Alcoa Corporation (NYSE:AA) Q4 2023 Earnings Call Transcript

Alcoa Corporation (NYSE:AA) Q4 2023 Earnings Call Transcript January 17, 2024

Alcoa Corporation beats earnings expectations. Reported EPS is $-0.56, expectations were $-0.99. 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 Fourth Quarter 2023 Earnings Presentation and Conference Call. All participant will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask question. [Operator Instructions] Please 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.

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: Thanks, Jim, and welcome, everyone, to our fourth quarter 2023 earnings call. Today, we’ll review the substantial progress we’ve made in the fourth 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 marked improvement in 2023. While we experienced two FSI-As last year, we improved year-over-year in all key safety metrics. We intend to continue our progress toward our goal of an injury-free workplace.

Safety performance is important for another reason too. It’s a 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, given our strong safety performance, we set production records at our three smelters in Canada and one in Norway, and we are also successfully restarting one potline at Warrick 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 second quarter of this year.

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, as well as the labor works council to discuss ongoing financial losses at the San Ciprian 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.

Molly Beerman: Thank you, Bill. Revenue was flat sequentially at $2.6 billion as lower shipments for both Alumina and Aluminum more than offset higher aluminum realized price. The net loss attributable to Alcoa improved $18 million to $150 million, and the loss per share improved from $0.94 to $0.84. On an adjusted basis, the net loss attributable to Alcoa was $100 million or $0.56. The difference is primarily related to the recording of a valuation allowance on deferred tax assets in Brazil, net of non-controlling interest. Adjusted EBITDA increased $19 million to $89 million. For the full-year 2023, year-over-year revenues decreased $1.9 billion to $10.6 billion and net loss attributable to Alcoa worsened $528 million to a loss of $651 million, or $3.65 per share.

Adjusted net income changed from $869 million in 2022 to a loss of $405 million in 2023, or $2.27 per share. And adjusted EBITDA, excluding special items, moved from $2.2 billion to $536 million. Let’s look at the key drivers of EBITDA. Fourth 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 Warrick and Massena more than offset higher other expenses. Alumina segment EBITDA increased $31 million sequentially, primarily on lower raw material costs and lower production costs in Brazil and Australia. We also saw a 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 premiums.

The higher energy costs included a second 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. Let’s look at cash movements within the fourth quarter on the next slide. The cash balance increased $18 million in the quarter to $944 million. The largest source of cash was working capital reduction of $222 million, which more than offset the largest use of cash, capital expenditures at $188 million, higher EBITDA of $89 million, various other items totaling $97 million and net non-controlling interest contributions of $18 million, mostly offset all other uses of cash. Moving on to other key financial metrics.

Our key financial metrics are consistent with our earnings results. Full-year 2023 return-on-equity was negative 8.9%. Our fourth quarter dividend added $18 million to stockholder capital returns, which totaled $72 million for the year. While free cash flow plus net non-controlling interest contributions was negative for the year at $282 million, it was positive $28 million in the fourth quarter. Proportional adjusted net debt increased by $0.1 billion due to fourth quarter pension and OPEB plan re-measurements. In both the fourth quarter and full-year 2023, capital expenditures and cash income taxes were our largest uses of cash. Days working capital improved 11 days to 39 days year-over-year, primarily on decreases in inventories of $243 million.

Sequential improvement, also 11 days, was driven primarily by the typical increase in year-end payables, while reducing inventory values further. The improved working capital performance provided a significant source of cash in the fourth quarter, resulting in a full-year working capital source of cash of $221 million. Let’s turn to the outlook in the first quarter 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 million and 10.0 million tons and shipments to range between 12.7 million and 12.9 million tons. The difference reflects our normal trading volumes, as well as externally sourced alumina to cover the customer contracts previously fulfilled by Kwinana production.

The Aluminum segment is expected to produce between 2.2 million and 2.3 million tons, increasing on smelter restarts, while shipments hold steady between 2.5 million and 2.6 million tons due to lower projected trading volumes. In EBITDA items outside the segments, we expect transformation cost to remain at $80 million and other corporate expense to improve to $120 million, reflecting a portion of our efforts in productivity and competitiveness programs. Below EBITDA, we expect depreciation to increase to $675 million, primarily due to additional assets placed in service as well as increases in the assets related to asset retirement obligations from mine reclamation and bauxite residue storage. Non-operating pension and OPEB expense is expected to be flat at $15 million and interest expense will be comparable to 2023’s level at $110 million.

For cash flow impacts, we expect 2024 pension and OPEB required cash funding to be similar to 2023 at $70 million. The majority of that spend is U.S. OPEB. Our capital returns to stockholders will continue to be aligned with our capital allocation framework. Our current capital expenditure estimate is $550 million, with $90 million in return-seeking and $460 million in sustaining capital. Approximately 65% of the total CapEx is within the Alumina segment, where 40% is funded by our JV partner. Looking ahead to 2025 and 2026, we expect CapEx to increase approximately $50 million to about $600 million, primarily related to mine moves. We expect approximately $130 million lower prior period income tax payments in 2024, down to $50 million. Environmental and ARO spending is expected to increase to approximately $295 million, approximately $20 million related to accelerated mine rehabilitation in both Australia and Brazil.

We also expect higher spending at Kwinana 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 Kwinana curtailment in our January 8th announcement. Of Alcoa’s share of related cash outlays, approximately $80 million are expected to be spent in 2024 and approximately $35 million in 2025. Our JV partner, Alumina Limited will cover the remaining 40% of those costs or approximately $65 million. 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 first quarter. In the Alumina segment, we expect approximately $15 million unfavorable impacts related to higher maintenance costs and lower volume in Australia. In addition, we expect benefits from lower raw materials and energy costs 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 fourth quarter 2023 one-time items. Alumina costs and the Aluminum segment are expected to be unfavorable by $5 million. Additionally, we expect a one-time unfavorable impact of approximately $20 million, as the hedge programs for the Alumar smelter restart ended in December 2023.

Below EBITDA, note that fourth quarter other expenses included one-time positive impacts of $51 million, primarily foreign currency gains. Based on recent pricing, we expect first quarter 2024 operational tax expense to be negligible. Now, I will turn it back to Bill.

William Oplinger: Thanks, Molly. Now let’s discuss our markets. In Alumina, prices rallied at the end of the fourth 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 the balance to slight surplus market, depending on the speed of demand recovery during the year. On the supply side, there are few announced restarts or new projects and China has held to its 45 million ton capacity cap. In addition, hydro power shortages caused 1.2 million 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. 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 effect. 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 stocks 90% in December.

Because LME stocks are now predominantly Russian origin metal, which is unwanted by much of the world, subject to a 200% tariff in the U.S. and now legally prohibited in the U.K., it is difficult to have confidence that the LME exchange price matches the true physical price for non-Russian aluminum. In December, we joined others within European Aluminium to 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. 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 three categories: near-term actions; medium-term opportunities; and market improvement. Near-term actions are underway and have the most well-defined financial impacts. The largest area of impact is our $310 million 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. Thanks to our procurement team’s actions as well as pricing and inventory lags, roughly one-third of that amount is already fully realizable, and the remainder is conservatively estimated using current market pricing. Next, we are targeting $100 million benefit 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 first quarter of 2025. This overarching program includes general belt tightening, as well as efforts such as our workforce blueprint, in which we benchmark our operations internally and externally and set an aggressive best-in-class goals for each operation. 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 Massena; completing the Alumar smelter restart and realizing savings from the Kwinana curtailment. 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 Ciprian smelter and refinery. In late 2021, with the support of our employees, local communities and government, we started down a path that aimed at positioning the San Ciprian complex for long-term economic viability. To accomplish that goal, Alcoa invested hundreds of millions 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 million across the San Ciprian complex. Despite our collective efforts, we’ve clearly fallen far short of our goal of achieving economic viability for San Ciprian.

Looking-forward into 2024, the San Ciprian complex is expected to incur substantial losses, even with the recent improvements in energy markets and the aluminum 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 2024. 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. Medium-term opportunities and market improvements are the other two drivers of adjusted EBITDA improvement potential. 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 to 2023 prices reveals massive potential for EBITDA improvement, especially in the metals segment should prices increase.

We have demonstrated the ability to profit from favorable market conditions when they arise. Finally, we have not included here the potential we see from breakthrough R&D technologies, including ELYSIS, because they are longer-term. We do not anticipate significant capital expenditures for ELYSIS before the end of the decade, although the continued ramp-up of the R&D work will produce additional volume of ELYSIS metal for the partners, including Alcoa, to bring to-market. For the quarter, I’m very proud that we have remained true to our values, including improving on both safety and operational performance. 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 Ciprian complex in Spain. 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 starting to look like a positive turning point. With that, operator, what questions do we have in the queue?

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Q&A Session

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

Michael Dudas: Good evening, Bill, Molly, Jim.

William Oplinger: Hey, Mike.

Molly Beerman: Hey, Mike.

Michael Dudas: First, with San Ciprian. So Bill, as you’ve analyzed it from a different seat over the past few months and have 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?

William Oplinger: Yes. Thanks, Mike. Let me just give you some background and give you some thoughts around San Ciprian and the situation there. If you recall, in February 2023, we agreed to a phase restart of the smelter, which 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 third quarter of 2022 to try to mitigate the losses. The economics for both the smelter and the refinery remain today unfavorable. Now, we’ve committed — we are committed to fully — 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 get — 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. 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 is virtually no ability for San Ciprian 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 to know. 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 the — 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 will 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 at San Ciprian today.

Michael Dudas: That’s very helpful. Thank you, Bill. And my follow-up is, maybe more thoughts on your near-term actions on your EBITDA potential slide. And the $310 million of the raw materials and the views of the market, maybe in a sense that is those expectations relative to expectations of the current or future market for alumina-aluminum, how – you say a third is in the bag so far, but how confident to realize those others? And is that on a annualized basis, over the next two year basis? And is that a level where you could maybe see better performance in a more improved pricing market? I mean, [indiscernible] price market, rather.

Molly Beerman: Mike, thanks for the question. The raw materials improvement that we are showing, the $310 million 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 2023, 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 million in 2024, and that is an annual run rate. So we would expect that to continue forward based on today’s market view.

Michael Dudas: Thank you, Molly. Thank you, Bill.

William Oplinger: Thank you, Mike.

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

Carlos De Alba: Yes, thank you very much, Bill and Molly. So just also on the business — other business considerations, just to clarify, the $36 million reversal for IRA, is that you’re going to give back the $36 million in total or only a part of that given that the benefit of the IRA should be recurrent going forward?

Molly Beerman: Yes, Carlos, what you’re going to see there is a net of $27 million in the first quarter. So the $37 million we recognize the full year 2023 and then we’ll have about $10 million in each quarter going through 2024.

Carlos De Alba: Great. And then just on San Ciprian then, at this point, Bill, you are not going to restart the small capacity that was supposed to come up in the first quarter of 2024. Is that correct?