Q3 2019 Earnings Call
Good afternoon, and welcome to the Alcoa Corporation.
Third quarter 2019 earnings presentation and conference call.
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I would now like turn the conference over to James Swire, Vice President of Investor Relations.
Please go ahead.
Thank you Allison.
Good day everyone.
I'm joined today by ROI, Harvey Alcoa Corporation, President and Chief Executive Officer, and William Operator, Executive Vice President and Chief Financial Officer.
We will take your questions after comments by ROI and Bill.
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 FCC violence.
In addition.
We have included some non-GAAP financial measures in this presentation.
Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation.
And he referenced in our discussion today for EBITDA means adjusted EBITDA.
Also note on our financial statements effective January Onest 2019.
The company changed its accounting method for value in certain inventories for LIFO to average cost the effects of the change in accounting principle had been retrospectively applied to all prior periods presented.
Finally, as previously announced the earnings release and slide presentation are available on our website.
With that here's ROI.
Thank you, Jim and thanks, everyone for joining todays call.
In the third quarter, we continued to demonstrate strong operational performance and stability across our aluminum value chain.
We achieved new production records and bauxite alumina and aluminum segment remained profitable helped in part by lower aluminum prices.
Actual cost sell across the portfolio and we continued to drive the benefit of lower raw material cost to our bottom line.
This past quarter. We also continued to strengthen our company we finalized the divestiture of to aluminum plants in Spain announced a new operating model and reached new labor contracts.
Looking back since separation, we have relentlessly improved our portfolio.
And our balance sheet, we've returned to stability to our plants as evidenced by our production records and we've continued to revitalize safety.
It is because of that work that we've been able to weather these markets.
Today, we're building upon that progress, we're announcing a multiyear review alumina and aluminum capacity and non core asset sales to drive costs lower and to enable sustainable profitability.
We have a lot of ground to cover so let's get started with an overview of third quarter results.
We reported a net loss of $221 million or $1.19 cents per share. Those results include restructuring charges to divest to aluminum assets in Spain and to implement our new operating model.
Excluding special items, we reported an adjusted net loss of $82 million or 44 cents per share.
Adjusted EBITDA basis, excluding special items, we generated $388 million.
Lastly, we closed the quarter with $841 million at cash that's slightly higher than the previous period and given the persistently weak markets a notable achievement.
Turning to safety, we're disappointed that we experienced one serious injury in the third quarter at one of our refineries. The employee is now resting and recovery.
As always we continue to prioritize safety every day, and we're making progress on improving our safety programs for the benefit of everyone enters our locations.
Our focus on operational excellence enabled our current bauxite alumina operating portfolio to achieved the highest quarterly production since our launch as a separate company in 2016.
And our aluminum stagnant, we successfully divested the other less and latonya facilities in Spain, removing historically uncompetitive capacity from our portfolio.
Correct the restart of our Buck on core facility is underway and on schedule to be completed in the second quarter of 2020.
And in the United States, the United Steelworkers ratified a new for your labor contract that positions, our company and our employees for future success.
In our markets, we continue to project a global aluminum deficit for the year.
We're reducing our global aluminum demand estimate due to macroeconomic headwinds and trade tantrums.
Today's current market environment, aside I sustainability becomes a growing force aluminum has a long bright future and will review some of those trends.
Lastly, we are continuously demonstrated our commitment to create stronger how cool just last month, we announced a new operating model that will bring our management, even closer to our plants, creating a leaner company and saving costs and as I mentioned earlier today, we're announcing a multiyear capacity review.
And the potential asset sales.
Just kind of announcement is never easy because it will eventually affect some of our employees.
But we must continue to act come back the current market environment.
Strengthened alcoa for the long term will undertake the portfolio review and asset sales inline with our values and communicate outcomes as decisions are made.
With that I'll turn it over to Bill for a detailed review of our third quarter results.
Thanks, Roy let's start with the income statement revenues were down 5% sequentially as higher bauxite and alumina shipments were more than offset by lower realized prices for alumina and aluminum.
Revenues declined $823 million year on year again on lower alumina and aluminum prices in the quarter restructuring charges gross to net loss attributable to alcohol corporation of $221 million or $1.19 per share one 800 on on 185.6 million shares outstanding.
So that's why it was in the third quarter totaled $139 million after tax non controlling interest the key components this quarter, where the $134 million charge related to the disposition of our out of London locker room to smelters $37 million related to charges to implement the new operating model and second quarter lock.
Out and restart costs totaling $14 million, partially offset by favorable tax items related to timing differences.
Now, let's look at the income statement, excluding special items.
Our third quarter adjusted net loss, excluding special items was $82 million or 44 cents per share adjusted EBITDA, excluding special items was $388 million, our second quarter EBITDA margin was 15.1%.
Through the third quarter, the estimated full year operational tax rate rose to 62.9% on lower profits, particularly in Australia and Brazil.
The higher annual rate required true up of prior periods in the third quarter, adding $51 million to the expense or 28 cents per share and brought the operational rate for the quarter from 62.9% to 99.5%.
Closer at factors driving adjusted EBITDA.
This quarter improved operations and lower costs, partially offset the impact of lower alumina prices.
Our market prices, primarily for Illumina drove adjusted EBITDA down 100 million dollar sequentially, taking together all other impacts improved $33 million sequentially, partially offsetting the price impact.
A few key points higher sales volumes in aluminum and bauxite lower production costs across the portfolio and improve raw material costs, primarily petroleum coconut caustic where the main operational positives.
Lower Brazilian hydro power prices and lower value added premiums, partially offset some of those operational gains.
Now, let's move to the segment.
In the segments bauxite, adjusted EBITDA improved $22 million, primarily on lower production costs and higher volumes with a combined a record production volume for from our own tomorrow.
Alumina adjusted EBITDA declined $146 million on lower sales prices, partially offset by improvement in virtually every area, most notably in higher sales volume and lower production costs. We saw record third quarter production volumes at our Umar and pin Jara and in the segment as a whole.
The aluminum segment, adjusted EBITDA improved $40 million sequentially on lower aluminum costs.
Non segment impacts net it to negative $12 million improving $17 million sequentially.
Intersegment eliminations were favorable 25 million dollarss and adjust the intercompany March and remaining inventory.
Went up prices dropped in the quarter, releasing profit held in inventory or partially offset by lower costs and higher inventory increasing the profit held in inventory.
Turning to the balance sheet.
We ended the third quarter with cash of $841 million up $7 million sequentially in the quarter, we made $37 million and payments related to the Spanish smelter divestitures and $12 million on the A.B. I restart.
He's working capital improved one day to 30 days as receivables declined on lower prices.
Our proportional adjusted net debt remained at $3.4 billion and includes our net pension and OPEB liability of $2.3 billion.
Every year end, we re measure our net pension and OPEB liability taking into account full year 2019 asset returns.
And year end discount rate.
As of September Thirtyth 2019 interest rates had declined substantially since our 2018 year end Remeasurement. However, asset returns year to date have been approximately 14% and if remeasurement had occurred at quarter end greater than expected asset returns with partially offset lower discount rates.
Of course, our actual results will depend on asset returns for the full year discount rates effective at year end and other factors.
Turning to our full year outlook [noise].
Our full year outlook remains mostly unchanged from last quarter's outlook, what the following adjustments, we expect transformation EBITDA ought to be approximately negative $5 million, we expect other corporate to be $5 million better $115 million instead of $120 million.
Our full year operational tax rate is expected to be up slightly to approximately 65% and to catch up the year to date tax rate, we expect approximately $15 million tax expense. In addition to the amount calculated using the full year right.
For cash related items, given current market conditions capital expenditures are expected to be $10 million lower with return seeking capital at 110 million and sustaining capital remaining at 290 million, we expect environmental and arrow payments to be approximately $110 million.
In the appendix as we have done the last few quarters. We also list additional considerations for the following quarter in this case, the fourth quarter, which provides sequential EBITDA benefits totaling approximately 60 million to $65 million.
They include bauxite adjusted EBITDA to be in line with the third quarter Reckitt record EBITDA.
$15 million to $20 million sequential benefit due to higher volumes and lower sequential maintenance and lower cost it costs in the Illumina segment.
In the aluminum segment, we expect approximately 45 million dollar benefit from lower aluminum costs compared to the third quarter other than alumina costs, we expect lower raw material costs to be completely offset by higher seasonal energy costs and lower European product premiums.
Let's turn it back to ROI. Thanks Bill.
As is our practice will now turn to a discussion regarding our markets.
In bauxite, we expect to the market to remain in surplus for the remainder of the year. China's inland refineries continued to show interest and using imported seaborne bauxite the country's key inland provinces have increased their consumption of these imports approximately four fold since 2018 input.
It's from Guinea, and Australia represent the dominant and reliable sources of imported bauxite into China, where the materialise stockpiles to mitigate the risk from an increasingly complex supply chain.
In alumina, we now expect a larger global surplus for 2019 in China smelter disruptions significantly reduced alumina demand.
Refinery curtailments due to economic factors only partially offset the result in higher alumina surplus.
In the World ex China refinery curtailments in the Caribbean were more than offset by tons that entered the market from expansions in restarts in the middle East and South America.
Finally.
In the aluminum market, we continue to project a full year deficit, albeit smaller than our prior projection due to weaker global demand, while a series of smelter disruptions in China helped to swing back countries balanced with deficit. It was not enough to offset lower demand growth in the rest of the world.
This year's trade tensions low trade volumes in the decline in growth in manufacturing activity have lowered our expectations for this year's global aluminum demand as such we estimate that global primary aluminum consumption, maybe flat and possibly contract year over year. In 2019. This is mostly driven by.
Week primary aluminum demand in the world ex China, where scrap use in Chinese imports have been rising well reduced manufacturing activity has started to translate into lower product order volumes.
We're also revising down our 2019 outlook for global aluminum production. This is mainly due to a series of Chinese curtailments didn't disruptive events and economic factors in that country, which has taken off approximately 600000 metric tons of production from prior full year estimates.
In summary.
Current economic conditions continue to pose real challenges still before I discuss a longer term and brighter outlook for aluminum demand growth.
I'd like to review, how we're positioning our company to manage through this downturn, so where even better prepared for the future.
One of the hallmarks of our company is our focus on relentless continuous improvement.
We've listed on the left side of this slide just the selection of recent accomplishments and I believe in each of these have contributed to a stronger more competitive alcoa I'm, particularly proud to see the improvement in safety and stability of our operations as well as the step change and improvement in our balance sheet, but that is not an ending point.
Rather we've continued to move forward just last month, we announced a new operating model. In addition to creating a more operator centric organization. It's also expect it to result in annual savings of $60 million in operating costs beginning in the second quarter of 2020.
The model, which goes into effect on November Onest will create a leaner organization by eliminating the company's business unit structure consolidating sales procurement and other commercial capabilities at an enterprise level and streamlining alcoa's executive team.
Rather than consolidated business units, our team will be focusing on each of our operating locations sharpening. Each plant is focused on production and improve competitiveness will also creating space to innovate and improve and by consolidating our commercial functions, we expect to drive improvements across our products and supply chain.
To ensure that our operational chain of command can efficiently connect with each of our global operations, our chief operating officer will be relocating to our existing office in the Netherlands in a time zone that will permit more frequent communications and a central hub to rapidly share best practices. This will enable our global locations.
To be better connected via our COO at this time no other members of our executive team plan to relocate.
Looking ahead over the next 12 to 18 months will review non core asset sales, which we can estimate.
Produced between 500 million to $1 billion in net proceeds far outweigh a corresponding reduction in adjusted EBITDA estimated at approximately $50 million to $100 million.
Now I'd like to take a longer term view of the global aluminum industry.
One thing is clear despite current market dynamics in a world, where sustainability and responsibility responsibly source materials are growing force Alcoa is positioned to succeed.
Let's begin the fundamentals demand for aluminum products has doubled since 2000 and is expected to continue to grow at an approximately 3% rate annually over the next 10 years.
Aluminum has well documented beneficial properties, such as Recyclability low density strength for mobility and durability due to its being anti corrosive.
Those properties had made aluminum ideal in automotive applications for vehicles that are lighter more fuel efficient and more environmentally friendly due to reduced greenhouse gas emissions to the complete lifecycle.
Importantly, aluminums, if an infinite recyclability reduces energy and resource consumption. It also enables safer and more energy efficient buildings airplanes, and sustainable food and beverage packaging.
It does consumers become more environmentally conscious they're demanding sustainable product solutions and as an industry, we're well positioned to capitalize on this secular trend.
Looking at Alcoa now, we're already recognized leader in sustainability.
This year assets across our bauxite alumina and aluminum portfolio were certified by the aluminum stewardship initiative. We've also been listed on the Dow Jones sustainability indices since our inception and last month, we were named the aluminum industry leader on this index.
In bauxite, our World Class mine rehabilitation and best in class methods of mining in areas of high bio diversity have earned us the credibility and trust to mine bauxite in two of the most protected areas in the planet the Brazilian Amazon rain forest and the job for us in Western Australia our approach.
Keeps us in good standing with governments and communities to ensure access to bauxite reserves and enhance our long term license to operate.
In alumina our portfolio is already the lowest per tonne emitter of carbon dioxide among global aluminum producers.
Our alumina refinery lead in energy efficiency, and we continue developing better storage practices for bauxite residue well also pursuing alternative uses for the material.
In aluminum. We're also one of the lowest per ton emitters of carbon dioxide among global producers and currently approximately 70% of our metal is produced with renewable energy and our products help our customers to meet their sustainability targets such as through our sustain a line of products made with either.
Lower low carbon emissions or from recycled aluminum and our certifications from the aluminum stewardship initiative provide important differentiation in the marketplace over.
Over the years, we have built solid reputation for sustainability, we believe that this reputation as a sustainable responsible producer a bauxite alumina and aluminum can meaningfully differentiate us from our global players and enable us to succeed in an evolving world that is becoming even.
More focused on sustainability.
The first we must take actions to strengthen our company further given the current market conditions.
To become a profitable and more competitive company today, we're announcing a multiyear review of our asset portfolio. The review will consider opportunities for significant improvement potential curtailments closures or divestitures.
You can see from this slide we anticipate making the most meaningful changes in our alumina and aluminum portfolios and alumina, we're placing approximately 4 million metric tons of capacity under review and in aluminum about 1.5 million metric tons of capacity under review.
Undertaking this review, we would look to achieve advantages across each segment.
In bauxite, our goal is to maintain our first quarter, how cost position, where the world's the second largest bauxite miner with access to bauxite deposits with mining rights that extend in most cases more than 20 years I'm proud of our mining practices and our approach to engagement with local communities and careful protection.
On the environment.
We also have a strong first quarter, while cost position in aluminum, where the biggest alumina refinery with the largest long position outside of China, and we would look to maintain our position as the lowest per tonne emitter of carbon dioxide among aluminum producers.
In aluminum our goal is to become the lowest per ton emitter of carbon dioxide among all global aluminum producers with up to 85% of our smelting portfolio powered by renewable energy. We currently hold a second works out position on the cost curve and we will drive to be a first.
Foretell producer once actions, resulting from the capacity review are complete.
As you can see at the end of the portfolio transformation not only will Alcoa had maintained or improved its competitiveness in each segment, but we also expect to be the lowest per ton emitter of carbon dioxide among all global aluminum companies in both smelting and refining.
Since we launched as a company in 2016, we have used our strategic priorities as our guided making decisions to strengthen our company.
At this time and in light of the steps that we've announced today to continue that journey, it's appropriate to refresh our strategic priorities to better define our destination.
First as we reduce complexity will reiterate our focus on being low cost to compete in the global cyclical commodity industry.
Second as we drive returns will remain margin focused we intend to improve our commercial capabilities invest in targeted growth opportunities and focus on increasing margins across the value chain.
And lastly to reflect alcoa's, increasing focus on becoming a stronger more sustainable company weve updated to strengthen the balance sheet to advance sustainably.
This priority captures both financial and sustainability improvements.
We plan continued work to strengthen the balance sheet transformed the portfolio and leverage our industry, leading environmental and social standards to deliver value for alcoa's stockholders.
As we look to the future. We believed long term outlook for aluminum demand remains strong a range of products will require more aluminum, but with an increased focus on materials that are sustainably and responsibly produced.
Alcoa has always been a sustainability leader in producing lightweight infinitely recyclable aluminum with our portfolio shift over the next few years, we'll expand our sustainability advantage and further position ourselves to capture changing views in the marketplace to win in the global aluminum market.
With that Bill and I would be happy to take your questions. Allison could you. Please remind us if the instructions and we'll get started.
Certainly and thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your touched 10 sad.
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When called upon please limit yourself to two questions.
At this time, we will pause for a moment to assemble a roster.
And our first question will come from David Gagliano of Dan miles capital. Please go ahead.
Okay. Thanks for taking my question first I was wondering if you could just provide a little more detail on which are the wanted a half million tons and smelting and 4 million tons refining capacity is under review what assets.
Sure, Dave and all hit that one first the fact is that were being a bit careful about about revealing exactly what plant that targets I'm part of that is to give us optionality and flexibility as we work through our portfolio and part of it and simply because we need to be working with these with with our play.
Yes, as they continue to operate so I think as you look at the cost curve you can make some conclusions, but the fact is our work lies ahead of us and we're not announcing the specific plans.
Okay, and then just my follow up I guess it has to be a cheap our follow up here.
The you know in terms of from a timing perspective, its five year review and then I'll, let somebody else ask about which noncore assets, you're under either under consideration, but the of the of the smelting and refining capacity that's under your five year process what no.
As part of the question is can you give a sense of the you know the front end loaded backend loaded fibers, a long time number one number two what part b or whatever.
I didn't respond to yeah I think.
What some may say is this is a you know a company that I mean, this is almost 50% of your smelting capacity and.
You know not a lot of people are projecting that kind of degradation in global aluminum demand. So obviously you know the implication that it's a market share loss from a global perspective, how do you respond to that that type of comment.
Yeah. So let me let me try to get those first and then bill can chime in so from a timing perspective, we need to look at this as a holistic program. The fact is it will be dependent upon on how the market and the type of cash flows that we're seeing based upon that market, but those market conditions I would also argue that someone.
Those changes remember part of business to try and make a step change in some of our cost structure is at existing plants. Some of those take some time in order to renegotiate or to fundamentally change how were approaching smelting or refining in that in that case. So the reason we put it into a five year timeline is.
Quite simply because we will be adapting both to the cash flows coming in into how we can afford to make those changes and most importantly about how about in that market cycle changes and perhaps permits us to do divestitures, rather than closures or curtailments. So a lot of a lot of a lot of different decision.
And parameters that need to be taken into consideration.
And on your comment about 50% of smelting capacity and market share I think when we look at our company and we think about our our viability as we go forward and our ability to move through the market cycles. Both at the top end at the bottom, but the fact is is that rather than looking at market share we need to be.
Okay.
On having one or the most competitive set up aluminum smelters that we possibly can so once we become once we become more competitive once we have a more consistent returns at all parts of the cycle that then gives us a better screen springboard from which to grow.
So I understand your point, however, and as I tried to make clear in my presentation. We are we are very enthusiastic about the future of that market, but we're also very determined to make sure that we approach that market in a very competitive low cost position.
I think it's right answer I'd only only only thing I would add as far as market share. A you know we're really looking at it from driving value for shareholders driving value for our owner. So we don't necessarily look at it as a market share position, we're looking at it as a value Max maximization for owners.
Thanks, Okay. That's helpful. Thank you.
Our next question will come from Paretosh Misra outbound Burns. Please go ahead.
Hi, Thanks, maybe I'll ask Standalone app on your non core asset sale.
Could you at energy assets and saw the downstream assets that you have I could those be a potential assets for sale.
Yeah, very similar to the ROI to answer around which assets that were looking at underperformer portfolio review, we're not being specific about the noncore asset sales.
But you know in the past we've talked about a number of assets that a that could be considered a in that and they'll they'll be looked at so.
Not not getting specific about which assets our for sale at this point, we'll let you know as we progress.
Okay Fair enough and my follow up or you know the new regulations for a marine fuel. The IMO 2020 are set to be active pretty soon I do you see that making any difference in your business either in terms of cost or maybe any availability offering at the raw materials that you can you.
Yeah. So we are a big shipper as you can imagine because we have global operations, we spend around $400 million annually on shipping costs.
And we would envision that IMO 2020 could add up to 10% on our shipping costs.
So that would be due to the fact that oh fuel prices would be going up I'm. So we were looking at maybe 10% increase a year over year due to I'm not 2020.
Yeah, I can I can just add quickly to that to parity cautious as you think about that I think.
It's also important to remember that that will also be occurring to our competitors and so when you think about the movement of materials across the Ocean and you think about how how that cost curve looks in a in a china versus rest of the world simply because they consume so much bauxite that's been shipped overseas that I am always going to have a dip.
For an impact on each of those companies. So yes, it's a cost increase but also think through the relative cost increase on some of our competitors as well yeah. Good point.
Great. Thanks, guys.
Our next question.
And our next question will come from Curt Woodworth.
Got it Suisse. Please go ahead.
Thanks, Good evening Ryan Bill.
Hey, Carter.
Yeah first question, it's just on oncology cost down on on raw materials Bill I think it was a year and have for two years ago. When you know the massive rally in caustic and some other commodities I think you guided to a number of like 500 million of raw material inflation and we've seen obviously, a pretty massive reversal and most all of these raw materials. So I was wondering.
You know if you could give some you know general guidance I'm kind of where raw materials look for you today, you know spot heading into next year versus where you are this year.
Yeah. So let me they put it a little bit into perspective, we had gone into 2018 seeing a big increase in raw materials, and we were projecting approximately 400 million dollar increase in raw materials.
For 2018 during the course 2018, we probably saw 350 million of raw material increased 18 over 17 19, a over 18 were seeing a decline in raw material prices and that's translating into about a third of that costs are improving so.
Ah roughly a $130 million year over year of improved raw material costs up between 19 and 18, it's coming in a couple of area. So first of all caustic prices are down fairly sharply.
Coke prices are also down and so going into 2020, we should continue to see the flow through a benefit of those raw material costs, because as you know caustic takes us anywhere between six to nine months to flow through our income statement. So we should see continued benefit the one that's been a little bit stubbornly high school.
So far fetched era smelting business, but that also has come down also so we're starting to see the improvement 19 persons 18, and should see more of that in 20.
Okay. That's helpful. And then in terms of restructuring you quantified the 60 million and congrats on you know that that's obviously a tough decisions that when you look at.
I guess I'd add an asset level for Bakken core and Spain near the shut down there and then restarting second quarter can you give us a sense for.
I guess, the EBITDA drag of those assets this year relative to.
I went back and course up or near an all production kind of what that Delta could look like 20 versus 19.
Yeah, we haven't provided Bakken core just because of the sensitivity around some of the numbers. What we have said is that back in core should be breakeven.
In the second quarter from an EBITDA perspective, so that is a significant benefit over where we were a in 18 my recollection around Spain is that Spain was losing approximately $70 million to $80 million both on a pre tax in a post tax basis because they are.
Earnings there that the tax they're fully reserved so it's a pre tax unopposed tax basis 70 $80 million that we would have been able to eliminate a by selling those two facilities.
Okay got it. Thank you very much really appreciate it.
That's correct.
And our next question will come from Alex Hacking Citi. Please go ahead.
Yes, thanks for the questions I just wanted to follow up on the portfolio review and I'm I'm not trying to Offtakes question, a different way, but that when you talk about say than say the aluminum portfolio 15 million tons of capacity you have 4 million will come under review you currently have that 50 and your current.
We have two and a half that's curtailed so would I be correct in assuming that thought to an off will come under review plus an additional 1.5 to get for the 4 million.
Thinking about that right yeah, Alex that's exactly the map you should be doing.
And that goes that goes for both refining and smelting. So the review numbers that we've provided our for both operating capacity and currently curtailed capacity so all of that capacity.
I would be I would be under review.
Okay. Thanks, and then I guess following up a bit on the non core.
Asset sales.
Why.
I guess why now.
The global economy is quite weak.
It doesn't seem like the best time to necessarily be selling assets and why do you believe that you can get 10 times EBITDA on these assets. Thanks.
I think if you don't.
Uh Huh, we haven't said, which assets are our for sale yet I think once the clarity comes around a the asset sort of that will be for sale, you'll see that a it's probably not a bad time to sell some of the assets that we're selling so I will give you more clarity wants a once we've made to discern once we've made the announcement on a on what.
We'll be sold.
There are other assets in the portfolio that don't generate a lot of a lot of EBITDA that could potentially be sold a that contributes that 500 million $2 billion and in proceeds.
Okay. Thanks.
So.
Our next question will come from Matthew Korn of Goldman Sachs. Please go ahead.
Hi, Good evening folks first for me could you give a little bit more detail on the 60 million reduction Opex. How this really comes from looks to be a consolidation in the management hierarchy and then how conservative do you consider do pad that target to be.
So let me let me hit the first one of them, maybe bill can pick conservatism so that.
Essentially what we're doing is collapsing out the business units structure and so when you think about where those reductions will take place and I think its was part of the announcement that my executive team is now smaller sniff to seven members.
But in addition, essentially you are grouping together operations grouping together commercial having that essentially centrally managed to a certain extent, but also permitting more freedom for the plant the actually chart their own courses. So it it very much happens at that middle layer of management and.
In the end of course will depend as you redeploy talent different parts of the organization.
And let me address the numbers. The number you know yesterday's is a conservative its a realistic number it's a number that we have line of sight to achieve I want to put it in perspective I'm you know, we spend approximately $75 million a quarter on SGN today that would tell you that on an annual basis that today.
300 million Dollarss, if that's DNA. This 60 million isn't all going to come out of SNA, but the preponderance of it will come out of SJ I'd put it in perspective, we spend a roughly 3% of revenue on us today and if you were to look at our major competitors.
You know that that's a pretty competitive number already so for us to take out an additional $60 million is or isn't aggressive number but we have line of sight be able to get there and let me just make one one more point just to add on to Bill's comments. The changes that we're making an operating model of course. It is a very welcome to have actually.
Savings and to see that that improvement year over year. It makes us more competitive, but even more importantly, I think it will give us a better connection to our markets and in better connection to our plants us as the executive team and the manages this corporation it helps us to be closer to better understand what's happening in the trends in our market.
And I truly believe it does not only will it be more efficient, but it will be a better form of operating.
Got it. So this is not just something subtracted, but you see it is additive to the ops as well.
Absolutely.
Second I I was interested I wanted a little bit more what does this new advanced sustainably priority mean in practice as it is it more emphasis of the position that you laid out here at the bottom of the slide 17 and talking about your your practice is currently are very sustainable or very friendly environmentally worthy changing these practices it.
We'll be investing in new things new measures, you're going to set goals on carbon per ton you know really what does this change for a relative to how your operating today.
Yeah. So let me let me put that in two directions first and foremost I think you're hitting a hitting it right, but the fact is that.
I believe we are fundamentally ahead of most of our competitors in many of these areas you think about the connection that we have with our communities, where we choose to operate in our mining practices in the reclamation rehabilitation activities not just as an example, I think we're ahead and so it is it is of course up to us to me.
Maintain that a that ability to be ahead on but it doesn't necessarily mean, we have to change our practices. It means we have to analyze adapt and see and see what will be coming next.
However, in some other areas and I would highlight a the change that we're projecting inside of our aluminum portfolio and some other areas. There will be change that's necessary in order to capture that that first spot when we compare ourselves to our aluminum competitors and so that to us it makes financial sense, because it makes us more competitive it also makes.
Financial sense, because we believe the market will be moving to a place where there is more value placed in a in those products that are lowest in carbon and that our responsibly sourced all the way from bauxite to aluminum and then into aluminum. So there's some actions that need to be taken there. So so when you look at our.
Our our strategic priorities the way I would look at that is that those are the guardrails that we use in order to make decisions. So when we look at the the management changes as an example, the the new operating model, we look at that and said does it make a simpler does it reduce complexity does it give us the ability to invest more can we read.
Invest those dollars is there a way for us to deploy those and then now I'm not only will be thinking about balance sheet, which for us is incredibly important. So that's what makes me so happy to have seen the improvement, but also we'll think about how bad then impacts our sustainability footprint what are the if we choose to invest in a plant what does the entered.
As you source, how do we then make sure that when we invest in a in a greenfield nine or in a brownfield expansion of one of our mind, how do we make sure that the practices that will be following will help to support that that that existing potential that we haven't sustainability already.
Got it thanks, very much and good luck would have been gas.
Our next question will come from Timna Tanners of Bank of America. Please go ahead.
Hey, good evening guys.
They didn't they came up.
So regarding the Port finally, do you have a couple of part question hopefully short answers and I want to go on and on but I'm in the past it popped over the years about I'll call. It kind of continuously reviewing all its assets.
And I appreciate you being a lower cost producer.
This initiative different from what you've already been doing first of all second.
In some cases I know that you've just re upped sunpower agreements and I think Messina and actually in a few others. So can you break those or is that why you'd have a five year review and on the third question is just along the same lines. How do we think about exit costs or permanent closure cost when you do this review.
Well, let me let me get started in that and then and then bill can jump into the third to help support. So first of all I think its right to look at this is a continuation of the real progress that we've been making.
Year after year I mean, you look at the changes that we've made the Spanish Spanish soda Burbs are Great example of a place that it would have it would've fallen inside this tape same type of asset review I think the fundamental difference is that while we are giving ourselves five years and again that will be market dependent and how we choose to deploy that what were.
Trying to help you understand Tim is the destination and did the and is the target of where we choose to go and why we think that will make a successful in our industry. So I think that isn't a that's the fundamental difference on on the power agreements and I'll start this when the fact is depending on.
The facility. That's in question, we structure those power agreements to ensure to give us the flexibility to the react to the market. So for four facilities that are very low in the cost curve, we would take more risks on long term duration and on ability to exit those power contracts than we would've facility that has higher on the cost curve to be very.
Frank.
Okay.
Yeah, Let me let me just jump in.
I wanted to it we should make it clear that this asset review is really a three pronged review it's in Peru.
Close or sell a review right. So there are three options for these facilities and if we can figure out how to significantly improve them we will.
But we will also look at closure and potential sale options. So you listed a couple of facilities Messina and Wenatchee Mussina does have a longer term power agreement that was a that was a signed a couple of years back when actually is apparently curtailed and went actually.
As a isn't a curtailed state a at this point as far as exit Cosco, we've not been clear about exit costs, because it's a it's a five year program and the and the focus is on those three things improve closed or sell so we don't have precise exit cost at this point because we are.
We're going to do it in a way that tries to maximize value for where the owners between those three options for each of the facilities.
Okay. Thanks to that want to hear it indulging in a high level question is I know you give us helpful thoughts on the outlook for the aluminum market and I know you said, there's a scenario where things are flat to down into 2020 and I was just wondering if you could give us a little sensitivity as you see a broad brush strokes. If we do get you know trade agreement late or if we.
We get I had a more comprehensive trade agreement, how do you think that could affect.
Aluminum demand.
Balances going forward.
Yeah, I think timna, how how I would answer that is look at the development of our markets over the course of this year and also look at it last year.
I guess the way that I look at it is that yes. There is a reduction and you can see this in automotive and what's happening in both the U.S. and Europe , particularly well you also see similar similar similar types of downturns are or weakness is that's happening in China, but these things when you book earlier in the year or.
Versus last year, there's no fundamental consumer difference that's driving those that's driving those reduced numbers, it's really about the uncertainty right now sitting in the economy and whether that's trade war focus store or macro economy is beyond my ability to explain clearly.
But so when we think about how about market will recover to be quite honest to me I don't see any reason why wouldn't recovered to a point, where we were earlier this year, where last year, because the underlying characteristics of aluminum demand and help to drive that change and I would add onto that.
And that I also believe that aluminum when you look at the lifecycle not the lifecycle content of of carbon as one specific component of sustainability and the infant Recyclability I think you'll continue to see that there will be substitution of materials in new ways to use aluminum on for consumers that are becoming more.
More and more green conscious.
Okay fair enough. Thanks, very much thanks Dana.
Our next question will come from Lucas pipes of B. Riley FBR. Please go ahead.
Hey, good afternoon, everyone.
Next question is on the 60 million of corporate savings and 37 million and a restructuring costs, how should that those be allocated across the segments.
Oh, we haven't broken it down by segment you refer to it as corporate it's not corporate it is actually in this segment I'm. There's a piece of it that will affect to each one of the three a foreigner business units or three segments and a piece of it that one type corporate.
That's that's helpful. Thank you and then back to the point of after reviewing sorry to harp on this just.
Well, it's looking for a better understanding of what brought this review about at this point in time is it a reaction to the market conditions is it more broad upon by.
You are evolving position on the global cost curve kind of what what what cost us. Thank you [noise].
Yeah, Lucas and I think the answer is going to be all of the above. The fact is that since launch we've spent a lot of time thinking about our markets and thinking about our portfolio. So it's been a and I think this gets back to Tim's question, It's Ben Ben if a continuous review.
Why we make this particular particular announcement right now is because we've just finished up a an in depth study and involved our board of directors that has taken a look at the long term compartment of our markets on how we position ourselves today and going forward and thus have spent real time thinking about how.
We succeed in win in today's and Tomorrow's environment and so of course, there's a bias to think about what we see in the market today, but more importantly, we also wanted to think about what are the keys to success for the long term and those get back to our strategic priorities, it's about having a a simple a simple why essential.
That being as as little complexity as possible and therefore being low cost it's about ensuring that we're investing in those facilities that we can drive returns and again you need to look at that and say hey, how my using my operational and capital dollars and then finally, how do we make sure we have the balance sheet, we need to succeed and.
And at the same time also take into consideration the changes in those markets and the fact that aluminum will be more and more more and more tied back to how that aluminum was actually produced from a sustainability standpoint. So for us. It's just it's just the right time, so to start to give our investors.
To give our analysts a better forward looking view about what we will look like in five years.
That's that's very helpful. Thank you then just to follow up on the sustainability point and driving value, which I, assuming kind of higher willingness to pay on your customers side for.
Sustainably sourced aluminum aluminum.
What sort of.
Things are we see or initiatives are we seeing on the ground today that chose to that there is this willingness in fact are you.
Having undertakings to strategic initiatives to drive that value capture what's what's happening on the ground and you can point to value capture on the sustainability from thank you.
Yeah. So salukis I think you know I won't spend a lot of prime on this but I think when you look across how how companies are approaching sustainability, how consumers are approaching sustainability I think you see that there is a shift in how people think about that now that shift is general in nature and doesn't necessarily drive.
Financials at the other end, so let's talk about financials.
We have a series of aluminum products right now as a very particular example that are that are either focused on being low carbon or being made from a certain amount of recyclable material. Those are products that are that have been able to command a premium in the marketplace. But this is just a nascent a nascent market.
It's going to take time for that develop to to develop I also think that you're seeing more and more customers that are interested in in the responsibility.
In the responsibility of how Youre bauxite was mind, how your aluminum was reform how your your aluminum was produced and so the fact is we're seeing more and more of a move to four in for customers to ask those questions.
And from our standpoint, whether it is a discount for for for producers that have higher carbon content or a premium for producers that can deliver the lowest carbon aluminum on the planet on both is a is how we choose to win.
I would also argued that when you look at our elephants technology and again. This is a research and development program that we're working on in conjunction with Rio Tinto here in Pittsburgh enough in Canada.
The fact is dot dot dot work because at some point. The fact that it is the only process that can that can generate oxygen rather than carbon dioxide in the smelting process is fundamentally different.
So that is a again, that's going to take time to prove it out but it is another step to be able to capture what will be a niche a niche market today, but perhaps a in much more global market tomorrow.
Very much appreciate that and best of luck. Thank you thank look like.
Our next question will come from Chris Terry of Deutsche Bank. Please go ahead.
Oh, Hi, billing right a couple of questions should may I'm sort of just just on the cash cash flow during the quarter peaceful true what was included in Threeq to fourq related to the Spanish snow because when you talked about the 115.
To comment just wondering what was actually included in three key on the cash side. Thanks.
I think on the cash side it was approximately $37 million associated with Spain, and then there was an additional $12 million associated with the A.B. I restart. So you know when I look at the cash balance in the third quarter.
Order I was pleased that given the tough market environment that we're in.
That we were able to maintain the cash balance at a at $841 million.
While we were able to make those payments associated with Spain, and abiotic a in the quarter. So it was a it was a good performance from cash perspective in my view.
Okay. Okay. Thanks, and then just opportunities going forward on on the cash from a total working capital pointed.
I'm working capital fell about a day in the in the quarter and Ah, We typically see working capital a decrease in the fourth quarter. So there's still probably some opportunities for working capital declines in the fourth quarter I get get back to again, you know the fact that we were able to.
Generate a cash from ops ER positive free cash flow keep our cash balance at the level and actually grow it ever so slightly in these tough market environments is a really good result for us so.
Pretty pleased with the with the outcome, Chris Let me add one qualitative comment on on builds as well from working capital standpoint.
As part of the new operating model, bringing commercial together and then having commercial and operations joined essentially through a a detailed focus on supply chain optimization, I think will help us to be smarter and the way that we manage inflowing and outflowing inventories and ensure that across our three products rather than looking at them as.
Individual businesses that we look at it as a combined in very competitive Alcoa. So I won't give you a target right now, but I think the fact is we expect to be able to collect real opportunities and working capital as well and probably looking more towards 2020, rather than immediately in 2019.
And our next question today will come from John Tumazos hub, John Tumazos very independent research. Please go ahead.
Thank you.
Hey, John John Thank you if someone who maybe it's not thinking green just looks at what you're doing and says Gee.
It's a quarter as a refining and almost half of the smelting Alcoa must think the.
Carbon taxes, and other costs of doing business will rise more than metal prices or.
One way or another we've had 10 years of economic growth were due for a recession.
We have a trade war somehow your bearish about things.
Oh.
How should we explain that react to it or.
React to investors just shrugs shoulders, so as.
You are reevaluating over a quarter as a business.
Yeah, John Let me, let me answer that one and you know our industry very very well you've been with us for a long time. The fact is is when we look at the cost structure of each of our plants in that alumina and aluminum portfolio. I think you don't need you don't need to believe in green to recognize.
The fact that there needs to be action in order to ensure that we are in that first quartile of the cost curve. So it and depending on how that market swings in this gets back to Bill's comments about how we choose to improve our operations or or curtail or divest depending on how that market market.
Swings it gives us more opportunities to divest rather than to have to close or more opportunities to improve or to fix. These operations. So I think a you know I don't think you need to believe in green to recognize the fact that these portfolio changes makes alcoa stronger I think the green the change in green and sustainable.
The message is something that that is a natural addition, and is in fact, the way it that alcoa succeeds into the future because we do the right thing and because at some point the market will recognize that there is value in that responsibility.
I would also had a you know John we've done a lot of starting over the last six months of our markets and Oh. It suggest to you that green it a greener world a sustainable world and higher metal prices are not necessarily mutually exclusive in fact, a a greater worlds may lead to better metal pricing just because of the natural.
UCO friendliness of aluminum and a in the sustainability of aluminum. So as we look forward a greener world is probably a better world for aluminum producers.
And our last question today, we will come from Justin Bergner, Oh Gee Research. Please go ahead.
Oh, good afternoon ROI good afternoon Bill.
Justin.
First question on the noncore asset sales can I infer that there's nothing material plan within your bauxite.
Mining alumina refining or aluminum smelting operations in that 500 million 2 billion.
You know a again tests and we're not going to go into the details that specific assets and Ah you know we will make it clear once we have line of sight to specific asset sales.
Okay, and you still own most of those 30000 acres by Rockdale right that could be if we we do it 31000 acres and a it is a it is for sale. It's been for sale now for a few years and so if you want to good ranch in Texas, You know give me Paul just [laughter].
That's funny.
Lastly on the flat rolled operations I mean, I know you had higher expectations for the profitability then you've sort of exhibited year to date could you maybe just give us a sense as to whats constrain profitability and sort of what are realistic targets.
Going forward.
Yeah, Let me hit the first part in Bill can talk about targets.
You know the fact is it simply hasn't operated as efficiently as we wanted it to and I won't belabor the points about what needs to be done in order to change it but we put together a team and made some very specific changes that I believe will drive that will drive that plant to better profitability.
I'd also pointed to the fact that it now has the smelter embedded in it so there is.
<unk> is a piece of those changes that as that happens because of metal pricing and how that embedded margin might be.
And so I think a I think they the current view of a of that.
Group of assets is more like a $55 million to $65 million of EBITDA in 2019, and as Roy said that in part has been negatively impacted by the fact that the smelter is included in that and ER with lower metal prices has hurt the profitability of that group assets.
Okay. Thank you for taking my questions.
Justin.
And this will conclude our question and answer session. At this time I'd like to turn the conference back over to ROI Harvey for any closing remarks.
Thank you Allison and thanks again to everyone for your time today.
We have acted continuously to make alcoa stronger and more profitable company. The announcements. We've made today achieved two things that position us for sustainable profitability and they grow our existing sustainability advantage. There was a widening gap between companies with strong sustainability commitments and those without and our AG.
Actions provide a path towards meaningful differentiation that is both profitable and responsible we believe that aluminum will continue to be the material choice for consumers positioning the most responsible aluminum companies for a long and bright future. Thank.
Thank you for your time, and we look forward to sharing our fourth quarter results in January .
Back to you Allison and thanks.
Thank you.
The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.