Q4 2021 Alcoa Corp Earnings Call
Good afternoon, and welcome to the Alcoa Corporation fourth quarter 2021 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 todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star 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 day everyone.
I'm joined today by Roy Harvey Alcoa Corporation, President and Chief Executive Officer.
And William Op, Linger 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 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 thanks to everyone for joining our call 2021 was truly a transformative year for Alcoa due to the work and dedication of employees across the globe. We're now in our best financial shape ever our accomplishments, which span across our business will help propel us forward with our vision to reinvent.
The aluminum industry for a sustainable future.
Before bill covers our results in detail I want to quickly highlight a few items first our most important focus is always on safety, which is embedded in our Alco values to act with integrity operate with excellence care for people and lead with courage and every one of those values has an application.
That helps to support and improve our safety importantly, we will never put production or profit our head of human life.
Last year, we had no fatalities, but we did experience some serious injuries, we recognize that our systems and processes must be consistently applied and regularly reviewed to prevent injuries. We never rest comfortably when it comes to safety, we must and will remain <unk>.
Do you want.
Next turning to some of our results we had a quarterly net loss due to restructuring charges that billable detail. Meanwhile, our quarterly adjusted net income increased 21% from the prior quarter setting a quarterly record for our company at $475 million adjusted.
Adjusted EBITDA, excluding special items was $896 million.
In the fourth quarter, we also paid $19 million in cash dividends are first as Alcoa Corporation.
This action to May 2021, an important year as the initiation of our dividend program indicates the strength of our company and our view of future performance through the cycle.
In the fourth quarter, we authorized an additional stock buyback program and repurchased three 2 million shares.
We generated nearly $1 billion from the sale of noncore assets in 2021, including $240 million from the Rockdale, Texas site in the fourth quarter. We've also continued to make good progress on the review of our operating portfolio. We've now addressed roughly 75% of the $1 5 million metric.
Tons of global smelting capacity that we said, we'd evaluate for significant improvement curtailment closure or divestiture.
Importantly, we have significantly reduced our debt position during the year, our adjusted proportional net debt was $1 $1 billion. In December 31, 2021, an improvement from $3 $4 billion from year end 2020, and on pensions, our remaining U S qualified pension plans are fully.
<unk>, we are newer ties additional portions of our U S plan de risking our balance sheet, while ensuring that pensioners and beneficiaries receive their payments from highly rated insurance companies.
We are now well positioned for the future where aluminum will become an even more important material.
Aluminum has always been a sustainable choice in metals, and we're ready to make it even more attractive to our greening world with technology advancements that will help us realize our vision progressed toward our net zero ambition and create an even more sustainable aluminum company and industry.
Finally, we're excited to see it all come together with many positive fundamentals in our markets, we expect the aluminum market to be stronger.
And for longer.
Now, let me ask Bill to go through our Q4 and full year results.
Our fourth quarter income statement reflects the solid underlying earnings and a.
Very Disney set of strategic actions, we recorded a net loss attributable to alcohol corporation of $392 million, but excluding special items. We recorded quarterly adjusted net income attributable to Alcoa Corporation of $475 million, our highest since becoming a standalone company and an increase of 80.
$4 million from the prior quarter.
Positive market fundamentals are reflected in our revenues and adjusted EBITDA, Excluding special items at $3 3 billion revenues were up $231 million or 7% sequentially on higher aluminum and alumina prices.
Revenues were up $948 million or 40% from the same period last year.
Adjusted EBITDA was up $168 million to $896 million sequentially, and up $535 million or 148% compared to last year.
On a full year basis revenues were up 31% to 12, one 5 billion net income attributable to alcohol change from a net loss of $170 million to net income of $429 million and adjusted EBITDA increased 140% from 1.15 billion to $2 70.
6 billion.
To provide a little more detail about the quarter the bottom of the page shows a bridge from fourth quarter GAAP net loss to adjusted net income.
Special items netted to negative $867 million and included noncash charges for pension annuity nations.
<unk> smelter closure, the sand Cyprian smelter curtailment as well as the positive impacts of noncore asset sales, primarily the Rockdale site sale.
Now, let's review adjusted EBITDA in more detail.
Higher alumina and metal prices as well as increased aluminum shipments drove the $168 million increase in adjusted EBITDA, excluding special items, while partial offsets came from higher energy and raw material prices.
Other impacts increased cost in San sit brand, primarily energy related were partially offset by onetime VAT credits recognized in Brazil.
Looking at the segments bauxite segment, adjusted EBITDA more than doubled to $49 million on lower production costs favorable shipments and the annual true up of mine lease royalties.
Alumina segment, EBITDA jumped 240% to $503 million on higher index pricing and lower production costs with partial offsets from the mix of customer shipments and higher caustic and energy costs.
Lower production costs, almost completely offset higher costs it costs.
Aluminum was the most profitable segment again this quarter. They are still at a high level EBITDA declines of $523 million as higher metal prices were more than offset by higher cost of alumina energy raw materials and production costs highlights included higher shipments in Quebec and <unk>.
At all as well as increased product premiums and shipments shifting to regions with higher premiums.
The sequential aluminum segment impact of the <unk> situation was $62 million in other and was partially offset by Brazilian VAT credits.
Below the segment line higher alumina prices caused increased intersegment eliminations, creating a negative $120 million impact.
Now, let's look at impacts and our cash flows.
The left side of the slide shows the drivers of the sequential increase in cash on the balance sheet, which increased from $1 $4 6 billion to.
To $192 billion, including the $110 million of restricted cash primarily related to the <unk> brand curtailment.
Roughly half billion dollars cash increase came from strong EBITDA as well as non core asset sales, partially offset by capital returns to stockholders.
Capital expenditures and increased working capital.
On the right side of the slide on a full year basis sources of cash were $4 $2 billion and uses $3 9 billion.
The largest cash source was adjusted EBITDA, excluding special items of $2 $8 billion, while non core asset sales generated $966 million.
The combination of debt offering proceeds and debt redemptions was a net reduction of $801 million.
Other major cash uses were increased working capital of $699 million $611 million for pension and OPEC funding, which includes a $500 million discretionary pension contribution in the second quarter.
Capital expenditures of $390 million in capital returns to our stockholders of $169 million.
Looking at other key metrics.
Return on equity increased to 33, 4% for fiscal 2021 full year 2021 free cash flow less net non controlling interest distributions was $336 million and includes the second quarter is $500 million pension funding.
Free cash flow less NCI was positive $387 million in the fourth quarter.
As working capital was flat sequentially at 29 days, we did have approximately three days unfavorable impacts from sand <unk> inventory build but this was offset by other reduction in days of inventory on hand, and favorable receivables collections on.
On a year over year basis days working capital is up nine days is higher sales disproportionately decreased days payable.
Both 2021, and 2020 year end working capital amounts include the impact of the workers' strikes at saying ZIP brand, which blocked over 50000 metric tons of metal shipments and represents approximately three days working capital we expect to work through this inventory build over the next eight months.
With unrestricted cash at $1 $8 billion, our key leverage metric proportional adjusted net debt is $1 1 billion and net debt is now net cash of $12 million.
As a final comment on the quarter, Here's a deeper dive on key pension actions, we took in November and December .
In November and December I'll call. It transfer to groups of U S pension liabilities totaling $1 $5 billion to Athene annuity and life company.
Pricing was very competitive we used a portion of our pre funding balance to meet contribution requirements. So no cash contribution was required.
I'll call booked a noncash charge of $848 million to recognize deferred losses that would have been realized over the term of those transferred obligations.
Our U S pension liabilities have changed substantially in the last year in 2021 gross U S pension liability decreased from $4 $5 billion to $2 6 billion and the number of new attempts decreased from 29000 to 14000, lowering alcoa's pension related risks.
The U S qualified pension are now fully funded.
That's enough looking in the rearview mirror now lets look forward to 2022.
Our 2022 outlook includes modest year over year increases expected in bauxite and alumina shipments.
In aluminum shipments the slight decrease projected reflects the impact of the 2021 work Rolling mill sale and the net impact of the 2022 restarts at Al Jamar, and Portland, as well as the curtailment at San separate.
And EBITDA impacts outside the segments transformation spending is expected to be approximately $75 million on increased project spending and other corporate expense is expected to decline to $140 million.
Below the EBITDA line depreciation and interest expense are both expected to decline and non operating pension and <unk> expense will increase due to the impact of the 2021 and <unk>.
Net impact of three line items is favorable $37 million.
Looking at cash flows required pension and <unk> funding is expected to decline $62 million to approximately $75 million.
Return seeking capital expenditures are expected to increase to approximately $75 million sustaining capital is expected to increase to approximately $450 million on spending for this routine mind move as well as impoundments and residue filtration spending primarily in Brazil.
A significant change from 2021 as expected and the payment of approximately $325 million of prior year income taxes.
A higher 2021 taxable earnings in Canada and Australia.
Finally, environmental and Aro spending is expected to increase $42 million to approximately $160 million.
Spending occurs to remediate closed locations.
For the first quarter of 2022.
Outlined in the appendix at current price levels, we expect adjusted EBITDA and adjusted net income to be similar to the fourth quarter of 2021.
<unk> metal index price benefits will roughly offset the raw materials and energy challenges and improvement from portfolio actions and sales contract pricing are expected to mitigate other seasonal changes and headwinds now let me turn it back to Roy.
As Bill noted the aluminum segment has a significant role in our overall profitability in 2021, the average <unk> aluminum price surged to its highest level in more than a decade and pricing today is higher than the average levels, we experienced in 2021.
On the supply side important fundamentals have taken shape in China, which is the world's largest producer of aluminum in 2021, the country curtailed more than 2 million tons of annualized capacity due to both power shortages and the enforcement of policies related to energy and the environment. These supply down.
<unk> are not only occurring in China increases in market power prices in Europe have led to a series of smelter cuts there that I will discuss in more detail on the next slide.
On the demand side, we expect annual global demand for primary aluminum to increase this year between two and 3% relative to 2021 demand in 2021 had already eclipsed the pre pandemic levels of 2019, we continue to see positive GDP and industrial <unk>.
Reduction across most of the world's leading economies, which supports continued annualized growth in aluminum demand across all major end use sectors.
Aluminum prices have been supported by supply constraints low inventory levels and high transportation costs.
From a commercial perspective, the shortages of some specific alloying materials key to our value added products have also eased somewhat from the tightest points in the fourth quarter.
On sales much of our volume for value add aluminum products is sold in annual contracts and negotiations with customers resulted in favorable pricing, we expect higher premiums relative to 2021 and continued demand for any remaining open volume.
We continued to benefit from our position as a domestic supplier to the deficit markets in North America, and Europe , where regional premiums remained high.
On overall market dynamics, the factor supporting higher aluminum prices represent fundamental structural changes that we believe will remain in place over the next decade supported by a drive towards more sustainable solutions.
The global push to reduce carbon emissions is a boon for aluminum demand at a time when supply constraints are becoming more prevalent particularly in China.
With policy goals that target reductions in total carbon emissions and a focus on energy efficiency, China has made a commitment to cap their primary aluminum smelting capacity at 45 million metric tons of annualized capacity, which leaves little room for any net production growth.
We expect China will remain a net importer of primary aluminum.
In the alumina market pricing remains higher relative to 2020 one's average, but supply constraints and primary aluminum production have reduced demand also some of the disruptions in supply it ex China refineries in 2021 have either recovered or are in the process of being resolved.
Our position in the aluminum market remains strong and advantaged. We are the world's largest producer of third party smelter grade alumina outside of China, and our refining system uses less caustic soda per tonne of alumina produced and then it's optimized for an integrated bauxite supply.
We are also proud to have a global refining system with the industry's lowest carbon intensity and we're the only refiner to sell eco source of low carbon aluminum brand that allows an aluminum smelter to reduce its carbon emissions simply by switching to this product in our view, our refining system and our unique product offer.
<unk> provides a sustainable advantage in a rapidly evolving world.
Next I'd like to take a deeper look at the aluminum market. The average view from analysts is that 2021 ended with close to a 1 million metric ton global deficit and another deficit of approximately one 4 million metric tons is expected in 2022.
All of this is happening at a time when inventories are at their lowest level in a decade looking at inventory levels from a days of consumption perspective inventories returned to a low point of 52 days of consumption at the end of 2021, if the deficit projection for 2022 holds we expect inventories.
I think to a new low of 44 days of consumption by the end of 2022.
Despite.
Deficit market conditions and inventories at low levels, we are continuing to see supply constraints due to challenges related to power and the emphasis on sustainable production. An interesting case study lies in the latest market dynamics in Europe .
In this important aluminum market average spot power rates increased between 200 and 400% between January and December of 2021, driving cuts in smelting capacity across Europe .
This chart shows in dark Blue the countries, where smelting capacity has been reduced due to power issues. We estimate these cuts have impacted between 600 and 700000 tons of annualized capacity, which represents around 15% of Europe's operating capacity.
This demonstrates the pressure that aluminum smelters will increasingly face during the transition from fossil fuels to more renewables and as I mentioned earlier, the structural changes driven by the carbonization should give low carbon operators like Alcoa, a sustained competitive advantage in the future.
However, we werent without our own challenges as it relates to power prices in Spain, and I'd like to next recap. The news we issued at the end of 2021 related to the <unk> smelter.
As we've discussed previously on these earnings calls we've been working to find the solution to the unfavorable energy prices for our son somebody on smelter, even with the positive shifts we've seen in aluminum pricing. The smelter has continued to lose money, primarily because of the exorbitant energy prices in Spain. The.
The price of electricity there hit an all time high late last year, averaging approximately 240 euros per megawatt hour in the month of December .
On December 29, 2021, we signed an agreement with the Workers' Representatives that sounds it beyond to temporarily curtail the smelter for two years to control our losses, we will use that time to find an energy solution by a long term power purchase agreements we've committed to restart the smelter in January of 2024.
Sure.
We started the curtailment process earlier this month and expect all molten metal production from the smelter will cease by the end of this month with.
With the agreement, we expect annual net losses between $20 million to $25 million. Both this year and in 2023. While this situation is not ideal it was important for everyone to have clarity on the losses and importantly to have a clear timeline to resolve the issues and define the date to restart with new power array.
<unk>, we will continue to operate the cast house during the smelter curtailment using accumulated inventory that could not be shipped during the strike action. The agreement with the Workers' Representatives ended the strike, which also had negative effects on a refinery.
There is certainly much to be done during this two year period, but we look forward to working towards a more successful <unk> smelter.
Next as I mentioned at the beginning of our call our achievements across 2021 truly showcase our efforts toward becoming a more streamlined efficient and high performing commodity focused company.
For the past five years, we have worked on improving our foundation financially operationally and strategically now we are ready for the future. We are embracing opportunities to reinvent how we operate innovating for long term impact and challenging the status quo.
These accomplishments reflect our company's overarching purpose to turn raw potential into real progress. This purpose combined with our Alcoa values serves as our foundation. It helps guide every goal we set decision we make action, we take and the strategy we implement.
I'd like to highlight only a few of the many accomplishments listed on this slide.
From a commercial standpoint, we have the industry's most comprehensive suite of low carbon products and our sustain a family last year, we sold our first commercial shipments of eco source alumina the industry's only low carbon smelter grade alumina also we sold our low carbon equaled him aluminum for the wheels on the Audi E Tron GT ILG.
<unk> sportscar the wheels used both equally aluminum and metal from our <unk> joint venture a revolutionary technology that eliminates all direct greenhouse gas emissions from the smelting process.
In our operations, we continue to make important advancements and I'd like to recognize just a few.
In Australia, our Huntly bauxite mine had a very strong year and nearly matched its 2019 record for dry metric tons in alumina, our Quinn on a refinery in Australia had its best ever annual production in 2021 in Norway, We had record molten production that <unk> and record billet production that Lisa.
And Canada, all three of the operations in Quebec are now certified to the aluminum stewardship initiative and set annual molten production records.
Finally in Brazil, the al <unk> refinery recovered from the bauxite ship on motor damage and set a quarterly production record in the fourth quarter.
On our portfolio, we've made very good progress in addressing our production capacities to create a set of cost competitive and sustainable operating assets.
Our vision to reinvent the aluminum industry for a sustainable future really helps to define our next challenge to innovate and create low carbon solutions at our world needs and to solve some of our industry's most pressing challenges. That's included here in our future oriented research and development projects, which have the potential to <unk>.
Not only transformed the industry, but drive important value for our investors in a carbon constrained world.
We are addressing these challenges with cost competitiveness in mind, we need to solve for low carbon.
Also for low cost and low capital.
And finally on this slide we had numerous financial accomplishments in the year, which provide a much stronger foundation for alcoa's future.
But to be successful we must build on the positive momentum. So next I'll discuss a few of the items on our list for this new year.
In 2022, we will focus on safely completing the full smelter restart at <unk> in Brazil, and the restart of some modest additional capacity at the Portland smelter in Australia. As I mentioned, we are also actively working on the energy situation at FEMSA pretty on in.
In Brazil, we will be implementing some important capital projects, which include the mind move for <unk> bauxite crusher for processed you called US we are working on the installation of press filtration for bauxite residue, bringing technology to Brazil that we first adapted it to western Australia and refineries.
Finally, we will continue to investigate additional pension and <unk> actions to reduce risk as market conditions allow.
At the same time, we are focused on new technologies. We shared this information at our Investor Day in November if you have not had the chance to view that material. We've kept it archived on the investors section of our website I would like to briefly revisit some of this today due to its importance and how it aligns with our purpose and vision.
We are at a time when the world needs more sustainable solutions, and Alcoa is well positioned to make a positive difference and drive value. We are addressing these challenges with a commodity cost conscious mindset supported by operational and technical experience.
Technology roadmap, which includes Ellis, Australia technology in the refinery of the future provide a path to help reach our net zero ambition, which we announced last October the projects also have the potential to further differentiate alcoa.
And drive stockholder value.
Our refinery of the future redesign and our emphasis zero carbon smelting technology, our research and development projects that not only aim to reduce costs and improve efficiency, but also target complete reduction of greenhouse gas generation from their respective production processes.
This year, our <unk> joint venture will begin detailed planning for its supply chain, including the production of the proprietary anode cathode materials that are critical to the carbon free smelting process that was first developed the Alcoa Technical center.
Also work is underway for additional commercial sized testing next year 450, kilo and pairs with.
With the current development pathway. The JV aims to have technology available for installation from 2024, allowing potential adopters to produce carbon free aluminum approximately two years later.
Another exciting R&D project, because our Australia process, we are working to ramp up this innovation, which can purify aluminum scrap to levels that far exceed the commercial grade quality of metal produced from the smelter.
As the world needs more aluminum the technology can leverage the vast quantities of low value automotive scrap we can use this material as a feed stores to create high purity aluminum that can be converted for premium end use applications such as aerospace. The technology is currently working at bench scale and we.
Plan to develop a pilot demonstration facility next year with engineering and design work taking place this year.
Next our refinery of the future project bundles, numerous technologies and process improvements to eliminate emissions. While also developing beneficial applications for bauxite residue from an emission standpoint, the refinery of the future will involve two primary innovations, we're working to develop mechanical vapor recompression, which has financial.
Port from the Australian government and electric calcination, adapting mechanical vapor recompression to refining could replace all fossil fuel energy consumed in our boilers, allowing refineries to operate from renewable electricity.
Calcination at the final stage in the refining process, where alumina hydrate crystals are heated to remove water molecules converting that process to renewable energy rather than fossil fuels would allow all of the steam generated by the calciner has to be captured and reused which would also significantly reduce water use.
Next we announced last year, the beginning of a joint development project related to the market for high purity aluminum where HBA.
Non metallurgical alumina HPA is used for items like lithium ion batteries and energy efficient led lighting applications and other sapphire glass products, it's a market expected to grow due to the need for low carbon solutions in transportation and other sectors. The first pilot trials have so far produced average purity levels that are.
Aligned with what is expected in the HPA market.
Finally, you'll see on the far right of this slide our estimates for future capital to support these projects.
<unk> there are several stage gates for each of them, which are still in the R&D phase and full project funding is not yet approved to be implemented each one must provide expected stockholder returns.
Next with so much financial progress I want to revisit the capital allocation framework, which we simplified late last year Youll noticed there are some important similarities from our prior framework. We will continue for example to focus on a strong balance sheet through the cycle, which includes both our cash and our net debt position.
Next we will continue to allocate capital dollars to both sustain and improve our operations. This year, we've increased our sustaining capital to $450 million up from $356 million. The prior year. This change was driven mostly by the planned mine move agility and improvements to some impoundment.
<unk>.
Below the line on the chart for value creation, we have three elements listed in no specific order of priority returning cash to stockholders transforming the portfolio and positioning for growth.
On returning cash to stockholders, we initiated our first cash dividend in the fourth quarter totaling $19 million at 10 cents per share. We also closed out in Q4, a prior $200 million buyback authorization repurchasing three 2 million shares.
We currently have an unused $500 million buyback program available.
Next on strengthening the portfolio through our transformation process. It's important to emphasize again that we have options to mitigate closure costs. The sales of noncore assets. For example, in 2021 helped to offset costs associated with closure actions.
On the portfolio transformation as noted earlier, we've now addressed roughly 75% of our $1 5 million metric tons of smelting capacity as we're just now past the two year Mark on the five year program, which we first announced in October of 2019.
The tally it includes the two year curtailment and future Repowering, some simply on the curtailment of telco and permanent closure of Wenatchee, both in the United States. The full restart now underway at <unk> in Brazil, and the Repowering at Portland aluminum in Australia, including restarting a bit more capacity.
Finally on this slide our capital allocation includes positioning our company for growth with a key timeframe in 2024, as we develop and implement technology innovation after progressing through appropriate stage gates.
To summarize 2021 provided an opportunity to demonstrate the work we've been doing across our business in our segments Alcoa employees across the globe. It made a difference we've focused on the fundamentals is a commodity based company strengthening our foundation for a brighter future.
In 2021, it all came together we made our highest ever adjusted net income. We also saw strong profitability from our aluminum segment with robust market pricing, we expect a stronger markets to continue due to positive changes in the aluminum industry, including meaningful supply constraints in China.
Next we've positioned Alcoa have strength through the market cycles, which supported our decision to provide the capital returns we announced for the fourth quarter.
Finally, after the challenges the industry has faced over the prior decade.
Very good time to be in the upstream aluminum business. We are the right company at the right time, one where the industry's fundamentals are changing.
Importance of excellence in environmental social and governance standards coming to the forefront. This is a change that benefits our company now and in the future.
Thank you once again for your trust in our company as we work to drive value for the future.
And with that Bill and I are eager to take your questions operator, who do we have on the line.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press star one kiln.
When called upon please limit yourself to two questions.
Our first question today comes from Satish <unk> with Deutsche Bank.
Yeah, Hi, good morning, Thanks for good evening. Thanks for taking my questions. My first question is on the aluminum shipment guidance for 2022.
The two five to $2 6 million ton guidance appears to be a little bit light can.
Can you provide some more color given the various moving parts I understand that there will be lower volumes from Sanchez.
But this should be offset by did you start off Aloha smelter Andy had volumes from Portland.
Click volumes should be lower but.
It should just be one quarter impact given it was started in April of last year. So any color you can provide please thank you.
So I think you've hit on all the major moving parts, we had work in the first quarter last year.
We will get.
The zip.
ZIP brand smelter curtailed after.
Within the next week or so so we won't have 11 months of shipments there.
And then we are ramping up some small amount of production at Portland.
That starts in the third quarter it goes in the fourth quarter.
And then some production in <unk>, but I think you've hit on all of the major items.
So just to be clear.
The 400 to 500000 decline and the annual volumes does it include any lower third party purchases for the year.
Is that the reason for the larger than expected decline.
Well there may be some smaller amounts of by resale, but that's not the major driver.
Okay. Okay. Thank you and my second question is on the overall guidance for the first quarter of 'twenty two.
So I just wanted to clarify if the guidance takes into consideration the potential reversal and intersegment eliminations, which was $120 million headwind in fourth quarter.
It does take into that that into account. So it takes into two things related to alumina pricing, we have lower alumina pricing currently than what we had in the fourth quarter, but we will have a reversal of that inner segment.
The loss in this case, we will have that reversal also.
Got it got it thanks for the clarification.
Okay.
Thanks.
Our next question comes from Timna Tanners with Wolfe Research.
Yeah, Hey, happy new year, and thanks for all the great detail.
Okay.
Hey, there and what has caused this box high level you know looking across your portfolio as we just heard and in looking at what's remaining I know you said, you're still doing an evaluation of that footprint.
You still have a number of U S assets that are shut in I was just wondering I E.
Turning to leave it after Alan main Portland, you're happy with your footprint or is it still possible that would be the visit work in massena West. That's my first question.
Yeah, I'll handle that one timna.
We're always looking at what we choose to operate.
And so it's.
No.
Look at what's happening in the current environment, we project that out as well and so both from a from a restart side and we do have some curtailed capacity, but also from the preferred the capacity for potential curtailments or divestitures et cetera.
It's a it's an active process and it also connects over Timna and we've talked about this before it connects with trying to Repower. These facilities to look for ways in order to invest to strengthen them to buildup partnerships. So I think the straight answer to your question is that yeah. We're.
Always looking at our portfolio to try and decide how we can drive towards the first quartile number one and then number two make sure that we're meeting our our decarbonization targets and driving towards net zero in 2015, which obviously is a good portion of way, but we need to be actively working on that now.
Gotcha.
The second question is really broader about censorship brand in particular, so first off you had said it would be about 100 million hit in the fourth quarter I was wondering if that materialized.
There is some discussion of a wind power option for sensor brand that ive seen in the media that you've done tentatively agreed to wondering if that's a viable option. If he can discuss that in the local media also had some reports of about 100 million Capex investment that's been Smith. So just trying to get a little more color on that ramifications of that brand and how to think about it.
Alright.
So timna, let me take the first and the third and then Roy can address.
Windpower question.
We had projected I believe around $85 million of sequential EBITDA impact from <unk>, we saw around $75 million of sequential.
Negative impacts from San <unk> brand, that's around $65 million in the smelter and approximately $12 million. So I guess about 77.
In the refinery from from the strike there.
So we did see essentially what we thought as far as the cash situation goes we had projected around $100 million.
Capital that would be.
Held up in working capital and given the fact that we had around 50000 metric tons of shipments that Didnt go. It was it was at least $100 million of working capital that's tied up at.
At the end at the end of the year as far as the $100 million of Capex, we have committed to $103 million of restricted cash.
And that breaks down.
We've committed to around $68 million of capital spend.
At the at the facility over the next couple of years and $35 million of restart costs. So youll see that on our balance sheet, that's actually held as restricted cash.
We've committed to spend that over the next couple of years as we prepare for a restart.
Roy do you want to take the wind power question.
Yeah, and so just stepping back and looking at the deal that we haven't been sebree on I think it's it's.
It's a good outcome because it gives us some clarity through what is a pretty incredible dislocation in energy prices in Europe , and very specifically in Spain, and so are our sort of the most important next step was to reach this curtailment because it cuts off those losses, which is which is what bill described very well.
So now we're already starting to mobilize and look towards this capital spend that we've committed to but more importantly for that committed restart January one 2024, we're looking for energy contracts that construct out for longer and can take away the energy price risk and those of course tend to.
Linked to potential renewables projects and in this case that you had mentioned wind power.
Those are pre agreements or <unk>. So the first step in this process.
They are indicative of moving in the right direction and so I think it's a.
We need to how policy in the regional government of shouldn't connected with the National government policy on how they build those renewable power.
Opportunities and then connected to <unk>, which is what allows us to have this step.
Step change improvement in energy price that we could entertain in January one 2024. So the important thing is is that we're reaching curtailment, which means we're no longer consuming what is incredibly high priced energy and at the same time working to make sense it Brian as competitive as we possibly can for that restart January 1st 2024.
Okay. Thank you.
Thanks Timna.
Our next question comes from Carlos de Alba with Morgan Stanley .
Yes, thank you very much.
Happy New year, guys. So first question just to remain with Nancy Brown.
For her for how long do you expect to use the stocks to primarily.
Primary metal is stuff that you currently have there and what is the.
How are you going to run the cast house.
The feedstock at.
After you run down those inventories.
So we anticipate using that inventory over the next eight to nine months Carlos.
And then after that we will bring in cold metal.
And if I may ask a bill.
Would you be buying from third parties, who would you be bringing it from although European in Memphis.
European and us method.
I think we will do whatever logistically it makes the most sense Carlos I don't I don't necessarily have an answer for for where we'll be getting that metal. After the 10 months, but we will continue to run the cast house.
Alright, understood and maybe if you could comment is there any other comments that you can add to the VIP increase that you expect to benefit the profitability of the primary metals Hooper Holmes as melting.
As melting operations this year.
Yeah, I can I can give you some qualitative comments.
I think when we look at the markets and these markets tend to be driven in North America, particularly on an annual basis. So we've moved through that annual contracting period.
In Europe , they tend to be redefined on a quarterly basis and so you do see some changes as the year progresses, and then our or the available capacity that we have or capacity that we can build and add to our portfolio over the course of the year. Then we can take advantage of of what are typically very good spot prices and so for us.
It is when we have sort of that annual contract period in North America, particularly we're seeing a lot of strength and continue to see a lot of strength.
As a deficit market in North America right now there is a clear demand upsurge in across all of our different products and so it was a very good time to be going out there for those annual contracts and I would argue it's the same in Europe , as well and will likely become even tighter given all of the different European curtailments that were seeing.
So just on a qualitative basis.
I think it is.
There is a.
Definite move upwards on on value added premiums in general.
We're striving and driving to make sure that we can produce as much as much as we possibly can of these value added these value added products.
And then in terms of when when do we see that are hitting your P&L is this mostly in the first quarter I mean, the contract reset in January .
Throughout the year throughout the first half of the year.
Okay.
So let me quickly.
Alright.
Yes, typically typically they reset in January and again, you see sort of a north American reset in January and then Youll see the European that will have the quarterly driven changes in pricing that'll happen on for each quarter. So it's not it's not it's not as simple as one one impact and then doesn't change and it also could change depending on what the <unk>.
Mix looks like itself I don't know Bill if you want to add to that.
The only thing I'd add carloads in the guidance that we've provided we've included the fact that there is a pricing reset in the first quarter.
And we will see two pricing benefits in the first quarter. The first is the higher value add premiums across the aluminum segment and the second is the non recurrence of the negative pricing that you see in the alumina segment in the fourth quarter as alumina prices came down in the fourth quarter, we have some block.
Pricing that gets repriced and and that was a negative in the fourth quarter and so that won't recur in the first.
Alright excellent. Thank you very much Brian and Bill all the best.
Thanks Carlos.
Our next question comes from Emily Chang with Goldman Sachs.
Good evening, Ryan Congratulations on the progress with your portfolio.
The strategy.
My first question is just around the capex outline, but not yet functions with HPA or existing 2020, 'twenty 'twenty three.
I guess at what point during the year should we expect the same update on London and additional that will be deployed.
And I realize how close I'll reiterate to.
<unk> is different.
Sure.
Yes from an HPA perspective, Emily and I. Appreciate I. Appreciate the question. This is this is an active research and development project and in fact, there's probably a lot more a lot more information that you are getting because of the joint venture partner because how important this is to there on <unk>.
<unk> business.
So over the course of 2022, we'll see advancements in what it is right now a relatively small scale application to make sure that it actually works and then coming into the end of this year is when we'll be actually starting to design and consider whether we move forward without larger project and so I think there will be more.
Formation coming out as 2022 continues forward.
I would just reiterate the fact that for projects like this that arent in the R&D phase and it's no different for Australia and to a certain extent elephants, although well if this is further along.
We go through the stage gates to make sure that when we choose to invest capital we're doing it in a project that will be very that will be successful that we've been able to eliminate the technological risk but at the same time also have very good shareholder returns. So we need both the market side, but more importantly, the cost side to come in where we wanted to.
Thanks, Alright, that's that's very clear my second question is just around the capital allocation.
And our net leverage is well below your target cash balance is well above the previous $1 billion target you've talked about in the past how should we think about what the right level of cash is on the balance sheet and perhaps what that could mean for how capital returns could look.
2022.
Let me I'll take that one Roy.
Emily as you alluded to you've seen over the last five years that our cash balances have fluctuated theres been times, where we've been below the $1 billion target.
And as of today, we are clearly above the $1 billion target.
With that in mind, we initiated the dividend in the fourth quarter, we bought back roughly $150 million.
Of shares in the fourth quarter, we have a further $500 million authorization that we can execute in 2022.
And so as we look at all of our all of that information.
<unk> develops.
The revised capital allocation framework it will be focused on three things returning cash to shareholders repositioning the portfolio and positioning for growth in the future you have seen that the repositioning of the portfolio actually does cost us some money. So we are in.
In the sand sit branch situation, we've committed $103 million of capital to restart that facility.
But.
The.
So we have that we've got the <unk> restart that that will cost us.
So that's what's going into the thinking behind the capital allocation.
Allocation program.
Got it thank you.
Thanks Emily.
Our next question comes from Michael Glick with J P. Morgan.
Yes, maybe just a follow up there on the buyback you did $150 million in <unk>.
How should we think about the pace of buybacks moving through 2022, and then just generally your thoughts on dividend increases versus buybacks.
Yeah, we really don't have any any guidance Michael on.
How quickly will execute upon the future buyback it will be based on as we see cash coming in and the market situation.
As we consider the the question around dividend versus buybacks. The dividend was set as an initial dividend and I should before we rush to talk about potentially increasing the dividend. We just paid our first dividend in the fourth quarter. After five years of being an independent company.
So we set that dividend at a level that we thought we could be comfortable through the cycle.
So as we consider the future use of excess free cash flow will be balancing the dividend versus additional buybacks.
Got it that's helpful and as it relates to the cost side could you maybe go into some of the key items on the raw materials side.
And how you see the trajectory of cost moving through the year.
I'll address the first quarter, specifically the cost situation on raw materials, it's very fluid. So we haven't provided our full year guidance.
The raw material situation, two big cost drivers on raw materials.
The first is caustic.
And the second is carbon products those are adding up to be about $50 million of sequential quarter.
Negative impact.
That's what that's included in the guidance that we've provided.
$50 million combined between between caustic and carbon products.
Thank you very much.
Thanks, Michael.
Our next question comes from John Tumazos, with John Tumazos, very independent research.
Thank you very much for the last 20 pages of slides, they're very helpful, especially.
Slide 31, and 34, so it's very helpful.
My question involves your 2% to 3% demand growth estimate for the year.
World Auto sales might grow two or three times or four times, depending on chip availability.
Easy sales typically are all aluminum.
Grew 50% to 100% in different markets.
The Bev can is growing.
With displacement of pega bottles and different capacity expansion, if I can makers Paul.
World GDP and most regions microbe by more than two 3%.
Which markets do you expect aluminum to be cannibalized or.
Priced out.
Building construction.
Electrical uses internal combustion.
Engines.
Other markets.
It's clearly there's many segments are going to grow more than 2% to 3%.
Yeah, John Let me, let me try and provide a little little extra information that might be helpful.
I'm not sure I would talk too much about cannibalization.
Because while we are enjoying positive aluminum prices and certainly like it when it's above $3000.
We're seeing a lot of that same type of commodity price inflation across some of the competing metals as well and so I'm not sure. If it's so much cannibalization as some weakness that we see in the markets as they're sitting today and.
So let me take one one quick example in transport or construction growth inside of China. As you watch some of the fiscal measures that they've taken and the tightening of some of the credit.
That's something that tends to drive a flatter construction market and Thats. How we were looking at this up until up until this point now that physical policy can change, we can see more money going into construction and so that that could drive a much a much more vibrant market.
So from the Chinese standpoint, it really is around the construction side and it's the availability of credit. So if we see that turning around.
You could you could start to argue which is which is I think where youre going with us the demand could be stronger.
From the from the rest of the World standpoint, you had a very strong 2021, that's very sharp rebound I think we continue to see good strength going forward and we're seeing strength across all the different markets.
And again I think transportation is a place where where we have seen we have seen those positives you've got the chip shortage, which sort of comes in and puts a little bit of uncertainty around how much that actually will be driven forward.
But in the end I think it's.
We had a really strong 2021, we're going to continue to build on that strength and we're going to continue to see that aluminum is used across the board pretty much in all of these separate markets.
Thank you.
Thanks, John .
Our next question comes from Lucas pipes with B Riley Securities.
Hey, good evening, congratulations on a great year.
Thanks for taking my question.
Wanted to circle back on your smelting footprint for my first question, maybe put a different twist on it.
Looking at global power markets.
Do you think the U S smelters have become relatively more competitive, but that's also where outside of sensitivity in your idle capacity still located how do you think about these assets and could it make sense to restart some of that capacity.
Luca so it's a.
It's a really good question and it's also a pretty complex answer because energy is first and foremost one of the most important decisions when you come to a restart or come into a brownfield or greenfield someday down the road.
And it's absolutely true that in the U S. You have access to power.
The second question that naturally comes is when you have access to well priced power what is the power source is it renewable versus as a is it a fossil fuel.
While these are relatively recent developments, we are certainly and absolutely moving towards renewables simply because it takes away some of that carbon risk and with our commitment to go to net zero by 2050.
We need to have a clear pathway for how to Decarbonize our portfolio. So de carbonization and power source is sort of a second consideration.
The other piece, though and perhaps this is the one that affects the U S more as the technology itself and so when you look at some of the newer smelters that we happen to be operating and Marvin is a great example of what is our most recent investments eurodollar as well when you compare it with some of the idled facilities that we have in the U S and you can look at.
In telco in the Pacific northwest or Wenatchee.
The fact is the technology is really don't compare they tend to be significantly more less efficient and much more requiring hands on labor and difficult jobs to do and very difficult jobs to actually find people that want that want to work there and that can be there long enough to really become very very good very preferred.
<unk> operators and so we look across all those different dimensions, as we think about any kind of restart potential energy very important but we have to look at the technologies and how that would then fit against all of our environmental goals.
Thank you very much for that perspective.
Unfortunately, I want to take it to for my second question to geopolitics for a second.
If tensions increase between Russia, and Ukraine, what could be implications for the global aluminum and alumina markets be thank you very much for your perspective on that.
My goodness Lukas that's a that's a big question.
I think the.
How I would limit my comments to say that those those types of pensions can have very broad impact. They can have broad impact on supply and this very much depends on if there were to be some kind of some kind of aggression. How are the different European countries. How are the different global countries is going to react to that and so you can.
Because because of where some of the supply comes from aluminum that can very quickly impact the supply that's coming.
It also has an impact on the supply side because of the energy prices inside of Europe and because.
So much of that power and what happens in natural gas, particularly is going to impact what's happening in Europe . We're already seeing this broad curtailment, because where energy prices are today imagine if potentially increase if.
If you're starting to see less availability of natural gasoline prices could go up even further and you could start to see even more of a supply impact happening in Europe , and potentially elsewhere because of knock on impacts.
Then just more generally the potential for disruption for conflict.
In the end impact of the demand that youre seeing as well and this is more of an indirect impact but could be something that could be an outcome again really projecting forward and just thinking through what some of the risks could be.
Thanks very much appreciate your perspective best of luck and hope you have a great 2022.
Thanks Lucas.
Our final question today comes from David Gagliano with BMO capital markets.
Alright, great. Thanks for fitting me in here I just have a couple of quick clarification questions at this point.
I was wondering if you just quantify the year over year EBITDA benefit in that value added contract and those value added contract for 2022 and <unk>.
And if those flow through basically.
On a.
Quarterly basis, prorated equal each quarter or does it change as the year progresses.
My first question.
You can't quantify we havent quantified the year over year yet David.
But I can't give you an idea of the sequential quarter benefit.
The sequential quarter benefit between the higher value added premiums.
And the block pricing in the alumina business that won't recur is around $75 million and you can see that the pricing in alumina was around $30 million negative in the fourth quarter.
So that would put.
The value add piece at around $40 million to $45 million on a sequential quarter basis. So so significant.
Okay. That's helpful. Thanks for that and then just.
Step back for a thing.
I think I missed this but the.
Can you speak a little bit more about the details behind that $375 million.
You know a catch up tax payments from prior years.
Yes, it's very very simple you you you've been following us long enough to know that in the case of Australia.
Lee pay taxes cash taxes.
The following year based on earnings from the prior year, so out of that $320 million approximately $35, 40% of that is in Australia. The other piece of that is in Canada in that the earnings and the Canadian smelters.
Grew significantly towards the end of last year, specifically in the fourth quarter. So that's all over into the first quarter and then there's a piece of that's in Europe for the exact same reason so.
Cash taxes in the smelting system typically have a little bit of a lag from when you make the earnings to when you actually pay the cash out and given the fact that we made very strong earnings in the fourth quarter in both Canada and in some of the European countries, we pay that out this year.
Okay, Great I appreciate the extra detail thanks a lot.
Thanks, David.
This concludes our question and answer session I would like to turn the call back over to Roy Harvey for any closing remarks.
Thank you Eiley and thank you to everyone who joined the call today, we always enjoy answering your questions and of course discussing our cost performance and the road ahead for our company I would also like to thank all of our employees once again for their excellent performance in 2021.
Look forward to talking to everyone again at our first quarter earnings call in April in the meantime, please be safe stay healthy and have a good evening. Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.