Yahoo Finance Alcoa Corporation (NYSE:AA) Q1 2024 Earnings Call Transcript
Alcoa Corporation (NYSE:AA) Q1 2024 Earnings Call Transcript April 17, 2024
Alcoa Corporation misses on earnings expectations. Reported EPS is $-0.81 EPS, expectations were $-0.62. AA isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Alcoa Corporation First Quarter 2024 Earnings Presentation and Conference Call. All participants will be in listen-only mode. [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 am joined today by William Oplinger, Alcoa Corporation's 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: Thanks, Jim, and welcome everyone to our first quarter 2024 earnings call. It's a pleasure to discuss our recent activities and performance with you today. Let's start with the transaction that we announced in late February. Our proposed acquisition of Alumina Limited, which would give Alcoa 100% ownership in the Alcoa World Alumina and Chemicals, or AWAC, joint venture. In the all-stock transaction, Alumina Limited shareholders would receive 0.02854 Alcoa shares for each Alumina Limited share. Based on Alcoa's and Alumina Limited's closing prices as of February 23, 2024, the agreed ratio implied an equity value of approximately $2.2 billion for Alumina Limited and a premium of 13.1% to Alumina Limited's share price.
Today, through a complex [web holdings] (ph) at a subsegment level, Alumina Limited shareholders have exposure to 40% of only the AWAC bauxite, alumina and aluminum assets. Upon completion of the transaction, Alumina Limited shareholders will own 31.25% and Alcoa shareholders would own 68.75% of the combined company on a fully diluted basis. We believe the acquisition will deliver immediate and significant value for both companies' shareholders and is the right path forward for both Alcoa and Alumina Limited. Alumina Limited's shareholders will participate in the upside potential of a stronger, better capitalized company with a larger and more diversified upstream aluminum portfolio. Alcoa offers a full suite of low carbon and recycled content products and has long-term technology projects under development to transform the upstream aluminum value chain.
Additionally, Alcoa shares will be traded in Australia through a secondary listing on the Australian Securities Exchange, or ASX, via CHESS Depositary Interests, or CDIs. And as stated earlier, it elevates the ownership position of Alumina Limited shareholders and provides them with a premium over the recent share price for their non-controlling interests. For Alcoa stockholders, the transaction increases Alcoa's economic interest in our core tier-1 bauxite and alumina assets and simplifies governance, resulting in greater operational flexibility and strategic optionality. It advances our position as the global pure play upstream aluminum company and enhances Alcoa's vertical integration along the value chain across bauxite mining, aluminum refining, and aluminum smelting.
Alcoa would significantly increase its ownership in five of the 20 largest bauxite mines and five of the 20 largest alumina refineries globally, excluding China. Following this transaction, Alcoa will be better positioned to continue our long-term plan of investing in Australian bauxite mining and alumina refining. Together, Alcoa and Alumina Limited shareholders will benefit several ways. There are tangible near-term cost synergies and potential for further organizational optimization, replacing the complex JV arrangement with a simpler, less expensive structure. We will be more efficient in executing decisions with a view to maximizing returns with fully aligned interest among Alcoa and former Alumina Limited shareholders. We remain fully committed to our capital allocation framework.
The all-stock transaction preserves Alcoa's balance sheet strength and provides capital structure flexibility. As one company, we will continue to have opportunities to pay distributions to shareholders, while also transforming the portfolio and positioning ourselves for growth, deploying capital to maximize value creation. So in sum, we believe this is the right deal for Alumina Limited shareholders, for Alcoa shareholders, and our broader stakeholders and communities. We're confident the transaction will build on our leading position as a global pure play aluminum company and improve our ability to execute on long-term strategies and growth opportunities. Finally, a quick note on transaction timing. We expect to close the transaction in the third quarter.
In the second quarter, we expect that Alcoa will be filing a proxy statement and Alumina Limited will be filing a scheme booklet in connection with the transaction. There are also government approvals that we are seeking in the second and third quarters, which include, in Australia, the Foreign Investment Review Board and the Australian Competition and Consumer Commission, and in Brazil, the Brazil Administrative Council For Economic Defense. We expect to apply for our ASX listing in May. And finally, but most importantly, the shareholder votes to approve the transaction and issue and exchange shares are expected to take place in the third quarter. Now, let's talk about the first quarter. It was a busy quarter. First and foremost, we had no fatal or serious injuries in the first quarter.
Our key lagging indicators, days away restricted time, total recordable injuries, and all injury rates all improved. The improving safety performance is driven by a concerted focus on safety across the company and by using programs that include managing critical risks and increasing the positive impact of our leaders spending time in the field. No matter what, safety is always our first priority. Other items to note in the quarter, in addition to announcing the Alumina Limited acquisition, we continued efforts to find a long-term solution for the San Ciprián complex, and we've started a process to potentially sell the facility. We completed the restart of one potline at Warrick, and we set records for quarterly production rates at two smelters, ABI and Mosjøen.
We fully deployed the $100 million productivity and competitiveness program, and we announced the Kwinana full curtailment. Finally, in March, we issued a $750 million green bond to support our cash position using Alcoa's new green financing framework. Now, I'll turn it over to Molly to take us through the financials.
Molly Beerman: Thank you, Bill. Revenue was flat sequentially at $2.6 billion. In the alumina segment, third-party revenue increased 6% due to higher average realized third-party price for alumina and higher shipments. In the aluminum segment, third-party revenue decreased 3% due to lower average realized third-party price for aluminum. The net loss attributable to Alcoa changed $102 million to $252 million, and the loss per share changed from $0.84 to $1.41. On an adjusted basis, the net loss attributable to Alcoa was $145 million or $0.81. The difference is primarily related to the restructuring costs and other charges for the Kwinana curtailment. Adjusted EBITDA increased $43 million to $132 million. Let's look at the key drivers of EBITDA.
First quarter 2024 adjusted EBITDA increased $43 million primarily due to improved energy costs. Raw material and other cost benefits were offset by volume and production costs. The unfavorable production costs included the single quarter recognition of Section 45X of the Inflation Reduction Act credits for Warrick and Massena, while last quarter included impacts for the full year based on the timing of approval. Alumina segment EBITDA increased $55 million sequentially, primarily due to higher alumina prices and favorable currency impacts. Lower raw material and energy costs mostly offset higher production costs and lower shipment volumes in Brazil and Australia. Aluminum segment declined $30 million sequentially. While we also saw substantial benefit from lower energy and raw material costs, those benefits were more than offset by unfavorable currency and metal prices, primarily due to the end of the metal hedge program at Alumar.
Other factors are higher alumina costs and unfavorable production costs, including impacts from the just mentioned 45X credits. Outside the segments, transformation demolition costs, other corporate costs and intersegment elimination all improved. Let's look at cash movements within the first quarter on the next slide. In the first quarter, working capital changes, capital expenditures, and environmental and ARO payments were the largest uses of cash. Working capital as a significant use of cash in the first quarter is typical for us. However, the first quarter 2024 increase was significantly lower than the last two years' levels. Capital spend and environmental and ARO payments were both in line with our 2024 outlook, although the spend is not ratable for the year.
Sources of cash in the quarter include the debt issuance of $750 million. The additional liquidity provides us with the flexibility needed to continue to execute the actions which further strengthen our asset portfolio. In the longer term, our capital allocation framework remains unchanged and focused on maintaining a strong balance sheet. In regard to our debt issuance, this is the first issue under our new Green Finance Framework, which prioritizes expenditures and climate change mitigation through projects in circular or low-carbon products and pollution prevention technologies while supporting renewable energy and water management. Proceeds from the issue cover both new and existing decarbonization and water management projects, our research and development expenses related to our breakthrough technologies, ELYSIS, ASTREA, and Refinery of the Future, purchases of renewable energy, as well as certain costs related to the production of our low carbon alumina and aluminum products.
Under the Green Finance Framework, the net proceeds of a green financing debt can be allocated to qualifying expenditures on a two-year look back and three-year look forward. We do not expect to allocate part of the net proceeds to significant capital investments in our breakthrough technologies as we do not expect those to occur in the remainder of this decade. Moving on to other key financial metrics. Our key financial metrics are consistent with our earnings results. Year-to-date return on equity was negative 14.5%. Days working capital increased 8 days to 47 days sequentially, primarily due to higher accounts receivable. Our fourth quarter dividend added $19 million to stockholder capital returns. While free cash flow plus net non-controlling interest contributions was negative for the quarter at $269 million, impacted by the typical first quarter working capital build, the cash balance increased $500 million to $1.4 billion, including proceeds from the debt issuance.
Let's turn to the outlook for the second quarter. We have one update to our full year outlook on the income statement. Interest expense is changing from $110 million to $145 million in light of our debt issue. Regarding sequential changes for the second quarter, in the alumina segment, we expect impacts of approximately $20 million related to higher seasonal maintenance and other mining costs for the Australian operation. In the aluminum segment, we expect favorable raw material and production costs to fully offset unfavorable energy impacts. Alumina costs and the aluminum segment are expected to be unfavorable by $15 million. Below EBITDA, note that first quarter other expenses included one-time negative impacts from foreign currency losses of approximately $20 million.
Based on last week's pricing, we expect second quarter 2024 operational tax expense to approximate $40 million to $50 million. Lastly, I'd like to provide a quick update on our near-term actions for profitability improvement as we guided last quarter. For the second quarter, we have locked in more of the $310 million year-over-year savings in raw material costs, although not as prominent from a sequential view. Our productivity and competitiveness initiatives are identified and being implemented. We are on track to deliver at a full run rate by the first quarter of 2025 as committed. The Warrick third-line restart was completed at the end of March. However, additional actions have been identified and need to be deployed to achieve profitability.
The smelter is not expected to have significant improvement in the second quarter, but is projecting an improved second half of 2024. The full improvement is not expected to be reached until the end of 2025. Kwinana curtailment is going according to plan and we expect to start seeing some savings in the second half of 2024. Although stability continues to be a challenge at the Alumar smelter, we remain committed to delivering our near-term targets by the end of 2025. Now, I'll turn it back to Bill.
William Oplinger: Thanks, Molly. The near-term markets are showing signs of improvement, and the long-term outlook remains very positive for both alumina and aluminum. For alumina, alumina prices recently reached a two-year high. While demand has remained steady, near-term supply concerns have continued. Chinese refineries have curtailed capacity due to bauxite shortages and environmental issues. The fuel depot explosion in Guinea raises concerns about the security of supply for China's and the world's largest seaborne bauxite source. The Queensland, Australia gas supply disruption, as well as our announced curtailment of the Kwinana refinery, has made Australian alumina supply less certain. Long-term alumina demand is expected to grow alongside aluminum, but limited low-carbon energy sources and increasing reliance on seaborne bauxite supply, particularly for Chinese refineries, are expected to constrain the growth potential and cost competitiveness of future refineries.
For aluminum, currently demand is looking up. Demand in the automotive and electrical sectors have remained strong, and we are seeing signs of recovery in packaging. Building and construction remains the most challenged end market, but it is showing signs of stabilization, especially in North America. In our order book, we see sales of VAP, or value-add products, increasing both year-over-year and quarter-over-quarter. We are even seeing opportunities for spot sales across our portfolio. From a supply perspective, there are few new projects coming online. Even considering the announced Yunnan restarts, China continues to hold to its 45 million metric ton production cap. So, inventory days remain low, and unwanted Russian aluminum still makes up more than 90% of the LME inventory.
The big news last week was that the US and UK governments announced sanctions on Russian aluminum. The impact was to establish an import ban into the US and the UK, and restrict activity at the London Metal Exchange and the Chicago Mercantile Exchange. This was the right decision, as Alcoa has consistently advocated, and we maintain that the EU should take action as well. As you might expect from this news, LME aluminum recently hit its highest level in a year, and first quarter regional premiums in the US, Europe, and Japan all increased sequentially. Long term, we remain bullish. More aluminum, both primary and secondary, will be needed to drive the renewable energy transition and achieve global decarbonization goals. Today, there are not enough announced projects to meet that expected demand, and future projects face challenges finding renewable energy supplies amid expected increases in carbon emission costs.
Even China is adding aluminum to its emission trading system, or ETS. In summary, alumina and aluminum markets are improving in the near term, and our long-term outlook remains very positive. Now, let's review key activities at Alcoa. We continue to make progress on key near-term actions as well as keeping momentum on long-term activities. Focusing on the near-term, the overall outlook is positive. We're seeing further improvement in purchase prices for key raw materials, so if the current market outlook continues, our expectation is to exceed our savings target. We have deployed our productivity and competitiveness program and expect to realize savings in the coming quarters with full run rate improvement of $100 million by the first quarter of 2025.
The restart of one potline at Warrick complete, and we remain optimistic that we will see additional IRA funding decided by the US government sometime this year. The Kwinana full curtailment, which we announced in January, is on track with all production to be stopped by the end of the second quarter. We expect to see resulting EBITDA improvement in the third quarter. On a negative note, the Alumar restart has regressed. While we have solved a number of issues, we continue to struggle with equipment reliability and personnel experience. We have reinforced the leadership and expert teams in Brazil and are taking actions to improve its overall performance. San Ciprián is a focal point of our near-term actions. Consistent with the viability agreement, we restarted 32 pots in the first quarter.
Our work is in two areas of focus: to take actions to make San Ciprián viable for the long term, and alternatively, to find a potential purchaser for the site. We have completed the optimization study and delineated a modest set of potential short-term and medium-term improvement actions. We are working on implementing actions while preserving cash. Though purchase prices for energy and sales prices have improved, the business remains unviable, and we do not expect near-term government support to be forthcoming. We started a potential sale process for the entire location, both the smelter and the refinery, and we expect to complete the bid process by the end of June. Any long-term solution requires government and union support. Consistent with all these actions and the current market environment and barring reaching an acceptable outcome on either of these two paths, we expect cash to run out in the second half of 2024.
At that point, Alcoa Corporation will not provide further funds and hard decisions will need to be made. As a company, we are very excited about the progress we are making on multiple fronts. Through the Alumina Limited deal, we are increasing the economic interest in assets we already control and operate in an all-stock transaction that benefits all parties. We have safely executed an impressive list of operational activities to improve the business, and we have more actions to complete. And both the alumina and aluminum markets are on the upswing. This is an exciting time to be at Alcoa. Operator, let's start the question-and-answer session.
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