Q2 2020 Alcoa Corp Earnings Call
[music].
So do you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one all your Touchtone phone. What's your your question. Please press Star then too. Please note that this event is being recorded I would now like to turn the conference over to James Dwyer Vice President.
<unk> Investor Relations. Please go ahead Sir.
Thank you and good day everyone.
I'm joined today by ROI, Harvey Alcoa Corporation, President and Chief Executive Officer.
<unk> Executive Vice President and Chief Financial Officer.
Take your questions after comments by boy and Bill.
As a reminder, today's discussion will contain forward looking statements relating to future prevention expectations that are subject to various assumptions and caveats factors that may cause the companys actual results could differ materially from these statements are included in today's presentation and in our FCC filings.
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 todays presentation.
Any reference in our discussion today to EBITDA means adjusted EBITDA.
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 to everyone for joining our call today.
As we previewed last week alcoa's progressing on each of our operational and strategic programs acting would resolve and urgency to deliver safe and healthy operations improved stability and a stronger future. This company.
And this quarter's strong outcome as a result of the dedication and focus to each of our teams as we face the challenges at the cobot 19 pandemic into resulting economic downturn.
We may not be able to control the macroeconomics factors that drive the price of our products. We are aggressively executing on the items within our control.
And well uncertainty continues.
I'm confident that our team is what innovate and improve to adopt a future situations.
Before we get into the details, though I want to begin as I always do safety, our most important metric and vital for continued success.
We had no serious injuries this quarter and we continue to manage the risks from the endemic and to maintain healthy safe and stable operations.
Of course, one principle of our safety program is that we must never rest comfortable especially with the risks posed by this virus in the increase in case counts and some jurisdictions, where we have important operations such as the United States in Brazil. We are confident however that we've put the right measures in place to protect our people and we have well developed reaction.
Plans, if the situation should worsen.
To put these latest financial result in context, it's important to remember that we have established three simple strategic priorities for this company to reduce complexity drive returns and advance sustainably and they have helped us navigate this period from a position a relative strength.
Late last year before the pandemic started its global spread we laid out a plan to improve our cost structure, where the new operating model, which is now fully implemented and started to review of our global asset portfolio, including our existing production capacity and noncore assets.
This plan will improve our portfolio wouldn't allow us to remain competitive in a fast evolving marketplace and to succeed in the world that is becoming more focused on sustainably and responsibly produced products.
It offers us a road map to follow as we manage the impacts of the current market, while not losing sight of our longer term strategy.
Next I would like to highlight the resilience and strength of our operations teams as evidenced by a number of achievements in the second quarter.
Overall, our production is up year over year in all three segments bauxite, we realized a production record for the first happened a year ended alumina recorded the quarterly record average daily production.
In our aluminum segment, our become core restart continues to advance we are progressing with safe and orderly curtailment of the Intalco smelter in Washington State.
We reached an agreement with the workers Union for severance to help mitigate the impact of this decision, which was necessitated by significant structural issues that made the facility uncompetitive.
Meanwhile, we are currently in the midst of a 30 day consultation with the works Council that represents employees at the sounds are pretty on aluminum facility in Spain.
No fenwal decisions will be made until we complete this negotiation process.
During this pandemic, we've worked across our company to help create a safe healthy and productive environment in our operations. This team work in conjunction with our supply chain commercial and financial team helped to drive our cash balance to $965 million two good operating performance in smart managed.
Most of our working capital.
Also last week, we issued $750 million senior notes with a coupon of 5.5% a rate lower than any of our other debt.
This will provide even greater liquidity during these uncertain times and will allow greater flexibility to potentially accelerate our portfolio review.
Clearly, making sure that noncore asset sales are executed at the right time, and the right price deliver maximum value.
Put simply through actions taken across our company to generate cash and by tapping the debt markets had a favorable time, we're in a stronger position to do what we said complete our portfolio review as soon as possible over the next several years generate cash from noncore assets and reduce net debt.
Before we begin a deeper discussion of markets I'd like to provide some additional information on our response to the cobot 19 Anda.
As I mentioned earlier all of Alcoa's global locations continue to operate stable it whether it be a bauxite mine alumina refinery aluminum smelter Rolling Mill importantly, we have been able to maintain the stability because of our focus on the health and safety of our workforce.
Globally, approximately 2% of our employees and contractors had been affected by the virus.
Thankfully most have already recovered and returned to work.
The fact that we've had a relatively low number of cases, among our workforce is a testament to the measures we implemented early and of course, what we continue to do.
For example, we're one of the first companies to restrict traveled for our global employees.
February has the global risk started becoming more apparent we triggered our global crisis response team and implemented our crisis management plan. My early March we had deployed a comprehensive approach to protect health, while simultaneously conducting supplying and staffing contingency planning.
On the left handed this slide you will see a chart that gives a glimpse of the very robust approach we viewed to manage through this pandemic.
First we have a global crisis management plan that provides a solid framework God decision, making and protect our company that's something like that in this case with a health prevention response plan developed with best practices and input from our own medical experts and external sources. We also have business continuity plans for.
Our locations. They are designed to ensure continued critical supply <unk> logistics and operational needs.
This feeds into our global regional and location crisis response teams and allows them to anticipate potential risks and ensure response plans are utilized whenever appropriate.
Playbooks on how to effectively operate based on increasing levels of stress.
We consider leading indicators such as the number of employees, who are self warranty and isolating infection rates in the local community and inventory levels of critical raw materials lagging indicators include items, such as cases of krona virus infections among location employee absenteeism government directives and other factors.
From all of this we assign a response loveland deploy additional inappropriate actions as of today, we have locations that have reached double to during this current health crisis, but due to our effective response, none have progressed implementation of all level three actions.
Well this is a simplified depiction of our cobot 19 response. The teams actions to date have made a real difference and they've helped us to avoid any significant impact to our operations for our supply chain.
But this crisis continues and we will not let up our guard as we remain focused on protecting the health and safety of our workforce.
Importantly throughout this pandemic. We've also responded to assist the communities, where we operate both to the Alcoa Foundation and our company's resources I'm proud of the work that is taking place on a humanitarian level at the further illustrates our alcoa values in action.
Next we'll discuss our three segments in how they performed this quarter.
As noted earlier, our change in operating model and selective strategic priorities had been designed and executed with the NIE to strengthen our operational performance across all segments and despite the disruption of a pandemic. We have improved operational stability. This year that is driving increased output and improved productivity. This is.
And achieved through strong collaboration across our operations and centralized resources, leveraging our technological expertise information systems and the creativity of alcoans to accelerate our productivity programs.
Our centers of excellence, our supporting sustainable cost saving improvements that can be leveraged globally key focus areas include reducing raw materials usage and energy consumption, improving maintenance strategies to increase availability and rigorous cost control.
In bauxite production is improving year on year. The segment had a first half production record in our Juruti mine in Brazil had a quarterly shipment record.
For the alumina segment, we are seeing improved stability at the refineries when compared to 2019 in fact, the segment had a record rate per metric tons per day in the quarter. Meanwhile, both the wager up refinery in Western Australia, and the volume our refinery at some weeks, Brazil set first half production records.
In our aluminum segment improved operational stability is helping to drive increased output contributing to the increases the ongoing restarted the hbr smelter Rendac encore, which is now approximately 90% complete and should be finished in the third quarter.
From a commercial perspective, it's in our aluminum segment, we discussed last quarter the year over year decrease in value added aluminum products at the result of the economic impact the and then which includes specifics foundry alloys are shapes, such as Rod billet thin slab this volume shifted to commodity grade ingot.
Well value added product sales are expected to remain relatively flat in the third quarter you continued to be depressed from the prior year. We are seeing some improvement in foundry alloy orders as automotive production in Europe, and North America resumed after widespread production outages due to the pandemic.
Finally on this slide we continue to monitor the discussions regarding the United States to treat to tariffs on aluminum we believed that tariffs do not address the fundamental challenge at the industry, which has been unfairly subsidized aluminum overcapacity in China.
Now, let's review our markets aluminum demand is starting to show some signs of recovery based on monthly data for some key and you sectors, particularly in China.
For example, Chinese passenger vehicle production was up more than 11% in both May and June when compared with the same lumps last year. The most recent data on construction activities in China are also better than the monthly levels in may of 2019.
Aluminum scrap shortages also supported a temporary boost in primary aluminum consumption in China in Q2.
The shortages had been a result of China's import quota system for scrap as well as earlier qubic related disruptions to scrap supply chains.
The scrap shortages in the increases in aluminum end markets like automotive and construction all contribute to the recovery in Chinese primary aluminum demand, which has also been supported by general improvement in domestic macroeconomic outlook and government stimulus announcement.
Outside of China high level manufacturing it aluminum and market data also showed signs of improvement North America and Europe in May and June as automotive plants got back to work and manufacturing orders continue to recover.
From a supply perspective, there had been some curtailments globally, but not enough to starch the rise of aluminum inventories in the first two quarters of 2020.
In the first half of this year smelters cut a little more than 1 million tons of annualized capacity in China of which 400000 tons has restarted, leaving 700000 tons of annualized capacity still down.
Outside of China, we have seen cuts of 600000 tons of annualized capacity, including Intalco.
Total 100000 tons have restarted in Brazil, leaving 500000 tons of net cuts.
With a recovery in demand the pace of inventory build slowed in the second quarter relative to the first quarter and inventories decreased substantially in China with close to a million ton drawdown in total stocks given the strong demand rebound.
Given these dynamics Chinese aluminum prices have led the charge during the second quarter and the price recovery. Although we noted across the board improvement relative April's lows higher Chinese aluminum prices have brought significant levels of aluminum smelter in production back into cash positive territory in the month in June only 1% of <unk>.
Finally, smelters with cash negative.
While prices have increased from April lows costs have also increased over the last two months, keeping 15% that ex China smelting capacity and global refining capacity in cash negative territory in June.
Of course, the market remains fluid it will be important to monitor supply demand inventories in pricing dynamics as we discussed in our last earnings call the ability to deliver aluminum into inventory provide a needed outlet in times of oversupply, but can quickly become a long term drag without any reaction.
The basic demand fundamentals.
Looking forward and the second half 2020, and beyond what is clear that the ultimate market balances in industry fundamentals will be determined by a few factors.
First and foremost how well the spread of Cobot 19 is managed around the world. If the number of buyers cases increases substantially in a prolonged first where potential second wave a new rounded strict locked down orders would likely cause the current demand recovery to reverse course.
Second assuming cobot 19 remained under control the speed of economic recovery will be influenced by levels of government stimulus and the resumption of activity after lockdowns or other restrictions. This quarter, we saw signs of demand recovery well on its way in China and turning the corner outside of China in data across Aluminums broad.
Net of end use markets, which includes transportation construction packaging machinery, electrical and consumer durables.
Third how industry players independently react to the pricing and demand environment. That's it shifts and changes in to result in build a release of global inventories.
Next before Bill discusses our second quarter numbers I want to very quickly recap the programs, we laid out both before and during this current crisis to improve our color.
I'm pleased to that we started deploying many of these actions early they help us navigate through uncertain times and contribute to a stronger future.
The top we announced in October T. strategic actions that included a new operating model a plan to generate additional cash from the sale of noncore assets and a review of our production portfolio focused on 4 million metric tons of global refining capacity and 1.5 million metric tons of smelting capacity as noted earlier, we are making progress.
Next the middle of this chart in February of this year before the Corona virus became a global pandemic, we announced plans to drive meaner, working capital and implement annual productivity improvement.
There too we are making strong progress and finally, we continue to manage cash to mitigate the economic impacts associated with cobot 19.
All of these initiatives are expected to totaled $900 million in cash actions this year and consistent projects and ideas of all sizes. What is certain is that alcoans around the world are focused on the right thing help safety and the stabilization and improved productivity of this company.
So with that I'll pass it to bill.
Thanks, Ryan that's Monday, we closed on at $750 million, five and 1% coupon senior notes issue.
Given our strong liquidity position I want to provide additional color regarding the rationale behind the new debt issue.
This debt issuance provides increased financial flexibility to meet the short term challenges of these uncertain times, while we continue to hold to our capital allocation framework using excess cash to achieve our midterm proportional and that that target.
Turn cash to shareholders transform the portfolio or investing value, creating growth projects now, let's look at the quarter.
Second quarter, 2020 revenue was down $233 million sequentially on lower aluminum and alumina prices.
Net loss attributable to alcohol corporation, with $197 million or $1.60 cents per share.
Adjusted net loss was $4 million or two cents per share.
Special items in a quarter included interim tax impacts due to changing assumption, a full year profitability and the resulting tax rate.
Intalco curtailment and second core restart costs.
Also on an adjusted basis, the second quarter operational tax rate was 178.3% primarily due to a true up of the prior quarter tax rate to the new full year tax rate.
Adjusted EBITDA, excluding special items was $185 million generating EBITDA margin of 8.6%.
That's a close certain factors driving adjusted EBITDA.
Adjusted EBITDA, excluding special items declined $136 million, then the second quarter market price impacts totaled negative $215 million and included lower metal prices lower aluminum prices and a weaker U.S. dollar due to a partial reversal last quarter's favorable revaluation impact.
All other factors net it's a positive $79 million and reflects strong operating results.
Our production costs favorable raw material and energy costs and improved volumes were partially offset by weaker sales mix and Buck alumina and aluminum other improvements of $25 million included lower SGN egg costs due to implementing the new operating model April intersegment eliminations and reduced transformation spending.
In the operating segment bauxite, EBITDA improved $11 million sequentially on higher shipments.
And alumina lower alumina index pricing and unfavorable contract mix combined with unfavorable currency revaluation to drive the change on the operating side lower raw material and energy costs and lower production costs were favorable partial offsets.
And the aluminum segment lower realized metal prices and value added product sales were partially offset by substantially improved production costs as well as lower input costs, including alumina smelter energy and car.
EBITDA impact outside the segment improved $54 million led by $38 million sequential improvement in intersegment eliminations, primarily due to lower alumina prices lower other corporate costs because of reduced overhead and transformation spending control.
Moving to cash.
Overall cash performance was very strong we generated $288 million in cash from operations 211 million and free cash flow and ended the quarter with 965 million on the balance sheet up $136 million from first quarter at $131 million from a year ago quarter.
Quick review of our major cash sources and uses for the first half of 2020.
Our total cash sources were $830 million, consisting of 506 million in adjusted EBITDA hundred 99 million and that proceeds from asset sale and $125 million from working capital reduction.
Largest outflows of cash were $168 million and capital expenditures $123 million tax payments, including $47 million and payments of prior income tax and net distributions to our joint venture minority interest partner of $90 million now, let's take a look at other financial metrics.
First half 2020 free cash flow less noncontrolling interest distribution improved to negative $60 million at second quarter free cash flow less and see I distributions was positive $152 million.
One reason for the cash flow improvement was favorable working capital sequential reductions of $275 million. This improvement was even better than expected and our days working capital decreased seven days sequentially and year over year to 24 days.
Another improvement with capital spending control I'll first half 2020 capital expenditures totaled $168 million second quarter, Capex was $14 million lower than the first quarter.
Our key balance sheet metrics proportional adjusted net debt remained at $3.3 billion Remeasurement of all pension and OPEB assets and liabilities typically occurs at year end.
However, due to planned changes related to the Intalco curtailment, approximately 40% of our pension liabilities was re measured as of April Thirtyth 2020, and what's the key driver increasing the net liability at $100 million as of June Thirtyth.
Year to date, our pension asset returns have been approximately zero percent and discount rates are down roughly 35 basis points for pension and 60 basis points for out that.
If asset returns are at targets in second half of the year discount rates and all other factors do not change we would expect the pension and OPEB net liability to increase approximately $200 million from the current $2.4 billion.
Turning to our 900 million dollar cash actions program.
We're continuing to make solid progress on our announced a cash action.
In key strategic actions, we're pleased to see the run rate savings from the new operating model reflected in lower second quarter, S. DNA in R&D costs, which declined $19 million compared to the first quarter.
Non core asset sale program continues and walk over 19 has impacted some sales activities were holding to our timeline and cash proceeds targets.
In Talcott curtailment is underway and we expect to have the whole curtailment completed and the third quarter.
San Sip grants smelter formal consultation process is also underway and we expect the outcome to be determined within the next several weeks.
On the 2020 programs, we have made excellent progress on working capital reduction and as you saw in our strong second quarter cash flow are already substantially ahead, our full year target.
Production cost and operations efficiency program as gathering steam being led by volume based cost reduction.
On Cobot 19 response, our capital expenditure and environmental an arrow spending targets are on track, we're deferring U.S. pension funding at the 2021 its plan and other cost reductions or deferrals are also on target.
Hey, Let's review our full year outlook for 2020.
Our full year 2020 outlook has only modest adjustments and it's our best current estimate notwithstanding be evolving code at 19 situation on earnings below the EBITDA line, we expect depreciation expense to improved to $665 million due to foreign currency rates as well our capital spending weeks.
Interest expense to increase so approximately $150 million as a result of our new debt issuance, we're not providing an outlook for the full year operational tax rate. However, based on recent prices, we expect operational tax expense in the third quarter to be approximately $150 million.
Our cash flow impacts we are adjusting slightly our capital expenditures estimate increasing return seeking capital $10 million to 35 million as we wind down those projects and reducing sustaining capital spending 10 million to $340 million, our prior year and current year cash taxes remain the same as in our previous outlook.
But do not include the deposit $74 million or $44 million Alcoa share expected to be made with the Australian tax office to test a recent tax assessment, we expect no further cash impacts from that assessment until it is ultimately resolved.
In the appendix, we also lift additional consideration expected for the second quarter. They include in the bauxite segment. Adjusted EBITDA is expected to be $5 million lower primarily due to lower export volume in the alumina segment, we are expecting higher energy costs in Australia to be partially offset by higher sales volume and lower.
Call netting to $15 million lower sequential EBITDA impact.
And the aluminum segment lower alumina costs are estimated to produce a sequential benefit of $10 million.
Aside from potential metal price or currency impacts other factors are expected to be flat sequentially. So with that let me turn it back to ROI.
In closing I want to step back and reinforce the reason behind all of this after a brief look at our destination.
During this pandemic, we had a relatively strong second quarter in despite the current situation. We are not losing focus on our strategy where objective.
While many things are difficult to predict today I'll call. It is unwavering in its commitment for continued improvement.
Our three strategic priorities provide a roadmap future we reduce complexity. So we can be low cost. We drive returns were focused on improved margins across our products and we intend to advance sustainably in all aspects of our business economically and environmentally and socially.
As we advance we are driving for actions to strengthen our balance sheet create a cycle proof portfolio of assets and build upon our strong reputation for environmental and social excellence, including demonstrating the value, we bring to our communities and our commitment to a diverse and inclusive workplace.
In terms of our portfolio, we will continue to drive values to our extensive high quality bauxite reserves sustainable mining practices in our low cost portfolio of efficient mind, we will maintain our position as the lowest per tonne carbon producer in alumina and protect our first quarter how cost position in this segment.
With our portfolio review, we will improve the cost structure of our aluminum business and become the lowest per tonne carbon producer and smelting.
The goal is to drive alcoa to be sustainable both financially and environmentally.
There are three major points I want to leave you with.
First we will continue to prioritize the health and safety of our global workforce. This commitment allowed us to deliver solid performance in the quarter. Despite the challenges the world faces from Cobot 19.
Second we remain committed to continuous improvement regardless of the circumstances were already improving their costs boosting our output driving gains in working capital and implementing sustainable year over year improvements in productivity. We're also focused on continued management of cash evidenced by our balance of 965 million dollar.
Others would be ended the quarter.
Third we will act smartly and use our increased liquidity navigate through these times, what we strengthen our portfolio of core assets and improve our balance sheet in accordance with our capital allocation framework.
Well, the pandemic has changed and watched and how the world currently works and interact we remain steadfast in our commitment.
Thank you.
Bill and I will welcome your questions now.
Operator.
Thank you well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too when called upon please limit yourself to two questions and our first question will come from Chris Terry.
With Deutsche Bank. Please go ahead.
Oh, ROI and bill Thanks for taking my question. So if you will first question I had is just on the on the tax ruling the IDR I'm just just talk to some more details on on on the actual announcement from lost last week and also whether you could talk about.
Yes, the principal and interest part of that in the context of potentially using the interest as a tax shield later on.
And my second question is is it was around the guidance for the Oak saw it was obviously quite a look different to what you provided at the end of one Q and that's primarily driven by the Foinaven should just just wondered if you could comment on that as well exactly some of that some of the moving parts and how that was so strong in the in the in the quarter.
Thanks.
Right and you want to address the a preliminary comments on the on the tax early.
Yeah, I can I wasn't sure if it was headed in the financial direction or more and I'll take it I'll take it from the financial directional.
Perfect. So from a from a willing standpoint, you know I think its a.
It stretches pretty far back in time, and so that is what is driving both the principal calculation at an interest calculation I'll leave that build to talk through the important thing here, Chris and I. Appreciate the question is that we are at the start of a process by which we plan to we plan to very much.
Jack to how they've reached this conclusion.
It's very basic we simply don't agree with their assessment, we don't agree with the way that they've chosen to calculate it nor that there has been any any under payment of taxes over these years. So that is this will be a process that takes place over the next period of time and we fully believe that we can we can reach poverty conclusion.
Yes.
Sure and let me have you when it comes down the finance Yeah, Let me just address some of the numbers correct.
And these are these are U.S. dollar a numbers not all the dollar numbers, but obviously the assessment of the interest as an RV dollar, but we converted it to U.S. dollar or the purposes of our disclosure.
The the 100% basis would be 147 million Dollarss err on the assessment.
$288 million to on the tax both of those are the 100% and they numbers.
Then translate those two alcoa share a that would be $88 million attacks and $293 million debentures.
As part of the process, we will she chlor alkali, Australia will be paying a part of the tax upfront.
So they will be making a payment of $74 million than the third quarter of which I'll call a share as $44 million just.
Just to reiterate rois points, we will be disputing, thus a sneak brave and they won't be disputing less it could take years to resolve and we will dispute it all the way through so.
We don't feel that their position as correctly, therefore, we will dispute.
And I'll address your second item as far as bauxite boss I did turned out better than what we had signal.
They are bauxite was really driven by two things one is intercompany shipments were better and that's because the refineries are running well and then secondly, our minority partnerships did a little bit better in the quarter than what we had anticipated specifically CBG. So overall the results of the bauxite.
Segment were pretty sharp.
Okay. Thanks, So just for the interest so they for <unk> is <unk>.
Let me start using that as a tax deduction, then can you know that sorry for settled.
I should have the trust that Chris I I meant to address it yeah. The ER.
Tax is deductible immediately upon the assessment. So we will start using that a $700 million Ozzy as the tax deduction.
And at that and that will ultimately drive a better tax position or in the near term for for Ed.
And then she is successful in over a timing issue then have to reverse so you see a good example, shouldn't even before.
But I settlement on.
Exactly okay. Another piece the other piece that I should have probably no that is that while we have not accrued anything or this or simply because we think we're more likely than not to prevail. So no accrual was taken in the second quarter a associated with the what this assessment.
So what's the sort of calling on of events here when should we expect the next update and how does it how does it look we play out have any more steps are there in that process.
There is a number of steps in the process I would tell you at this point, Chris we are evaluating what are the alternatives are and well keep you updated as we go through the process.
Okay. Thanks Gus.
Thanks, Chris.
Our next question will come from Alex hacking <unk> with Citi. Please go ahead.
Yeah. Thanks, ROI on Bell I guess, just a follow up on Christmas.
A question there on the taxes not sure if you can answer that but.
You know that the high court in Australia ruled against BHP Billiton I'm on kind of a transfer pricing issue related to their operations in Singapore, a year or two ago. I mean does that does that create a precedent or you guys can also.
Kinda take this all the way to the high court in Australia, if necessary. Thanks.
Yeah, Alex Let me, let me answer that one so you know I think each each case has its.
Its own set a specific circumstances and so for for this particular case I think it has been very different set of it's very different market first of all and number two our approach to transfer pricing has been very transparent through time, and so with aluminum pricing has developed through time those.
And so we'll be continuing to discuss that would be with the tax authorities and we believe that we will continue to each to go to those various stages and levels.
Bill had alluded to and that if if a it continues finding against US then we will take it all the way through to.
So to the Supreme Court. So I think it's there are no precedence that would say that this is a this is the pre decided case.
Okay. Thanks, very much and then a second question.
If I may maybe you could comment on on your Brazilian operations.
And how you're finding a you know the covance situation down there obviously, there's a lot of headlines about some of the challenges Brazil has been facing.
But you know looking at your results and seems like you know you're able to keep Europe operations going so maybe some comments that would be helpful. Thanks.
Yeah, Alex and so we have we have multiple operations and in various parts of Brazil selection I can give a little color on each of them, but the much of its going to be the same.
Particularly in northern Brazil, where we have some lease joint venture the are you more plant.
And then we have the Judah T. bauxite mine and then the did joint venture that were not operating on but partners in the M.R. and mine just across the Amazon River across all of those locations. We are being extremely careful and extremely washable, because we have had particularly in the northern in the northern.
Northern cities, some some community spread of the virus and so we have put into place a bunch of reaction plans in order to make sure that we are carefully keeping people you people social socially distance in our operations and that is the same for our contractor that is for our employees. We also have a.
Isms in place for we changed ship structures. So that we can isolate as much as possible to keep people to keep people not necessarily mingling and therefore that gives us a lot of strength inside of inside of how we're running the operations. You know I I'd also say is that there has been a there's been a lot of effort put in.
To place to make sure that we're keeping our our workforce up to date on whats happening I'm talking about what they need to do as far as circuit, preventing this happening inside of their homes. Although obviously, we don't we don't reach into their homes and I would say that we have done a very good job.
The of keeping our our folk at work and actually coming coming and doing they're doing their jobs and doing it safely. So from an absenteeism perspective, we're continuing to see improvement we did sort of at the very beginning of the outbreaks in Brazil start see those numbers creep up some and that really includes both people go.
Our quarantine because they might have been exposed or people that have or other similar symptoms that could either be the flu or cobot and so we've been very careful to make sure that people could could choose not to come to work and could isolate themselves and that then keeps it from spreading inside of our work from population and we're now seeing those absenteeism rates come down.
And so from injured or de standpoint of San Luis standpoint, both both that have some some spread of cobot inside of the communities I'd say that the actual currents inside of our plants themselves.
Is significantly more modest than what we're seeing out in the communities and we have seen no impacts to production and in the end I think as a joint effort of all of our operators all of our mechanics, and our management. So I'm very proud of the team.
Thanks, that's very helpful. Good luck.
Thanks, Alex.
Operator, do we have another question.
[noise], yes, Sir our next question will come from Carlos de Alba with Morgan Stanley. Please go ahead.
Oh, Thank you very much good afternoon, ROI meal Hum.
Well so [laughter].
So.
The the progress year today on working capital has been quite impressive I Wonder you can comment a little bit more what exactly you were able to due to a achieved these results and also you mentioned I think I heard that you are ahead of your target or do you expect to keep these gains that they have been able to to a two to book.
Oh, great or do you spend maybe to get back some of that you'd progressive and then my second question.
<unk> would be yeah in terms of what Doug maybe really what have you heard in terms of that potential.
We spend and Oh, Oh section to tell you to size on <unk> yeah.
Melting imports into the U.S. pursuant to you already mentioned that you don't think that that should be a apply but have you heard any feedback.
Your conversations with people here in Washington.
Let me let me take the first one Carla Oh, we did have really good performance in working capital in the second quarter and there's really three things that we're driving that performance.
And I'll start with a to me what's the what's probably the most important the new operating model that we launched at the towards the end of last year has allowed us to look at working capital from and to add.
And it starts with purchasing a broad materials and that ends with receivables from from customers. They gotta commercial organization that is looking at the entirety of working capital throughout the entire system.
And that has allowed us to aggressively pursued a all three levers working capital payment terms.
Both on the customer and the supplier side and a and inventory.
So that that would I would say the item number one the other two items, which are our so our lot large impacts also it's clearly with the decline in prices raw material prices finished goods pricing.
That has had a favorable impact on working capital and then thirdly, the shift away from value added product, which is on a margin perspective, not a positive impact for us, but on a cash flow impact the shift to selling commodity great detail on it.
It means that we get cash quicker.
So all three of those things added up to the impact in the second quarter as far as whether we will do better in the second half that first item that I addressed or the new operating model will continue to work so looking for improvements even from the low levels of working capital.
But I would say if anything they may be working against higher prices. If we continue to see that strategy pricing being higher they will have to work to offset some of the higher prices. So we're sticking with our target 75 to 100 million Dollarss of days working capital Uh Huh.
Proof that even though we are at this point.
Beat that through the first half, but we'll be offsetting some of these better market conditions.
And ROI alternative to 32 question over to you.
Absolutely and a in Carlos I'd love to be able to give you a definitive answer on where we're gonna land from the 232 perspective, but the fact is is that we continue to hear very different.
Very different a potential outcomes on a on a daily or even hourly basis, no stepping back and looking at what alcoa's position has been through this what we would really like to do is ensure that we are driving to fix the root problem, which is very much. The fact that we have been and overcapacity.
Particularly in China and that Subsidization goes all the way through the value chain is simply overwhelming from a from the Chinese perspective, when so stepping back and trying to address the underlying issues at play as what we have been what we had been trying to message and drive over the course of these years really as a Standalone company.
Probably before that we've been trying to be as clear as possible with and this is through the aluminum association or through the Canadian aluminum Association more directly with with the administration and anybody who listen I'm not really the solution here is to try and work on those on those deeper problems.
And that the and out from a Canadian tariff standpoint, because of the close relationship and in many ways symbiotic relationship between products produced in Canada, and the U.S. and the customers across the U.S. and in Canada of course is simply doesn't make sense that there is a tariff that that tariff that 10% history reinstated.
So again I don't I don't think I have a I wouldnt hazard, a prediction that where we land nor what the rules about potential reinstatement could look like because I've also heard a lot of different different potential options there, but in the end alcoa's going to keep talking about what is the underlying issues at stake.
And looking for ways to address those across multiple jurisdictions.
Alright, Thank you very much.
As Karla files.
Our next question will come from Lucas pipes with B. Riley FBR. Please go ahead.
Hey, good afternoon, everybody in the job managing.
Argument and.
Meeting.
So successfully nice last week.
Hi.
Well, it's a little surprised just kind of given what happened during the second quarter.
In two of your segments for Q3.
If you're guiding to kind of modestly lower performing today I wonder just their degree of conservatism.
Pricing likes what did you possible to give a little bit more color as to what exactly is going on there kind of.
Thank you.
Yes, so Lucas.
In the bauxite segment, we had a really really strong second quarter.
So we're projecting to be $5 million.
Lower we do have an outage at a there's your teeth facility in the third quarter that will limit some volumes. So that's really probably the biggest impact between the second and third quarter.
In the alumina segment, one of the big changes that it's going on is that you know that we have that a number of years ago, we entered into long term gas contract.
Got it.
Hi, Western Australia refiner.
Those gas contracts are coming to a and in effect in the third quarter. Those gas contracts will have a negative impact on the segment approximately a third quarter versus second quarter local about $40 million I'm. So when we're projecting the alumina segment to be $15 million.
Lower and I should say that $15 million lower exclusive of any changes and aluminum pricing.
But and that's how we always are we always protected the <unk>. The segment itself is projecting pretty strong performance because it. It is looking to at least partially offset some of those higher a cast cost that we'll be rolling through a in the third quarter. So that's what's going on and.
As to upstream segment.
Very helpful. I. Appreciate that then for my second question I wanted to touch on something that you had discussed previously and.
Now during the quarter, there's been an announcement that.
Let me just launched green aluminum contracts and have you had qualification discussions and you think just could help open up the premium.
Quicker than <unk>.
Yeah, Lucas and it's it's a good question.
The fact is I think it's it's very much still under development I would argue that the way that they're approaching it is sensible we haven't been we've been trying to think through how best we can make this whole green aluminum market really start to move into a premium environment because as you.
Well no I'm, we're one of the lowest carbon carbon per ton producers of aluminum and are quickly running towards.
Ensuring that we are the lowest whether that's through portfolio change or through the Ellis. This work that we're doing as well.
So I think the Ela me work is going is going well and from a qualification standpoint, I think and it depends upon the specific plant in question, but I would argue that that we're very well positioned for that I'm I'd also say that the A.S. side on the aluminum stewardship initiative is also something that is very much.
Much on our radars as a way to look through the entire value chain, which from our perspective, because we go from bauxite.
Alumina onto aluminum, we think is quite important and because it can help drive the right behavior across all lines of the about value change and I would add one more piece to it as well, which is also the fact that I think the the market and whether it's being driven by consumers or more and more driven by investors and not just your.
Ian investors, but also U.S. investors now I think there is a quicker drive to demand more accountability.
And that and in the end I still can't say when will that green premium developed and when will when will lower carbon emitters had the benefit of about lower carbon story, but I would argue that we're seeing the stars align very quickly to make that more and more important which just reiterate the fact that our shift in our.
Portfolio in our are very much targeting both financial but also very much environmental sustainability is Ah helps to get us into right place to benefit from that most.
Hey, I appreciate all the color and continued.
Thank you.
Thanks Lucas.
Again, if you have a question. Please press Star then one our next question will come from John to make those what John Tomatoes, very independent research. Please go ahead.
Thank you you correctly predicted three months ago that high value products.
[noise] markets would weaken.
[noise] looking at your end.
I didn't get realization in the corridor.
It looks like it's a penny less.
The nine Sun Midwest premium plus.
And get kind of I mean anger lagged one month.
So is it fair to say that there were no high value added shapes like Extrusions.
No high value.
Purity, and I was and maybe some kind of.
Transportation cost settlement or provisional pricing or something I get a penny adjustment.
Uh huh.
I don't think so John you know there there was.
The value that shipments in the second quarter were substantially less than what was in the first quarter. The value that shipments went a you know what we had historically talked about the percent of value add from.
The.
To be approximately 50, 55% and that with being 20% reduction in value add.
So we continued to show value add in the second quarter and the and are actually thing I think its Roy alluded to in his comment a little bit of strength and things like about foundry markets going into the third quarter I would suggest to you that when you're doing that math that the lags art completely.
Perfect and you can't necessarily take 15 day lag on the LNG and make it quite that precise but there was still value add products being sold in the second quarter, just not isn't nearly as high first quarter.
Hi, Ken.
Thanks, John.
And for last question today will come from parity cost Misra, what's been Baird. Please go ahead.
Hi, Bill Android or just a question on demand in order book. So can you talk about what are some of the science.
Awesome demand improvement that you're seeing in your aluminum business and how's the order activity a progression in the last few months App.
Putting what you've seen in early July.
Of course is whats maybe difficult for this time of year.
Yeah and parents, Josh I'm Gonna have to give you. Some some qualitative answers to that because I think we're just starting to see the some of that positive positive movement and so let me let me first make one quick copy out that as we think about our primary markets and input in much of.
Them as in the U.S. I'm of course in Canada, but then also into Europe and so it's in both of those places where you're starting to see a lot of reopening activities, you're seeing a lot of where we're seeing a lot of our customers come back and start to demand and there are some that were still buying through the downturn.
And some of that is contractual Ciena book was actual demand and so you have to work your way through some some built up inventories inside of our customers, but as we look where we stand right now in July I'd argue that both in Europe, and North America, we really are starting to see those quote unquote green shoots and we are starting to see.
He that our customers are talking about more and more ability to to reconnect with there would bear automotive customers with the different different parts of the end the aluminum end markets I happened to be there I'm. The one concern that I would voices is that I think everybody is still waiting to see how how.
From U.S. perspective, how from bear in various European countries, how we can make sure that we're taking the right steps. So that we don't see a relapse or don't see some or some additional closures because of because of cobot, becoming more serious in different parts of the world, but right. Now you know I think what we look to in India.
Optimistic cases to see as much about and economy Roaring back much like it did in China. You know, we're still a few months behind that but it would be nice to see the both north American Europe can follow a similar type of curve to what we've seen really in China up till now I'm very pleased with how China has gotten gotten all of that.
It's a it's sort of aluminum end use markets very much in line and very much productive again.
Hi, Thanks, Thanks for the details called that's very useful and maybe a follow up on a how Ah how does the oil price impact you like what are the man.
Main been derivatives that you buy and I are you a already benefiting from that or is that more of that it did come in that second half of this year.
So paretosh, we actually provide a sensitivity to oil price Andy or in the appendix I'm looking to see what charted thought but there's a a breakdown of our cost structure and and how oil prices impact our results on a core.
Really basis.
Great. Thanks, guys.
Next our touch.
This concludes our question and answer session I would like to turn the conference back over to really Harvey for any closing remarks. Please go ahead.
Yeah. Thank you operator.
Thank everyone for their time and attention today I know, there's a lot going on so I really do appreciate the fact that you take you take a few minutes to look through what's happening and Alcoa.
I'm very pleased with Alcoa's response in these unprecedented times I'm proud to be part of a moment, where we can truly accelerate some of our actions in where we can have very very clear side that focus on where we're going in what we need to do in order to make this company more competitive but also more sustainable for the.
Long term so I look forward to explain in more and talk more about how about in the developed at our next earnings session and we'd like to ask everybody be please be safe healthy and we'll talk too soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.