Alcoa Corporation (NYSE:AA) Q3 2023 Earnings Call Transcript

Alcoa Corporation (NYSE:AA) Q3 2023 Earnings Call Transcript October 18, 2023

Alcoa Corporation misses on earnings expectations. Reported EPS is $-1.14 EPS, expectations were $-1.13.

Operator: Good afternoon and welcome to the Alcoa Corporation Third Quarter 2023 Earnings Presentation and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Dwyer, Vice President, Investor Relations and Pension Investments. Please go ahead.

James Dwyer: Thank you, and good day, everyone. I’m joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer; and Molly Beerman, 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. 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. With that, here’s Bill.

William Oplinger: Thank you, Jim, and thanks to everyone for joining the call today. Before we get started, I want to acknowledge the important contributions from our former CEO, Roy Harvey. Roy played a key role in our evolution into a stronger and more resilient business and he was pivotal in our 2016 launch as a pure-play upstream aluminum company. He led the company through some difficult market environments, including COVID and his commitment to making Alcoa successful never wavered. He is serving as a strategic advisor to me for the remainder of the year and I appreciate his counsel. I’ve interacted with many of you over my 23 years with Alcoa Inc and Alcoa Corp both in my CFO and COO roles, and I’m glad to be with you again today.

In my first few weeks in this role, I’ve met with employees, customers, and industry participants. Several questions keep coming up in those conversations such as what are our priorities and what are Alcoa’s key challenges. First, to address the constant in our company, our values. At Alcoa, we act with integrity, operate with excellence, care for people, and lead with courage. These aren’t statements that simply live on a plaque. These are the values we expect every Alcoan to live daily. I’m proud to lead the company guided by strong values. Our relentless focus on the safety of our employees, contractors, and visitors to our sites will continue as will our efforts toward our sustainability targets. As I step into the CEO role, I want to make it clear that I have an ambition for this company, an ambition manifests as an expectation of excellence in everything we do from EH&S, operations, maintenance, and commercial excellence.

Alcoa has an impressive history of innovation and leadership in the industry and we plan to further build on that and strengthen our market connections. We will be action-oriented and make decisions guided by our values, sound business principles and with a focus on creating value for our stockholders. We’ve made good progress this year. Across our system, we’ve improved stability, and we intend to build on that operational momentum. So for the near term, the focus will be gaining approvals for bauxite mining in Western Australia. This is our top priority, we are making progress. We have the right team in place for success and we understand the improvements that our stakeholders are expecting. We will be driving for further operational improvements in Brazil.

The ongoing start-up at the Alumar smelter in Sao Luis hasn’t gone as planned. We now have conditions in place for a successful restart from here forward. Next, we will be focusing on productivity across our system with every site focused on margin improvements through operational productivity going into 2024. And we have action plans in place to improve the financial results of certain locations in the system that have been underperforming. Each operation is working to become more globally competitive. In the long-term, we remain bullish on aluminum as a material of choice. Mega-trends continue to drive increased aluminum usage globally from further EV penetration to the substantial future demand in solar installations. Alcoa is uniquely positioned in the aluminum industry for a world focused on carbon emissions and other sustainability issues which we are addressing from three vectors.

Primary metal production with our joint venture ELYSIS, post-consumer scrap usage with our ASTRAEA technology, and carbon and residue emissions with our refinery of the future initiative. So before I address the third quarter results, let me re-emphasize. We are laser-focused on improving the short-term and we are working on developing unmatched, industry-leading technology for the long-term. Let’s begin with safety. I am disappointed that we had one serious injury with life-altering implications in the third quarter. A worker at our Juruti bauxite mine lost portions of two fingers while performing maintenance on a bulldozer. While this event is unacceptable, overall, we are making progress on preventing fatalities and serious injuries. So far this year, our total recordable injury rate has improved by 16%, and days away and restricted time injury or DART rate is 27% better on a year-over-year basis.

Also, we are increasing the number of onsite field verifications for leaders to evaluate the effectiveness of critical safety controls and coach workers on safety improvements. Now, moving to the financials. We reported an adjusted net loss for the third quarter of $1.14 per share and $70 million in adjusted EBITDA, excluding special items driven by lower average realized prices for both alumina and aluminum. Improvements in both raw material and production costs did not fully offset the impact from lower realized pricing in both of our segments. We ended the quarter with a strong balance sheet and a cash balance of $926 million. We’ve made meaningful progress on our approvals for bauxite mining in Australia during the quarter and have more visibility on the timeline for decisions from the government and regulators.

I will address this more fully later. In our operations, our Quebec smelter system set production records in the quarter, and we’re investing there to increase our casting capabilities for value-added products. From a commercial perspective, we also continue to be encouraged by the reception from customers for our Sustana line of low-carbon products which includes EcoLum metal and EcoSource alumina. And while demand in some key end markets remained soft, there are signals for a rebound in 2024. We’ll talk more about that macroeconomic view of the market in a moment, but first, let me turn it over now to our CFO. Molly, please go ahead.

Molly Beerman: Thank you, Bill. Revenue was down 3% to $2.6 billion as higher shipments only partially offset lower realized prices for both alumina and aluminum. The net loss attributable to Alcoa increased $66 million, to $168 million and the loss per share increased from $0.57 to $0.94. On an adjusted basis, the net loss attributable to Alcoa increased $140 million to $202 million. The difference in net loss is primarily related to the reversal of a valuation allowance on deferred tax assets in Iceland. Adjusted EBITDA declined $67 million to $70 million as part of the decrease in revenue was offset by lower costs. Let’s look at the key drivers of EBITDA. Third quarter 2023 adjusted EBITDA declined $67 million to $70 million as lower metal and alumina realized prices were only partially offset by lower raw materials energy and production costs.

Alumina segment EBITDA increased $20 million sequentially lower raw material costs, primarily caustic soda and lower production costs in Brazil and Spain, more than offset lower alumina index prices. We also saw the benefit of lower raw materials and production costs in the Aluminum segment as well as energy improvements, but not enough to overcome the impact of lower metal prices. Other costs outside the segments were unfavorable $56 million. They reflect unfavorable inter-segment eliminations, higher transformation demolition costs and higher other corporate costs. Here’s a deeper dive on raw material costs. This year we’ve seen substantial improvement in our segment EBITDA due to lower prices for our key raw materials. Market prices for caustic soda, calcined petroleum coke, and coal tar pitch continued to decline in the quarter and are expected to improve further.

Company-wide, we have seen an $86 million EBITDA improvement over the first nine months, $32 million in the Alumina segment and $55 million in the Aluminum segment. These lower raw materials market prices worked through our financials on a lag basis to expect further improvement in the fourth quarter. Let’s now move to other key financial metrics. Our key financial metrics are consistent with our earnings results. Year-to-date return on equity is negative 8.7%. Our third quarter dividend added $18 million to stockholder capital returns, which totaled $54 million year-to-date. Free cash flow less net NCI contribution was negative $36 million in the quarter increasing proportional adjusted net debt by $0.1 billion and decreasing the cash balance by a similar amount.

Year-to-date capital expenditures and cash income taxes remained our largest use of cash. In the third quarter, days working capital improved five days to 50 days on lower inventories. The improved working capital performance provides a significant source of cash in the third quarter entirely offsetting the previous year-to-date working capital cash use. The working capital improvement is evident on the next slide. Cash balance declined $64 million in the quarter. The largest source of cash was a working capital reduction of $183 million primarily from lower inventories followed by EBITDA of $70 million and net non-controlling interest contributions of $40 million. We expect working capital to be a source of cash in the fourth quarter. Capital expenditures were the largest use of cash at $145 million as CapEx typically increases as we move through the year.

Notable this quarter were settlement payments of $75 million to former workers at two smelters that Alcoa previously owned in Spain, as well as environmental and ARO spending of $52 million. Let’s turn to the outlook for the final quarter of 2023. Our full-year outlook has one favorable adjustment. We expect other corporate expense to improve $10 million to $120 million. At the segment level, in alumina we expect an improvement of approximately $50 million due to lower raw material prices, better production costs and higher volumes. Partially offset by approximately $10 million and higher energy costs. In addition, we expect impacts related to lower bauxite grades in Australia to be consistent with the prior two quarters. In the Aluminum segment, we expect unfavorable energy impact of approximately $30 million mainly due to CO2 compensation changes in Norway.

Additionally, we expect $35 million in raw material price improvement to be offset by unfavorable product mix and higher production costs. Finally, alumina costs in the Aluminum segment are expected to be favorable by $5 million. Below EBITDA, note that the third quarter other expenses included one-time negative impact of $35 million primarily foreign currency losses. And we expect the fourth quarter operational tax to range between $10 million to $20 million. Now, I’ll turn it back to Bill.

William Oplinger: Thank you, Molly. Next, I’d like to recap some key items from our global operations. Each of the three smelters in Quebec, Deschambault, Baie Comeau, and ABI in Becancour have set year-to-date production records for tons per day. When totalled together they have performed the best since our 2016 separation. This week, one of those smelters, ABI announced the planned investment to further improve its casting capabilities for a broader array of alloys for value-added products. The new equipment should enable us to deliver products with additional sizes, smoother surfaces and better dimensional control for the automotive and packaging markets. We are also focused on operational improvements from assets across our global system driven by productivity enhancements.

We took our first action last month at our Kwinana refinery in Western Australia with the restructuring plan that is intended to improve that facility and save $10 million annually with more improvements under consideration. In Brazil, we are employing a deliberate and methodical approach to the Alumar smelter restart, which is now operating at approximately 65% of the site’s total capacity and has restored stability to the parts that have been restarted. Finally, we are committed to conformance with the global industry standard on tailings management. Alcoa has voluntarily disclosed information from all of our global tailings and we’ve worked with the International Council on Mining and Metals or ICMM to improve the industry’s management of tailings.

This has been a significant undertaking and we’ve worked diligently including with third-party reviewers to provide additional information about impoundments with the highest classification ratings before an August deadlines set for ICMM members. Now let’s turn to an update on our mining approvals in Western Australia. Our teams have continued to work with relevant state government departments to advance our annual approvals for bauxite mining at the Huntly and Willowdale mines. Securing an approval is an absolute priority for our Company and we are working toward a final resolution in the fourth quarter. We’ve submitted a revised mine management program or MMP for the period ’23 to 2027. This updated MMP is now being reviewed by regulators.

We believe this revised plan meets evolving stakeholder needs as it includes numerous enhancements designed to specifically address expectations of the government. It includes additional controls for the protection of drinking water, including increased distances from reservoirs, and addresses biodiversity concerns through a plan to accelerate rehabilitation. Separately, let me briefly discuss the Western Australian Environmental Protection Authority process. In August, the agency completed a public consultation period on whether it should assess all or part of the current and next MMPs. The WA EPA has indicated that it expects to decide on this before the end of the year. We have demonstrated our commitment to transitioning to a more modernized approvals framework for new major mine regions.

That’s why we proactively began a formal assessment in 2020 from the WA EPA for our two new major regions for the Huntly mine, Myara North and Holyoake. But this will take some time. The assessment for Myara North and Holyoake is ongoing and we do not expect the first bauxite ore from these new regions any earlier than 2027. We do expect the bauxite grade from these regions to be more consistent with the higher grades we previously experienced at the existing Myara central. However, until then we expect similar bauxite quality as compared to recent grades. As Molly described we are actively working to mitigate the financial impacts of these lower grades, while also looking for opportunities to optimize productivity. Next slide, let’s move to some highlights from a commercial perspective and discuss some demand trends.

First, customers are increasing demand for our Sustana line of products, the Sustana line is a small but growing proportion of our overall sales volume. Sales of EcoLum, our low carbon aluminum is strong in Europe and orders are being placed in North America too. Overall, we expect our annual global sales volume for EcoLum to increase approximately 60% for 2023 when compared to last year. Also, in the third quarter, we made our first sale of the non-metallurgical variety of EcoSource, our low-carbon Alumina brand. Earlier this year, we started offering non-metallurgical varieties in addition to existing smelter-grade EcoSource. Alcoa is one of the world’s largest producers of non-metallurgical alumina, which is used in everything from refractories, sandpaper and water treatment processes across the world.

Our Sustana line has the aluminum industry’s most comprehensive portfolio due to the range of products we offer from alumina to metal. Meanwhile, we also have customers coming to us due to our history of alloy development. Last month, we were recognized for the second year in a row with an award from the North American Dye Casting Association for an Alcoa-developed alloy used in mega castings for electric vehicles. We are selling and licensing alloys that can be used to make these one-piece high-pressure dye castings. With our alloys, OEMs can get a one-piece casting rather than many separate pieces creating greater efficiency. On the cost side, our energy team signed a new nine-year power agreement in August that will cover 50% of Portland’s smelter capacity starting in July of 2026.

We continue to pursue options for the smelter’s remaining electricity requirements with a strong focus on renewable energy. The global alumina and aluminum markets are both balanced to a slight surplus. At the same time, aluminum inventories in terms of days of consumption remained at historically low levels, positioning the market well for when demand improves. In 2024, there is uncertainty in the markets due to a range of geopolitical and macroeconomic factors, one of the biggest questions revolves around demand outside of China. Our base views is for continued growth in transportation and recovery in the packaging and in the building and construction sector. Within transportation, the automotive market typically drives the major trends. At this point, most of the COVID-related automotive supply chain disruptions have resolved.

While uncertainty remains due to labor actions in the United States, we anticipate year-on-year growth in tons for aluminum as automotive production continues to ramp up to 2019 levels. In packaging, downstream inventory levels have largely normalized and we expect demand increasing. In building and construction, high-interest rates have negatively affected that sector in the last year, particularly in North America and Europe. A relative recovery in building and construction is expected next year compared to 2023. This is based on analysts’ projections for slowing inflation and stabilizing interest rates, which should provide a better foundation for increased year-over-year activity although, the pace of that improvement remains uncertain and reliance on economic conditions.

In closing, we are encouraged by the positive operational momentum in the third quarter and intend to build on that performance. Our Company’s primary objective is to gain approvals for bauxite mining in Western Australia. We believe we’re on the right path with an updated mine plan that has an enhanced commitment meant to address the government’s expectations. And importantly, we now have line of sight to decision timing which is expected before the end of the year. Across our global operations, we are focused on improvement. We will work to increase productivity, reduce and control costs, and manage our working capital. We also are continuing work on our future-focused breakthrough technology programs, which have the potential to further differentiate our company.

And finally, while some end-use sectors for aluminum are softer now, we remain bullish on the long-term fundamentals for our markets. I’m not alone in this view. I attended LME Week where the prevailing view was that aluminum is poised for long-term growth. Alcoa is well-positioned for the future. We have the distinct advantage of being active in all aspects of upstream aluminum production and I’m excited about our prospects and the work ahead. With that Molly and I are ready to take your questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Lawson Winder with Bank of America Securities. Please go ahead.

Lawson Winder: Hello. Thank you, operator. Good evening, Bill and Molly. Bill congratulations on your new role.

William Oplinger: Thank you, Lawson.

Lawson Winder: Yeah, it’s very nice to hear from you today. I just wanted to ask about Kwinana and just with the lower grades now expected to continue through 2027 at the earliest, is there a point at which a complete shutdown could become a high probability of risk?

William Oplinger: So, at Kwinana we’re essentially looking at all options, and in the near term as you see, we’ve announced a restructuring that takes some cost out. In addition to that, we’re looking at a variety of different levers to be pulled to drive cost down and improve profitability there. But ultimately, as with any marginal asset and Kwinana is a marginal asset at this point, you know, we’ll consider options on the table, including curtailment and closure.

Lawson Winder: Okay, that’s very clear. And then in a similar vein, Alcoa has had this goal of reducing its cost to first quartile level globally. You know, with you now in the lead seat, what are your thoughts on that goal in terms of timing and achievability? Thank you.

William Oplinger: Thanks, Lawson. I think we, first of all, if you step back and look at where crew has us today on the cost curve, we are still first quartile bauxite mining, first quartile refining, and second quartile smelting. The current situation in Western Australia puts pressure on the refining segment. So that could move us into the second quartile. But to answer your question very specifically you see in the presentation that we did today we highlighted productivity and competitiveness a couple of times in the presentation. We have launched a program across the company to enhance competitiveness plant by plant and so we’re essentially going after that. I think there’s opportunities even in our best plants and we highlighted the great success that we’ve had in Quebec so far this year. I still think there’s opportunities to make those plants more competitive, take cost out, and more productive. So we’ll continue to strive for those targets.

Lawson Winder: Okay, thank you very much. I’ll get back in the queue.

William Oplinger: Thanks, Lawson.

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

Lucas Pipes: Thank you so much operator. Bill, I’d like to add my congratulations. Thank you also for taking my question. And I wanted to pick up with the last question left off on the competitiveness. Can you maybe add a little bit more detail on what else you can tweak, is there capital needed to modernize plants, is it streamlining some of the labor relationships, is it energy? If you could maybe just peel the onion a little bit further, would really appreciate your perspective. Thank you.

William Oplinger: Yes. Sure. So, we will peel the onion back a little bit. We — and the plants are at varying stages of where they sit on this effort. Probably the earliest one to undertake it was Kwinana given some of the difficulties that we’re having at Kwinana. We’re looking at Kwinana from two perspectives. The first is an overall profitability perspective, where we were looking at are there additional markets that we can address because Kwinana has NMA capability or non-metallurgical alumina capability. Are there opportunities for pricing improvements for specific products, but then on the cost side, it’s about labor productivity and maintenance productivity, so really getting down not these upon. But to get down to the nuts and bolts of trying to determine ROE effective on the maintenance side.

And can we significantly improve our wrench time, so that was the work that’s being done at Kwinana. We subsequently launched what we’re calling workforce blueprint exercise and it started in some of our best facilities up in Quebec and you say, why start in some of your best facilities because I think if we can get gains in places like Quebec that are really, really performing well, we can probably get better games in other parts of the system. So that is actually going through and looking at the labor that we have and the amount of time it takes to do a specific tasks and a very scientific comparison of the people that we have in each plant and whether there’s opportunities across the system to streamline and take cost out.

Lucas Pipes: Thank you very much for that color. I want to follow-up on Western Australia, a couple of quick questions there. First, I think the company had previously guided to I think 2024 at the earliest, in terms of a transition back to higher grades, now 2027, could you remind us what changed, why three more years? And then if there is a kind of formal assessment at the EPA level in Western Australia, could that change the timeline, would appreciate your thoughts on that. Thank you.

William Oplinger: Sure. So if we address kind of the suite of questions that you have, I think, we made good progress in the third quarter on this issue. We have been working with the government, and we’ve been working with the agencies and the government to get our annual mine approvals processed, we’ve submitted what’s called a revised mine management program for ’23 to 2027 with the enhancements that we talked about in the presentation. And essentially where that gets us to is that we expect that decisions will be taken this quarter, both on the mine plan approvals and the EPA assessment process. So I think it’s a big step forward for the company, we should have some clarity this quarter. Now to address your question about what changed between our prior guidance and today’s guidance, if you go back and look at our prior guidance we are very careful to note that there was not great clarity beyond 12 and 18 months, so we were essentially saying, hey, the — we’re expecting the lower grades for 12 to 18 month period.

Since that time, with the concessions that we have made in the MMP process, we now have some better clarity. We’ve been able to work those concessions through the mine plans and the mine models. And we’ve developed the detailed plans for the most economic ways to mine the areas, that are now, that we believe are likely to be assessable under the approvals. And even with our best thoughts as far as mining and blending plans, we can get back to the historical grades that we’ve seen prior times. However, as we transition to Myara North, we believe that the geological sampling in those new regions will support the better grades that transition will occur, we expect in the ’27 timeframe. I hope that addresses your question.

Lucas Pipes: That is very helpful. There are more questions here, but I’ll jump back in the queue. Thank you so much and best of luck.

William Oplinger: Okay, thanks.

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

Michael Dudas: Good afternoon Jim, Bill, Molly.

William Oplinger: Hey, Michael.

Molly Beerman: Hey, Michael.