Q2 2022 Alcoa Corp Earnings Call

Speaker 1: you

Speaker 1: The St.

Speaker 2: Good afternoon and welcome to the Alcoa Corporation 2nd quarter 2022 earnings presentation and conference call. All participants will be in a listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

Speaker 2: To ask a question, you may press star then one on your 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. I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations.

Speaker 3: Thank you. Good day, everyone.

Speaker 2: I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer, and William Oplier, Executive Vice President and Chief Financial Officer.

Speaker 3: We will take your questions after comments by Roy and Bill.

Speaker 3: 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. To amendments 03 –

Speaker 3: 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.

Speaker 3: In addition, we have included some non-GAAP financial measures in this presentation.

Speaker 3: Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation.

Speaker 3: Any reference in our discussion today to EBITDA means adjusted EBITDA.

Speaker 3: Finally, as previously announced, the earnings release and slide presentation are available on our website.

Speaker 3: With that, here's Roy.

Speaker 2: Thank you Jim, and welcome to everyone joining today's call. Once again, we had a strong quarter with results that included a sequential increase in revenue, solid met income, strong cash flows, and increased capital returns to our stockholders.

Speaker 2: We will dive deeper into our results soon, but here are a few of the most important highlights. Net income was $549 million. Our adjusted EBITDA, excluding special items, was $913 million, which brings us to nearly $2 billion through the first half of this year. Our free cash flow, less non-controlling interest, was $383 million.

Speaker 2: Strong cash flow in the quarter supported capital returns to our stockholders.

Speaker 2: Year to date, we have provided $387 million in capital returns. This includes $275 million in stock by-box during the second quarter and $19 million in cash dividends, which the company paid on June 3rd at the rate of $0.10 per share. Year to date, we have provided $30 million in cash dividends, which the company paid on June 3rd at the rate of $1.20 per share. Year to date, we have provided $1.20 per share. Year to date, we have provided $1.20 per share.

Speaker 2: Also, today we announced an additional authorization of $500 million for future stock repurchases.

Speaker 2: supplementing the $150 million that remains from the prior authorization.

Speaker 2: Importantly, in these volatile markets, we continue to have a very strong balance sheet and we are well positioned for all parts of the commodity cycle.

Speaker 2: Our proportional adjusted net debt has reached much lower levels. It stood at $1.2 billion at quarter's end down from $3.4 billion for full year 2020. And we ended the quarter with a cash balance of $1.6 billion. We also recently amended and restated our revolving credit facility to provide more flexibility, which Bill will discuss in more detail during today's presentation.

Speaker 2: Before we do that, however, I want to reinforce an important foundational item. Our Alcoa values. You see them on the left of this slide, and they continue to guide our company. We act with integrity, operate with excellence, care for people, and lead with courage. These values are our consistent guideposts, and we lean into them even more during times of volatility and uncertainty.

Speaker 2: Importantly, our commitment to safety is embedded in these values.

Speaker 2: This year, we've not had any fatal or life-altering serious injuries or what we classify as FSIA's.

Speaker 2: Working safely remains our overarching goal every day. Our success requires continued vigilance in protecting the health and safety of our global workforce.

Speaker 2: including contractors and anyone who may visit our location.

Speaker 2: As China approaches its 45 million ton per year capacity cap, we expect new projects outside of China will be needed to meet demand while managing the rising costs of carbon emissions. Due to these carbon costs, we expect the bulk of global smelting projects in the future to seek renewable power. Those factors should also advantage today's low carbon emitting producers, like Alcoa, as demand continues to grow for low carbon aluminum, particularly in markets like Europe and North America. These longer-term factors continue to make us optimistic on the aluminum market and reinforce our need to continue strengthening our business as we prepare for a bright future. As I mentioned at the top of our call, we continue to work on optimizing our operating portfolio for today and tomorrow. First, we remain focused on driving returns, restarting capacity when it makes financial sense, such as at the Alumar Smelter in Songhawese, Brazil, and at Portland, Aluminum are joined venture smelter in Australia. In Brazil, we have successfully energized the first set of Alumar's smelting plots, and we continue to add new costs to operations as the restart progresses. Our fully-owned subsidiary in Brazil owns 60% of the smelter with the remaining percentage belonging to South 32. Both partners have agreed to fully restart the site 447,000 metric tons of capacity, which have been fully curtailed since 2015.

Speaker 2: We announced in September that we would restart Alcoa's share, which is 268,000 metric tons. We expect the restart to be complete in the first quarter of 2023. Next, we continue to take decisive action when either operational or cost pressures require adjustments to production.

Speaker 2: In December of last year, we reached an agreement for a two-year curtailment of the 228,000 metric tons of aluminum smelting capacity at Sun Sabrion, which faced exorbitant energy costs.

Speaker 2: We successfully completed that full curtailment this year and we're actively working on arranging competitive power arrangements to support the agreed upon restart in January of 2024.

Speaker 2: Also at our Suncipiton location, the Illumina refinery is currently challenged with extremely high natural gas prices. They are higher there, in fact, than anywhere else that we operate, climbing to more than $25 per giga-joule, a nearly five-fold increase since early 2021. As such, we have reduced the daily production rate by about 15% to help mitigate the impact of these higher prices.

Speaker 2: and continue to actively monitor this situation. Separately in the United States, on July 1st, we quickly acted to safely curtail one of the three operating smelting lines at our Warwick facility in Indiana.

Speaker 2: Unfortunately, we have struggled with stacking shortages at the smelter, which uses older, more manual technology.

Speaker 2: The Decision Tooker Tail One Line allowed us to work on these operational challenges while focusing on stability for the two remaining lines.

Speaker 2: And at the bottom of the slide, we were happy to announce this quarter some return seeking capital projects in both Norway and Canada. These two initiatives will allow us to creep capacity while adding value ad products for our customers.

Speaker 2: Next, I'd like to turn to our strategic priority to advance sustainably.

Speaker 2: Today, we have the aluminum industry's most comprehensive portfolio of low carbon products in our sustain-a-brand family. These offer customers the opportunity to lower their carbon footprint by simply using our products, which have lower carbon intensity than the industry average. Our sustain-a-brand family includes three products, beginning with EcoSource, which is our low carbon smelter grade aluminum. It has a carbon footprint that is two times lower than the industry average.

Speaker 2: Next, our equilibrium aluminum counts scope 1 and 2 emissions from mined bauxite to cast metal and is 3.5 times better than the industry average.

Speaker 2: Finally, we also offer aluminum with at least 50% recycled content in our Ecuador brand.

Speaker 2: While still a relatively small portion of our overall sales, we do earn a premium on these products, and we've experienced year-over-year growth in annual sustainer sales as the move toward more sustainable solutions gains momentum.

Speaker 2: We continue to see strong demand for our aluminum made with low carbon emitting processes, specifically in Europe .

Speaker 2: And focusing on our operating portfolio, we are also well positioned for a world focused on lower carbon emissions. We have the industry's lowest carbon intensity refining and we are also well positioned for a world focused

Speaker 2: Our global smelting portfolio has 81% of its power sourced from renewable electricity, which makes us one of the world's lowest carbon intensity producers of primary aluminum.

Speaker 2: Additionally, we have obtained certifications from the Aluminum Stewardship Initiative, the most comprehensive third-party system to audit responsible aluminum production. We can globally market and sell ASI certified box-site, alumina and aluminum.

Speaker 2: Meanwhile, we communicated last year a net zero 2050 ambition, which builds on the progress we are already making against our existing goals to reduce greenhouse gas emissions and increase renewable energy in our smelting business.

Speaker 2: Meeting our net zero ambition relies heavily on technologies that we're currently working to develop.

Speaker 2: At Alcoa, we take pride in the fact that the legacy of our company is tied to the invention of the aluminum smelting process.

Speaker 2: The discovery by Charles Martin Hall in 1886 transformed society, turning aluminum from a rarely used material It was the world's most expensive metal at the time, into something that we use daily. That spirit of challenging the status quo lives on with us today. That's why we have a strategic vision to reinvent the aluminum industry for a sustainable future. We are running forward to demonstrate what a low carbon sustainable aluminum industry can look like.

Speaker 2: We have a suite of technologies under development with a potential to transform our industry and drive value for Alcoa and our investors.

Speaker 2: ELSIS is the result of years worth of R&D work that started at Alcoa's Technical Center. Now, this joint venture with Rio Tinto remains focused on building out this process so it can be adapted for full-scale commercial use.

Speaker 2: Velocis has produced the world's only commodity grade aluminum manufactured without direct carbon emissions. And its metal has been used by brands ranging from Apple to Audi. Velocis has produced the world's only commodity grade

Speaker 2: LSS continues to be focused on its R&D development timeline, with the technology available for installation from 2024, and then two years later for the production of metal from the first the doctor. LSS continues to be focused on its R&D development timeline, and then two years later for the production of metal

Speaker 2: In addition to the environmental benefits, this innovation is being designed so it can save both operating costs and boost productivity when compared to a same-sized smelting cell.

Speaker 2: Our Refinery of the Future initiative is a combination of several different R&D projects and process improvements that aims to not only decarbonize the alumina refining process using renewable energy, but also to lower the cost of capital in constructing a new refinery, reduce freshwater use, and minimize and ultimately eliminate deposits of bauxite residue.

Speaker 2: As I noted earlier, the world is going to need more aluminum over the long term, and some of that has expected to come from recycled aluminum.

Speaker 2: We have a recycling process under development known as Australia that has been demonstrated at bench scale. It can use low value, non-ferrous scrap, remove impurities and other metals, and purify the remaining aluminum to a standard that exceeds the quality level of most smelters. It is a standard that exceeds the quality level of most smelters.

Speaker 2: Finally, another project we have to Alcoa, Australia, leverages our leading position in alumina refining. Hi-Purity alumina, or HPA, is used in a range of applications, including LED lighting and lithium ion batteries. We are in stage one of a multi-stage process that includes ongoing production trials and the detailed design of a demonstration facility. And the detailed design of a demonstration facility.

Speaker 2: Each of these projects require intense effort, focus, and problem solving skills from our teams. But our R&D projects offer vast potential as we continue to act in a cost competitive and productive manner.."

Speaker 2: As Bill and I prepare to take your questions, I want to quickly recap a few important points.

Speaker 2: Our company delivered strong financial results in the second quarter, and we had an impressive first half. The work that we have done over these past several years has put Alcoa in a good position for all market cycles, and we continue to work on improving our company.

Speaker 2: Alcoa provided substantial capital returns in the second quarter with our stock repurchase program and our third consecutive dividend payment. And we are proud to have announced today another $500 million authorization for future stock repurchases.

Speaker 2: We also consistently evaluate our portfolio in accordance with our strategic priorities.

Speaker 2: We will restart capacity when it makes sense to do so and, inversely, we will act on curtailment, closures, or debatitures. kurmates focus on sort of the

Speaker 2: If it brings value for our company and its future.

Speaker 2: Finally, we know that the aluminum ministry is vital today and tomorrow, including an evolving economy focused even more on sustainability.

Speaker 2: Alcoa is the company to deliver.

Speaker 2: Today, we have a low carbon position with the industry's most comprehensive suite of low carbon products in our Sustainer line.

Speaker 2: For the future, we are investing in technologies that have the potential to transform our industry, and we are using industry-leading, environmental, and social standards to help chart the challenging and exciting course ahead.

Speaker 2: Importantly, we are led by strong values and our purpose is to turn raw potential into real progress.

Speaker 2: These simple statements help to drive us forward with our strategic vision to reinvent the aluminum industry for a sustainable future.

Speaker 2: Now, Bill and I look forward to taking your questions.

Speaker 3: We will now begin the question and answer session.

Speaker 2: To ask a question, you may press star then one on your touch tone phone.

Speaker 2: If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker 2: If it any time your question has been addressed and you would like to withdraw your question, please press star them too.

Speaker 3: When caught upon, please unmute yourself to two questions.

Speaker 3: And our first question will come from Timna Tanners with Wolf Research. Please go ahead.

Speaker 3: Tim Nutaners with Wolf Research. Please go ahead. Yeah, he's got to get him in.

Speaker 4: Thank you.

Speaker 5: Hey there, one or two, I address kind of the energy concerns in Europe , and I know you mentioned this as a headwind for some of your competitors, but if you could just give us an overview of your market conditions, I know you've mentioned the past listing and the other one in Norway, I don't think I can pronounce. And then if you could talk a little bit about a little more detail about Sense Sipriana, if it's so easy to get wind power, wire, your competitor is not doing it. So just to add a little more detail on Europe would be great.

Speaker 2: Yeah, Tim, let me start on that one and then build Knet in as well if I miss anything. So, energy conditions in Europe as I think everybody on the call knows are seeing particular increases pretty much from where we were before. And there is in fact even more uncertainty when we think about how much of that, how much gas will actually be delivered into Europe the need for potential.

Speaker 2: potential restraints and what's used, etc. So it is a very complicated situation that's changing each and every day. And that is for gas, which is what we use, natural gas, which is what we use inside of our San Zebrian Refinery, but then also the knock-on impacts to the electricity market, which is what impacts the list of plant, which is our smaller plant up in Norway. So from our perspective, essentially we have spot exposures in both of those, and we have been pursuing the

Speaker 2: We are in the midst of putting together long-term energy contracts there. It's an agreement that we made with the workers and there is also a lot of support from the regional government of Galicia and the national government in Spain to try and offer incentives to the producers of renewable energies to also be able to supply us with energy. So we're making good progress. We've signed one contract already. We're working on some others. And that is all aligned to try and support the restart that we've committed to.

Speaker 2: to support some of the developers as they put together those investments.

Speaker 2: So I don't think it's necessarily a playbook that can't be copied by others, but I think the location and who we are helps to support that program. The refinery consumes natural gas and we have a spot exposure there. We announced over the course of this quarter that we have brought down that capacity by 15%. We continue to experience very high gas prices. So it is a developing situation. We look at what's happening on aluminum pricing.

Speaker 2: We also have a good amount of chemical sales that happens at that, or chemical non-smelt or great aluminum essentially, chemical sales that happen at that plant. And so that is a developing situation. We'll continue to discuss any other decisions that we make down the road, but certainly in a challenging environment. We'll get challenging environment.

Speaker 2: The last piece is on Lista in Norway. They are exposed to the spot market, but they have two advantages. Number one, southern Norway, while it is impacted by European energy prices, is still a step below what you're seeing in places like Spain and other places. So that helps to keep the energy prices a little bit more realistic, although we have seen pretty significant increases. And the second piece is that they also have a very strong cast house. So are very, very...

Speaker 2: very heavily focused on value-add products. And so as we look at the energy prices that we were able to secure, and as we compared that with the revenues that were coming in, we actually chose to take some of that risk off the table and in fact look forward a few over the months at the end of this year into 2023 and actually actually secure energy for that period. So we will be less exposed once we get past these next couple months because we'll have those contracts in place.

Speaker 2: And we see that as the best outcome for LISTA from a financial perspective. And of course that certainly brings stability operationally and also stability to the workforce inside of LISTA.

Speaker 2: So that's how we're dealing with where we have spot exposures. The other facilities that we have in Europe , essentially, moved in Norway and in Fjordal and Iceland have long-term power contracts and so they're not exposed to some of these spot issues that we're seeing there.

Speaker 3: I don't know Bill, if you want anything else to add to that. I think you covered it really well. I guess the two minor points that I would add is that in Spain, in the refinery, since we're exposed to spot gas prices, we are seeing spot gas prices close to $30 per gigajoule, which results in a fairly large loss that we're looking at in the third quarter, which is baked into the guidance that we provided in them. But the losses in the refinery in Spain are around $75 million a quarter currently.

Speaker 3: You addressed motion, motions in a good situation, given the fact that it's up in northern Norway, so it's not exposed to the southern European or southern Norwegian energy prices. So that's the only two things I'd add, right?

Speaker 5: Okay, thanks so much for the comprehensive answer and best of luck.

Speaker 5: comprehensive answer and best of luck.

Speaker 6: Our next question will come from Carlos de Alba with Morgan Stanley . Please go ahead. All right.

Speaker 7: Yeah, thank you. Thank you very much, Ryan Bell. So, just continuing with, I guess, the questions on cost. Any comments as to how, how do you see the cost pressures in alumina with the refineries there? And then also in that continent.

Speaker 7: How do you feel about the sportland in your medium to long term strategic view for the smalting business?

Speaker 3: So I'll take the cost question first. It's important, Carlos, for you to go to the outlook page, which I think is page 30 of our deck. In Illumina, we're expecting $30 million in higher energy and raw material costs, and a third of that is related to San Cipriot. So as I said to Tim, we are seeing high energy costs in Spain and projecting that they're a little bit higher in the third quarter versus where we are in the second quarter. Continue.

Speaker 3: Continue to see some high raw material costs flowing through. However, we are projecting a stronger shipment of you in the third quarter for the Illumina segment. And we think that that stronger shipment will offset all the other cost increases or any other issues that we have in the Illumina segment in the third quarter. So I then step back and think about... I then step back and think about...

Speaker 3: the cost structure of raw materials that are flowing through both the alumina and the aluminum segment. We are now finally starting to see on an as-purchase space this costic price is going down in the second quarter already and going into the third quarter. Now you know there's a six-month lag on our costic purchases that it takes to flow through and to our cost of goods sold but it's good to actually see that we think we've peaked out on costic prices at least for now.

Speaker 3: and we're starting to see those come off, and that's the positive. On the smelting side, seeing something similar, but probably in the third and fourth quarter, as Coke and Pitch peak out in the third and fourth quarter, they will start to decline from there. So we're finally starting to see some relief from higher raw material costs, but as we've said all along, it takes some time to flow through the P&L. So let me turn it over to you, Roy, to answer the Portland question.

Speaker 2: Yeah, Carlos, so four Portland very specifically, let me start off a bit more generally and then get to a very specific answer to your question. So generally what we've been driving to do, and I think this was in a lot of the materials that we've provided in the investor day that we did, it seems like a world to go, but it wasn't that long ago. We're focused on driving down the cross-pervent, making sure that we have long live assets that we can invest in in drive to have a portfolio that makes us a very strong company. We're also very...

Speaker 2: a whole heavy power supply, not exclusively, but obviously that has been important to the development of Victoria State in Eastern Australia in general. They're working a lot in order to change that. So I think as you look a number of years out, they're moving very quickly towards heavy or renewables. Right now we have a contract that I think has four years left, approximately four years left. That gives us time to evaluate what we wanna do and how Portland fits in our long-term portfolio.

Speaker 2: When we look at facilities, we always talk about, and this is very simplistic terms, fix, close, or sell. We look for ways to repower, and if we repower, can we secure renewable sources in order to do that repowering? We have always had the opportunity to curtail or close. Obviously, that wouldn't happen until that power contract ends. And of course, there's always the option to be able to do best if we see that we can't solve those issues in a way that then matches our portfolio. So for Portland, we're actively looking to find what is the right solution and how...

Speaker 8: So, you know, certainly great to see the additional buy back there. But was the step change in that program simply a function of the improvement in working cap and high-freight cashflow? Is quarter or was it perhaps an increased confidence in the ability to let us through this period of macro uncertainty?

Speaker 3: I'm going to agree with both. How about that, Emily? Thanks for the question. You know, we have a capital allocation program that's focused on maintaining a strong balance sheet, sustaining the plants, and sustaining the operations. And then you've heard us say there's three prongs of that capital allocation after we've done that in no particular order, transforming the portfolio, positioning for growth, and returning cash to shareholders.

Speaker 3: Given the strength of the balance sheet, and the balance sheet, as you've heard us say numerous times with the work we've done around funded debt, pension and OPEB is substantially stronger than where it was even two years ago, much less four or five years ago, we have confidence in the strength of the company. And so we provided returns to shareholders in the second quarter as our cash balance was strong, our cash generation was strong.

Speaker 3: And we have confidence in the future ability of the company to weather through cyclical storms. And so that's why we've provided it. We announced an additional $500 million buyback. We still have $150 million left on the prior buyback authorization. It's very consistent with what we've done in the past where when we see the authorization getting low, we go out with a new level of authorization. You can actually see great data from the availability side of the Maui thing that we've found. We're also

Speaker 8: So that's what we executed upon in the second quarter. Great, and just one quick follow-up if I may. Roy, you mentioned there was a significant amount of capacity that's currently underwater given where spot prices have trended to. Maybe turning the question to the Alcoa set of assets, are you able to share what percentage of aluminum and alumina capacity is still generating positive cash margins? Maybe said another way, what's the aluminum slash alumina break-even?

Speaker 2: Yeah, Emily, I appreciate the question. I'm not going to be able to give you a direct answer because that's not information we typically share. You know, more generally I would just say is that when, as we see facilities that are going underwater, we take evasive action to try and figure whether it's best to continue to operate or to curtail or to find other actions. And so, and I think Bill had mentioned, Sensipre and Refinery is a good example of a place where with exorbitant gas prices it's...

Speaker 9: Thanks, Emily.

Speaker 6: Our next question will come from David Gagliano with BMO Capital Markets. Please go ahead..

Speaker 10: Hi guys thanks for taking my questions. My question is actually related to some of the you know the cost questions have been asked for you so but it's just a bit of a broader stab at it. So if you know if we consider what's been going on in the aluminum market things have changed quite a bit obviously the last few months. We've seen a China production ramp, we've seen you know the demand outlook you know incrementally negative. I think that's a fair comment versus what it was a few months ago.

Speaker 10: And obviously, commodity prices come way down. It's like 10 to 20% of global aluminum smelting is, you know, under underwater based on how CoA estimates. And so, my question is in terms of how you think about your business, your smelting business specifically. If we look at the 2.5 to 2.6 million tons of capacity now, if, say, for whatever reason, you know, prices continue to go down another 10% and another 20% for example. Nice.

Speaker 10: and costs all kind of say where they are. You know, about how much of that 2.5 to 2.6 million tons of capacity, you know, would be at risk of closure in a sort of a six month to one year week pricing environment. Dave, let me take a stab at it first and then Roy can follow up with some more information.

Speaker 3: We've done a lot on the portfolio over the last five and a half years. We announced a portfolio review going on three years ago, I believe it is. We curtailed in TALCO. We repowered Portland. We are restarting San Luis, almost a San Siprin. We restarting San Luis. We curtailed San Siprin, which as Roy said earlier, boy, you know, we had not curtailed San Siprin smells.

Speaker 3: answer hypothetical questions, you've seen what we've done over five and a half years. If a facility needs to be curtailed because it's losing money, we don't shy away from hard decisions. We do it in humane ways, but we don't shy away from hard decisions. So Roy, anything you want to add to that?

Speaker 2: Hey, I think you covered a lot of it, Bill. You know, I would just call your attention, Dave, to three things. First of all, you talked about demand. You know, we look out at demand and we continue to see growth this year. There's a lot of uncertainty. There's a lot of questions, particularly in Europe and of course China with COVID. So there's the potential that we continue to see customers stepping away. But realistically what we're seeing right now is that demand continues to grow for the year.

Speaker 2: And so we continue to have a good full order book. We have constant conversations with our customers and of course we have annual contracts and we have in the US those tend to be priced annually and in Europe they tend to be priced quarterly. We continue to see very strong premiums, very strong order books and value added. And so while there is great uncertainty I think it continues to be a good story on demand. It's just a question of where that takes us. The second thing is really around cycles.

Speaker 2: and Bill and I and Jim have been around this business for a very, very, very long time, decades at this point. And I think the one thing that is typically true is that as you see that revenue cycle turned down, you also tend to see that cost cycle turned down as well. Typically there is margin of impression for the first few months, but then you start to see some of the relief on cost pressures, which Bill's already talked about. And so we try to analyze our decisions based on data assumption. Now every...

Speaker 2: Every situation is very different, right? Russia, Ukraine is a very specific circumstance and what's happening in the energy markets in Europe is very specific to what we're seeing right now. But we always try to look to see how we can make sure that we're squeezing costs out as quickly as we can. Of course, that's the stuff that we control. It's our workforce. It's our what we do on raw materials and our maintenance decisions, et cetera. But there's a lot of places that we can try and drive out costs across the board and we continue to.

Speaker 2: need to be made. We don't flinch away from making difficult decisions while at the same time. We never stop trying to make sure that we can drive an improved business so that we can continue to operate and continue to operate things the way that they should be operated. We

Speaker 10: Okay, that's a tell-play. I appreciate the historical references. And I do remember those days as well. And I remember going through these contingency planning conversations with Bill. And I think you actually, in the IR role at one point. And I thought there was typically an answer that said, yeah, if price to go down another 20%, we have 20% of our capacity of risk. And really what I'm trying to get to is, is that the case now or is it such that the cost?

Speaker 10: structure to your point is so much better that the existing assets are

Speaker 10: you know, not impervious, but are, you know, at what point, you know, at what point, I guess really what I'm trying to get to is at what point does the commodity price impact start to actually have an impact on the existing smelting capacity? I just was kind of curious.

Speaker 10: some sort of framework. It doesn't have to be specific to the smelter or anything like that. And also just while you try to address that rambling follow-up, the Alumar restart, how does that factor into the thought process with regards to that's a 10% increase in your capacity.

Speaker 10: you know, in this environment? How does that factor into your thought process in terms of the the rest of the portfolio?

Speaker 2: So, you know, I think...

Speaker 2: The one thing I'll add to try and address your first question there, Dave, is that we...

Speaker 2: You know, we tend to look at a number of different actions that you can take as the world shifts. And first and foremost, like we've talked about portfolio already, but most of our smelters at this point are with long-term low-priced energy contracts. And so when you think about the danger of them turning negative, it is much lower because they have long-lived contracts. And the fact is, those were set at a time where LME prices were significantly lower.

Speaker 2: than what we're experiencing right now. And so we can always move to stop pot relining. We can step into partial curtailments, full curtailments, there's a lot of actions that we can take and I remember all those wonderful slides that we used to put together that talked about those programs. I think if we were to get to an area where those things were to start to occur, we would certainly communicate that to you into the market because that would signify that we're getting to a point where we'd have to start taking action.

Speaker 2: Like we said, it's really the sense of written refinery and it's listed that right now or the places where we have, where we've had to take decisions and we've already talked through those so I won't belabor the point. When it comes to Alumar, the Sun and the Wies restart, and this is the plan that I used to work at, so it's near and dear to my heart. The restart started off a bit later than we wanted it to, but it continues to ramp up now according to the plan that we wanted it to be. We just offset by those couple months.

Speaker 2: You know, I think they're doing a very good job of restarting. We've got a long-term, renewable power contracts in place at very attractive power prices. And so it's coming in at the, on the very strong end of our portfolio, and that's why we chose to restart it. And that's even before you get to value-ad taxes and all the add-on benefits of having an integrated facility and having a strong position inside of Brazil. And a good strong domestic market as well for the metal that we're making. And so it's coming in at the very end of our portfolio. And so it's coming in at the very end of our portfolio.

Speaker 2: And so what it does is make our portfolio even stronger, and it's great to be able to bring that plant back up again.

Speaker 3: And the only thing I would add, Roy, as, and I know we're trying to address Dave's question, one thing to keep in mind, Dave, and this is a change from, if you looked back 10 or 15 years ago with the portfolio we had, today around 65% of our energy is element linked.

Speaker 3: So that means when the LME is going up, we're not getting all the benefit of the LME. And you've seen that, but when the LME goes down, we're, our energy costs are following that.

Speaker 3: So that's a much higher percentage than it was, let's say 10 years ago, and it positions the portfolio four times that when the enemy does go down, we're not the ones that have to curtail.

Speaker 2: And if I can just add one more piece onto it also, Dave. I know we keep adding on pieces and pieces. When you think about the smelters, tick smelters are specifically at risk, and who's sitting at the very top end of that cost curve and what are they dependent on? I think it's, you look at, and these are in my prepared comments, but you look at sort of the average for June specifically in China, and it was 10 to 20 percent that were underwater,

Speaker 2: That changed so significantly because of a change in SHFE prices that have reached half of all smelters in China underwater because those prices had come down over the course of a couple weeks. And so when you think about how flat the cost curve is, where our facility is sitting on that cost curve and then where some of the competitors sit on that cost curve and then how beholden they might be to things like coal prices or specific aluminum costs, et cetera. You know, I think... I think...

Speaker 2: I think it helps you to understand the decisions that we make are a bit more predictable. Because of where we're now located on the cross curve and the work on the portfolio, it's just simply a different game than it was a decade ago or five years ago.

Speaker 9: Okay, that's helpful. Thank you.

Speaker 11: Thank you, Dave.

Speaker 6: Our next question will come from Kurt Woodworth with Credit Suisse. Please go ahead. Jin FamousBEHood Ten

Speaker 6: Yeah, I got to be annoying though, and grab some of the progression on the buyback. You know, it's sort of a follow up to the power question and the enemy linkage. And the enemy linkage. And the enemy linkage. And the enemy linkage.

Speaker 6: We're so much surprised this quarter, the power cost is only 25% of the total to the smelting segment, whereas running 33, 34%, and we sort of would have figured that, given the LME linkage, and the fact that you have spot power and more way that would have caught up a lot. So is it, and I'll see you have less buy resale. So could you address that? Is it simply a function of other things going up more or is there a flag, like a flag mechanism in place?

Speaker 3: Kurt, I think it's a little bit of both. There is a little bit of a lag on pricing, so it depends on which contract it is. It can be anywhere between 30 and 90 days, so you do see a lag there. You also see some of the raw material costs have gone up, and that would deflate the amount of percentage associated with energy.

Speaker 3: I don't have a real more precise answer for you than that, Kurt.

Speaker 6: Okay. And then just on by refail and polling, you know, that is about 25% of your shipments and the snouter segment, and you mentioned in the pair of remarks that margins.

Speaker 6: have come down for that and some of that is I think modern tolling. But can you just talk to what you're seeing in margins on that part of the business and if you could give us a sense for profitability there in terms of our model that would be helpful. Thanks guys.

Speaker 3: Profitability is generally very low. We're doing buy-resell activities to try to essentially meet customer demands in certain areas. We may do those also for just to swap from a time perspective of when we need to make deliveries and so profitability is not large on the buy-resell. In the case of the…

Speaker 3: The second quarter we did see with the rapidly declining metal price, there was times where we were buying at one price and turning around and selling at a little bit lower price given some of the supply chain disruptions that we saw in the quarter. So that's what was meant by my remark in the prepared comments.

Speaker 6: Okay, and then maybe just one quick one on the tax rate for the third quarter. I know that typically the Illumina segment has higher percentage tax base.

Speaker 6: Do you feel like the tax rate will move around much sequentially? Would it go up a little bit, just given the fact that the enemy may be a little bit more than a woman now? Would it go up a little bit more than a woman now?

Speaker 3: Tax rate can move around substantially, depending on earnings levels and where the earnings come from. That's why we, in my prepared remarks, I give you specifically the amount of tax expense that we're anticipating for the company. That gets you out of having to try to figure out what the actual tax rate will be. It's our best, you know, given the current metal prices, current aluminum prices.

Speaker 3: Forex, it's our best estimate of the tax expense and it saves you from having to

Speaker 3: try to figure that out.

Speaker 6: Okay, thank you.

Speaker 11: Thanks, Kurt.

Speaker 6: Our next question will come from Lucas Pipes with B. Riley Securities. Please go ahead. You're welcome.

Speaker 2: Good afternoon, good job on the quarter. And I also wanted to ask a quick question on the cost side. So you mentioned the labor shortages at war. I'm percent CPI, of course. Folks are feeling the pinch. What are you seeing on labor inflation? And if so, how quickly would that run through the cost structure? Thank you very much.

Speaker 3: It depends by jurisdiction and in certain jurisdictions we have labor agreements that are a combination of built-in increases that are related to inflation. There are also places around the world, for instance, like Norway where there's a stipulation of how much increases get paid. So Lucas, there's not one kind of...

Speaker 3: monolithic answer that I can give you about wage inflation. And so it really depends on the jurisdiction.

Speaker 3: As we look out, it's getting harder and harder to determine how much wage inflation there will be just with some of the volatility that we're seeing in the marketplace. And just take the US, for instance, we did have difficulty getting enough folks to work at Indiana, which in large part led to the curtailment of the facility. But at the same time, we're seeing some of our competitors curtail. So that may give us an opportunity to.

Speaker 2: means that as we solve essentially the essential manufacturing technology inside of the cell, and so right now we started off, we've been essentially ramping up the amperages and increasing the size of the cells, working up to the 450 kiloamp air cells that will be operating here by the end of next year. As we ramp up that, we need to start thinking about how we make sure that the proprietary material and technology that is the anode...

Speaker 2: the replacement for the carbon anode that we can manufacture that, manufacture the cathode, and essentially manufacture everything that goes into what will be the design and finally the installation of that first and then those sequence elicis cells. So essentially it means how do you solve the supply chain because these are new materials, these are new technologies, and thus elicis as an entity, and then alkoa and Rio tend to with the partners that have ownership in that entity.

Speaker 2: really need to solve how we're going to make sure that we have the materials necessary and the know-how to be able to allow that deployment to happen as quickly as it could happen because of increasing demand for low-carbon aluminum.

Speaker 2: and the very unique product that will be

Speaker 2: That's helpful. And then the commercial strategy would be to sell those packages by 2024. Did I hear that right? I want to share the live only dialog will end it is get list through here.

Speaker 2: The strategy that we have is that we'll have a proven technology by the end of 2024. We'll then go into a design phase for what would be the deployment of the, essentially, putting into place that first facility for first hot metal coming in 2026.

Speaker 2: And so the decision about how we put together the commercial packages and then who is gonna deploy it first and all those things are still decisions that will be made as well as a decision whether we choose to license or just keep it in-house. And so that all has option value for us as we solve technology problems and make sure that we have a great and cost-deficient system that then we can choose to do what creates value for our shareholders.

Speaker 12: Very helpful. Thank you very much and best of luck.

Speaker 13: Thanks, Lucas. Thank you, Lucas.

Speaker 12: Our next question will come from Michael Dudas with Vertical Research. Please get ahead.

Speaker 14: Good evening gentlemen.

Speaker 3: I might not call me.

Speaker 2: Roy, I was intrigued by your comment that you made in your prepared remarks about customers looking to more advantage, more in-market type suppliers than maybe in the past. How quickly has that changed? And can you look at that relative to what's going on in the global markets and with Russia and the dynamics that could be with us for quite a while and how that meddled me or may not?

Speaker 2: material that they want and they want to have it when they want it. There's always been...

Speaker 2: There's always been an advantage for the supplier for the company that is close to the customer.

Speaker 2: I think what we've seen, and this was really brought into stark contrast through the COVID pandemic, I think we've seen that people realize that supply chains are fickle. And I think that's not just aluminum that's across the board. And so what we've seen is more and more interest over these last two to three years of how can you guarantee not just the quality and the price, but also the fact that you're going to have that material when you need it. Because if you don't have the material, you're not going to be able to produce and therefore you're losing demand or losing it to other competitors.

Speaker 2: That then add one more wrinkle, which is Russia Ukraine, because Russia was importing into the US, it was importing into Europe . And all of a sudden, you have a lot of companies that are choosing to no longer accept that medal, even if it's going through traders. And so I think that's even exacerbating the situation, making people really think twice about how can they really drive towards local suppliers. And so for us, it's an advantage for Alcoa, because a lot of our capacity and a lot of our customers have to be able to sit in North America and Europe .

Speaker 2: which is where we have also the strongest premium environments where we offer our value added products and where we can actually create more value because we have cast houses that we can invest in and where we have good capacities inside of our value add to make those connections with customers. And I'll just add one more quick piece to it not to belabor the point. But as you think about, then another overlay, which is low carbon, and the drive to have products that have less carbon content.

Speaker 2: That then is another decision point that a lot of our customers are making. And you see this particularly in Europe . In fact, a good portion of our sales in Europe are already moving towards these low carbon products. Customers are now not just looking to have a surety of supply, but they also want to make sure that that supply is going to have a lower carbon content. And so for Alcoa that looks at Scope 1 and 2 emissions that goes all the way from bauxite to alumina to aluminum, we can actually help them understand what is the material they're going to be getting, what is the carbon content that sits in there, and then how can we evolve that to buying equilibrium products, which is our low carbon.

Speaker 12: Next question will come from John Tumasos with John Tumasos Independent Research. Please go ahead..

Speaker 15: Thank you.

Speaker 16: The two smelter idlings in the Midwest that were 30% of US output.

Speaker 16: I didn't benefit Midwest premiums except following.

Speaker 16: There wasn't much bruhaha in the press.

Speaker 16: I would have thought Tesla increasing output or ball corporation building two plants might have had some anxiety.

Why.

Why is there so much complicity with shrinking out but...

Is it just that all those in housing are particularly weak this month as well? Yeah, John , let me take a stab at that. So I think it's a good question. And we put some thought into it. And as is always the case when it comes to pricing environments, there's a lot of factors that go into it. So I'm going to give you some bread crumbs. And I also know that you're going to put it together with bread crumbs to have a view as well.

So obviously there's the supply side, which is pretty clear what's happening. On the demand side, we continue to see an order book that is full. We continue to see a lot of demand for value-ad products. And so that's us really, we haven't seen a lot of changes that have happened over the course of this year. And so that says those two things are more or less stable to where they were. Although you still continue to see a little bit of weakness in the automotive side as we talked about last quarter as well. Add that then to the logistics of some of these imports coming into country.

in the moment that can have impacts that are a bit surprising. So in this one, everything that we see is that the Midwest premium is continuing to reflect the strong demand that we see. It's not yet reflecting the lack of that supply because it's being substituted by some of these imports that came in a bit tardy, but I have actually come in. I think the question will, of course, be, and I'll leave that to you as you think through this, what happens in the future and how does that change through time. So, you can see that the Midwest premium is continuing to reflect the strong demand that is continuing to reflect the strong demand that the Midwest premium is continuing to reflect the strong demand that

But for us, we continue to see good demand and that supply obviously is having an impact.

Do you think a solution would be for Washington to increase the 10% tariff?

We'll probably leave that to smarter people to work through. You know, from our standpoint, we're always looking to have a very efficient market. And so, for us, we want to make sure that we're incentivizing demand. We want to be sure that we can have the best possible outcome for our plants that are operating in the US and Canada and Brazil around the world. You know, I think we want to make sure that we don't have unintended impacts that happen downstream.

A tariff is, you know, it's benefactor to a certain extent that increasing driving the market as we see it today, but it's an imperfect instrument and we just want to make sure that it doesn't have unintended consequences. A tariff is a tariff, but it's a tariff, so it's a tariff.

I'm not gonna ask one last one. The IAA data this morning had Eastern Europe , Russia, 5,000 times more output than April , another 30 day month.

It would seem as though it's four plus months now with the war and the sanctions.

The Plenty of Illumina must be getting into Russia, overland from China or even further from Vietnam or India, overland or...

Some think a box type here, I live in the Indonesia.

There must be enough covered gondola cars.

covered trucks given there aren't that many hopper cars for overland transport from Asia.

many hopper cars for overland transport from Asia.

Does it appear that the Thai Shet 428,500 ton new Greenfield smelter is in fact getting fired up? That they're maintaining the old 3.75 million ton output plus firing up the new smelter despite the sanctions and most of their alumina getting cut off from the west.

I hope President Biden's jackasses are listening.

Hey, John . We're looking at a lot of the same import data that you look at, I'm sure. We're having a hard time determining how imports, sizeable enough imports are getting into Russia to support all of the smelting capacity. We don't really have any better insight into what what smelters are actually producing in Russia than probably what you do.

But like I said, the import data of Illumina certainly wouldn't suggest that they can keep all of this melters running plus ramp up tie-shet, but we have not heard anything different.

You know, that's where we stand.

The aluminum price would suggest the

and that the sanctions are some kind of fantasy.

The data the Russians submit is truthful because the alumni price goes down.

Unfortunately.

Thank you. You guys are doing a great job and a tough time.

Thank you very much, John . Thanks, John .

And our final question is a follow up from David Gaglionna with the Immokapital Markets. Please go ahead.

Hi, Dave. Hi, I promise this will be shorter. I just had a quick question on the costs, the costs that are tied to LMA, 65% of costs tied to LMA. Is there any kind of lag in there? You're on mute again.

Yeah, so it's 65% of energy. It's not all costs. It's energy costs. And the lag is anywhere between 30 and 90 days. So there can be a little bit of a lag there.

Okay, that's helpful. Thanks.

All right. Thanks, Dave. Thanks, Dave. This concludes our question-and-answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks.

Thank you once again for joining our call today and for your questions and continued interest in Alcoa. We will continue to execute on our strategies as we progress throughout the year. Both Bill and I look forward to talking to everyone again in October for our third quarter results. In the meantime, please be safe, take care of yourselves and each other.

Thank you once again for joining our call today and for your questions and continued interest in Alcoa. We will continue to execute on our strategies as we progress throughout the year. Both Bill and I look forward to talking to everyone again in October for our third quarter results. In the meantime, please be safe, take care of yourselves and each other. Thanks.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.