

Speaker 4

Okay. Thank you very much.

Speaker 2

Thanks, Alex.

Operator

The next question is from Carlos De Alba with Morgan Stanley. Please go ahead.

Speaker 5

Yes. Hello. Good afternoon. Thank you for taking the questions. So I wonder if you could perhaps Molly quantify The cost savings that you expect to reach in alumina from the initiatives that you have identified to sort of offset or reduce the impact of the lower bauxite that you will be mining?

Speaker 5

And in terms of the timing as to when those May kick in, is that something that you see for the Q4 or mostly in the 1st or second quarter of next year?

Speaker 3

So Carlos, we've already started to implement some of the savings initiatives. They didn't amount to a significant amount In the Q3, so that's why we've kept the $55,000,000 guide. But you will start to see changes related to changes in our labor, So those will start to pick up some speed in the Q4 and then we'll continue because we are continuing to identify additional opportunities To take it that savings into 2024.

Speaker 5

All right. Okay. Thanks, Murray. And Maybe on the products that Roy on the Low carbon products that the company offers, ecolume for instance and others, you mentioned that the clients are asking for that and it will represent 50% of your aluminum volumes in Europe. Have you been able to monetize these lower carbon products?

Speaker 5

Are you getting a And is there a way you can give us a range of how much this premium represents?

Speaker 2

Yes. So let me take a stab at that, sort of break it into 2 pieces. The first is around volumes and continued demand. I have to say and this really starts in Europe and we're about 40% of our value added now is going into these low carbon products. We're seeing more and more pull.

Speaker 2

And you can see this, for example, with some of the automotive customers where they've set some pretty aggressive targets to be able to drive to net zero carbon. But we also see it in, for example, electric cables and in a number of different places. And so I have to say as we progress and I'm probably been asked this question every single quarter for the last couple of years. I'm becoming more and more optimistic that those volumes are going to continue to improve. And we're seeing that really take root in Europe and starting to see that in North America as well.

Speaker 2

And of course, there's a lot of connections between customers in North America and Europe, so the attendance is still over. So certainly seeing good volume improvements and particularly You're going to continue to see those volume improvements because we've got a lot of ongoing conversations with customers. On the realizable value, so the important thing here for us is that because we've for the most part turned to renewable energy, a lot of these sales right now are cost free, Right. It's a matter of making sure that we have the right power source. Of course, there's all the work that goes into being a responsible producer and making sure that we can line up the aluminum stewardship initiatives so that we can prove our credentials.

Speaker 2

But most importantly, this is essentially driving towards the scarcity or the fact that there is A differentiated product with less carbon content inside of our products and so it's cost free. On the premium side, And you can see some of the published indices, which I think are pretty representative of the kind of premiums that we're getting, Tends to range between $25 $50 now, which is a beginning. It is certainly not where we see this continuing to go. And I would also argue look at our low carbon sales, Equilum has a very good example of that, which is our low carbon aluminum. Look at this as sort of the first step To making sure that our market is prepared for 0 carbon aluminum down the road.

Speaker 2

For our Elesys metal, We want it to be very clear the unique properties, the unique characteristics and the fact that this will be truly a differentiated product. And so really this is sowing the seeds that does create value for us in the short term, but more importantly will be the That will be significantly greater value down the road. All right. Excellent. Thank you very much.

Speaker 2

Good luck. Thank you, Carlos.

Operator

The next question is from Timna Tanners with Wolfe Research. Please go ahead.

Speaker 6

Yeah. Hey, good evening. Wanted to follow-up a little bit on the Timeline for the upstream bauxite inefficiencies that you've laid out. So on the Fact sheet that you've provided on your website or the Australia website on environmental assessment, there's a time line that says the finalization of the ERD environmental review document is Q2, Q3. Is that what you're talking about that has to get finalized to kick off that 9 to 12 month lag before you get to kind of the Optimization of the bauxite mining that you've anticipated?

Speaker 2

Tim, there are 2 different sets of issues and I can see how It's pretty confusing. So that particular timeline refers to this next mine phase, essentially what we call Mayara North in Holyoke, which is the next sort of that Big conveyor move that then gets to this next large field bauxite. That is a completely separate process to what we've been talking about as As far as the short term set of approvals that have been running on a 5 year rolling basis. And so that runs through this full Look at it as an environmental impact assessment that's run through the EPA. That represents sort of the end state of where we're going and what we're And so that is a process that has a clearly set out timeline, but that Timeline can tend to change if they have additional asks as they change consultation period etcetera.

Speaker 2

So that timeline pertains to that next mine phase And that will take considerable time to be able to develop that. So that's not a 9 to 12 months. That will take a few years in order to prepare for the conveyor move, etcetera. The other side of that are short term approvals is how do you take what is this sort of This customized approvals process that we run today that was a 5 year rolling process that we submitted every year, How do we then incorporate a lot of the same types of environmental protections, community consultations? How do we incorporate that into this Current process and get to these short term approvals that have been allows us to already that allows us to go into new mine sites that are part of the existing Mine area.

Speaker 2

And so that does that answer your question, Timna?

Speaker 6

Yes. I mean, it sounds like it's a bit apples and oranges or at 2 somewhat separate instances and you did warn that it's a complicated regulatory process, so probably not great to spell it all out on the call. But I appreciate that they're a bit distinctive and we'll wait to get an update on the more immediate issues. So shifting gears if we could, I did want to also ask you a little bit more Color on the forecast you have for global aluminum and alumina. I know in last quarter's presentation you had said that the markets were balanced.

Speaker 6

This time you're saying it's a mixed bag and we have seen premiums fall. So I know the medium and longer term is positive, but just a bit more color on what you're seeing in the near term would be

Speaker 2

Yes, certainly Tim. And it's I think mixed bag is probably the right word for it. So to go back to your first point, I don't see supply demand balances being all that different than last quarter to be quite honest. We're essentially on a knife's edge and it can shift towards a very small surplus, shift towards a very small deficit. So in the end, we're really quite balanced both in aluminum and aluminum.

Speaker 2

And that's sort of where we expected to be. What we are seeing however though is that our markets and particularly when we look at it a lot of our sales are happening in North America and Europe. We're seeing some additional weakness than we did before and seeing some strength in things like electrical and transportation. And we see that particularly outside of China, but also inside of China transportation continues to be very strong. And from a weakness standpoint really billet, which goes into construction and then slab, which goes into packaging.

Speaker 2

And so you look at it, you've got some areas of strength. You've got some areas where it really hasn't lived up to the strength and where we're not seeing those increases year over year. And that Sort of combines then with some of the supply issues that have happened. I know we have some facilities coming back up in Yunnan and China. That is not a surprise.

Speaker 2

I think we all knew some of that was going to come back up again. It doesn't take away some of the uncertainties around how much hydroelectrical power they're going to be able to generate. It's not easy to shutter or bring back those facilities. But in the end, it all sort of comes through this big calculation to get down to essentially a roughly balanced market. And that balanced market, of course, is waiting for what happens on inflation and therefore monetary policy It connects back with what's going to happen with the broader economy, whether there'll be Chinese stimulus.

Speaker 2

And so I sort of get back Hey, it's a mixed bag. We're sort of more or less where we were at the end of last quarter, probably a little weaker demand, but also a little bit weaker supply as well.

Speaker 6

Appreciate the color. Thanks again.

Speaker 2

Thanks, Timna.

Operator

The next question is from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 7

Thank you very much, operator. Good afternoon, everyone. And I first wanted to ask on the cost side, you called out the $65,000,000 in alumina, $25,000,000 in aluminum with continued raw material savings. And with flags, first with caustic soda, but then also kind of Costs working their way through inventory. Is that an order of magnitude we could expect also for Q4 or maybe even greater than what you've outlined for Q3?

Speaker 7

Thank you very much.

Speaker 3

Lucas, we're actually seeing very notable improvements in the 3rd So within that $65,000,000 for alumina and the $25,000,000 for aluminum, we've got $20,000,000 related to the caustic improvement and then within aluminum $30,000,000 related to coke and pitch. As we give an early look to the Q4, we are seeing notable savings. The trend is continuing. So we do see a nice step down heading into the 4th quarter.

Speaker 5

Hey, Lucas, I'm going to

Speaker 2

add one very Good comment, but we've been waiting for this cost relief to come through for a while. And it's particularly frustrating on the caustic Because it takes so long to work its way through our processes. But now to finally start to see those raw materials come through in Q3 and beyond It's certainly welcome relief and it's very relevant for Q3.

Speaker 7

Very helpful. Thank you. Then taking a step back From this and zooming out a bit, where do you think you sit today on the global cost curve? And would you expect Maybe a supply response from higher cost producers. You touched on it here and there throughout the call, but would appreciate maybe Honing in on this point.

Speaker 7

Thank you.

Speaker 2

Yes. Lucas, I'm not going to be able to give you a particularly educated view on cost curves Just because we tend to do that analysis on an annual basis and we do it next quarter. So you're 1 quarter early. I can give you some qualitative comments without Giving you a quantitative number. I think through this part of the cycle, what we've been suffering on Suffering from both on the alumina and aluminum cost curves is the fact that we had our short energy position sitting inside Europe.

Speaker 2

And so when you look at Fortunately, we had the San Siprian smelter down, so that one didn't impact us so much in this downturn. But the San Siprian refinery has really suffered from natural gas prices. So they have drifted their way up the cost curve. Now we'll find a resolution to that. It's a market resolution for the most part.

Speaker 2

We've also been managing Essentially, how much we're choosing to operate that plant and I have to tell you that our operators and our managers there Our masters of making the plant work really well no matter what capacity they're running at. The other side of it is places like Liza and Norway. Their cost jumped up because we used to have some of the least expensive spot energy on the planet and for a little while it was some of the most expensive. We've been able to find a good middle ground, but certainly that's pushing us up the cost curve when we look at that. And so what we'll try and do when we come to our cost curve analysis, is to talk a little bit about what the positioning will be, but also what are some of the Some of the significant events that might be causing that cost curve to differ from what should be a longer term view on where we believe that we sit in more normal conditions.

Speaker 2

Now your next question is when do normal conditions come back? That's a really good question and I'd love to Gary, someone answer that for me too. We look out and our job is to make sure that we're managing the system in our portfolio as smartly as we You see that in how we manage on Sinciprion in the refinery. You see that in the way that we try to look across all of our Make sure that they're creating value in this quarter and then for the next 10, 12 quarters, right? So we're Working on that, we have a lot of opportunities to drive that next class of power contract.

Speaker 2

We're working in the midst of with the Spanish government Trying to find relief on natural gas costs. We're also looking for different ways to bring in other supplies. So there's a lot that we can do. We are not helpless, But we will give a lot more insight into cost curves and where we find ourselves in the next quarter. So more to come on that one, Lucas.

Speaker 7

Well, I really appreciate all the detail. Thanks again and best of luck.

Speaker 8

Lucas.

Operator

The next question is from Chris Lefebena with Jefferies. Please go ahead.

Speaker 9

Hey, thanks for taking my question. So I'm just trying to Basically frame the range of possibilities. So you did $137,000,000 of EBITDA in the quarter And you have the benefit now of raw material prices that are going to start to falling through the P and L, some Higher volumes as you're restarting some capacity eventually, assuming you get the mining licenses in Australia and you're mining high grade bauxite again. So those costs come down. If we ignore the impact of changes in alumina and aluminum prices and all the stuff goes right for you operationally, What does that quarterly EBITDA number go to?

Speaker 9

Does it go from $137,000,000 to $200,000,000 Does it go to $300,000,000 Can you give me some sort of ballpark as to where you can be ignoring any change in alumina or aluminum prices?

Speaker 3

Chris, that's hard to do with the market impacts. I'll take you back to our guidance. Again, we're focused on the downward trend for raw materials. We are improving production costs with our Improvements in stability, getting the higher volumes out is also helping us with our cost absorption. So we will stay focused on what we can control.

Speaker 9

Okay. Thank you.

Operator

The next question is from Michael Dudas with Vertical Research. Please go ahead.

Speaker 8

Good evening, Molly, Roy, Jim.

Speaker 2

Thanks, Michael.

Speaker 8

Yes, I'm not sure when normalization is coming back in the near future, Roy, so I I want to further discuss on the Russian metal comments you made. You think that the current market is being restricted from a mechanism on what pricing is today, where prices should be either better because of what's going on? And Is there a real risk of that happening in the next several weeks to months given the distortions in LME aluminum? And where do you get a sense of where those stockpiles may be and how it's going to flow through given all the things that you discussed on that front?

Speaker 2

Yes. Michael, so what I would say is that I don't necessarily see pricing broken right now. And you can essentially chart that back and say how is how are aluminum prices in And it's the exchange of warrants on the LME. And that exchange of warrants essentially represents people that are holding that material and then choosing to either Continue to hold it or to sell it. And so that changes over on a daily basis.

Speaker 2

And that changeover from buyers Sellers is what sets the basis for the entire aluminum market. Now as you compare that with what's happening with headlines, what's happening with We continue to see what appears to be an orderly market. LME Metal is meant To be the metal of last resort. So if I'm selling metal, I only sell it to the LME because I can't find another buyer. So a great example is a lot of those Russian metal that came on warrant that came into the LME, because they couldn't find another buyer because nobody wanted to buy Russian metal.

Speaker 2

That's How the market that's how that market of last resort works. On the buyer side, when somebody is going out to look for metal, it's also the market of Someone would prefer it to buy from a producer because then you are given those tons where you choose to buy them from a particular plant, from a particular producer And you can understand what the logistics are going to be. Whereas when you're going when you're sifting through warrants, when you're buying from the LME warehouses, You get it where you get it. You get a commodity grade metal that's located in some place where LME has warehouses. So it truly is a last ton of last resort.

Speaker 2

Right now, you've got 80% of that metal, Which represents Russian metal. And so there's still 20% of metal for the most part it's Indian, that if I wanted to buy metal of last Resort, I could buy enough tons so that I could actually get some of that Indian metal coming out and I could leave the Russian metal sitting inside the warehouse. And remember that whoever is holding those warrants will always give you the warrant that has the least value. They'll give you the Russian metal first. So let's say there's 200,000 tons of Russian metal, I need to buy 220,000 tons, so I can get 20,000 tons out.

Speaker 2

Again, always representing the purchase of last resort. So right now, you can still put up enough capital to be able to buy those warrants to be able to get down to those non Russian tons. But as we watch this sort of almost this constant march to a higher percentage of aluminum from Russia Sitting in inventory, the potential that even more tons could come into the LME because The customers for the most part are not buying these tons and that's not universal. That is a generalization particularly for North American and European consumers. As you watch that percentage increase and as those tons that make up that percentage also increases, it means to be able to use that Market to actually buy non Russian tons will require more and more and more capital.

Speaker 2

So I'd say right now we're not seeing distortions, but the higher that percentage The more tons are sitting on inventory, the more likely that you could start to see distortions. And effectively, you'll have a bunch of metal that nobody wants Sitting inside the LME warehouses. And so who's going to be buying and exchanging those warrants if that's not metal that anybody wants to actually Take delivery of. Now remember the other mechanism and I'm not going to get any further than this. The other mechanism that people are buying and selling those warrants because they're essentially Establishing the spot price versus the future contango or the future backwardation.

Speaker 2

So the reason there is another impetus beyond just trying to buy metal, which is also If I buy it for $2,500 today, it's worth $2,520 in 3 days, as an example. And so I'm willing to do that because I can then establish a trade. So that's sort of the nuts and bolts of what's happening in the warehouse. But as you have less and less people willing to take Russian metal, as you start to see banks that are not willing to finance That metal and traders that have said they're not going to be dealing with Russian metal, it increases the risk of a non functioning market. So that was a very long answer to a very short question.

Speaker 2

Does that help to clarify a little bit?

Speaker 8

It did, Roy. Yes, it's very helpful. Thanks so much and good luck with that.

Speaker 2

Thank you, Mike.

Operator

The next question is from Katya Janssik with BMO Capital Mortgage. Please go ahead.

Speaker 3

Hi. Thank you for taking my questions. Maybe going back to more near term, pricing has And if this soft environment persists, Molly, you mentioned that you're focusing on what you can control. What are the cost or what is the magnitude of cost savings you could potentially generate if this softer Pricing environment persists and outside the raw material price declining? Concha, let me start with, we've spent the last several years really improving the portfolio, strengthening our balance sheet.

Speaker 3

Right now, we have a lot of liquidity excellence, dollars 1,000,000,000 in cash. We have a revolver undrawn at $1,250,000,000 No long term debt maturities until 2027. We do have high working capital now. That will generally convert to Cash be a source in declining markets. So we will stay focused on operations.

Speaker 3

We'll adjust our spending and our operating levels as needed, Really to safeguard our assets and protect the long term value for the shareholders.

Speaker 2

Got you. I'll add one Comment on tamale's as well, because she's exactly right. As if prices continue to It drives the review of the portfolio that we're operating. And so we that's sort of in the aluminum business. We're always doing portfolio reviews, it seems to be just part and parcel to what our business looks like.

Speaker 2

But in the end, we need to make sure that we're running the portfolio and the set of Away from savings that are good today and bad tomorrow, a lot of times maintenance you can save money today and then you end up having failures 6 months from now. So we don't spend a lot of time on short term savings programs, but we do make sure that we can operate our plants to their best. And so that when we look at where our facilities sit, we have a lot of levers that we can pull in order to make sure that they are working well. We have a lot of times support from national and local governments. But in the end, as conditions continue to move forward, We really need to think about how do we make sure that we have the right portfolio and continue to have the right portfolio.

Speaker 2

You've seen that in the decisions that we've made over since we've been a standalone company and really over the last few years. And hopefully, we've built the analytical models so that we can understand that. We have a good understanding not just of today's markets, but where those markets we expect them to go. And so we tend to make those decisions not just for the next 3 months, but for the next 18 months.

Speaker 3

Thank you.

Speaker 5

Thanks, Scott.

Operator

The next question is from Bill Peterson with JPMorgan. Please go ahead.

Speaker 10

Yes. Hi, good afternoon and thanks for sneaking me in. My first question is on CapEx. You discussed deferring some growth and sustaining CapEx. Can you provide a little bit more color detail on what type of projects or regions you're deferring this CapEx?

Speaker 3

So Bill, this really applies to the whole portfolio of capital projects. So typically, as we're running the projects through the year, if we Have projects that have maybe naturally slowed. We might fill the queue. We're just not doing that. We're going to keep the projects that we had in the plan on the timeline.

Speaker 3

And so we'll just allow the projects to run a bit longer. So there's nothing really being deferred. It's just the open projects that we have are extending.

Speaker 10

Okay. Thanks for that. And maybe I guess another one on capital allocation. So there are no buybacks in the quarter. I guess how should we think about Capital returns and buybacks in the coming quarters, are you looking for improved pricing in the marketplace, more clarity on operational improvements, Working capital from us, just trying to get a sense of how you're thinking about the returns through here?

Speaker 3

Yes. So Bill, our capital allocation framework So right now in the operating environment, we're going to stay with our dividend. It's appropriate for this market cycle. And so we continue to review this actively with our Board, but for right now, we have nothing to announce there.

Speaker 10

Okay. Thanks. I look forward to following the progress.

Speaker 8

Thanks, Bill.

Operator

The next question is from John Tumazos with John Tumazos Independent Research. Please go ahead.

Speaker 2

Thank you. I wouldn't expect that you would draw down the revolver, increase the $1,800,000,000 of Debt increased to $3,000,000,000 of other liabilities to fund the tough market or the losses. We have much comfort from $990,000,000 of cash balances. Maybe we improve on the $63,000,000 a month Cash drawdown in the first half, but a year from now the cash in these conditions would be less. Should we

Speaker 3

So John, just as you said, we're not going to leverage up in the near term. We do believe that we're in a very strong position now with our cash Where it stands and again we have a lot of liquidity options should they be needed. I'm going to take you back to 2020 when we faced the pandemic And we did put in a very active cash management program. I mean, there we were able to cut CapEx, reduce working capital. We had a very robust program.

Speaker 3

And so if the market turns and goes further down, we will be looking at those types of programs to reinstitute them.

Speaker 2

What's the lowest level of cash balances that you're comfortable with given the needs to manage Raw materials between plants all around the world.

Speaker 3

John, we've really not shared our Cash levels because they differ depending on the market cycle, what we're comfortable with and what we're not. So we don't kind of set an external target for cash.

Speaker 2

Thank you. Thanks, John.

Operator

The next question is a follow-up from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 7

Thank you very much for all the time and really helpful discussion. I wanted to follow-up on Michael Dudas' question on The Russian situation. And Roy, if I understood you correct in your prepared remarks, you called on LME to act. And I wondered, Do you act in your commercial agreements? Do you consider something else besides Elemy as a basis?

Speaker 7

I appreciate your thoughts on that. Thank you.

Speaker 2

Yes, Lucas, it's a good question. I think today there is no good alternative to the London Metal Exchange. And so what we truly hope is that we can influence number 1, the LME because we think There's just no reason that they can't make a decision immediately to no longer list Russia as deliverable metal. And also number To work with our host governments and particularly the European Union and the United States to try and make sure that Russian metal is sanctioned, which That makes it very easy for the LME to no longer have that as a listed commodity. So there's a few routes to get We're not yet at the point where we say, hey, pricing has fundamentally broken down and we need to find a different pricing mechanism,

Speaker 9

Just because there's just not

Speaker 2

a lot of really great alternatives that sit out there. And so the market continues to function. We will continue to look at that. What we're trying to do is to prevent the need to try and find a different pricing mechanism, which then could be more volatile, could require just a bunch of different changes. So I think we've got some routes to not have to do that.

Speaker 7

I appreciate it. Thanks again. And again, best of luck.

Speaker 8

Thanks, Lucas.

Operator

That being our final question, this concludes our question and answer session. I would like to turn the conference back over to Roy Harvey for closing remarks.

Speaker 2

Thanks, Gary. And thanks to everyone for joining our call today and also very much for your continued interest in Alcoa. We're focused very clearly on driving improvements for the future. And we're focused on a future where aluminum will continue to be an important metal, An important metal for decarbonization, an important metal for across all the applications as our economies continue to improve. We've got a lot of advantages built into Alcoa.

Speaker 2

We're a pure play aluminum company and we have tried to demonstrate that we take actions so that we can make this company better each and every day. I look forward to talking to you again in October, where we'll report our Q3 results. And in the meantime, please all be safe. Good night, everyone.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • An employee at Alcoa’s Icelandic smelter lost partial vision in Q2, although overall injury rates continued to decline as the company ramps up proactive risk identification and corrective actions.
  • Alcoa generated $2.68 billion in Q2 revenue, achieved adjusted EBITDA of $137 million and a net loss of $62 million (–$0.35/share), finished with $1 billion in cash and further reduced pension liabilities.
  • The company secured an 8-year alumina contract with Emirates Global Aluminium, ratified new U.S. labor agreements, and is focused on obtaining bauxite mining approvals in Western Australia while optimizing lower-grade ore and enhancing operational stability.
  • Alcoa views near-term aluminum markets as mixed—limited supply growth but divergent demand by end use—and is expanding its SUSTAINA low-carbon portfolio, with Equilume volumes in Europe set to rise 60% year-over-year.
  • Q3 guidance includes a $55 million EBITDA impact from lower bauxite grades, partly offset by anticipated raw material cost reductions; full-year capital expenditures were cut by $60 million, and working capital is expected to be a cash source in H2 2023.
A.I. generated. May contain errors.
Earnings Conference Call
Alcoa Q2 2023
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