Q3 2020 Alcoa Corp Earnings Call

Good afternoon, and welcome to the Alcoa Corporation third quarter 2020 earning presentation and conference call. All participants will be in listen-only mode. Should you need assistance, please signal a specialist by pressing the star key followed by zero after today's presentation. We will be an opportunity to ask questions to ask a question. You may press star than one on your touchtone phone. Who is your question, please press star than to please note. This event is being recorded. I would now like to turn the conference over to James Dwyer vice president of investor relations, please go ahead. Thank you. Have a good day everyone. I'm joined today by Roy Harvey Alcoa Corporation president and chief executive officer and William oplinger Executive Vice President and Chief Financial Officer long. It will take your questions after comments by Roy 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 SEC 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 today's presentation off any reference in our discussion today to Eve. It means adjusted David.

Finally as previously announced the earnings release and slide presentation are available on our website.

With that, here's Roy.

Thank you, Jim. And thanks to everyone for joining our call today despite what had been turbulent and unpredictable circumstances this quarter. I am proud to report that alcoa's performance has been struck a few examples of this quarter's accomplishments include increasing sales revenue underpinned by improving prices and solid production successful efforts to reduce our cost structure off and continued progress on a comprehensive set of measures that are improving our company for the long term.

Let me begin my discussion with our most important initiative safety.

I'm happy to report that we had no serious injuries in the quarter the priority we've placed on safety which includes the systems based approach to risk mitigation is fundamental the careful attention to details into potential risks, including clear mandates to seek help when necessary has worked to keep people safe during these uncertain times.

Getting safety right allows us to perform. Well in other aspects of our business.

What we continue to follow health-based protocols to mitigate the risks from the pandemic. Our teams are also staying focused on the everyday items that can create unsafe conditions. We recognize it depend emack can create distractions. So we are consistently communicating The Importance of Being laser focused on the tasks at hand in completing pre job briefing as an example to ensure. We have adequate safety controls in place before ever beginning work.

As far as the risks posed by the pandemic, we've had a relatively low number of cases across our company since the pandemic began in most who are diagnosed have now he's fully recovered and returned to work mean while we're not becoming overconfident as some countries experience a rise in cases are Global and Regional Crisis response teams remained active our locations are continuing to refine and update their preparedness and response plans to ensure that they are a fit-for-purpose as local or Regional conditions change.

Put simply the safety and well-being of our Global teams. Remain our top priority.

As we moved through our presentation today, you'll see that we continue to make progress on multiple fronts. We're doing what we said we would do to improve our company. Our strategic priorities have helped took us so we can succeed through all Market Cycles including in these uncertain and unexpected times. We entered this current period from a position of relative strength as we had a clear plan of action, and we're already implementing steps to improve Alcoa for the long term.

Turning to our results. We reported that a. Of 284 million dollars which was a 54% sequential Improvement. And we also increased our cash balance to more than one point seven dollars at the end of the third quarter as most will recall. We completed a bond issuance in July the proceeds increase our flexibility to meet short-term challenges while I continue to hold to our Capital allocation framework.

Our new operating model which took effect late last year is driving down costs and increasing efficiency and output again this quarter we set production records in the box and aluminum in our commercial arms driving a productive view of our supply chain working Capital Management and customer relationships. This operating model change has already proven its resilient and effect.

Also, we are seeing improvements in our markets which are recovering from the Lowe's in the second quarter. We saw an 11% sequential increase in volume of value-added products within a month or aluminum business.

In the third quarter, we also fully completed the restart of the separately in August. We finished the full curtailment of our until go smelter which faced significant cost challenges. I want to thank the employees there for completing safe and orderly curtailment. We've now placed the smelter and care and maintenance mode while we consider future opportunities for the next we announced last month the new addition to our sustainable and which is the most comprehensive Suite of sustainable products in the aluminum industry. Thursday is the world's first low-carbon alumina brand leveraging our leadership at the world's largest third-party supplier of smelter great alumina, and with the lowest average carbon footprint in the industry.

I do want to know an action that we announced just last week on October 8th. We made a decision to curtail the tends to be on smelter. We made this decision within a 15-day. Perspective regulations to consider our next steps after completing four months of consultations with the workers Representatives. The smelter has sustained significant and ongoing Financial losses. We understand the significance of the decision on our employees and the community and we are offering Severance and outplacement services for the affected employees a portion of our Casto suck you to cast metal separately our Refinery continues to operate

Now, let's discuss our markets in the trends. We're observing.

When it comes to the observed Rebound in global aluminum demand China is leading the way though the restart of the Chinese economy from COVID-19 faster than other regions. We are seeing Investments across the globe first starting from the bottom of the chart on the left in China industrial production as well as the key aluminum and markets and building and construction and transportation. We're All Above 2019 levels as early as the second quarter. We saw continued strength in the third quarter with those three indicators up 7% when compared with the same quarter last year.

In Europe and North America, which are key regions for Alcoa Aluminum customers. We see solid quarterly improvements across those sectors. Well, not a strongest China demand is returning a gradual recovery is likely in these end markets in North America and Europe with specific Improvement expected in the fourth quarter in the transportation sector. We're on a year-over-year basis light vehicle production in North America is expected to be up 3% and up 6% in the European Union according to Automotive analyst.

The building and construction Market didn't suffer a demand shock that severe at the transportation sector, but commercial construction where more aluminum is used is likely to be down to recover due to reduced pull for Office Space.

Moving down to the right hand of the slide recovery in the end markets translated into further improvements in global primary aluminum demand in the third quarter which has increased quarter-on-quarter over the course of the year off in the third quarter worldwide demand for primary aluminum was off just 4% from the same period in 2019. This is improved from the first half where there was an eleven percent drop in dog from the same six-month period in 2019 to other areas indicate an improvement in aluminum demand inventories. And Chinese Imports are fun Rock aluminum foil inventories. We estimate the global Aluminum stock growth has slowed in the second and third quarters relative to the first quarter.

In China net Imports of aluminum have increased steadily over the last two quarters showing an unusual reversal of typical trade flows Imports unalloyed an alloyed metal in July and August alone totaled over seven hundred thousand tons up from nearly 400,000 tonnes in the second quarter. It is likely that these flows are baptized of a mix of both primary and secondary mouth as China seeks more aluminum due to a domestic scrap shortage a result of the limit that is placed on Imports of low-grade scrap.

At the same time this trend indicative of primary aluminum demand and prices in China having increased enough to make it profitable for China to import now while this strength may be temporary. It is another sign of the strength of the recovery in China.

Course on the global economy. Nonetheless the third quarter provides some cautious optimism for Global aluminum demand.

Now let's discuss performance in our 3 segments starting with operation. We're proud of the dedicated work of our teams to keep all of our Global assets operating without interruption during the global crisis. We remain Vigilant in protecting our people in using all appropriate health related measures. We saw consistent production Improvement in the third quarter continuing the positive momentum from the prior. We once again saw increases in daily average production cross are 3 seconds, the productivity program we implemented in the first quarter of the year is providing a sustainable cost-saving improvements for the tons. We produce

In bauxite. We are mining at a record Pace to the third quarter. Alcoa has operated mines said a year-to-date production record led by two of our minds in Western Australia or aluminum. We also broke a record. We set in this segment last quarter for metric tons per day production.

Finally in our aluminum segment improved operational stability is helping to drive increased output as noted earlier. This takes into account that the ABI smelter in Quebec is now fully booked a task completed in the third quarter now an update on our commercial activity in bauxite. We expect steady volume and pricing for the year in aluminum. We have realized benefits from a tighter than expected Market driven by the improved supply-demand balance has an aluminum that we discussed also some Supply disruptions from other producers resulted in a further tightening in the market during 3rd quarter.

finally in aluminum

Noted we saw an overall increase in orders for value-added products as we mentioned in both the second and third quarters sales of value-added products were negatively impacted by coping with the second phone as a low point in the third quarter. We saw in 11% sequential Improvement. Although still lower than the same. In 2019 while our customers continue to be coughing. We see signs of green shoes. Although Q4 demand is still expected to remain below 2019 levels.

Now I'll turn it over to Bill to discuss more fully this quarter's results.

Thanks for calling we achieved significant improvements in the third-quarter third-quarter. 2020. Revenue was up $217 sequentially on higher aluminum and aluminum prices off the net loss attributable to alcohol Corporation was $49 or $0.26 per share and Improvement of $148 were eighty cents per share. The adjusted net box was $218 or $1.17 per share the most significant driver was a tax provision of $229 primarily interim tax impacts do too. He's proving you a full-year profitability and the resulting prior. To catch up in the third quarter.

Adjusted ebitda, excluding special items was $284 million dollars of $99 sequentially in generating an ebitda margin of 12% off closer at factors driving adjusted ebitda.

Adjusted ebitda, excluding special items increased $99 and third quarter with $174 million higher earnings in the segments partially offset by a reversal of intersegmental Nations, 65 million dollars monthly due to higher aluminum prices overall favorable market price impacts totaled $89 where higher metal aluminum prices were partially offset by a weaker US dollar all other factors combined for positive ten million dollars higher natural gas cost in the aluminum segments were partially offset by the lower smelter energy costs primarily in Norway price mix volume and production costs were bright spots this quarter a testament to the benefits of our new operating model for operations team activities rice mix improved $18 due to additional value-added sales and the aluminum segment and the mix of shipments and better non metallurgical Illuminati contract pricing in, New Jersey.

Even a segment volume improved $15 with two-thirds of the benefit coming from higher aluminum shipments and 1/3 coming from capturing sales and improving aluminum Market off. The largest performance Improvement Factor was production costs, which were thirty-two million dollars lower in the third quarter the aluminum segment saw improved box light quality and usage wage was lower caustic usage the aluminum segment experience seasonally lower labor costs and the bauxite segments all lower production costs that are operated Minds other impacts were down $30 sequentially and include a twelve million dollars related to section 232 tariffs and $9 from inventory and backs in in terms segment eliminations.

cash

Their quarter liquidity was exceptional with over one point seven billion dollars in cash on the balance sheet our year-over-year cash down with increased $895 million dollars in sequentially our cash balance increased $771. We issued $750 of debt in early July with net proceeds of $736 not counting the debt issue our year-over-year cash balance increased $159 and sequential improvement with thirty-five million dollars.

For the first three quarters of twenty-twenty sources of cash total to 1.9 billion dollars and uses of cash total of $1 billion dollars even removing the debt proceeds a $736 year-to-date sources of cash have outpaced uses by $121 a reflection of solid operating performance and are successful $900 cash actions program.

Now, let's take a look at other Financial metrics.

Year-to-date 20 20 free cash flow last non-controlling interest distributions improved $46 in the quarter to negative $14. Partially the result of lower working capital is working capital improved two days to potentially 222 days driven by a decline in inventory and days on hand AR Ki balance sheet metrics proportional adjusted net debt remained at three point three billion dollars a year to date. Our pension asset returns have been approximately 3.4% and discount rates are down roughly 30 to 35 basis points, since the plans were last three measured to deliver variety of actions taken this year. Approximately fifty percent of our pension liability has been re-measured on a walk-in basis if asset returns are at Target for the fourth quarter and discount rates and all other factors do not change. We would expect the pension and Opeth net liability to increase approximately 200 Jun.

$10 from the current 2.4 to 2.6 billion dollars

turning to our $900 cash actions program.

We continue to drive all aspects of our cash program targets remain on track. We continue see the benefits of the new operating model. But in terms of lower spending improve focus on line or working capital and labor production costs and our non-core assets sales and portfolio review timelines remain in place are COVID-19 and spending controls are also on track, although we expect to defer slightly less wage and funding than originally planned.

We are making a few adjustments to our full-year 20/20 album. We are increasing the range for 20 20 aluminum shipments by two hundred thousand tons to a range of 13.8 billion tonnes to 13.9 million tonnes based on better production and shipping performance.

NE bataa impact outside the segments. We are improving $15 driven by reduced transformation costs.

Explode ebitda line, we expect depreciation expense to improve $10 to $655 million dollars. We are not providing an outlook for the full year operational tax rate home based on recent prices. We expect operational tax expense in the fourth quarter to be approximately $25 million dollars.

For full-year 2020 cash flow impacts. We are adjusting our minimum required pension and open up the funding up ten million dollars to reflect modest funding we made to lower expected pension costs.

We are reducing environmental and Aro funding by $10 to $115 a result of spending controls and COVID-19 actions.

Our 2020 year-to-date cash taxes include a $74 payment to the Australian tax office to begin the dispute resolution process for its previously disclosed notice of assessment.

In September 8th issued a position paper on its preliminary view of administrative and all these related to that assessment and proposes penalties of approximately 93 million dollars a hug. I'll call of Australia's here company does not agree with the position and they will continue to defend this matter and pursue all available dispute resolution methods up to and including the filing of proceedings in the Australian courts.

We expect no further get cash impacts for this matter until it is ultimately resolved.

In the appendix. We also listed digital considerations expected for the fourth quarter. They include in the Box side segment adjusted. Ebitda is expected to be flat compared to the third quarter off in the alumina segment. We are expecting higher energy costs in the mix of customer shipments to result in ten million dollars lower sequential ebitda impact

in the aluminum segment Illuminati costs are estimated to be approximately the same as in the third quarter the side from potential metal price. Our currency impacts. All other factors are expected to decline a $15 sequentially including anticipated higher power costs in Europe a full quarter of section, 232 tariffs and higher maintenance and seasonal labor costs partially offset by the exhaustive impact of the until curtailment for the full quarter.

With that, let me turn it back to Roy.

Thanks Bill. Next I want to spend a few minutes discussing our sustainable product portfolio in line with our strategic priority to Advanced sustainably last month. We launched wage Source another product in our sustainer line to help our customers reach their sustainability goals ecosource is the world's first low-carbon aluminum brand it offers number than 0.6 metric tons of carbon dioxide equivalents per metric ton of aluminum, which is half the global alumina industry is average carbon content in our measurement in clubs direct and indirect emissions from Mining and refining ecosource leverages our leadership as the world's largest third-party provider of smelter grade aluminum, and as we've noted our founding assets have the lowest average carbon footprint in the industry.

this product

Decarbonizing aluminum while expanding our sustain a line to the broader aluminum value chain considering the increased pull from consumers and producers of sustainably-sourced and low-carbon Alternatives ecosource provides a unique opportunity for aluminum producers to lower their carbon footprint.

Our sustain a family of Brands is the most comprehensive in the aluminum industry, which also includes aluminum with guaranteed low-emission and metal with at least fifty percent recycled content.

It's important to note here to that. We take a more advanced view on how to define green one that considers impacts across the production machine equally deadly carbon aluminum is a great example. It guarantees no more than 4.0 metric tons of carbon dioxide equivalents for ton of aluminum produced from bauxite mining to cast Products off. This concludes scope one in scope to emissions from all production systems.

Well, the market for low-carbon aluminum is continuing to develop we are seeing more and more interest in this space in with our comprehensive line of products. We are leading the way for the industry wage also consumers and our customers are demanding products that include assurances of responsible production with our sustainable practices and bauxite mining aluminum refining and aluminum smelting and Thursday. We are uniquely positioned to deliver sustainable products across the value chain. Alcoa has operations in all three of our segments certified the standards set by the aluminum wage initiative were ASI. It is the only comprehensive third-party validation of sustainable practices looking at the entire value chain that involves producers users found ngos. We also have a size chain of custody certification earning us the right to Market ASI certified products across our value chain.

We have eleven locations already certified in more are currently in the pipeline.

Next I wanted to quickly recap how our strategies and actions are driving the stronger more agile company. It was one year ago that we first announced key strategic actions that included a new operating model a plan to generate additional cash from the sale of non-core Assets in to review of our production portfolio. We've made significant progress. Our new operating model is now faster and is on Pace the delivers $60 in annual savings. This early action was vital to help us weather the economic downturn brought on by the pandemic.

We've also made Headway on our multi-year portfolio review that includes options to improve curtail close or divest assets.

In February before COVID-19 became a global pandemic. We launched plans to drive leaner working capital and Implement annual productivity gains, and we're projecting will finish the year within the total range projected year-over-year improvement from these two programs.

We continue to manage cash to mitigate the economic impacts associated with COVID-19 in the collaboration across Alcoa to generate and Implement cost savings ideas is remarkable.

Has Bill noted all these initiatives are on track to Total nine hundred million dollars in cash actions in 2020.

Our pursuit of continued improvements as part of what it means to be an outgoing across our company. We've been on a steady and consistent path and tackling challenging projects to strengthen Alcoa. Yep. Just a few of these listed at the bottom of the slide items that align with our overall strategic priorities most importantly we've strengthened our safety program and have seen real improvements in our leading and lagging a safety indicators across the organization. We've also strengthened our balance sheet to numerous actions, including renegotiating our credit facility, annuitizing pensions and reducing okay.

Our teams continue to break production records and were operating more efficiently with new modern labor agreements in the United States Canada and Australia and as mentioned before we took our strong reputation in sustainability including continued progress on our Ellis's joint venture, which produces carbon free aluminum the work to drive this technology commercial-scale is progressing as you can see from the prior slide. We have tackled difficult challenges, but we still have much to do to strengthen and prepare Alcoa for a brighter future and I'd like to arrange Force what is consistently guiding it for the company?

First and foremost, it's our three. Alcoa values act with Integrity operate with excellence and care for people these are fundamental to our decision-making and Central to our company.

Those three values underpin our strategic priorities which provide a roadmap for the future and ensure alignment across our operations and resources. We reduce complexity so we can a low-cost we drive returns with a focus on improved margins across our products and we are advancing sustainably to improve economic environmental social outcomes and ultimately provide value for our stockholders in the long-term and with that bill and I would welcome your questions.

We will now begin the question-and-answer session to ask a question. You may press stars and one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off withdraw your question, please press * then two when called upon please limit yourself to two questions.

And your first question today will come from Terry with Deutsche Bank, please go ahead.

Call royan Bill a couple of questions for me. Just wanted to get an update on some of the bigger picture targets the divestment target of $500 to a billion. I think over eighteen months. I think we're about 12 months since that that was announced. Just wondering whether that's still a relevant Target and and how how you looking at that and then in terms of the assets off reviews we brought in thinking that Portland after sense cyprian would be, you know, the next asset sort of in the spotlight of such. Thanks.

So I'll take the first pass at that one Chris and thanks for the question. As far as the the asset sales go. You're right. We announced in October of last year that we would take 12-18 months to execute on acid sales between 500 million to a billion dollars of net proceeds. We sold Gum Springs at the beginning of this year wage. That is an immediate $200 with a $50 million contingent payment that will come over time. And since that time we've been running forward with some processes to look at further divestitures and we are having said which assets those are but we're holding to that Target that by the end of the first quarter next year. We would be generating five hundred million to a billion dollars of net proceeds. The only asset that we have said that is up for sale if we're off tail lens and we continue to pursue that birth.

That transaction so yes, we're sticking with that Target Roy. Do you want to address the asset reviews? Yeah, absolutely. And Chris. Thanks for the question. You know, we we've not said specifically what fits inside of those asset reviews. So in that very specifically for the purpose that we continue to work on a number of tracks at the same time. And I'd remind you that that that program really has options that include trying to repower the facilities trying to find new ways to to do what what we might have been doing for a number of years and in each of these different locations dead and and at the end we also have the opportunity to curtail or to divest Etc. So as to what comes next I think as you refer to Portland we bought said whether that's on the list or not. We are in the midst of discussions with the Australian government to repower the facility and will then be making decisions as we move forward on that, but I I would just reassure you that we're hard at work log.

Looking at how we can really Drive our portfolio in particular in the Aluminum stock number to a certain extent also the aluminum portfolio how we make sure that they are both very low cost involved. So very green and very low carbon. So you'll hear more as we go along Chris.

Okay, thank you said two very quick questions. Hopefully just checking on the pension. So I think for 20 21 originally it was going to be 380 as of the start of this year's you sign you use the prepayment for $200. So that would be employing $180 for a cash cents. I think if if if I'm correct on that just wanted to check and then the author's on very small but on slide 32 you talk about the aluminum segment with production down about 10% I think it's implied for four Q the aluminum foil to be flat. Sequentially. That's dollar per ton right? I just wanted to check that.

Let me let me address the pension one. And then Chris they'll probably ask you to clarify that the second one we had been projecting cash outflows with pension and open up a hundred and twenty Twenty-One. You know, we that we deferred two hundred million dollars of pension contributions and twenty-twenty those would come due in 2021. So the some of the month and the $200 would equal to $500 billion dollars in cash outflows associated with pension and Opeth. However, we have a pre-funding balance setup in the in the in the package plan that is also just corresponds to approximately three hundred and eighty million dollars. So depending on what cash flow looks like in 20 21, we can choose to use that money funding balance to offset those large cash contributions that are required in 2021. So if we chose to use all of the pre-funding balance, we would be back to approximately two hundred years.

Dollars of pension and open up cash outflow in 2021. So I hope that's clear if I could ask you to clarify your aluminum segment question.

Or did we lose Chris? So sorry not this is like 32 where it says. I was just on the luminar cost. I was just checking whether that's dollar per ton or dollar million dollar dollar million. And so what we're essentially signaling there is that aside from prices and Forex off the aluminum segment will have flat alumina cost in total and then on top of that we're we're signaling that aluminum would be down about fifty million dollars sequentially off before I get the question just to to Dimension that fifty million. I figured I would address it. Um, the piece of that is energy costs. So higher energy costs in Europe. We had very good energy costs in Spain Norway and the third quarter. We don't know if those will repeat going into the fourth quarter as economies recover. We do have some higher operational costs approximately twenty-five million dollars. We have a couple of outages

Not Rolling Mill that are better plans for the fourth quarter. So nothing surprising there. We do have some higher labor and maintenance costs also and then included in that number is the assumption that took the tariffs coming in from Canada would continue to be paid. We are accruing for the tariffs in the fourth quarter just as we accrued for the tariffs in the third quarter because we're not certain whether the exemption will be in place or not. So we're still considering the presidential decree that has come out and but at this point I'm assuming that we will be accruing for those terrorists coming in from from Canada.

Hope that helps. Yeah, thanks, cuz that's it for me.

I don't next question will come from Carlos de Alba with Morgan Stanley, please go ahead. Good afternoon. Thank you very much. So the first question he has to do with just staying that is exhibit or slide 32 on the Lumina. Can you provide a little bit more details in terms of the comment relating the mix of customer shipments that will check with higher energy costs. Sorry we have with the lower higher because that is going to read you read that what could you could provide some more details? And if this is something that you just need to see at the end of the quarter maybe because you need to complete some contracts or is this something that maybe extending towards 2021?

So Carlos, the the there's there's two components that the larger component is the higher energy costs energy costs are assumed to be going up in June in Brazil. For instance for a fuel oil at our Ally of our facility based on just this higher higher oil costs overall in the fourth quarter and the mix of Cups shipments is really a comment around the timing of shipments at the end of the quarter. So nothing that is projecting out into twenty twenty one point. All right. Thanks for that bill. And just a question is with the curtailment in Saint cyprian. What should we assume in terms of the aluminum production and shipment there as well as what sort of level of production to see from from the house house.

So currently and I'll directly address your question and maybe really wants to add on some some more commentary but we're assuming that the cast house continues to operate wage um, and as far as timing of the smelter curtailment we're expecting that to be completed by the end of the first quarter of 2021 we are assuming that the that the refinery will continue to operate and so that's that's how we see the site that the refinery is on impacted by by this situation in the smelter wage and at the cast house would also continue to operate

Yeah now I'll just chime in there as well Carlos and I think I think Bill covered the quantum Quantified assumptions that were making at this point. I just I just want to talk to bring into Focus the fact that it was a a process that spanned over a number of weeks. We thought long and hard and worked with our works Council worked with the government Etc to try and find a solution for the issues the long-term underlying pricing issues on energy that we've seen and we announce this just recently so as you've seen there has been a move to to potentially could have a strike on that has not been defined yet and we still don't know what impact that will have. But as Bill said the expectation is post curtailment. We will have the output coming from the south and then expect to no no no impact in certainly no long-term impacts on the refinery.

All right. Thank you very much on the best. Thank you, Carlos.

It's Carlos.

And our next question will come from Tyndall Tanner's with Bank of America security, please go ahead. Hey, good afternoon guys.

So I wanted to just ask the obvious here and I apologize for that. But just kind of going back to slide eleven clearly the debt issuances now on the books been there for a couple of months. You've also said really clearly that paying down the pension are addressing a different attention to health care of the top priority. Is there a time frame or a mechanism or anything that you can signal to us just to help us out about what that would look like. Just let me address it currently as a slideshow. We have a very good Strong Quick Cash balance. We went out and raised debt at the beginning of the quarter as you know, which seems like ages ago at this point and there was a number of reasons for why we were raised at first and foremost. We ended up being able to raise debt at the cheapest coupon out of any of the debt issuance has that we have so it it gives us the flexibility wage.

That if we want we can pay off some of the other debt tranches. So for instance the 2024 es we will also consider using that to fund them but I would tell you at this point over the next let's say three to six months will be making the decision on what we do with those proceeds assuming that we continue to see cash come in like we saw in the third quarter. So we have a capital allocation model, you know that our Capital allocation model starts with keeping a billion dollars of cash on the on the balance. We were able to excluding the the proceeds as debt issuance. We're able to regain that level to the billion dollars cash on the balance sheet. We've got four uses of cash in a capital allocation model which we have said at various times. We will use the cash for those four things the first one being debt repayment the second one being dead.

Mid midsize growth projects the 3rd, uh being uh, just losing my train of thought but essentially, uh may be making a decision on on how to on how to use that cash over the next six months and and I should have said the 3rd is the return to shareholders, which is clearly important to us.

Okay, one of the concerns that we hear repeatedly from investors is just that you know, they'd like to feel comfortable that this balance here that you point out the sources and uses would be you know in the positive very inevitably wage without things like dead assurances and proceeds from asset sales. So just you know, I think it'd be helpful to understand, you know, some of these recurring start restructuring are a function of kind of money reducing your footprint and pairing back some of the less profitable or loss-making businesses. But how do you see how KO over the next several years kind of getting to a place where you do have a better balance the proceeds from outside sales and debt issuance like on a normalized basis. How do we get to that place where it's more balanced?

Well, I'll let you quantitatively and and address it.

Further you clearly see us taking action today to rectify some of the underperforming assets that we have. So we have that said that we will put under review for a million metric tons of refining capacity 1.5 million metric tons of smelting capacity. We immediately took action on shutting down Point Comfort package. And so we took that action we have taken action at Elco to curtail a loss-making facility and intalco recall that intalco lost twenty-five million dollars in the first month of uh of this year. So a loss-making facility that we've tried to curtail we have said that Saint cyprian smelter is structurally disadvantaged and we've made the decision effectively dismissed the employees at Saint cyprian. So taking action there, um, when we get through this portfolio review, uh, we see us as being

And I would point you to to the back of the deck. We're we're first quartile box. I first quartile refining second quartile smelting once we get through this portfolio Thursday. We think that all three sets of the assets can be first quartile. But on top of that as Roy said we will be the lowest carbon emitter amongst all the major players off. So we will have taken our smelting assets which are second quartile moved to them to write at the break even at the first and second quartile smelting cost curve and significantly lower the carbon footprint. So I think the near-term view is that our portfolio will be a much better position. Once that review is done.

Yeah, no, I'll just reiterate Bill's comments. I think you said it he said it was spot-on. But Tim, I think it's it's a valid question that you raised and I just one month. I really just want to reinforce the statement that we've spent a good amount of time at the management team thinking through not only how the market works today and how our portfolio interacts with that market wage. But also had looked out a number of years and it's really the process. That means it's been ongoing for the last four years. But last year we spent a bunch of mine a bunch bunch of time thinking about what can we do and we're dead and not really culminated in in the announcement about the divestitures to generate cash about how we're going to drive operations and commercials through the New Jersey operating model and then the portfolio and so these these actions will take a little bit of time and each one has its own schedule. They require a great amount of money.

Of challenging decisions in in dealing with situations, but at the same time it's going to leave it in a significantly improved spot and and I won't I won't go into every month the bill said again, but in the end it will make us a very low-cost. It'll make us very very Green from a carbon standpoint. But also I believe with a great reputation for doing the right thing all the way from bauxite down to aluminum and I think it's it's it's really an opportunity for us to make a big difference, but we'll take some work in the meantime.

Okay, that's helpful. Thanks.

Text Jenna.

Hello. Next question will come from Lucas pipes with B Riley security, please go ahead. Thank you and good afternoon. Happy one. I wanted to pick up on a comment. You just made there in regards to looking out a few years and looking at the what this industry is going to look like. Can you elaborate on that a little bit? What what's what's your vision of this industry took three years down the road. Thank you.

Yeah Lucas in at the front question. So when when you look out, you know, I always start with what the demand fundamentals look like. And we've had the the the the great blessing that aluminum demand has been strong over these last last couple of decades and so as we look forward in in you look at this and China as well as we're outside of China because of how much China has been back to the market. We continue to see a a metal that is in high demand in will continue to see demand growth and wage. So from a pure Market perspective, there's a lot of opportunities in aluminum and then in the knock-on impact and Illuminati and and down in the Box side at the same time. We also see that our customers in the consumers that lay at the other end of those customers are going to have a significantly higher expectations and in understanding of what is contained in goes dead.

Those products themselves. So not only are we seeing good demand growth because of the electric bills and vehicles in automotive or or aluminum cans or off all of the electrical infrastructure. Not only are we seeing that good command, but I believe there would be more and more of a shift to to having to understanding the carbon impact in fact the and just the entire content of all of those things around communities and social social social programs and how everything combined into a final product and so as we look at that and and as I spend time examining what's happening in today's market in the acceleration, we're seeing towards what can be a pretty exciting future. I think I think aluminum in particularly company a company like Alcoa can have a great future inside of that market now, it means we need to drive so that we have the portfolio that we need to win both from from across.

Perspective but also from from from a carbon content and social responsibility and environmental awareness standpoint. But at the same time, I think it bodes well because I have the opportunity to to make changes in our portfolio in our cost structures today that sets us up for this very quickly approaching pretty great opportunity with the future. That's very helpful. I I really appreciate the additional color on this and then uh, my second question is is more in the in the office now kind of looking at my numbers it looked like metal prices were much higher than what would have been kind of implied back of the envelope and I wondered what was there anything going on with the mix Q3 versus Q2? And then as we look into Q4 any anything that could reverse, um, meaning you wouldn't capture the additional dead.

Improvements on the pricing side. Thank you.

Thanks Lucas for the the question the the one thing that we saw in the third quarter above and beyond the second quarter is a rebound wage demand for value-added products. We we saw volumes of value-added products increase by 11% We also saw premiums increase in in the third quarter for spot business and that drove the realizations for metal higher as we look into the fourth quarter. We're being cautiously optimistic the underlying Market transactions are still favorable. Uh, but we're we're waiting to see how spot orders come in in in the fourth quarter, but but feeling generally optimistic about our end markets currently.

Got it. That's that's helpful. So there shouldn't be any any additional considerations on the revenue side kind of like 32 what you already discussed on wage from the call center slide slide 32 is inclusive of all the all the things we see when when we looked at a current view of the fourth quarter of round value-added products is currently name is level with what we saw in the third quarter. But again, we're being a little bit I think cautiously optimistic that we could see some business increase in the fourth quarter of a nice spot sales, but at this point they have not yet materialized, but but certainly no deterioration from what we saw in a third quarter.

Very helpful. I appreciate that and continue best of luck. Thank you.

Our next question will come from Alex speaking with City, please go ahead. Thanks, Roy and Bill. My first question is again on slide 32,000, um, the 50 million of additional kind of headwinds on the aluminum segment. How much of that is the accrual for the section 332 tariff and how do you add kind of like from a Catholic perspective? How do you unwind that you know, if if there is no section 232 tax which there isn't right now, I guess right. It was a great question. So appreciate you asking. Let me let me give you the a little bit broader landscape with the terrorist situation in in the third quarter. We accrued for seven million dollars left in the fourth quarter in the number that that you see and that fifty million. We're we're projecting an incremental twelve million dollars and tariffs expense wage.

Which means that in the quarter will have about $18 million dollars eighteen nineteen dollars of of terrorist expense your question around the accounting. We we will know off on a six-week lag whether the tariffs or retroactive after that six week lag when we find out whether the terrorists are not retroactive, then we can book a gain wage created with that that month Terror. So, uh, you know, if you're thinking about $18 a quarter three months six million dollars each month will make the determination based on that prior six weeks, uh to tariff system on whether we book The gain associated with not having terrorists because we're accruing for the dead. So I you know, your next question should be how are you going to try to estimate that in your models? I think you're going to have to watch to see how how the metal flows come across.

the border and whether they

Meet the quota levels that are in place.

All right. Thanks Bill. That's that's helpful. In fact the explanation. I was very confused when I saw it on the slide. Yeah made the comment about the I was like God it's a very it's a very confusing situation and you know, we have to make an accounting determination of whether we approve for it and at this point given the quota levels, we think it's probable and we certainly can estimate it. So that's why we we accrue for it and hopefully we're pleasantly surprised that that that we we have a gain associated with okay. Thanks and then the second question, I guess more bigger picture, you know on on green aluminum

You know from the headline sitting on the outside, it seems like you know the idea of you know, Green metal responsible metal is gaining traction particularly with you know, consumer type companies. Yep, Apple, you know, and at least this and Anheuser-Busch and Tesla. I mean, are you seeing you know, as you talk to your customers, are you seeing an inflection point and kind of interest in in green and sustainable product and it just generally how would you characterize the discussions right now our customers still in the fact-finding kind of stages of things trying to figure out what they should be doing going forward or do you think actually ready to stop by and kind of green material on on the net and thank you very much. Yeah, Alex and I'll I'll take that one. You know, I I'd say wage over the course of this year really the end of last year. We we've truly reached an inflection point and I think we're a bit beyond just general interest in actually start.

Into starting to see a real a real beginning of of some some customers and consumers that are really looking to to create deals and so we have a number of a number of areas that we're working on as you know, we've just launched ecosource, which is this new green iluminage product, which is brand new. So that's that's something that that adjust under development and and starting to have conversations now, but I would say that even given all the craziness that happened because of the COVID-19 pandemic we continue to see a great amount of interest in more and more discussions that are turning into into more more discussions around potential contracts. I think we're seeing more and more of that. So I'm I am I'm really quite pleased at how quickly that is developed. When you think about the fact that really this is becoming more and more on on investors dashboards really over the course of the last month.

For 24 months and it's pretty quickly turned into what can actually be orders and changes. I would say that the market is still developing how that should be priced. So I think that's still one of us how to determine that I know there's a bunch of of different different potential options that are being proposed from our standpoint really having those discussions with a customer's explaining what I can do differently and and that is dependent upon the product that you choose. You know, I think it's the it's the right discussions to be having and again, I'd get back to the simple fact that I think I'll go ahead as a real real opportunity in a real benefit here to our long our long history and in the end to the portfolio that we operate today and even more importantly will be operating down the road.

And and if you don't mind.

I just been a little bit on on that Roy, um just to just to highlight ecosource and I don't know how much the time that you've paid looking at ethosource. The Eco source is a big deal ecosource allows our customers to get a certified low carbon content aluminum and a wax. Our joint venture is is uniquely positioned to be able to sell low carbon content alumina, and as somebody pointed out to me, you know, it's very difficult to change and very expensive to change your power source for a smelter. But now with ecosource you can get a certified low-carbon alumina that change fundamentally changes the carbon content of the aluminum smelter makes by buying the right source of Illumina. So, uh, you know a little bit of a Salesman job there, but it's actually a pretty big deal that for us we offer a phone number.

Sweet of sustainable products on the 11 the aluminum space and I believe we're the only ones that are offering uh, a low carbon content Illuminati source.

Thanks, so I can I just follow up like how much ecosource alumina could you produce? Theoretically? If if everybody wanted it all of our all of our refineries can produce ecosource off the the thing that you would be getting with Eco source is that you get a certification that the alumina that you get is low carbon-emitting. Uh, so it's a it's a certification process that you can get the certified that we are the the process in which we make alumina cuts the carbon emissions in half versus the industry average. So, you know at this point you can buy aluminum from us or you can buy ecosource but ecosource is actually certified that it's low carb

Connect me just let me just how long slack and just add one one layer on top of that as well. And this really gets back to the purpose behind the strategy and what I've talked about from the long-term when you have a a portfolio of very very low cost aluminum refineries that also happen to be very very low carbon content. It means that you can transition to graduate products in have sufficient green products to really make a difference not only for Alcoa but make a difference in the marketplace and I tie that back over to the work that we're doing from the aluminum segment as well in our portfolio. Is that as we go into the future we'll again have a low very low cost portfolio. But then also the lowest carbon content across the board of all of all other aluminum foil aluminum producers and so it helps you to win As the World Turns to Green aluminum, it actually gives you a sustainable Advantage because your portfolio is sustainable and renewable and has these characteristics across

Thank thank you very much. Very helpful.

Thanks, Alex.

The next question will come from David gaglione with BMO Capital markets, please. Go ahead.

Hi, a lot of my questions have already been answered. But I I guess I just wanted to pick up on the on the last line of question with regards to the coast source and the aluminum low carbon content. How how do you plan the price this and and and what I'm hearing from customers or do you plan to price ecosource differently than the rest of the Illuminati.

Um clarification question regarding fourth quarter in the aluminum segment obviously called out the 50 million incremental headwind, excluding and commodity changes, you know, if you assume current FX and commodity changes with those changes offset that fifty million headwind and and the other part of that for the iluminage segment, you know, the down quarter-over-quarter and four Q does that take into consideration ethics at that flowed through three Q results as well.

Yeah, so so all of them exclude FX, so whenever we get guidance David's exclusive of metal prices and FX.

As far as The Illuminati's goes we said it would be really the energy side and some of the the mix and as far as as far as their question in regard to whether eleme and FX would offset that fifty million clearly at this point, it's early in the quarter prices are better premiums are a little bit worse than where they were in the third quarter. Um, you know, we give you sensitivities to all of that. So as we go through the quarter what you can do is just build in your sensitivities and uh and determine where we end up based on that 50 million.

All right under so I just wanted to clarify on the FX part. Thank you very much.

And the next question will come from Michael Judas with vertical research, please go ahead. Can you good evening? Everybody turning the China your assessment of you know, Thursday is you indicate a very strong demand a certainly there's been some changes on the Flo's on the Illuminati side is or capacity situation going to continue to expand in China and then let's try to restarting excess exports into the marketplace in the 20 21 something that that investors should keep a real focus on as they're trying to figure out where aluminum pricing might you know wash out heading into next year assuming we continue get a cold or emerging recovery rest of the world.

Yeah, Michael. I appreciate the question. I think I think the answer is pretty simple. Yes. I think that's all those are all considerations that investors should have in mind is based on this is something that we do have in mind, you know, I think the benefit that we've seen is that China's demand is really snapped back. I mean if you want to look at a definition of a v-shaped recovery, when you look from from birth to one into Q2 and then on into Q3, it really have recover very quickly and you look at that pretty broad-based through Transportation Construction Construction packaging all the different areas really particularly in July and August. We've seen a very strong snapbacks Adam and I think is is back where it should be and when you look at some of the some of the support mechanisms that they've been rolling out wage is very helpful and very supportive that demand continuing. I think you've also seen that that Supply continues to come online. It's certainly coming online at a slower rate.

Then it has before you're also seeing them move more towards provinces where they have renewable energy.

She's available. So they are doing work in order to to shift their portfolio. I think the fundamental question is is how demand then connects back over to supply and then how that connects into into Pig and so that I don't think I have a crystal ball nor would I take a guess and where it leads us but I would say that China has been very constructive in trying to actively managed house where demand is growing and trying to incentivize it and then also have been very careful to enforce the rules. They have in the book around capacity available Cassidy to capacity to bring online and ensuring that it has said that the operating permit but also an environmental permit. So I'd say that over these last couple of years China's been very careful to enforce its rules and that's been very welcome from from my perspective.

That is encouraging and how my second question was. How much are is China on board with low-carbon issues in the aluminum industry and what's the ability for the country to you know, you kind of mention that trying to shift their portfolio, but they're going to be somewhat Limited in what they have and where where they can go to get those sources.

Yeah, you know another another really good question. You know, I think it's I think when you look at the way that the industry has developed outside of China is so much tied over to our renewable energy simply because the low cost price of that low cost energy was was carbon-free. It was typically hydropower. So so we look at our portfolio and it's not Universal but we're on that package going in that direction. It's been very much based on Renewables because that's how the market developed in China. It's been very much more based on coal and in the relatively inexpensive available coal country large coal reserves. And so the carbon content if you look at the look at the chart, we published it a few quarters ago. It's staggering when you look at how skewed towards the higher part of that carbon content curve in aluminum and quite frankly and aluminum as well. I think there is an acknowledgement and you see that an acknowledgement by the Chinese that this is an issue and yep.

Do that because of some of the announcements. They've made about moving moving into provinces that do have do have hydropower available. I think that is to a certain extent limited by by how much Hydro they can bring back online and how much they want dedicated into the aluminum industry. I think it will take time. Although the Chinese are very good at constructing plants, but I think it's also to a certain extent supportive of the development of of the Green Market in general. I'm thinking perhaps even accelerate and hasten it as we look at people as the Chinese and the rest of the world really starting to look and at the carbon contact and therefore wage becomes more and more transparent what different classes of metal might be excellent. Where you thank you. Thanks, Michael.

And then next question will come from John to Manassas with John semesters. Very independent research, please go ahead.

I was reading the Illuminati limited disclosure to prepare and looking at your equity line and Illuminati. It looks like the month Equity stake lost twenty 1 million year to date. It is your newest Refinery and presumably the or grades and wage issues etcetera where attractive or you never would have gone in could you tell us why it doesn't perform as well as your life appears to be a pretty big performance differential for a p&l standpoint.

I saw one moment. Let me take that question. The the modern Refinery does perform very well. Actually when you see that Equity pick up what I'm seeing is the share of earnings posts post interest and post depreciation. So it's it's not an ebitda number. It supposed appreciation post interest and net income number. So at at the market level within the third quarter that Refinery lost money at a net income level but but usually operates and performs extremely well and and we've been very pleased with the overall operation of of the modern Refinery and the mod smelter to add on Monday is the equity

For that we see also have taxes in it. So you're you're looking at a post you're looking at essentially our Equity earnings that are post office taxes post interest post appreciation.

So the way the numbers are reported, it looks like the Illuminati Refinery earned your cost of capital maybe four quarters since 2017 took the capital and tax burden is a good bit. I'd have to look back at the numbers to confirm that John what what I can tell you is that you know, that project was Project fine. So at this point, we're now paying back the debt and and it was both the the refinery and the smelter were fairly expensive to build off and at the time had projections of higher metal prices and aluminum prices. So at this point as you can see from from our disclosures over the last few years, we've not down and out of that Venture not out of the refinery or out of the smelter, but we're very focused on making sure that the Venture starts to pay dividends when

When when when when the cash flows bill?

Thank you. Thanks John. Hope you're doing well.

And our final question today will come from this road with berenberg, please go ahead.

Thank you for taking my question. So it's just going back on the green aluminum discussion. I'm guessing a good Market to get some sort of price premium for those product green aluminum problem would be the packaging sector. So just curious do you sell much into that and Market or those beverage can make us primarily by scrap?

Yeah parrot Ash. It's you know, it's going to be hard to get down into that level of detail. I think we've we've had conversations with a number of different customers. And as you know, some of some of our competitors also have a 6 or or or somewhat similar green products as well. So I think there is a move from can makers specifically step into that market into into look for ways to lower their birth. As you know, we've got a role in the mail that does make Ken stock. However, a lot of that that metal feed comes from our work smelter and so right now probably not a dog perfectly positioned in order to turn that into a green aluminum, although that's something that will be considering for the future. But at the at the same time, I think those discussions are ongoing. I think we are seeing more and more questions about premium and Firming up how that will look like in the future. And again, I think it's I think it's a great opportunity and I think packaging itself is a great place for us for more aluminum

Yeah, I agree. That's very interesting and and just to another one on that and like the last one I'm seeing some of the plastic companies have also started exploring the idea of recycling plastic. Perhaps not all types of plastics, but maybe six out of seven. So are you also seeing an increased competition from plastic and some of your markets or you think I'm I'm still by far Remains the preferred material at least from the recycling point of view.

Yeah, you know we've never seen plastic recycling programs that worked as well as aluminum recycling programs. And obviously I'll not be the expert on on where some of the Plastics manufacturers how they're trying to build up those recycling programs. But I'd say it's taking time to develop aluminum recycling also I'd say that aluminum offers other other other real benefits, like the the way that the cans are made the stock ability of the ability to transfer code from your refrigerator into your drink and beverage choice. So I I'd say that I I I have no doubt that Plastics will be trying to make an end run into some of those markets again, but at the same time I think that aluminum just offers a lot of advantages it offers a pretty reasonable price and in the end I think will be the boss be the metal of choice and and I'll tell you a flat-out that's part of our job is to make sure that that actually happens in that we we smartly and hopefully explain the the benefits from birth.

Bauxite all the way down to that rolled product what green aluminum that's that's that has green aluminum.

Content inside and follows the all of the certifications for social responsibility Etc. The the difference that makes and how that in fact not only not only strengthens but really just brings forward to the value proposition of aluminum beverage cans or any other market so we'll be working on it. And and if you don't mind I'll I'll just sort of some additional facts out there before you prepare your closing remarks it just to be clear Paradox aluminum unlike plastic is infinitely recyclable. All right, so it does not get down cycle in the process so you can you can recycle it off definite basis. It uses about $120 or 5% of the energy to recycle an aluminum can vs. Create a new one. So tremendous economic benefits to recycling off and something like seventy 5% of all the world's aluminum ever made is still being in use just because it is the one the one recycling stream that a club

Is economically viable so, uh, we think there's a tremendous future for the economic and environmental benefits of living. So sorry. Sorry to get on the on the sofa there, but it's it is it's a great model in into the future.

Very interesting. Thanks man. Thanks Bill and good luck with everything.

Thanks. Josh.

Ladies and look include the question answer session. I'd like to turn the conference back over to Harvey and closing remarks. Perfect. Thanks col so like to like to thank everyone for their time today. I'll I'll summarize simply by saying that I'm very proud of what what we've achieved what are all Cohen's have achieved. I'm also very much looking forward to the work ahead cuz wage as we discussed the number of times in a number of different places. There still is work to be done in order for us to continue to drive towards that strategy. I appreciate you following our story and look forward to update you again next quarter. Thank you and have a good evening.

The conference is not concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.