Q1 2021 Alcoa Corp Earnings Call
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Cole
good afternoon, and welcome to the Alcoa Corporation first quarter 2020 earnings presentation and conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star them on your phone to withdraw your question, please press * then two, 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 and good.
Hey 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. We 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 our 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 Roy.
Thank you, Jim. And thanks to everyone for joining our call. It is a real pleasure to present Alcoa excellent first quarter, as you can see from our release our results were strong on both the left and bottom line with our strongest results since the record-setting year in 2018. I am very happy with the progress. We've made at Alcoa on multiple fronts particularly in a quarter of the world's economy has continued to spin up from the lows of last year's pandemic induced lockdowns. We are capturing the benefits of stronger markets. We are delivering them as the sustainable materials. They need to meet improved demand importantly. We are operating safely and reliably demonstrating the same kind of Relentless discipline that helped guide us through more turbulent times.
Bill discuss the financial results in more detail, but I'd like to take the opportunity to characterize our most important achievements. We have net income of 175 million dollars or eight cents per share on a year-over-year basis. This is more than double the eighty million dollars in the first quarter of 2020 adjusted net income was $150 which month than tripled last quarter's forty nine million dollars adjusted ebitda, excluding special items was $521 million dollars a 44% increase sequential and significantly we finished the quarter with two point five billion dollars of cash on hand.
I'm proud of the work. Our team is doing to drive each of these results as Alcoa and we never shy away from getting the hard work done working inclusively and remaining focused on execution against our goals. Our company is getting better and stronger and this was certainly the case in the first quarter.
Before we get into the details though. I want to emphasize again that I'll always places an emphasis on our values and our strategic priorities regardless of market conditions V 19 crisis has served as a strong pressure test when the pandemic hit last year. Alcoa was well prepared to implement rigorous process has to protect our people and support our communities keep our operations running and preserved and generate cash today our values in our strategic priorities are working to keep us on track and to help Drive positive results. Most importantly. We have no fatal or serious injuries in the quarter the safety of our Workforce whether employees or contractors is always our most important responsibility and our teams continue to make progress and using Proactiv tools to keep all of our people safe.
in the first
Quarter, we also continue to make progress on our strategy accomplishing several key actions first. We successfully closed on the 670 million dollar sale of the work Rolling Mill in Indiana an encore asset that sale combined with Gum Spring sale last year put us at the top of our Target of between 500 million and $1 billion dollars for non-core assets a.m. Although will continue to pursue other opportunities where it makes sense.
Last month in our aluminum segment. We reached an agreement to repower the Portland aluminum smelter in Australia our agreements with multiple power providers and the Australian government will improve the smell Thursday evening and also help provide reliability to the electric grid in the state of Victoria.
Also are strong cash position coupled with a favorable debt Market provided Alcoa an opportunity to pre-fund certain pension obligations and pay off higher interest rate debt off a $500 debt issuance at a 4 1/8 per cent interest rate. This was the lowest rate that we've ever issued as an independent company earlier this month. We retired in. The 750 million dollars senior notes that were due in 2024 which were issued at a six and three-quarter percent coupon.
In April, we also contributed five hundred million dollars to our pension plans improving are funded status these actions position Alcoa for minimal cash outflows for debt down payment or pension contributions for the next several years.
This provides added optionality to use future access free cash for items aligned with our Capital allocation framework and Bill will discuss more about this in a moment.
We are also seeing stronger markets markets that are evolving to reflect the key issues facing our planet. We are fortunate that aluminum is a sustainable solution to help solve many challenges due to its lack of quality. It is lightweight strong durable in infinitely recyclable. We are also extremely well positioned to meet our customer's demands for sustainably produced products.
As a company with an integrated Upstream aluminum value chain, we have a distinct advantage to differentiate with sustainably produced bauxite alumina and aluminum in additionally, we do have the industry's most comprehensive portfolio of low-carbon products through our sustainable e which includes the industry's first and only low-carbon Centigrade alumina product. Finally an important point to consider for the future is China's evolving role in the global aluminum industry. We have been encouraged to see the strict discipline now evident in their issuance and enforcement of operation permits. Comply with their supply-side reforms and environmental targets.
And over these last months it is obvious that the country with the world's largest capacity in aluminum is working to reduce its carbon footprint with increasing impacts on today's and tomorrow's aluminum operations. Alcoa is ready to win in this rapidly changing world with improving markets increased environmental discipline in China and our strong ESG focus in the Upstream aluminum entry without let's get straight to the results bill, please go ahead.
Thanks for letting.
First before diving into what was a very good quarter financially and operationally, let's cover the for important strategic actions taken in March and early April wearing. We significantly improved our cash. Yeah maturity profile and liquidity position first in early March we issued at 4.125% five hundred million dollars of 8 year bonds maturing into 59 second at the end of March we closed on the war Rolling Mill sales Kaiser Aluminum generating cash proceeds of approximately $600 these two actions took our cash balance off point five billion dollars on March 31st. Third lie on April 1st, we funded $500 into r u s pension plans and lastly on April 7th week off the entire $750 of our 6.75% 8 year bonds maturing in 2024.
On a pro-forma basis and none of these actions brings our cash balance to 1.3 billion dollars in line with our Capital allocation framework Target of retaining 1 billion dollars off balance sheet and eliminates all material debt maturities until 2026 these actions also significantly moved us toward meeting are adjusted proportional met that Target and creative potential pension funding flexibility. We believe that are optimal capital structure and whack is cheap with a proportional adjusted net debt of two two point five billion dollars off the end of the first quarter. We have proved that metric over seven hundred million dollars from your end to two point seven billion dollars and just two hundred million dollars from the top of our target range for the office press on achieving the net Target can be made through reduced debt lowering pension Opeth net liability or increasing cash on hand.
The five hundred million dollar pension funding substantially improves the u s pension and our overall tension position funded status for the US pensions moved from 81% off your end to an estimate of greater than 95% on April 1st and create the pre-funding balance of roughly $1 billion dollars further taken as a whole are glass of Pensions are estimated to be greater than 90% funded the change in funding status benefits Alcoa in two ways first, it allows us to de-risk the pension investment strategies. It reduces balance sheet volatility associated with both asset returns and discount rate changes second. It can free up future cash flows. Should we choose to direct cash flows to other uses or should fund it status continue to improve the pre-funding balance can be used to meet are expected minimum funding requirements for the u s pension.
Now let's talk about the first quarter of 2021 in more detail revenues increased approximately $500 of 20% sequentially and 21% year-over-year on higher aluminum and aluminum prices higher revenues translated into earnings per share of $0.93 per share on a gaap basis or $0.79 per share a special items that include the gain on sale of the war growing Bill adjusted ebitda, excluding special items was $521 up 44% sequentially dead end up 62% compared to the first quarter twenty-twenty looking at drivers adjusted ebitda, excluding special items the entire benefit and aluminum and aluminum foil flow through to the bottom line unfavorable currency higher energy prices and slightly slower seasonal shipments. We're totally offset by the resumption of shipments of the San ciprian smelter and Thursday.
Super Bowl inventory costs
In the segments bauxite with lower on the inter-company pricing changes. We announced in January non-return of a favorable contract true up in the fourth quarter of $20 and earnings at non-operated mine alumina more than doubled up $130 sequentially to $227 on higher alumina prices and lower box wage costs aluminum improved 56% $280 million dollars in the first quarter of primarily due to higher metal prices slightly offset by higher alumina, turning to the balance sheet and cash flow working capital usually increases in the first quarter and including the impact of the war growing Mill days working capital increased five days off 25 days and approved for days compared to the year ago quarter.
Other key metrics also improved as return on Equity was 18.5% and the 2.5 billion dollar cash balance help to reduce our proportional adjusted net zero point seven billion dollars improving over seven hundred million dollars from year-end 2020.
Free cash flow smti distributions was -131 Million reflecting the expected use of working capital in the first quarter approximately $344 million dollars cash sources of 1.6 billion dollars are from nearly equal contributions from adjusted ebitda Rolling Mill sale, and the debt issue uses after working capital included Capital expenditures and seventy-five million dollars cash income taxes and seventy 1 million dollars in pension funding of $70, which does not include the five hundred million dollars funded April 1st.
Power outlet for the year continues the trend set by our very good first-quarter shipments are expected to remain at high level supported by consistent production level operations. We've increased the estimated full-year 20-21 alumina shipments range by a hundred thousand times several cost elements are expected to improve a total of $45 on a three-year basis with transformation costs that are five million dollars not operating pension and opeb expense that are twenty-five million dollars and interest expense that are $15 cash flow impacts now note the additional u s pension funding of $500 made on April 1st and assume using the US pre-funding balance for the remainder of the year and also took the debt repayment of $750 made on April 7th all other cash flow impacts remain on track for the coming quarter will no longer have earnings from the Warrick rolling off.
Which booked adjusted ebitda a 14 million dollars in the first quarter? However, we expect to see increased benefit from the current Tire aluminum market prices and continued Improvement in value add aluminum shipments and prices as is often the case we expected the second quarter will be our highest level of Maintenance activity for the year. Approximately twenty-five million dollars higher than the first quarter and then returned to a lower level in the third quarter also based on current energy market conditions around the world. We expect an unfavorable impact $20 sequentially home. Finally. We expect tax expense for the second quarter to be approximately ninety million dollars in summary. We are on track for an excellent year consistent with the very good first quarter now, let me turn it back to life.
Thanks, Bill.
Next I'd like to highlight the improvements. We're seeing across the fundamentals of our industry, perhaps the easiest way to demonstrate the impact of these underlying changes is by examining the realized price for Thursday, which is the highest we've seen since 2018 as you can see prices have continued a steady upward trend from the Lowe's at the start of the global pandemic. The average realized I was up 36% since the low in the second quarter of 2020.
Economic recovery manufacturing restarts and tightness in the physical availability of aluminum have all contributed to this latest price rally. We have observed strong macroeconomic Trends in the third quarter including positive GDP and industrial production growth in many of the world's leading economies. Also be announced and implemented monetary and fiscal stimulus programs have support stronger demand in aluminum's end-use Market, which is expected to continue as vaccination efforts progress lockdowns are East and additional stimulus measures reach further into the economy.
Now turning to the right hand side of the slide and on markets specifically.
Aluminum we saw an approximate 10% increase in shipments of value-added products during the first quarter. This was the third consecutive quarter of sequential Improvement for our metalcast in specific shapes wage boys. Also we are seeing significant year-over-year growth in our order book for these value-added products. We currently expect value-added products to represent more than half of our shipments in 2021 and to grow more than 20% year-over-year.
Alumina, the average API price for the quarter increased sequentially currently. However, High Freight rates have pressured the alumina price. We expect our smelter grade alumina slightly increase in 2021 in bauxite least saw a lower sequential third-party segment Revenue do to lower shipments. As I said last quarter. We expect full game 2021 third-party bauxite shipments to increase as we continue to boost production.
Next I'd like to spend a few moments on aluminum industry fundamentals specifically with regard to China changing Dynamics in this country have the potential to have a major impact on global primary aluminum industry over the last ten years China increased its Global Production of aluminum. And this was particularly acute from 2011 to 2017 long as its manufacturing sector grew at a Breakneck Pace with subsidized primary aluminum capacity many of these unfair subsidies continue today.
However growth has been lower over the last four or five years due to a combination of slower development in manufacturing as well. As China's own supply-side reforms this includes strictly enforcing the capacity permit program with a cap at forty-five million tons of annualized capacity and other constraints that will limit capacity in certain provinces over the last year China has announced other policies that could further impact the aluminum industry. It is set carbon dioxide reduction goals for the country announcing last year took a peek and Emissions by 2030 and carbon neutrality by 2060. China has also announced its latest Five-Year Plan to reduce by 18% off its carbon intensity per unit of GDP by 2025. The plan includes carbon intensity targets for individual provinces.
And we are already seeing.
These changes on the ground some provinces are preventing the launch of new energy intensive industrial projects including primary aluminum smelting in order to meet their targets and others are canceling preferential power tariffs for smelters. We have seen this occur in two provinces inner Mongolia curtailed smelters and delayed or canceled projects in Gansu canceled off parental smelter power tariffs in addition, the China nonferrous Metals industry Association announced in April a draft goal that called for peaking emissions in the industry by mm five years ahead of national carbon people as well as a Target to reduce by 40% industry carbon emissions by 2040.
Furthermore China has launched its own National emissions trading scheme this year, which will first Target the power industry including captive power. It is likely that the next round we'll focus on emission wage intensive Industries and include primary aluminum
adding costs and Supply restrictions to carbon emissions will be a challenge for China's domestic primary aluminum smelting industry of which more than 80% is powered by coal. In fact 5% of China's total carbon emissions come from the non-ferrous Metals industry the majority of which comes from primary aluminum smelting to put that in perspective. China's primary aluminum engine alone produces a similar amount of carbon emissions each year as the entire country of Australia.
In summary China's recent moves toward decarbonization have the potential to address persistent overcapacity in the country given the pressures and constraints in China is likely that we will see Supply growth in the country slow even further as the primary aluminum industry their approaches. It's 45 million tonnes capacity cattle and that can drive significant positive change in the global aluminum Industries fundamentals.
China is not the only significant change occurring across our industry other Global economies are also taking steps to transition to a carbon constrained World in our stake holders are demanding rapid change when it comes to a broad range of related issues. And as I've noted previously Alcoa is well positioned to meet the demands of this new sustainably focused world.
Our sustainable I know of low-carbon products is the most comprehensive in the aluminum industry and includes ecosource the world's first and only low-carbon smelter grade aluminum product. We are the world's largest third-party provider of alumina and our refining system also has the globe's lowest average carbon dioxide equivalents Something That We're leveraging with this differentiated product.
Sico Source supports decarbonizing aluminum while expanding our sustainability to the broader aluminum value chain, it offers no more than 0.6 metric tons of carbon dioxide equivalents per metric ton of alumina, which is half of the global alumina Industries average carbon contact and our measurement includes direct and indirect emissions from Mining and refining we expect to make our first customer shipment of ecosource alumina in May.
meanwhile
Also, seeing additional demand for aluminum in our sustainalytics and four metal certified by the aluminum stewardship initiative. Alcoa has operations in all three of our segments certified asio exacting standards and we have earned both performance and chain of custody certification, which allow us to Market certified products across our value chain in March. We announced that metal from our joint venture elysis and our low-carbon equal which is produced with no more than 4.0 tons of carbon dioxide equivalents wage being used in the wheels of the audit e-tron GT the manufacturer's first electric sports car. We supplied the low-carbon aluminum to run our group which produced the wheels with gloom and an allocation of metal produced from the elysis zero carbon smelting technology that we invented that technology which eliminates all greenhouse gases is now being ramped up to a commercial
oh by the elysis joint venture
Well the market for low-carbon aluminum continues to develop we are well-positioned to fill the needs of a society calling for lower greenhouse-gas emissions in customers who demand products that include Assurance of responsible production, whether it's electric vehicles wind turbines solar panels or Battery Technology aluminum is an essential material for Global economies that are working to address climate change and control carbon emissions carbon pricing initiatives are either in place now or being scheduled for implementation in 64 jurisdictions, including the European Union, Canada and China in Thirty-One countries, and you have ghg reduction Targets in place or NetZero pledges and here in the US the Biden Administration is making a climate change a top priority. Alcoa has specific ghg reduction targets that align with the Paris climate Accord and we're well-positioned for this important transition occurring
in the global market
next I want to reinforce the tremendous progress. We've made in our strategic priorities and Alcoa. We have a Relentless focus on continuous Improvement. I am impressed by our Global team of employees. Well, we set aggressive goals which stretch to achieve them last year was the first full year working within the new operating model which further streamlined our business it delivered an annual run rate of sixty million dollars savings importantly. We have this in place before the pandemic and the fact that we performed so well in a time of Crisis demonstrates that we designed a system that can work. Well for the future wage now count this action as fully completed and working effectively.
We have also achieved our goal of generating between 500 million and 1 billion dollars from the sale of non-core asset with the Gum Spring sale last year and the Warrick Rolling Mill sale last month completed this program finishing toward the top end of the target.
finally
Made progress in our portfolio review which includes opportunities for significant Improvement curtailments closures or divestitures.
Last month, we were happy to reach new power agreements for the Portland aluminum smelter. We appreciate the collaboration with multiple power generators the Australian federal government and the state of Victoria. I'm working with us to help improve the smelters competitiveness.
Also, we continue to work on solutions for the sensitivity on smelter in Spain. We agreed with the workers representatives and the government to pursue an exclusive sales process with a Spanish government owned a dead. We've complied with that agreement and are working in good faith with all our stakeholders to find the best solution.
It's important to note that we're now in the second year of his five-year portfolio review program and we will continue to work as expeditiously as possible to provide Clarity for our employees communities and other stakeholders.
Finally as we prepare to take your questions. I want to emphasize three major points to leave you with today. First has Bill detailed. Our balance sheet is solid due to the numerous actions taken including paying off higher interest rate debt and reducing our pension net liability, which has improved our net debt position with no major cash outlays do in the foreseeable future with significant cash on hand. We have much greater flexibility within our Capital allocation frame.
Second we've delivered on some key components on our strategic actions that have improved this company for the long term. We're doing exactly what we've said in improving Alcoa so that can be successful go through all Market Cycles. We will continue to drive for consistent improvements fact the Alcoa way third. We are working to Define what it means to be a sustainable Aluminum Company with best-in-class processes from mine to metal the most comprehensive low-carbon products portfolio in the industry and it continued pursuit of operational excellence. We will continue to act with Integrity operate with excellence and care for people all of this aligns to with our strategic priorities, including our work to advance a sustainably
Thanks for your attention and Bill and I are now ready to welcome your questions operator.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press * then two when called upon please limit yourself to two questions.
Our first question today comes from Carlos Alba with Morgan Stanley. Thank you very much, We'll just the question first question is wrong with the greater flexibility that you have achieved in your in your balance sheet and the cash balance that you have. How should we think about the the priorities and what does flexibility time would you like to do with this flexibility any update on on the groundbreaking alumina or any any other things that you might have in in in mind and then if I may just ask is it possible to quantify or to either qualitative or quantitative the actively the potential benefits of the renegotiated Portland Choice melter agreements? Yeah for the energy cost. Thank you guys.
Roy do you want me to take the capital allocation question? Yeah. Why don't you take it in general then? I can add a few comments at the end. Sure the Carlos great Great Commission on Capital allocation the some of the moves that we've made this year and some of the Tailwinds that we have in the market have really positioned the company to successfully execute on our Capital allocation program. You saw you saw the big decline in proportional net debt in the first quarter that's largely due to the sale of the war facility. So we've been able to get rid of Portugal net debt down to two point seven billion dollars. Remember we have a target range of 2 to 2 and 1/2. So when we look at the capital allocation program, there's four key areas for allocation accessory cash flow. The first is proportional continuing to make improvements on proportional net debt. I would tell you that that has been a focus area for us.
And it'll be continued to continue to be a primary focus for us. And I also believe that we should be able to get within our target range this year. Secondly and these are not necessarily A tranquil. We got returns to shareholders. We've got the continued actions on the portfolio review and then lastly the mid-size gross projects that we've talked about in the past month. I'll address the last one at this point at this point the the mid-size gross projects specifically in Australia and Brazil refining are currently on hold with their put on hold and 20/20. We will re-evaluate those projects over time. But at this point those those are on hold so those are the priorities for Capital allocation. We offer great progress on on the debt reduction. I think we'll continue to make great progress on the debt reduction in today's market environment. And and that's that's how we're moving forward dead.
As as as far as the Portland transaction goes really pleased to be able to repower Portland. It's a great facility really strong work for a good strong technology. And we've not released details about the power contract in today's market environment. It's very strong facility, but I really can't quantify anything much more than that for you Carlos, uh other than the fact that it is one of the one of the assets that was under portfolio review and now he's got every repowered. We're really pleased at that facility has a future for the next five years.
San Carlos if I can just add a couple of quick comments cuz I completely agree with Bill on on Portland. I think one of the one of my favorite things about this this announcement was the fact that during this portfolio portfolio review. We've been trying to be very clear that there's a number of potential outcomes and it's really good to see us be able to put in place as five-year deal for for a facility just wrong and it's competitive now with that improved power price has Portland. So I think just just a really great example of what you can do and when you have power providers in governments involved in a company and work for it that's looking to try and make an improvement and on the capital allocation question again, I think Bill hit it right on. You know, I think we're I am just incredibly pleased that we've been able to make so much progress particularly on on improving the the net net Target that we had and even through the midst of the pandemic. We've also been able to move forward and wage.
our portfolio restructuring we've been able to take real steps that that really
Helps to build functionality for us. And so I I would say in in coming out of first quarter in in the rest of 2021 stretching in front of us. We're really well positioned with a lot of great options in front of us. Thank you very much. Sorry if I could just tag on one more comment Carlos, you know, we talked about the portion on that that but underneath the proportion on that. You've got the the debt off and intention. It should be apparent to everyone through this press release that our pension situation is markedly better today and that it has been since we were an independent company our Global pension systems are greater than 90% funded r u s pension system is is greater than 95% funded and the fact that we pre-funded an additional five hundred million dollars gives us a billion dollar pre-funding balance that essentially eliminates wage.
Need to make contributions to the the pensions through twenty twenty-five and that's all assuming, you know, today's interest rates and today's asset returns. You can never ever check on that stay in the same. But as we look forward that freeze up significant cash flow as if you simply compare the the amount of cash that we're projecting today versus what was in most recent 10-K, if we use our pre-funding balance, it reduces our cash requirements by a couple hundred million dollars a year over the next few years. So gives us a lot of flexibility gets us very close to our net debt Target and just strengthens the company
All right, right results in in the clearly opens up the space for potential dividends or or share BuyBacks or grade. Thank you very much. I appreciate it. Good luck. Thanks.
Our next question will come from Alex hacking with City.
Yeah, good afternoon, Ron Bell. And thanks for the time. My first question is on the aluminum Market. You laid out. I think really helpfully everything going on in China with regards to aluminum and obviously it looks really bullish. How do you think all that plays out in alumina? I'm I'm kind of curious there and then the second question, you know, you know congrats on all the the successful on the balance sheet. It's really great to see the company in such good shape. Is there a potential still for more asset sales? You know, I know that you have that land package in Texas that I don't need you sold if I remember correct and you know, I guess you've got some power assets in Brazil and things like that or or you if actively done with the asset sales now that you've hit the target, thank you. Yes, I'll address the second one first and that'll that'll give time to Roy can address the aluminum Market question. Now, it's you know, it's Lippy asset sales in perspective. We commit it to five hundred million to affiliate.
We achieved.
Over eight hundred million dollars in proceeds between Gum Springs and and warped. So we're going to put a big check mark beside the the target of having five hundred million to affiliate. But as you allude to we took of Rockdale land down in Texas roughly 30,000 Acres where it's got a list price of 250 million dollars where we're actively pursuing potential opportunities. They're so very interested in getting that assets old. And on top of that we have a group of people who look at uh-huh, the the assets around the periphery something of our closing sale. That's to try to maximize values. So it maybe there's some smaller asset sales that are out there is potential and then you specifically mentioned the hydros down in Brazil at this point. We're pretty happy with their Hydro position in Brazil, so we'll probably continue owning those at this point. So Roy, do you want to address the aluminum Market question? Yep.
Thanks, Bill and appreciate the question Alex, you know, just just a few quick points and particularly looking at China but also sort of looking a bit further afield as well first from a short-term perspective and I know we hit some of this in the presentation, you know where we are seeing with increasing Freight rates in in the balance of pricing between China and burst of the world. We're not seeing a large window of Arbitrage opportunity for for taking tons into into China. So when you think about how those prices have been set in in in the fact that we've been relatively flat for these last months while the aluminum prices have been going up, you know, it's really just a the fact that we have both supply and demand relatively balanced in the good thing about the aluminum Market is that took a lot of transparency and you see those transactions occurring when you look out a bit and think about what will happen from the supply side particularly inside of China, you know, yep.
And I think the the supply-side reforms in aluminum have been very well very well explained. I mean we've seen a lot of a lot of enforcement in in in country as to what what's China has decided to do there's always a possibility that they looked to try and drive those same types of changes into alumina, but right now there's there's really not a any explanation of where that piece of the industry is going so not a lot of clarity. However, when you think about really two trends that I wanted to highlight the first is the fact that you're getting more and more transparency about environmental issues and Environmental Management certainly around the world, but also inside of China and so when you think of the the importance of how you manage and handle bauxite residue off and it's one of the things that we put a lot of emphasis on to to make sure that we're doing that with the best best methodology across the business you're seeing more and more transparency inside of China wage.
That means that that that it.
Tends to to ensure that that the the global competitiveness is it says level of planning field as possible. The other side is in in this will continue to be a big influence inside of the Chinese alumina industry because of the dwindling bauxite reserves. The fact is that they're importing more and more bauxite that creates the bauxite the import bauxite industry, which as you as you know, we do sell into age. I'm more importantly it tends to seep in the cost curve because now you're competing in most of our facilities, although not all are are co-located very close to the reserve itself the bulb itself when you're importing you then have that exposure both to Freight rates, but also to the just the cost of of mining elsewhere and then importing it so it tends to to be supportive of of driving from steepness inside of that cost curve. So when I look across that, you know, China has has become a very a very strong competitor and has grown its alumina business quite a bit. Yep.
It's I think something that offers us opportunities and also gives us the opportunity to the a moment to see how we can ensure that our our refineries are as competitive as they possibly can and watch how that Market Market continues in the future.
Thank you. It's very helpful color.
Thanks, Alex.
Our next question comes from Lucas pipes with Riley Securities. Hey, good afternoon, everyone and like to have my congratulation phone number that stood out to me in particular is the RO of 18 and a half percent. So so congratulations on that and some of the questions we've already had kind of touched on a lovers ways to continue to improve that that metric and I wanted to ask maybe a little bit more open-ended but you've done a great job as the assets you sold assets, um from here on out. How do you continue to drive that that figure higher? Thank you very much.
Lucas thanks. For the question. I appreciate that. You noticed the 18 and half percent one of the things about our company as all of you know, we have a joint venture partnership in and then they bauxite and alumina business. We also have a a somewhat complex tax situation where we pay we would pay taxes in Australia, but in many places around the world with net operating losses that we have we don't have to reserve for future taxes on on profitability that ends up resulting in a quarter like this where you seen a strength in the earnings and the aluminum business really all falling to the bottom line is so in a marketplace where we're seeing metal prices greater than $2,300 off our aluminum smelting business really shines and drives drives the profitability to the bottom of the line and that's what you see in that r o e calculation before birth.
Before I get to what's next and and all.
Actually, let Roy address what's next it shouldn't get lost in in the first quarter results the strength of the operations that we had all through 2023. Yeah through through the pandemic and into the first quarter of 2021. When you look at the bridge that that I showed in in the presentation. We're making the volumes that we that we need to make and we're making cost improvements on top of that and so in a market that's got good strong Tailwinds to be able to make tons as stably as predictably and as safely as we have been doing and also deliver on cost-savings just a tremendous amount of credit does to our operations team in the in in our operations around the world. So Roy, do you want to address some of the things that we would we would be looking at next? Yeah. Yep.
And you hit really what was going to be my first point which is how how strong of a foundation that the stability of operations can give us as we think about building on top of that and trying to drive off next from a really from from a return standpoint. You know, we have we try to take a pretty longer cycle view of how we approach investment in in also try and make sure that we can explain that very carefully both internally but also of course to our investors and and externally so we try to make sure that we're not simply react to the most most recent developments in our Market, but also trying to think a bit longer term and I think it's particularly important given how much how many changes were seeing in the market not only when you look up the some of the things we talked about with China over the course of this last for this last 40 minutes, but also when you think about this low-carbon revolution in the expectation for responsible production that we had
Embedded into the aluminum stewardship initiative and and some other work that we're doing. So it it offers a lot of opportunities and when you look across the portfolio and you think about how can we drive off? How can we drive great returns across the product lines that we have you've got the elysis partnership, which is developing which I think is is a great opportunity although still a bit far out because it's in the midst of research development but also along the lines in across aluminum when you look at some of the most competitive plants where you have real support both in the pricing standpoint and from from a desire to have that industry in country. I think you still have a creep opportunities in order to drive relatively small in modest projects, but really be able to drive further production and you took that on top of the stability in with a great Center of Excellence like we have in our aluminum group alumina is another place where in in Bill mentioned is a little while ago, we've got medium-sized projects that we can.
Going to Bear again. We need to.
We need to have confidence that the market is going to support that we need to make sure that the capital costs are as low as possible because it is a very it's a very competitive market out there and we want to bring everything that we can from from the Centre of Excellence perspective technological perspective. But then also make good use of the Box itself, but really good opportunities there that again is wage is a great way for us to be able to drive earnings and in bauxite and I realized bauxite pricing has been a little bit weaker over the course of this last these last few months, but we have great Reserve. We have a real opportunity in order to to consider growing those mines. If we find that we have the right customer and the right pricing environment and the right the right long-term certainty to be able to bring that to them. So, you know, it's there's a lot of ways that we can work to make this company better. I think you've seen a lot of those demonstrated through the the work on our our our net debt position. You've seen it demonstrated in, New Jersey.
That we can operate our plants stably. And again, that's work of everybody. But I think you're also going to see that we can be very disciplined and how we choose to deploy Capital to make sure we can actually drive value for our shareholders. And as one lever across all of the capital allocation members that have built and talked about as well.
I I really appreciate the very detailed answers. Thank you. I'll have a quick follow-up on the value-added products and the opportunity there with like pretty pretty impressive growth. Can you can you share with us? Do you spend capital in that segment or is that really just the the very strong manufacturing recovery that we're seeing that with you adding more value-added products and from here on out. What do you think is is the growth potential for that? So what for that product? Thank you.
Yeah, you know value-added Wise I think the the improvements that you're seeing now really is the the benefits of the return in the market. And so when you look across and faith in Europe North America, you are seeing a lot of a lot of demand returning and then it's vaccinations continue to be rolled out as you see manufacturers get back on the ins you seen that that Downstream can come into place. I think we're seeing what just a lot of strength and so from that perspective. It's it's really a matter of getting back to getting back to where we should be in really making good use of the faith in place when we look to the future. I mean, that's of course going to depend a bit on on how the recovery progresses and and I think we always need to be cognizant that there can be surprises in in both directions both positive and negative. But we can we can also consider how we try and creep forward value-added. There's always targeted Investments that we can make they tend to be very modest compared wage.
documents that you would put in for example in in creeping the smelter and or in in driving new production in a Refinery, however
We need to we would need to make sure that we've got both the molten metal available in order to produce them or a scrap input. If we were to choose to try and use some scrap or find a good business case to make sure that it would be sensible in order to drive more value-added. So it's certainly additional possibilities that fit inside of that and it's something that we continuously review its life, you know, one of the benefits of our portfolio across the world is that we are in some very vibrant vibrant value-added product. That's now those have been a lot of changes over the last couple of years with with some additional inputs Etc. And also with some of the some of the programs to 3 to terrorists etcetera that you'd seen that have altered some of those product flows, but we always try and look through that and again look for the long term so that we can actually see a good positive good positive outcome for any investment that we'd actually put into place.
Thank you.
Our next question will come from David Gagliano with BMO Capital Market. All right, thanks for thanks for taking my questions. A lot of them have already been covered. But I just you know, I I'm just going to press you a little bit on the on the capital return um or Capital allocation policy, obviously a lot of progress and and you know, very commentary regarding, you know, potential down the road as well as the the pre-funding of the pension already. So, you know, really the question is at this point. It's been dancing around a bit but should you know Equity shareholders expect dividends in 2021 at this point?
David I don't I don't think we're going to comment on whether they should expect dividends. What what I would say is given the current market situation. I think we can get our targeted net in that situation within our target range of the two two and half and after that the the the the goal will be to maintain it in June and then allocate Capital between the three other prongs of the capital allocation model.
All right. I thought I'd give it a try. All right, and then on the additional business considerations, obviously you call that a lot of what looks like really kind of one-time or some the second quarter for higher wage, you know seasonal maintenance and and and energy-related costs, you know as we think about the third quarter, you know, are there any thoughts all sets to to Simply assuming that those just go away in the third quarter? All the ones that are called out is one time or is there anything that we should be thinking about that set says it's some of that's going to lead into a third-quarter loss. Yeah, we as you know, we'll get third quarter guidance at the beginning of the third quarter. But I think you're you're the point you're making is is a strong one. And and that is the fact that wage tried to make it pretty clear that the twenty million dollars of seasonal maintenance in in the alumina segment is truly the high point of Maintenance in the year is in the second quarter wage.
and that it rebounds, uh, the
Kline's in the in the third quarter. Um, so uh, and the same on the 5 million dollars of in the aluminum smelting segment. We would typically see some maintenance in the second quarter, but I'm anticipating that to go away in in the third quarter and you know, obviously the war growing Mill sale, you know, we we lose those earnings because we've sold that asset, but I thought if I would kind of summarize the the second quarter, we do have some of these one-time items but we do have uh, some really strong Market Tailwind behind us with with metal price as high as it is with Midwest premiums or original premiums around Globus eyes, they are and and the value-added products did business focus on my volume side and pricing has has been very strong. So, uh, you know, our anticipation is that the second quarter of should be uh, good quarter off.
And but also need to consider these these items that we talked about here.
Understood that's helpful. Thank you very much. Appreciate it. Thanks, Dave.
Our next question will come from John tumazos with very independent research.
Thank you. Congratulations on the good times.
It takes a little while since the new smelter and Iceland and the participation in Saudi Arabia and the refinery and bauxite and Saudi Arabia drudy bauxite and
Brazil is there an appetite for a project if it were a smelter, would you be building a wind farm or would you be comparing?
solar and tax productivities
and the Sinai desert vs Arabia the Sahara the Kalahari the Sonora West Texas and other deserts would you do a renewal smelled or integrated into signer wind?
Yeah, John, so so I'll take that one and it's it's it's looking a bit forward into the future and I appreciate that, you know will we as always you know, I would step in and look to see how the markets are changing in order to to imagine what that future looks like. We don't have any significant growth projects that are currently lined up and when we do we'll certainly announce that to the to the brake world that said when you think about what the future and particularly in smelting is going to be it is almost definitely going to be one that has a a dedicated renewable power source, you know, I I don't think we as Alcoa would be imagining to do both power side and the smelter side but I don't I just don't see a a non-renewable smelter coming into Palm being on the table either for us or for most of the industry and when you when you step back and also think about the Revolutionary technology that's being developed in elysis right now. And again, there's still work that needs to age.
in order to make that a
A viable option for the future. It's also uh, I think a pretty exciting opportunity that we would always be evaluating before we chose to build that money next new facility to be quite honest. And again, just just one step backward cuz we always try and look across the market and think about how how we see those Trends developing, you know, the the agenda jealous is that it has operational cost improvements because you no longer need to to have an a note facility. You have the opportunity to be more productive than the same footprint, but we're also trying to make sure that it is very competitive on Capital cost perspective in really in the capital cost side is where you need to make sure that given the the trends that are happening in the market. So you connected to a renewable power source with the opportunity to take advantage of the low carbon Market, but if you were then to put in else with technology, it would make it the cleanest and greenest aluminum on the planet. So to me, it's great. Great place. Yep.
For us to be analyzing the for the future and and I think it's it's going to be it's going to be an exciting time. But right now nothing too nothing to specifically announced.
Thank you.
Thanks, John. If I could just add add $0.02 to that one thing to keep in mind is that motion is is going to be powered by wind in part in the future. So we've signed a series of wind contract so long, you know as you and I look back at the history of of this industry over the last ten or Twenty Years who who would have thought that a smelter would be wind-powered. But but we will have a smelter Thursday is in large part wins power going into the future.
Our next question comes from timna Tanners with Bank of America.
Hey guys. Hope you're doing well.
Thanks, one of two questions. Why is this, you know, if you were in our shoes, how do you think about modeling green aluminum? Is it just a talking point or a nice business, you know, is there a way to quantify that opportunity and your mind that you could get us too and my second question is just do you think we're approaching any incentive pricing for restarts or new capacity when you add together the aluminum price and reject premiums or do you think that Global costs have risen enough to where that that's not in reach yet. Thanks.
Let me let me take a first first swing at at the Greene aluminum point and then and then maybe bill can can add his thoughts to you know, it's the way that we try to look at the green aluminum foil. It's it's and as you can imagine it's just in the midst of of growing so it's it's hard to see exactly what it's going to look like. And so it's hard to develop. What does that model look like the fact is is that off, you know, one of the points we've been trying to make is that there should be a differentiation in in levels of green aluminum rather just than just fixing one particular point you I want to make sure that the market understands that off when you look at the the value chain coming up to aluminum tubing bauxite and alumina on how you choose to produce those products. But then also the the direct emissions content inside of aluminum as well which which box to make sure that of have customers are thinking about the the carbon content of their portfolios are thinking of that entire aluminum value chain, and for Alcoa has been imagine that that's important to us.
You know how to model it.
I think it's in my view. We're seeing those premiums start to develop today. I think because it's it's such a new market. They don't necessarily represent what that future can look like wage the more you can think about how you differentiate those products on the more that the the more potential and opportunity that lies inside of that green aluminum and it needs to be connected with the broader the broader expectations around cost of carbon in in carbon taxes that might be built around the world and so it's certainly not an easy modeling exercise at all. But again, I think one thing I would embed into it is in fact that not not all aluminum companies are the same and and not every Green aluminum is going to be the same as well. I don't know Bill to have any other thoughts about about a model it.
No, I mean it it's a small Market at this point. Right and it's just starting to grow. You know, I was just talking some some of the folks in our Marketing Group today and they're really start to see a pool from specific customers and and it's just building now pull from specifics. I can speak specific customers that I'm not really are starting to understand the you know, the the possibilities of green aluminum and uh, but but it's a small Market at this point Timothy.
You asked about oh, go ahead. I'm just going to I'll just going to start on the incentive capacity and if new capacity or really restarted capacity could come online wage. You think you're certainly seeing a stronger market today? You're starting to see some raw material inflation, but not a significant amount yet. Although certainly that changes quarter-on-quarter. You know, I I look at our portfolio obviously is what we have inside of our inside of our control on each of those smelters has its own set of of gives and takes and and challenges that might be there in that would be the Technologies of the smelter and question the availability of power whether it is Renewable Power of the car word content, is that power itself and and how long of the how long of a a Runway that you can build for it? Cuz you imagine bringing the plant back from Democrats failed State can be expensive and it can also take some time. So it's you know, when I when Alcoa reviews it it's not just about where pricing sits today but really dead.
So the basis for that price to continue and more importantly as you look through the cycle and I wouldn't have it. I guess where we sit in the cycle today when you look through that cycle you want to make sure that that that can be a competitive and profitable Enterprise but as you can imagine, we it's something that we continuously look at we continuously look at to make sure that are all of our plants are competitive and in generating good projects in today's world, but we also look at the plans that we could bring bring back up again if if we were to choose to
So you're saying you're not planning to bring anything back at these prices? Is that what I should take away from that comment know I think you should take away that we would analyze it and when we make a decision to bring something back, we would absolutely tell you I wasn't I wasn't meaning to infer it in One Direction or another.
Okay.
All right. Thanks guys.
Our next question comes from Emily Chang with Goldman Sachs.
Hey guys, and congratulations on a great quota. I wanted to touch a little bit on sort of the progress with the portfolio restructuring review. He was missing some updates on Saint cyprian and Portland, but you know, there's Clues still capacity under review. It sounds like from your last comments that you know, the higher model price environment doesn't necessarily change thinking and and everything still, you know under consideration he'll but when should we think about know maybe sharing the next update instead of you know, three and a half year old program?
So so I think I think you hit a lot of the most important points Emily. It's it's a it's a program that takes time because each of these facilities in look at the Portland is a good example. We've we've been working on Portland now for for more than two years and so I do think about trying to make structural change and as you know, we don't we don't talk about the those plants that we took an ounce this particular part of the portfolio review and you look at those changes as you look at those those Steps step changes in in the competitive cost structure. Sometimes it can take time for that actually to happen on then it's not something we talk about the market. So, you know Portland's now behind us as you know, since everything is in the midst of of negotiations right now with the state-owned industry to see if we can see if we can do a divestiture about Flags outside of that. There's no particular timeline for when we would make different decisions about any of the other plants in the portfolio. We still have the expectation and have something
Remaining in that program as you will know we'll be announcing that as the when the time comes and when we actually see that we can take action on each of those each of those facilities.
Great, that's awful. And and if I can just squeeze one last question and just around the carbon pricing. I know you guys put a great slide out on that. But any early impacts or signs of that starting to walk through and your operations and and how you might be thinking about sort of your aluminum Outlook going forward.
Yeah, so right now I think you know on the product side low-carbon products you are starting to see some sales and you saw our first ecosource sale, which is the aluminum product and then also in sales and equal in the cetera. And so that has a positive impact on the on the product side on on carbon taxes and carbon prices and how he's acting. You know, I think there is a a indirect impact that happens inside of the aluminum pricing environment itself and perhaps even into the regional premiums depending on what the what the different banks might be there. So to me because there's so much talk about carbon pricing and where this will take us and and the knock-on impact on the industry. I think you can see those indirect tax party inside of some of the pricing environment that we're experiencing today. I'm not sure that's a bit of a squishy answer but I think that's the best I can do.
That's really helpful, Thank you. Thanks, Emily.
Our next question comes from Michael dudas with vertical research.
Good evening. Thanks for taking a question. So Roy, just let me follow up on tend to start restarting capacity. You know, there's this the next expectations from investors that seemed odd years Aluminum Supply would be a lot easier to bring on to the marketplace world would say other non-ferrous metals and such but given what you talk about China and the fact that this Renewable Power probably going to be suck tight capacity giving what the use of that is going to be around the world cuz it wants to decarbonize. Do you think that that growth curves really flattened out quite a bit? It's going to take a lot longer period of time for supplying to catch up to whatever the demand growth is in. This industry is that we're starting to see emerge give them the Confluence of environmental de-carbon and some of the issues that you mentioned in China wage.
Yeah, Michael, let me try and answer that in and then give you some feedback. If I'm I'm missing the point. You know, I think it's I think in general bringing bringing facilities out of out of curtailment is a pretty difficult Enterprise. It's costly it requires significant negotiations in order to reopen your power contractor to find find the way to outside of just the pricing environment, which can which can come and go be quite honest. Although we always assume it's going to be a positive positive future. I think everyone would need to consider that and and in the end, you know, and as we look at it from an Alcoa perspective, we need to make sure that when you curtail a facility there is a reason for it and wage would think about bringing back on again there would need to be a reason as well. And again, it's it takes time it is it is risky in the sense that you need to have a lot of experience about how to restart those facilities. So, I think it's Thursday.
I think it's actually pretty difficult from that now koe perspective again to make a decision in order to bring that facility up again that said, you know from again. I I look at it from how we approach our facilities, you know, we look for opportunities in in curtailed facilities to see if there is a way to to address some of the underlying problems that might be there. Is there a power contract that can be renegotiated or or other knock on the effect that can be taken on it just takes time. And again, I think it's we're we're very careful not just to look at today's prices, but it's look for wage at least 12:18 or more months because of the time it would take in order to pay back that investment.
That's a that's a fair answer. I appreciate that cuz it seems like others in the industry would probably be having those. If not even more difficult decisions relative to what how you guys may have to run your business. Thank you.
Thanks, Michael.
This concludes our question-and-answer session. I'd like to turn the call back over to Roy Harvey for any closing remarks.
Thank you, and I'd like to thank everyone once again for joining us today in for all of the really good questions. I'm proud of the work that all of my fellow fellow Mark Owens are accomplishing and I really am happy with how it has made our companies stronger today. We have an improved balance sheet, and we are even better positioned for the future. Our strategies are working and making Alcoa resilient through Old Market Cycles. We will continue to focus on our values and on our priorities and we are well-positioned for more sustainable world with materials and solutions that Alcoa can provide. I am truly excited for the possibilities. Please be safe and I look forward to talking to you in April for our second quarter results. Good night, and thank you operator for all the support.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.