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Alcoa Corporation (AA) Q2 2021 Earnings Call Transcript

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Alcoa Corporation (NYSE:AA)
Q2 2021 Earnings Call
Jul 15, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Alcoa Corporation Second Quarter 2021 Earnings Presentation and Conference Call. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that 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.

James DwyerVice President of Investor Relations

Thank you, and good day everyone.

I’m joined today by Roy Harvey, Alcoa Corporation’s President and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Roy and Bill.

As a reminder, today’s discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the Company’s actual results to differ materially from these statements are included in today’s presentation and in our SEC filings.

In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today’s presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website.

With that, here’s Roy.

Roy C. HarveyPresident and Chief Executive Officer

Thank you, Jim, and thank you to everyone for joining our call.

Before we get started, I want to take a moment and emphasize once again that Alcoa’s actions are always guided by our values. We consistently act with integrity, operate with excellence and care for people. That is true every quarter, but it’s been especially important in this past year and a half as the world has wrestled with unprecedented challenges brought on by the COVID-19 pandemic. While risks remain, vaccines have helped to move many of the world’s economies forward again. I’m proud of the work that our Alcoa employees following our values have done to mitigate these risks, supporting each other, our business and our communities.

I am disappointed however that we had two serious injuries during the quarter, a hand injury and a case of heat stress. These are both important reminders that there are numerous everyday risks that we must consistently work to eliminate or reduce. Our most important objective is the safety of our employees.

Now, let me quickly recap some of our results, which Bill will describe in greater detail. We posted our highest ever quarterly earnings per share since becoming an independent Company in 2016. It’s also our most profitable first half of the year in the aluminum sector. The results demonstrate that our strategic priorities are working to improve this company and deliver results. It’s a very good time to be in the upstream aluminum business and it’s a good time for Alcoa, with a company that is stronger now than any time since our 2016 launch. We’ve made significant progress on our strategy to strengthen our balance sheet, eliminating all long-term debt maturities until 2026.

Importantly, we are now well within our target range of proportional adjusted net debt. We also delivered above and beyond our previously announced target to generate cash from non-core asset sales. Although we have reached our target on this program, we will continue to evaluate other sales when it makes sense. Last month sale of the former Eastalco smelter site in Maryland, which had been closed since 2010 was an example of this. The new owner will use the property for a next-generation data center. This too is an example of our strategic priorities working. It shows that former brownfield sites can bring economic value for our Company and the communities where we used to operate.

Across Alcoa, we’ve worked to ensure this company can succeed through all commodity cycles. When market prices plummeted last year, we were resilient because of the strategies we already had in place. Our plants remain operational and performed well. We stayed focused on the future, continuing to make improvement. Now with stronger markets, we’re capturing the benefits from much better pricing and driving it to the bottom line. While we will continue to improve our portfolio of assets, our aluminum segment saw our company’s highest ever third party realized price. Also ongoing strength in customer demand in China’s efforts to reform its industry suggest continued strength in global aluminum pricing.

The metal we produce is an important material for the future in more sustainable solutions. We’re ready for that future through existing low carbon products and the development of breakthrough technologies that we’re working to bring to the market. I look forward to discussing this in more. But now, I’ll ask Bill to dig deeper into our financial results. Bill, please go ahead.

William F. OplingerExecutive Vice President and Chief Financial Officer

Thanks, Roy. It was another great quarter. Revenues at $2.8 billion were steady sequentially and after removing the impact of the Warrick rolling mill sale, we were up 7%. Revenues were up $685 million or 32% from the same period last year on higher aluminum prices.

Second quarter earnings per share was $1.63 per share, $0.70 per share higher than the prior quarter, and $2.69 per share higher than the year ago quarter. Adjusted earnings per share for the second quarter nearly doubled sequentially to a record $1.49 per share. Adjusted EBITDA, excluding special items, also increased, up 19% sequentially to $618 million, and more than tripled last year’s $185 million. A key reason for our record net income this year and a key differentiator from prior years has been the relative contribution of our Aluminum segment with modest income taxes and virtually no minority interest, more Aluminum segment EBITDA translates to the bottom line compared to the other segments.

In the first half of 2021, the segment provided 65% of Alcoa’s total adjusted EBITDA, excluding special items, compared to 28% of the total in our previous best first half 2018. Even though, Alcoa’s adjusted EBITDA was $376 million lower in the first half of 2021 compared to the same period in 2018, Alcoa’s first half 2021 net income excluding special items was $20 million higher than 2018. A similar dynamic also holds true for cash flows.

Now let’s review adjusted EBITDA in more detail. The $97 million increase in adjusted EBITDA, excluding special items was driven by higher metal prices. That $199 million benefit was partially offset by lower aluminum prices and unfavorable foreign currency impacts, which together totaled $41 million. Higher production, energy and raw material costs were unfavorable impacts, partially offset by better mix of alumina contracts and higher value added shipments and premiums.

At the product segment level, Bauxite adjusted EBITDA declined $18 million due to lower intercompany transfer prices and higher production costs. In Alumina, $22 per ton lower API and higher maintenance and energy costs were only partially offset by improved mix of shipments in contract pricing. The Aluminum segment benefited from much higher LME and higher regional premiums, especially at the Midwest premium as well as stronger value added shipments and pricing while higher production costs, non-recurrence of Warrick rolling mill EBITDA and higher raw materials and energy costs were partial offsets.

Now let’s look at impacts in our cash flows. The cash flows highlight many of the major corporate actions we’ve undertaken this year as well as the benefits from very strong adjusted EBITDA. Given the magnitude of the cash balance change in addition to our normal year-to-date chart we have bridged from the first quarter ending cash balance to the second quarter cash balance. It shows the April cash uses following the 2024 bonds and funding the US pension as well as the quarter benefiting from cash inflows related to non-core asset sales proceeds predominantly the former Eastalco smelter location. It also shows the benefit of strong adjusted EBITDA, particularly in the Aluminum segment, net…

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