Alcoa Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 17, 2024

There are 13 speakers on the call.

Operator

Note, today's event is being recorded. I'd now like to turn the conference over to James Dwyer, Vice President, Investor Relations and Pension Investments. Please go ahead.

Speaker 1

Thank you, and good day, everyone. I'm joined today by William Opplinger, Alcoa Corporation President and Chief Executive Officer and Molly Bierman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill 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 presentation. We have not presented quantitative reconciliations of certain forward looking non GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, The earnings press release and slide presentation are available on our website.

Speaker 1

With that, here's Bill.

Speaker 2

Thanks, Jim, and welcome everyone to our Q4 2023 earnings call. Today, we'll review the substantial progress we've made in the quarter on key objectives, the financial results, the market and our plans to continue to improve and strengthen our company. I started last quarter's call by affirming the areas of Alcoa's near term focus and reinforcing our values to act with integrity, operate with excellence, Care for people and lead with courage. Consistent with those values, I'm proud that Alcoa's safety performance showed market improvement in 2023. While we experienced 2 FSIAs last year, we improved year over year in all key safety metrics.

Speaker 2

We intend to continue our progress toward our goal of an injury free workplace. Safety performance is important for another reason too. The key indicator of the stability and quality of our operations. Excellent safety performance goes hand in hand with operational excellence. I'm not surprised then that given our strong safety performance, we set production records at our 3 smelters in Canada and one in Norway.

Speaker 2

And we are also successfully restarting one potline at Warwick here in the States. We made great progress on other focus areas too. We achieved what I said was our most important objective, gaining approvals for our bauxite mines in Western Australia. With these approvals, we now have a clear path forward for continued operation in Western Australia. Also in WA, we recently announced the curtailment of the 60 year old Kwinana refinery starting in the Q2 of this year.

Speaker 2

The decision was based on a variety of factors, including Kwinana's age, scale, operating costs and current bauxite grades, in addition to current market conditions. In December, we began engagement with the national and regional authorities in Spain,

Speaker 3

as well

Speaker 2

as the Labor Works Council to discuss ongoing financial losses at the San Siprian Refinery and Smelter. We are considering all forms of relief while working collaboratively on a long term solution for the complex. With that, let me turn it over to Molly to go over the financials.

Speaker 4

Thank you, Bill. Revenue was flat sequentially at $2,600,000,000 as lower shipments for both alumina And aluminum more than offset higher aluminum realized price. The net loss attributable to Alcoa improved $18,000,000 to $150,000,000 and the loss per share improved from $0.94 to $0.84 On an adjusted basis, The net loss attributable to Alcoa was $100,000,000 or $0.56 The difference is primarily related to the recording of a valuation allowance on deferred and tax assets in Brazil net of non controlling interest. Adjusted EBITDA increased $19,000,000 to $89,000,000 For the full year 2023, year over year revenues decreased $1,900,000,000 to $10,600,000,000 And net loss attributable to Alcoa worsened $528,000,000 to a loss of $651,000,000 or $3.65 per share. Adjusted net income changed from $869,000,000 in 20.22 to a loss of $405,000,000 in 20.23 dollars or $2.27 per share and adjusted EBITDA excluding special items Moved from $2,200,000,000 to $536,000,000 Let's look at the key drivers of EBITDA.

Speaker 4

4th quarter 2023 adjusted EBITDA increased as improved raw material costs and shipment volumes offset energy and price mix challenges. In addition, favorable production costs, including recognition of the full year benefit for Section 45X of the Inflation Reduction Act at $31,000,000 sequentially, primarily on lower raw material costs and lower production costs in Brazil and Australia. We also saw substantial benefit from lower raw material costs in the aluminum segment, which combined with favorable production costs, primarily 45x to offset the impact of higher energy costs and lower value add product premium. The higher energy costs included a 2nd year of unfavorable legislative changes in Norway's CO2 compensation arrangement. Outside the segments, transformation demolition costs were lower, but inter segment eliminations and other corporate costs were unfavorable.

Speaker 4

Let's look at cash movements within the Q4 on the next slide. The cash balance increased $18,000,000 in the quarter to $944,000,000 The largest source of cash was working capital reduction of $222,000,000 which more than offset the largest use of cash, capital expenditures at $188,000,000 higher EBITDA of $89,000,000 Various other items totaling $97,000,000 and net non controlling interest contributions of $18,000,000 mostly offset all other uses of cash. Moving on to other key financial metrics. Our key financial metrics Our earnings results. Full year 2023 return on equity was negative 8.9%.

Speaker 4

Our 4th quarter dividend added $18,000,000 to stockholder capital returns, which totaled $72,000,000 for the year. While free cash flow plus net non controlling interest contributions was negative for the year at $282,000,000 It was positive $28,000,000 in the 4th quarter. Proportional adjusted net debt increased by $100,000,000 due to 4th quarter pension and OPEB plan remeasurements. In both the Q4 and full year 2023, Capital expenditures and cash income taxes were our largest uses of cash. Day's working capital improved 11 days 39 days year over year, primarily on decreases in inventories of $243,000,000 Sequential improvement also 11 days was driven primarily by the typical increase in year end payables while reducing inventory values further.

Speaker 4

The improved working capital performance provided a significant source of cash in the 4th quarter, resulting in a full year working capital source of cash of $221,000,000 Let's turn to the outlook in the Q1 and the full year 2024. For 2024, we have included an outlook for both production and shipments for the segments. We expect alumina production to range between 9.8 And 10,000,000 tons and shipments to range between 12,700,000 and 12,900,000 tons. The difference reflects our normal trading volumes as well as externally sourced alumina to cover the customer contracts previously fulfilled by Quandana Production. The Aluminum segment is expected to produce between 2,200,000 and 2,300,000 tons increasing on smelter restart, While shipments hold steady between 2,500,000 and 2,600,000 tons due to lower projected trading volumes.

Speaker 4

In EBITDA items outside the segments, we expect transformation costs to remain at $80,000,000 and other corporate expense to improve to $120,000,000 reflecting a portion of our efforts in productivity and competitiveness programs. Below EBITDA, we expect depreciation to increase to $675,000,000 primarily due to additional assets placed in service as well as increases in the assets related to asset retirement obligations for mine reclamation and bauxite residue storage. Non operating pension and OPEB expense is expected to be flat at $15,000,000 and interest expense will be comparable to 2023's level at $110,000,000 For cash flow impacts, we expect 2024 Pension and OPEB required cash funding to be similar to 2023 at $70,000,000 The majority of that spend is U. S. OPEB.

Speaker 4

Our capital returns to stockholders will continue to be aligned with our capital allocation framework. Our current capital expenditure estimate $550,000,000 with $90,000,000 in return seeking and $460,000,000 in sustaining capital. Approximately 65% of the total CapEx is within the Illumina segment, where 40% is funded by our JV partner. Looking ahead to 20252026, we expect CapEx to increase approximately $50,000,000 to about $600,000,000 primarily related to mine moves. We expect approximately $130,000,000 lower prior period income tax payments in 2024 down to $50,000,000 Environmental and ARO spending is expected to increase to approximately $295,000,000 Approximately $20,000,000 relate to accelerated mine rehabilitation in both Australia and Brazil.

Speaker 4

We also expect higher spending at Quenana and residue area closures and regulatory requirements in Brazil. And more spend is projected for demolition and remediation at Previously closed sites in 2024 as we prepare those properties for future redevelopment. While we do not provide guidance on full year cash restructuring charges, we did provide the estimates for the Quinone curtailment in our January 8th announcement. Of Alcoa's share of related cash outlays, approximately $80,000,000 are expected to be spent in 2024 at approximately $35,000,000 in 2025. Our J.

Speaker 4

D. Partner, Illumina Limited will cover the remaining 40% of those costs or approximately $65,000,000 To provide flexibility to implement our portfolio actions, Today, we executed an amendment to our revolving credit facility agreement, which includes adjusting covenant limits for the 2024 fiscal year. Looking at the Q1, in the Illumina segment, we expect approximately $15,000,000 unfavorable impacts related to higher maintenance costs and lower volume in Australia. In addition, we expect benefits from lower raw materials and energy to be fully offset by other factors. In aluminum, we expect multiple factors to fully offset, including favorable energy impacts, primarily due to lower prices in Brazil and Norway, lower product premiums and unfavorable net impact from the non recurrence of 4th Quarter 2023 one time items.

Speaker 4

Aluminum costs in the Aluminum segment are expected to be unfavorable by $5,000,000 Additionally, we expect a one time unfavorable impact of approximately $20,000,000 as the hedge programs for the Eleomar smelter restart ended in December 2023. Below EBITDA, note that 4th quarter other expenses included one time positive impacts of $51,000,000 primarily foreign currency gains. Based on recent pricing, we expect Q1 2024 operational tax Expense to be negligible. Now I'll turn it back to Bill.

Speaker 2

Thanks, Molly. Now let's discuss our markets. In alumina, prices rallied at the end of the 4th quarter, Driven by announced Chinese refinery curtailments due to a domestic bauxite shortage and concerns about Guinea bauxite supply and have continued to increase in January. We expect the market to be short in 2024 with steady demand from smelters and little inventory available. In aluminum, for 2024, we expect a balanced to slight surplus market depending on the speed of demand recovery during the year.

Speaker 2

On the supply side, there are a few announced restarts or new projects, and China has held to its 45,000,000 ton Capacity cap. In addition, hydropower shortages caused 1,200,000 tons of capacity to be curtailed in Yunnan Province last November. Demand has stabilized in North America and Europe, and we see the potential for a moderate recovery throughout the year. Regional premiums are increasing due to both the widening contango and higher transportation costs to import metal. In our order book, value add product orders are stabilizing and premiums appear to be firming up.

Speaker 2

While lower than their peaks, that premiums remain above historical levels. In China, we expect government stimulus programs to prompt demand growth as those measures take Globally, growth in aluminum intensive EVs and renewable power infrastructure will continue to support this positive trend. We also see demand improving in packaging as inventory destocking has been largely accomplished. And finally, on a concerning note, We have seen the share of Russian metal stocks on the LME sort to 90% in December. Because LME stocks are now predominantly Russian origin metal, which is unwanted Call on the EU to progress sanctions against Russia and specifically to include aluminum primary metal, which remains outside of the scope of the measures currently agreed to by the EU.

Speaker 2

Now let's turn our focus from the market to Alcoa and our Actions to improve profitability. This slide describes factors that can improve our financial performance over 2023's results. As you can see from the chart, we have significant upside potential to adjusted EBITDA. We divide the improvement drivers into 3 categories: Near term actions, medium term opportunities and market improvement. Near term actions are underway and have the most well defined financial The largest area of impact is our $310,000,000 estimate of raw material savings for 2024, including for key raw materials like caustic soda and lime for refining and anode carbon products for smelting.

Speaker 2

Thanks to our procurement team's actions as well as pricing and inventory lags, roughly 1 third of that amount is already fully realizable and the remainder is conservatively estimated using current market pricing. Next, we are targeting $100,000,000 from our program to reduce controllable operating costs across our organization, outside of raw materials, energy and transportation, which are already under active management. Recently initiated, full run rate savings are expected to be achieved by the Q1 of 2025. This overarching program includes general belt tightening as well as efforts such as our workforce blueprint in which we benchmark Three additional components of our near term actions are the Warrick smelter optimization and potline restart With the benefit of additional IRA funding at both Warrick and Messina, completing the I. U.

Speaker 2

R. Smelter restart and realizing savings from the Quinonecurtailment. All of these locations are fully mobilized and working toward achieving the savings targets. As mentioned earlier, last month, we started discussions with union and government stakeholders on finding a long term solution for the San Cyprian smelter and refinery. In late 2021, with the support of our employees, local communities and government, We started down a path aimed at positioning the San Sipram complex for long term economic viability.

Speaker 2

To accomplish that goal, Alcoa invested 100 of 1,000,000 of dollars in the operations and supporting employees, their families and the local economy. While operations continue to be restricted to 50% at the refinery and are fully curtailed at the smelter, 2023 EBITDA losses were over $150,000,000 across the San Sip brand complex. Despite our collective efforts, we have clearly fallen far short of our goal of achieving economic viability for Sancyprian. Looking forward into 2024, the Sancyprian complex is expected to incur substantial losses even with the recent improvements in energy markets and the alumina price. If the situation does not change significantly in the months ahead, we anticipate that available funding will be exhausted in the second half of twenty twenty four.

Speaker 2

If that happens, we will have no choice but to make hard decisions that will adversely and potentially irrevocably impact employment and the economy in Galicia more broadly. Nobody wants that, but absent significant change, that is exactly what will happen. That is why we are urgently advancing our engagement efforts with employees and governments to begin defining options. For its part, Alcoa intends to continue to honor the spirit of the commitments it made in the viability agreement. However, we will need flexibility from our unions and significant support from the regional and national governments.

Speaker 2

Medium term opportunities and market improvements are the other two drivers of adjusted EBITDA Medium term opportunities are beyond 2024 and 2025, but achievable in the next several years. An example is benefiting from better bauxite grades in Australia after upcoming mine moves. When it comes to market impacts, we are a commodity business. A large part of adjusted EBITDA potential correlates to market improvement. As an example, comparing more favorable 2022 metal and alumina prices The 2023 prices reveals massive potential for EBITDA improvement, especially in the metals segment should prices increase.

Speaker 2

We have demonstrated the ability to profit from favorable market conditions when they arise. Finally, we have not Capital expenditures for Elesys before the end of the decade, although the continued ramp up of the R and D work will produce additional volume of Elesys metal for the partners, including Alcoa to bring to market. For the quarter, I'm very proud that we've remained true to our values, including improving on both safety and While profit metrics improved slightly on a sequential basis, we are aiming to improve substantially from where we are today. And on that front, we have made important and impactful progress on our key challenges. Going forward, we are working to maintain positive momentum in Western Australia and continue to build toward a long term solution for our San Cyprian complex in Spain.

Speaker 2

Our entire organization is focused on delivering near term actions and company wide productivity and competitiveness programs. We believe that not only is the medium and long term outlook for aluminum strong, but 2024 is starting to look like a positive turning point. With that, operator, what questions do we have in the queue?

Operator

Thank you. We will now begin the question and answer session. And our first question today comes from Michael Dudas with Vertical Research. Please go ahead.

Speaker 5

Good evening, Bill, Molly, Jim. First, let's say on Cyprian. So Bill, as you've analyzed it from a different seat over the past few months and You've been dealing with this for several years. Maybe you can assess how more comfortable or Solutions, are there changes or opportunities that are coming about? Or is it really getting down to the point of something needs to give here, which kind of sounds what you kind of indicated here in your prepared remarks?

Speaker 2

Yes. Thanks, Mike. Let me just give you some background and give you some thoughts around Sam Ciprian and the situation there. If you recall, in February 2023, we agreed to a phased restart of the smelter, which It was supposed to begin in 2024 via what's called the viability agreement. And the refinery has been operating at about 50 capacity since the Q3 of 2022 to try to mitigate the losses.

Speaker 2

The economics for both the smelter and the refinery remain today Now we've committed we are committed to fully to fulfilling the spirit of the obligations and the viability agreement. However, the commitments need to result in a viable operation. And due to decline in the markets, both metal And the delay in the development of competitive power solution, the time to realize a viable operation has extended out considerably. And so as you alluded to under these circumstances, it's prudent to look at every action that we can take to stretch the remaining funds available to See if a viable business plan can be assured for the site. To be clear, the refinery and the smelter have not been funding their operations.

Speaker 2

They've not been able to fund their operations for many years. And the operational losses and investments have been funded via loans from other Alcoa entities and there's virtually no ability for Sancyprian to repay those Loans, the Alcoa entities will provide no further funding to an operation that is not viable and that's an important point for you and others So at this point, you're probably wondering about timing of a resolution. The timing is not clear at This point, but we're asking the unions for their understanding of the situation and necessary flexibility to reach the solution. Likewise, we're working with the regional and national governments to identify all potential forms of relief and we'll work Collaboratively with all stakeholders on a long term solution. So that basically sums up some of the history and where we stand At the site, it's Sancyprian's day.

Speaker 5

That's very helpful. Thank you, Bill. And my follow-up is maybe more Thoughts on the near term actions on your EBITDA potential slide. And the $310,000,000 of the raw And the views of the market, maybe in a sense that is are those expectations relative to expectations of the Current or future market for aluminum aluminum, how you say a third is in the bag so far, but how confident You realize those others and is that on an annualized basis over the next 2 year basis and is that a level where you could maybe see better Performance in a more improved pricing market I mean, selling price market

Speaker 4

Mike, thanks for the question. The raw materials improvement that we are showing, the $310,000,000 is our outlook for 2024. Now it's based on prices that we've already achieved given our lags that we incurred in the second half of twenty twenty 3 as well as what we're seeing now in current purchases as well as our procurement teams look forward. So yes, we have about a third of that already confirmed and good outlook for achieving the 310 in 2024 And that is an annual run rate. So we would expect that to continue forward based on today's market view.

Speaker 6

Thank you, Mike. Thank you, Bill.

Speaker 2

Thank you, Mike.

Operator

And our next question comes from Carlos De Alba with Morgan Stanley. Please go ahead.

Speaker 6

Yes. Thank you very much, Bill and Molly. So just also on the business other business considerations, Just to clarify, the $36,000,000 reversal for IRA, Is that you're going to give back the $36,000,000 in total or only a part of that given that the benefit of the IRA should to be recurrent going forward.

Speaker 4

Yes, Carlos, what you're going to see there is a net of 27 in the first Quarter. So the $37,000,000 we recognized the full year $23,000,000 and then we'll have about $10,000,000 in each quarter going through $24,000,000

Speaker 6

All right, great. And then just on Saint Cypria and then at this point in the bill, you are not going to restart There's more capacity that was supposed to come up in the Q1 of 2024. Is that correct?

Speaker 2

Well, we plan to fulfill the viability agreement. And part of the viability agreement is that we restart 32 pots in the Q1. However, it does not make economic sense to restart those spots. And the more that we if we were to restart those They are negative cash flow and it will just simply consume cash out of the entities quicker than if we were not restarting those spots. So at this point, we will be having the discussions with all the parties involved and make sure they understand that Starting those spots will consume cash and there is only a limited amount of cash available in the entities.

Speaker 2

And once that cash Alcoa does not plan to put further cash into the entities.

Speaker 6

Fair enough. If I may just squeeze one more. The $70,000,000 benefit from the closure of Kwinana starting in the Q3, are those net of the purchase that you have to make in the market to fulfill your customer contract?

Speaker 4

So Carlos, the $70,000,000 is the Kwinana loss elimination. We will have some costs To replace basically purchase the committed alumina for customers. That's part of our overall trading activity and we do not see a material impact

Speaker 7

Fair. Fair

Speaker 6

enough. Thank you very much, Manny and Bill.

Speaker 2

Thank you, Carlos.

Operator

And our next question today comes from Katya Yanchetsch with BMO Capital Markets. Please go ahead.

Speaker 8

Hi. Thank you for taking my questions. Can you quickly provide an On the Alomar smelter restart?

Speaker 2

Yes. So as we said in the 4th quarter, We are taking the Alumar smelter restart slowly and at a measured pace. We have increased the amount of pots operating to as of Today to approximately 70% of the plant, and we're making Slow but good progress on restarting the smelter. So, while I would wish it was faster, we want to do it safely, we want to do it And we want to do it in a way that positions the asset for the long term. And so we continue to make progress.

Speaker 8

And is the $75,000,000 is that expected to also occur in 2024 Benefit?

Speaker 4

Yes. Katya, you will see the $74,000,000 come in over time. So that would be a run rate by the time we get to the end of 'twenty five.

Speaker 8

Okay. And just one more question, if I may. Going back to San Cyprian, are there specific reasons why you can Just shut it down now.

Speaker 2

The smelter, as you know, obviously is curtailed today. The refinery is at 50% capacity. If we chose to go to a full curtailment, we would have to go through the process of negotiating with The unions on a curtailment and that may be a consideration. We'll be looking at all options at this point to Serve cash out of that entity.

Speaker 8

Okay. Thank you.

Operator

And our next question today comes from Timna Tanners with Wolfe Research. Please go ahead.

Speaker 9

Yes. Thanks for taking that question and happy New Year. Wanted to ask about the comment on Elesys and how there wasn't any required spending to the end of the decade. I didn't know if that was a change from the past, I thought. At your last Investor Day, there's been a lot of talk of Elesys, Straya, Refinery of the Future Investments.

Speaker 9

And I'm just wondering if you could provide us an update on that broadly?

Speaker 2

So I'll take a first cut at that and then Molly can jump in if you want to add anything. Tim, we continue to make progress with our partners And Elisys on the process. And we have plans to start a commercial size sell at the Alma smelter in Quebec in 2024. So we are continuing to make progress. However, we are not planning on an implementation in the near term of Elesys.

Speaker 2

We're going to Allow for Elesys to go through some of the testing process and ensure that we have the right package of engineering. And so at this point, we're not planning on significant investments in Ellis' cutover or an Ellis' This plant, this part in this decade. So it would be earlier next decade. Is that a change? It's an R and D project And we're working through that R and D and ensuring that the process works well.

Speaker 2

And we'll implement it Later in the decade or early next decade.

Speaker 9

Okay. Thanks. And then regarding Possible other portfolio changes. I know you've talked about Listy in the past. At these aluminum prices, any thinking about its viability?

Speaker 9

And similarly, anything that you could tweak beyond the Warwick restart given the 45x

Speaker 2

Well, to give you a little bit of perspective of some of the things that we've had going We mentioned the Warrick restart and so we got half of that done in the Q4. I plan on getting the other half of that done in the Q1. We've made the announcement around Kwinana. So that will be in 2024. We continue to make progress Around Alumar and so we have that restart going on.

Speaker 2

And we have engagement on all the pertinent She's in Spain, and so we have that going on. At this point, Tim, that's a lot to get done. And I think the team has done a great job of initiating all of that. We will consider as we always do asset by asset, does it make sense You start, stop, all of those options. And we make it on a fairly real time basis.

Speaker 2

And where we have Power exposure, we make those decisions on a real time basis. So, we're always considering some of those portfolio options, specifically around high cost

Speaker 9

And

Operator

And our next question today comes from John Tumazos with Tumazos Very Independent Research. Please go ahead.

Speaker 10

Congratulations on getting through the tough year and cutting costs so much.

Speaker 2

Thanks, John.

Speaker 10

First question, and I'm not sure if I'm supposed to ask this question, but I'll try. You're planning to buy almost 3,000,000 tons of alumina this year, which is a lot of boatloads. Where are you buying it? China's 59% of world output. You're around 5 So there aren't that many choices.

Speaker 10

Are you buying it from China or some Western country Complying with sanctions that has some capacity that would have gone to RUSAL in the old days.

Speaker 2

John, to give you a little bit of background, it is not unusual for us to be in the market to buy alumina. In past years, I think in 2023, we probably did about 2,000,000 metric tons. As you see with the curtailment of Kwinana, that's Increasing to about 3,000,000 metric tons. We have an alumina trading arm and I don't want to make that sound as if we're doing any type of prop trading, But we have an Illumina trading arm that is constantly sitting there trying to optimize logistics And optimize tons and quality across the system. And where will we get that?

Speaker 2

We have Already agreed with certain suppliers that we will have offtake in 2024. And those suppliers run the gamut of Western World Suppliers, Indonesian Traders. And as we go through 2024, we'll do more of that.

Speaker 10

I can ask another one. You've Designated your Chief Operating Officer to be in Australia. Over most of my career, the raw Materials have been a big cash cow and the market is a little tougher now. Is the division of labor for Mr. Reed to be Primarily raw materials and you're focusing on the smelters bill and is this signal that we're going to be Paying very close attention to the environmental permitting and regulatory issues as well as operations in Australia.

Speaker 2

Thanks for the question, John. So let me just back up a little bit. Matt Reed was chosen The COO because he's the best person for the job in my view. And the fact that he sits in Western Australia is a little bit of a benefit because we do have such a massive operations in Western Australia. To specifically address your question of whether I'll be focused on the smelters and he'll be focused on mining and refining, no.

Speaker 2

Matt has a remit for all operations globally. It's a big job. It will be a hard job to do out of Western Australia and he and I have had that But I think he's the right person for the job. And now with that said, He has 4 regional vice presidents that sit underneath him. And they and he used to be one of them

Speaker 7

obviously in Australia, so he has to

Speaker 2

replace himself. They're very good people, So he has to replace himself. They're very good people, very capable people who have the ability to make decisions in the regions to benefit the regions. And that's important because as we saw in the permitting process, it is critically important To have really strong local leadership in the regions that can make decisions that make Sure that the permitting is done correctly, that the rehab is done correctly, that the ESG factors are appropriately considered in the regions. Sometimes it's hard for a global player to have that perspective.

Speaker 2

That's why you have to have strong leadership in the regions. And Matt will ensure that he has 4 strong leaders around the world.

Speaker 11

Thank you.

Speaker 2

Thanks, John.

Operator

Thank you. And our next question today comes from Bill Peterson with JPMorgan. Please go ahead.

Speaker 7

Yes. Hi, Bill and Molly, and thanks for taking my questions. I wanted to come back to the near term, dollars 245,000,000 How to think about the cadence? It sounds like there's some visibility in raw materials, maybe a third of that $310,000,000 of hydrosped truck, pardon me, I'm in the airport. But what else do you have visibility?

Speaker 7

Is this do Suisomosis is in back half rated more in the 25 based off of the other buckets that are within that? Just to get a feel for So there's a lot of this in the last 12 to 24 months.

Speaker 4

Yes. Bill, I think it's fair to say that there is various timing on those items, They are, again, designed to deliver a run rate savings by the end of 'twenty five. On the raw materials, we did indicate That's a 24 number. That's an annual number that will repeat. On the Productivity and Competitive Programs, we're Trying to hit a run rate by the end of the Q1 of 25.

Speaker 4

On Warrick optimization and the IRA funding, that one will Kind of bleed in over time as Warrick gains momentum from the restart and we are working actively with Treasury and other Folks in the government on the funding improvements. Aliamar will come in over time as well and then Kwinana will start to be realized in the second Half of 24.

Speaker 2

And Bill, I really have to give this to Molly and her team because and Jim Dwyer. Many of the investors have been asking us, hey, there's lots of moving parts here. Can you help us understand what those moving parts look like? And how good can things be if you accomplish those moving parts. And so that's the point of this slide.

Speaker 2

It basically says, hey, let's our view overall materials, it's going to be $300,000,000 better. We're actually instituting and we haven't talked much about it on this call, but we're Instituting what we're calling a competitiveness program where we're trying to get 5% of the cost structure aside from raw materials and energy out of the cost Structure and it's at every single plant, mine, refinery around the world. So this chart was meant To be a reaction to investors that said, help us understand with all these moving pieces, what can it look like? And that's why we put it together.

Speaker 7

No, I can appreciate that. Just the cadence is particularly an important addition to that. Second question, Follow-up on your lower carbon solution and I appreciate it. Analysis looks more like next decade. But what about, I guess, You guys have talked in the past, Ecolon, Ecosource, Ecol Dura.

Speaker 7

How should we think about those programs, the ability for you to drive premiums? And where does, I guess, Lower carbon aluminum just fit more broadly in your strategy for Alcoa as well as your customers?

Speaker 2

So, I made some comments at the Future Minerals Forum in Saudi Arabia last week, and I'll reiterate those here. Our customers are asking for low carbon solutions. And we and some of our competitors are developing those low carbon solutions. We have the broadest line of low carbon solutions of anybody out there between Eculum, Ecotura, Ecosource, we offer low Carbon Solutions today that our customers can take advantage of. We've seen fairly sizable growth of ecolumb year over year, Something like a 60% increase in sales in Ecolum.

Speaker 2

Are we getting premiums? Small ones, Right. And I would like to get a whole lot more premium than what we get. But today, we are getting premiums for ecolum across the system. And so Our customers want it.

Speaker 2

We need to be on the forefront. Elesys and Astrea going into the next decade will provide us significant advantages. But we're starting to see some of the benefits of selling that broad product line today.

Speaker 7

Okay. Thanks for that.

Speaker 2

Thanks, Bill.

Operator

And our next question today comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 12

Thank you, operator. Good afternoon, everyone. Bill, I wanted to follow-up on Sancyprian. You mentioned that internal funding sources and lines are Close to being exhausted. And I wondered, in the status quo, is this a matter of weeks, months, quarters?

Speaker 12

When would those lines be fully exhausted? Thank you very much.

Speaker 2

I hate to give you a definitive time, But I can quantify a little bit for you. There is roughly $240,000,000 of combination of restricted cash in the entities and credit lines available. The entities lost on a pre tax About $150,000,000 in 2023. So, we are essentially sitting down with the stakeholders Trying to determine how can we preserve the cash in the entity to give that facility Long enough time to come up with a plan to be viable over time. So there's not any specific at this point Something as far as I'm willing to go out and say when that cash will run out, but it is a situation where there is limited cash available and we need to figure out how to get that facility viable over time.

Speaker 12

Very helpful. And Understand if you were to restart those $240,000,000 of restricted cash and credit lines would that would be exhausted very quickly.

Speaker 2

So If we were to restart the 32 pots, it just adds to the drain. Now we have a viability agreement that we plan on fulfilling. But if we do that, then it just accelerates the drain of cash. And that's a situation where everybody loses.

Speaker 12

Thank you, Bill. Two quick follow-up questions. The first is on 45X. Does that change how you think about The U. S.

Speaker 12

Assets more structurally, where would you say they fit within your smelter portfolio today? And where do you think they fit on the global cost curve after this credit. And then on the environmental ARO, I think kind of cash outflows went from $139,000,000 in 20.20 $202,000,000 last year and then this year $295,000,000 Are those inflationary pressures? Is there something lumpy? And where do you think that cash item will go over the coming years?

Speaker 12

Thank you very much.

Speaker 2

Let me take the U. S. Question first. Just It's important to note how appreciative we are to the U. S.

Speaker 2

Government for providing the clarity around 45x and the fact That those funds essentially support keeping aluminum, which in our view is a critical mineral for the United States economy keeping those assets running. Warwick, as we said, we're investing in Warwick To restart the 3rd line, the 45x clearly helps, and we have plans to make Warrick even more profitable over time. Now Warrick in the future needs to figure out what its energy source is going to be. Its energy source is Still coal based and if we're going to meet our greenhouse gas targets, we will have to transition that to a sustainable energy. But that's a problem that we have some time to work on.

Speaker 2

Messina, on the other hand, is a it's renewable energy. It's got a great energy source. And now with the 45x support, it's a better facility. So we're pretty pleased with The level of support that we've gotten, we're trying to get further clarity around 45x to include the raw material sources, Included in that $90,000,000 benefit that you see, but we'll continue to work that.

Speaker 4

On the environmental and remediation cash Increase. So it's about $95,000,000 and there's 3 main components there. We are accelerating mine rehabilitation, primarily in But also a bit in Brazil. We've got some residue areas coming to end of life as well as Kwinana water treatment. And then lastly, we are upping our spend on demolition because we have closed properties that are getting ready for redevelopment.

Speaker 12

Thank you, Molly. And I'm looking forward on a more normalized basis, where could that number settle out

Speaker 4

This is a lumpy one because of the, again, the demolition and we have Opportunity, so that's why we want to get all that done. And also on the mine rehab, you can think of that as really a 3, 3.5 year up Because we are accelerating the Brazil as part of our commitment for the mine approval.

Speaker 2

Westrobes, right?

Speaker 4

Sorry. Brazil, but we need

Speaker 2

to be accelerating Brazil too because of external stakeholders, but Western Australia. Western

Speaker 4

Australia. Thank you.

Speaker 12

Really appreciate all the color. Best of luck. Thank you.

Speaker 4

Thank you.

Operator

And our next question today comes from Lawson Windner with Bank of Please go ahead.

Speaker 3

Thank you, operator, and good evening, Bill and Molly. Very nice to hear from you. Thank you for the update today. Hey, Bill. I just wanted to ask on just one other capital allocation question and then on the dividend.

Speaker 3

I don't know, maybe your slide on taking actions now might actually address my question. But just when you think about the dividend, would your Recommendation be to the Board to change it in any way. Are you comfortable with the current level?

Speaker 4

Our capital allocation program really is not changing, Lawson. And we're going to continue to maintain the strong balance sheet. We're going to make capital expenditures to maintain and improve our portfolio. And then when we have excess cash in no particular order, we'll use it for portfolio actions, preparing for growth and returning cash to shareholders. The dividend is something that we speak carefully to the Board about and they would guide us in any changes there.

Speaker 2

And remember, when we set the dividend, we set it at a level that we thought was very affordable through the cycle. It's not a huge dividend, But we said it at a time when our indebtedness, our overall proportional net debt had gone from $3,800,000,000 down to $1,100,000,000 It's crept up a little bit this year, but we set the dividend at a level that we thought was affordable through the cycle. And so that's the thinking.

Speaker 3

Okay, fantastic. And then if I could just add Maybe ask one more question on San Cyprian just to potentially get a little more clarity on what the path forward might be. But I mean, if those facilities run out, I mean, does that imply then that, that subsidiary then would have to enter some sort of bankruptcy protection proceeding?

Speaker 2

Lawson, at this point, I don't want to speculate what happens when and if They were to run out of cash. What the task for us currently is to work with the unions and the government to try to get that to be a viable operation. And that's what we're really focused on. We have a dedicated group of people who are working with the various stakeholders And constituents to make it viable.

Speaker 3

Okay. That's very clear. Thank you so much for your time today.

Speaker 2

Thank you.

Operator

Thank you. And our final question today comes from Curt Woodworth with UBS. Please go ahead.

Speaker 11

Yes. Thanks. Good evening. Hi, Bill and Molly.

Speaker 2

Hi, Kurt. Hi, Kurt. Hey, Kurt. Thanks for reinitiating coverage, but you did it at

Speaker 8

the wrong

Speaker 2

level, Just to be clear.

Speaker 8

All right. Let's dig into that a little bit.

Speaker 2

Good. We can. We got a while, so we can dig in.

Speaker 11

Okay. So here's the question. So, alumina is at 3.70, bauxite is up. You're saying you've got a third of the way down on the $3.10 of raw materials. You're guiding to a tax expense in the Q1 of 0.

Speaker 11

So are you saying based on spot pricing for the Q1, your earnings before tax It's 0. Like I would have thought that at 3.70 alumina, you'd have some tax expense in AWAC. And then Correct. So how do I think about that? And then again, just kind of what's the cadence, I

Speaker 3

guess, as you see kind

Speaker 11

of The margin profile in the Illumina segment, I know that you've talked about trying to get costs down and mitigating some of the bauxite Great issues, but is there a glide path in the next several quarters where there's more meaningful margin recovery for a given aluminum price point.

Speaker 4

So Kurt, let me take the tax part first. You've followed us for a while. You know As our income gets right around breakeven, predicting taxes is extremely difficult. Looking at the jurisdictions where we're paying taxes versus those where we're fully reserved. So we are at that point where if we have a meaningful departure on tax, We'll have to give you an update.

Speaker 2

So let me address the second part The question or maybe the theme of the question, Lawson, part of the reason why we put the chart together that we've been very focused On here is that we made $500,000,000 in EBITDA in 2023. Everybody can see that. And at the prices and raw material level in 2023, that's where we ended up. We have line of sight to near term That are going to double that over the next, let's say, 2 years. And that's not Banking on any type of a metal market or alumina market improvement.

Speaker 2

If you then factor in where we were Way back in 2022, which was not that long ago on metal prices, you can see the earnings just really Accelerate very, very quickly. So we at Alcoa aren't sitting here hoping for an earnings For a market recovery, we're taking action. We're taking the hard actions, quite honestly. Quite honestly, it's not an easy decision. Warwick is an easy decision, but hard to accomplish safely and to do it effectively.

Speaker 2

Alumor, we're improving. We haven't even talked much about WA bauxite permits here. That is something that was a nontrivial task to get accomplished in the 4th quarter. And it's good to have that beyond behind us. And then on top of that, we're going after $100,000,000 of cost savings And we're going to have that on a run rate basis by the Q1 of next year.

Speaker 2

So you can see that we are pulling Every lever to take that $500,000,000 to a much higher level And essentially, prove your initial thesis incorrect.

Speaker 8

Okay. And what do you

Speaker 11

think cash restructuring could theoretically look like? Like in the event that you I think you had a comment in November that underperforming assets were $90,000,000 negative EBITDA quarterly, Right. So San Josep is maybe 40% of that, Kawana is 70%, but you still have other buckets at play to deal with. So I guess, Do you expect more restructuring? And can you size potential like cash And then just lastly, in terms of North Myara and getting the permit for the next phase, When do you expect that to happen?

Speaker 11

Because I think there was a view that it could be concomitant with what you're trying to do with your existing permit. Thank you.

Speaker 2

So on the permitting, we are going through a Part 4 permitting process in Western Australia. That takes time. And we are saying that we won't be into North Myara until at least 2027. As far as any potential further restructuring, and I'm going to let Molly answer it from a quantitative perspective, When we talk about our financially troubled operations, there are still ones in there that we are really Challenging to be more cost competitive. Lista, we talked about earlier in this call.

Speaker 2

Warwick, we have a plan to get there. Portland has been repowered and is currently Starting some marginal small marginal capacity and a couple of pots at a time, but that adds marginal EBITDA. So, that's the actions that we're taking to address those remaining financially troubled operations. Any comment from you on cash restructuring?

Speaker 4

It's too early to have a number for San Cyprian. Obviously, we're working toward a solution there, but there's potential, No numbers, Shaft.

Speaker 11

Yes. All right. Thank you very much.

Speaker 2

But Kurt, thanks for coming back to following us. Appreciate it.

Speaker 11

All right.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Oplinger for any closing remarks.

Speaker 2

Thanks, Rocco, for hosting the call for us. And thanks again to all who joined our call. We're excited about our initiatives as you can hear from our voices, Including the work to address key challenges and drive improvements, I think we made a lot of progress over the last 90 days. There's an energy and enthusiasm within The company that's driving toward solving many of these near term and midterm problems and we are really going after it. Molly and I look forward to speaking with you next time and until that time be safe.

Speaker 2

Thank you.

Speaker 4

Thank you.

Operator

Thank you. The conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.

Powered by Quartr

Key Takeaways

  • Alcoa improved its safety performance with fewer recordable incidents in 2023, achieved production records at three Canadian smelters and one in Norway, and restarted a potline at the Warwick smelter in the U.S.
  • The company secured regulatory approvals for its Western Australia bauxite mines, announced the curtailment of the 60-year-old Kwinana refinery starting in Q2, and is working with stakeholders on a long-term solution for the loss-making San Ciprian complex in Spain.
  • In Q4 2023, revenue held at $2.6 billion, adjusted EBITDA rose $19 million sequentially to $89 million, and net loss per share improved to $0.84, while full-year adjusted EBITDA fell sharply to $536 million amid softer markets.
  • For 2024, Alcoa expects alumina production of 9.8–10 million tonnes and shipments of 12.7–12.9 million tonnes, aluminum production of 2.2–2.3 million tonnes with 2.5–2.6 million tonnes of shipments, and plans $550 million of capital expenditures (65% in alumina).
  • The company is targeting near-term productivity gains including $310 million of raw material savings, a $100 million controllable cost reduction program, and IRA-funded optimizations at its U.S. smelters to drive EBITDA higher.
A.I. generated. May contain errors.
Earnings Conference Call
Alcoa Q4 2023
00:00 / 00:00