Q2 2019 Earnings Call
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Good afternoon, and welcome to the Alcoa Corporation second quarter 2019 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 too.
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 Shawn and good day everyone.
I'm joined today by Roy Harvey Alcoa Corporation, President and Chief Executive Officer, and William <unk>, Blair 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 todays 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.
Also of note on our financial statements effective January Onest 2019, the company changed its accounting method for evaluating certain inventories from LIFO to average costs. The effects of the change in accounting principle had been retrospectively applied to all prior periods presented.
Finally, as previously announced the earnings release and the slide presentation are available on our website.
With that here's Roy.
Thank you Jim and thank you to everyone for joining todays call.
In the second quarter, we maintained stability in our operations and took several steps to improve the business.
In our segments bauxite reported healthy profitability and alumina achieved production records and steady profits despite lower alumina prices.
Lower aluminum prices combined with other favorable impacts helped our aluminum segment to rebound from a quarterly loss, even as metal prices weaken further.
And across our segments, our renewed focus on manufacturing excellence continued to bear fruit through greater stability and better operational performance.
As we had committed our businesses also drove the benefits of lower raw material costs to our bottom line.
Lastly, we made progress on long term projects to strengthen our aluminum portfolio and closed a significant transaction tied to our mob in joint venture, which provides immediate benefits for our company.
While restructuring charges tied to that transaction were largely responsible for a second quarter net loss.
Excluding those special items on an adjusted EBITDA basis, we reported steady profitability.
With that let's start with an overview of second quarter results.
We reported a net loss of $402 million or $2.17 a share excluding special items, we reported an adjusted net loss of $2 million or one cents per share.
On an adjusted EBITDA basis, excluding special items, we generated $455 million lastly, we ended the quarter with a solid $834 million of cash even after sizable cash outlays in the quarter.
Turning to safety, we are disappointed that we experienced two serious injuries in the second quarter, both in our aluminum business.
As a reminder, our focus is on preventing serious injuries defined as life ending or life altering.
Both employees are now focused on rehabilitation and recovery still these incidents underscore the importance and urgency of our work to further strengthen our safety programs safety remains our most important goal ensuring that everyone who walks through our doors goes home safe and sound.
We also made real progress this quarter on a number of portfolio strengthening initiatives.
We amended our modern joint venture agreement and the divested our minority interest in the Rolling Mill.
The exit reduces operating losses, and simplifies our business in Saudi Arabia, our interests in the remaining portion of the mob in joint joint venture remain the same.
In our aluminum portfolio in Quebec, we reached two competitive six year labor contracts. The first step back a mall and the second best Encore the contract at second quarter ends and 18 month lockout at the smelter and the process to fully restart idle capacity gets underway later this month.
Also in Qubec, we're implementing plans to increase the production capacity addition, combo one of the lowest cost smelters in the Alcoa system.
The Canadian government will offset some costs for the project expected to be complete in 2021.
In Spain, we made significant progress toward removing historically on competitive capacity from our aluminum portfolio.
Earlier this month, we signed a conditional agreement with a private equity investment from the divested the Alcoa, probably less and lock Runion plants.
Lastly, turning to markets, while we're while we're reducing our estimate for global aluminum demand growth. We continue to project our global aluminum deficit for the year, we also see aluminum inventory trending lower and other reasons for optimism.
With that I'll turn it over to Bill for a detailed review of our second quarter results.
Thanks, Roy let's start with the income statement revenues were flat sequentially as higher volumes and energy revenues were more than offset by lower realized prices for alumina and aluminum.
Revenues declined to $868 million year on year, primarily on lower alumina and aluminum prices.
In the quarter restructuring charges drove the net loss attributable to alcohol corporation to $402 million or $2.17 per share on a 185.5 million shares outstanding.
Special items totaled $400 million after tax and non controlling interest of that amount costs related to the MRC divestiture were $319 million.
Also included as a charge of $38 million related to the pension benefit plan offered at Bay Comeau, Quebec as part of the new Labor agreement.
We did not take a charge related to our analysts and lock Ronya smelters. This quarter as we did not sign the conditional divestiture agreement until July 5th.
We expect that charge ranging from 100 million to a $140 million depending on the outcome of the process to occur in the third quarter.
Now, let's look at the income statement, excluding special items.
Our second quarter adjusted net loss, excluding special items was $2 million or one cents per share improving $41 million sequentially.
Adjusted EBITDA, excluding special items was $455 million down $12 million sequentially.
Our second quarter EBITDA margin was 16.7%.
Two items in the quarter second quarter, SGN, AE and R&D expenses declined $14 million the nonrecurrence of the $20 million receivable write off in the first quarter was partially offset by slightly higher overhead spending.
Our second quarter operational tax rate was 46.5% decreasing eight percentage points sequentially as we trued up the year to date rate to reflect higher earnings in non taxpaying jurisdictions.
Let's look closer at the factors driving adjusted EBITDA in the quarter.
This quarter, we offset the majority of the impact of slightly lower alumina and aluminum prices.
Lower market prices for alumina and to a lesser extent aluminum drove adjusted EBITDA down $79 million sequentially.
Taken together all other impacts improved $67 million sequentially nearly offsetting the price impact a few key points.
Favorable smelter energy prices combined with higher energy sales from Brazil, Hydros to drive adjusted EBITDA up $38 million.
Raw material costs improved $22 million, primarily from favorable caustic prices.
The strong us dollar drove another $19 million of improvement.
The negative impact was from higher production cost of $18 million, resulting from scheduled maintenance activities in the bauxite and alumina segments.
Finally, we can see the positive impacts of improved operations in our alumina segment reflected in better volume and the benefit of the Canadian infection 232 tariff exemption for half the quarter shown in the other column.
Now, let's move to the segments.
In the segments bauxite, adjusted EBITDA declined $14 million, primarily on higher maintenance costs and lower production at MRM.
Alumina adjusted EBITDA was basically flat as improved caustic prices favorable currency and higher shipment volumes almost entirely offset the lower realized aluminum prices and higher production costs.
The aluminum segment adjusted EBITDA improved $99 million sequentially on a number of factors.
Lower smelter power costs and higher earnings from the Brazil, Hydros lower alumina costs Nonrecurrence of the receivable write off in the first quarter and we also started to see positive impacts from the Spanish smelter curtailments and the Canadian tariff exemption.
Non segment impacts netted to negative $29 million down $94 million sequentially.
Intersegment eliminations declined $87 million to negative $1 million in the second quarter as aluminum prices were more stable in the quarter.
Turning to the balance sheet.
We ended the second quarter with cash of $834 million down $183 million sequentially.
This change from first quarter to second quarter is due to the $306 million in prior year tax payments, primarily in Australia, as well as cash contributions totaling $100 million related to the divestiture of alcohol as 25% interest in the modern rolling facility.
Days working capital improved four days sequentially to 31 days with improvements across to all working capital components.
Our feet free cash flow net of contributions from and distributions to.
Non controlling interest was negative $173 million in the first half of the year, primarily due to the onetime payments.
Moving to the outlook.
Our full year outlook remains mostly unchanged from last quarter's outlook with four adjustments.
We expect transformation EBITDA to improve $10 million to $15 million to nearly breakeven.
We expect other corporate to be $10 million better $120 million instead of $130 million.
Our full year operational tax rate is expected to increase to 55% to 65% as alumina segment profits react to lower market prices.
In the third quarter to catch up the year to date tax rate, we expect approximately $35 million tax expense. In addition to the amount calculated using the full year rate.
Given current market conditions capital expenditures are expected to be $40 million lower with return seeking capital at $120 million and sustaining capital at $290 million.
Regarding cash impacts of restructuring depending upon the outcome of the outlets and lock ronya process could range from 60 million to $70 million in the second half of 2019.
In the appendix, we also list additional considerations for the third quarter, which provide sequential benefits totaling approximately 75 million to $90 million.
They include $5 million to $10 million related to higher volume and lower maintenance costs and bauxite.
$30 million to $35 million related to higher volume lower maintenance cost and lower cost and costs in the alumina segment.
And then in the aluminum segment $35 million to $40 million lower aluminum costs compared to the second quarter.
A negative $10 million expected lower Brazil hydro prices will be partially offset by expected better rolling results.
And $15 million related to the removal of section 232 tariffs on Canadian origin us sales lower raw material costs and other performance improvements are expected to provide that sequential benefit. So let me turn it back to Roy.
Thanks Bill.
In our markets, we expect bauxite will remain in surplus this year.
China is importing and stockpiling additional bauxite from Guinea, and southeast Asia due to dwindling supply in the country and to de risk the long complicated import supply chains involved.
Bauxite depletion in China will likely persist, suggesting that Chinese refiners will need to seek additional sources of bauxite outside their country.
In the aluminum market, we continue to expect a slight 2019 surplus driven by the restart of our North Bay refinery in Brazil, and lower alumina demand due to an overall decrease in worldwide smelting operations.
This surplus is partially offset by environmental related reductions in China and India.
We saw a series of alumina curtailments due to bauxite supply concerns in China.
And the mismanagement of bauxite residue in both China and India.
In China, specifically, the government forced three separate refineries and Sean she'd province to curtail due to environmental related issues with bauxite residue. We also saw news this past quarter about refinery upgrades implemented to meet to mission standards.
At the same time, some Chinese inland refineries cut production due to difficulties sourcing appropriate bauxite because of depleted domestic sources.
Those refineries were unable to immediately replace that bauxite from seaborne sources.
Taken altogether environmental concerns in India, and China removed, almost 2 million ton metric tons of production from our 2019 balance.
Considering all of these developments it remains clear that operating in an environmentally sustainable way is the key to success.
At Alcoa, we strive to be leaders in environmental health and safety practices, which gives us our license to operate and makes us the partner of choice in the industry.
Finally in aluminum we continued to project the global deficit.
Well, we still see growing global demand trade tensions macroeconomic headwinds and a slowdown in global manufacturing has informed our lower demand projection. We expect these headwinds will likely result in slower growth in aluminum end use sectors. This year, particularly in the global automotive sector.
While not in our base outlook ongoing trade talks central Bank policy decisions and Chinese stimulus measures provide room for optimism and our potential swing factors for aluminum demand both this year and next.
Our 2019 outlook for aluminum supply on the other hand is tighter as the postponement of smelter projects in China and the recent curtailment of a Boston and smelter will outweigh the impact of the planned restart of AB.
Smelter index Encore Qubec, which is beginning later this month and will continue into the second quarter of 2020.
In China authorities continue to enforce the national permitting policy for smelters, which by law caps total aluminum smelting capacity.
As a result, China's aluminum supply growth for 2019 is estimated at less than 250000 tons.
Equivalent to a growth rate of less than 1%.
That is one of the lowest Chinese year on year growth figures in both percentage and absolute volume terms since 2000.
With a sustained aluminum deficit forecast, we continue to expect lower global inventories aluminum inventories measured in days of consumption.
Continued to decline and our expected by year's end reached levels not seen in more than a decade since before the global financial crisis in 2008.
Because of demand growth and falling stocks, we estimate the inventories in days of consumption terms will have steadily decreased from a peak of 119 days in 2009 to an estimated 56 to 59 days at the end of 2019.
In the longer term demand in key end use sectors, such as transportation construction and packaging is expected to grow steadily over the next decade aluminum will continue to help the global economy meet its energy efficiency in general sustainability objectives.
As inventories continue to be consumed in this deficit market. We are optimistic about the future of aluminum its supply chain and Alcoa has a role in this industry.
Turning to our operations over the course of the last quarter. We remained focused on strengthening the company by executing key projects, improving processes and reliability and upgrading equipment.
Importantly, our drive for consistent manufacturing excellence continued to revealed results with production records and new stability in operations.
In bauxite, while average daily tons dropped sequentially due to lower production at the MRM mine in Brazil, and planned maintenance at Willow Dale in Western Australia Daily production still rose, 1% year over year.
At Willow Dale we safely completed a major overhaul of the mines crusher last quarter to provide uninterrupted internal supplier to our wager up refinery the mine and have built stocks to prepare for the planned maintenance.
In alumina, our refinery portfolio already among the most competitive in the world posted record quarterly production up 2% from the same period last year.
We're also completing the residue filtration project at Panera, our second such improvement project at our Western Australia refineries.
First successfully installed at Kwinana. This technology allows residents to be dry stacked conserving both water and land use and providing a more stable residue disposal area.
Given the efficiency and competitiveness of our refineries. We're also reviewing equipment upgrades and debottlenecking projects for our aluminum plants in both Western Australia and Brazil.
In aluminum, we continued to take steps to strengthen the company overall for example, as Bill and I mentioned earlier last quarter, we divested our minority interest in a modern Roland facility with our exit we avoid future capital contributions for the mill and were released of all obligations related to the model enrolling company.
This eliminate ongoing financial losses, and frees up future cash our remaining interest in the modern JV, which includes the mine refinery smelter and cast house remain intact.
We also took steps to reinforce our competitive aluminum footprint and come back.
First we reached two new six year labor contracts, when a bank loan and another epic encore. The contractor second quarter ends an 18 month lockout at the smelter a full restart process is scheduled to officially began July 26th.
And will be completed in the second quarter of next year.
Good labor contracts ultimately benefit both the employer and the employees by increasing the long term sustainability and profitability of plants, enabling us to provide good paying jobs now and for future generations.
At our duration both facility, we've implemented plans to increase the smelters 260000 metric tons of annual production capacity by approximately 10%.
Canada is strategic innovation fund will contribute 10 million Canadian dollars to offset a portion of the 85 million Canadian dollar upgrade expected to be complete in 2021.
The investment will help nation boat innovate by acquiring cutting edge equipment to boost its amperage enable it to lower costs and increase aluminum production.
Lastly, in Spain, we signed a conditional agreement with a private equity investment firm to divest the Alcoa Novelis and locker room. Your plants. The proposed deal as part of a collective dismissal agreement with Workers' Representatives at both facilities.
For the acquisition to close however, the investment firm must provide a credit facility by the end of the month to support future operations or the collective dismissal will take effect.
Earlier in the year. These two smelters were curtailed reducing aluminum smelting capacity of 5% year over year.
Over the last few years, we've consistently emphasized the importance of our three strategic priorities to reduce complexity drive returns and strengthened the balance sheet.
As the guide posts that drive our decisions as we enter the second half of the year will stay true to these priorities to further strengthened alcoa.
We'll continue to emphasize the importance of our safety systems to keep our people from harm and maintain our unwavering commitment to responsible and sustainable practices across our operations a key factor in our corporate reputation.
We are committed to maintaining the operational improvements we've made over the first half of the year and we look forward to doing even better in the second half of 2019.
As raw material prices remain favorable we will work to drive those benefits to the bottom line.
To strengthen our company overall, we'll evaluate projects across the globe that remove uncompetitive assets from our portfolio. So we can put our capital and efforts behind the assets and projects that generate the best returns.
Alcoa was founded on innovation more than a 130 years ago, and we'll continue our focus on developing breakthrough technology processes and products for a more sustainable future.
We will undertake to undertake these efforts to make our company more competitive and strengthen our balance sheet as appropriate.
All to provide consistent returns to our stockholders.
With that Bill and I would be happy to take your questions. Sean Please remind us of the instructions and we'll get started.
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 then two when called upon please limit yourself to two questions.
Our first question will come from David Gagliano with BMO capital markets. Please go ahead, hi, Thanks for taking my questions I don't I don't have a lot Tonight.
Just in terms of the Canadian deal the Bakken core restart.
We know that's a low cost assets can you frame the volume impact and separately help us to frame the EBITDA impact somehow.
Obviously, assuming prices and input costs remain the same as they are now.
Once that assets restarted and also the timing of that ramp up to full production by Two Q2 020.
Yes, so Dave is the.
The ramp up you know we are running part of the plant.
Currently right. So we're still running half over the line.
The ramp up will be occur through the second quarter and.
Essentially be much more weighted into the first half of next year, so minimal tons in the third quarter. Some tonnage in the fourth quarter and then tons in the first half.
As far as.
You saw that we put out a range of restart costs.
So in the second half.
We're anticipating $30 million to $35 million of after tax restart costs.
In the first half of next year, an additional $30 million to $35 million of after tax restart costs.
But I would tell you that the plant turns EBITDA positive.
Under current market conditions in the second quarter.
And I would anticipate that the plant essentially pays for the restart.
Over the course of the next 12 months so it overcomes those restart costs over the next 12 months. So thats the detail that we're able to provide.
Okay. That's helpful. Thank you and then just my.
Unrelated follow up.
In the aluminum box I, when you add up the equipment upgrades and the de bottlenecking programs that were mentioned on the call. What do you think your alumina bauxite volumes will be once those are finished and what's the timing.
We gave guidance specifically around the third quarter Dave.
So we are guiding to.
A pretty strong third quarter.
So just to be clear around the third quarter.
We essentially said a couple of things $30 million to $35 million of EBITDA improvement.
In the third quarter associated with.
Better volumes.
The lower maintenance costs.
And the lower cost at costs and alumina.
So that's the that's the outlook that we provided.
And Dave I'd also tie it back to the to the ranges that we gave as far as production production and shipments for the year better said, yes. It's good. So that's what gives you good good way to double check the information that Bill's, giving you and then also look forward at what's what's remaining for the second half of the year.
Yes, we have done 6.7 million metric tons in the first half and then we're predicting 13.6 to 13.7 for the year that allows you to back into what what the second half looks like.
Totally understand that from 2019, I was really getting out beyond 2019, it sounded like and maybe I misunderstood. The prepared remarks, I thought were more geared towards longer term projects in alumina bauxite is likely what I'm asking is.
With the products you have in the pipeline now what do you think your alumina and bauxite volumes would be in say for example, three years from now based on the projects that you have.
Approved between you and Illumina Ltd.
Yeah, I think the answer is going to be Dave that we don't have those those larger projects yet approved right and so where we find ourselves in essentially the engineering stage and so once we have the final the final details and engineering. We then have a look at markets and how we see those markets evolving because as you can imagine these are projects that pay off over a number of years.
And we'll then make a decision on it so at this point I would say that we are on our normal creep trajectory and you can see that through the historical production figures, but we are always trying to find a way to drive some production improvements across the portfolio.
These projects and whether it's in Brazil, or Western Australia would be step changes that would offer more tonnage is and as we finalize the engineering will give you a better a better overview of what those projects cost and the kinds of tonnage is that would be coming out.
Okay. That's helpful. Thank you.
Thanks, Dave.
Our next question comes from Chris Terry with Deutsche Bank. Please go ahead.
Oh, Hi, Bill and Roy couple a couple of questions from me.
The first the first one just on the on the cash balance.
In terms of the stated billion dollar minimum just interested in your comments around the current moving interest rates low or what that might do to unfunded pension.
And how we think about that billion dollars versus the the current cash balance and then the second question is just just around the cash flow slide 25 vetting those items together gives around 75 to 90 million benefit related to a bit of caustic maintenance et cetera.
And then in the quarter.
Alumina and aluminum now coming coming off into this quarter, just thinking about free cash flow specifically when when you stepped through.
Perhaps the restructuring costs in spine and any other capex items, just directionally, how you think about the free cash flow there and then and then just related to that that $15 million in the in this section 232 number that you've guided to I thought I thought it was a little higher than that I thought more like 10 to 12 months. These a number I remember just some comments on that as well. Thanks.
Wow Chris.
Youre limited to two questions I think you worked in like six or eight there.
Well I think I think I tried to tried to capture all of them. So let me, let me take a crack and ROI.
If I missed any you jump in.
You're right.
Interest rates are lower.
And that means that discount rates on the pension or lower and Oh, we give a sensitivity of approximately $160 million on the liability for every 25 basis point move in.
In the discount rate year to date discount rates I don't recall thought my head, but we're probably in the 50 to 75 basis point, a lower year to date, but the years not over and interest rates. We know change during the course of the year. So you can use a sensitivity there to get an idea of how.
Our pension liability will perform however, I would tell you that on the asset side. We are you know year to date have had a pretty good year, along with the with the with the strengthening the markets. So we've got an expected return on assets of 6.75% we've exceeded that year to date I'm not going to provide the exact number because the year is not over yet, but but we will be able to make up some of that negative differential from lower discount rates should those persist with better.
Asset returns as you know we've transitioned our asset portfolio to much more of a traditional asset portfolio largely focused around.
The equity investments and a liability hedging structure. That's a that's much more of a physical liability hedging structure than any type of an option structure. So.
Overall years not done.
But but better asset returns.
This year than what we've seen in the past.
As far as free cash flow goes there was a lot of the questions embedded in that I would point you to the cash consideration stage tries to walk you through or the cash consideration section any outlooks age tries to walk you through some of the big cash considerations for the year.
But as you alluded to we are projecting performance improvement in the third quarter.
And we gave a lot of details around that performance improvement in the third quarter.
That that will be.
Yes that will be at least today, partially offset with some of the lower prices that we're seeing but that remains to be seen what what prices will do.
As far as free cash flow items to keep in mind.
I believe we've guided to $60 million to $70 million of Spain cash outflow in the rest of the year associated with either of the two.
Potential outcomes in Spain.
Weve guided to $30 million to $35 million of.
Hi.
In the second half of <unk>.
Restructuring charges.
So overall.
I think you can look at the considerations on the consideration space for free cash flow.
Let me address the cash balance and we and I think your question started with the cash balance.
And.
We have a target of having a billion dollars of cash on hand, we ended the quarter with $834 million I would suggest to you that's not a bad outcome, we handled as Roy said.
Our legacy a future liability in MRC, So we paid $100 million in the second quarter to exit MRC that was a combination of a trailing cashcall associated with the earnings of MRC from $34 million and an additional contribution of $66 million associated with getting out of the future losses and future.
Debt repayment of MRC, So I'm actually very pleased without that outcome and then on top of that we made trailing cash payments associated with the earnings the outsized earnings in 2018 of around $306 million of of cash payments on taxes associated with the earnings so even though we weren't able to maintain our billion to our cash balance. The 834 is a pretty good outcome.
And then the last one.
Oh, the 232, sorry, I had it written down here.
Recall that we have a partial quarter benefit associated with 232 in the second quarter. So when we guide towards an incremental $15 million benefit in the third quarter Thats on top of the $10 million benefit that we got in the second quarter. So in aggregate now that Canada is exempted from the 232.
Tariffs, we would anticipate an annual benefit of approximately $200 million.
From from the 232 tariffs so that.
As you said was.
Approximately $10 million before we bring back a b. I I'm, sorry, $10 million a month before we bring back KBR Abby I helps with that so in aggregate $200 million on an annual basis. So I hope I have address all of your questions.
You got them all thanks, Thanks, very much I appreciate all the detail.
Okay. Thanks, Chris.
Our next question comes from Timna Tanners from Bank of America Merrill Lynch. Please go ahead.
Hey, guys good evening.
And that's.
I just want to review with you you've been going through your assets pretty methodically and calling out ones that are underperforming in disposing of them.
But what's left that's not core.
Specifically.
Wondering about the rolling mill, and Warrick and since you have no longer broken that out is that an asset that could be split off or are there. Other assets that are not core you are expanding in.
In a market that is actually shrinking in terms of demand and so I'm wondering.
If you are still looking to reduce.
Well, if you're actually kind of more in expansion then so I guess two questions.
Timna, Let me, let me hit that first and then Bill Bill can chime in.
Were careful not necessarily to drive to define what is core and what's not core but rather what what assets are we the best owners of and there's some obvious ones like jarrod or wager up where we would argue that we are certainly the best operators on but when you look at assets like work or the Brazilian Hydros. These are assets that are very valuable to us and I believe particularly with work we're bringing a.
Significant improvement in volumes and qualities and the ability to drive improving improving relationships and contracts with our customers as well as putting some capital to use I think we're.
We're putting the right emphasis and making the right changes to see that to see those assets.
Assets improved for the long term.
However to call them core, which I think implies that we would never consider a divestiture on is a bit. Further then we would go it comes down to fair pricing and it also comes down to two a review on the uses and deployment of cash that we have for the future and so when you look across the portfolio you've got sort of a couple that I've already mentioned you also have a series of plants, where we're taking very active active and deliberate deliberate actions in order to improve them, whether they are in the aluminum aluminum portfolio or aluminum or bauxite and these are places that are really inside of our core businesses, but where we have real levers to try and improve them I call attention to sensibly on in Spain, which is as a challenging energy situation.
Portland in East, Australia, which should also shares a challenging energy situation as well.
And when you look at assets that still have potential.
Four fundamental changes.
When you think about the San Luis smelter down in Brazil, which is currently completely idled at the place where if you have the right power contract you could see a very different outcome for that so we try and drive across or we try and analyze and look for opportunities across all of those to improve them.
But also look for ways in order to make our portfolio better performing over the long term.
Yes, the only the only thing I would add to that ROI and it's really just a complement what you said and Tim what I would point you to is.
Consider what we were able to accomplish in the second quarter.
And I think that the I think we showed in the second quarter that were willing to take action in our portfolio.
When we need to take action. So in aggregate just to just to summarize we got the MRC deal done.
We got a VI to a position where we've gotten a labor agreement in AI and we're in the process.
In late July restarting it we got a labor agreement at Bay Como that that positions us for success for the next to six years.
We moved the ball significantly in Spain, right. The final chapter isn't written yet in Spain at Alkalies unlock ronya, but I can tell you and from my perspective, I thought it would take us a lot longer to get where we've gotten in Spain, and and I think we've done a great job there we've announced that a.
A small expansion at patient though.
And it's not it's not huge but it's a 10% to accrete project that patient, though which has it has good economics at the same time, we are recovering on stability in our.
Aluminum business and we've shown that in the production numbers and the mining business just keens keeps kind of chugging along successfully so I think I think our future actions are probably best informed by what we were able to accomplish in the second quarter.
Okay. That's helpful.
If I could I wanted to understand a little bit better your outlook because on the one hand, if you read through your release and the presentation you clearly are calling far smaller.
Smaller deficits and bigger surpluses that your commentary sounded more upbeat.
I just wanted to understand do you think that recently shrunk Chinese demand is is a temporary situation because of the consumers' lack of confidence around trade. For example, do you think that we can see aluminum demand resume kind of historical patterns could you just comment a little bit more about.
How you're thinking about the outlook and.
On supply and demand going forward and the three factors you said that could turn the market for the positive could that be delayed outcome. If we see like the central banks and the Chinese stimulus in the trade war get a positive outcome. What do you think that would have a pretty quick impetus. Thanks.
Yes, timna so thats.
I think you put your finger on on.
On an important topic, and so and I think you're actually did a pretty good job of answering part of your own question, which is which is always nice from my perspective, So remember that when we sit down to prepare for earnings. It is by necessity a snapshot of how we see current conditions and so what we've been trying to do is not just provide a snapshot, but also to try and help help you and help our our other investors and analysts to understand what can be effecting that both both upwards or downwards.
I think when we look at the amount of volatility in the market today and just the turbulence around announcements on a day by day by day basis, So brown trade et cetera, and how that connects with economics and then of course, how that connects with aluminum I think we're seeing just an incredible amount of volatility and so that volatility then impacts how quickly manufacturing is growing and consuming materials and so aluminum has the incredible benefit over these years of being so intertwined with so many different parts of the economy.
It has an incredible growth story and so even given some of these uncertainties in these these trade tensions et cetera. It continues to be a place where growth is happening. It's just that when we take a snapshot of how we've seen that develop over these these first six months of the year.
It led us to to give a.
A lower demand view than what we had given in the past.
The second part of the question is I would argue even more important because the past is not necessarily a good indicator of the future here.
The first thing you asked was is does this indicate slower growth in the future and I think that very much depends on how you look at the future developing I think at some point will be passed the trade tensions I think we will we will we are already seeing financial stimulus inside of China, and if there if there.
If they're relative slowdown they continue to grow pretty nicely from an economy standpoint, and you continue to see some of that some of that slowdown inside of their common you're going to see more stimulus that moves from financial.
Physical infrastructure and that will then give you a number of impact positive impacts, particularly in aluminum.
So.
From that standpoint, I don't think that this particular earnings snapshot is indicative of the long term potential that aluminum has as a commodity.
And I'd also turn your attention to the other other side of the of the supply demand balance would just supply I think one of the one of the hallmarks of what we're seeing in the world. Today is that you're also seeing action on the supply side I call. Your attention in aluminum specifically to the fact that China is growing the least amount of aluminum productive capacity.
Since 2000, and so that is.
I think that is a very disciplined response to the fact that that there is some of this uncertainty happening in the market itself and I think that shows that there is a lot more discipline to the aluminum market.
In todays World and I think also on the aluminum side not to leave behind I also think that people are finding the aluminum business and production pumps to be very complicated very complicated, particularly in a world today, where the environmental.
Repercussions of good or bad tailings management is more and more important and so painfully highlighted with what's been happening around the world and so that I think bodes well for the future of our industry because it will help to level, the playing field and ensure that each and every refinery around the world is following that same set of environmental dynamics in designing those refineries or those bauxite mines afford those aluminum smelters in a way that that allows for sustainable production and sustainable growth.
So I think what we've been trying to portray is that the balances that we see still remained in good control. We are seeing this economic slowdown for 2019, but we still have a lot of optimism not only for declining inventories this year, but for a very bright future of aluminum into the future.
Okay. Thank you.
Thanks, Tim.
Our next question comes from Paretosh Misra with Berenberg. Please go ahead.
Great. Thanks for taking my question.
It seems to me like there is some incremental interest in aluminum as the material of choice in packaging.
Because sustainably sustainability benefits that you highlighted it actually.
Some of the packaging companies that seem the share price gain this year. So just wondering is that.
Packaging business completely scrap based.
Our how or when does it begin to make a bigger impact on on the.
Supply demand for the prime the aluminum side.
Yes, paretosh so that's.
It's an interesting question because is it scrap based it's almost indifferent. The if you continue to grow the consumption of aluminum. If you would continue to embed aluminum into year into these new into these new products. It drives higher consumption of the metal across all of the metal sources and that in the end is good for Alcoa and for other metal producers because there is only so much scrap available and now that scrap availability changes as you start to see more recycling and different economies or you start to see the end of some of the infrastructure that has been replaced with new infrastructure, but we we don't necessarily see scrap as a as a competitor for for our business and in fact look for ways to also use recycling to strengthen our business, whether it's by bringing recycled products into our cast houses connected to our smelters or whether it's in our work plant, where we actually bring in bringing scrap from from some of our customers.
And from elsewhere, so I see that as additive and so the more that we can drive the more we can drive these new products and the more that we can segment our market and the more we can convince people about not only recycled content, but low carbon aluminum content or also just the sustainable nature through for example, the aluminum stewardship initiative. The more we can drive this awareness of the sustainability baked did to alcoas products.
And we have a series of what we'd like to think of as green aluminum absolutely Ecuador in new sustain a line.
The more we can drive that the better it is for our industry and by turned the better. It is for Alcoa. So I think that is I think that is a story that still has a lot to develop and it's one of the reasons that we're working as hard as we are on on Atlas, which is will be the lowest lowest carbon aluminum on the plant once we get that out to commercial production.
Got to interesting thanks for that.
And then second.
Follow up on the raw material side and on the smelting business.
After all these recent changes what's your position with regard to the notes are you are you going to be net short or self sufficient.
Regarding China, we still do some importing of the M. and it's from China.
But it's it's a fairly small amount compared to us.
So.
We make the majority of our anodes in our.
On.
Facilities.
In our in our smelters interbank furnaces and the smelters so.
A small amount of imported anodes.
From China.
Got it thanks, Thanks Ray.
Thanks, Josh.
Our next question comes from Matthew Korn with Goldman Sachs. Please go ahead.
Hey, good evening, everybody just a couple left for me.
See withdrew from the Monro and company last month, what prompted the decision to do it now did you see some reason the downgrade your expectations on the.
On the perceivable potential achievable returns of that particular asset and if so why.
Let me, let me start on that and then Bill Bill can chime in if he wants to add.
No I don't think there was a particular catalyst from a business standpoint.
The fact is as we went into the separation a number of years ago and as we walked up plant develop it wasn't the what Marlin had in mind for the development of that plant just didnt fit with our capital allocation priorities and to be quite honest. It wasn't generating the types of cash flows and returns that we would want from that that deployment of capital.
And so as we as we continue to drive improvements in our bauxite mine and alumina refinery in country, which is now operating very stable or aluminum smelter, which has been operating safely for a while now.
The fact that rolling mill and the attached automotive mill.
Was not performing stood out more and more and so as those discussions were developing inside of the boardroom and as we saw some of the as we saw an opportunity in order to make a change it just happened to it happened to coincide with the with some of the some of the factors in some of the things that Mylan was considering and so it became a good opportunity for us to discuss what would it take for us to exit that particular that particular joint venture.
It's it's you're spot on ROI I mean, just a couple of the the financial aspects of the decision. Matthew we were as I said, we contributed $100 million 34 that was a capital call associated with past losses.
Finally, we contributed an additional $66 million to be able to exit the rolling mill.
To put it in perspective that rolling mill in 2018, we had approximately $35 million of losses.
In our income statement in 2018 associated with the Rolling mill and going forward, we had approximately $300 million of debt our share.
Associated with that mill outstanding.
So we essentially were exiting.
EBITDA breakeven mill that was looking at significant cash associated with debt repayment in the future.
All for an incremental $66 million after the cashcall.
And it came down to a financial decision to exit.
And if I can just ask one more piece to Matthew we've been.
Part of the concept behind the work Rolling Mill go was up.
Going with Alcoa Corporation was so that we'd have a complete product offering.
Through time, what we found is that yes, we have been able to commercialize the Saudi Arabian rolled products, but we've also been able to develop a customer base that is very tied to work and that I think is.
Has helped our customers both to improve themselves, but has also been very very profitable and has helped us to grow volumes inside of the work Rolling mill.
And so I think we're in a pretty good spot, even though we were exiting that joint venture we're still in the very good spot commercially for the work business as well.
Got it guys I really appreciate all that detail, let me just slide one more small one in bill you did say that.
Given current market conditions, you are bringing down capex for the year is a little bit lower.
What in particular are you slowing in response to market when you're looking at over the rest of year.
We had.
Built in sell them.
The amount of capital associated with.
Some growth projects that we were looking at.
Really from in the engineering phase and we have slowed those down a little bit and then on the sustaining capex side you can see we've just trimmed from a $300 million estimate to $290 million estimate.
So a very small amount, but it essentially says hey in today's market environment with.
The target that we have of keeping a billion dollars of cash cash on the balance sheet, we're really tightening the belt.
To try to make sure that every capital dollar that spent makes a lot of sense.
Our next question comes from Lucas pipes with B. Riley FBR. Please go ahead.
Yes. Thank you very much and good evening, everyone I wanted to ask an industry question I think in the past.
You made reference as to what percentage of the global aluminum supplies uneconomical. I think you also specifically highlighted China now we've had a change in a lot of the input factors on the pricing side et cetera, and I wondered if you can give us an update as to where you see kind of breakeven in China what percentage is out.
Economical and then also around the rest of the world. Thank you.
Yes, Lucas so I'll tell you that with the flat cost curve that we're seeing now back and that can shift pretty quickly.
And so let me let me illustrate that first by talking a little bit about the alumina alumina cost curve. So if you take today's conditions.
We estimate about 7% of the rest of the world and about 5% of China are underwater.
And so that's a.
Thats, a pretty a relatively small amount when you think about where how much pricing has changed through time.
Again, when you look at aluminum and again you take the current Empire current alumina pricing and take that and current aluminum pricing you end up with about 4% rest of the world in 2% in China.
However, if you go back a week ago, where alumina prices were higher both in China and in the rest of the World you ended up with almost a third of Chinese capacity underwater so relatively small changes in the underlying input input.
Input raw materials or in aluminum in the case of aluminum can have some pretty significant impacts across the market. So so it's it tends to be.
A pretty dynamic calculation.
That is very helpful. Thank you for that detail and maybe one last follow up.
On the inventory side, what's your perspective on channel inventories and do you have a sense for where inventory stand in China versus the rest of the world. Thank you.
Yeah, you know we tend to we tend to try and aggregate all of the inventories that we see out there and so when you think about what you can actually see see on the on the London metal exchange or on the Chinese exchange.
We try to take that and then add onto our understanding of what is sitting in the market.
And we do that by trying to close one eye on listen to everything that were hearing and I think what we found we've had good success with being able to being able to understand and devaluate, how those inventories are changing and so when I. When I mentioned the sort of how those inventories are developing those are meant to actually include the shadow inventories are the inventories that are also held off exchange.
We also have a couple a couple of small warehouses that we run inside of our plant. So that helps us to understand some of the financials and economics associated and it also gives us a front row seat to see when when people are interested in warehousing aluminum as an example, and they come out as a very good example of a place where we've done where we've done that kind of business.
And just to just to put a fine point on it.
When we're looking at inventory numbers globally, we would say, there's probably around 10.7 million metric tons of inventory.
In the world of which.
Roughly half of that is what you would call shadow, what we would call unreported stocks.
So roughly 2.5 million metric tons in China, and 2.5 million metric tons held outside of China. So.
The numbers that we quote and when when Roy talks about inventories coming down in inventories potentially ending the year at a 10 year low that is inclusive of our best estimate of what unreported.
Inventories are.
Our next question comes from Justin Bergner with GE Research. Please go ahead.
Oh, good afternoon, Roy good afternoon Bill.
This adjustment.
Oh, just start your tax situation clearly your tax rate is very high given how your profits and losses split up between the U.S. the rest of world.
You know from past payments it seems like the cash tax rate is too much below the operational tax rate.
What are your long term strategies that you're either thinking through working through to try and get that down to a more normal level.
Yes, yes, and it's a really tough question to answer and I think the reason why such a tough question to answer is because you hit on it.
Our tax rate is based on the jurisdictions in which we in which we make profits.
In today's environment, we have losses in a number of jurisdictions.
That have valuation allowances against the taxes, and therefore have a a essentially a zero percent tax rate.
That's in places like the U.S. and Spain.
Conversely, we pay taxes and accrue for tax expenses in places, where we have long term profitability in places like Australia.
Canada, Brazil, and so therefore, you can see some.
Some really strange tax rates as profitability gets lower tax rates can can get higher.
As far as taking actions we have.
And no else that can be used in the U.S. So so as we.
Hopefully can get profitability in some of our us facilities that profitability will be essentially tax free because we've got anywhere else to to use up.
So I would tell you that we look at tax planning all around the world.
And make our best estimate to try to.
Essentially.
Minimize our tax bill.
But but the tax rates that you see are a function of where we make money and where we don't make money.
Okay understood, but in theory, you could acquire.
Earning asset in the U.S.
And your industry in an adjacent industry and put those that fit those animals to use should better.
That's correct.
And I would tell you that as we look at capital allocation.
In in any of its forms we take marginal tax rates into consideration so as we look at.
Assets in the us from an expansion perspective than the existing portfolio that we have we apply a zero percent tax rate.
In the near term.
As we look at opportunities for expansion in Australia, we apply apply that to 30% tax rate in Australia. So it is built into our capital allocation model as we consider where we put capital around the world.
And great balance sheet.
I'll just chime in really quickly and just just.
Just to support what Bill's, saying, we understand and find that there are ways that we can try to improve the tax situation, whether its driving quick and better improvements in the way that we produce and the underlying cost structure and therefore, the profitability of Intalco or Messina.
Or try and drive more businesses that end up being tax free businesses by.
Down in Texas or in other places, where we're performing transformation activities and trying to drive some new some new businesses. So those those tend to be blocking and tackling.
But.
Trying to find a way to absorb and use those into wells is very important to us.
Great. Thank you I just had one quick clarification question for the second quarter restart what are the total cash costs that youre anticipating.
Across the remainder of 2019 is 2020.
Yes, we haven't guided the cash costs, but I think I think it's.
You probably have three components of cash associated with the restart of avionics.
So you've got the second half after tax expense of $30 million to $35 million.
We will have some capital expenditures to to get a beyond that.
Back to the level that we want it to be at that's included in the 290 and $120 million of return seeking capital and sustaining capital that we've we've guided to so those numbers are inclusive of.
The restart of avionics and there will be some level of working capital I would probably estimated at the 20% to 30 million dollar level of working capital build in a b. So the three components restart cost 30 to 35 working capital estimate of probably 20 to 30.
And then capex, but the Capex is built into the guidance that we provided.
Our next question will come from Michael Dudas with vertical research partners.
Please go ahead.
Hi, gentlemen, thanks for taking the question just one question Roy wanted to share your current thoughts on.
You know how industry governments are trying to get a more fair environment relative to the global aluminum industry.
Yes, its a.
That is certainly something that we have talked a lot about in these earning calls and it's something that we take to each and every meeting that we have whether its here in the us and Canada or elsewhere.
And so I think we've seen some fits and starts I think just recently, we've seen some discussions around how to.
Our specifically around the subsidization and particularly in China, but elsewhere can also be the case.
And also started to see some some movement towards trying to trying to present, a United front.
So it becomes a bit more complicated when we start fighting about the the trade in Paris.
And so we're trying to trying to move away from home for example, the 232 releasing that on Canada was was a great step forward.
Now we want to start building that partnership with Canada with Europe elsewhere around the world. So that we can start to see start to see a more level playing field, we were not trying to shifted in our favor necessarily we're trying to have as quarterly industry as we possibly can.
Now I will not tell you that that is easy in order to assemble that coalition. It takes time and it takes it takes effort.
But it is something that I believe I believe in particularly with the always CD report that was just published you're a little while ago without jumping into too much information about that essentially shows the the incredible and and almost order of magnitude size of the subsidization inside of China as opposed to as opposed to what happens in aluminum around the planet I think there's a lot of really good information that we can use in that report and what we've been talking about before in order to better strength in that coalition, so more to come but rest assured Michael we're trying to we are out there are advocating for this and using all of the opportunities we have to explain that to the decision makers.
And our final question will come from John Tumazos with John Tumazos Independent Research. Please go ahead.
Thank you.
Could you review the share buybacks.
Shares outstanding at June Thirtyth for about a million less than a year ago.
And could you give a little more background.
On them on the Rolling mill, not so much the financial numbers as to the market grow us or was there more competition from rolled products coming from China, or Russia, Germany or whatnot.
Let me let me answer your second question first just because because I think it I think it is a point that's work that's worth exploring a little bit.
I think for the modern Rolling mill, specifically it was built with an eye to a very rapidly Ics blending economic growth.
Circled around aluminum consumption inside of Saudi Arabia. So if you imagine I think the kingdom what they wanted to drive was not just bauxite alumina aluminum rolling It was to also build all about automotive production side of country.
And so that is that as a very noble purpose and I think we shared in the in that vision dreamed to see that grow quickly.
But I think when it came to the pragmatic reality. It takes time to develop those industries and so unfortunately for us when we think about the preciousness of our capital resources.
And we don't necessarily as a as Alcoa Corporation have the patience to wait for that to grow nor do we have any kind of impact that we can bring on trying to grow that into into the kingdom. So when you think about the divergence of interests between not and now for Corporation.
They are very much tied into what the what this new this new plan inside of the inside of the Kingdom is trying to develop and so they buy having full control control over that Rolling mill I think they can also help to.
Helped to make that vision more of a reality.
And let me let me just briefly answer your question around shares outstanding John .
If you go back to the second quarter of last year, we made earnings.
We you use the diluted share count.
And that diluted share count last year was 188.7 million shares.
That included a stock options and awards.
Of 2.3 million shares fast forward to the second quarter of this year.
Where.
Essentially because you were in a loss position we have to have the accounting will tell you have to take a more conservative view of shares outstanding.
And you have to use the shares outstanding that exclude the equivalent share. So we would be at 185.5 million shares outstanding.
At the end of the second quarter the differential between the second quarter of last year in the second quarter of this year is the net impact of having bought back shares in the fourth quarter of last year recall that we spent $50 million on share buybacks in the fourth quarter at roughly a 29 point it should stay roughly at $29 INO three cents.
The average share price that we purchased in the fourth quarter of last year that is approximately 1.7 million share. So the differential is the combination of that and any shares that were.
Used as part of.
Management compensation, so thats the difference.
Thank you.
Thanks, John .
This now concludes our question and answer session.
I would like to turn the conference back over to really Harvey for any closing remarks.
Thank you Shawn and thank you everyone for your time today.
As we enter the second half of 2019, we are committed to maintaining all the improvements that we've made so far this year.
And we are also hard at work to achieve and do even more so thank you for your time today. We appreciate the questions and we look forward to sharing our third quarter results in October back to you Sean.