Q2 2021 Alcoa Corp Earnings Call
Good afternoon, and welcome to the Alcoa Corp, second quarter 2021 earnings presentation and conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask you. A question you May Press Star then 1 on your phone.
To withdraw your question. Please press Star then 2 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 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.
We'll 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.
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.
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 thank you to everyone for joining our call before.
Before we get started I want to take a moment and emphasize once again that alcoa as actions are always guided by our values. We consistently act with integrity operate with excellence and care for people that is true every quarter, but it has been especially important in this past year and a half as the world has wrestled with unprecedented challenges.
Brought on by the COVID-19 pandemic, while risks remain vaccines have helped to move many of the world's economies forward again.
I'm proud of the work that our Alcoa employees following our values have done to mitigate these risks supporting each other our business and our communities.
I am disappointed however that we had 2 serious injuries during the quarter hand injury in the case of heat stress. These are both important reminders that there are numerous everyday risks that we must consistently work to eliminate or reduce our most important objective is the safety.
All of our employees.
Now, let me quickly recap some of our results, which bill will describe in greater detail.
We posted our highest ever quarterly earnings per share since becoming an independent company. In 2016. It's also our most profitable first half of the year in the aluminum segment.
The results demonstrate that our strategic priorities are working to improve this company and deliver results. It's a very good time to be in the upstream aluminum business and it's a good time for Alcoa with a company that is stronger now than any time since our 2016 launch we've made significant progress on our strategy to.
Strengthen our balance sheet, eliminating all long term debt maturities until 2026 importantly, we are now well within our target range of proportional adjusted net debt.
We also delivered above and beyond our previously announced target to generate cash from noncore asset sales. Although we have reached our target on this program. We will continue to evaluate other sales when it makes sense.
Last month sale of the former East Alcoa's smelter site in Maryland, which had been closed since 2010 was an example of this the new owner will use the property for a next generation datacenter. This too is an example of our strategic priorities working it shows that former brownfield sites can bring economic value for all.
Company and the communities, where we used to operate.
Our cross sell Koa, we've worked to ensure this company can succeed through all commodity cycles when market prices plummeted last year, we were resilient because of the strategies. We already had in place our plants remained operational and performed well we stayed focused on the future continuing to make.
Improvements now with stronger markets, we're capturing the benefits from much better pricing and driving it to the bottom line.
While we will continue to improve our portfolio of assets. Our aluminum segment saw our companys highest ever third party realized price also ongoing strength in customer demand and China's efforts to reform its industry suggest continued strength in global aluminum pricing.
The metal we produce is an important material for the future and more sustainable solutions, we're ready for that future through existing low carbon products and the development of breakthrough technologies that we're working to bring to the market.
I look forward to discussing this in more but now I'll ask bill to dig deeper into our financial results Bill. Please go ahead.
Thanks, Roy It was another great quarter.
Revenue was at $2.8 billion were steady sequentially and after removing the impact of the Warrick Rolling mill sale were up 7%.
Revenues were up $685 million or 32% from the same period last year on higher aluminum prices.
<unk> quarter earnings per share was $1.63 per share 70 cents per share higher than the prior quarter and $2.69 per share higher than the year ago quarter.
Adjusted earnings per share for the second quarter nearly doubled sequentially to a record $1.49 per share adjusted EBITDA. Excluding special items also increased up 19% sequentially to $618 million and more than triple last year's $185 million.
A key reason for our record net income this year and a key differentiator from prior years has been the relative contribution of our aluminum segment with modest income taxes and virtually no minority interest more aluminum segment EBITDA translates to the bottom line compared to the other segments in the first half of 'twenty 'twenty 1 the segment provided 65%.
<unk> of Alcoa as total adjusted EBITDA, excluding special items compared to 28% of the total in our previous best first half 2018.
Even though I'll call. It adjusted EBITDA was $376 million lower than the first half of 2021 compared to the same period in 2018 of course first half 2021 net income excluding special items was $20 million higher than 2018, a similar dynamic also holds true for cash flows.
Now, let's review adjusted EBITDA in more detail.
The $97 million increase in adjusted EBITDA, Excluding special items was driven by higher metal prices.
$199 million benefit was partially offset by lower aluminum prices and unfavorable foreign currency impacts, which together totaled $41 million higher production energy and raw material costs were unfavorable impacts partially offset by better mix of alumina contracts and higher value added shipments and premiums.
<unk>.
At the product segment level bauxite, adjusted EBITDA declined $18 million due to lower intercompany transfer prices and higher production costs and alumina $22 per ton lower API and higher maintenance and energy costs were only partially offset by improved mix of shipments and contract pricing the aluminum.
The segment benefited from much higher <unk> and higher regional premiums, especially the Midwest premium as well as stronger value added shipments and pricing while higher production costs non recurrence of work Rolling mill, EBITDA and higher raw materials and energy costs were partial offsets.
Now, let's look at impacts and our cash flows.
The cash flow is highlight many of the major corporate actions, we've undertaken this year as well as the benefits from very strong adjusted EBITDA.
Given the magnitude of the cash balance change in addition to our normal year to date chart. We have bridge from the first quarter ending cash balance to the second quarter cash balance. It shows the April cash uses of calling the 2020 for bonds and funding in the U S pension as well as the quarter benefiting from cash inflows related to non core asset sale.
<unk> proceeds predominantly the former east alcoa's smelter location.
It also shows the benefit of strong adjusted EBITDA, particularly in the aluminum segment net of other operating uses which included a modest use of working capital primarily due to higher metal prices.
On a year to date basis, you can see the additional benefit of the strong first quarter EBITDA and the partial offset from a typical first quarter working capital change.
Those cash flows and EBITDA is also impact key financial metrics.
Return on equity increased from 18, 5% in the first quarter to 24, 6% for the first half of 2021, reflecting the record adjusted net income attributable to Alcoa.
First half 2021 free cash flow less net non controlling interest distributions was negative $371 million, reflecting the strong EBITDA, partially offset by the $500 million pension funding and the working capital increase as working capital increased 1 day sequentially on higher receivable and.
Evaluations, most importantly, our key leverage metric proportional adjusted net debt is now well within our 2 to $2.5 billion target range at $2.1 billion, our pension and <unk> net liability has decreased $1.7 billion or 55% from the 2016 year end balance of 3.
$1 billion to $1.4 billion liquidity is very good our cash balance was $1.65 billion at quarter end.
Moving to our outlook for the remainder of the year.
Our outlook for the full year 2021 is improving slightly in several areas shipments. The expected ranges are increasing a 100000 tons and both the bauxite and alumina segments and increasing 200000 times in the aluminum segment on.
On the income statement transformation costs are improving $5 million in cash flows. There are 2 expected improvements pension and <unk> cash funding is expected to be $5 million better and environmental and Aro spending is expected to be $10 million better than the last time, we showed this chart.
More importantly, we expect the third quarter to be another very solid quarter.
Operations are expected to continue performing at a high level.
Current aluminum prices are significantly higher and alumina prices are higher to compared to the second quarter.
We will see some partial offsets to these benefits as we are seeing cost inflation in the form of higher raw material costs energy and transportation costs.
Finally, with current market prices indicative of another quarter of substantial earnings we expect our operational tax expense to be over $100 million in the third quarter.
Now, let me turn it back to Roy.
Thanks Bill.
Now turning to our markets as Bill noted the aluminum segment has a significant role in our profitability and we saw a continued upward trend in realized pricing last quarter. It grew more than 60% since the low in the second quarter of 2020.
Broad economic recovery manufacturing restarts and tightness in the physical availability of aluminum have all continued to support this rally in the L. A meat and regional premiums we have observed strong macroeconomic trends, including positive GDP and industrial production in many of the world's leading economies also.
Monetary and fiscal stimulus programs, both announced and implemented have supported stronger demand in aluminum end use markets that is expected to continue as vaccination efforts advance lockdowns are eased and stimulus measures progress.
In addition, as noted last quarter, we continue to see China moving to constrained supply growth in energy intensive industries like aluminum to help meet its own goals to reduce carbon emissions.
We're alcoa's commercial impacts specifically in aluminum. We are also seeing significant year over year growth for value add products in the second quarter. We saw increases in both sales and shipments the second quarter was the fourth consecutive sequential improvement in shipments up 11% for the quarter and 40% year over year.
<unk>.
For full year 2021, we expect continued year over year growth in value add product sales revenue.
Now, let me return to the topic of China for a deeper look as it continues to play a predominant role in global aluminum industry fundamentals the country.
<unk> is continuing to focus on energy intensive industries to assist with its de carbonization goals and its announced 14th 5 year plan, which ends in 2025, the government set its highest priority goals, including work to reduce carbon emissions by 18% per unit of GDP and to reduce energy consumption per unit.
<unk> by 13, 5%.
The Chinese Central government has set dual control targets for each province on energy intensity per unit of GDP and total energy consumption on the left you'll see a summary of the publicly disclosed first quarter outcomes for this dual control system for China's 17 aluminum producing provinces.
Colors correspond to a traffic light approach that the government has deployed and is described on the chart Rick.
Results from this snapshot showed that provinces that produce close to 65% of China's primary aluminum had been rated yellow or red for at least 1 of the 2 targets.
China's central government has called on provinces not meeting targets to Titan energy efficiency controls in response, some provinces are limiting new projects and energy intensive industries, such as primary aluminum smelting inner Mongolia has already curtailed primary aluminum production in response to this program and other factors.
This is on top of other developments, we are seeing where Chinese provinces are taking action to limit primary smelting growth as part of their own policy priorities for example, Shandong province home to around 20% of Chinese aluminum capacity recently announced its intention to strictly enforce implementation of the reduction principle.
Which would apply at 2 thirds of scaling factor to interprovincial capacity transfers.
To give an example, this would mean that for a smelter in Shandong to expand capacity by 100000 metric tons per annum. It would require a purchase or transfer of 150000 metric tons per annum of capacity permits.
Finally, and gone through this year, we have noted that the province canceled preferential power tariffs for primary aluminum smelters.
In addition, the Chinese government also has started the first phase of a national emissions trading scheme with the aluminum industry expected to be included in subsequent phases with other industries.
Ana is also continuing to work towards its announced limit of carbon and energy intensive primary aluminum capacity of 45 million tonnes per annum of target announced in 2017 as part of supply side reform policies.
Considering all of the ongoing efforts in China. The country is expected to remain a net importer of primary aluminum with the potential for new capacity to be needed outside of China in the future clearly Chinese policies on carbon emissions reduction and energy have the potential to drive significant positive change in.
Global aluminum industry fundamentals.
Next I want to highlight the fact that our 3 segments continued to perform well, allowing us to capture the benefits from the positive market fundamentals. We are currently experiencing we have remained focused on strengthening our operations through improved processes and reliability to ensure that we continue to operate with stability in box.
We're continuing to boost our production from majority owned mines and seeing higher tonnes from joint venture mine in Western Australia, We reached a major milestone earlier this year for our Willow day L mind relocating the hub to a new region known Atletico transferring to this new region included a highly engineered process that involved moving.
850 ton crusher. It was an impressive project and I congratulate the team for a safe and successful move to this new region, which will be used for the next couple of decades and.
In alumina, we're maintaining production at near record levels for the world's most cost competitive refinery system. We've continued to improve our processes to reduce bottlenecks and operate efficiently and aluminum were benefiting from the restart of the Abi smelter in back on core Quebec that was fully completed last year, albeit partially offset.
The in telco curtailment.
Now, let's turn to some of our achievements in the first half of the year.
As mentioned earlier, we over achieved on our gold relating to the sale of non core assets, while continuing to evaluate future opportunities. We also made progress this year in our portfolio review, which includes opportunities for significant improvement curtailments closures or divestitures earlier. This year, we were pleased to announce the repower.
<unk> of our Portland aluminum smelter in Australia.
From a financial standpoint, as we noted our balance sheet is in the best shape since our launch as a standalone company due to the actions. We've taken today, we have more flexibility to execute on Alcoa strategies.
From a sustainability perspective, we are well positioned in an evolving marketplace that is placing greater emphasis on low carbon products in June we shipped the first commercial loads of equal source. The worlds first and only low carbon smelter grade alumina brand. This particular product, which is part of our.
Dana family Leverages, our leadership as the world's largest third party provider of alumina with a refining system that has the globe's lowest average carbon dioxide intensity.
While we have a strong position currently in our industry with the most comprehensive line of low carbon products. We're also leading the development of next generation technologies, we developed a zero carbon smelting process that helped create the technology basis for our <unk> joint venture the technology eliminates all direct greenhouse gas.
<unk> from the traditional smelting process, producing instead pure oxygen.
Metal produced from this ongoing R&D project has already been used in commercial products, including from the deal we announced earlier this year to supply metal for the wheels used an Audi E. Tron GT the Companys first electric Sportscar.
The <unk> joint venture is now ramping up the technology and began construction last month on commercial sized inert anode sales in Quebec, which will complement the ongoing work at Alcoa Technical Center near Pittsburgh and at the <unk> Research and development Center in Quebec.
Also we announced in May that we're investigating the application of a technology known as mechanical vapor recompression, which has the potential to reduce our refineries carbon footprint by approximately 70%. It would use renewable energy to capture waste heat and produce high pressure steam which would then be used to provide our refineries.
S heat displacing the use of natural gas the Australian renewable energy agency has provided funding for testing if successful by the end of 2023 Alcoa of Australia would install on mechanical vapor Recompression module at the wager up refinery to test the technology at scale.
And now turning to the right hand side of the slide we will continue to progress in the second half of the year, we're continuing to pursue a solution for our sensor prion smelter in Spain, including working with the Workers' Representatives and government stakeholders on a sales process for that asset in the state of Texas. We continue to work on the sale of the former rocked.
Tail site known as Sandau Lakes Ranch.
The real estate listing includes more than 30000 acres with significant water rights.
From a financial perspective, we are focusing on capital allocation in light of the improvements we've made to our balance sheet and the evolution of our product markets.
We'll remain committed to executing on our advance sustainably priority through our continued development of breakthrough technologies and a focus on growing sales from our sustained a line, which will help our customers lower their carbon footprint.
We will continue to improve our business by executing on our consolidated capital expenditure budget for 2021 that includes both sustaining and return seeking projects.
Next month, we intend to begin construction on 1 of the sustaining capital projects at our pulses to called US refinery, where we will implement technology with first adapted in Western Australia, known as residue press filtration it saves water and reduces the use of land required to store residue.
From a return seeking perspective, we're also working on a project at our <unk> smelter in Quebec, boosting average to enable lower cost and increase the smelters annual production capacity by approximately 10%. The project is expected to be commissioned by the end of the year.
Before we close our formal remarks I want to emphasize again the significant progress we've made not only since the inception of our company, but the accelerated progress. During these last several months our facilities consistently operating well capturing the benefits of this much improved market we.
Good resilience to the challenges of 2020, and we have the operational knowhow structure processes and systems to succeed with a significantly improved our balance sheet. Our company is positioned well for the future yet we will continue to push to perform even better relentless and continuous improvement is the all.
Co away.
Finally, we are proud to be a values based company with leadership in environmental social and governance practices and we will continue to lead with breakthrough technologies processes and products for a more sustainable future.
Thank you once again for your time today, Bill and I are now ready to take your questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then 1 on your phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 when called upon please limit yourself to 2 questions.
And our first question today will come from Michael Glick with J P. Morgan. Please go ahead.
Good evening.
Michael Hi, Michael.
Capital allocation is obviously top of mind for most of your investors and yourselves included I mean can you talk about how youre thinking about shareholder returns or growth now that youre in your targeted proportional net debt range.
Yes, Michael let me take that 1 but before I do I wanted to clarify.
Like I said in my prepared remarks, we actually said that I think I said in my prepared remarks that bauxite outlook has increased by 100000 tons. If you look at the chart. It's increased by 1 million metric tons, which makes a lot more sense from a 100000 and so to get that out of the way, let me address your cap out capital allocation question.
As you know we have.
A 4 pronged approach to capital allocation, we have a net debt target, which for the first time, we are in that target range. After the second quarter..1 of the problems is returns to shareholders third is the strategic review of repositioning of the asset portfolio and the fourth is earnings growth.
<unk>.
We continue to follow that capital allocation model, we're happy to be in our target net debt range at this point.
And I think over the last 5 years, you've seen that we're very disciplined about how we allocate capital so.
We are continuing to follow that model.
At this point.
Got it.
Just given the move in billet premiums and some of the other value added products I mean, maybe it's simply demand, but what else do you think is driving that give a view on prices in could you remind us how pricing for value added products flows through in terms of your contracts.
Yes. So there is in the in the backup of the presentation.
Some information I believe on how metal price flows through and how regional premiums flow through.
But as far as the value add premiums flow through the <unk>.
A large majority of north American value add products are done on an annual pricing.
Basis.
Europe.
Price more on a.
Quarterly basis. So you will see the billet prices flow through on a quarterly lag generally but in North America much of that is already price for the year going into 2022, we would be having those negotiations now with our customers.
For value added products, obviously, if we're able to pick up spot business from time to time as you've seen we've picked up slot business. This year, because our value added products volumes have been growing we've been able to sell more spot market business, but the pricing is largely at least in North America on an annual basis.
To complement that a little bit Michael the fact, because right now with a demand picking up so much in the U S. North America and also in Europe, what we're seeing is that spot premiums, particularly on bill but also on other products are going up and so as we in Europe, we can pick that up quicker like Bill was saying and then in North America as we get into the.
The.
The next year's contracting system, Cleveland will have the opportunity to pick up that those spot premiums as well. So certainly certainly a good time to be selling value added products right now.
Understood. Thank you.
Michael.
And our next question will come from Curt Woodworth with Credit Suisse. Please go ahead.
Yes, Thanks, good afternoon, Roy and Bill Thanks.
Sure.
First question I, just wanted to get your sort of initial take on the EU carbon border tax framework that was announced.
How you see that affecting the market I guess broadly and then you specifically.
And then also kind of in parcel what that I think previously you've talked about incentive pricing for new smelter is around 2600 metric ton.
You look at the amount of capital that's going to need to be spent.
Globally to address the carbon issue and I know that there's some significant capital that potentially could occur for you in the refinery system on the compressors, how do you see that as kind of baking into longer term normalized pricings. My first question.
Sure. So let me let me comment on the EU carbon border tax and then I'll, let bill talk a little bit about incentive pricing.
So obviously, we just started to look through the details to share.
Start at the very beginning.
From our perspective because of the portfolio that Alcoa operates and the fact that we are low carbon compared with much of the industry.
The quicker we can go to a global carbon price embedded inside of the aluminum price the better off we can meet and so as we look at around the world regionally and we think about the development of these types of mechanisms.
Hold theyre going to be positive for Alcoa.
Now when you start to look at something like the European the European border adjustment mechanism. There is a lot of details that we need to sort to really to be able to understand what are the gives and takes.
However, it is a step absolutely in the right direction. It is going to help to establish the fact that there is a true difference between what is low carbon aluminum and higher carbon aluminum.
And to me that is a very positive step forward.
And Curt if I address the incentive price in question, let me come at it from a slightly different perspective.
We think that the Chinese are pretty well committed to the cap that they have debt in the future. So if you then consider incentive pricing outside of China.
There's really 2 areas that <unk>.
Consider the first is restart.
And at today's pricing I would think that a lot of.
Producers are running the numbers around restarts and trying to make a determination whether the restart makes sense for them.
But then on top of that there is greenfield and you've seen in the rest of the world very few greenfield announcements for smelting projects and they take a while to come online. So at this point if anyone's considering greenfield, it's probably a couple of years down the road.
Okay. That's helpful and then I'll try to take another stab at the capital allocation capital allocation question.
Maybe start with the <unk>.
Fact that you've only spent I think $10 million on growth capex year to date so.
Clearly there is scope for the company to accelerate.
Our growth spend ahead, but given the free cash flow outlook. It seems like youre going to have plenty of wherewithal to do both so.
In terms of capital returns specifically to shareholders.
Should we think that Ah.
A decent percentage of European free cash flow will start to accrue back to the shareholder is there any any way you could quantify or help help.
Help frame the opportunity set for the investor around that because I mean, there's a lot of investors that have been patiently waiting for the net debt target to be head and obviously the recovery in the aluminum fundamentals creates a pretty good opportunity here. Thanks.
Yes, so I'll just touch upon a couple of the facts that you brought up first of all we had a we had a great cash generation quarter.
We contributed $500 million.
The U S pensions.
Back that out of cash from ops or cash from ops.
Close to it was over $400 million after you back that out.
So we are in a position in this part of the market and that's part of the cycle, where we are generating significant cash flow.
I'll come back, though to the current capital allocation model, there's 4 pronged we will weigh those 4 pronged.
To maximize value and I'm not going to speculate at this point how that occurs over the next few quarters, but as you alluded to we do have earnings growth opportunities. We've only spent $10 million of return seeking capital, we're going to ramp that up to $40 million additional by the end of the year.
Because we're at a $50 million target as you see in the outlook. So not significant return seeking capital growth at this point.
But we'll use the current capital allocation model to determine how we allocate capital going forward.
Great. Thanks, very much congrats on the quarter. Thank you.
Kurt.
And our next question will come from Lucas pipes with B Riley Securities. Please go ahead.
Yes, thanks for Matson debt.
Afternoon, everybody and Paul I'd like to add my congrats on a good quarter good outlook.
And also hitting your net ballpark.
Thanks, Lucas Thanks Lucas.
I now want to turn to the question has fallen.
I'm wondering just still way too.
Quantify.
The potential capital outlay for transformation of the portfolio.
<unk> value, creating growth opportunities so are we talking.
Tens of millions of dollars hundreds of millions of dollars over the next 12 months.
That would really help investors kind of set the expectations for <unk>.
Net loss.
Pall mall remaining item of.
Before long strategy.
Okay.
Okay.
So they they return seeking capital budget for the year is $50 million. We spent 10 year to date, we will spend an additional 40 during the course of this year.
We have not purposely not put a size around.
How much it's going to cost us to reposition the portfolio and the reason why we haven't done that is because we.
Essentially have to treat each plant on a case by case basis Greatest example, Portland, and we put a number out that said, we need to close or curtailed Portland back when we announced the.
Strategic repositioning we would've fundamentally been wrong, we were able to.
Repower, Portland, and it didn't cost us anything to Repower, Portland, and now Portland is going forward with a 5 year power deal that should position us to be successful over that time period. So.
We're trying not to give a view of how much it will cost to reposition the portfolio because it will depend on how we how we do that.
That's helpful. Thank you and maybe on the transformation.
We've had this discussion today in terms of capital outlays, but.
This could be a source of capital to.
I'm thinking of blocked out for example, can you speak to that and how that might fit into into this framework.
Thanks for bringing it up Lucas.
Many people tend to think of our legacy portfolio as the only cash outflows and we currently manage about 20 closed or curtailed sites around the world.
We think of them as.
And a number of ways, 1 we need to be good stewards of the environment and so for those.
<unk> closed and curtailed sites, we have to do them manage them in a sustainable way for the communities and the environment around them, but secondly, we look to minimize the liabilities and maximize the value East Alcoa is the Best example, east Alcoa is a site that we closed.
A number of years ago, we had been looking for opportunities to redevelop this alco and 1 came along where we were able to work with quantum loophole to put.
Redevelopment plan in place and they bought the site for $100 million and.
And we will move on from there Rockdale is another Great example, where we havent for sales for $250 million.
And we have a group that works to maximize the value of those transformation sites around the world.
And Lucas if I can just complement that I think 1 of the 1 of the reasons I. Most enjoy working for Alcoa is that we manage those sites all the way from inception.
1 to closure and then redevelopment and we have a very talented team that is focused on these legacy sites and you can see that very much and again in these VAALCO.
So.
Just a great opportunity to demonstrate that this entire life of an operation.
Can have value for alcoa, but but also for our communities.
That's that's very helpful. Thank you I'll follow up on 1 other point the $150 million.
Available.
<unk> 200 million buyback.
How should investors think about that in today's environment. Thank you very much.
I would just point you back to the capital allocation program.
<unk>.
It's part of the 4 pronged capital allocation program that we have.
Excellent guys.
Yes.
And our next question will come from Emily Chang with Goldman Sachs. Please go ahead.
Hi, everyone congratulations on a good quarter.
I just wanted to sort of check in on sort of the commentary that you had around 3 key guidance and a number of pieces of cost inflation that you're starting to see creep true do you mind sort of stepping Asturias at the component by component pieces.
How manageable do you think some of those cost pressures going forward.
So Emily thanks for the question.
I think we alluded to $10 million.
In the.
Alumina segment and that there's really 2 components to that as higher caustic prices that are beginning to flow through now you know caustic flow through on a 6 month lag. So we are just now starting to see some of the higher cost debt costs flow through to cost of goods sold.
And some higher energy costs, we do have.
Especially in places like Spain, we've got.
Natural gas that is linked to oil prices the higher oil prices are driving from the higher energy costs. There in the aluminum segment really on a sequential quarter basis.
We're seeing around $25 million of higher cost, that's a combination of coke and pitch costs, which are starting to trend up.
And from transportation costs. So those are the big components.
Yes.
It's not surprising in our industry for the folks who have followed us for a long time that when you see a run up in aluminum price is that there will be a trailing higher raw material cost and we're starting to see that today.
That's really helpful and 1 follow up if I may just around sort of the alumina market. It seems like that's.
Sort of trailed aluminum.
Little bit of time now can you provide an update as to what you're seeing there.
Thanks.
Yes, Emily I'll take that 1 and I. Appreciate the question. So first and foremost I think it helps to demonstrate the fact that these are 2 very different markets with very different sets of fundamentals.
The reason that we started to move to a an API pricing methodology, rather than simply having it be a percentage of of aluminum.
I think there is there's really 2 main points that I'd bring up the first is freight as.
As you look at the increase in price cost, it's really driving China to be to import less alumina and therefore operate more domestically and so that tends to as you see even those price increases happening inside of China. It tends to incentivize less imports and so that helps to constrained to a certain extent the.
Alumina pricing environment, and the second 1 which really ties in with that is the fact that when you look at the when you look at the transactions happening on a day by day or week by week basis. There are buyers as many buyers as there are sellers and so the market is balanced.
In fact, probably balanced to a slight surplus. So right now you don't have a lot of a lot of very specific catalysts that are driving the price upwards. The same as you don't have a lot of catalysts to drive the price downwards.
I'd also just note note as well that aluminum tends to be driven very much by sentiment and by looking at how that demand changes and because of the actual production of aluminum is less sensitive. It means that illumina is a bit less sensitive to some of those macroeconomic trends.
Got it that's clear thank you.
Thanks Emily.
And our next question will come from Carlos de Alba with Morgan Stanley. Please go ahead.
Thank you very much Brian and Bill.
Congratulations on the quarter.
A question on wanting to own their coupons from benefits on the balance sheet. The drop is around 700 million and get on a cash basis.
Payment in the quarter was around $500 million.
I Wonder if you could explain the difference is that a revision on the discount rate assumptions and or <unk>.
Settlement and debt.
Net also came through in the especially on items can you give us a pension lump sum settlement which might be.
Linked to the decrease.
200 million decrease in the balance sheet versus the cash flow and then the second question regarding the market.
When would you expect.
The focus in China on environmental aspects and emission reductions will result in lower net exports.
Aluminium semi products and what have you and therefore start to benefit the balance in the rest of the world.
Carlos I'll take the first 1 and that's a great catch to see how much. We contributed first is the change in the liability.
The we did contribute to $500 million.
Biggest additional move between the balance sheet is that we re measured.
The part of the U S pension plans.
The reason why we re measured part of those U S. Pension plans is because when we offered a lump sum offer we had enough people taking the lump sum.
Out of the pension plan that the accounting treatment requires us to re measure a part of that so that's the decline because you've seen an increase in discount rates from year end.
In part that's that's what drove that.
Change.
And Carlos Let me, let me answer your market question I think that is also a very good question. When we look at China today, we're already starting to see different provinces take active steps to start to start to meet those targets and it's the reason. It's the reason we highlighted the dual control methodology because not only is it.
Pretty pretty neat crop, that's also having having actual effects and impacts on the ground and so we're starting to see China become tighter and tighter and in fact, we believe China is in a deficit situation. So while they continued to have pretty steady net exports their imports over these last few months have actually grown and so.
The I think the answer to your question is I think you're already seeing the impact of those changes, it's really impacting lesson in their production of semi that debt.
Then export in more in the fact that they're importing metal to be able to to be able to address the demand that they have inside of China and you can also see that in the release of inventory from the strategic reserves, which is which is also demonstrating the fact that they are short of metal right now.
All right excellent. Thank you very much guys.
Thanks Louis.
And our next question will come from David Gagliano with BMO capital markets. Please go ahead.
Hi, Thanks for taking my questions I, just have a couple of sort of.
Questions to address them.
<unk> that were set last quarter that seemed assumed in the guidance is corner. So first of all on the bauxite business I think last quarter. It was a $59 million EBITDA line and the commentary around the second quarter was flat quarter over quarter.
Came in at $41 million in the guide for the third quarter was flat quarter over quarter can you talk about what's changed there in the bauxite business.
The biggest biggest change day visit some intercompany pricing was reduced between 1 of our mines to 1 of our refineries.
With the decline in bauxite prices that we're seeing globally. We adjusted that that is approximately and I'm going to estimate now approximately 12 of the of that change so.
The biggest impact.
Okay. This is sort of that low forty's per quarter, a reasonable run rate moving forward then or are there other adjustments for.
As I said as we said for the third quarter, we're expecting that to be flat.
We don't typically adjust.
Bauxite prices between the the.
The mines in the refineries, but we have seen a fairly large decline year to date and bauxite pricing. So we made that adjustment.
Okay, and then it's actually kind of dovetails into my next question, which is in the alumina segment.
Last quarter.
The list of special items for consideration for the next quarter, meaning this quarter was $25 million in total 1 time increase in costs and I noticed or noticed that there wasn't any commentary around a reduction of $25 million reduction in costs in the third quarter.
In the alumina business.
Is there should we assume a $25 million reduction in alumina costs from the third quarter.
No I think we said alumina costs.
I think we would say that it will be a $10 million negative.
In the third quarter, and thats related to higher raw materials and higher energy costs.
We are spending a little bit more maintenance in the third quarter than what we had anticipated given the strength of.
The metal markets, largely but to a lesser extent in alumina, we're spending a little bit more maintenance than what we had anticipated in the third quarter versus the second quarter and as Youre walking down our segments, you're probably going to get to aluminum here. Shortly so I'll answer the question in advance.
In the case of aluminum, we are investing a little bit more in the third quarter on pot restarts than what we had anticipated given the strength of the overall metal price. This we're trying to make sure that we have all the parts online that we can possibly have online to be producing metal. The payback is very quick at today's prices.
Okay. That's that's helpful. Thanks actually.
Just to follow up on the on the alumina side. So then.
What happened to that $25 million that was supposed to be a 1 time increase in costs.
Are we talking about then we now have another so it's kind of $35 million up from the first quarter as well.
On costs, yes.
Yes, so $2000.25 million increase versus second quarter to first quarter, and then anticipating a $10 million more increase in the third quarter remember that the $10 million includes raw materials. So we are starting to see an increase in raw materials and energy prices.
So yes.
The case.
Okay. That's helpful. Thanks, I appreciate it.
Okay.
And our next question will come from Alex hacking with Citi. Please go ahead.
Yes, Thanks, Roy and Bill.
I have a couple of questions.
Firstly, just on slide 13, the guidance for the aluminum shipments.
You know you did $3 million in the first half the FY <unk> guidance implies a slowdown in the second half is that does that still fair and is there specific reason for that.
And then secondly, I'm curious in your thoughts around the Midwest premium.
<unk> it.
It's amazingly strong obviously, it's great to see.
I mean, I guess, how sustainable do you think that is what do you think are the key forces behind it is that just reflecting.
Strong aluminum demand around the world.
High freight costs or are there other things going on that you think may be more structural.
So let me take the aluminum shipments theres 2 things that are driving and I would certainly not read.
The second half being weaker than the first half on aluminum shipments. The 2 structural things that are driving that lower in the first half we had some inventory in the San <unk> facility debt because of the labor dispute at the time was hung up in inventory going into the first quarter that we are able to ship out in the first quarter that elevated shipments.
Higher secondly, you have to remember.
<unk> in those shipments for also for the first quarter was the Warrick Rolling Mill and we subsequently divested the Warrick Rolling mill, so underlying shipments.
<unk> are strong in the second quarter I'm, sorry in the second half as the first half.
And Alex I'll take I'll take your question on Midwest premium and I think you started the answer yourself.
We need to start off with the understanding that it's now a duty paid and duty unpaid market because of the <unk> premiums.
Outside of that though the fact is that there is just unprecedented demand and so there's just not enough metal inside of North America, which is really what is the very basic structural change that is driving those premiums up.
And being able to and being able to divert tons to get it into into the market. It takes time.
So from our perspective, it's very well justified because it looks at how that dynamics are playing out in the market today.
And we will continue to develop through time.
Thank you I appreciate it thanks Alex.
And our next question will come from John Tumazos with.
Independent research. Please go ahead.
Thank you it's great to see all the good results.
John and John Hi.
Much as the.
Impact.
The green aluminum pricing to date.
Is it as much as half a percent or 1% or 5 percentage of the $4.60 of EBITDA from metal.
Second question.
You described the 10% cost increase in our alumina being driven by caustic.
Of course.
Currency and energy as part of that.
Bauxite unit costs only rose 2%.
Could you explain how the bauxite rose so much with US obviously it has.
Our diesel and other things moving it to.
I can answer your I can answer your green premium and I think the simple answer at this point is that it's still relatively immaterial. So while there is a true premium and you can see that in some of the some of the discussions unlisted listed indices.
It really is so far is a pretty small total of our product portfolio and our sales.
It is growing very quickly and I would argue that that premium also is headed upwards.
But right now it's still relatively immaterial John.
Thank you.
And John Let me let me.
Try to address the cost question.
Making sure that.
I understand the premise the cost structures of bauxite and alumina are just fundamentally different and you alluded to the Aussie dollar and they both have an aussie dollar component to them. So that's 1 of the few linkages between the 2.
In the case of the refining business as you can see in the backup we gave you the cost structure of the refining business in some of the big components. There are caustic natural gas which is.
On a lag.
Underlying.
Labor cost so to do a flat out comparison of bauxite cost to alumina cost is really difficult.
In the case of the as I said in the case of the alumina costs, we had some higher maintenance in the second quarter.
We're starting to see caustic prices increase bauxite is much more stable.
Thank you.
Thanks, John Thanks, John.
And our next question will come from Michael Dudas with vertical research. Please go ahead.
Good evening Roy Bill Jim.
Hey, Mike.
Just a question on portfolio transformation and non core asset sales I guess combined in that in this <unk>.
You've done a solid job of not only achieving.
<unk> X is exceeding expectation.
Usable on what Youre doing here that you highlight since it bringing in Rockville, but.
In the 3 year plus that Youre talking about corporate transformation is anything.
In the horizon.
Different changed.
The 'twenty 2 'twenty 3 'twenty 4 outlook, what the portfolio could be much different than maybe what you would have thought in 2017 and 18 prior to the massive structural and cyclical changes we've seen in the market share.
So let me let me take a first shot at that Mike So.
Our the purpose behind the portfolio transformation is to ensure that we have really a set of assets that can succeed no matter whats happening in the market cycle and so of course, we take into consideration the current market impacts and how that might be changing through time, but at the same time, we want to make sure that we have a day.
Cost competitiveness positioning positioning that we'll be successful no matter what.
So I would say the purpose behind the portfolio transformation has not changed I would also highlight the fact that it is it is a program that can result in a fundamental change in the overall cost structure in Portland is a great example of that as well as curtailments and closures or divestitures.
And to be quite honest the going between those different axes might change depending on what's happening in the circumstances around us. So we still have some work to do part of the reason that you've got a 5 year period is that some of those step change moments would happen later in the 5 years. So you really don't have access if you have.
Our power contract expiring in 2023 for example, until you get to that point to be able to actually make that step change and make a decision about the plant.
So we are still very much committed as <unk>.
<unk> had alluded to earlier in the Q&A session.
Outcomes might change depending on how the current environment is swirling around you, but the underlying the underlying purpose of having very cost competitive plants and having plans to frankly that are also low carbon and and that meet the demands of the future of aluminum market are very much top of our minds.
And just to follow up on your on your.
Last comment about low carbon and such and such.
Over the next 24 months or so.
Do you see a significant significant investment or how are we stage or to structure. Some of the progress that you're seeing obviously with some of your initiatives.
When do you think there could be will be required more or accelerate the.
Investment or potential from Alcoa that some of this capital could be allocated much more aggressively in those areas, which I think most people would probably appreciate it though.
Yes, Mike you know the way the way I would answer that is that Alcoa has a fundamental.
A fundamental advantage in that the way that we have grown.
Has given us a portfolio that is going to be very rich and very positive from a when you look at it from a green perspective, which doesn't mean that we stand still at all as you know we have a target to drive renewable energy up from 78% to 85% while at the same time moving down the cost curve. We're just getting started on.
The.
Mechanical vapor recompression inside of alumina, which is the step change.
We're already the lowest carbon intensity alumina refiner.
In the planet, but as we think about what does the future look like we need to see if we can find ways to start using renewable energy rather than natural gas inside of alumina refining as well.
I would also highlight the <unk> research and development project, which is that next and most green aluminum that could be on the planet right now thats a relatively minimal outlay, it's actually stepping forward and we're starting construction on the first commercial scale.
Inert anode sales as we speak right now.
However, when you get to be able to prove that and we've said that would be done by 2024. When we have the commercial package available that would open up a question about how that investment would take place in investment or licensing.
Excellent. Thanks, so much Roy.
Thanks, Mike.
And our final question today will come from David Gagliano with BMO capital markets. Please go ahead.
Hey, great. Thanks for taking my fault.
I am.
Just a quick follow up really.
Wanted to ask you mentioned a value add a few times here, obviously, but can you just give us a sales how much value add product as alcoa producing now.
What is like a <unk>.
Current value add premium for your own.
On average for your product.
Can you just give us a bit of a range as to how much you expect that might improve in terms of the contracts for next year. Thanks.
Yeah, so value added products is unknown.
Don't know the exact number 50, 253% of our total metal sales.
And it's hard to give a range just because the product does.
<unk> is very wide right. So the variety of products that we sell are wide. So you you have everything from foundry in North America to 2 slab to day.
Will it.
In North America and Europe.
We'd be looking to try to drive.
Better pricing going into 2022 as Roy said the markets are very strong and.
Hopefully that allows us to improve pricing for 2022.
Is there I am sorry, the price of it is there is there a way to give a bit.
Kind of a bit of a framework around what.
What you are.
Just on average so you don't give up any commercial issues or anything like that just on average what is a reasonable expectation just so we can kind of model it in.
Yeah no worries.
It's too early to give you an expectation around increases in that but at this point, Dave will Oh, it will be in the process of negotiating them with our customers between now and the end of the year.
Alright, okay. Thanks, very much. Thank you thanks, Dave.
And this does conclude our question and answer session I would like to turn the conference back over to Roy Harvey for any closing remarks.
Thank you Cole and I want to thank everybody for your questions today and for joining us.
Brown to be a leader in the industry and due to the hard work across our company Alcoa is stronger today than any time since our launch in 2016, our strategic priorities are working to bring results. We are doing what we said, we'd do making sure Alcoa is successful through all of the market cycles, we will.
Continue the strong momentum stay focused on continuous improvement and operational stability across the aluminum value chain to capture benefits from improved markets and with that please be safe and look forward to speaking with you again in October for our third quarter results. Thank you.
Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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