# call

companyname: Alcoa Corp
symbol: AA
date: 2019-07-18
year: 2019
quarter: Q2
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation Second Quarter 2019 Earnings Presentation and Conference Call. [Operator Instructions] Please note this event is being recorded.\\nI would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you, Sean, and good day everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer.\\nWe will take your questions after comments by Roy and Bill.\\nAs 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.\\nIn 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.\\nAlso a note on our financial statements effective January 1, 2019, the Company changed its accounting method for valuing certain inventories from LIFO to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented.\\nFinally, as previously announced, the earnings release and the slide presentation are available on our website.\\nWith that, here's Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim, and thank you to everyone for joining today's call.\\nIn 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 aluminum prices. Lower aluminum prices combined with other favorable impacts helped our Aluminum segment to rebound from quarterly loss, even as metal prices weakened further. And across our segments, our renewed focus on manufacturing excellence continues to bear fruit through greater stability and better operational performance.\\nAs we had committed, our businesses also drove the benefits of lower raw material costs to our bottom line.\\nLastly, we made a progress on long-term projects to strengthen our aluminum portfolio and closed a significant transaction tied to our modern joint venture, which provides immediate benefits for our company.\\nWhile 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.\\nWith that, let's start with an overview of second quarter results. We reported a net loss of $402 million or $2.17 a share.\\nExcluding special items, we reported an adjusted net loss of $2 million or $0.01 per share. On an adjusted EBITDA basis excluding special items, we generated $455 million.\\nLastly, we ended the quarter with a solid $834 million of cash even after sizable cash outlays in the quarter.\\nTurning to safety. We're disappointed that we experienced two serious injuries in the second quarter, both in our aluminum business.\\nAs 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.\\nWe also made real progress this quarter on a number of portfolio strengthening initiatives. We amended our margin joint venture agreement and then divested our minority interest in the rolling mill. The exit reduces operating losses and simplifies our business in Saudi Arabia.\\nOur interests in the remaining portion of the Ma'aden joint venture remain the same.\\nIn our aluminum portfolio in Quebec, we reached two competitive 6-year labor contracts, the first at Baie Comeau and the second at B\\u00e9cancour. The contract at B\\u00e9cancour ends an 18 month lockout at the smelter and the process to fully restart idle capacity gets underway later this month.\\nAlso in Quebec, we are implementing plans to increase the production capacity at Deschambault, 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.\\nIn Spain, we made significant progress toward removing historically uncompetitive capacity from our aluminum portfolio. Earlier this month we signed a conditional agreement with a private equity investment firm to divest Alcoa Aviles and La Coruna plants.\\nLastly, turning to markets, while we are reducing our estimate for global aluminum demand growth, we continue to project a global aluminum deficit for the year.\\nWe also see aluminum inventory trending lower and other reasons for optimism.\\nWith that, I'll turn it over to Bill for a detailed review of our second quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks Roy.\\nI want to 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 $868 million year-on-year, primarily on lower alumina and aluminum prices.\\nIn the quarter restructuring charges drove the net loss attributable to Alcoa Corporation to $402 million or $2.17 per share on 185.5 million shares outstanding. Special items totaled $400 million after tax and non-controlling interest. Of that amount cost related to the MRC divestiture were $319 million, also included is a charge of $38 million related to the pension benefit plan offered at Baie Comeau, Quebec as part of the new labor agreement.\\nWe do not take a charge related to Aviles and La Coruna smelters this quarter as we did not signed a conditional divestiture agreement until July 5.\\nWe expect that charge ranging from $100 million to $140 million depending on the outcome of the process to occur in the third quarter.\\nNow let's look at the income statement excluding special items.\\nOur second quarter adjusted net loss, excluding special items was $2 million or $0.01 per share, improving $41 million sequentially. Adjusted EBITDA, excluding special items was $455 million, down $12 million sequentially.\\nOur second quarter EBITDA margin was 16.7%.\\nTwo items in the quarter, second quarter SG&A and R&D expenses declined $14 million. The non-recurrence of the $20 million receivable write-offs in the first quarter was partially offset by slightly higher overhead spending.\\nOur 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-tax paying jurisdictions.\\nLet's look closer at the factors driving adjusted EBITDA in the quarter.\\nThis 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.\\nTaken together, all other impacts improved $67 million sequentially nearly offsetting the price impact.\\nA 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 U.S. dollar drove another $19 million of improvement, a negative impact was from higher production cost of $18 million resulting from scheduled maintenance activities in the Bauxite and Alumina segments.\\nFinally, we can see the positive impacts of improved operations in our Alumina segment reflected in better volume and the benefit of the Canadian Section 232 Tariffs exemption for half of the quarter, shown in the other column.\\nNow let's move to the segments. In the segments Bauxite adjusted EBITDA declined $14 million, primarily on higher maintenance costs and lower production at MRN. Alumina adjusted EBITDA was basically flat as improved caustic prices, favorable currency and higher shipment volumes almost entirely offset the lower realized alumina prices and higher production costs.\\nThe 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 non-recurrence of the receivable write-off in the first quarter and we also started to see positive impacts from the Spanish smelter curtailments in the Canadian tariffs exemption.\\nNon-segment impacts netted to negative $29 million down $94 million sequentially. Inter-segment eliminations declined $87 million to negative $1 million in the second quarter as alumina prices were more stable in the quarter.\\nTurning 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 Alcoa's 25% interest in the Ma'aden rolling facility.\\nDays working capital improved four days sequentially to 31 days with improvements across all working capital components.\\nOur 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 one-time payments.\\nMoving to the outlook.\\nOur full year outlook remains, mostly unchanged from last quarter's outlook with four adjustments.\\nWe expect transformation EBITDA to improve $10 million to $15 million to nearly breakeven.\\nWe expect other corporate to be $10 million better, a $120 million instead of $130 million.\\nOur 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.\\nGiven 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.\\nRegarding cash impacts of restructuring depending upon the outcome of the Aviles and La Coruna process could range from $60 million to $70 million in the second half of 2019.\\nIn the appendix, we also list additional considerations for the third quarter, which provides sequential benefits totaling approximately $75 million to $90 million. They include $5 million to $10 million related to higher volume and lower maintenance costs in bauxite. $30 million to $35 million related to higher volume lower maintenance cost and lower caustic costs in the alumina segment.\\nAnd then in the Aluminum segment, $35 million to $40 million of lower alumina 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 U.S. sales, lower raw material costs and other performance improvements are expected to provide that sequential benefit.\\nLet me turn it back to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks Bill.\\nIn 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.\\nIn the alumina market, we continue to expect a slight 2019 surplus, driven by the restart of the Alunorte 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.\\nIn China specifically, the government forced three separate refineries in Shaanxi province to curtail due to environmental related issues with bauxite residue.\\nWe also saw news this past quarter about refinery upgrades implemented to meet the emission 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.\\nTaken altogether, environmental concerns in India and China removed almost 2 million metric tons production from our 2019 balance. Considering all these developments, it remains clear the operating in an environmentally sustainable way is a 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 a partner of choice in the industry.\\nFinally in aluminum, we continue to project a global deficit.\\nWhile we still see growing global demand, trade tensions, macroeconomic headwinds and a slowdown in global manufacturing has informed our lower demand projection.\\nWe expect these headwinds will likely result in slower growth in aluminum end-use sectors this year particularly in the global automotive sector.\\nWhile 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.\\nOur 2019 outlook for aluminum supply on the other hand is tighter, as the postponement of smelter projects in China in the recent curtailment of a Boston and smelter will outweigh the impact of the planned restart of ABI smelter in B\\u00e9cancour, Quebec which is beginning later this month and will continue into the second quarter of 2020.\\nIn China, authorities continue to enforce the national permitting policy for smelters which by law caps total aluminum smelting capacity.\\nAs a result, China's aluminum supply growth for 2019 is estimated at less than 250,000 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.\\nWith a sustained aluminum deficit forecast, we continue to expect lower global inventories. Aluminum inventories measured in days of consumption continue to decline and are expected by year's end to reach levels not seen in more than a decade since before the global financial crisis in 2008.\\nBecause 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.\\nIn 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 to meet its energy efficiency in general sustainability objectives.\\nAs inventories continue to be consumed in this deficit market, we are optimistic about the future of aluminum, its supply chain, and Alcoa's role in this industry.\\nTurning to our operations.\\nOver the course of the last quarter, we remained focused on strengthening the Company by executing key projects, improving the processes and reliability and upgrading equipment.\\nImportantly, our drive for consistent manufacturing excellence continue to yield results with production records and renewed stability and operations.\\nIn bauxite, while average daily tons dropped sequentially due to lower production at the MRN mine in Brazil and planned maintenance at Willowdale in Western Australia, daily productions still rose 1% year-over-year. At Willowdale, we safely completed a major overhaul of the mines crusher last quarter to provide uninterrupted internal supplier to our Wagerup refinery, the mine built stocks to prepare for the planned maintenance.\\nIn 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 a residue filtration project at Pinjarra, our second such improvement project at our Western Australia refineries.\\nFirst successfully installed at Kwinana, this technology allows resident to be drive stacked conserving both water and land use and providing a more stable residue disposal area.\\nGiven 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 continue to take steps to strengthen the company overall.\\nFor example, as Bill and I mentioned earlier, last quarter, we divested our minority interest in the Ma'aden rolling facility. With our exit, we avoid future capital contributions for the mill and were released of all obligations related to the Ma'aden Rolling Company. This eliminates ongoing financial losses and frees up future cash.\\nOur remaining interest in the Ma'aden JV, which includes the mine, refinery, smelter and casthouse remain intact.\\nWe also took steps to reinforce our competitive aluminum footprint in Quebec.\\nFirst, we reached two new six year labor contracts, one at Baie Comeau and another at B\\u00e9cancour. The contract of B\\u00e9cancour ends an 18 month lockout at the smelter. A full restart process is scheduled to officially begin July 26 and will be completed in the second quarter of next year.\\nGood labor contracts ultimately benefit both the employer and employees by increasing the long-term sustainability and profitability of plants, enabling us to provide good paying jobs now and for future generations.\\nAt our Deschambault facility, we've implemented plans to increase the smelters 260,000 metric tons of annual production capacity by approximately 10%. Canada's Strategic Innovation Fund will contribute CAD10 million to offset a portion of the CAD85 million upgrade expected to be complete in 2021. The investment will help Deschambault innovate by acquiring cutting edge equipment to boost its average, enable it to lower cost and increase aluminum production.\\nLastly, in Spain, we signed a conditional agreement with a private equity investment firm to divest the Alcoa Aviles and La Coruna plans. The proposed deal is part of the collective dismissal agreement with the workers representatives at both facilities.\\nFor 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.\\nEarlier in the year, these two smelters were curtailed reducing aluminum's smelter capacity 5% year-over-year.\\nOver the last few years, we've consistently emphasized the importance of our three strategic priorities to reduce complexity, drive returns and strengthen the balance sheet at the guidepost that drive our decisions.\\nAs we enter the second half of the year, we will stay true to these priorities to further strengthen Alcoa.\\nWe will 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.\\nWe're 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.\\nAs raw material prices remain favorable, we'll work to drive those benefits to the bottom line.\\nTo strengthen our company's 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 130 years ago and we will continue our focus on developing breakthrough technology, processes and products for a more sustainable future. We'll undertake these efforts to make our company more competitive and strengthen our balance sheet as appropriate all to provide consistent returns to our stockholders.\\nWith that, Bill and I would be happy to take your questions. Sean, please remind us of the instructions and we'll get started.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions] Our first question will come from David Gagliano with BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"I don't have a lot tonight just in terms of the Canadian deal, the B\\u00e9cancour restart, we know that's a low cost asset. 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 asset is restarted and also the timing of that ramp up to full production by 2Q, 2020?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so Dave, the ramp-up we are running part of the plant currently. Right so we are still running half of 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.\\nAs far as you saw that we put out a range of restart costs.\\nSo in the second half we're anticipating $30 million to $35 million of the after-tax restart costs in the first half of next year.\\nAn additional $30 million or $35 million of after-tax restart costs. But I would tell you that the plants 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.\\nSo it overcomes those restart costs over the next 12 months.\\nSo that's the detail that we're able to provide.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"And then just, my unrelated follow up in alumina and bauxite, when you add up the equipment upgrades and the debottlenecking programs that were mentioned on the call. What do you think you're alumina and bauxite volumes will be once those are finished and what's the timing?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"We gave guidance specifically around the third quarter Dave.\\nSo, we are guiding to a pretty strong third quarter.\\nSo 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 caustic costs in alumina.\\nSo that's the outlook that we provided.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And Dave, I'd also tie it back to the ranges that we gave as far as production and shipments for the year, better said.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes it\\u2019s good. Well, that gives you good way to double track the information that Bill is giving you and then also look forward at what's remaining for the second half of the year.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes so we\\u2019ve done 6.7 million metric tons in the first half and we're predicting 13.6 to 13.7 for the year so that allows you to back into what the second half looks like.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Yes totally understand for 2019, I was really getting up beyond 2019. It sounded like I maybe I misunderstood the prepared remarks. I thought we're more geared towards longer-term projects in alumina and bauxite. And frankly what I'm asking is, with the projects that you have in the pipeline now, what do you think you're alumina and bauxite volumes would be. And say for example three years from now based on the projects that you have approved between you and Alumina Limited.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, I think the answer is going to be Dave that we don't have those larger projects yet approved right.\\nAnd so, where we find ourselves is in essentially the engineering stage.\\nAnd so, once we have the final details in engineering, we then have a look at markets and how we see those markets evolving, because as you can imagine these are projects that payoff over a number of years and we'll then make a decision on it.\\nSo at this point, I would say that we are on our normal creep trajectory.\\nAnd 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 tonnages. And as we finalize the engineering we\\u2019ll give you - a better overview of what those projects cost and the kinds of tonnages that would be coming out.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, Bill and Roy couple questions from me.\\nThe first one just on the cash balance in terms of the stated $1 billion minimum just interested in your comments around the current move in interest rates lower what that might do to unfunded pension. And how, we think about that $1 billion versus the current cash balance. And then the second question is just around the cash flow, slide 25 adding those items together gives around 75 million to 90 million benefit related to better caustic maintenance, et cetera.\\nAnd then in the quarter, alumina and aluminum now coming off into this quarter.\\nJust thinking about free cash flow, specifically when you step through perhaps the restructuring costs in Spain and any other CapEx items just directionally how you think about the free cash flow there. And then just related to that the $15 million in the Section 232 number that you've guided to I thought, it was a little higher than that. I thought, more like 10 to 12 per month is a number I remember, just some comments on that as well? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Oh Chris, you're limited to two questions I think you worked in like six or eight there.\\nI think I tried to capture all of them.\\nSo let me take a crack and Roy, if I missed any you jump in.\\nYou're right. Interest rates are lower and that means the discount rates on the pension are lower and we give a sensitivity of approximately $160 million on the liability for every 25 basis point move in the discount rate.\\nYear-to-date discount rates I don't recall off top my head, but we're probably in the 50 to 75 basis point lower year-to-date, but the year is not over and interest rates, we know change during the course of the year.\\nSo you can use your sensitivity there to get an idea - of how our pension liability will perform.\\nHowever, I would tell you that on the asset side we - year-to-date have had a pretty good year along with the strengthening the markets.\\nSo we've gotten expected return on assets of 6.75%, we've exceeded that year-to-date.\\nI'm not going to provide the exact number because the year is not over yet. But, we will be able to make up some of that negative differential from lower discount rates should those persist with better asset returns.\\nAs we've transitioned our asset portfolio too much more of a traditional asset portfolio, largely focused around equity investments and a liability hedging structure that's, much more of a physical liability hedging structure than any type of an option structure.\\nSo overall, the year is not done, but better asset returns this year than what we've seen in the past.\\nAs far as free cash flow goes, there is a lot of questions embedded in that. I would point you to the cash considerations page, tried to walk you through or the cash consideration section on the outlook page, tried 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 will be, 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 prices will do.\\nAs 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. We've guided to $30 million to $35 million of [ABI] in the second half of restructuring charges.\\nSo overall, I think you can look at the considerations on the considerations page for free cash flow.\\nLet me address the cash balance and I think your question started with the cash balance and we have a target of having $1 billion of cash on hand.\\nWe ended the quarter with $834 million. I would suggest to you, that's not a bad outcome. We handled as Roy said a 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 cash call associated with the earnings of MRC from a $34 million. And an additional contribution of $66 million associated with getting out of the future losses and future debt repayment of MRC.\\nSo I'm actually very pleased with 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 cash payments on taxes associated with the earnings.\\nSo even though we weren't able to maintain our $1 billion cash balance, the $834 million is a pretty good outcome.\\nAnd then the last one. The 232, sorry, I had it written down here. Recall that we have a partial quarter benefit associated with 232 in the second quarter.\\nSo when we guide towards an incremental $15 million benefit in the third quarter. That's on top of the $10 million benefit that we got in the second quarter.\\nSo in aggregate, now that Canada is exempted from the 232 tariffs.\\nWe would anticipate an annual benefit of approximately $200 million from the 232 tariffs.\\nSo that as you said was approximately $10 million before we bring back ABI, I'm sorry $10 million a month, before we bring back ABI. ABI helps with that.\\nSo in aggregate $200 million on an annual basis.\\nSo I hope, I have addressed all of your questions.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Timna Tanners from Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"I just wanted to review with you, you've been going through your assets pretty methodically and calling out ones that are underperforming and 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, are there other assets that are not core, you're expanding in a market that is actually shrinking in terms of demand.\\nAnd so I'm wondering, if you're still looking to reduce or if you're actually kind of more in expansion mode.\\nSo I guess, two questions in there.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Timna, let me - let me hit that first and then Bill - Bill can chime in. We're careful not necessarily to drive to define what is core and what's not core, but rather what assets are we the best owners of and there is some obvious ones like Pinjarra or Wagerup that we would argue that we are certainly the best operators. But when you look at assets like Warrick or the Brazilian hydros, these are assets that are very valuable to us and I believe particularly with Warrick, we're bringing a significant improvement in volumes, in qualities and the ability to drive improving relationships and contracts with our customers and as well as putting some capital to use.\\nSo I think we're - we're putting the right emphasis and making the right changes to see that - to see those assets improve for the long term, however, to call them core, which I think, implies that we would never consider a divestiture is a bit further, than we would go. It comes down to fair pricing and it also comes down to a review on the uses and deployment of cash that we have for the future.\\nAnd so when you look across the portfolio.\\nYou've got sort of a couple of 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 portfolio or alumina or bauxite.\\nAnd 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 San Ciprian in Spain, which is - has a challenging energy situation - and Portland in East Australia, which - also it shares a challenging energy situation as well.\\nAnd when you look at assets that still have potential for fundamental changes, when you think about the Sao Luis smelter down in Brazil, which is currently completely idled. It's a place where if you have the right power contract, you could see a very different outcome for that.\\nSo 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.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, the only thing I would add to that, Roy, and it's really just a compliment what you said. And Timna, what I would point you to is consider what we were able to accomplish in the second quarter and I think that - I think we showed in the second quarter that we're willing to take action in our portfolio when we need to take action.\\nSo in aggregate, just to summarize, we got the MRC deal done. We got ABI to a position where we've gotten a labor agreement in ABI and we're in the process of in late July, restarting it. We got a labor agreement in Baie Comeau, that positions us for success for the next six years. We moved the ball significantly in Spain. Right.\\nWe did - the final chapter isn't written yet in Spain at Aviles and La Coruna 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 I think, we've done a great job there.\\nWe've announced a small expansion at Deschambault and it's not huge but it's a 10% creep project at Deschambault which has good economics. At the same time, we're recovering on stability in our alumina business and we've shown that in the production numbers and the mining business just keeps kind of chugging along successfully.\\nSo I think.\\nI think, our future actions are probably best informed by what we were able to accomplish in the second quarter.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"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 for smaller deficits and bigger surpluses but your commentary, it sounded more upbeat. But I just want to understand, do you think that recently shrunk Chinese demand is a temporary situation because of the consumer's 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 supply and demand going forward and the three factors, you said that could turn the market for the positive. Could that be a delayed outcome if we see like the Central Banks and the Chinese stimulus and the trade war get a positive outcome or do you think that would have a pretty quick impetus? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Timna.\\nSo that's, I think you put your finger on - on an important topic.\\nAnd so - and I think you actually did a pretty good job at answering part of your own question which is always nice from my perspective.\\nSo remember that when we sit down to prepare for earnings, it is by necessity a snapshot of how we see current conditions.\\nAnd 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 other investors and analysts to understand what can be affecting that both upwards or downwards.\\nI think when we look at the amount of volatility in the market today. And just the turbulence around announcements on a day by day basis around trade etc and how that connects with economics, and then of course how that connects with aluminum.\\nI think, we're seeing just an incredible amount of volatility.\\nAnd 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.\\nAnd so even given some of these uncertainties in these trade tensions, etc, 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 - this first six months of the year. It led us to give a lower demand view than what we had given in the past.\\nThe second part of the question is - is I would argue even more important because the past is not necessarily a good indicator of the future here.\\nThe 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.\\nI think at some point, we will be past the trade tensions.\\nI think, we will - we are already seeing financial stimulus inside of China and if there - if their relative slow down, they continue to grow pretty nicely from an economy standpoint, as you continue to see some of the - some of that slowdown inside of their economy, you're going to see more stimulus that moves from financial to physical and to infrastructure and that will then give you a number of impacts - positive impacts, particularly in aluminum.\\nAnd 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 side of the supply-demand balance which is supply.\\nI 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.\\nI'd 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 today's world.\\nAnd I think also on the alumina side not to leave that behind. I also think that people are finding the alumina business and production 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.\\nAnd 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 and designing those refineries or those bauxite mines or those aluminum smelters in a way that allows for a sustainable production and sustainable growth.\\nSo I think, what we've been trying to portray is that the balances that we see still remain in good control.\\nWe 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.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Paretosh Misra with Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"It seems to me like there is some incremental interest in aluminum as a material of choice in packaging because of sustainability benefits that you highlighted actually and some of the packaging companies have seen big share price gain this year.\\nSo just wondering, is that packaging business completely scrap-based? Or how or when does it begin to make a bigger impact on the supply demand for the primary aluminum side?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Paretosh.\\nSo that's a - it's an interesting question, because, is it scrap-based, it's almost indifferent, that if you continue to grow the consumption of aluminum, if you would continue to embed aluminum into your - 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.\\nAnd because there is only so much scrap available and now that scrap availability changes as you start to see more recycling in different economies or you start to see the end of some of the infrastructure that is then replaced with new infrastructure.\\nBut 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 casthouses connected with our smelters or whether it's in our Warrick plant, where we actually bring in scrap from some of our customers and from elsewhere.\\nSo I see that as additive.\\nAnd 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 in to Alcoa's products and we have a series of what we like to think of as green aluminum Ecolum, Ecodura in the Sustana line.\\nThe more we can drive that, the better it is for our industry and by turn the better it is for Alcoa.\\nSo 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 Elysis which is the - will be the lowest - lowest carbon aluminum on the planet. Once we get that out to commercial production.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"And then second follow-up.\\nOn the raw material side in the smelting business, after all these recent changes, what's your position with regard to anodes, are you, are you going to be net short or self-sufficient?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Regarding anodes, we still do some importing of anodes from China, but it's a fairly small amount, Paretosh, so we make the majority of our anodes in our own facilities - in our smelters, in our bake furnaces in the smelters.\\nSo a small amount of imported anodes from China.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Matthew Korn with Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Just a couple left for me, so you withdrew from the Ma'aden Rolling Company last month. What prompted the decision to do it now? Did you see some reason to downgrade your expectations on the achievable - potential achievable returns of that particular asset. And if so why?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Let me, let me start on that. And Bill can chime in if he wants to add. I don't think there was a particular catalyst from a business standpoint, the fact is - is, as we went into - to separation. A number of years ago. And as we watch that plant develop. It wasn't - what Ma'aden had in mind for the development of that plant just didn't 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.\\nAnd so as we, as we continue to drive improvements in our bauxite mine and alumina refinery in country, which is now operating very stably or aluminum smelter, which has been operating stably for a while now. The fact that that rolling mill and the test automotive mill was not performing, stood out more and more.\\nAnd so as those discussions were developing inside of the board room. 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 and some of the things that Ma'aden was considering.\\nAnd so it became a good opportunity for us to discuss what would it take for us to exit that particular - that particular joint venture.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So you're spot on, Roy. I mean, just a couple of the, the financial aspects of the decision, Matthew. We were, as I said, we contributed $100 million, $34 million of that was a capital cost associated with past losses.\\nSo 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.\\nOur share associated with that mill outstanding.\\nSo we essentially, we're exiting an EBITDA breakeven mill that was looking at significant cash associated with debt repayment in the future, all for an incremental $66 million after the cash call and it came down to a financial decision to exit.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And if I can just add one more piece to Matthew. We've been - part of the concept behind the Warrick 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.\\nBut we've also been able to develop a customer base that is very tied to Warrick, 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 Warrick rolling mill.\\nAnd so I think, we're in a pretty good spot. Even though we were exiting that joint venture. We're still in a very good spot commercially for the Warrick business as well.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"I really appreciate all that detail, let me just sly one more small one in. Bill, you did say that given current market conditions.\\nYou're 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 that over the rest of the year?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"We had built in some 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.\\nSo a very small amount but it essentially says, hey, in today's market environment with the target that we have of keeping $1 billion of cash, cash on the balance sheet, we're really tightening the belt to try to make sure that every capital dollar that's spent makes a lot of sense.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Lucas Pipes with B. Riley FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Yes, thank you very much and good evening, everyone. I wanted to ask an industry question.\\nI think in the past, you made references to what percentage of the global aluminum supplies uneconomical. And I think you also specifically highlighted that China, now we've had a change in a lot of the input factors on the pricing side, et cetera. I wondered if you can give us an update as to where you see kind of breakeven in China, what percentage is economical and then also around the rest of the world. Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, Lucas.\\nSo, I'll tell you that with the flat cost curve, that we're seeing now. That can, that can shift pretty quickly.\\nAnd so let me - let me illustrate that first by talking a little bit about the alumina cost curve.\\nSo if you take today's conditions, we estimate about 7% of the rest of the world and about 5% of China are underwater.\\nAnd so that's, that's 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 API or current alumina pricing and take the and current aluminum pricing, you end up with about 4% rest of the world and 2% in China.\\nHowever, 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 under water.\\nSo relatively small changes in the underlying input raw materials or in alumina in the case of aluminum can have some pretty significant impacts across the market.\\nSo it's, it tends to be a pretty dynamic calculation.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Maybe one last follow-up on the inventory side, what's your perspective on shadow inventories and do you have a sense for where inventory stand in China versus the rest of the world? Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, we tend to - we tend to try and aggregate all of the inventories that we see out there.\\nAnd so when you think about the - what you can actually see on the London Metal Exchange or on the Chinese Exchange, we try to take that and then add on to it, our understanding of what is sitting in the market.\\nAnd we do that by trying to close one eye and listen to everything that we're hearing. And I think that we found, we've had good success is being able to - being able to understand and evaluate how those inventories are changing.\\nAnd so, when I - when I mentioned the - sort of how those inventories are developing, those are meant to actually include the shadow inventories or the inventories that are also held off-exchange.\\nWe also have a couple, 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 Baie Comeau is a very good example of the place where we've done, where we've done that kind of business.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And 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, we would call it unreported stocks, so roughly 2.5 million metric tons in China and 2.5 million metric tons held outside of China.\\nSo the numbers that we quote and when Roy talks about inventories coming down and inventories potentially ending the year at a 10-year low that inclusive of our best estimate of what unreported inventories are.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Justin Bergner with G.Research. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"To start, your tax situation, clearly your tax rate is very high given how your profits and losses split up between the U.S. and the rest of the world. From past statements, it seems like the cash tax rate isn't too much below the operational tax rate. What are your long-term strategies that you're either thinking through or working through to try and get that down to a more normal level?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, it's a, Justin, it's a really tough question to answer. And I think the reason why I touched tough question to answer is because you hit on it.\\nOur 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 - essentially a 0% 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.\\nAnd so therefore, you can see some, some really strange tax rates as profitability gets lower, tax rates can get higher.\\nAs far as taking actions, we have NOLs that can be used in the U.S.\\nSo as we hopefully, can get profitability in some of our U.S. facilities that profitability will be essentially tax free, because we've got NOLs to use up.\\nSo 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 the tax rates that you see are a function of where we make money and where we don't make money.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"But in theory you could acquire earning asset in the U.S. in your industry or an adjacent industry and put those NOLs to use\\u2026\"}, {\"speaker\": \"William Oplinger\", \"content\": \"That's correct and I would tell you, as we look at capital allocation in any of its forms, we take marginal tax rates into consideration.\\nSo, as we look at assets in the U.S. from an expansion perspective in the existing portfolio that we have. We apply a 0% tax rate in the near term as we look at opportunities for expansion in Australia we - apply the 30% tax rate in Australia.\\nSo, it is built into our capital allocation model as we consider where we put capital around the world.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And Justin I'll just chime in really quickly. And just to support what Bill is saying, we understand and find that there are ways that we can try to improve the tax situation. Whether it's driving quick and better improvements in the way that we produce in the underlying cost structure and therefore the profitability of in telco or Sina 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 in trying to drive some new businesses.\\nSo those tend to be blocking and tackling, but it's trying to find a way to absorb and use those NOLs it's very important to us.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"I just had one quick clarification question for the B\\u00e9cancour restart. What are the total cash costs that you are anticipating across the remainder of 2019 and 2020?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, we haven't guided the cash cost. But I think it's you probably have three components of cash associated with the restart of ABI.\\nSo you've got the second half after-tax expense of $30 million to $35 million.\\nWe will have some capital expenditures to get ABI back to the level that we want it to be at that's included in the 290 million and the 120 million of return seeking capital and sustaining capital that we've guided to.\\nSo those numbers are inclusive of the restart of ABI. And there will be some level of working capital.\\nI would probably estimate it at the $20 million to $30 million level of working capital build in ABI.\\nSo the three components restart cost 30 million or 35 million, working capital estimate of probably 20 to 30 and then CapEx. But the CapEx is built into the guidance that we have provided.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Michael Dudas with Vertical Research Partners. Please go ahead.\"}, {\"speaker\": \"Michael Dudas\", \"content\": \"Just one question Roy, wanted to share your current thoughts on how industry governments are trying to get a more fair, environment relative to the global aluminum industry?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, it's that is certainly something that we have talked a lot about in these earnings calls. It's something that we take to each and every meeting that we have whether it's here in the U.S., in Canada or elsewhere.\\nAnd so, I think we've seen some fits and starts.\\nI think just recently, we've seen some discussions around - how specifically around the subsidization and particularly in China, but elsewhere can also be the case. And also started to see some movement towards trying to present a united front, so - it becomes a bit more complicated when we start fighting about the trade and tariffs.\\nAnd so, we're trying to trying to move away from for example, the 232 - releasing that on Canada was a great step forward.\\nNow we want to start building that partnership with Canada with Europe elsewhere around the world.\\nSo that we can start to see - a more level playing field. We're not trying to shift it in our favor necessarily. We're trying to have as orderly and industry as we possibly can. And I'll not tell you that that is easy, in order to assemble that coalition. It takes time and it takes and it takes effort.\\nBut it is something that I believe, I believe and particularly with the OECD report that was just published here a little while ago. And without jumping into too much information about that it essentially shows the incredible and - almost order of magnitude size of the subsidization inside of China as opposed to what happens in aluminum around the planet.\\nI think there's a lot of really good information that we can use in that report.\\nAnd what we've been talking about before in order to better strengthen that coalition.\\nSo more to come, but rest assured, Michael we're trying to, we are out there, advocating for this and using all of the opportunities we have to explain that to decision makers.\"}, {\"speaker\": \"Operator\", \"content\": \"And our final question will come from John Tumazos with John Tumazos Independent Research. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Could you review the share buybacks, the shares outstanding at June 30 or about $1 million less than a year ago. And could you give a little more background on the modern rolling mill, not so much the financial numbers, as did the market grow last year, was there more competition from rolled products coming from China, Russia, or Germany or what not?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Let me answer your second question first, just because I think it is a point that's worth exploring a little bit.\\nI think for the modern rolling mill specifically, it was built with an eye to a very rapidly expanding economic growth circled around aluminum consumption inside of Saudi Arabia.\\nSo 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 of that automotive production inside of country.\\nAnd so that is a very noble purpose. And I think we shared in that vision and dream to see that grow quickly.\\nBut I think when it tends to the pragmatic reality it takes time to develop those industries.\\nAnd so unfortunately, for us when we think about the preciousness of our capital resources. And we don't necessarily 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 the kingdom.\\nAnd so, when you think about, the divergence of interest between modern and Alcoa Corporation, they are very much tied into what this new plan inside of the kingdom is trying to develop.\\nAnd so, they by having full control over that rolling mill I think they can also help to make that vision more of a reality.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And let me just briefly answer your question around shares outstanding, John.\\nIf you go back to the second quarter of last year where we made earnings - we use a diluted share count. And that diluted share count last year was 188.7 million shares that included stock options and awards of 2.3 million shares.\\nFast forward to the second quarter of this year where, essentially because we're in a loss position, we have to - the accounting will tell you, you have to take a more conservative view of shares outstanding and you have to use the shares outstanding that exclude the equivalent shares.\\nSo we'd be at 185.5 million shares outstanding at the end of the second quarter. The differential between the second quarter - of last year and 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 - just say roughly at $29.03 average share price that we purchased in the fourth quarter of last year. That is approximately 1.7 million shares.\\nSo the differential is the combination of that and any shares that were used as part of management compensation.\\nSo, that's the difference.\"}, {\"speaker\": \"Operator\", \"content\": \"This now concludes our question-and-answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Sean. And thank you everyone for your time today.\\nAs 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.\\nSo 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.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2019-10-16
year: 2019
quarter: Q3
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon. And welcome to the Alcoa Corporation Third Quarter 2019 Earnings Presentation and Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.\\nI would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you, Allison, 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.\\nWe will take your questions after comments by Roy and Bill.\\nAs 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.\\nIn 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 a note on our financial statements, effective January 1, 2019, the Company changed its accounting method for valuing certain inventories from LIFO to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented.\\nFinally, as previously announced, the earnings release and slide presentation are available on our website.\\nWith that, here's Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim, and thank you to everyone for joining today's call. In the third quarter, we continued to demonstrate strong operational performance and stability across our aluminum value chain. We achieved new production records in bauxite and alumina and our aluminum segment remained profitable, helped in part by lower aluminum prices.\\nProduction costs fell across the portfolio, and we continued to drive the benefit of lower raw material costs to our bottom line. This past quarter, we also continued to strengthen our company. We finalized the divestiture of two aluminum plants in Spain, announced a new operating model, and reached new labor contracts.\\nLooking back, since separation, we have relentlessly improved our portfolio and our balance sheet. We've returned stability to our plants as evidenced by our production records, and we continue to revitalize safety. It is because of that work that we've been able to weather these markets. Today, we're building upon that progress. We're announcing a multiyear review of alumina and aluminum capacity and non-core asset sales to drive costs lower and to enable sustainable profitability.\\nWe have a lot of ground to cover.\\nSo, let's get started with an overview of the third quarter results.\\nWe reported a net loss of $221 million or $1.19 per share. Those results include restructuring charges to divest two aluminum assets in Spain and to implement our new operating model.\\nExcluding special items, we reported an adjusted net loss of $82 million or $0.44 per share. On an adjusted EBITDA basis, excluding special items, we generated $388 million.\\nLastly, we closed the quarter with $841 million of cash, that's slightly higher than the previous period and given persistently weak markets, a notable achievement.\\nTurning to safety, we\\u2019re disappointed that we experienced one serious injury in the third quarter at one of our refineries. The employee is now resting and recovering.\\nAs always, we continue to prioritize safety every day, and we're making progress on improving our safety programs for the benefit of everyone who enters our locations.\\nOur focus on operational excellence enabled our current bauxite and alumina operating portfolio to achieve the highest quarterly production since our launch as a separate company in 2016. In our aluminum segment, we successfully divested the Aviles and La Coruna facilities in Spain, removing historically uncompetitive capacity from our portfolio. In Quebec, the restart of our B\\u00e9cancour facility is underway and on schedule to be completed in the second quarter of 2020. And in the United States, the United Steelworkers ratified a new four-year labor contract that positions our company and our employees for future success.\\nIn our markets, we continue to project a global aluminum deficit for the year, but we're reducing our global aluminum demand estimate due to macroeconomic headwinds and trade tensions. Today's current market environment aside as sustainability becomes a growing force, aluminum has a long, bright future, and we'll review some of those trends.\\nLastly, we have continuously demonstrated our commitment to create a stronger Alcoa.\\nJust last month, we announced the new operating model that will bring our management even closer to our plants, creating a leaner company and saving costs. And as I mentioned earlier, today, we're announcing a multiyear capacity review and potential asset sales.\\nThis kind of announcement is never easy, because it will eventually affect some of our employees. But we must continue to act to combat the current market environment and strengthen Alcoa for the long term. We'll undertake a portfolio review and asset sales in line with our values and communicate outcomes as decisions are made.\\nWith that, I'll turn it over to Bill for a detailed review of our third quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy.\\nLet's start with the income statement. Revenues were down 5% sequentially as higher bauxite and alumina shipments were more than offset by lower realized prices for alumina and aluminum. Revenues declined $823 million year-on-year, again on lower alumina and aluminum prices.\\nIn the quarter, restructuring charges drove the net loss attributable to Alcoa Corporation of $221 million or $1.19 per share on 185.6 million shares outstanding. Special items in the third quarter totaled $139 million after tax and non-controlling interest. The key components this quarter were the $134 million charge related to the disposition of our Aviles and La Coruna smelters, $37 million related to charges to implement the new operating model, and B\\u00e9cancour lockout and restart costs totaling $14 million, partially offset by favorable tax items related to timing differences.\\nNow, let's look at the income statement excluding special items.\\nOur third quarter adjusted net loss excluding special items was $82 million or $0.44 per share. Adjusted EBITDA excluding special items was $388 million.\\nOur second quarter EBITDA margin was 15.1%. Through the third quarter, the estimated full year operational tax rate rose to 62.9% on lower profits, particularly in Australia and Brazil. The higher annual rate required true up of prior periods in the third quarter adding $51 million to the expense or $0.28 per share and brought the operational rate for the quarter from 62.9% to 99.5%.\\nLet's look closer at factors driving adjusted EBITDA.\\nThis quarter improved the operations and lower costs partially offset the impact of lower alumina prices. Lower market prices primarily for alumina drove adjusted EBITDA down $100 million sequentially. Taking together all other impacts, improved $33 million sequentially, partially offsetting the price impact.\\nA few key points, higher sales volumes in alumina and bauxite, lower production costs across the portfolio and improved raw material costs, primarily petroleum coke and caustic, were the main operational positives. Lower Brazilian hydropower prices and lower value-added premiums, partially offset some of those operational gains.\\nNow, let's move to the segments. In the segments, bauxite adjusted EBITDA improved $22 million, primarily on lower production costs and higher volumes, with the combined record production volume from our owned mines. Alumina adjusted EBITDA declined $146 million on lower sales prices, partially offset by improvement in virtually every area, most notably in higher sales volume and lower production costs. We saw record third quarter production volumes at Alumar and Pinjarra and in the segment as a whole. The aluminum segment adjusted EBITDA improved $40 million sequentially on lower alumina costs.\\nNon-segment impacts netted to negative $12 million, improving $17 million sequentially. Inter-segment eliminations were favorable $25 million and adjust the inter-company margin remaining in inventory. Alumina prices dropped in the quarter releasing profit held in inventory but were partially offset by lower costs and higher inventory, increasing the profit held in inventory.\\nTurning to the balance sheet. We ended the third quarter with cash of $841 million, up $7 million sequentially. In the quarter, we made $37 million in payments related to the Spanish smelter divestitures and $12 million on the ABI restart. Days working capital improved one day to 30 days as receivables declined on lower prices.\\nOur proportional adjusted net debt remained at $3.4 billion and includes our net pension and OPEB liability of $2.3 billion.\\nEvery year-end, we re-measure our net pension and OPEB liability, taking into account full year 2019 asset returns and the year end discount rates.\\nAs of September 30, 2019, interest rates have declined substantially since our 2018 year-end re-measurement.\\nHowever, asset returns year-to-date have been approximately 14% and if re-measurement had occurred at quarter end greater than expected assets returns with partially offset lower discount rates.\\nOf course, our actual results will depend on asset returns for the full year discount rates effective at year-end and other factors.\\nTurning to our full year outlook.\\nOur full year outlook remains mostly unchanged from last quarter's outlook with the following adjustments; we expect transformation EBITDA to be approximately negative $5 million; we expect other corporate to be $5 million better, a $115 million instead of $120 million; our full-year operational tax rate is expected to be up slightly to approximately 65%; and to catch up the year-to-date tax rate, we expect approximately $15 million tax expense in addition to the amount calculated using the full year rate.\\nOur cash related items given current marketing conditions, capital expenditures are expected to be $10 million lower with return seeking capital at $110 million and sustaining capital remaining at $290 million.\\nWe expect Environmental and ARO payments to be approximately $110 million.\\nIn the appendix, as we have done the last few quarters, we also list additional considerations for the following quarter, in this case the fourth quarter, which provides sequential EBITDA benefits totaling approximately $60 million to $65 million. They include bauxite adjusted EBITDA to be in line with the third quarter records EBITDA, $15 million to $20 million sequential benefit due to higher volumes and lower sequential maintenance and lower costs in the alumina segment.\\nIn the aluminum segment, we expect approximately $45 million benefit from lower alumina costs compared to the third quarter. Other than alumina costs, we expect lower raw material costs to be completely offset by higher seasonal energy costs and lower European product premiums.\\nLet me turn it back to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks Bill.\\nAs is our practice, we'll now turn to a discussion regarding our markets. In bauxite, we expect the market to remain in surplus for the remainder of the year. China's inland refineries continue to show interest in using imported seaborne bauxite. The country's key inland provinces have increased their consumption of these imports approximately fourfold since 2018.\\nImports from Guinea and Australia represented dominant and reliable sources of imported bauxites into China, where the material is stockpiled to mitigate the risk from an increasingly complex supply chain. In alumina, we now expect a larger global surplus for 2019. In China, smelter disruptions significantly reduce alumina demand. Refinery curtailments due to economic factors only partially offset the resulting higher alumina surplus. In the world, ex-China, refinery curtailments in the Caribbean were more than offset by tons that entered the market from expansions and restarts in the Middle-East and South America.\\nFinally, in the aluminum market, we continue to project a full year deficit, albeit smaller than our prior projection to the weaker global demand.\\nWhile the series of smelter disruptions in China helped to swing back country's balance with deficit, it was not enough to offset lower demand growth in the rest of the world. This year's trade tensions, low trade volumes and the declining growth and manufacturing activity have lowered our expectations for this year's global aluminum demand.\\nAs such, we estimate that global primary aluminum consumption maybe flat and possibly contract year-over-year in 2019. This is mostly driven by weaker primary aluminum demand in the world, ex-China, where scrap used and Chinese imports have been rising, while reduced manufacturing activity has started to translate into lower product order volumes. We're also revising down our 2019 outlook for global aluminum production. This is mainly due to a series of Chinese curtailments due to disruptive events and economic factors in that country, which has taken off approximately 600,000 metric tons of production from prior full-year estimates.\\nIn summary, current economic conditions continue to pose real challenges. Still, before I discuss a longer-term and brighter outlook for aluminum demand growth, I'd like to review how we're positioning our company to manage through this downturn so we're even better prepared for future.\\nOne of the hallmarks of our company is our focus on relentless continuous improvement.\\nWe've listed on the left side of this slide just the selection of recent accomplishments, and I believe each of these have contributed to a stronger, more competitive Alcoa. I'm particularly proud to see the improvement in safety and stability of our operations, as well as a step changed improvement in our balance sheet. But that is not an ending point, rather, we have continued to move forward.\\nJust last month, we announced a new operating model.\\nIn addition to creating a more operator-centric organization, it's also expected to result in annual savings of $60 million in operating costs, beginning in the second quarter of 2020. The model, which goes into effect on November 1st, will create a leaner organization by eliminating the Company's business unit structure, consolidating sales, procurement and other commercial capabilities at an enterprise level and streamlining Alcoa's executive team.\\nRather than consolidated business units, our team will be focusing on each of our operating locations, sharpening each plant's focus on production and improved competitiveness, while also creating space to innovate and improve. And by consolidating our commercial functions, we expect to drive improvements across our products and supply chain.\\nTo ensure that our operational chain of command can efficiently connect with each of our global operations, our Chief Operating Officer will be relocating to our existing office in the Netherlands, in a time zone that will permit more frequent communications and a central hub to rapidly share best practices. This will enable our global locations to be better connected via our COO. At this time, no other members of our executive team plan to relocate.\\nLooking ahead over the next 12 to 18 months, we will review non-core asset sales, which we can estimate produce between $500 million to $1 billion in net proceeds, far outweighing a corresponding reduction in adjusted EBITDA estimated at approximately $50 million to $100 million.\\nNow, I'd like to take a longer-term view of the global aluminum industry. One thing is clear, despite current market dynamics in a world where sustainability and responsibility to responsibly source materials are growing force, Alcoa is position to succeed.\\nLet's begin with the fundamentals. Demand for aluminum products has doubled since 2000, and is expected to continue to grow at an approximately 3% rate annually over the next 10 years.\\nAluminum has well documented beneficial properties, such as recyclability, low density, strength, formability and durability due to its being anticorrosive. Those properties have made aluminum ideal in automotive applications for vehicles that are lighter, more fuel-efficient and more environmentally friendly due to reduced greenhouse gas emissions through the complete lifecycle.\\nImportantly, aluminum's infinite recyclability reduces energy and resource consumption. It also enables safer and more energy-efficient buildings, airplanes and sustainable food and beverage packaging. And as consumers become more environmentally conscious, they're demanding sustainable product solutions. And as an industry, we're well positioned to capitalize on the secular trends.\\nLooking at Alcoa now. We're already a recognized leader in sustainability. This year, assets across our bauxite, alumina and aluminum portfolio were certified by the Aluminum Stewardship Initiative. We've also been listed on the Dow Jones Sustainability Indices since our inception. And last month, we were named the aluminum industry leader on this index.\\nIn bauxite, our world-class mine rehabilitation and best-in-class methods of mining in areas of high biodiversity have earned us the credibility and trust to mine bauxite in two of the most protected areas in the planet, the Brazilian Amazon rainforest and the Jarrah forest in Western Australia.\\nOur approach keeps us in withstanding with governments and communities to ensure access to bauxite reserves and enhance our long-term license to operate.\\nIn alumina, our portfolio is already the lowest per ton emitter of carbon dioxide. Among global alumina producers, our alumina refineries lead in energy efficiency. And we continue developing better storage practices for bauxite residue, while also pursuing alternative uses for the materials.\\nIn aluminum, we're also one of the lowest per ton emitters of carbon dioxide among global producers. And currently, approximately 70% of our metal is produced with renewable energy. And our products help our customers to meet their sustainability targets, such as through our [sustainer] line of products made with either low carbon emissions or from recycled aluminum.\\nAnd our certifications from the Aluminum Stewardship Initiative provide important differentiation in the marketplace.\\nOver the years, we have built a solid reputation for sustainability. We believe that this reputation as a sustainable responsible producer of bauxite, alumina and aluminum, can meaningfully differentiate us from our global players and enable us to succeed in an evolving world that is becoming even more focused on sustainability.\\nBut first, we must take actions to strengthen our company further given the current market conditions. To become a profitable and more competitive company, today, we're announcing a multiyear review of our asset portfolio. The review will consider opportunities for significant improvement, potential curtailments, closures or divestitures.\\nAs you can see from this slide, we anticipate making the most meaningful changes in our alumina and aluminum portfolios.\\nIn alumina, we're placing approximately 4 million metric tons of capacity under review and in aluminum, about 1.5 million metric tons of capacity under review. By undertaking this review, we would look to achieve advantages across each segment. In bauxite our goal is to maintain our first quartile cost position. We're the world's second largest bauxite miner with access to bauxite deposits with mining rights that extend in most cases more than 20 years. I'm proud of our mining practices and our approach to engagement with local communities and careful protection of the environment.\\nWe also have a strong first quartile cost position in alumina. We're the biggest alumina refiner with the largest long position outside of China. And we look to maintain our position as the lowest per ton emitter of carbon dioxide among alumina producers. In aluminum, our goal is to become the lowest per ton emitter of carbon dioxide among all global aluminum producers with up to 85% of our smelting portfolio powered by renewable energy.\\nWe currently hold a second quartile position on the cost curve, and we will drive to be a first quartile producer, once actions resulting from the capacity review are complete.\\nAs you can see, at the end of the portfolio transformation, not only will Alcoa have maintained or improved its competitiveness in each segment but we also expect to be the lowest per ton emitter of carbon dioxide among all global aluminum companies in both smelting and refining.\\nSince we launched as a company in 2016, we have used our strategic priorities as our guide in making decisions to strengthen our company. At this time and in light of the steps that we've announced today to continue that journey, it's appropriate to refresh our strategic priorities to better define our destination.\\nFirst, as we reduce complexity, we'll reiterate our focus on being low cost to compete in the global cyclical commodity industry.\\nSecond, as we drive returns, we'll remain margin focused. We intend to improve our commercial capabilities, invest in targeted growth opportunities, and focus on increasing margins across the value chain.\\nAnd lastly, to reflect Alcoa's increasing focus on becoming a stronger more sustainable company, we've updated strengthened the balance sheet to advance sustainably. This priority captures both financial and sustainability improvements. We plan continued work to strengthen the balance sheet, transform the portfolio and leverage our industry leading environmental and social standards to deliver value for our Alcoa\\u2019s stockholders.\\nAs we look to the future, we believe the long-term outlook for aluminum demand remains strong. A range of products will require more aluminum, but with an increased focus on materials that are sustainably and responsibly produced. Alcoa has always been a sustainability leader in producing lightweight infinitely recyclable aluminum. With our portfolio shift over the next few years, we'll expand our sustainability advantage and further position ourselves to capture changing views in the marketplace to win in the global aluminum market.\\nWith that, Bill and I would be happy to take your questions. Allison, could you please remind us of the instructions and we'll get started?\"}, {\"speaker\": \"Operator\", \"content\": \"Certainly and thank you.\\nWe will now begin the question-and-answer session. [Operator Instructions] And our first question will come from David Gagliano of BMO Capital. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"First, I was wondering if you could just provide a little more detail on which are the 1.5 million tons in smelting and 4 million tons of refining capacity is under review and what asset?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Sure, Dave, and I'll hit that one first. The fact is that we're being a bit careful about revealing exactly what plant that targets. And part of that is to give us optionality and flexibility as we work through our portfolio and part of it is simply because we need to be working with these with our plants as they continue to operate.\\nSo, I think as you look at the cost curve, you can make some conclusions, but the fact is our work lies ahead of us and we're not announcing the specific plants.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"And then just my follow-up, I guess, it has to be a two-part followup here.\\nIn terms of -- from a timing perspective, it's a five-year review, and I'll let somebody else ask about which non-core assets you're under consideration, but of the smelting the refining capacity under review, five year process.\\nFirst part of the question is, can you give us a sense if it is frontend loaded, backend loaded? Five year is a long time, number one. And number two or part B or whatever, how do you respond to, I think what some may say is this is a company that -- I mean, this is almost 50% of your smelting capacity and not a lot of people are projecting that kind of degradation in global aluminium demand.\\nSo, obviously the implication is that it\\u2019s a market share loss from a global perspective. How do you respond to that that type of comment?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo, let me try and hit those first and then Bill can chime in.\\nSo, from a timing perspective, we need to look at this as a holistic program. The fact is it will be dependent upon how the market and the type of cash flows that we're seeing based upon that market, those market conditions. I would also argue that some of those changes, remember part of this is to try and make a step change in some of our cost structures at existing plants.\\nSome of those take some time in order to renegotiate or to fundamentally change how we're approaching the smelting or refining in that in that case.\\nSo, the reason we put it into a five year timeline is quite simply because we will be adapting both the cash flows coming in and to how we can afford to make those changes; and most importantly, about how that market cycle changes and perhaps permits us to do divestitures rather than closures or curtailments.\\nSo, a lot of different decision parameters that need to be taken into consideration.\\nOn your comment about 50% of smelting capacity in market share, I think when we look at our company and we think about our viability as we go forward and our ability to move through the market cycles, both at the top and at the bottom, the fact is that it is rather than looking at market share, we need to be focused on having one or the most competitive set of aluminum smelters that we possibly can.\\nSo, once we become more competitive, once we have a more consistent return at all parts of the cycle, that then gives us a better stream -- springboard from which to grow.\\nSo, I understand your point.\\nHowever, and as I tried to make clear in my presentation, we are very enthusiastic about the future of that market, but we are also very determined to make sure that we approach that market in a very competitive low-cost position.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"The only thing I would add as far as market share, we're really looking at it from driving value for shareholders, driving value for our owners.\\nSo, we don't necessarily look at it as a market share position, we're looking at it as value maximization for owners.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Paretosh Misra of Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Maybe I'll ask the other one. On your non-core asset sale, could your energy assets and some of the downstream assets that you have, could those be a potential asset for sale?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, very similar to Roy's answer around which assets that we're looking at in the portfolio review. We're not being specific about the noncore asset sale. But you know in the past, we've talked about a number of assets that could be considered in that, and they'll be looked at.\\nSo, not getting specific about which assets are for sale at this point.\\nWe will let you know as we progress.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"And my follow-up, the new regulations for marine fuel, the IMO 2020 are set to be active pretty soon. Do you see that making any difference in your business either in terms of cost or maybe any availability of any of the raw materials that you consume?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, we are a big shipper as you can imagine because we have global operations. We spend around $400 million annually on shipping costs, and we would envision that IMO 2020 could add up to 10% on our shipping costs.\\nSo, that would be due to the fact that fuel prices would be going up.\\nSo, we're looking at maybe a 10% increase year-over-year due to IMO 2020.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"If I can just add quickly to that too Paretosh ,as you think about that.\\nI think it's also important to remember that that will also be occurring to our competitors.\\nAnd so when you think about the movement of materials across the ocean and you think about how that cost curve looks in China versus rest of the world simply because they consume so much bauxite that's been shipped overseas, that IMO is going to have a different impact on each of those companies.\\nSo yes, it's a cost increase but also think through the relative cost increase on some of our competitors as well.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Curt Woodworth of Credit Suisse. Please go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"First question is just on cost down on raw materials, Bill.\\nI think it was year and half or two years ago when you have the massive rally in caustic and some other commodities.\\nI think you guided to a number of like $500 million of raw material inflation. And we have seen obviously a pretty massive reversal in most all of these raw materials.\\nSo I was wondering if you could give some general guidance on kind of where raw materials look for you today, spot heading into next year versus where you are this year.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo let me put it a little bit in the perspective. We had gone into 2018 seeing a big increase in raw materials, and we were projecting approximately a $400 million increase in raw materials for 2018.\\nDuring the course of 2018, we probably saw $350 million of raw material increase, '18 over '17. '19 over '18, we're seeing a decline in raw material prices and that's translating into about a third of that cost improving.\\nSo roughly a $130 million year-over-year of improved raw material costs between '19 and '18.\\nIt's coming in a couple areas.\\nFirst of all, caustic prices are down fairly sharply. Coke prices are also down.\\nAnd so going into 2020, we should continue to see the flow-through benefit of those raw material costs, because as you know, caustic takes us anywhere between six to nine months to flow through our income statement, so we should see continued benefit. The one that's been a little bit stubbornly high is coal tar pitch there our smelting business, but that also has come down also.\\nSo we're starting to see the improvement '19 versus '18, and should see more of that in '20.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"And then, in terms of restructuring, you quantified the $60 million and congrats on -- that that's obviously a tough decision. But when you look I guess at an asset level for B\\u00e9cancour and Spain, the shutdown there and then restarting B\\u00e9cancour. Can you give us a sense for I guess the EBITDA drag of those assets this year relative to when B\\u00e9cancour's normal production, kind of what that delta could look like '20 versus'19?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, we haven't provided B\\u00e9cancour, just because of the sensitivity around some of the numbers. What we have said is that Becancour should be breakeven in the second quarter from an EBITDA perspective.\\nSo that is a significant benefit over where we were in '18. My recollection around Spain is that Spain was losing approximately $70 million to $80 million, both on a pre-tax and a post-tax basis, because the earnings there, the tax there fully reserved.\\nSo it's a pre-tax and a post-tax base of $70million, $80 million that we would have been able to eliminate by selling those two facilities.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Alex Hacking of Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"I just wanted to follow up on the portfolio review, and I'm not trying to ask Dave's question a different way. But when you talk about, say the alumina portfolio, you have 15 million tons of capacity.\\nYou said 4 million will come under review.\\nYou currently -- of that 15 million, you currently have 2.5 million that's curtailed.\\nSo would I be correct in assuming that that 2.5 million will come under review plus an additional 1.5 million to get to the 4 million? Am I thinking about that, right?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, Alex, that's exactly the math we should be doing.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And that goes that goes for both refining and smelting.\\nSo the review numbers that we've provided are for both operating capacity and currently curtailed capacity, so all of that capacity would be under review.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"And then I guess following up a bit on the non-core asset sales. I guess why now the global economy is quite weak? It doesn't seem like the best time to necessarily be selling assets. And why do you believe that you can get 10 times EBITDA on these assets? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I think we haven't said which assets are for sale yet.\\nI think once the clarity comes around the assets that will be for sale, you'll see that it's probably not a bad time to sell some of the assets that we're selling.\\nSo we'll give you more clarity once we've made the announcement on what will be sold. There are other assets in the portfolio that don't generate a lot of EBITDA that could potentially be sold that contributes to that $500 million to $1 billion in proceeds.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Matthew Korn of Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"First from me, could you give a little bit more detail on the $60 million reduction in OpEx and how this really comes from -- it looked to be a consolidation in the management hierarchy? And then how conservative do you consider that target to be?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Let me hit the first one and then maybe Bill can take the conservatism.\\nSo essentially what we're doing is collapsing out the business unit structure.\\nAnd so when you think about where those reductions will take place, and I think this was part of the announcement that my executive team is now smaller, it's moved to seven members. But in addition, essentially you are grouping together operations, grouping together commercial, having that centrally managed to a certain extent, but also permitting more freedom for the plant to actually chart their own courses.\\nSo it very much happens at that middle layer of management. And in the end, of course it will depend as we redeploy talent into different parts of the organization.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And let me address the numbers. The number you asked is a conservative -- it's a realistic number. It's a number that we have line of sight to achieve. I want to put it in perspective.\\nYou know we spend approximately $75 million a quarter on SG&A. And I would tell you that on an annual basis that's about $300 million of SG&A.\\nThis $60 million isn't all going to come out of SG&A, but the preponderance of it will come out of SG&A. To put it in perspective, we spend roughly 3% of revenue on SG&A. And if you were to look at our major competitors, that's a pretty competitive number already.\\nSo for us to take out an additional $60 million is an aggressive number, but we have line of sight to be able to get there.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And let me just make one more point just to add on to Bill's comment. The changes that we're making in operating model, of course, it is very welcome to have actual savings and to see that improvement year-over-year, it makes us more competitive. But even more importantly, I think it will give us a better connection to our markets, and a better connection to our plant. To us as the executive team and the managers of this corporation, it helps us to be closer to better understand what's happening and the trends in our market. And I truly believe not only will it be more efficient but it will be a better form of operating.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"So this is not just something subtractive but you see it as additive to the ops as well\\u2026\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Absolutely.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"The second, I was interested -- I want to know a little bit more. What does this new advanced sustainably priority means in practice? Is it more emphasis of the position that you lay out here at the bottom of Slide 17 and talking about how your practices currently are very sustainable or very friendly environmentally, or is it changing these practices? Is it actively investing in new things, new measures, you're going to set goals on carbon per ton. Really what does this change for AA relative to how you're operating today?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So let me put that in two directions.\\nFirst and foremost, I think you're hitting it right. The fact is that I believe we are fundamentally ahead of most of our country in many of these areas, you think about the connection that we have with our communities and where we choose to operate and our mining practices and reclamation and rehabilitation activities, just as an example, I think we're ahead.\\nAnd so it is of course up to us to maintain that ability to be ahead. But it doesn't necessarily mean we have to change our practices, it means we have to analyze, adapt and see what will be coming next.\\nHowever, in some other areas and I would highlight the change that we're projecting inside of our aluminum portfolio. In some other areas, there will be change that's necessary in order to capture that first spot when we compare ourselves to our aluminum competitors.\\nAnd so that to us it makes financial sense because it makes us more competitive, it also makes financial sense because we believe the market will be moving to a place where there is more value placed in those products that are lowest in carbon and that are responsibly sourced, all the way from bauxite to alumina and then into aluminum.\\nSo there're some actions that need to be taken there.\\nSo when you look at our strategic priorities, the way I would look at it that is that those are the guardrails that we use in order to make decisions.\\nSo when we look at the management changes; as an example, the new operating model, we look at that and said does it make us simpler, does it reduce complexity, does it give us the ability to invest more, can we invest those dollars, is there a way for us to deploy those.\\nAnd then now, not only will we be thinking about balance sheet, which for us is incredibly important, that's what makes me so happy to have seen the improvement, but also we'll think about how that then impacts our sustainability footprint; what are the -- if we choose to invest in a plant, what is the energy source, how do we then make sure that when we invest in Greenfield mine or in a Brownfield expansion of one of our mine, how do we make sure that the practices that will be following will help to support that existing potential that we have in sustainability already.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Timna Tanners of Bank of America. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"So regarding the portfolio review, I have a couple part questions. Hopefully, short answers. I don't want to go on and on. But in the past we've talked over the years about Alcoa kind of continuously reviewing all its assets in a pursuit to being the lower cost producer.\\nSo how is this initiative different from what you've already been doing, first of all? Second, in some cases I know that you've just re-up some power agreements, and I think Massena and Wenatchee and a few others.\\nSo can you break those, or is that why you have a five year review? And then the third question is just along those same lines. How do we think about exit costs, or permanent closure costs when you do this review?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So let me get started on that and then Bill can jump in to help support.\\nSo first of all, I think it's right to look at this as a continuation of the real progress that we've been making year-after-year. I mean you look at the changes that we've made, the Spanish Soderberg are a great example of place that it would have fallen inside the same type of asset review.\\nI think the fundamental difference is that, while we are giving ourselves five years and again that will be market dependent and how we choose to deploy that. What we're trying to help you understand, Timna, is the destination. It is the target of where we choose to go and why we think that will make us successful in our industry.\\nSo I think that's the fundamental difference.\\nOn the power agreement and I'll start this one. The fact is depending on the facility that's in question we structure those power agreements to ensure to give us the flexibility to react to the market.\\nSo for facilities that are very low in the cost curve, we would take more risks on long-term duration and on ability to exit those power contracts then we would at facility that is higher on the cost curve, to be very frank.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And let me just jump in. I wanted to -- we should make it clear that this asset review is really a three pronged review. It's an improved close or self review.\\nSo there are three options for these facilities. And if we can figure out how to significantly improve them we will, but we will also look at closure and potential sale options.\\nSo you listed a couple of facilities, Massena and Wenatchee. Massena does have a longer-term power agreement, that was signed a couple of years back. Wenatchee is currently curtailed, and Wenatchee is in a curtail state at this point.\\nAs far as exit cost go, we've not been clear about exit cost because it's a five-year program and the focus is on those three things: improve, close, or sell.\\nSo we don't have precise exit costs at this point, because we're going to do it a way that tries to maximize value for the owners between those three options for each of the facilities.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"And I was wondering if you could indulge me in a high level question is, I know you give us helpful thoughts on the outlook for the aluminum market and I know you said there is a scenario where things are flat to down into 2020. But I was just wondering if you could give us a little bit sensitivity as you see at broad breaststrokes, if we do get trade agreement late or if we get a more comprehensive trade agreement. How do you think that could affect aluminum demand and the balances going forward?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I think, Timna, how I would answer that is to look at the development of our markets over the course of this year and also look at it last year. I guess the way that I look at it is that, yes, there is a reduction and you can see this in automotive and what's happening in both the U.S. and Europe, particularly if you also see similar types of downturns or weaknesses that's happening in China. But these things when you look at earlier in the year or versus last year, there is no fundamental consumer difference that's driving those reduced numbers.\\nIt's really about the uncertainty right now sitting in the economy and whether that's trade war focused or macro economy is beyond my ability to explain clearly.\\nSo when we think about how that market will recover, to be quite honest, to me, I don't see any reason why it wouldn't recover to a point where we were earlier this year or last year, because the underlying characteristics of aluminum demand help to drive that change.\\nAnd I would add-on to that. And that I also believe that aluminum, when you look at the lifecycle, the lifecycle content of carbon as one specific component of sustainability and the infinite recyclability, I think you'll continue to see that there will be substitution of materials and new ways to use aluminum for consumers that are becoming more and more green conscious.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Lucas Pipes of B. Riley FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"My first question is on the $60 million of corporate savings and $37 million in restructuring cost. How should those be allocated across the segments?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"We haven't broken it down by segments.\\nYou referred to it as corporate, it's not corporate. It is actually in the segments. There is a piece of it that will affect each one of three former business units. There are three segments and a piece of it that will impact the corporate.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"And then back to the point of review, and sorry to harp on this.\\nJust I was looking for a better understanding of what broad basis review about at this point in time. Is it reaction to the market conditions? Is it more brought upon by your evolving position on the global cost curve? What caused this? Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Lucas. And I think the answer is going to be all of the above. The fact is that since launch, we have spent a lot of time thinking about our markets and thinking about our portfolio.\\nSo it's been -- and I think this gets back to Timna's question. It's been a bit of a continuous review. Why we make this particular announcement right now is because we've just finished up an in-depth study and involved board of directors that have taken a look at the long-term comportment of our markets, and how we position ourselves today and going forward. And thus have spent real time thinking about how we succeed in win in today's and tomorrow's environment.\\nAnd so of course, there is a bias to think about what we see in the market today. But more importantly, we also wanted to think about what are the keys to success for the long-term, and those get back to our strategic priorities. It's about having a simple eye essentially being as little complexity as possible and therefore being low cost.\\nIt's about ensuring that we're investing in those facilities that we can drive returns. And again, you need to look at that and say, hey, how am I using my operational and capital dollars? And then finally, how do we make sure you have the balance sheet we need to succeed. And at the same time, also take into consideration the changes in those markets in the fact that aluminum will be more and more tied back to how that aluminum was actually produced from a sustainability standpoint.\\nSo for us, it's just the right time to just start to give our investors, start to give our analysts, a better forward looking view about what we will look like in five years.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"And then just to follow up on the sustainability point and driving value, which I assume it's kind of higher willingness to pay on your customers' side for sustainably sourced aluminum. What sort of things are we -- or initiatives are we seeing on the ground today that shows that there is this willingness in fact? Are you having undertaking strategic initiatives to drive that value capture? What's happening on the ground that you can point to value capture on the sustainability front? Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo Lucas, I think, I won't spend a lot of time on this. But I think when you look across how companies are approaching sustainability, how consumers are approaching sustainability, I think you see that there is a shift in how people think about that.\\nNow, that shift in general in nature and doesn't necessarily drive financials of the other end.\\nSo let's talk about financials.\\nWe have a series of aluminum products right now as a very particular example, that are either focused on being low carbon or being made from a certain amount of recyclable material. Those are products that have been able to command a premium in the marketplace. But this is just a nascent market. It's going to take time for that to develop. I also think that you're seeing more and more customers that are interested in responsibility of how your bauxite was mined, how your aluminum was refined, and how your aluminum was produced.\\nAnd so the fact is we're seeing more and more of a move for customers to ask those questions. And from our standpoint, whether it is a discount for producers that have higher carbon content or a premium for producers that can deliver the lowest carbon aluminum on the planet, both is how we choose to win. I would also argue that when you look at our Elysis technology.\\nAnd again, this is the research and development program that we're working on in conjunction with Rio Tinto, here in Pittsburgh and up in Canada. The fact is that, that works because at some point, the fact that it is the only process that can generate oxygen rather than carbon dioxide in the smelting process is fundamentally different.\\nAnd so that is -- again, that's going to take time to prove it out. But it is another step to be able to capture what would be a niche, a niche market today, but perhaps a much more global market tomorrow.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Chris Terry of Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Couple of questions from me.\\nFirst one just on the cash flow during the quarter. Can you just talk through what was included in 3Q related to the Spanish smelters? And you talked about the [150] to come. I just wondered, what was actually included in 3Q on the cash side? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I think on the cash side, it was approximately $37 million associated with Spain and then there was an additional $12 million associated with the ABI restart.\\nSo when I look at the cash balance in the third quarter, I was pleased that given the tough market environment that we're in that we were able to maintain the cash balance at $841 million, while we were able to make those payments associated with Spain and ABI in the quarter.\\nSo it was a good performance from cash perspective in my view.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"And then just opportunities, going forward, on the cash from a working capital point of view?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Working capital fell about a day in the quarter and we typically see working capital decrease in the fourth quarter.\\nSo there's still probably some opportunities for working capital declines in the fourth quarter. I guess, get back to again the fact that we were able to generate cash from ops, positive free cash flow, keep our cash balance at the level and actually grow it ever so slightly in these tough market environments, is a really good result for us.\\nSo pretty pleased with the outcome.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Chris, let me add one qualitative comment on Bill's as well from working capital standpoint.\\nAs part of the new operating model, bringing commercial together and then having commercial and operations join essentially through a detailed focus on supply chain optimization, I think will help us to be smarter in the way that we manage inflowing and outflowing inventories and ensure that across our three products, rather than looking at them as individual businesses that we look at it as a combined and very competitive Alcoa.\\nSo I won't give you a target right now. But I think the fact is we expect to be able to collect real opportunities in working capital as well, and probably looking more for 2020 rather than immediately in 2019.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question today will come from John Tumazos of John Tumazos Very Independent Research. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"If someone who maybe is not thinking green just looks at what you're doing and says, gee, it's quarter as a refining and almost half of the smelting. Alcoa must think that carbon taxes and other costs of doing business will rise more than metal prices, or one way or another we've had 10 years of economic growth. We're due for a recession.\\nWe have a trade war.\\nSomehow you're bearish about things. How should we explain that, or react to it? Or react to an investor who shrugs his shoulders and says, you're re-evaluating over a quarter of the business?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"John, let me answer that one. And you know our industry very, very well, you've been with us for a long time. The fact is, is when we look at the cost structure of each of our plants in that alumina and aluminum portfolio, I think you don't need to believe in green to recognize the fact that there needs to be action in order to ensure that we are in that first quartile of the cost curve. And depending on how that market swings and this gets back to Bill's comments about how we choose to improve our operations or curtail, or divest. Depending on how that market swings, it gives us more opportunities to divest rather than to have to close or more opportunities to improve, or to fix these operations.\\nSo I think I don't think you need to believe in green to recognize the fact that these portfolio changes makes Alcoa stronger.\\nI think the green, the change in green and sustainability message, is something that is a natural addition and is in fact the way that Alcoa succeeds into the future, because we do the right thing and because at some point the market will recognize that there is value in that responsibility.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I would also add, John, we've done a lot of studying over the last six months of our markets. And I would suggest to you that green, a greener world, a sustainable world and higher metal prices, are not necessarily mutually exclusive.\\nIn fact, a greener world may lead to better metal pricing just because of these natural eco friendliness of aluminum and the sustainability of aluminum.\\nSo as we look forward, a greener world is probably a better world for aluminum producers.\"}, {\"speaker\": \"Operator\", \"content\": \"And our last question today will come from Justin Bergner of G. Research. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"First question on the noncore assets sales. Can I infer that there's nothing material planned within your bauxite mining alumina refining or aluminum smelting operations in that 500 million to 1 billion?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Again, Justin, we're not going to go into the details of specific assets and we will make it clear once we have line of sight to specific asset sales.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"And you still own most of those 30,000 acres by Rockdale, right?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"We do. Its 31,000 acres and it is for sale. It's been for sale now for a few years.\\nAnd so if you want a good ranch in Texas, give me a call, Justin.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Lastly, on the flat-rolled operations, I know you had higher expectations for the profitability than you sort of exhibited year-to-date. Could you maybe just give us a sense as to what's constrained profitability and what are realistic targets going forward?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, let me hit the first part, and Bill could talk about targets. The fact is it simply hasn't operated as efficiently as we wanted it to. And I won't belabor the points about what needs to be done in order to change it. But we put together a team and made some very specific changes that I believe will drive that plant to better profitability.\\nI'd also point you to the fact that it now has the smelter embedded in it.\\nSo there is a piece of those changes that happens because of metal prices and how that embedded margin might be.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And so I think the current view of that group of that is more like $55 million to $65 million of EBITDA in 2019. And as Roy said, that in part has been negatively impacted by the fact that the smelter is included in that, and with lower metal prices has hurt the profitability of that group of assets.\"}, {\"speaker\": \"Operator\", \"content\": \"And this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Roy Harvey for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Allison. And thanks again to everyone for your time today.\\nWe have acted continuously to make Alcoa a stronger and more profitable company. The announcements we have made today achieve two things; they position us for sustainable profitability and they grow our existing sustainability advantage.\\nThere is a widening gap between companies with strong sustainability commitments and those without, and our actions provide a path towards meaningful differentiation that is, both profitable and responsible. We believe that aluminum will continue to be the material choice for consumers, positioning the most responsible aluminum companies for a long and bright future.\\nThank you for your time. And we look forward to sharing our fourth quarter results in January. Back to you Allison, and thanks.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you. The conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2020-01-15
year: 2019
quarter: Q4
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation Fourth Quarter and Full Year 2019 Earnings Presentation and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.\\nI would now like to turn the conference over to Mr. James Dwyer, Vice President of Investor Relations. Please go ahead.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you, Shawn, 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.\\nWe will take your questions after comments by Roy and Bill.\\nAs 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.\\nIn 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.\\nAlso a note on our financial statements, effective January 1, 2019, the Company changed its accounting method for evaluating certain inventories from LIFO to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented.\\nFinally, as previously announced, the earnings release and slide presentation are available on our website.\\nWith that, here's Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you Jim, and thanks to everyone for joining us today. We've got a lot to discuss, so let's start with a quick overview of the fourth quarter results.\\nFor the fourth quarter, we reported a net loss of $303 million or $1.63 per share. This includes charges associated with the closure of our Point Comfort refinery in Texas, which had been fully curtailed since 2016, and it includes the cost of additional actions we've taken to manage liabilities associated with pensions and other postemployment benefits.\\nExcluding special items, we reported an adjusted net loss of $57 million or $0.31 per share. On an adjusted EBITDA basis, excluding special items, we generated $346 million.\\nLastly, we closed the fourth quarter with $879 million in cash, the second sequential quarterly increase in our cash balance.\\nNow, as we prepare to close out 2019, let's review some of the actions we've taken and how our priorities are guiding us to make additional improvements. Last quarter, we've refreshed our company's three strategic priorities.\\nFirst, we are focused on being a low-cost producer, which means reducing complexity to better compete through all parts of the cycle in our commodity markets.\\nSecond, we intend to improve our margins and invest wisely to drive returns. And finally, we are working to advance sustainably, which includes actions toward a strengthened balance sheet, a cycle proof portfolio, and an enhanced reputation for environmental and social excellence.\\nWe've made quick progress last quarter with these refreshed priorities and more will be done in the quarters ahead to reinforce Alcoa's competitiveness.\\nWe have moved with speed to further reduce overhead with a new leaner operating model.\\nWe are working to generate additional cash from the sales of non-core assets, and we have started a comprehensive review of our current portfolio to improve long-term profitability.\\nTurning to our fourth quarter business update, most importantly we had no serious injuries in the quarter.\\nWe also continued our strong operational performance with new quarterly production records from our bauxite mine in Juruti and our Wagerup refinery. In the fourth quarter, we also completed a modernized labor agreement in Australia covering more than half of our unionized employees there.\\nWe also became members of the International Council of Mining and Metals known as ICMM, which is dedicated to improving the sustainable development performance in the industry.\\nWe are working with ICMM to develop a global standard for the safe management of tailings dams and we're honored to be part of this very important effort.\\nAlso in December, our joint venture ELYSIS shipped to Apple aluminum produced with a new carbon-free smelting process. Alcoa invented this technology which eliminates all direct greenhouse gas emissions. Instead, this breakthrough process produces pure oxygen.\\nAs an early investor, Apple asked to purchase the first commercial batch of aluminum produced with this new process while ELYSIS works to scale up this technology so it can be licensed in 2024. In a world becoming more and more focused on sustainability, this technology has the potential to transform the conventional process used to produce aluminum.\\nNow, let's turn to the full year 2019.\\nIn addition to closing another fatality free year, our 2019 accomplishments span across our business and throughout the year. We drove improved stability in our operations and set annual production records for both our bauxite and alumina portfolios. We reached several new modernized labor agreements with the Australian workers union in November and with unions in the United States and Canada earlier in the year.\\nTaken together, these contracts cover almost 70% of the unionized employees in these three countries.\\nImportantly, they incorporate provisions that will allow our plants to better compete. The multi-year agreements feature improved salaried union collaboration and efficient work practices. In the U.S. we reached a four-year master agreement that covers approximately 1,600 active employees at five locations. In Canada, we\\u2019ve reached agreements with the two separate unions that represent 100% of our unionized employees in that country.\\nFirst, at Baie Comeau [ph]we secured a six-year agreement that covers about 600 employees.\\nNext, after an 18-month lockout we reached a six-year agreement at B\\u00e9cancour smelter that was ratified on July 2. Today, the smelter's restart is progressing well under that new labor contract and is on schedule for completion in the second quarter. All employees eligible for recall are now back to work.\\nAlso last year, we completed the divestiture of the historically unprofitable Avil\\u00e9s and La Coru\\u00f1a smelters in Spain after reaching an agreement with workers' representatives at these two facilities. In November, we also implemented our new operating model for a leaner company, which will provide annual savings beginning in the second quarter of this year.\\nFinally, in our markets, 2019 ended in a global deficit for aluminum and surpluses in bauxite and alumina. We see slight surpluses ahead in 2020 for bauxite and alumina and a balanced market for aluminum.\\nWe will discuss more on the markets and these other topics after Bill provides a detailed review of the results.\\nSo with that, I'll turn it over to Bill.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks Roy. Reviewing our income statement, revenues were down $131 million or 5% sequentially due to lower realized prices for alumina and aluminum, partially offset by improved volumes. Year-over-year, revenues declined $908 million compared to the fourth quarter of 2018 again on lower alumina and aluminum prices. In the quarter, restructuring charges drove the net loss attributable to Alcoa Corporation of $303 million or $1.63 per share on 185.6 million average shares for the quarter.\\nSpecial items in the fourth quarter totaled $246 million after-tax and non-controlling interest. The key components this quarter were the $274 million charge related to the closing of our Point Comfort Texas alumina refinery, $75 million related to pension and OPEB changes, and $23 million of B\\u00e9cancour restart costs partially offset by non-controlling interest and favorable interim tax impacts.\\nNow let's look at the income statement excluding special items.\\nOur fourth quarter adjusted net loss excluding special items was $57 million or $0.31 per share. Adjusted EBITDA excluding special items was $346 million.\\nOur fourth quarter EBITDA margin was 14.2%. The full year operational tax rate ended the year at 67.9%, higher annual rate required through-up of prior periods in the fourth quarter adding $28 million to the expense or $0.15 per share and brought the operational rate for the quarter to 99.5%.\\nLet's look closer at factors driving adjusted EBITDA.\\nThis quarter lower raw materials cost partially offset the impact of lower alumina and aluminum prices. Lower market prices for alumina and aluminum drove adjusted EBITDA down $77 million and $23 million respectively.\\nTaken together, all other impacts improved $58 million sequentially, partially offsetting the price impact.\\nRaw material costs primarily our carbon at the smelters and costs to get the refineries continue their improvement, but were partially offset by higher production costs at mines and smelters. Intersegment eliminations drove the change in other category as lower alumina prices, changes in refinery cost structures, and lower alumina inventories released profits held in inventory.\\nNow let's move to the segments. In the segment bauxite adjusted EBITDA continued near its record high level at 42% EBITDA margin. Alumina adjusted EBITDA declined $90 million on lower sales prices. Aluminum adjusted EBITDA improve $32 million sequentially from better alumina costs, partially offset by lower aluminum prices and lower value added product premiums. Non-segment impacts contributed $6 million and $18 million better than last quarter. Intersegment eliminations were favorable $15 million and other corporate costs improved $3 million.\\nTurning to cash, in the fourth quarter we ended the year with cash of $879 million up $38 million sequentially. Year-over-year cash decline $234 million. A quick review of our major cash sources and uses for 2019, our total cash sources were $2 billion consisting of $1.7 billion in adjusted EBITDA and approximately $300 million sourced from changes in working capital.\\nThe largest outflows of cash were tax payments including $351 million in payments of prior year income tax, net distributions to our joint venture minority interest partner of $421 million, $379 million of capital expenditures, as well as $240 million of required pension and postemployment benefits funding made in addition to the $52 million related expenses within adjusted EBITDA. Outflows also include $220 million in restructuring payments, primarily the Saudi rolling mill and the Spanish smelter divestitures.\\nNow let's take a look at the balance sheet.\\nOur balance sheet remained strong and reflects solid management in 2019.\\nOur fourth quarter days working capital was 27 days down three days sequentially and even with last year's fourth quarter. We controlled total capital spending to $379 million a level $20 million lower than in 2018.\\nOur key balance sheet metric proportional adjusted net debt increased $135 million from last year primarily due to a lower cash ending balance.\\nAt year end our consolidated pension and OPEB net liability rounded up to $2.4 billion, up only $40 million year-over-year in spite of lower discount rates increasing the net liability by approximately $600 million. Global pension asset returns were approximately 17% and actions taken to manage the pension and OPEB liabilities offset the increase related to the discount rate.\\nNow let's move to our outlook for 2020.\\nFirst let's look at the income statement impacts.\\nWe expect shipments to increase year-over-year in all three product segments as the existing facilities preproduction in bauxite and alumina and in aluminum our B\\u00e9cancour restart ramps up.\\nWith the divesture of the Afobaka hydroelectric dam in Suriname and the Gum Springs, Arkansas treatment facility and the closure of the Point Comfort refinery, we expect transformation EBITDA to be negative by approximately $85 million compared to negative $7 million in 2019. A majority of that impact is from the divestiture of the Suriname dam.\\nPart of the positive impact of our new operating model and overhead cost reductions can be seen in the lower other corporate impacts expected to improve by roughly $13 million. The remainder of the impact we expect to see in the operating segments starting in the second quarter. DD&A expense is also estimated to improve and we expect interest expense in our operational tax rate to be similar to 2019 levels, although market conditions can greatly impact the tax rate.\\nFor cash flow impacts minimum required pension and OPEB funding is planned to increase roughly $100 million as historical pension asset returns were also funded. Sustaining capital expenditures are expected to increase to approximately $400 million. The key reasons for the increase are mine moved. Willowdale mine in Australia will move major infrastructure several miles to a new reserve area, an elaborate process that occurs there roughly every 25 years.\\nWe are also starting a mine move at Juruti in Brazil expected to be complete in 2021.\\nWe will target return seeking capital of $75 million. Prior period tax payments are expected to be roughly $300 million lower in 2020 as alumina prices were lower in 2019 and large prior year tax through-ups are not expected.\\nWe expect environmental ARO payments to increase to approximately $150 million reflecting the impact of the Point Comfort closure.\\nAs usual, in the appendix we also list additional considerations expected for the first quarter. They include bauxite adjusted EBITDA to be down approximately $35 million on lower sales prices and seasonal maintenance outages. In alumina, we expect $5 million sequential benefit from the Point Comfort closure while improvements from lower bauxite, energy and raw material costs will offset the unfavorable mix of sales contracts and impacts of scheduled maintenance overhauls.\\nIn the aluminum segment approximately $10 million benefit from lower alumina costs compared to the fourth quarter. Benefits from the B\\u00e9cancour restart and lower raw material costs are expected to be more than offset by higher energy costs in Europe, lower shipments of rolled products and price and mix impacts in North America yielding an expected $5 million to $10 million sequential negative impact.\\nAlso in the second half the year we expect to see the impact of the higher cost natural gas contracts for Western Australia refineries that we announced in 2015 and 2018. These contracts cover 90% of Western Australia requirements and begin in the second half of 2020. In 2015 and 2016 we made $500 million in cash prepayments related to the 2015 contracts and net of those prepayments we expect 2020 cash payments for WA gas to increase our total Australian refining cash cost to 2.5% or $50 million compared to 2019.\\nSo with that, I'll turn it back to you Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks Bill.\\nAs we start the new year, I'd like to recap our final view of the 2019 markets and provide new estimates for 2020. In bauxite, the market ended the year with a smaller surplus than we estimated in the prior quarter. Decreased supply from Guinea, largely due to rainy season supply chain disruptions in the second half of the year is the primary reason for the lower surplus.\\nFor 2020 we expect the market to be in a similarly sized surplus with increased supply from Guinea and Australia serving demand in China where we project bauxite imports will increase by close to 20 million tons year-on-year. Chinese refiners continue to build strategic stockpiles to mitigate their supply chain risks.\\nIn alumina, the year also finished with a smaller market surplus than we estimated previously. This revision is due primarily to some delays in Chinese refinery restarts and expansion. In 2020 we expect a roughly balanced market globally. Increased demand from Chinese smelters is expected to outpace alumina supply increases.\\nAs such, we expect China to remain a net importer of alumina in 2020 bringing in tons from the rest of the world surplus to meet its deficit.\\nFinally, in the aluminum market we maintain our estimate of a full-year deficit for 2019. In 2020 we expect the global market will turn to surplus driven by additional supply from smelter expansions and restarts more than offsetting modest global demand growth.\\nWe expect that China will continue to be a market, a surplus market and in the world ex-China we expect a balanced to slightly surplus market.\\nLast year we lowered our expectations for 2019 world ex-China global aluminum demand growth, primarily due to trade tensions, lower trade volumes, declining growth, in manufacturing activity, most notably in Europe and North America.\\nFor 2020 however, we are anticipating a rebound in demand growth in both world ex-China and in China.\\nWe expect to see a recovery in key aluminum end use sectors including such important markets as the European transport sector and the construction and transportation sectors in China. In summary, while 2019 economic conditions posed real challenges to the aluminum market, we are cautiously optimistic about 2020 from a return to demand growth.\\nNow let's transition from the current state of our global markets to medium to long-term market trends and connect these developments to the strategic programs we announced in October. In bauxite, China's appetite for imports is likely to continue unabated with its imports projected to double between 2018 and 2025 due to the continued depletion of its own domestic supply. China is also strategically stockpiling bauxite due to concerns about supply chain risks. Meanwhile, Alcoa has ownership in seven bauxite mines globally with the first quartile cost position. These assets are strategically located to supply our own top-tier alumina refining system and serve the third-party market.\\nAs Bill mentioned, we are increasing CapEx this year to fund additional mine moves which sustained our cost position and provides continued access to our long-lived bauxite reserves. We can provide high quality bauxite for both, our own internal refining system and to global customers, which we see as a competitive advantage.\\nIn alumina, Chinese refineries will continue to face higher costs for bauxite relative to world ex-China refineries due to the higher costs associated with importing seaborne bauxite. This too illustrates the advantage of the low cost position of our refining system, which is fully served by our own bauxite mines and have a low-cost and highly dependable supply chain.\\nLooking forward, the complexity in China's bauxite supply will support steepness in the global cost curve.\\nAlumina is notoriously difficult and costly to inventory, which tends to keep supply and demand closely linked to a market efficient and transparent pricing mechanism. And the management of bauxite residue is complex and Alcoa has developed and deployed market-leading and cost-efficient best practices and that gives Alcoa another competitive advantage in this attractive market for our company.\\nFinally, in aluminum, Chinese over capacity continues to challenge the global market in the form of increased exports of semi fabricated products or semis. Chinese net semis exports are projected to increase from just under 3 million tons in 2018 to over 4 million tons in 2025. The extra supply of Chinese semis will be exported to the world ex-China effectively displacing primary aluminum in those markets. This trend of growing Chinese exports competing with aluminum produced outside of China is nothing new.\\nIn fact, over the past five years Chinese exports of aluminum semis and finished products have captured more of the ex-China total aluminum consumption growth than ex-China smelters did. This growth has been fueled by China's unfair subsidies which were detailed in last year's report by the Organization for Economic Cooperation and Development or the OECD. The report clearly demonstrates that nonmarket forces, including financial subsidies and value-added tax rebates have contributed to increases in aluminum smelting capacities and incentivize the Chinese exports of semis with negative impacts across the value chain.\\nAs a company we support free trade, but it needs to be fair. That is why we are encouraged by yesterday's agreement by the trade ministers for the United States, the European Union and Japan to strengthen existing World Trade Organization rules on industrial subsidies, which would include aluminum. This is a positive sign in our continued call for governments to address unfairly subsidized overcapacity in China and to ensure a level playing field.\\nWhile the rise of Chinese exports resulting from subsidies has become the single most important issue facing the aluminum industry, we are not waiting for government action or policy changes to transform our business.\\nWe are evaluating our portfolio to ensure that our locations are sustainable financially and environmentally.\\nAs I said earlier today, our strategic priorities will guide us to improved competitiveness with low-cost operations. At the end of our portfolio review, we expect not only to have an improved cost position, but also to lead in a world becoming even more focused on sustainably produced products. In aluminum, we currently hold a high second quartile position in the cost curve and once we complete the capacity review, we expect to enter the first quartile.\\nFrom an environmental perspective, we expect that our smelting portfolios carbon dioxide intensity will improve almost 50% due to the changes that we make as part of the portfolio review. Today, we're already one of the lowest per ton emitters of carbon dioxide among global producers and approximately 70% of our metal is produced with renewable energy. And once we've progressed through our portfolio review, we expect to be the lowest carbon emitter with 85% of our metal produced with renewable energy. We believe that this environmental footprint, strengthened by our continued portfolio actions will provide a true advantage in a world focused on sustainability.\\nNow, let's spend a bit more time discussing our most recent actions to improve.\\nFirst, at the top left of the chart, our new operating model took effect in the fourth quarter beginning in November. It is expected to result in annual savings of $60 million in operating costs beginning in the second quarter.\\nWe have eliminated our prior business unit structure and consolidated our sales, procurement and other commercial capabilities.\\nImportantly, we are bringing our operations closer to our management team, enabling faster decisions. Also, we are making quick progress in our plan to generate between $500 million and $1 billion in cash through the sale of non-core assets over the next 12 to 18 months.\\nA few weeks ago, we announced an agreement to sell our Gum Springs waste processing facility.\\nWhile the team there expanded the scope of services this facility can provide, it is not a core function at Alcoa.\\nSo, we have agreed to sell the location to a global environmental firm in a transaction valued at $250 million.\\nWe will receive $200 million when the transaction closes this quarter, and another $50 million upon the satisfaction of post-closing conditions.\\nThe additional cash we generate from the sale of non-core assets will assist us in our work to reshape our existing portfolio.\\nAs part of that multi-year portfolio review, we made the decision last month to permanently close the Point Comfort alumina refinery in Texas, which has been fully curtailed since 2016. This is the first action in a five-year review process, which is focused on 4 million metric tons of global refining capacity, or 27% of our current portfolio, and 1.5 million metric tons of smelting or approximately 50% of that segment's capacity.\\nFinally, we marked an important milestone in Suriname, where we successfully completed the transfer of the Afobaka hydroelectric dam to the government, effective December 31, 2019. This happened in accordance with closure agreements approved earlier in the year by Suriname's parliament.\\nWhile the transfer of the dam ends an important chapter in our history in the country, we will remain to work on remediation of the sites for years to come.\\nIn closing, Alcoa has made significant progress since we launched as an independent company in 2016. We've resolved numerous legacy items and strengthened our balance sheet by managing our liabilities and eliminating high cost unprofitable capacity from our portfolio. There is still much work to do, and our strategic priorities will continue to guide us as well our values.\\nWe are focused on being low cost, which means that we will consistently work to reduce complexity so we can better compete in a global cyclical commodity industry.\\nWe will be margin focused. With our new operating model, we are streamlining our operations and we'll work to further improve our productivity across Alcoa, so we can drive returns across the value chain. And finally, we aim to advance sustainably, capturing both financial and sustainability improvements to deliver value for Alcoa's stockholders.\\nWe have a clear roadmap for success, and we are determined to progress no matter where we find ourselves in the commodity cycle.\\nAnd with that, Bill and I are ready to take your questions.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you. [Operator Instructions] Our first question today will come from Curt Woodworth with Credit Suisse. Please go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Yes, thanks. Good evening.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Curt.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Hey, Curt.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Hi.\\nSo, first one for you Bill, could you just kind of walk through some of the cash restructuring items this year between Point Comfort, the corporate restructuring, as well as any kind of cash startup costs from B\\u00e9cancour to try to get a little bit of feel for what is normalized? And then you talked about transformation being $85 million this year. How much of that would be non-recurring as well or what's kind of in that number is my first question?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, if you look at the page that has the sources and uses of cash, and on that I think we talked about $200 million of cash outflow associated with kind of restructuring items. The big numbers there are really two things. One is the rolling mill divestiture. In total, that was $100 million in the second quarter.\\nThe -- in addition to that, the exit of the Spanish smelters, the combination of the curtailment, the layoffs, and then the subsequent divestiture in the quarter adds about $70 million. And then the rest is various restructuring activities, so about $200 million there. We've not disclosed how much -- I guess we have, I'm sorry. In the second half of this year -- I'm sorry, in 2019, we expended $25 million on an after-tax basis in B\\u00e9cancour for the restart.\\nSo that's included in those numbers also.\\nSo those are the big items.\\nWhen you then go to transformation, transformation, as you know, is approximately 22 sites around the world where we manage the closure and curtailment of those sites. The big swing between 2019 and 2020 is that in 2019 we had the Afobaka dam that was producing revenues for our Suriname facility.\\nWe have subsequently handed that dam back to the government of Suriname, and so we won't have that.\\nSo, approximately $50 million of that difference between $7 million and $85 million is the impact from the Afobaka dam.\\nIn addition to that, we are now starting to spend money on Point Comfort.\\nAnd so, as we take Point Comfort into closure, we will spend money.\\nAnd so that's the biggest driver, in addition to the Afobaka dam that bridges that difference in '19 and '20.\\nSo we have given you enough color there to help you out.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Yes, that helps. That helps a lot. And then I guess the second question is just with respect to the market.\\nYou know, entering the year, I think you had a forecast of 4% to 4.5% growth in China and it came out to 1%, which is a pretty meaningful downward revision. And you know, we're all well aware that they have plenty of excess capacity and maybe not totally clear with the cost curve for that looks like.\\nBut when you kind of look at what happened in China this year, you had pretty dramatic inventory reduction, semis exports despite the worsening overcapacity situation arguably was flat and semis exports were actually down 14% in the fourth quarter, and up until, you know, a couple days ago, the shipping [ph] price is at a 16 month high.\\nSo, you know, now you're kind of looking at this year, forecasting a pretty sharp reacceleration in global demand, yet the supply seems to overwhelm that. And I guess, do you think, is \\u2013 it seems like you still are very concerned on the China semis piece, but maybe if you could kind of walk through how you think it could affect price and sort of the China piece would be helpful? Because it seems like what you would have thought would have transpired in '19 certainly did not in terms of the pressure on the ex-China market.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Curt.\\nSo let me -- let me try and hit a couple of pieces in that and make sure \\u2013 and we can make sure I'm answering your question.\\nSo, I mean, from the perspective of semis, where \\u2013 when I look at that, one of the concerns that I have is that essentially, as you see the, as you see these semis grow coming from China, and I recognize that there are some differences that happened quarter-on-quarter. But it essentially is pulling demand from rest of the world back into China.\\nAnd so the more that they tune up their business in semi fabricated products and coming both from scraps and from primary, it tends to pull that demand growth or just pull basic demand from the rest of the world. And where I am mostly concerned comes to the fact that the way that they've built their industrial policies is to \\u2013 is not to incentivize the selling of primary metal, but rather is to incentivize the production and then export of these semi fabricated products.\\nJust to the value added taxes and the rebates offered for those products, it's just \\u2013 essentially it's meant to capture those first basic set of products coming out of China.\\nAnd so, it comes down to the supply and demand across all of aluminum and whether that is coming from both scrap or coming from primary aluminum and then how that interacts with the actual consumption of aluminum inside of China or outside of China.\\nIn the end, I think it's a global market, and I think there are distortions between pricing inside of China and outside of China, but the distortions are economically motivated and they are connected back with these policies.\\nAnd so, when we look at the two China's, the two markets, they tend to operate with their own set of supply and demand fundamentals, but it is those semi fabricated products and in the worst of cases, fake semis, which we have seen continue in smaller portions but still there, it is what reconnects those markets back and brings essentially both the marginal capacity in China and connects it to the price setting that happens around the world.\\nAnd we see that in aluminum and to a certain extent, we also see China serving that role of marginal producer in alumina as well.\\nSo, I mean, from a broader market perspective, the most important thing is that we see that demand ramp back up again. And as we look at this and as we look at the balance of risks both in trade policy and trade tensions, which obviously ratcheted down a little bit today, certainly not back to where they were a couple years ago.\\nYou know, I think \\u2013 and as we look at the actual data coming out, whether it's in construction, construction of housing inside of China or automotive in Europe, I think we feel fairly confident with where we have projected out aluminum demand growth over this coming year. But as you highlighted and circling back to the very beginning of your question, Curt, that can change depending on how those metrics evolve.\\nI would like to think that there are risks to the upside, but I also recognize the fact that this is the best estimate we have right now.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"I mean, in terms of the sort of the trade deal negotiations, has there been any communication with the government regarding the massive export rebate that they get on semis, or any dialogue around trying to make amends for what are pretty clear, substantial subsidies on semis?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So we spend a good portion of our time trying to make sure that we educate all the jurisdictions where we happen to produce in the U.S. obviously, as a very important set of discussions to make sure they understand how those subsidies in fact impact the market.\\nI think one of the best things that we've had is that the publishing of the OECD report which has helped to put into numbers from an independent third-party, or as independent as it can be.\\nI think that has helped to explain, quantify and demonstrate that how that subsidization works and how it then connects over into the \\u2013 not just into primary aluminum, but into the downstream \\u2013 into those semi fabricated markets as well.\\nSo I think we've, I think we've done a good job explaining it, but now we need to see real action that starts to correct it. And again, this announcement just yesterday with the agreement between Japan, the U.S. and the EU is a great first step. It pushes us in the right direction, but it is a first step and doesn't necessarily have the actions yet delineated about what will make the difference.\\nSo, it's a good beginning, but just a beginning.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Great, I appreciate your comments. Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Curt.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Carlos [indiscernible] with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Unidentified Analyst\", \"content\": \"Thank you very much for taking the question.\\nSo, first one is related to the USMCA.\\nGiven the concern that you just expressed on the impulse or the exports of semis from China, I'm not aware maybe it did happen, but I'm not aware that in the new text, it is required even over time that to receive the benefits of the new agreement you need to pour and melt the aluminum in the region as they did for the steel.\\nWas there any reason why that may not have been included in the final test Roy? And would it be possible to maybe add something similar to what they have done in the field which - is it going to seven years. Seven years after the signature of the signing of the agreement is when it kicks in, but it definitely will protect some of the producers in the three countries?\\nAnd then my second question, if I may, is just on, is you mentioned that the better demand growth outlook in 2020 versus last year, you alluded to Europe transport and construction and transport in China, but nothing in the U.S. I wonder if you could give us some comments as to how you see the different end markets gain in North America?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Sure.\\nSo, let me hit the USMCA first and I'll probably steer clear of trying to look into the minds of the negotiators to figure out exactly how they came to their conclusions.\\nYou know, I think there are incremental improvements.\\nI think the \\u2013 when you think about the expectations for growing that produced and manufactured in North America, I think it is positive on whole of USMCA, but it does, as you mentioned, fall short of where it could have been.\\nWhy that is the case, and the relative lobbying interests of how that log is put into action, I think is beyond my ability to explain clearly.\\nI think it is \\u2013 I think on the whole, it is positive.\\nOf course, we would have liked to have been even more positive given our footprint in Canada and the U.S. particularly.\\nOn your second question about the demand growth outlook and particularly in the U.S. you hit the \\u2013 you hit my main points.\\nI think we're seeing some green shoots in Europe, particularly in transportation.\\nI think China will come back. In the U.S., I think we've not yet seen that we've turned the corner as far as starting to see growth again in our end markets.\\nI think there are the catalysts to perhaps start to see that improve. But from my perspective, and as we look across, as we look across each of these different markets, the fact is there's just not a - we're not yet at a point where we're actually seeing that manufacturing pick up, and therefore starting to see that turn into actual aluminum orders.\\nI think as we alluded to also and Bill talked about it, it's from a value added market standpoint as well, it's a difficult market out there with [indiscernible] back in the mix. Because remember there were sanctions at the beginning of last year, which was during the normal season where we signed all those contracts. And we've also, because of the elevated premiums, both Midwest and product premiums in the U.S. have started to see that some additional imports have been coming into the U.S. even though they have to pay the duty.\\nSo, it's - we've not yet seen that demand turn and we still haven't \\u2013 and we're seeing headwinds when it comes to our value-added premiums in the U.S. as well. Again, I think there are catalysts for positive change.\\nI think the recent developments that we've seen with China, and particularly as we start to advance towards Phase 2 part of the deal, I think that gives us the catalyst for improvements happening more quickly.\\nHowever, right now, this is the best estimate we've got Carlos.\"}, {\"speaker\": \"Unidentified Analyst\", \"content\": \"Excellent, thank you very much, Roy and all the best to you guys.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thank you, Carlos.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Matthew Korn with Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Hey, good evening, everybody.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey Matt.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Hey Matt.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"A question for you, Bill.\\nNext year, the 70%-80% tax rate, little higher than we thought. I know, the elevated levels last couple quarters had included some catch up to expense, prudently speaking. Is the expectation for the next year is that all jurisdictional mix, are there other pieces at play that we should know about?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"No, it's all jurisdictional mix, right. I mean, what it comes down to is we make money in Australia and we've got tax rate in Australia that gets applied to the BBC [ph]. We lose money in certain jurisdictions around the world where we are reserved for taxes.\\nSo, we essentially have no tax benefits and that's how you end up getting to that, that high rate.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it.\\nSecond, I'm interested, you've moved more towards the sustainability, you made that as part of your framework.\\nYou got the emphasis here on the carbon free aluminum. What can you tell us, I guess technically is fitting to this call. How the ELYSIS is actually produced? I've been on the website, I wasn't able to extract a whole lot of information.\\nI know it's early in the process, but it's also commercially you made your first delivery.\\nSo, anything you can say and how the economics of this compares, is the premium on price expected, does that make up for what I'd assume it's additional cost? What can you tell us more about that as a commercial enterprise?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Matt, I thought you were asking about the technical aspects and I was going to launch into a 45 minute discussion of how we do that. And secrecy at the end of that. It sounds like you're looking more for parts of how the economics we expect the economics to work. We've been working on this for a while Matt. And the idea was always to find a process that is more economical and has a better invested capital cost versus what we saw as traditional smelting technology.\\nIn the meantime, of course, China has come roaring in with good technology and at the same time with pretty reduced capital costs.\\nSo, the world has changed quite a bit. We still believe that when we think about the cost of installing capacity and the operating costs of then operating it and focused on projects outside of China, we have - this process is going to be more economically efficient. And because you're no longer changing anodes in such a short cycle, you end up having pretty significant savings on the operating side as well.\\nI would also argue, and where I think that this can become an even more powerful opportunity for the future is by nurturing and growing that what is today a niche market for premiums for sustainable metal and particularly for what will be the lowest carbon metal on the planet when you connect one of the \\u2013 when you connect this ELYSIS process to hydropower and to alumina and bauxite that is mined and then refined in low carbon intensity ways.\\nWhen you bring this all together, it will be the lowest carbon metal on the planet.\\nI think that is - we're comfortable with making that statement.\\nAnd so, you have to then determine what is that premium going to look like.\\nI think it says a lot that Apple was \\u2013 that Apple chose to invest with us. And I think it also means a lot that they wanted that first commercial production of metal, because there will be a demand.\\nWhat we need do as an aluminum company, and I know some of our competitors are working on this as well is nurture and develop that market, so that premium will exist. Or on the other side, a discount exists for carbon intense products that might be produced outside of \\u2013 or in other peoples systems.\\nSo that - I'd love to tell you that we have quantified what that number will be, but that's really that looming question that we need to decide not only for ELYSIS but for our portfolio, because just transitioning back to the changes that we're making in Alcoa, in the existing portfolio that we have, we have the benefit that we're making these changes because they're the right thing to do financially. Future proofing and cycle proofing our portfolio and smelting is the right thing to do.\\nWe need to be in the first quartile because it's a rough and tumble business. But also having the added benefit of then being the lowest carbon emitter of all the smelt \\u2013 of all the smelting systems in the world, then positions us to capture that premium for ELYSIS, yes, but even more importantly for the broader portfolio, which is a lot of tons as we emerge from there.\\nSo to me, the reason we talk more about it is because I think it is a trend that is growing in importance. I believe that at some point, that premium or that discount will become more real, but would not hazard a guess as to what that number is going to be at this point.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it. Last quarter could you emphasize how much you saw? Sustainability is something tied in environment and also economics.\\nSo, we'll be watching carefully as this market develops. Thanks very much guys, good luck.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks Matt.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks Matt.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, Roy and Bill, thanks for taking my question. Hi. Yes, the first question I had just thinking big picture, Slide 23 where you go through - it's not new, I don't think, but the target to get to $2 billion to $2.5 billion net debt, including the pension, just wondered if you could, given where you're at today, if you could just step through a few of the pieces there? So may be as a start, if you could split out, maybe the target on net debt as opposed to the target on the overall pension? And then, if I'd just do the math on that, you're trying to reduce it, I guess, 0.8 to 1.3.\\nYou should get another $200 million from the Gum Springs transaction.\\nAnd then if you do reach the upper end of your $1 billion, $500 million $1 billion asset sales target, you take up most of that.\\nSo, there's not a lot allowed for in actual cash flow. Am I reading that correctly? I just wanted you to step through the lightest and how you saying that that goal, that two to four-year goal?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, one thing I would just start out by saying Chris is, if you look at Page 40, that's the reconciliation of the net debt calculation.\\nSo, if we start there, that would say that we're sitting at the end of 2019, at a $3.4 billion net debt calculation.\\nSo, to get to that level that we're targeting, we would need to come off of that $3.4 billion.\\nEssentially what we have said and first of all, that was originally a three to five-year target, we are now making that a two to four-year target because one year has passed. We can get to that level of net debt by simply making our required minimum pension contributions. There's a bunch of assumptions built into that, and I'll tell you what those assumptions are. We hit our expected return on assets, 6.5% for the U.S., varies across other parts of the world, but it is a big number, 6.5% in the U.S.; and discount rates don't change substantially from where they are today,\\nSo, simply by making our minimum contributions, we can do that. That should then lead you to the question, okay you started going down the path of $200 million of, at least in the near term, $200 million for Gum Springs, an extra $50 million once we meet those post closing requirements and the additional asset sales. And remember, I would tell you that Gum Springs, maybe we didn't say this, but Gum Springs was included in our asset sale list.\\nSo, we've executed now on nearly half of the bottom end layer of \\u2013 or level of that asset sale list.\\nSo, then we will use that cash and redeploy it in the capital allocation model that's on Page 23, right? So that capital allocation model is pretty clear, we want to have $1 billion cash on the balance sheet. We want to invest in the business in sustaining capital this year, that'll be $400 million. We want to do small return seeking projects of $75 million this year.\\nAnd beyond that, any excess free cash flow will be used for the four items down at the bottom, essentially the debt reduction, repositioning the portfolio, the large- the mid-size growth projects that we have, and then returning cash to shareholders.\\nSo, that's the way you should be thinking about it. And just to circle back to your original point, we think we can get to our net debt target simply by making our minimum pension contributions over the next few years.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay, thanks. That's helpful. I just had a couple of follow-up on the cost side.\\nAs we think about, you've gone through some of this already, but just thinking about over the course of 2020 and then into the future as you want to move down towards the first quartile in the aluminum business, just wanted if you could step through some of the opportunities, particularly on the cost side and that's across all your business.\\nSo, maybe if you could discuss caustic carbon energy, et cetera, just directionally over the next, say 12 to 18 months? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Sure, I'll hit the raw materials piece first and then we can talk more broadly about some of the other things that will help us drive towards that first quartile.\\nYou know, that back in 2018, we saw significant cost headwinds in raw materials and 2018 is ancient history at this point, but we did see large increases.\\n2019 was a year where we captured some of that back in raw materials. 2020, I would tell you that that is accelerating the amount of production of raw materials in 2020 is larger than what we saw in 2019. I would project that we should see approximately $175 million of reduction in raw materials in 2020.\\nThat's coming from two areas. That's first in caustic prices and then the second is in lower carbon prices.\\nSo, we are seeing some of that come back that we have seen higher costs over the last few years.\\nAs far as addressing the repositioning of the portfolio down to the first quartile, that's going to be a combination of two things.\\nFirst, is the asset review that we have. We've said that we have 1.5 million metric tons of smelting capacity that will be either improved significantly, sold or curtailed. And then, in addition to that, and Roy can speak more about this, we're looking to really energize the productivity side of our business and to start to drive incremental cost savings, not only in the smelters, but on the on the refineries also.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And Chris, just to add a little bit on to Bill's last point, and I won't - I won't belabor it. But I think as we look towards this year's market and last year's market, I think we've regained a lot of stability across the portfolio. But part of what we're trying to do with this operating model change is to make sure that we are being very clear in binary with each and every one of our plant managers about what success looks like for all of our plants.\\nAnd so, that I believe will help us to drive a mentality about how to drive costs out of our plants as quickly as we possibly can. And that is raw materials first, and there's also a component of your usages of those raw materials and how smartly you can do that and when compared with the price of what you're using. But it also connects over to maintenance costs, to how you drive your plants to the choice about how you run electricity through your pots so that you are getting the best financial outcomes.\\nSo, I think it's - we're determined to see real improvements there. I actually have a lot of confidence in our new operating team and we have some fresh people that are looking at problems that we've been working on for the last decade. And we're determined to make sure that that ends up being improvements in productivity and improvements in the end of our cost efficiencies.\\nSo, more to come on that, certainly Chris, but it's - it is really one of the most important things we'll be doing in 2020 and beyond.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay, so thanks, guys.\\nJust one more if I may. The CapEx guidance of sustaining CapEx of $400 million versus $290 million for 2019, is that $400 million - is that the go-forward, right, we should expect in beyond 2020 as well or is there other items in that? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo just to put some characterization around the $400 million, spend $290 million in 2019, the big difference between 2019 and 2020 are the two mine mills. We've got one in full swing down in Australia in 2020 and we will just be starting one in Brazil, in 2020. Both of those will be wrapped up in 2021.\\nWe haven't provided an outlook past 2020 but I think at least in the bauxite segment, we will have elevated spending on the mine moves for the next couple of years and so that's what's driving it.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay, thanks. That's all from me.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks Chris.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks Chris.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from David Gagliano with BMO. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Hi, thanks for taking my questions. I just have a couple of fairly good ones.\\nFirst, on the $35 million, quarter-over-quarter decline in EBITDA on the bauxite business, how much of that is due to the seasonal volume decline and how much of that is due to the price decline?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"The price decline is the biggest piece of that, Dave. Out of the $35 million, I would tell you probably two-thirds of that is coming from both intercompany and external pricing. And the intercompany clearly has picked up on the refining side, but so out of the $35 million, two-thirds is price, and a third is seasonal lower volumes.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay, and then just a related question.\\nAs we think about that moving forward just for segment modeling purposes, I'm assuming that that piece that's price decline driven is pretty much reasonable run rate moving forward at this point, correct?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, for 2020. We typically reset internal bauxite pricing once a year, unless there's a major move in the marketplace that changes, which we haven't really seen over the last couple of years.\\nSo, yes, I think assume that for 2020.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay, great. And then my other question, slightly bigger picture. When I look at the volume targets for 2020, they imply year-over-year growth of about 5% to 8%. Obviously, there's a fairly cautious backdrop in terms of calling for a global surplus in primary aluminum. I get B\\u00e9cancour restart, but my question really is without identifying specific assets, how much of that 3.0 to 3.1 million tons of third party shipments should we consider to be under review for curtailment realistically as we move through 2020 if prices stay soft and premiums continue to fade?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, it's really - it's really, really difficult to answer, Dave. When we look at the portfolio, clearly, there are some plants that are fairly high cost and we'll be looking at those in 2020 in light of market dynamics and those decisions will be made fairly quickly. I can only point you to the fact that 90 days in to our announced strategy, we already have closed or at least announced the closure of Point Comfort and have already executed on nearly half of the bottom end of the range on the asset sales.\\nSo, I would tell you, we look at each plant, we look at the run rate economics and we look at the current market environment and we'll make decisions fairly expeditiously.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Lucas Pipes with B. Riley FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Hey, good afternoon everybody. I have a quick follow-up question on the Gum Springs transaction. Is that akin to a sale-leaseback and if so, what sort of EBITDA contribution was this plant or would this plant be generating under the current \\u2013 under the structure that you agreed to? I would appreciate any color on that. Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. It is not a sale-leaseback. It is an out and out sale, and it's a sale to Veolia. And as far as EBITDA contribution in 2019, the plant lost $12 million. We had, we had kind of use of improving the planet to be a breakeven in 2020. That gives you a pretty good indication of the contribution of Gum Springs to our financials.\\nWe do have a mid-term contract for processing and spotlighting.\\nSo, we know that they will be taking our SPL for a number of years, but from my perspective, this is a really good deal. It gets the plant, it's a good deal for Alcoa. It's also a good deal for our shareholders, but it's also a good deal for the plant. It gets the plant to be owned by a company that's going to grow the capabilities and our employees that are Alcoans today that are going to Veolia have a bright future.\\nSo, I think it's a really good transaction.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"That's very helpful. And it's not like you're guaranteeing a certain number of profitability to the plant?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"No, absolutely not. I mean, we will be sending our CL there for a number of years, but we are not guaranteeing a profitability level.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"That's very helpful. I appreciate it and best of luck.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Lucas.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Timna Tanners with Bank of America. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Yes. Hey, Happy New Year.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Timna, thanks.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Hey there, thanks.\\nSo just a follow-up on a few points I wanted to clarify.\\nIf you could give us an update on talks for the Portland complex and energy subsidies, how to think about that complex going forward? And then along those same lines, how far along are we in terms of the benefit already being or still yet to come in terms of the B\\u00e9cancour startup and the Spanish smelter closure?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So, let me start on Portland. Essentially the deal that we agreed to was a 4.5 year deal. And in that we'll go out to the middle of 2021.\\nAnd so in between now and that particular moment in time, we need to see if there is a repowering solution or if there is another eventuality for that plant.\\nSo, in the midst of discussions with government, it's a plant that operates very stably. It is a very good \\u2013 it is good technology. It just happens to be one of the most highest energy priced markets on the planet.\\nSo, you'll not see action on that, in fact, part of that agreement is that we wouldn't take action until the middle of 2021. On B\\u00e9cancour, your second question, Timna, we're about halfway through the restart from a pot standpoint. We actually have all employees will be back in the plant and back helping to tend those pots by the end of this month.\\nWe're having a very good \\u2013 so far, we're having a good startup and I've been very pleased with it. And it's an important situation where we've been following this lockout for 18 months. It is important for us to reestablish those connections with our employees. But also it is an environment that takes a lot of care. Those B\\u00e9cancour workers, happen to be some of the best that we have around our system.\\nSo really positive to see how that is progressing, so on the right track.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, let me throw some numbers around that. On B\\u00e9cancour, Timna, when we announced B\\u00e9cancour restart, we said we would spend $30 million to $35 million after tax in the second half of 2019, and an additional $30 million to $35 million in the first half of 2020.\\nWe are actually \\u2013 the spending has probably been a little bit more backend loaded than what we anticipated.\\nSo, we spent about $25 million in the second half at B\\u00e9cancour, that gets pushed to the first half of 2020.\\nSo, at this point, we're not reducing our overall estimate of the spend. Put Spain in a little bit of perspective for you. The fact that we have divested Spain, Spain was about $40 million EBITDA hit in 2019 and that's before any of the special items. That was just the operations.\\nSo, we won't have that EBITDA hit in 2020, clearly, since we don't own the assets.\\nWe still have some payments that have to go out to our partner, our partner, the people who bought it, who are known as partner. And that's about $68 million that has to be done over the next six quarters.\\nSo, we still have that cash outflow over the next six quarters, and that's 68 million total.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay, super helpful.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Hope that helps.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Yes, that's great. Thank you. And then another question I wanted to ask is, just taking a step back, I know in the past, you've talked about thinking about cash returns to shareholders at above $1 billion and above $1 billion in terms of cash on the balance sheet. And it seems like you're getting close to that level, but obviously, also a lot of cash requirements into next year.\\nSo, I just want to \\u2013 any updated thinking on is that you hit a $1 billion and you start to think about it, or you want to position that for a couple quarters or how those priorities changed or how you think about cash returns? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, the priorities clearly haven't changed. The capital allocation model is the same as the one that we announced last quarter. If we get to the $1 billion level, we'll balance between those four items. And as you said, there are some things that are going to cost us cash, the repositioning of the portfolio will cost us some cash, but we'll balance.\\nWhat I would tell you is, I was personally pleased with the fact that we generated cash in the fourth quarter again, we generated cash in the third quarter. These are, you know, fairly tough market environment and we generated cash and at the same time we made the contributions towards all the things that we needed to contribute towards.\\nSo, for instance, we made our mandatory required pension contributions in the fourth quarter.\\nSo, from an overall perspective, I would tell you that one of the bright spots in the quarter is -- was the cash balance at the end of the year.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay, fair enough. Thanks again.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Timna.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from John Tumazos, Independent. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you. Could you elaborate a little bit more on the Chinese aluminum demand? We read that vehicle sales fell 8.2% last year. Which other markets were up in China and which are the markets are the one or two biggest markets for aluminum in China?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So that's a pretty - that's a pretty broad question, John.\\nSo, so let me sort of couch it in terms of how we see that market growing into 2020. I don't know John, exactly here where you were going with the question, but hopefully at least it gives you the right direction.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And after you\\u2019ve done that we'll put some numbers down on it.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so from - when you look across the board, the largest component sits inside of construction.\\nI think one of the highlights that people saw in the Chinese market last year is that you started to see building starts come back again. Unfortunately, for last year, aluminum really comes in at the end of the process.\\nSo, what we're hoping to see this year is that those building - those building starts turn into building completions.\\nWe have started to see that turn the corner as we come into 2020.\\nAnd so that's going to help drive some growth in the construction market. And happily, that is the largest consumption of aluminum that happens inside of China.\\nFrom a transportation standpoint, that one is also an important market. We believe that that \\u2013 the stimulus programs and what's happening in China is going to be driving that into a positive growth as well for this coming year.\\nI think it was a difficult, difficult 2019. I don't particularly have the negative 8% that you that you reference. But we should see that come back, and in fact, come back to be one of the strongest, strongest growth, growth, growth in the markets that we'll see across China.\\nI would just also mention that we continue to see some decent growth in packaging and foil.\\nIn fact, that growth will be down a little bit compared to the strong growth that we saw in 2019. That's a pretty big contributor to the overall aluminum consumption in China. But I think we continue to see that that aluminum as a packaging material continues to be strong and continues to grow.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"You had all the things that I wanted to cover. I mean, it is a big market John, is construction and Roy addressed that. The next kind of bigger markets are packaging and foil, machinery, transportation. We did see transportation in a contraction like you did, probably not the same level that you're referencing, but we see that turning around pretty well in 2020.\\nSo those are the big markets.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, thanks John.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Paretosh Misra with Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Thanks for taking my question.\\nJust to follow-up on a couple of other questions.\\nOn the end market, how close are you to your end market customer now given that you don't have any downstream business? Do you know every shipment going out of your facility whether it's going to construction or automotive or is that more about you having some market intelligence or market sources that's how you have a read on the market demand?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, I'd say Paretosh that when we get to the actual aluminum consumption that goes into the end markets, that is because of who we are, it is Alcoa Corp. instead of Alcoa Inc.\\nWe are a step removed from that final, that final end market.\\nSo, we put our effort into trying to understand what's coming out from other analysts and from what we hear and what we see in our sales of value added products and aluminum value added or rolled products and aluminum.\\nSo, I think it's more - it is more an interpretation and not so much driven by what our - what's coming out of our smelters. We do have a pretty good idea of where our metal is going, particularly when it comes to value added products.\\nSo, typically it is very different whether it's going into the can sheet or whether it's going into billet [ph] or extrusions, et cetera. But it's - particularly for P1020 for the commodity grade that can go into any kind of use.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Got it. And just a quick follow-up on the aluminum shape premiums, so has there been any change this year versus last year? I guess that's mostly a contract business.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nYou know, and the fact is, is that there has been a change and unfortunately it's not for the better, it is in fact a decline. What we're seeing really \\u2013 and remember that we are very-very-very skewed towards North America and Europe, but we're seeing pretty significant declines for two reasons. Number one, we've seen that when Midwest premium come down, and number two we've seen product shape and our premiums also come down.\\nThat, I would tie it over to two things. Number one, that Rusov [ph] has come back into the market.\\nSo, if you remember at the end of 2018 and beginning of 2019, with most of those contracts were set for 2019 annual year, particularly in North America Rusov [ph] was still under sanctions, so they were not able to step into a lot of those value added businesses.\\nFor 2020, obviously, the sanctions are behind them. And thus they are now fully participating and are really driving to recapture market share.\\nSo that is certainly having an impact on the amount of material that's available.\\nAnd number two, and also important is because you had a period of such differentiated higher Midwest premiums, I think it attracted a decent amount of imported material that we'll really start to see coming into 2020 markets.\\nYou've seen that come in.\\nI think that could change if it seemed the West premiums come off their highs. But at the same time, we're seeing and more imports both from Rousav [ph] and from others in the 2020 value added premium markets.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you. This concludes our question-and-answer session. I would now like to turn the conference to Roy Harvey, for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Good. Thank you, Shawn. And I would like to thank everybody for your time and attention today.\\nWe will continue to act aggressively to improve this Company and to act on the strategic program that we've set out, and to make sure that we position ourselves for success into the future.\\nSo, thank you for joining us, and we look forward to talking to you here three months down the road.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2020-04-23
year: 2020
quarter: Q1
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation First Quarter 2020 Earnings Presentation and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.\\nI would now like to hand the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you, operator, and good day everyone. I'm joined today by Roy Harvey, Alcoa Corporation\\u2019s President and Chief Executive Officer and William Oplinger, Executive Vice President and Chief Financial Officer.\\nWe will take your questions after comments by Roy and Bill.\\nAs a reminder, today\\u2019s 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.\\nIn 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\\u2019s presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA.\\nFinally, as previously announced the earnings release and slide presentation are available on our website.\\nWith that here is Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim. And thanks to everyone for joining our call.\\nWe will discuss our first quarter results in a moment. But first I want to pause in memory of Paul O'Neill, the former CEO of Alcoa Inc. He passed away on Saturday here in Pittsburgh. Mr. O'Neill was a visionary leader and mentor including to many in our company today. His legacy lives on at Alcoa. His principle to always focus first on safety and the protection of human life is timeless, especially as we face the current challenges.\\nOur sympathy goes out to all who loved and respected him.\\nNow this earnings call is going to be different.\\nWhile we had a solid quarter and we'll take the time to explain our results we are living in unprecedented times.\\nSo before we discuss the quarter, I will talk about the impact of COVID-19 and what we're doing as a company in response. The pandemic has affected not only the way we work and interact with our global economy as well.\\nWhile a lot has changed in the world our Alcoa values serve as unwavering guideposts. Those three values are fundamental to everything especially in times of crisis. We've kept them at the forefront. There is significant uncertainty due to the pandemic and its effect on the world's economy.\\nAs such we\\u2019ve decided to withdraw our full year projections on global supply and demand balances while we expect aluminum demand to be affected by government lockdowns and temporary closures from some end-use manufacturers the range of scenarios is too broad to forecast projections with a high level of confidence.\\nWe are closely monitoring our markets and we'll talk today about what we're seeing in our three market segments and how these changes impact Alcoa.\\nIn addition to our third-party sales of bauxite and alumina we produce a final commodity product aluminum that can be sold into the terminal market.\\nThus, shipments can continue unlike some other downstream industries, but given the build of commodity inventories, current dynamics can create longer term supply demand impacts once we see demand return.\\nJust as our values have guided our response efforts, staying on course with our strategic priorities has enabled Alcoa to enter this period from a position of strength.\\nOver these last several years we\\u2019ve taken numerous actions to improve our business and we implemented a number of actions earlier this year to continue that momentum.\\nToday, we'll detail some additional actions to effectively manage our cash in 2020 due to the uncertainty of this pandemic.\\nTaken together these new and existing initiatives including the sale earlier this year of our former Gum Springs plant will total $900 million in cash actions for the year. This will enhance our ability to weather this crisis and continue to improve for the future.\\nFinally, as you recall it has been our practice to report any serious safety incidents as part of our quarterly earnings announcement. I'm deeply saddened and disappointed to report a workplace fatality, a tragedy unrelated to the current health crisis.\\nOn February 10th a contracted worker died after sustaining injuries at the Po\\u00e7os de Caldas facility in Brazil. This is unacceptable and we are working to make sure this doesn't happen again.\\nWhile much focus is currently on COVID we are reinforcing to everyone at every location that safety is our most important priority and I would like to thank all of our employees for their efforts through this health crisis.\\nThe everyday actions to protect the safety of their fellow workers and to keep our plants operating makes me proud.\\nNow I will discuss Alcoa's specific actions related to COVID-19.\\nOur first and most important objective is the health and safety of our global workforce. Across our facilities we have comprehensive measures to minimize the risk of exposure to this virus.\\nWe have implemented response and preparedness plans to protect our people, our business and our communities.\\nWe are following protocols that align with the US Centers for Disease Control and Prevention, the World Health Organization and other public health authorities where we operate. Measures to protect our people include adjusting shift patterns, instituting additional hygiene protocols and ensuring the exercise of social distancing measures.\\nMost of our administrative offices are closed as we've authorized employees to work from home where practical and possible.\\nWe also acted quickly to restrict all non-essential business travel. Beginning in late February and currently continuing.\\nOur company's global crisis response team is meeting frequently and is continuously tracking any reported cases and ensuring that those who may be ill or were exposed to the virus observe quarantine protocols.\\nIn addition to the protection of our employees and our operations we are supporting our communities. The Alcoa Foundation has allocated a total of $4 million that can be used in our local communities for humanitarian aid projects.\\nOur locations are working with qualifying non-profits to allocate this funding for the greatest impact.\\nNow turning to our operations, we are still running our current portfolio of bauxite mines, alumina refineries, energy assets and aluminum manufacturing facilities.\\nWe continue to provide essential products and materials that are fundamental for society in the world's economies.\\nGiven the uncertainty of the current climate we're taking prudent steps to manage costs without compromising the safety of our facilities.\\nFirst, we have instituted restrictions on new hiring, focusing only on what is essential to support the continued safe and effective operation of our facilities.\\nSecond, we are reviewing all non-critical maintenance activities that can be safely deferred. And third, we are also stopping or delaying the relining on some of our smelting pots depending on the individual circumstances at specific facilities.\\nAt the ABI smelter in the Becancour, Quebec for example we've slowed the restart which is currently 85% complete to comply with restrictions in the Canadian province. The return to full operation was originally expected to be fully complete in the second quarter of 2020. And the timing for the full completion will be evaluated in the months ahead.\\nNow let's discuss our three product segments and the impacts caused by the pandemic. Starting with bauxite, throughout the first quarter we saw steady demand outside of China as refineries largely operated without disruption. From a cost standpoint most of our bauxite mining expenses are fixed in nature apart from diesel fuel which we purchased at market rates.\\nAs noted here on Slide 7, our bauxite shipments and pricing in the first quarter were largely unaffected and we expect Alcoa's third-party bauxite shipments and pricing for the second quarter to remain relatively stable.\\nTurning to alumina, our shipments were largely unchanged in the quarter.\\nWe have a strong cost position due to our integrated bauxite position and given the quality of Alcoa's bauxite and Alcoa's refinery design that is specific to each type of bauxite we use less caustic soda on a per ton basis than competitors.\\nWe also have an advantage in that when customers are impacted with curtailments we have the ability and commercial presence to shift to spot sales.\\nFor alumina shipments are continuing but with substantial pricing decline in the second quarter. This is a dynamic I\\u2019ll discuss on the next slide as well.\\nIn aluminum, Alcoa prices its products using the London Metal Exchange aluminum price, having relevant regional and product premiums for delivering into the markets to which we sell. From a cost perspective energy represents one of the largest input costs approximately 70% of our smelting production is linked to aluminum prices or short term wholesale power markets. Also as prices fall other input costs typically do as well, such as carbon, which we purchase quarterly.\\nWe produce a mix of higher margin value add primary aluminum products as well as lower margin commodity grade products at our smelters and integrated cast houses. In our products we have seen demand impacts.\\nSo we have started to shift some of our sales from value add castings to commodity grade products, and we will see this trend continue. In the second quarter we anticipate converting around 20% of previously allocated production from value add product sales to commodity grade ingot sales as some customers request shipment postponements or declare force majeure.\\nMost of the decrease in our value add product sales is due to weakening demand from customers serving the transportation sector followed by customers in building and construction. This mirrors trends in the broader market as these are the two aluminum end use sectors most likely impacted by the economic impacts of COVID-19, the shift from value-add to commodity grade adversely impacts our revenue. This loss of product premium will be coupled with the substantial decline in aluminum pricing over the first quarter which I will discuss next.\\nConsidering the current uncertainty in the markets I believe that it is appropriate to lay out the facts and trends from the first quarter to explain what we are seeing. Lower prices, inventories that are higher than last year and a growing number of producers underwater financially. Aluminum demand is likely to be impacted significantly by government lockdowns and plant closures starting in China and moving around the world to two of our major markets Europe and North America.\\nAs I noted earlier out of the different aluminum end use sectors this impact is likely to be felt most strongly in the transportation sector where automotive plants have been shut down for varying lengths of time followed by the building and construction sector where the projects have been slowed or delayed in the first quarter.\\nWhile aluminum demand is likely to have decreased in the first quarter of 2020 in particular in China primary aluminum smelters continued to produce without significant interruption for most of the quarter. This resulted in an over 2 million ton increase in global inventories largely seen so far in China.\\nWhile we normally see some stock building in China in the first quarter due to the Chinese New Year holiday this year's increase in inventories was likely three to four times the size of the Chinese stock build we saw during the first quarter of 2019.\\nGiven these dynamics aluminum and alumina prices decreased over the quarter.\\nWith the lower prices have driven significant levels of production into cash negative territory. We estimate that 60% of Chinese smelters and 20% of smelters in the world outside of China were in a cash negative position for the month of March.\\nWe also estimate that 40% of Chinese refining production was cash negative for the same period. In turn we have started to see the beginning of a supply response.\\nIn aluminum it has been reported that smelters have cut 1 million tons of annualized capacity in China and 400,000 tons of annualized capacity outside of China between March and April. In alumina Chinese refineries cut 6 million tons of annualized capacity in February with 2.5 million tons remaining in a curtailed status today.\\nI would call your attention however to the fact that these dynamics and prices can change dramatically. Since March we have seen a decline in alumina prices which creates a larger group of underwater refineries but with corresponding input cost relief and smelting. Most important however is the relationship between supply, demand, inventories and pricing. There is near-term support to the industry given the ability to deliver aluminum into inventory.\\nHowever this release can quickly become a long term drag given the new demand fundamentals.\\nLooking forward what is clear is that the ultimate supply demand balances this year will be determined by a few factors.\\nFirst and foremost how fast the spread of COVID-19 is brought under control.\\nSecond once the pandemic is under control the speed at which economies recover will depend on how governments lift lockdown measures and implement stimulus programs. With a return of economic activity aluminum demand will pick up across its broad set of end use markets which includes transportation, construction, packaging machinery, electrical and consumer durables.\\nThird, the entire aluminum value chain will respond to the pricing and demand environment as it shifts and changes. This is where we could see further capacity curtailments depending on the strength and demand. It is clear however that the current market is in an oversupply situation. Alcoa will continue to monitor this situation and may need to mix further curtailments if this supply and demand situation persists. Needless to say we will discuss these trends in more detail as the year progresses and as more clarity develops about the ongoing situation.\\nNext, I wanted to lay out a simple timeline that summarizes the actions we've been taking to further improve our company, including the most recent initiatives associated with our response to current market conditions.\\nWe have been consistently focused on acting smartly through the cycle including preparing for downside scenarios, and we have worked tirelessly to strengthen our balance sheet.\\nWe have initiated programs to strengthen our portfolio and company for the long term. I am pleased that we started deploying these actions during better times, they provide a solid foundation and clear pathway during the current challenges.\\nLet's turn to the information on slide 9.\\nFirst starting on the left, in October of 2019 we announced key strategic action that included a new operating model that reduced overhead and made us a leaner organization. That is important because it enabled faster decision making. The model is now fully implemented and will provide $60 million in annual savings beginning in the second quarter of this year. At that same time we announced a plan to generate between $500 million and $1 billion through the sale of non-core assets.\\nIn January of this year we completed the sale of our Gum Springs plant in a deal worth $250 million and we will continue to pursue the remainder of this target.\\nOur other strategic action was the launch of a multi-year review of our operating portfolio focused on 4 million metric tons of global refining capacity and 1.5 million metric tons of smelting capacity which is approximately 50% of our aluminum portfolio.\\nToday we're announcing an action connected to our portfolio review, the curtailment of the remaining capacity at our Intalco smelter in Washington State.\\nWhile our employees have worked tirelessly to improve the facility, the smelter faces significant cost challenges that have only been exacerbated by these poor market conditions. In the first quarter of 2020 Intalco lost $24 million and aluminum prices have fallen more than 20% down 45% from highs in 2018.\\nWe recognized the impact this decision has on our workforce so we will ensure appropriate support as we work to safely curtail the facility.\\nAs I've said before we owe it to our employees and communities to work through this portfolio review as quickly as possible and we will strive to accelerate this process to provide clarity for the future.\\nNext in the middle of this chart in February we announced two planned programs to further our improvement in 2020.\\nFirst, driving leaner working capital that should result in savings between $75 million and $100 million by reducing inventory and optimizing contract terms.\\nSecond, we continue to expect approximately $100 million in sustainable and annual productivity improvments. These previously announced actions provided a head start on what we're doing next, implementing comprehensive actions to conserve and manage our cash during the current down cycle that is magnified by the impact of COVID-19.\\nOn the right hand side we have our COVID-19 related actions to date.\\nWe are reducing our annual capital expenditures effectively stopping work on most return seeking capital projects for the remainder of the year.\\nWe are evaluating various governmental programs in the jurisdictions where we operate and we intend to use provisions in the US Government Cares Act to defer this year's pension contributions.\\nWe will also implement other across the board spending cuts which Bill will discuss with more details shortly.\\nImportantly, all of these initiatives including the one completed asset sale are expected to total $900 million in cash auctions this year. Again, our work to hone our strategy gave us a head start to manage through this downturn and we will move aggressively to strengthen our company so we can thrive in the future.\\nSo, with that I'll turn it over to Bill to dig into the details on the first quarter results and our cash management strategies.\\nBill, please go ahead.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy. We streamlined the financial results section and this first slide provides key financial highlights. Detailed slides are in the appendix.\\nFirst quarter 2020 revenue was down $55 million sequentially on seasonally lower alumina volumes and by resell activity in aluminum and lower realized aluminum prices.\\nNet income attributable to Alcoa Corporation was $80 million or $0.43 per share and includes the gain on sale of the Gum Springs treatment facility. Adjusted EBITDA excluding special items was $321 million generating an EBITDA margin of 13.5%. The adjusted net loss was $42 million or $0.23 per share also on an adjusted basis, the operational tax rate was 78.5%.\\nLet's look closer at factors driving adjusted EBITDA. Adjusted EBITDA excluding special items declined $25 million in the first quarter. The strength of the US dollar combined with favorable energy impacts and lower raw material costs more than offset lower alumina and metal prices.\\nFirst quarter EBITDA includes a $36 million benefit from revaluation of receivables and payables due to substantial changes in the quarter and currency rates.\\nIn the operating segments bauxite and aluminum EBITDA\\u2019s declined sequentially but were more than offset by improved alumina earnings. Lower bauxite prices on intercompany sales impacted bauxite segment earnings, but resulted in lower bauxite costs in the alumina segment.\\nThe stronger US dollar created benefits mostly in the alumina segment, which also saw lower caustic and energy costs. In the aluminum segment lower realized metal prices were partially offset by lower alumina and carbon costs. Price mix was unfavorable sequentially on the mix of smelter grade alumina contracts and lower chemical grade alumina pricing as well as lower external bauxite price.\\nVolume was down in all segments on seasonal factors but driven largely by scheduled maintenance activities in alumina and bauxite. Production costs were unfavorable in aluminum primarily at work rolling. In other transformation costs were higher sequentially due to no longer receiving certain energy revenues and the addition of Point Comfort closure due to no longer receiving energy revenue and the addition of point comfort closure costs. Intersegment eliminations declined $48 million sequentially as more stable alumina prices meant no further profit was released from inventory.\\nMoving to the key financial metrics and cash. Difficult for the first quarter are our days working capital increased sequentially up four days to 31 days but improved four days year-over-year and was an encouraging start to our working capital reduction efforts. Capital spending was $91 million up $22 million year-over-year primarily due to a mine move occurring in Australia. These factors combined with lower EBITDA to generate negative free cash flow less NCI distributions of $212 million.\\nOur key balance sheet metrics, proportional adjusted net debt was flat this quarter and appropriately does not reflect the remeasurement of pension and OPEB assets and liabilities that occurs at year end. We ended the first quarter with cash of $829 million down $50 million sequentially.\\nA quick review of our major cash sources and uses for the first quarter of 2020.\\nOur total cash sources were $520 million consisting of $321 million in adjusted EBITDA and a $199 million in net proceeds from asset sales, our largest outsourced cash were $150 million working capital use, $91 million of capital expenditures, $70 million of tax payments, including $32 million in payments of prior year income tax, net distributions to our joint venture minority interest partner of $31 million as well it's $75 million of pension, and post-employment benefits funding made in addition to $15 million related expenses with an adjusted EBITDA.\\nOutflows also include approximately $37 million in restructuring payments primarily for implementing the new operating model in Spanish smelter divestitures.\\nNow let's take a look at our pension and OPEB net liability which has impacts on the balance sheet and cash flow. Based on many questions from you we have summarized the balance sheet and cash flow impacts from our pension plans, pension and other post-retirement benefits have important balance sheet and cash funding impacts.\\nOn the balance sheet there is three key points to consider.\\nThe net pension liability is completely re-measured at year end, not every quarter. Factoring in all payments funding, asset returns, demographic changes and discounted using year-end rates. The OPEB liability is similarly remeasured at year end using a similar year end discount rate.\\nThe pension funds are invested across numerous asset classes including fixed income, returns were negative approximately 7% in the first quarter. The pension OPEB discount rate approximate a 10 year to 15 year investment grade corporate bond even while Treasury bond rates fell in the first quarter, discount rate rose roughly 20 basis points from year end to the end of the first quarter.\\nIn sum our asset returns and discount rates are variable and subject to change. If we assume that we received our expected return on assets for the last three quarters of the year and we assume that no change in the discount rate occurs from March 31 and funding and other normal adjustments are in line with our outlook we would anticipate our year end 2020 pension OPEB not net liability to be approximately the same as the balance at year end 2019.\\nThere are several factors that dictate the amount of pension and OPEB funding required every year and especially in 2020. Funding requirements for 2020 are set and based on smooth asset performance and 25 year average segment rates mandated by the IRS. This year the CARES COVID-19 stimulus package allows deferment of a $220 million of pension payments until January 1, 2021, and we have elected that option, thus funding for pension and OPEB from cash flows in 2020 is estimated to be a $108 -- $180 million down from $400 million.\\nNext year we could use our $382 million pension pre-funding balance instead of funding the pension entirely with operating cash flows.\\nLet's now look at our debt and cash position.\\nFirst we have a very solid credit position with no significant debt maturities until 2024. At quarter end we had cash of $829 million and no borrowing against our two credit facilities.\\nThis month we amended our revolver to temporarily increase borrowing base availability for the next four quarters. That can't -- while in February, we disclosed working capital and production cost reduction programs targeting up to $200 million in 2020. And we just mentioned the CARES deferment until 2021 of $220 million in pension funding.\\nWe are taking several more actions to improve our cash position; they include reducing capital expenditures of $100 million, deferring environmental and ARO spending of $25 million and a number of other cash conservation measures that are expected to total $35 million.\\nLet's see how it all adds up, our cash actions announced so far this year add up to an approximately $900 million benefit in 2020, some cash impacts are ongoing and it have an annual run rate some are onetime savings and some are deferrals until a later year, but all of them are designed to improve our cash position in 2020.\\nOf the $900 million of cash benefits related to our three key strategic actions totaled approximately $300 million and include overhead reductions, our Gum Springs asset sale and the Intalco curtailment. The 2020 programs for working capital and production cost reductions target another $175 million to $200 million.\\nAnother approximately $400 million comes from our newly announced COVID-19 response.\\nWhile $900 million is impressive start, we're not done.\\nFor example, while Gum Springs is our first completed non-core asset sale we continue to pursue the remainder of our $500 million to $1 billion target. We realize that these exceptional times require continued efforts to maximize all of our cash programs.\\nFinally, let's review our full year outlook for 2020.\\nOur full year 2020 outlook although being subject to change based upon the evolving COVID-19 situation is our best current estimate and reflects the actions described earlier.\\nFor example, the curtailment of Intalco is expected to reduce our full year aluminum shipments.\\nSo, we are adjusting that full year outlook approximately 100,000 tons to arrange a 2.9 million to 3.0 million tons.\\nEarnings related impacts reflect lower spending.\\nWe expect transformation EBITDA impact to improve $10 million to approximately $75 million.\\nWe also expect other corporate EBITDA impacts to improve $10 million to approximately $90 million.\\nWe expect interest expense to increase slightly to a range of $125 million to $130 million as lower capital spending will mean lower interest capitalized as part of major projects.\\nFinally, until further notice we\\u2019re not providing an outlook for the full year operational tax rate.\\nWith the current situation so uncertain we cannot predict with sufficient confidence the 2020 taxable earnings across our businesses. The largest changes in our outlook can be seen in our cash flow impacts.\\nMinimum required pension and OPEB funding is expected to decrease from $400 million to $180 million, a result of the Care pension funding deferral until 2021. We're cutting our estimated capital expenditures of $100 million effectively stopping return seeking capital spending for the rest of the year and reducing sustaining capital spending.\\nWe are also reducing environmental and ARO spend of $25 million to a targeted $125 million. In the appendix we also listed additional consideration expected for the second quarter. They include, in the bauxite segment adjusted EBITDA it's expected to be $10 million lower primarily due to non-recurrence of an annual sales contracts true up.\\nIn the alumina segment we are expecting lower raw material costs to yield $10 million sequential benefit. In the aluminum segment lower alumina costs are estimated, it's produced sequential benefit of $15 million and benefits from lower smelter power costs will be more than offset by lower Brazil hydro sale prices while lower value-add pricing and volumes will be partially offset by production cost improvements yielding an expected $10 million sequential decline.\\nDue to an unusually large change in quarter end exchange rates first quarter 2020 adjusted EBITDA included a balance sheet revaluation benefit of $36 million and a $41 million sequential benefit compared to the fourth quarter of 2019. Currency changes related to balance sheet revaluations are not incorporated into the current key sensitivities provided for EBITDA.\\nSo now let me turn it back to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"In closing as we move forward through this period of instability and uncertainty we will continue to execute against our company's three strategic priorities.\\nFirst, we remain focused on being a low cost produces which means reducing complexity to better compete through all parts of the cycle in our commodity markets.\\nSecond we intend to improve our margins and invest drive returns when markets offer us this opportunity. And finally we are working to advance sustainably which includes actions toward a strengthened balance sheet, a cycle proof portfolio, and an enhanced reputation for environmental and social excellence.\\nThere are three major points I want to leave you with today. Most importantly we are focusing on meeting the fundamentals of this crisis. That means continued vigilance and mitigating risks for our people and operations.\\nWe are prioritizing in keeping our people safe and healthy, keeping our operations running, and helping our communities navigate this crisis.\\nNext our early action helped us prepare for the economic challenges presented by the COVID- 19 pandemic. With a stronger balance sheet, we are well positioned to act smartly and to continue executing on our strategic priorities and the actions that we announced prior to this crisis.\\nFinally, we are adapting to this unprecedented situation quickly, having a clear direction ensures that our short term reactions will help accelerate our long term direction to enhance the competitiveness and profitability of Alcoa. And with $900 million of 2020 cash improvements already underway it gives us a solid foundation to continue to build our future.\\nAnd with that, Bill and I are ready to take your questions.\"}, {\"speaker\": \"Operator\", \"content\": \"We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from David Gagliano of BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay, great and thanks for taking my questions. My first question is really just a bit of a clarification question, on the $36 million that was included in the $321 million adjusted EBITDA, where is that in terms of the segment results? Is it most of that in the alumina segment or if not can you -- or can you break that out by segment too? That\\u2019s my first question.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Hey, Dave. Yeah it\\u2019s mostly in the alumina segment.\\nSo let me give you a breakdown, $2 million in bauxite, $28 million in alumina and $7 million in aluminum and I know that it doesn\\u2019t round to $36 million but it's just around it.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay, All right, great, thanks and then just a bigger picture question. I mean obviously if one -- plays with the sensitivities in plugs and spot even after giving all the -- the benefits for the operating model, the Intalco shut down, productivity improvements or costs, it's still a very low run rate EBITDA at least on the numbers that were coming up with on an annual basis I'm guessing a lot of that -- the aluminum segments.\\nSo my question is what other actions is Alcoa considering at the moment. If -- given the backdrop with the big drop in all three of the main drivers, premiums included.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah, let me hit that one first Dave and then probably it\\u2019s worthwhile for Bill to chime in as well. I mean the fact is that we\\u2019re trying to look at this in a very staged methodology.\\nWe\\u2019re trying to read a bit what we\\u2019re interpreting from the markets and then take actions that correspond to what we see both in the immediate term and further out.\\nAt this point and you've seen the list of things that we've already put into place I'm assuming -- I'm assuming that you're looking for what else could be done.\\nYou know we've been trying to focus on doing what does not have long term or create long term issues or even medium term issues.\\nSo good example are the mine rules, we're continuing with the mine moves because those have immediate impact if you choose not to do them just on grades and then also on haul distances.\\nSo right now because we're in the cash position that we're in, and as we project that forward because of the liquidity, we feel that we do not need to take actions that cut deeper into some of those sort of emergency measures that we could take.\\nNow the fact is and depending on when we start to see demand return, we're starting to see more of a supply response that starts to bring balance back in and then with the resulting change in pricing.\\nWe have a series of actions that we can continue to take, and those actions run the gamut from additional curtailments looking at each plant on a specific operation by operation basis, it also steps into further capital reductions defer -- choosing to defer more maintenance et cetera.\\nSo there is you know realistically there is a pretty large set of actions that we have chosen, specifically chosen not to move forward with and thus as conditions change and as that pricing environment changes we'll be ready to start stepping into those case as that is needed. I don't know Bill if you want to add to that.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I don't know there's a whole lot to add Roy, other than the fact that, Dave you've seen us over the course of about three and a half years now and we take action and we've laid out, and we started back in October and where we announced the strategic review, we've taken action on the strategic review between the Point Comfort closure and now the Intalco curtailment.\\nYou know we're stripping out the overhead and then today we announced a series of COVID actions to enhance liquidity. And you know we\\u2019ll continue to do what needs to be done to improve the business. And as Roy said, we're doing it with an eye towards the long term, but we clearly understand the situation in the near-term. And it's just -- it\\u2019s the management team that doesn't sit back and I think we've seen that over the last three and a half years.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"No, no\\u2026\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I'm chime back in with one more comment Dave, if you don't mind.\\nYou know I think as we sat here a year ago, and we're really getting deep into some of those strategic reviews and thinking through where does Alcoa need to be for the long-term. And obviously and I'll be the first to tell you we had no expectation that there would be a global pandemic that would then create the knock-on market impacts.\\nHowever when we looked forward we did really think about what is necessary in order to make our portfolio and stable of operations be as cycle proof as possible.\\nAnd so I would argue that the fact that we started moving in October and that we have been taking we have essentially a head start and have been taking phased actions since then.\\nI am really, really pleased that we did that at that point because it helps us react more quickly and gives us more space and more liquidity so that we can make our actions thoughtful and also make them as powerful and impactful as they need to be.\\nI think since separation I remember one of the things I had been consistently saying is that we as a company we want to do smart at the uptimes and we also want to do smart at the downtimes as well.\\nAnd so that is exactly what we intend to do, and like Bill said I\\u2019m not thinking but he could say it better.\\nWe are a team that chooses to take actions on our own terms, so that we can make this company better.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"I appreciate that. Thanks for those comments.\\nJust if I could just jump in with one more that the follow up there, if you know we've got an inventory problem, we've got a demand problem, and if that continues to bleed into a lower for longer pricing problem like we saw you know for years a while back you know can you -- can you give us a -- just a sort of a framework about how much capacity on the smelting side Alcoa is willing to take out of the market, either on you know on a percentage or production basis.\\nWell, obviously without going smelter by smelter but just can you give us a sense of things the way they are on pricing say for the next six months what should we expect in terms of the next moves on smelting capacity cuts.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah. It\\u2019s hard to quantify -- hard to quantify that Dave, and specifically because it\\u2019s you know it is very dynamic, and as you can imagine pricing changes depending on what's going on with some of our -- some of our competitors and around the aluminum industry.\\nThe fact is that we announced a million and a half tons of review.\\nAnd so that is -- that is the list of places where we are -- where we need to be taking action and those actions can result in improvements to the bottom line. And as you can imagine there is a bunch of changes going on in some of the input costs that can mean new power contracts but it can also mean curtailment or shutdown.\\nSo we take that very, very seriously, and as you\\u2019ve seen we've taken a couple of steps already Intalco being the one that has the impact on an actual operated tons. And Bill go ahead, if I interrupted you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"No.\\nI think that\\u2019s exactly what I was going to say, I mean you've got to go back to the 1.5 million metric tons, out of that 1.5 million I believe around 900,000 is operating today we announced Intalco. And you know we continue to move forward on the strategic review and the current market conditions make that strategic review even more important, and you know really push us to make decisions quicker.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay. That's helpful. Thanks very much.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Curt Woodworth of Credit Suisse. Please go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Yeah. Thanks. Good evening.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hi.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Hey guys. I'm hanging in there. From a modeling perspective it's pretty challenging at least on the smelting side right now because you've got you know a lot of delays in your cost structure and from I think about 70% of your power costs are only linked you know, alumina flows through on a month lag, and then you know right now obviously you're going to see much better shape premium if you go more and get away from cast house products.\\nSo you know I guess you know the question and then you have Intalco on top of that.\\nSo could you estimate or give us a rough sense for if you were to assume kind of spot assumptions for these things kind of what the profitability of the smelter business would look like today?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"No. Kurt, we don't provide that.\\nI think the best thing that you can do is what you alluded to and that is you know take a look at both the sensitivity page and the cost structure page, and the cost structure will help you model through -- how the cost flow through for the smelting system.\\nSo you know and then on top of that we've given you an indication of how much profitability Intalco will contribute this year by the fact of having it I should say on the run rate basis by having it curtailed.\\nSo you can factor that into the model and like you said unfortunately premiums and value-adds have come down so that -- that's a negative. But we don't provide necessarily a breakeven per se or a breakout specifically around the aluminum business.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay. And then with respect to the pension and OPEB liability I mean that the fact that there could be flat this year despite what we're seeing is pretty remarkable and I realize that part of that is the benefit of the CARES Act. But you know since quarter end S&P is up I think roughly 12% so you know it seems like they're in a pretty healthy position relatively speaking from what I think a lot of us have thought.\\nCould you look to do anything further with your pension funds amortizations and as you get more proceeds from asset sales are there other things you're looking at with regards to derisking your pension exposure?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo and I'm glad to make the point. When -- and just so I clarified my comments because I think today as you pointed out there -- it's a pretty interesting perspective.\\nSo when we look at the March end discount rate and when we look at the March end asset return rate and we all know that the first quarter on asset returns weren't great and I believe our asset returns were about minus 7% and then we factor in that we think we can make our expected return on assets for the last nine months of the year.\\nSo we need to earn a 9 -- I\\u2019m sorry a 6% of -- on the rest of the year assets which if you consider how low they were at the end of March is probably viable, and we bake all that in and assume the discount rates don't change the pension and OPEB liability would be pretty close to flat year-over-year.\\nNow clearly in this very volatile market returns are changing daily, discount rates are changing by the minute.\\nAnd so you know that's just a moment in time projection, but it gives you an indication of where our pension is.\\nSo could we do more? Yes, we have the opportunity to do more annuitizations, we consider it from time to time.\\nAnd you know it's -- as you know we've got a two year to four year plan to get our adjusted net debt down to $2 billion to $2.5 billion and the way we're most likely going to do that is through the pension.\\nAnd so, I guess to summarize my comments the pension is a focus area for our company, it has been since the first day, we originated and we've continued to work it down and will be continued to work in going forward because it\\u2019s part of the capital allocation model that we've laid out pretty clearly.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay. And then just one follow up.\\nYou said the pre-funding balance, I think was $380 million close to $220 from CARES act, I was -- of the understanding that you could -- you had a $500 million in pre-funding from the debt you get in 2018 so is some of that pre-funding is effectively being completed by the CARES number or if you just kind of update from that? Thank you very much.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah, so a little bit of -- a little bit of the pre-funding was used during the course of the year to keep the pension at the level that they're at. I just want to make it clear the Cares Act allows us to defer any contributions CARES Act allows us to defer any contributions into the US pensions without using the pre-funding balance.\\nSo we will come into the year with -- not having made the pension contributions this year we'll have to catch them up next year but we will have our full $382 million pre-funding balance available to us.\\nSo as you look at next year if we, if we do choose to push out all of our pension contributions the pension contributions next year are high and then we can use that pre-funding balance to offset that -- to offset much of the pension contributions next year.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay, thank you very much I appreciate that.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Timna Tanners of Bank of America. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Hey, good evening and hope everyone is healthy and all right. I wanted to ask two questions.\\nThe first one is -- heading into this call we were struck, our whole metals and mining team was struck with how aluminum was the one commodity maybe or the commodity with the least supply response so you've taken a dent to that with the Intalco difficult decision, but I just wanted to first ask if you could explain or remind us when you curtail that permanent or is that temporary and how to think about that. And then in the same vein do you expect other actions by other participants because that has been kind of striking how little supply response we've seen relative to other commodities?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah and thanks for the question Timna. I'll try and answer the best that I can so Intalco is, a decision to temporarily curtail so it doesn't mean or we don't mean to project forward and say whether it will return to operations or won't return to operations. What I will say is, is that when we make a curtailment decision we do it not just with the current pricing in mind but also looking forward a number of years and so it is -- it's not necessarily just meant to represent the world as we see it right this very second, and we do look forward at least 12 months to 18 months.\\nAnd so when we then transition it over to a broader what do we -- what do we think is going to happen across the market, and I'll be the first one to tell you that we certainly can't project or indicate where our competitors or what they're going to do.\\nWhen we look at the facts as they sit today, and you see it with the 2.5 million tons of inventory that was put into place over the -- over the course of Q1, the fact is, is that we are -- that we are in an oversupply situation. And you are seeing the price response which I realize is very complex and not just supply demand but that is obviously the most important long term aspect of it. It means that we are continuing to -- we as an industry are producing more then as required by our customers.\\nAnd so that would argue with basic economic theory that pricing is going to incentivize that we see curtailments.\\nAnd when we look around the world and as you can imagine this is -- this moves pretty quickly because as we saw alumina prices come down over the last couple of weeks, it changes the dynamics inside of smelting. But as you look around at what's happening with pricing on both China and the rest of the world, the fact is there is a pretty significant chunk of underwater capacity.\\nAnd so you see -- as you saw that in the presentation I mentioned that it was, it had changed over the course of these two weeks, but the fact is the longer that we remain in oversupply condition the longer we build up inventories, the longer that the pricing issues could continue.\\nNow we do expect and hope that demand will come roaring back as some of the social distancing measures come off, some and all of those social distancing measures cannot or if we find a treatment or in the end if we find a vaccination, so I think there will be some demote, but certainly as we look at it today, there is a -- there is an incentive because pricing and because of this oversupply condition that will create a pretty serious issue if we don't see that supply response.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"That\\u2019s it. Thank you. And the other question I wanted to ask and hopefully just get a little more clarification on is the comments you made about the Castro products premium and to get a little more color about how long that could last. How that transition moves? It is just a function of some of your higher end applications for aluminum or not, demanding as much like auto and aerospace for example and therefore you are making more commodity grade because there is demand there or and like that just lasts as long as that condition lasts, or is there anything I\\u2019m missing.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So, so on that one you know I -- and let me hit it a sort of qualitatively and then Bill can jump in from a quantitative perspective.\\nYou have to divide it into two different pieces. There is the premium impasse that we were seeing and this is particularly on a cast product side. We were seeing already some pressure on premiums coming in to 2020.\\nCOVID has exacerbated that to a certain extent because of you have -- we\\u2019ve seen a pretty significant demand production but you were already seeing those pressures because you because of the short in North America because that Midwest pre-news had come up even when you consider the fact that a lot of imported metal have to pay the duty, you saw a lot of metal come into North America specifically and that created a long P1020 position and a long product position which started to then have an impact on premiums and in the end on -- on both Midwest and then product premiums.\\nAnd something simple -- similar in Europe where you're seeing that you saw more production come online than you had demand.\\nSo that is what essentially is driving some of -- some of the product premiums that you're seeing.\\nSome of that will cure itself and if you see real curtailments on and you see those cast houses come down well with the smelters as well but it also -- it also means that that could last a bit longer than just when there are specific COVID impacts.\\nAnd I'd also remind you that in Europe you typically are negotiating on a quarterly basis and in the US you\\u2019re typically negotiating on the annual basis.\\nHowever there is a lot of distortions to that this year because you have some decisions being made around push outs or forced [indiscernible] etcetera.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And just if -- if I can add just really simply in the -- I mean you see it all over the place. Automotive manufacturers are taking curtailments just not everywhere.\\nOur downstream customers took the better part of March and April off or shut down so what we're seeing is things like extruders not need bill it, foundry alloys you know with the wheel manufacturers not needing foundry alloys.\\nSo instead of making foundry alloys instead of making billet we're making commodity grade aluminum and we sell it to either traders or ultimately if we -- if we needed to we can sell it to the LME but what that means is you're not earning that value add premium and I think for that I think Roy had talked about a 20% decline second quarter or first quarter so that's the impact of that.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay great. Thanks a lot.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Carlos De Alba of Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"Yeah. Hello. Good afternoon, everyone.\\nSo first question if maybe Bill can you clarify on the slide 16 can you clarify on slide 16 the comments about leaner working capital that one-time $75 million to $100 million and presumably this is for this year. We saw in the first quarter working capital change what\\u2019s driving to cash flow generation so can you maybe give a little more color as to how you see these playing out throughout the year. That will be my first question.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Sure. It's really two things going on this. They are just naturally with lower alumina and aluminum prices and raw material prices we should see our inventory values go down.\\nSo essentially what we're suggesting to you here is that if you look at the hard dollar days working capital at the end is 2019 which I believe is around $700 million, we're telling you hey, we should be -- we should be able to see $75 million to $100 million reduction off of that working capital level that we ended 2019 which results in a cash generation for the year.\\nNow we say that's one-time because we don't know what we're going to do in 2021 but that ultimately ends up as a generation so as I said there's two things going on, one is just naturally working capital will come down with lower prices assuming that lower prices stay where they're at the rest of this year. But on top of that the new organization structure that we put in place is looking at our supply chain from end-to-end.\\nSo we are now -- now that we've eliminated the business units we are looking at all the raw material, all the work in progress inventory, all the finished goods inventory, all the receivables, all the payables from an end-to-end perspective with one organization and they've been tasked with driving out working capital so the combination of those two naturally lower prices and the task that they're doing $200 million.\\nAs he said we were up in the first quarter, we\\u2019re always up in the first quarter. It's a replenishment of the pipeline because we tend to see everything get drawn down in the fourth quarter, but we're singling to you that we\\u2019ll recover from that first quarter and get to a lower level in the fourth quarter again assuming the prices -- they stay where they're at today.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"Great. And thank you. And the second question is other than the reduction in the -- net worth reduction in the cash flow generation and performance of the business. Is there any room for our core to reduce the contributions poor to non-controlling interest given what is going on in the market and in the economy?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah.\\nSo and I'll address that one Roy, the non-controlling interest, Carlos it's very simple, it's 40% of the AWAC joint venture gets paid out to our partners.\\nAnd so the cash flow implications of that is essentially the netting of any investments that we're doing on capital expenditures and the earnings that we make in that section.\\nSo there's really no -- I should say flexibility on our ability to pay NCI out to our partners.\\nThere's a defined you know a cash management system. We make eight dividend payments a year -- and when I say we -- AWAC makes eight dividend payments a year to Alcoa and to a Alumina Limited so there\\u2019s a very limited flexibility there, which you know from our perspective is fine. I mean that\\u2019s the way the joint venture was set up.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"Right okay. And if I may squeeze one more. Roy any comments that you can make on ongoing conversations with any given specific on the asset sale front, given what is happening right now? Are you even able to engage potential buyers what is happening right now, and you\\u2019re even able to engage potential buyers, or all of these has been pushed out to when we return to some sort of normality.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Roy, you want me to take\\u2026\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Since that's my area.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah. Go ahead, Bill.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yeah.\\nSo Carlos, it\\u2019s a great question. We got Gum Springs done, right. And thankfully we got Gum Springs pre COVID, we got a great value, just to put it in perspective, Gum Springs you know has valued at $250 million. We got cash of $200 million. There's a contingency of another $50 million that will come over time, and recall that's an entity that had negative EBITDA, all right.\\nSo it had a minus 12 EBITDA. All right.\\nSo we'll take a victory lap real quick on Gum Springs. But as we look forward, yes, the COVID-19 has made things go slower, right. And quite honestly with the volatility in the market they've made the asset sales a little bit more difficult. That doesn't mean we've let up at all, so we're continuing to push forward.\\nBut I would admit to you that things are going slower because you know I mean you well know if you were to take an asset to market today you can't even really have meetings, you can't have you know can't have reviews of the ads.\\nSo things have gone a little bit slower.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Carlos.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Chris Terry of Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, Roy and Bill. A couple of questions for me hopefully short and sharp, just wanted to start on slide 15, if I may. The $100 that you highlight in reduced production cost year-on-year, is that your forecast of what will be the benefit from low overall materials being caustic carbon diesel et cetera, or is that something you've achieved regardless of that and there\\u2019s more -- up there\\u2019s more potential cost cuts beyond that if raw materials decline from here. Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yeah. I'll jump in that the $100 million is not raw materials Chris. The $100 million is when I say not raw materials it\\u2019s not the price of raw materials if we use less cost then. If we are smarter about carbon consumption that counts towards the $100 million but this is real blocking and tackling on taking cost out, its productivity improvements.\\nIt's looking at MRO and services spend and you should see this in two places on the bridge right, you'll see it in the production cost section on the bridge so when you see at the end of the year how we did against this you'll see the production cost and you may see some of this benefit in volume.\\nSo for instance if we're able to make more tons with the same cost structure, with the same amount of people that we're getting productivity out of that.\\nSo you'll get a little bit of a benefit there but it has nothing to do with lower raw material cost. At this point we would be projecting lower raw material cost on a year-over-year basis to be a couple of hundred million dollars.\\nSo we are really taking up some of the benefits from the lower raw material cost versus what we saw last year.\\nSo it\\u2019s around $200 million in lower raw material costs on a year-over-year basis.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And Chris I\\u2019d like to jump in just to complement Bill's comments you know I think we had constructed this program prior to COVID and of course we had our pricing issues that don't seem like pricing issues anymore that were happening before COVID ever hit us.\\nOne of the things we're trying to do with the new operating model is be very clear about what is in fact in the control of our operations when our plant managers and department managers et cetera and so this target is very much looking towards driving improvements that can be sustainable and that are not just base of the current maintenance et cetera.\\nAnd so it\\u2019s exactly as Bill said, these -- these are meant to be stocked at our absolutely in our control, and that drives productivity which is more production or lower cost than our plant, and so I can\\u2019t stress it enough, it\\u2019s we see our job as commodity producer.\\nWe continue to drive our way down the cost curve and we will -- we will go after every lever that we can and we are trying to unleash all of the intelligence we have in our plants and the great work forces that we have to capture those for the long term.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. Thanks. That\\u2019s clear. And then slide 16 quickly, just in terms of the 225 focusing on the run rate bucket, how -- how can you split that up into what\\u2019s inside AWAC JV and what\\u2019s not.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"No. I don't think we're prepared to Chris at this point.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. And then the $100 million of CapEx, is it some of that deferred or is that you decided you can call it saved that $100 million from your previous guidance.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yeah, maybe some of that will be deferred. We'll assess that going into next year, but I mean it's a good point to make. We're being pretty aggressive around lowering capital spending and as Roy said you know we're putting on hold the return seeking projects given the market situation that we're in and we're really aggressively going after the sustaining projects in order to drive cash this year.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. And then the last one for me, the -- just to square a few different things you've said, so you're obviously pulled the total market outlook for the company but you are retaining your own volume guidance and you haven't -- you haven't pulled that in itself is a methodology that just the path that you see visibility on because I\\u2019m just surprised that people wanted that for the other given your acknowledgement that the markets over supplied and further adjustments has to be made do you just wait until you\\u2019ve made those if you made those and then make the changes after that.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah, I think that\\u2019s how you should look at it. Chris, I mean the fact is, is that its -- if market conditions drive us to another curtailment we will then modify whichever of the -- whichever the shipments forecasts that we've given here.\\nSo this is meant to look at our business as sort of a growing concern with the portfolio that we have, it incorporates Intalca shutting down in the third quarter into those numbers and if we move to another, if we move to another curtailment we\\u2019ll incorporate it at that point.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay that\\u2019s it from me guys, thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you. Chris.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Alex Hacking of Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Yeah, thanks. Thanks Roy and Bill and good evening. I guess you mentioned in the slides that you're going to convert about 20% of your value added sales to Inga [ph]. Is that a rough proxy for where you see US and European ally demand right now? Or that value added sales is into certain segments that are being hit either worse or better then why you think the overall market is.\\nSo I guess anything that you have where you could kind of quantify where you see the different segments would be helpful and I think also you mentioned earlier in your comments that construction demand was, it was quite weak. Maybe you could follow-up on that because -- some other players in the construction supply chain or say in that construction markets have remained relatively stronger. Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah.\\nSo, Alex let me take a swing at those two.\\nSo, from the 20% in value added product sales, I think that is very much meant to be a book into second quarter, and it's specifically looking at second quarter because we typically are bringing in our what we have our actual sales orders come in somewhere between one, two or three months before they actually materialize.\\nAnd so at this point you know finding our sale, so two thirds of the way through the first month of the quarter, we have a pretty good insight into what's going to happen over the course of Q2.\\nAnd so I would say that it gives us visibility there.\\nNow when we start projecting forward you know depending on where that particular business is located and how it is deemed, or how it chooses to start coming back with -- as we start to get past some of the worst times around COVID-19, we would expect that to start to -- to start to return.\\nHowever, we just don't feel that we have the confidence to -- we don\\u2019t have the confidence to predict when that will be and exactly how quickly that recovery will be at this particular time.\\nSo look at that very much as a Q2 indicator and then we will give you more information as we get into -- as we get down the -- down the path.\\nOn your question on construction you know I\\u2019d argue it is a very -- it's a very similar type of analysis. And we really were looking at what -- what are we seeing right now in our building and construction segments. And while I think that there is -- there is a push to get a lot of that we started or to get back to more normal times, it does connect over with what we're seeing actually in our customer order book.\\nAnd so from a Q2 perspective we are seeing that there is some weakness inside construction. How much of that is using is using aluminum and so it\\u2019s -- that\\u2019s that sort of what we find right now although we do -- we do barrels of recovery.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay, thanks. And I guess one quick housekeeping question.\\nI think last quarter you guided that bauxite EBITDA was going to be about $35 million lower.\\nYou did quite a bit better than that was that just FX or there were other factors there as well? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Combination of FX and there was a contractor that we alluded to where we sell bauxite during the course of the prior year and then at the end of the year you true up for the actual tons that were mined because we're getting a royalty payment from one of our competitors and that royalty payment ended up being that true up ended up being about $7 million and so we didn't know that when we gave the guidance.\\nSo it's a combination of the strong USD and the true up payment.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Lucas Pipes of B. Riley. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Hey. Good evening, everyone. I hope everybody is doing all right. I have another question on the customer side in terms of aerospace roughly what percent of revenues that could have be including value added and everything and then just to follow kind of up on some of the earlier question what sectors are stickier on the demand side maybe packaging for example what percent of revenue is there. Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah.\\nLet me -- let me answer the first question on aerospace maybe a little bit different than you are asking. Aerospace is a very small percentage in looking at North America as an example of the larger world, it\\u2019s a -- it\\u2019s sort of a 1% to 2% of the total aluminum demand.\\nSo, I think there is a value that fits inside of there for the downstream producers because these are pretty specialized alloys. But from an overall demand perspective of aluminum, it really isn\\u2019t going to have, it isn\\u2019t going to have a large impact.\\nSo, it\\u2019s not one of the key drivers and what sectors are stickier?\\nYou know I think we're seeing the other sectors outside of building the construction and automotive being a lot stickier than what we're seeing inside of -- inside of those two particularly.\\nSo can business tends to be able to cope with this and in fact you're seeing an increase in demand year-on-year. And then when you look at -- when you look at how things are consumer durables, electrical, overhead wires, et cetera, et cetera, I think the fact is that you're finding things to be relatively sticky.\\nThe next question obviously is, is how quickly do we see recovery and do you actually see some of that catch back up as some of those supply and production hiccups occur. And not when I don't think we put an opinion out yet.\\nSo we'll have to see how that recovery continues.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"And then in terms of the percentage of revenue of the stickier parts of your customers roughly what\\u2019s the ballpark?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I have to admit which is off top of my head I don't recall what percent of revenue packaging is, we can revert back to you.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Yes. That would be great. And then just sort of the second question in terms of the international trade flows, are you seeing any changes there depreciated thoughts, it\\u2019s something that\\u2019s come up occasionally, would -- would be helpful to hear your thoughts on that. Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And Lucas is that in reference to anything specifically or just sort of general trade moving around the world.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"General trade moving around the world.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah.\\nI think what I would comment there is that there was a lot of concern that -- that with China being shut down, you\\u2019d see just a lot of issues around trade flows and particularly when you're bringing in components from China into the rest of the world, North America and Europe.\\nSo, I think all of a sudden, all of that became a lot of speculation as China starts to ramp back up again and it\\u2019s the rest of the world and US and Europe in particular where you're starting to see some of these -- these COVID related impacts.\\nSo, I don't think we have data that\\u2019s outside of our markets that would be particularly helpful.\\nI think when you look at Bauxite, when you look at Alumina flows around the world, when we look at how our Aluminum products are moving outside of the conversion to our value add products into commodity grade which typically will go into either -- either license to warehouses.\\nI don't think we've seen a lot of distortions outside of freight prices. We've not seen a lot of distortions to trade.\\nNow, once you get into components and things like that I think you'll need to be asking some of the downstream producers but from our perspective we still have materials that are flowing and we do not have any serious risks on our horizon about getting raw materials into our plants either.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Very much appreciate all the -- all the color, and best of luck during these challenging times. Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah. Thanks, Lucas.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Paretosh Misra of Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Thank you. When you look at the aluminum futures curve these days and looking at the low interest rates do you think this is an attractive market for commodity traders to put on some financing deals either in China or outside China similar to what happened in '08 or '09?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah to make that a very simple answer to what can be a complex question, the fact is as we've seen that aluminum futures curve adapt to make sure that, that warehousing play that essentially that storing of metals is the contango it essentially reasserts itself so that that is possible.\\nAnd so whether that, whether you look at data the total price going up or which would be much less -- much less agreeable the stock price coming down and the fact is as we have never seen -- we have never seen an environment that has lasted very long where you don't have an attractive trade on putting metal in the warehouses.\\nSo right now we simply don't see a bottleneck in that the banks or other traders are not willing to take that -- take that inventory on.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Okay and then just going back to bauxite is there any other comment you could provide let\\u2019s say about the pricing as you see it in bauxite business for the rest of the year, like if there any other contract that is coming up for true up in the six to nine months?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah you know a lot of our contracts tend to be longer dated and we do have some spot cargoes and those spot cargoes will get priced based on the prevailing market but a lot of times those will be in places where they'll be closer to apartment price at MRN or CBG etcetera.\\nAnd so it's a bit of a rarified market.\\nI think you're talking specifically about bauxite going into China which is where you have most of the material going.\\nI think what you've seen in China is that you've seen domestic prices start to come down and I think part of that is going to be the fact that our aluminum refineries are -- you've had a good number of alumina refineries in the first quarter and now you're starting to see some of the logistical bottlenecks disappear inside of China.\\nAnd so you started to see there that some pretty significant downturns in domestic pricing.\\nThat said from an import bauxite price you know I think -- I think it has made relatively steady and in fact one could argue that there might be some downside if there are linkages back over into the alumina price whether that is the Chinese or global alumina price. But from our perspective really the pricing environment and the volume environment we haven't seen a lot of distortions even in Q1 because of COVID so it's for the most part steady as she goes from a Alcoa realized price perspective.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Thanks, Roy. I appreciate the color.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah. Thanks, Paretosh.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from John Tumazos, a private investor. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Can you give us a flavor of what are some of the asset sales that might be possible 6 months or 12 months or 18 months out when things warm up a bit. Maybe The Point Comfort property in Texas is big and valuable for example and would you be a candidate for the federal bailout fund that's intended for airlines or other hard hit industries and are there any other federal initiatives that might be practical for Alcoa\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I think I'll try to take all of those John.\\nAs far as the asset sales go we haven't announced specific assets and recall that we have a program that\\u2019s $500 million to a $1 billion and we have already done the $250 million, the one asset that is publicly for sale is the Rockdale land and you know it\\u2019s -- it has a list price of $250 million, and we have been working to sell that now for a while, so that is one of the assets that we have publicly said is for sale.\\nAs far as your comment around Point Comfort, yeah, there is value in some of these curtailed sites, and we actively tried to maximize the value of those curtailed or closed sites, and in the case of Point Comfort we have moved to closure and so we will be looking at opportunities to maximize value out of -- out of that facility.\\nYour question around specifically federal bailout funds, the presentation that you see today is our best view of the opportunities that we have with the programs that have been placed -- put in place with the US government today.\\nSo, some of the things that you're seeing in the presentation say the deferral of the pension contribution is because of the CARES Act, some of the deferral around some of the cost specifically in you know hiring, traveling, other trends -- other restrictions, we would be taking advantage of deferring Sika contributions. And that's I think all companies are doing that currently and that just came out with -- with one of the new -- with the CARES Act also.\\nSo, what you see today is our best view of what we think we can -- we can do with the existing programs. And as far as other programs or other opportunities you know I'm not aware of them, I don't know if that addresses your third question.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"So, we shouldn\\u2019t think that there is $100 million or $500 million loan potential the way that Boeing or General Motors or Ford, or an airline might consider supposedly is like have to trade or fund.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah. Not to the best of our understanding at this point, John. These things evolve fairly quickly, but to the best of our understanding we are taking advantage of what we can at this point.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"Our last question will come from Andrew Cosgrove of Bloomberg Intelligence. Please go ahead.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Hi gentlemen. Thanks for taking my question. I hope is all right.\\nJust real quick on alumina, it came in quite a bit above where you kind of thought it would land pricing that is. I was just curious if you could elaborate a little bit if there were any kind of fixed costs or index lags associated with pricing in the first quarter?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"No. Nothing unusual. I would say again alumina -- the alumina segment gets a benefit from the stronger US dollar.\\nSo you see a little bit of that in the results but nothing unusual on the revenue side.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Okay, great. Yeah. And then the next one was just around the pension again, and just to kind of belabor at this point, but just to clarify, so next year I believe the number was between $350 million to $400 million just on the base.\\nSo you have the $220 million carryover. Are you saying that is there a limit to the prefunding balance you can use to apply against this grand total?\\nAnd then secondarily the -- are you saying that the -- you know if the return assumption and discount rate that you walked through before kind of holds, are you saying that that would eliminate that $220 carryover, or I'm just kind of curious how that kind -- well kind of shakes out?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yeah, sorry.\\nNow they -- it doesn't eliminate the $220 million carry over.\\nSo let me just parse my comments.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Yes\\u2026\"}, {\"speaker\": \"William Oplinger\", \"content\": \"The comments I was making around the pension and OPEB liabilities purely from a balance sheet perspective.\\nSo you do all that math with the returns at the end of the year if nothing more were to change for March. We would be at the same balance sheet position which is good right. That's great news for us.\\nAs far as cash contributions which are run under a very different calculation on pension contributions, the cash contributions we would be deferring this year and we don't have to use our pre-funding balance to defer this year.\\nSo the minimum required contribution of $220 million we can push out into 2021. But as you alluded to we've got and I don\\u2019t have the numbers in front of me something like $350 million to $400 million of pension contribution that we have to do in 2021.\\nSo at that point if we choose we can use our pre-funding balance to not make those contributions and there is no limit to the amount of pre-funding balance that we can use in a particular year. The only limit that you have is that it's only there for the US pensions. It's not there for the overseas pensions but we could use that $380 million next year to offset the large scale pension contributions that we're going to have because we're deferring this year.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Okay, great. Thank you so much for that. Yes, very clear. Thanks so much for clarifying.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Okay. Thanks.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Stay Safe.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks.\"}, {\"speaker\": \"Operator\", \"content\": \"This concludes our question-and-answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Andrea. And I'd like to thank everyone for your time today and for your questions. We're acting aggressively to improve Alcoa and make it through this uncertain time better and stronger. And as I said, I\\u2019m pleased that we were able to get started early to drive improved competiveness for this company, and that we can build on that strong foundation.\\nWith that we look forward to discussion our second quarter 2020 results in July. Please stay safe and healthy everyone. Back to you, Andrea.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference is now concluded. Thank you for attending today's presentation. And you may now disconnect.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2020-07-15
year: 2020
quarter: Q2
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon and welcome to the Alcoa Corporation\\u2019s Second Quarter 2020 Earnings Presentation and Conference Call. All participants will be in a listen-only mode. [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, sir.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you and good day everyone. I am joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer and William Oplinger, Executive Vice President and Chief Financial Officer.\\nWe will take your questions after comments by Roy and Bill.\\nAs a reminder, today\\u2019s 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\\u2019s actual results to differ materially from these statements are included in today\\u2019s presentation and in our SEC filings.\\nIn 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\\u2019s presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA.\\nFinally, as previously announced the earnings release and slide presentation, are available on our website. With that, here is Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim and thanks to everyone for joining our call today.\\nAs we previewed last week, Alcoa is progressing on each of our operational and strategic programs acting with resolve and urgency to deliver safe and healthy operations, improved stability and a stronger future for this company. And this quarter\\u2019s strong outcome is a result of the dedication and focus of each of our teams as we faced the challenges of the COVID-19 pandemic and the resulting economic downturn. We may not be able to control the macroeconomic factors that drive the price of our products, but we are aggressively executing on the items within our control. And while uncertainty continues, I am confident that our teams will innovate and improve to adapt to future situations.\\nBefore we get into the details though, I want to begin as I always do with safety, our most important metric and vital for our continued success. We had no serious injuries this quarter and we continue to manage the risks from the pandemic and to maintain healthy, safe and stable operations.\\nOf course, one principle of our safety program is that we must never rest comfortably, especially with the risks posed by this virus in the increasing case counts in some jurisdictions, where we have important operations such as the United States and Brazil.\\nWe are confident however that we have put the right measures in place to protect our people and we have well developed reaction plans if the situation should worsen. To put these latest financial results in context, it\\u2019s important to remember that we have established three simple strategic priorities for this company, to reduce complexity, drive returns and advance sustainably and they have helped us navigate this period from a position of relative strength. Late last year before the pandemic started its global spread, we laid out a plan to improve our cost structure with a new operating model, which is now fully implemented and started a review of our global asset portfolio, including our existing production capacity and non-core assets. This plan will improve our portfolio and allow us to remain competitive in a fast evolving marketplace and to succeed in a world that is becoming more focused on sustainably and responsibly produced products. It offers us a roadmap to follow as we manage the impacts of the current market, while not losing sight of our longer term strategy.\\nNext, I would like to highlight the resilience and strength of our operations teams as evidenced by a number of achievements in the second quarter. Overall, our production is up year-over-year in all three segments. In bauxite, we realized a production record for the first half of the year and in alumina, we recorded a quarterly record for average daily production. In our aluminum segment, our Becancour restart continues to advance and we are progressing with safe and orderly curtailment of the Intalco smelter in Washington state. We reached an agreement with the workers union for severance to help mitigate the impacts of this decision, which was necessitated by significant structural issues that made the facility uncompetitive. Meanwhile, we are currently in the midst of a 30-day consultation with the works council that represents employees at the San Ciprian aluminum facility in Spain. No formal decisions will be made until we complete this negotiation process.\\nDuring this pandemic, we have worked across our company to help create a safe, healthy and productive environment in our operations. This teamwork in conjunction with our supply chain, commercial and financial teams helped to drive our cash balance to $965 million to good operating performance and smart management of our working capital. Also last week, we issued $750 million of senior notes with a coupon of 5.5%, a rate lower than any of our other debt. This will provide even greater liquidity during these uncertain times and will allow greater flexibility to potentially accelerate our portfolio review, including making sure that non-core asset sales are executed at the right time and the right price to deliver maximum value. Put simply, through actions taken across our company to generate cash and by tapping the debt markets at a favorable time, we are in a stronger position to do what we have said, complete our portfolio review as soon as possible over the next several years, generate cash from non-core assets and reduce net debt.\\nBefore we begin the deeper discussion of markets, I would like to provide some additional information on our response to the COVID-19 pandemic.\\nAs I mentioned earlier, all of Alcoa\\u2019s global locations continue to operate stably, whether it be a bauxite mine, alumina refinery, aluminum smelter or rolling mill.\\nImportantly, we have been able to maintain the stability, because of our focus on the health and safety of our workforce. Globally, approximately 2% of our employees and contractors have been affected by the virus. Thankfully, most have already recovered and returned to work. The fact that we have had a relatively low number of cases among our workforce is a testament to the measures we implemented early and of course what we continue to do.\\nFor example, we were one of the first companies to restrict travel for our global employees. In February, as the global risks started becoming more apparent, we triggered our global crisis response team and implemented our crisis management plan. By early March, we had deployed a comprehensive approach to protect health, while simultaneously conducting supply and staffing contingency planning.\\nOn the left hand of the slide, you will see a chart that gives a glimpse of the very robust approach we have used to manage through this pandemic.\\nFirst, we have a global crisis management plan that provides a solid framework to guide decision-making and protect our company. That\\u2019s supplemented, in this case, with a health prevention response plan developed with best practices and was input from our own medical experts and external sources.\\nWe also have business continuity plans for our locations. They are designed to ensure continued critical supplies, logistics and operational needs. This feeds into our global regional and location crisis response teams and allows them to anticipate potential risks and ensure response plans are utilized whenever appropriate.\\nWe have playbooks on how to effectively operate based on increasing levels of stress. We consider leading indicators such as the number of employees who are self-quarantining and isolating, infection rates in the local community and inventory levels of critical raw materials. Lagging indicators include items such as cases of coronavirus infections, among location employees, absenteeism, government directives and other factors. From all of this, we assign a response level and deploy additional and appropriate actions.\\nAs of today, we have locations that have reached Level 2 during this current health crisis. But due to our effective response, none have progressed to implementation of all Level 3 actions.\\nWhile this is a simplified depiction of our COVID-19 response, the team\\u2019s actions to-date, have made a real difference and have helped us to avoid any significant impact to our operations or our supply chain. But this crisis continues and we will not let up our guard as we remain focused on protecting the health and safety of our workforce.\\nImportantly, throughout this pandemic, we have also responded to assist the communities where we operate both through the Alcoa Foundation and our company\\u2019s resources. I am proud of the work that has taken place on a humanitarian level as it further illustrates our Alcoa values in action.\\nNext, we will discuss our three segments and how they performed in this quarter.\\nAs noted earlier, our change in operating model and selected strategic priorities have been designed and executed with an eye to strengthen our operational performance. Across all segments and despite the disruption of a pandemic, we have improved operational stability this year and that is driving increased output and improved productivity. This has been achieved through strong collaboration across our operations and centralized resources, leveraging our technological expertise, information systems and the creativity of Alcoans to accelerate our productivity program.\\nOur Centers of Excellence are supporting sustainable cost saving improvements that can be leveraged globally. Key focus areas include reducing raw materials usage and energy consumption, improving maintenance strategies to increase availability and rigorous cost control. In bauxite, production is improving year-over-year. The segment had a first half production record in Juruti mine in Brazil had a quarterly shipment record.\\nFor the alumina segment, we are seeing improved stability at the refineries when compared to 2019.\\nIn fact, the segment had a record rate for metric tons per day in the quarter. Meanwhile, both the Wagerup refinery in Western Australia and the Alumar refinery in Sao Luis, Brazil set first half production records. In our aluminum segment, improved operational stability is helping to drive increased output. Contributing to the increase is the ongoing restart of the ABI smelter in B\\u00e9cancour, which is now approximately 90% complete and should be finished in the third quarter. From a commercial perspective, in our aluminum segment, we discussed last quarter, the year-over-year decrease in value-added aluminum products as a result of the economic impact of the pandemic, which includes specific foundry alloys or shapes, such as rod, billet and slab. This volume shifted to commodity grade ingot.\\nWhile value-added product sales are expected to remain relatively flat in the third quarter and continue to be depressed from the prior year, we are seeing some improvement in foundry alloy orders as automotive production in Europe and North America resumed after widespread production outages due to the pandemic.\\nFinally, on this slide, we continue to monitor the discussions regarding the United States 232 tariffs on aluminum. We believe that tariffs do not address the fundamental challenge of the industry, which has been unfairly subsidized aluminum overcapacity in China.\\nNow, let\\u2019s review our markets. Aluminum demand is starting to show some signs of recovery based on monthly data for some key end use sectors, particularly in China.\\nFor example, Chinese passenger vehicle production was up more than 11% in both May and June when compared with the same months last year. The most recent data on construction activities in China are also better than the monthly levels in May of 2019. Aluminum scrap shortages also supported a temporary boost in primary aluminum consumption in China in Q2. The shortages have been a result of China\\u2019s import quota system for scrap as well as earlier COVID related disruptions to scrap supply chains. The scrap shortages and the increases in aluminum end-markets like automotive and construction all contribute to the recovery in Chinese primary aluminum demand, which has also been supported by general improvements in domestic macroeconomic outlook and government stimulus announcements. Outside of China, high level manufacturing and aluminum end-market data also showed signs of improvement in North America and Europe in May and June as automotive plants got back to work and manufacturing orders continued to recover. From a supply perspective, there have been some curtailments globally, but not enough to starch the rise of aluminum inventories in the first two quarters of 2020. In the first half of this year, smelters cut a little more than 1 million tons of annualized capacity in China, of which 400,000 tons has restarted, leaving 700,000 tons of annualized capacity still down. Outside of China, we have seen cuts of 600,000 tons of annualized capacity, including Intalco. Of that total, 100,000 tons have started in Brazil, leaving 500,000 tons of net cuts. With a recovery in demand, the pace of the inventory build slowed in the second quarter relative to the first quarter and inventories decreased substantially in China, with close to 1 million ton drawdown in total stocks given the strong demand rebound.\\nGiven these dynamics, Chinese aluminum prices have led the charge during the second quarter in the price recovery, although we noted across the board improvement relative to April\\u2019s lows. Higher Chinese aluminum prices have brought significant levels of aluminum smelting production back into cash positive territory. In the month of June, only 1% of Chinese smelters were cash negative.\\nWhile prices have increased from April lows, costs have also increased over the last 2 months, keeping 15% of ex-China smelting capacity and global refining capacity in cash negative territory in June.\\nOf course, the market remains fluid. It will be important to monitor supply demand inventories and pricing dynamics.\\nAs we discussed in our last earnings call, the ability to deliver aluminum into inventory provides a needed outlet in times of oversupply, but can quickly become a long-term drag without any reaction to basic demand fundamentals.\\nLooking forward to the second half of 2020 and beyond, what is clear is that the ultimate market balances and industry fundamentals will be determined by a few factors.\\nFirst and foremost, how well the spread of COVID-19 is managed around the world. If the number of virus cases increases substantially in a prolonged first or potential second wave, a new round of strict lockdown orders would likely cause the current demand recovery to reverse course.\\nSecond, assuming COVID-19 remains under control, the speed of economic recovery will be influenced by levels of government stimulus and the resumption of activity after lockdowns or other restrictions.\\nThis quarter, we saw signs of demand recovery well on its way in China and turning the corner outside of China in data across aluminum\\u2019s broad set of end use markets, which includes transportation, construction, packaging, machinery, electrical and consumer durables.\\nThird, how industry players independently react to the pricing and demand environment as it shifts and changes and the resulting build or release of global inventories.\\nNext, before Bill discusses our second quarter numbers, I want to very quickly recap the programs we\\u2019ve laid out, both before and during this current crisis to improve Alcoa. I\\u2019m pleased that we started deploying many of these actions early to help us navigate through uncertain times and contribute to a stronger future. At the top, we announced in October key strategic actions that included a new operating model, a plan to generate additional cash from the sale of non-core assets and a review of our production portfolio, focused on 4 million metric tons of global refining capacity and 1.5 million metric tons of smelting capacity.\\nAs noted earlier, we are making progress on many of these actions.\\nNext, in the middle of this chart, in February of this year, before the coronavirus became a global pandemic, we announced plans to drive leaner working capital and implement annual productivity improvement. There too, we are making strong progress. And finally, we continue to manage cash to mitigate the economic impacts associated with COVID-19.\\nAll of these initiatives are expected to total $900 million in cash actions this year and consist of projects and ideas of all sizes. What is certain is that Alcoans around the world are focused on the right things, health, safety and the stabilization and improved productivity of this company.\\nSo, with that, I\\u2019ll pass it to Bill.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy. This Monday, we closed on a $750 million 5.5% coupon senior notes issue.\\nGiven our strong liquidity position, I want to provide additional color regarding the rationale behind the new debt issue. This debt issuance provides increased financial flexibility to meet the short-term challenges of these uncertain times, while we continue to hold to our capital allocation framework, using excess cash to achieve our mid-term proportional net debt target, return cash to shareholders, transform the portfolio or invest in value-creating growth projects.\\nNow, let\\u2019s look at the quarter.\\nSecond quarter 2020 revenue was down $233 million sequentially on lower aluminum and alumina prices. The net loss attributable to Alcoa Corporation was $197 million or $1.06 per share. The adjusted net loss was $4 million or $0.02 per share. Special items in the quarter included interim tax impacts due to changing assumptions of full year profitability and the resulting tax rate, the Intalco curtailment and Becancour restart costs. Also on an adjusted basis, the second quarter operational tax rate was 178.3% primarily due to a true-up of the prior quarter tax rate to the new full-year tax rate. Adjusted EBITDA, excluding special items, was $185 million, generating an EBITDA margin of 8.6%.\\nLet\\u2019s look closer at factors driving adjusted EBITDA. Adjusted EBITDA, excluding special items, declined $136 million in the second quarter. Market price impacts totaled negative $215 million and included lower metal prices, lower alumina prices and a weaker US dollar due to a partial reversal last quarter\\u2019s favorable revaluation impact. All other factors netted to positive $79 million and reflect strong operating results. Lower production costs, favorable raw material and energy costs and improved volumes were partially offset by weaker sales mix in both aluminum and alumina. Other improvements of $25 million included lower SG&A costs due to implementing the new operating model, favorable inter-segment eliminations and reduced transformation spending. In the operating segments, bauxite EBITDA improved $11 million sequentially on higher shipments. In alumina, lower alumina index pricing and unfavorable contract mix combined with unfavorable currency revaluation to drive the change, while on the operating side, lower raw materials and energy costs and lower production costs were favorable partial offsets. In the aluminum segment, lower realized metal prices and value-added product sales were partially offset by substantially improved production costs, as well as lower input costs including alumina, smelter energy and carbon. EBITDA impacts outside the segments improved $54 million, led by a $38 million sequential improvement in inter-segment eliminations primarily due to lower alumina prices, lower other corporate costs because of reduced overhead and transformation spending control.\\nMoving to cash, overall, cash performance was very strong. We generated $288 million of cash from operations, $211 million in free cash flow and ended the quarter with $965 million on the balance sheet, up $136 million from the first quarter and $131 million from the year-ago quarter. A quick review of our major cash sources and uses for the first half of 2020.\\nOur total cash sources were $830 million, consisting of $506 million in adjusted EBITDA, $199 million in net proceeds from asset sales and $125 million from working capital reductions. Largest outflows of cash were $168 million of capital expenditures, $123 million of tax payments, including $47 million in payments of prior year income tax and net distributions to our joint venture minority interest partner of $90 million.\\nNow, let\\u2019s take a look at other financial metrics.\\nFirst half 2020 free cash flow, less non-controlling interest distributions, improved to negative $60 million as second quarter free cash flow less NCI distributions was positive $152 million. One reason for the cash flow improvement was favorable working capital sequential reductions of $275 million. This improvement was even better than expected, and our days working capital decreased seven days both sequentially and year-over-year to 24 days.\\nAnother improvement with capital spending control, our first half 2020 capital expenditures totaled $168 million.\\nSecond quarter CapEx was $14 million lower than the first quarter.\\nOur key balance sheet metric proportional adjusted net debt remained at $3.3 billion. Re-measurement of all pension and OPEB assets and liabilities typically occurs at year end.\\nHowever, due to plan changes related to the Intalco curtailment, approximately 40% of our pension liabilities was re-measured as of April 30, 2020 and was the key driver increasing the net liability $100 million as of June 30. Year-to-date, our pension asset returns have been approximately 0% and discount rates are down roughly 35 basis points for pension and 60 basis points for OPEB. If asset returns are at targets in the second half of the year and discount rates and all other factors do not change, we would expect the pension and OPEB net liability to increase approximately $200 million from the current $2.4 billion.\\nTurning to our $900 million cash actions program, we are continuing to make solid progress on our announced cash action. In key strategic actions, we are pleased to see the run rate savings from the new operating model reflected in lower second quarter SG&A and R&D costs, which declined $19 million compared to the first quarter. The non-core asset sale program continues, and while COVID-19 has impacted some sales activities, we are holding to our timeline and cash proceeds targets. The Intalco curtailment is under way, and we expect to have the full curtailment completed in the third quarter. The San Ciprian smelter formal consultation process is also under way, and we expect the outcome to be determined within the next several weeks.\\nOn the 2020 programs, we have made excellent progress on working capital reduction, and as you saw in our strong second quarter cash flow, are already substantially ahead of our full-year target.\\nOur production costs and operations efficiency program is gathering steam, being led by volume-based cost reductions. On COVID-19 response, our capital expenditure and environmental and ARO spending targets are on track.\\nWe are deferring US pension funding in the 2021 as planned and other cost reductions or deferrals are also on target.\\nFinally, let\\u2019s review our full year outlook for 2020.\\nOur full year 2020 outlook has only modest adjustments and is our best current estimate notwithstanding the evolving COVID-19 situation. On earnings, below the EBITDA line, we expect depreciation expense to improve to $665 million due to foreign currency rates and lower capital spending.\\nWe expect interest expense to increase to approximately $150 million as a result of our new debt issuance.\\nWe are not providing an outlook for the full-year operational tax rate.\\nHowever, based on recent prices, we expect operational tax expense in the third quarter to be approximately $150 million.\\nFor cash flow impacts, we are adjusting slightly our capital expenditures estimate, increasing return-seeking capital $10 million to $35 million as we wind down those projects and reducing sustaining capital spending $10 million to $340 million.\\nOur prior year and current year cash taxes remain the same as in our previous outlook, but do not include the deposit of $74 million or $44 million Alcoa share expected to be made with the Australian Tax Office to contest a recent tax assessment.\\nWe expect no further cash impacts from that assessment until it is ultimately resolved. In the appendix, we also list additional considerations expected for the second quarter. They include in the bauxite segment, adjusted EBITDA is expected to be $5 million lower, primarily due to lower export volume, in the alumina segment, we are expecting higher energy costs in Australia to be partially offset by higher sales volume and lower costs, netting to $15 million lower sequential EBITDA impact; in the aluminum segment, lower alumina costs are estimated to produce a sequential benefit of $10 million.\\nAside from potential metal price or currency impacts, other factors are expected to be flat sequentially.\\nSo with that, let me turn it back to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"In closing, I want to step back and reinforce the reason behind all of this act, a brief look at our destination.\\nDuring this pandemic, we had a relatively strong second quarter. And despite the current situation, we are not losing focus on our strategy or objective.\\nWhile many things are difficult to predict today, Alcoa is unwavering in its commitment for continued improvement.\\nOur three strategic priorities provide a road map for the future. We reduce complexity, so we can be low cost. We drive returns with a focus on improved margins across our products, and we intend to advance sustainably in all aspects of our business, economically, environmentally and socially.\\nAs we advance, we are driving for actions to strengthen our balance sheet, create a cycle-proof portfolio of assets and build upon our strong reputation for environmental and social excellence, including demonstrating the value we bring to our communities and our commitment to a diverse and inclusive workplace.\\nIn terms of our portfolio, we will continue to drive value through our extensive, high-quality bauxite reserves, sustainable mining practices in our low-cost portfolio of efficient mines.\\nWe will maintain our position as the lowest per ton carbon producer in alumina and protect our first quartile cost position in this segment. With our portfolio review, we will improve the cost structure of our aluminum business and become the lowest per ton carbon producer in smelting. The goal is to drive Alcoa to be sustainable, both financially and environmentally. There are three major points I want to leave you with.\\nFirst, we will continue to prioritize the health and safety of our global workforce. This commitment allowed us to deliver solid performance in the quarter, despite the challenges the world faces from COVID-19.\\nSecond, we remain committed to continuous improvement regardless of the circumstances.\\nWe\\u2019re already improving our costs, boosting our output, driving gains in working capital and implementing sustainable year-over-year improvements in productivity.\\nWe are also focused on continued management of cash, evidenced by our balance of $965 million at the end of the quarter.\\nThird, we will act smartly and use our increased liquidity to navigate through these times, while we strengthen our portfolio of core assets and improve our balance sheet in accordance with our capital allocation framework.\\nWhile the pandemic has changed much in how the world currently works and interacts, we remain steadfast in our commitment. Thank you. Bill and I will welcome your questions now. Operator?\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you. [Operator Instructions] And our first question will come from Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, Roy and Bill. Thanks for taking my questions. I hope you are well.\\nFirst question I had is just on the tax ruling, the ATO just start to some more details on the actual announcement from last week and also whether you could talk about both the principal and the interest part of that in the context of potentially using the interest as a tax shield later on? And my second question is around the guidance for the bauxite was obviously quite a lot different to what you provided at the end of 1Q and that\\u2019s primarily driven by the volumes.\\nSo I just wondered if you could comment on that as well exactly some of the moving parts and how that was so strong in the quarter? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Roy, do you want to address the preliminary comments on the tax ruling?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. I can\\u2019t. I wasn\\u2019t sure if it was headed in the financial direction or more in general.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, and I will take it from the financial direction.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Perfect.\\nSo from a ruling standpoint, I think, it\\u2019s a \\u2013 it stretches pretty far back in time, and so that is what is driving both the principal calculation and then the interest calculation. I will leave that to Bill to talk through.\\nThe important thing here, Chris, and I appreciate the question is that we are at the start of a process by which we plan to very much object to how that reached this conclusion. And it\\u2019s very basic, we simply don\\u2019t agree with their assessment. We don\\u2019t agree with the way that they\\u2019ve chosen to calculate it nor that there has been any underpayment of taxes over these years.\\nAnd so, that is \\u2013 this will be a process that takes place over the next period of time, and we fully believe that we can reach a positive conclusion on this. And Bill, maybe you want to jump in on the financials?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, let me just address some of the numbers, Chris. And these are U.S. dollar numbers, not Aussie dollar numbers, but obviously the assessment and the interest is in Aussie dollar, but we converted it to U.S. dollars for the purposes of our disclosure. The 100% basis would be $147 million on the assessment, $488 million on the tax both of those are the 100% AofA numbers.\\nIf you then translate those to Alcoa share, that would be $88 million of tax and $293 million of interest.\\nAs part of the process, we will, I should say, Alcoa of Australia will be paying part of the tax upfront.\\nSo they will be making a payment of $74 million in the third quarter; of which, Alcoa share is $44 million.\\nJust to reiterate Roy\\u2019s points, we will be disputing this. I speak for AofA. AofA will be disputing this. It could take years to resolve and we will dispute it all the way through.\\nSo we don\\u2019t feel that their position is correct and therefore we will dispute it. And I will address your second item.\\nAs far as bauxite, bauxite did turn out better than what we had signaled. The bauxite was really driven by two things. One is inter-company shipments were better and that\\u2019s because the refineries are running well. And then secondly, our minority partnerships did a little bit better in the quarter than what we had anticipated, specifically CBG.\\nSo overall, the results of the bauxite segment were pretty strong.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay, thanks.\\nAnd so just for the interest of the $488 million is \\u2013 can you start using that as a tax deduction and can you use that to forward settled.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I should have addressed that, Chris. I meant to address it. Yes, the tax is deductible immediately upon the assessment.\\nSo we will start using that AUD700 million as a tax deduction in AofA and that will, ultimately, drive a better tax position in the near-term for AofA.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"And then, if you successfully overturning this, you\\u2019d then have to reverse that, so you stop getting deduction even before there\\u2019s settlement on that?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Exactly. And the other piece that I should have probably noted is that we have not accrued anything for this simply because we think we\\u2019re more likely than not to prevail.\\nSo no accrual was taken in the second quarter associated with this assessment.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"So what\\u2019s the sort of timeline of events here? When should we expect the next update and how does it likely play out? How many more steps are there in that process?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"There is a number of steps in the process. I would tell you at this point, Chris, we are evaluating what our next alternatives are and we\\u2019ll keep you updated as we go through the process.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. Thanks, guys.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Chris.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Alex Hacking with Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Yes. Thanks, Roy and Bill. I guess just to follow-up on Chris\\u2019s question there on the taxes, not sure if you can answer this, but the High Court in Australia ruled against BHP Billiton on kind of a transfer pricing issue related to their operations in Singapore a year or two ago. I mean, does that create a precedent or you guys can also kind of take this all the way to the High Court in Australia, if necessary? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Alex, let me answer that one.\\nSo, I think, each case has its own set of specific circumstances.\\nAnd so, for this particular case, I think it has a very different set of \\u2013 it\\u2019s a very different market first of all. And number two, our approach to transfer pricing has been very transparent through time.\\nAnd so, with aluminum pricing has developed through time, those pricing mechanisms.\\nAnd so we\\u2019ll be continuing to discuss that with the tax authorities. And we believe that we will continue to go through those various stages and levels as Bill had alluded to and that if it continues finding against us, then we will take it all the way through to the Supreme Court.\\nSo I think it\\u2019s \\u2013 there are no precedents that would say that this is a pre-decided case.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay. Thanks very much. And then a second question, if I may. Maybe you could comment on your Brazilian operations and how you\\u2019re finding the COVID situation down there. Obviously, there\\u2019s a lot of headlines about some of the challenges Brazil has been facing, but looking at your results, it seems like you\\u2019re able to keep your operations going.\\nSo maybe some comments there would be helpful. Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Alex.\\nAnd so, we have multiple operations in various parts of Brazil.\\nSo I can give a little color on each of them, but much of it\\u2019s going to be the same. Particularly, in Northern Brazil, where we have the Sao Luis joint venture, the Alumar plant and then, we have the Juruti bauxite mine, and then the joint venture that we\\u2019re not operating on but partners in at the MRN mine just across the Amazon River. Across all of those locations, we are being extremely careful and extremely watchful, because we have had, particularly, in the northern cities some community spread of the virus.\\nAnd so, we have put into place a bunch of reaction plans in order to make sure that we are carefully keeping people social distanced in our operations and that is the same for our contractors as it is for our employees.\\nWe also have a series of mechanisms in place where we changed shift structures, so that we can isolate as much as possible to keep people not necessarily mingling and therefore, that gives us a lot of strength inside of how we\\u2019re running the operations. I would also say is that there has been a lot of effort put into place to make sure that we\\u2019re keeping our workforce up-to-date on what\\u2019s happening, talking to them about what they need to do as far as preventing this happening inside of their homes, although obviously we don\\u2019t reach into their homes. And I would say that we have done a very good job of keeping our folk at work and actually coming and doing their jobs and doing it safely.\\nSo from an absenteeism perspective, we are continuing to see improvements. We did sort of at the very beginning of the outbreaks in Brazil start to see those numbers creep up some. And that really includes both people that are quarantined, because they might have been exposed or people that have other similar symptoms that could either be the flu or COVID.\\nAnd so, we have been very careful to make sure that people could choose not to come to work and could isolate themselves and that then keeps it from spreading inside of our working population. And we are now seeing those absenteeism rates come down.\\nAnd so, from a Juruti standpoint or Sao Luis standpoint, both have some spread of COVID inside of the communities, I would say that the actual occurrence inside of our plants themselves is significantly more modest than what we are seeing out in the communities. And we have seen no impacts to production, and in the end, I think it\\u2019s a joint effort of all of our operators, all of our mechanics and our management.\\nSo I am very proud of the team.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Thanks. That\\u2019s very helpful. Good luck.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks. Thanks, Alex.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Operator, do we have another question?\"}, {\"speaker\": \"Operator\", \"content\": \"Yes, sir.\\nOur next question will come from Carlos De Alba with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"Thank you very much. Good afternoon, Roy and Bill. I hope you guys are doing well.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hi. Carlos.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"So, the progress year-to-date on working capital has been quite impressive. I wonder you can comment a little bit more what exactly you were able to do to achieve these results. And also you mentioned I think I heard that you are ahead of your target. Do you expect to keep these gains that you have been able to book or to print or do you expect maybe to give back some of that as the year progresses? And then my second question would be in terms of what \\u2013 maybe Roy, what have you heard in terms of the potential restatement of Section 232 tariffs on Canadian smelting imports into the U.S.\\nSo \\u2013 I mean, you already mentioned that you don\\u2019t think that, that should be applied, but have you heard of any feedback in your conversations with people in Washington?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Let me take the first one, Carlos. We did have really good performance in working capital in the second quarter. And there is really three things that were driving that performance. And I will start with, to me, what\\u2019s probably the most important. The new operating model that we launched at the \\u2013 toward the end of last year has allowed us to look at working capital from end to end. And it starts with purchasing of raw materials and it ends with receivables from customers. We got a commercial organization that is looking at the entirety of working capital throughout the entire system and that has allowed us to aggressively pursue all three levers of working capital: payment terms both on the customer and the supplier side, and inventory.\\nSo that\\u2019s \\u2013 that would I would say the item number one.\\nThe other two items, which are large impacts also is clearly with the decline in prices, raw material prices, finished goods prices that has had a favorable impact on working capital. And then, thirdly, the shift away from value-add products, which is on a margin perspective, not a positive impact for us, but on a cash flow impact, the shift to selling commodity-grade P1020 means that we get cash quicker.\\nSo, all three of those things added up to the impact in the second quarter.\\nAs far as whether we will do better in the second half, that first item that I addressed, the new operating model, we will continue to work to looking for improvements even from these low levels of working capital. But I would say, if anything, they may be working against higher prices. If we continue to see this trend of pricing being higher, they will have to work to offset some of the higher prices.\\nSo we are sticking with our target of $75 million to $100 million of days working capital improvement even though we have at this point beaten that through the first half, but we will be offsetting some of these better market conditions. And Roy, I\\u2019ll turn the 232 question over to you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Absolutely. And, Carlos, I would love to be able to give you a definitive answer on where we are going to land from a 232 perspective, but the fact is that we continue to hear very different potential outcomes on a daily or even hourly basis. Stepping back and looking at what Alcoa\\u2019s position has been through this, what we would really like to do is ensure that we are driving to fix the root problem, which is very much the fact that we have an overcapacitized environment, particularly in China and that subsidization goes all the way through the value chain is simply overwhelming from a Chinese perspective.\\nAnd so, stepping back and trying to address the underlying issues at play is what we have been \\u2013 what we have been trying to message and drive over the course of these years really as a stand-alone company and probably before that.\\nWe have been trying to be as clear as possible with \\u2013 and this is through the Aluminum Association or through the Canadian Aluminum Association or directly with the administration and anybody who listen that really the solution here is to try and work on those deeper problems and that from a Canadian tariff standpoint, because of the close relationship and in many ways symbiotic relationship between products produced in Canada and the U.S. and the customers across the U.S. and in Canada, of course, is simply doesn\\u2019t make sense that there is a tariff that that tariff that 10% is reinstated there.\\nSo again, I don\\u2019t think I have a \\u2013 I wouldn\\u2019t hazard a prediction at where we land, nor what the rules of that potential reinstatement could look like because I have also heard a lot of different potential options there. But in the end, Alcoa is going to keep talking about what is the underlying issues at stake and looking for ways to address those across multiple jurisdictions.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"Alright. Good luck. Thank you very much.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Carlos.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question will come from Lucas Pipes with B Riley, FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Hey, good afternoon everybody and good job on managing this very difficult environment and liquidity so successfully last week. I was a little surprised just kind of given what happened during the second quarter that in two of your segments for Q3, you are guiding to kind of modestly lower performance. And I wondered is there a degree of conservatism, pricing lags, would it be possible to give a little bit more color as to what exactly is going on there kind of quarter-over-quarter? Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, Lucas, in the bauxite segment, we had a really strong second quarter.\\nSo we are projecting it to be $5 million lower. We do have an outage at the Juruti facility in the third quarter that will limit some volumes.\\nSo, that\\u2019s really probably the biggest impact between the second and the third quarter. In the Alumina segment, one of the big changes that is going on is that, you know that we have \\u2013 that a number of years ago, we entered into long-term gas contracts associated with our Western Australian refinery. Those gas contracts are coming to in effect in the third quarter. Those gas contracts will have a negative impact on the segment approximately on a third quarter versus second quarter look of about $40 million.\\nSo when we are projecting the Alumina segment to be $15 million lower, and I should say that $15 million lower, exclusive of any changes in alumina pricing, but \\u2013 and that\\u2019s how we always projected. The segment itself is projecting pretty strong performance, because it is looking to at least partially offset some of those higher gas costs that will be rolling through in the third quarter.\\nSo that\\u2019s what\\u2019s going on in those two upstream segments.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Very helpful. I appreciate that. Then for my second question, I wanted to touch on something that you had discussed previously.\\nNow, during the quarter, there has been an announcement that the LME has launched green aluminum contracts. And have you had qualification discussions and do you think this could help open up a premium for green aluminum quicker than previously expected?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Lucas, and it\\u2019s a good question. The fact is, I think, it\\u2019s very much still under development. I would argue that the way that they are approaching it is sensible.\\nWe have been \\u2013 we have been trying to think through how best we can make this whole green aluminum market really start to move into a premium environment, because, as you well know, we are one of the lowest carbon per ton producers of aluminum and are quickly running toward ensuring that we are the lowest whether that\\u2019s through portfolio change or through the ELYSIS work that we are doing as well.\\nSo, I think the LME work is going well, and from a qualification standpoint, I think. And it depends upon the specific plant in question, but I would argue that we are very well positioned for that. I would also say that the ASI, the Aluminum Stewardship Initiative is also something that is very much on our radars as a way to look through the entire value chain, which from our perspective, because we go from bauxite to alumina and to aluminum, we think is quite important, because it can help drive the right behavior across all lines of that value change. And I would add one more piece to it as well, which is also the fact that I think the market and whether it\\u2019s being driven by consumers or more and more driven by investors and not just European investors, but also our U.S. investors now, I think there is a quicker drive to demand more accountability and that in the end, still can\\u2019t say when will that green premium develop, and when will lower carbon emitters have the benefit of that lower carbon story. But I would argue that we are seeing the stars align very quickly to make that more and more important, which just reiterate the fact that our shift in our portfolio and our \\u2013 are very much targeting both financial, but also very much environmental sustainability is \\u2013 helps to get us in the right place to benefit from that the most.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"I appreciate all the color and continue best of luck. Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Lucas.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions] Our next question will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you.\\nYou correctly predicted 3 months ago, the high value markets would weaken.\\nLooking at your ingot realization in the quarter, it looks like it\\u2019s a $0.01 less than a $0.09 Midwest Premium Plus ingot \\u2013 LME ingot lagged one month.\\nSo, is it fair to say that there were no high value-added shapes like extrusions and no high value purity and alloys and maybe some kind of transportation costs settlement or provisional pricing or some negative penny adjustment?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I don\\u2019t think so, John. There was \\u2013 the value-add shipments in the second quarter were substantially less than what was in the first quarter. The value-add shipments went what we had historically talked about percent of value-add from the \\u2013 to be approximately 50% to 55% and that we have seen a 20% reduction in value-add.\\nSo, we continued to ship value-add in the second quarter and are actually seeing, I think, as Roy alluded to in his comments, a little bit of strength and things like the foundry markets going into the third quarter. I would suggest to you that when you are doing that math that the lags aren\\u2019t completely perfect and you can\\u2019t necessarily take a 15-day lag on the LME and make it quite that precise, but there was still value-add products being sold in the second quarter, just not nearly as high as first quarter.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, John.\"}, {\"speaker\": \"Operator\", \"content\": \"And for our last question today will come from Paretosh Misra with Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Hi, Bill and Roy.\\nJust a question on demand and order book.\\nSo, can you talk about what are some of the signs of demand improvement that you are seeing in your Aluminum business and how is the order activity progression in the last 2, 3months, including what you have seen in early July versus what\\u2019s maybe typical for this time of the year?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. And Paretosh, I am going to have to give you some qualitative answers to that, because I think we are just starting to see some of that positive movement.\\nAnd so, let me first make one quick caveat that as we think about our primary markets, and much of them is in the U.S., of course, and Canada, but then also into Europe.\\nAnd so, it\\u2019s in both of those places where you are starting to see a lot of reopening activities, you are seeing a lot of \\u2013 or we are seeing a lot of our customers come back and start to demand and there are some that we are still buying through the downturn and some of that is contractual, some of it was actual demand.\\nAnd so you have to work your way through some built-up inventories inside of our customers. But as we look where we stand right now in July, I would argue that both in Europe and in North America, we really are starting to see those \\\"green shoots\\\" and we are starting to see that our customers are talking about more and more ability to reconnect with their automotive customers with the different parts of the end \\u2013 aluminum end markets that happen to be there. The one concern that I would voice is that I think everybody is still waiting to see how from a U.S. perspective how from \\u2013 in various European countries, how we can make sure that we are taking the right steps, so that we don\\u2019t see a relapse or don\\u2019t see some additional closures because of COVID becoming more serious in different parts of the world. But right now, I think what we look to in an optimistic case is to see as much of an economy roaring back much like it did in China.\\nWe are still a few months behind that, but it would be nice to see that both North America and Europe can follow a similar type of curve to what we have seen really in China up until now. I am very pleased with how China has gotten all of it\\u2019s sort of aluminum end use markets very much in line and very much productive again.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Thanks. Thanks for the detailed color. That\\u2019s very useful. And maybe a follow-up on how does the oil price impact you, like, what are the main derivatives that you buy? And are you already benefiting from that or is that more of that to come in the second half of this year?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So, Paretosh, we actually provide sensitivity to oil price in the appendix. I am looking to see what chart it\\u2019s on, but there is a breakdown of our cost structure and how oil prices impact our results on a quarterly basis.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Great. Thanks, guys.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Paretosh.\"}, {\"speaker\": \"Operator\", \"content\": \"This concludes our question-and-answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks. Please go ahead.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Thank you operator. I would like to thank everyone for their time and attention today. I know there\\u2019s a lot going on.\\nSo I really do appreciate the fact that you take a few minutes to look through what\\u2019s happening in Alcoa. I am very pleased with Alcoa\\u2019s response in these unprecedented times. I am proud to be part of a moment where we can truly accelerate some of our actions and where we can have very \\u2013 a very clear side of focus on where we are going and what we need to do in order to make this company more competitive, but also more sustainable for the long-term.\\nSo, I look forward to explaining more and talking more about how that is developed at our next earnings session and would like to ask everybody to please be safe, healthy and we will talk to you soon. Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference has now concluded. Thank you for attending today\\u2019s presentation.\\nYou may now disconnect.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2020-10-14
year: 2020
quarter: Q3
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation Third Quarter 2020 Earnings Presentation and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today\\u2019s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you, and good day, everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer.\\nWe will take your questions after comments by Roy and Bill.\\nAs 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.\\nIn 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.\\nFinally, as previously announced, the earnings release and slide presentation are available on our website. With that, here's Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim, and thanks to everyone for joining our call today. Despite what had been turbulent and unpredictable circumstances this quarter, I am proud to report that Alcoa's performance has been strong. A few examples of this quarter's accomplishments include: increasing sales revenue underpinned by improving prices and solid production, successful efforts to reduce our cost structure and continued progress on a comprehensive set of measures that are improving our company for the long term.\\nLet me begin my discussion with our most important initiative, safety. I'm happy to report that we had no serious injuries in the quarter. The priority we've placed on safety, which includes a systems based approach to risk mitigation, is fundamental. The careful attention to details and to potential risks, including clear mandates to seek help when necessary, has worked to keep people safe during these uncertain times.\\nImportantly, getting safety right allows us to perform well in other aspects of our business.\\nWhile we continue to follow health-based protocols to mitigate the risks from the pandemic, our teams are also staying focused on the everyday items that can create unsafe conditions. We recognize that the pandemic can create distractions.\\nSo we are consistently communicating the importance of being laser-focused on the tasks at hand and completing pre-job briefings, as an example, to ensure we have adequate safety controls in place before ever beginning work.\\nAs far as the risks posed by the pandemic, we've had a relatively low number of cases across our company since the pandemic began, and most who are diagnosed have now fully recovered and returned to work. Meanwhile, we're not becoming overconfident as some countries experience a rise in cases, our global and regional crisis response teams remained active.\\nOur locations are continuing to refine and update their preparedness and response plans to ensure that they are a fit-for-purpose as local or regional conditions change. Put simply, the safety and well-being of our global teams remain our top priority.\\nAs we move through our presentation today, you'll see that we continue to make progress on multiple fronts. We're doing what we said we would do to improve our company.\\nOur strategic priorities have helped strengthen us, so we can succeed through all market cycles, including in these uncertain and unexpected times. We entered this current period from a position of relative strength as we had a clear plan of action, and we're already implementing steps to improve Alcoa for the long term.\\nTurning to our results. We reported EBITDA of $284 million, which was a 54% sequential improvement, and we also increased our cash balance to more than $1.7 billion at the end of the third quarter.\\nAs most will recall, we completed a bond issuance in July. The proceeds increase our flexibility to meet short-term challenges while we continue to hold to our capital allocation framework.\\nOur new operating model, which took effect late last year, is driving down costs and increasing efficiency and output. Again this quarter, we set production records in the Bauxite and Alumina segments. And our commercial arm is driving a productive view of our supply chain, working capital management and customer relationships. This operating model change has already proven its resiliency and effectiveness. Also, we are seeing improvements in our markets, which are recovering from the lows in the second quarter. We saw an 11% sequential increase in volume of value-add products within our aluminum business. In the third quarter, we also fully completed the restart of the ABI smelter in B\\u00e9cancour. Separately, in August, we finished the full curtailment of our Intalco smelter, which faced significant cost challenges. I want to thank the employees there for completing a safe and orderly curtailment. We've now placed the smelter in care and maintenance mode while we consider future opportunities for the site.\\nNext, we announced last month a new addition to our Sustana brand, which is the most comprehensive suite of sustainable products in the aluminum industry. EcoSource is the world's first low carbon alumina brand, leveraging our leadership as the world's largest third-party supplier of smelter-grade alumina and with the lowest average carbon footprint in the industry. I do want to note an action that we announced just last week. On October 8, we made a decision to curtail the San Cipri\\u00e1n smelter. We made this decision within a 15-day period per Spanish regulations to consider our next steps after completing 4 months of consultations with the workers' representatives. The smelter has sustained significant and ongoing financial losses. We understand the significance of the decision on our employees and the community, and we are offering severance and outplacement services for the affected employees. A portion of our casthouse will continue to cast metal. Separately, our refinery continues to operate.\\nNow let's discuss our markets and the trends we're observing. When it comes to the observed rebound in global aluminum demand, China is leading the way. Though the restart of the Chinese economy from COVID has been faster than other regions, we are seeing improvements across the globe.\\nFirst, starting from the bottom of the chart on the left, in China, industrial production as well as the key aluminum end markets of building and construction and transportation were all above 2019 levels as early as the second quarter. We saw continued strength in the third quarter with those 3 indicators up 7% when compared with the same quarter last year. In Europe and North America, which are key regions for Alcoa's aluminum customers, we see solid quarterly improvements across those sectors.\\nWhile not as strong as China, demand is returning. A gradual recovery is likely in these end markets in North America and Europe, with specific improvement expected in the fourth quarter in the transportation sector, where, on a year-over-year basis, light vehicle production in North America is expected to be up 3% and up 6% in the European Union according to automotive analysts. The building and construction market didn't suffer a demand shock as severe as the transportation sector, but commercial construction, where more aluminum is used, is likely to be slower to recover due to reduced pull for office space.\\nMoving now to the right hand of this slide. Recovery in the end markets translated into further improvements in global primary aluminum demand in the third quarter, which has increased quarter-on-quarter over the course of the year. In the third quarter, worldwide demand for primary aluminum was off just 4% from the same period in 2019. This has improved from the first half, where there was an 11% drop in demand from the same 6-month period in 2019. Two other areas indicate an improvement in aluminum demand: inventories and the Chinese imports of unraw aluminum. On inventories, we estimate that global aluminum stock growth has slowed in the second and third quarters relative to the first quarter. In China, net imports of unraw aluminum have increased steadily over the last 2 quarters, showing an unusual reversal of typical trade flows. Imports of unraw, unalloyed and alloyed metal in July and August alone totaled over 700,000 tons, up from nearly 400,000 tons in the second quarter. It is likely that these flows are comprised of a mix of both primary and secondary metals as China seeks more aluminum due to a domestic scrap shortage, a result of the limit that is placed on imports of low-grade scrap. At the same time, this trend is indicative of primary aluminum demand and prices in China having increased enough to make it profitable for China to import metal.\\nWhile this trend may be temporary, it is another sign of the strength of the recovery in China.\\nOf course, much can still happen with COVID-19 and its impacts on the global economy. Nonetheless, the third quarter provides some cautious optimism for global aluminum demand.\\nNow let's discuss performance in our 3 segments, starting with operations. We're proud of the dedicated work of our teams to keep all of Alcoa's global assets operating without interruption during the global health crisis. We remain vigilant in protecting our people and using all appropriate health-related measures. We saw consistent production improvement in the third quarter, continuing the positive momentum from the prior period. We once again saw increases in daily average production across our 3 segments. The productivity program we implemented in the first quarter of the year is providing sustainable cost saving improvements for the tons we produce. In Bauxite, we are mining at a record pace. Through the third quarter, Alcoa's operated mines set a year-to-date production record, led by 2 of our mines in Western Australia.\\nFor Alumina, we also broke a record we set in this segment last quarter for metric tons per day production.\\nFinally, in our Aluminum segment, improved operational stability is helping to drive increased output.\\nAs noted earlier, this takes into account that the ABI smelter in Qu\\u00e9bec is now fully restarted, a task completed in the third quarter.\\nNow an update on our commercial activities. In bauxite, we expect steady volume and pricing for the year. In alumina, we have realized the benefits from a tighter-than-expected market, driven by the improved supply/demand balances in aluminum that we discussed. Also, some supply disruptions from other producers resulted in a further tightening in the market during the third quarter.\\nFinally, in aluminum, as we've noted, we saw an overall increase in orders for value-add products.\\nAs we mentioned in both the second and third quarters, sales of value-add products were negatively impacted by COVID, with the second quarter as a low point. In the third quarter, we saw an 11% sequential improvement, although still lower than the same period in 2019.\\nWhile our customers continue to be cautious, we see signs of green shoots, although Q4 demand is still expected to remain below 2019 levels.\\nNow I'll turn it over to Bill to discuss more fully this quarter's results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy. We achieved significant improvements in the third quarter.\\nThird quarter 2020 revenue was up $217 million sequentially on higher alumina and alumina prices. The net loss attributable to Alcoa Corporation was $49 million or $0.26 per share, an improvement of $148 million or $0.80 per share. The adjusted net loss was $218 million or $1.17 per share. The most significant driver was a tax provision of $229 million, primarily interim tax impacts due to the improving view of full year profitability and the resulting prior period's catch up in the third quarter. Adjusted EBITDA, excluding special items, was $284 million, up $99 million sequentially and generating an EBITDA margin of 12%.\\nLet's look closer at factors driving adjusted EBITDA. Adjusted EBITDA, excluding special items, increased $99 million in the third quarter with $174 million higher earnings in the segments partially offset by a reversal of intersegment eliminations, $65 million sequentially due to higher alumina prices. Overall, favorable market price impacts totaled $89 million, where higher metal and alumina prices were partially offset by a weaker U.S. dollar. All other factors combined were positive $10 million. Higher natural gas costs in the Alumina segment were partially offset by lower smelter energy costs, primarily in Norway. Price mix, volume and production costs were bright spots this quarter, a testament to the benefits of our new operating model for operations and commercial activities. Price mix improved $18 million due to additional value-add sales in the Aluminum segment and the mix of shipments and better non-metallurgical alumina contract pricing in the Alumina segment. Volume improved $15 million, with two-thirds of the benefit coming from higher alumina shipments and one-third coming from capturing sales in an improving aluminum market. The largest performance improvement factor was production costs, which were $32 million lower in the third quarter. The Alumina segment saw improved bauxite quality and usage as well as lower caustic usage. The Aluminum segment experienced seasonally lower labor costs, and the Bauxite segment saw lower production costs at our operated mines. Other impacts were negative $30 million sequentially and included $12 million related to Section 232 tariffs and $9 million from inventory impacts in the intersegment eliminations.\\nMoving to cash.\\nThird quarter liquidity was exceptional with over $1.7 billion in cash on the balance sheet.\\nOur year-over-year cash balance increased $895 million, and sequentially, our cash balance increased $771 million. We issued $750 million of debt in early July with net proceeds of $736 million. Not counting the debt issue, our year-over-year cash balance increased $159 million and sequential improvement was $35 million. Through the first 3 quarters of 2020, sources of cash totaled $1.9 billion and uses of cash totaled $1 billion. Even removing the debt proceeds of $736 million, year-to-date sources of cash have outpaced uses by $121 million, a reflection of solid operating performance and our successful $900 million cash actions program.\\nNow let's take a look at other financial metrics. Year-to-date, 2020 free cash flow less non-controlling interest distributions improved $46 million in the quarter to negative $14 million, partially the result of lower working capital. Days working capital improved 2 day sequentially to 22 days, driven by a decline in inventories and days on hand.\\nOur key balance sheet metric, proportional adjusted net debt, remained at $3.3 billion. Year-to-date, our pension asset returns have been approximately 3.4% and discount rates are down roughly 30 basis points to 35 basis points since the plans were last remeasured. Due to a variety of actions taken this year, approximately 50% of our pension OPEB liability has been remeasured on an interim basis. If asset returns are at target for the fourth quarter and discount rates and all other factors do not change, we would expect the pension and OPEB net liability to increase approximately $200 million from the current $2.4 billion to $2.6 billion.\\nTurning to our $900 million cash actions program.\\nWe continue to drive all aspects of our cash program. Targets remain on track.\\nWe continue to see the benefits of the new operating model, both in terms of lower spending and improved focus on leaner working capital and lower production costs, and our non-core asset sales and portfolio review timelines remain in place.\\nOur COVID response spending controls are also on track, although we expect to defer slightly less pension funding than originally planned.\\nWe are making a few adjustments to our full year 2020 outlook.\\nWe are increasing the range for 2020 alumina shipments by 200,000 tons to a range of 13.8 million tons to 13.9 million tons based on better production and shipping performance. In EBITDA impacts outside the segments, we are improving $15 million, driven by reduced transformation costs. On earnings below the EBITDA line, we expect depreciation expense to improve $10 million to $655 million.\\nWe are not providing an outlook for the full year operational tax rate.\\nHowever, based on recent prices, we expect operational tax expense in the fourth quarter to be approximately $25 million.\\nFor full year 2020 cash flow impacts, we are adjusting our minimum required pension and OPEB funding up $10 million to reflect modest funding we made to lower expected pension costs.\\nWe are reducing environmental and ARO funding by $10 million to $115 million, a result of spending controls and COVID-19 actions.\\nOur 2020 year-to-date cash taxes include a $74 million payment to the Australian Tax Office to begin the disputed resolution process for its previously disclosed Notice of Assessment. In September, the ATO issued a position paper on its preliminary view of administrative penalties related to that assessment and proposes penalties of approximately $93 million, a 100% Alcoa of Australia share. The company does not agree with the ATO's position, and AofA will continue to defend this matter and pursue all available dispute resolution methods up to and including the filing of proceedings in the Australian courts.\\nWe expect no further cash impacts for this matter until it is ultimately resolved. In the appendix, we also list additional considerations expected for the fourth quarter. They include: in the Bauxite segment, adjusted EBITDA is expected to be flat compared to the third quarter; in the Alumina segment, we are expecting higher energy costs and the mix of customer shipments to result in $10 million lower sequential EBITDA impact; in the Aluminum segment, alumina costs are estimated to be approximately the same as in the third quarter.\\nAside from potential metal price or currency impacts, all other factors are expected to decline $50 million sequentially, including anticipated higher power costs in Europe, a full quarter of Section 232 tariffs and higher maintenance and seasonal labor costs, partially offset by the positive impact of the Intalco curtailment for the full quarter. With that, let me turn it back to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Bill.\\nNext, I want to spend a few minutes discussing our sustainable product portfolio. In line with our strategic priority to advance sustainably, last month, we launched EcoSource, another product in our Sustana line to help our customers reach their sustainability goals. EcoSource is the world's first low carbon alumina brand. It offers no more than 0.6 metric tons of carbon dioxide equivalents per metric ton of alumina, which is half the global alumina industry's average carbon content, and our measurement includes direct and indirect emissions from mining and refining. EcoSource leverages our leadership as the world's largest third-party provider of smelter-grade alumina. And as we've noted, our refining assets have the lowest average carbon footprint in the industry. This product supports decarbonizing aluminum, while expanding our Sustana line to the broader aluminum value chain. Considering the increased pull from consumers and producers of sustainably sourced and low-carbon alternatives, EcoSource provides a unique opportunity for aluminum producers to lower their carbon footprint.\\nOur Sustana family of brands is the most comprehensive in the aluminum industry, which also includes aluminum with guaranteed low emissions and metal with at least 50% recycled content. It's important to note here, too, that we take a more advanced view on how to define green, one that considers impacts across the production chain. Equally, our low-carbon aluminum is a great example. It guarantees no more than 4.0 metric tons of carbon dioxide equivalents per ton of aluminum produced from bauxite mining to cast products. This includes Scope 1 and Scope 2 emissions from all production steps.\\nWhile the market for low-carbon aluminum is continuing to develop, we are seeing more and more interest in this space. And with our comprehensive line of products, we are leading the way for the industry. Also, consumers and our customers are demanding products that include assurances of responsible production. With our sustainable practices in bauxite mining, alumina refining and aluminum smelting and casting, we are uniquely positioned to deliver sustainable products across the value chain. Alcoa has operations in all 3 of our segments certified to standards set by the Aluminum Stewardship Initiative, or ASI. It is the only comprehensive third-party validation of sustainable practices looking at the entire value chain that involves producers, users and NGOs.\\nWe also have ASI's chain of custody certification, earning us the right to market ASI-certified products across our value chain.\\nWe have 11 locations already certified and more are currently in the pipeline.\\nNext, I wanted to quickly recap how our strategies and actions are driving a stronger, more agile company. It was 1 year ago that we first announced key strategic actions that included a new operating model, a plan to generate additional cash from the sale of non-core assets and a review of our production portfolio. We've made significant progress.\\nOur new operating model is now fully implemented and is on pace to deliver $60 million in annual savings. This early action was vital to help us weather the economic downturn brought on by the pandemic. We've also made headway on our multi-year portfolio review that includes options to improve, curtail, close or divest assets. In February, before COVID-19 became a global pandemic, we launched plans to drive leaner working capital and implement annual productivity gains, and we're projecting we'll finish the year within the total range of projected year-over-year improvement from these 2 programs. And finally, we continue to manage cash to mitigate the economic impact associated with COVID-19, and the collaboration across Alcoa to generate and implement cost savings ideas is remarkable.\\nAs Bill noted, all these initiatives are on track to total $900 million in cash actions in 2020.\\nOur pursuit of continued improvements is part of what it means to be an Alcoan. Across our company, we've been on a steady and consistent path in tackling challenging projects to strengthen Alcoa.\\nYou'll see just a few of these listed at the bottom of the slide, items that align with our overall strategic priorities. Most importantly, we've strengthened our safety program and have seen real improvements in our leading and lagging safety indicators across the organization. We've also strengthened our balance sheet through numerous actions, including renegotiating our credit facility, annuitizing pensions and reducing OPEB liabilities.\\nOur teams continue to break production records, and we're operating more efficiently with new modern labor agreements in the United States, Canada and Australia. And as mentioned before, we are leveraging our strong reputation in sustainability, including continued progress on our ELYSIS joint venture, which produces carbon-free aluminum. The work to drive this technology to commercial scale is progressing.\\nAs you can see from the prior slide, we have tackled difficult challenges, but we still have much to do to strengthen and prepare Alcoa for a brighter future. And I'd like to reinforce what is consistently guiding us as a company.\\nFirst and foremost, it's our 3 Alcoa values: act with integrity, operate with excellence and care for people. These are fundamental to our decision-making and central to our company. Those 3 values underpin our strategic priorities, which provide a road map for the future and ensure alignment across our operations and resources. We reduce complexity, so we can be low cost. We drive returns with a focus on improved margins across our products. And we are advancing sustainably to improve economic, environmental and social outcomes, and ultimately, provide value for our stockholders in the long term. And with that, Bill and I would welcome your questions.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions]. And our first question today will come from Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Roy, Bill, a couple of questions from me.\\nJust wanted to get an update on some of your bigger picture targets, the divestment target of $500 million to $1 billion, I think, over 18 months.\\nI think we're about 12 months since that was announced.\\nJust wondering whether that's still a relevant target and how you're looking at that? And then in terms of the asset reviews, are we right in thinking that Portland after San Cipri\\u00e1n would be the next asset sort of in the spotlight as such?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So I'll take the first pass at that one, Chris, and thanks for the question.\\nAs far as the asset sales go, you're right. We announced in October of last year that we would take 12 to 18 months to execute on asset sales of between $500 million to $1 billion of net proceeds. We sold Gum Springs at the beginning of this year, which netted us an immediate $200 million with a $50 million contingent payment that will come over time. And since that time, we've been running forward with some processes to look at further divestitures. And we are -- haven't said which assets those are, but we're holding to that target that by the end of the first quarter of next year, we would be generating $500 million to $1 billion of net proceeds. The only asset that we have said that is up for sale is the Rockdale lands, and we continue to pursue that transaction.\\nSo yes, we're sticking with that target. Roy, do you want to address the asset reviews?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, absolutely. And Chris, thanks for the question. We've not said specifically what sits inside of those asset reviews.\\nSo -- and that's very specifically for the purpose that we continue to work on a number of tracks at the same time. And I'd remind you that, that program really has options that include trying to repower the facilities, trying to find new ways to do what we might have been doing for a number of years in each of these different locations. And at the end, we also have the opportunity to curtail or to divest, et cetera.\\nSo as to what comes next, I think, as you referred to, Portland, we've not said whether that's on the list or not.\\nWe are in the midst of discussions with the Australian government to repower the facility, and we'll then be making decisions as we move forward on that. But I would just reassure you that we're hard at work looking at how we can really drive our portfolio, and particularly in the Aluminum segment, but to a certain extent, also the Alumina portfolio, how we make sure that they are both very low cost and also very green and very low carbon.\\nSo you'll hear more as we go along, Chris.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. And just 2 very quick questions, hopefully.\\nJust checking on the pension.\\nSo I think for 2021, originally, it was going to be $380 million as of the start of this year.\\nYou're saying you use the prepayment for $200 million sort of be implying $180 million from a cash sense, I think, if I'm correct on that. I just wanted to check. And then the other one, very small, but on Slide 32, when you talk about the Aluminum segment with production down about 10%, I think, it implies for 4Q. The alumina costs to be flat sequentially, that's dollar per ton, right? I just wanted to check that.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So let me address the pension one, and then Chris, I'll probably ask you to clarify the second one.\\nWe have been projecting cash outflows with pension and OPEB of $380 million in 2021.\\nYou know that we deferred $200 million of pension contributions in 2020. Those would come due in 2021.\\nSo the sum of the $380 million and the $200 million would equal to $580 million of cash outflows associated with pension and OPEB.\\nHowever, we have a prefunding balance set up in the U.S. pension plan. That is also -- just corresponds to approximately $380 million.\\nSo depending on what cash flow looks like in 2021, we can choose to use that prefunding balance to offset those large cash contributions that are required in 2021.\\nSo if we chose to use all of the prefunding balance, we would be back to approximately $200 million of pension and OPEB cash outflow in 2021.\\nSo I hope that's clear. If I could ask you to clarify your Aluminum segment question or did we lose Chris?\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Sorry. No, I'm still here.\\nJust Slide 32, where it says, flat. I was just -- on alumina cost.\\nSo I was just checking whether that's dollar per ton or dollar million.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Dollar -- that's dollar million.\\nAnd so what we're essentially signaling there is that aside from prices and ForEx, the Aluminum segment will have flat alumina costs in total. And then on top of that, we're signaling that Aluminum would be down about $50 million sequentially.\\nBefore I get the question, just to mention that $50 million, I figured I would address it. A piece of that is energy costs, so higher energy costs in Europe. We had very good energy costs in Spain and Norway in the third quarter. We don't know if those will repeat going into the fourth quarter as economies recover. But we do have some higher operational costs, approximately $25 million.\\nWe have a couple of outages in our rolling mill that are planned for the fourth quarter, so nothing surprising there. We do have some higher labor and maintenance costs also. And then included in that number is the assumption that the tariffs coming in from Canada would continue to be paid.\\nWe are accruing for the tariffs in the fourth quarter just as we accrued for the tariffs in the third quarter because we're not certain whether the exemption will be in place or not.\\nSo we're still considering the presidential decree that has come out. And -- but at this point, we're assuming that we will be accruing for those tariffs coming in from Canada. Hope that helps.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Carlos De Alba with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"So the first question, it has to do -- just stay in that exhibit on Slide 32. On Alumina, can you provide a little bit more details in terms of the comment relating to the mix of customer shipments that will, together with higher energy cost -- sorry, together with a lower -- higher energy cost is going to reduce your EBITDA. What -- could you provide some more details? And if this is something that you just expect to see at the end of the quarter maybe because you need to complete some contracts? Or is this something that may be extending towards 2021?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So Carlos, there's 2 components to that. The larger component is the higher energy cost. Energy costs are soon to be going up in Brazil, for instance, for fuel oil at our Alumar facility based on just this higher oil costs overall in the fourth quarter. And the mix of customer shipments is really a comment around the timing of shipments at the end of the quarter.\\nSo nothing to -- that is projecting out into 2021.\"}, {\"speaker\": \"Carlos De Alba\", \"content\": \"All right. And just my last question is, with the curtailment in San Cipri\\u00e1n, what should we assume in terms of the alumina production and shipments there? As well as what sort of level of production do you expect to see from the casthouse?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So currently -- and I'll directly address your question and maybe Roy wants to add on some more commentary. But we're assuming that the casthouse continues to operate. And as far as timing of the smelter curtailment, we're expecting that to be completed by the end of the first quarter of 2021.\\nWe are assuming that the refinery will continue to operate.\\nAnd so that's how we see the site that the refinery is unimpacted by this situation in the smelter and that the casthouse would also continue to operate.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. And I'll just chime in there as well, Carlos. And I think Bill covered the quantified assumptions that we're making at this point. I just want to bring into focus the fact that it was a process that spanned over a number of weeks. We've thought long and hard and worked with our works council, worked with the government, et cetera, to try and find a solution for the issues, the long-term underlying pricing issues on energy that we've seen, and we announced this just recently.\\nSo as you've seen, there has been a move to potentially have a strike. That has not been defined yet, and we still don't know what impacts that will have. But as Bill said, the expectation is post curtailment, we will have the output coming from the casthouse, and then expect no impacts and certainly no long-term impacts on the refinery.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Timna Tanners with Bank of America Securities. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"So I wanted to just ask the obvious here, and I apologize for that, but just kind of going back to Slide 11. Clearly, the debt issuance is now on the books, been there for a couple of months.\\nYou also said really clearly that paying down the pension or addressing underfunded pension in healthcare is a top priority. Is there a time frame or a mechanism or anything that you can signal to us just to help us think about what that would look like?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nLet me interest that one, Timna. Currently, as the slide shows, we have a very good strong cash balance. We went out and raised debt at the beginning of the quarter as -- which seems like ages ago at this point. And there was a number of reasons for why we are raising debt.\\nFirst and foremost, we ended up being able to raise debt at the cheapest coupon out of any of the debt issuances that we have.\\nSo it gives us the flexibility that if we want, we can pay off some of the other debt tranches, so for instance, the 2024s.\\nWe will also consider using that to fund the pension. But I would tell you, at this point, over the next, let's say, 3 to 6 months, we'll be making the decision on what we do with those proceeds, assuming that we continue to see cash come in like we saw in the third quarter.\\nSo we have a capital allocation model.\\nYou know that our capital allocation model starts with keeping $1 billion of cash on the balance sheet. We were able to -- excluding the proceeds of the debt issuance, we were able to regain that level to $1 billion of cash on the balance sheet. We've got 4 uses of cash in that capital allocation model, which we have said at various times, we will use the cash for those 4 things.\\nThe first one being debt repayment.\\nThe second one being mid-sized growth projects.\\nThe third being -- I'm just losing my train of thought. But essentially, we'll be making a decision on how to use that cash over the next 6 months. And I should have said that third is the return to shareholders, which is clearly important to us.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay.\\nOne of the concerns that we hear repeatedly from investors is just that they'd like to feel comfortable that this balance here that you point out, the sources and uses, would be in the positive arena, fully without things like debt issuances and proceeds from asset sales.\\nSo just I think it'd be helpful to understand some of these recurring restructurings are a function of kind of reducing your footprint and carrying back some of the less profitable or loss-making businesses. But how do you see Alcoa over the next several years kind of getting to a place where you do have a better balance, ex the proceeds from asset sales and debt issuance? Like on a normalized basis, how do we get to that place where it's more balanced?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Well, I'll address that quantitatively, and I'll let Roy address it further.\\nYou clearly see us taking action today to rectify some of the underperforming assets that we have.\\nSo we have said that we will put under review 4 million metric tons of refining capacity, 1.5 million metric tons of smelting capacity. We immediately took action on shutting down Point Comfort, and so we took that action.\\nWe have taken action at Intalco to curtail a loss-making facility at Intalco. Recall that intalco lost $25 million in the first quarter of this year, so a loss-making facility that we've tried to curtail.\\nWe have said that San Cipri\\u00e1n's smelter is structurally disadvantaged, and we've made the decision to collectively dismiss the employees at San Cipri\\u00e1n.\\nSo taking action there. When we get through this portfolio review, we see us as being -- and I would point you to the back of the deck, where we're first quartile bauxite, first quartile refining, second quartile smelting. Once we get through this portfolio review, we think that all 3 sets of the assets can be first quartile. But on top of that, as Roy said, we will be the lowest carbon emitter amongst all the major players.\\nSo we will have taken our smelting assets, which are second quartile, moved them to right at the breakeven of the first and second quartile smelting cost curve and significantly lowered their carbon footprint.\\nSo I think the near-term view is that our portfolio will be in a much better position once that review is done.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. And I'll just reiterate Bill's comments because I think he said it spot on. But Timna, I think it's a valid question that you raised. And I just want to -- I really just want to reinforce the statement that, we've spent a good amount of time as a management team thinking through not only how the market looks today and how our portfolio interacts with that market, but also have looked out a number of years. And it's really the process that -- I mean, it's been ongoing for the last 4 years. But last year, we spent a bunch of mines -- a much bunch of time thinking about what can we do and where do we go. And that really culminated in the announcement about the divestitures to generate cash about how we're going to drive operations in commercial through the new operating model and then the portfolio review.\\nAnd so these actions will take a little bit of time and each one has its own schedule. They require a great amount of challenging decisions in dealing with situations. But at the same time, it's going to leave us in a significantly improved spot. And I won't go into everything that Bill said again, but in the end, it will make us a very low cost. It will make us very, very green from a carbon standpoint, but also, I believe, with a great reputation for doing the right thing, all the way from bauxite down to aluminum. And I think it's really an opportunity for us to make a big difference, but will take up some work in the meantime.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Lucas Pipes with B. Riley Securities. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Roy, I wanted to pick up on a comment you just made there in regards to looking out a few years and looking at what this industry is going to look like. Can you elaborate on that a little bit? What's your vision of this industry 2, 3 years down the road?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Lucas, and that's a fun question.\\nSo when you look out, I always start with what the demand fundamentals look like. And we've had the great blessing that aluminum demand has been strong over these last couple of decades.\\nAnd so as we look forward, and you look at this in China as well as everywhere outside of China because of how much China has impacted the market, we continue to see a metal that is in high demand, and we'll continue to see demand growth.\\nAnd so from a pure market perspective, there's a lot of opportunities in aluminum and then in the knock-on impacts in alumina and down into bauxite. At the same time, we also see that our customers and the consumers that lay at the other end of those customers are going to have significantly higher expectations and understanding of what is contained in those -- into those products themselves.\\nSo not only are we seeing good demand growth because of the electric vehicles in automotive or aluminum cans or all of the electrical infrastructure, not only are we seeing that good demand, but I believe there will be more and more of a shift to having -- to understanding the carbon impact and just the entire content of all those things around communities and social programs and how everything combines into a final product.\\nAnd so as we look at that and as I spend time examining what's happening in today's market and the acceleration we're seeing towards what can be a pretty exciting future, I think aluminum, and particularly a company like Alcoa, can have a great future inside of that market.\\nNow it means we need to drive so that we have the portfolio that we need to win both from a cost perspective, but also from a carbon content, social responsibility and environmental awareness standpoint. But at the same time, I think it bodes well because we have the opportunity to make changes in our portfolio, in our cost structures today that sets us up for this very quickly approaching pretty great opportunity we have in the future.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"That's very helpful. I really appreciate the additional color on this. And then my second question is more in the here and now. Kind of looking at my numbers, it looked like metal prices were much higher than what would have been kind of implied back of the envelope. And I wondered, was there anything unique going on with the mix Q3 versus Q2? And then as we look into Q4, anything that could reverse, meaning you wouldn't capture the additional improvements on the pricing side?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. I'll address that one. Thanks, Lucas, for the question. The one thing that we saw in the third quarter above and beyond the second quarter is a rebound in demand for value-added products. We saw volumes of value-added products increase by 11%.\\nWe also saw premiums increase in the third quarter for spot business, and that drove the realizations for metal, higher.\\nAs we look into the fourth quarter, we're being cautiously optimistic. The underlying market trends are still favorable, but we're waiting to see how spot orders come-in in the fourth quarter. But feeling generally optimistic about our end markets currently.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it. That's helpful.\\nSo there shouldn't be any additional considerations on the revenue side, kind of \\u00e0 la Slide 32, what you already discussed on the cost side already.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"No. Slide 32 is inclusive of all the things we see. When we look at our current view of the fourth quarter around value-added products is -- currently, it is level with what we saw in the third quarter. But again, we're being a little bit, I think, cautiously optimistic that we could see some business increase in the fourth quarter via spot sales. But at this point, they have not yet materialized. But certainly no deterioration from what we saw in the third quarter.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Alex Hacking with Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"My first question is again on Slide 32. The $50 million of additional kind of headwinds on the Aluminum segment, how much of that is the accrual for the Section 232 tariff? And how do you -- kind of like from an accounting perspective, how do you unwind that if there is no Section 232 tariff, which there isn't right now, I guess?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Right.\\nI think those are great questions, so I appreciate you asking.\\nLet me give you a little bit broader landscape of the tariff situation. In the third quarter, we accrued for $7 million of tariffs. In the fourth quarter, in the number that you see in that $50 million, we're projecting an incremental $12 million of tariff expense, which means that in the quarter, we'll have about $18 million, $19 million of tariff expense.\\nYour question around the accounting, we will know on a 6-week lag whether the tariffs are retroactive. After that 6-week lag, when we find out whether the tariffs are not retroactive, then we can book a gain associated with that month's tariff.\\nSo if you're thinking about $18 million a quarter; 3 months, $6 million. Each month, we'll make a determination based on that prior 6 weeks' tariff system on whether we book the gain associated with not having tariffs because we're accruing to the tariffs.\\nSo your next question should be, how are you going to try to estimate that in your models? I think you're going to have to watch to see how the metal flows come across the border and whether they meet the quota levels that are in place.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"All right. Thanks, Bill. That's helpful. And thanks for the explanation. I was very confused when I first saw that on the slide when you made the comment about the accrual. I was like, didn't Section 332 go away?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"It's a very confusing situation, and we have to make an accounting determination of whether we accrue for it. And at this point, given the quota levels, we think it's probable, and we certainly can estimate it.\\nSo that's why we accrued for it. And hopefully, we're pleasantly surprised that we have a gain associated with it.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay. And then the second question is, I guess, more bigger picture. On green aluminum, from the headline, sitting on the outside, it seems like the idea of green metal, responsible metal is gaining traction, particularly with consumer-type companies, Apple and Elysis, and [has a push] in Tesla. I mean are you seeing -- as you talk to your customers, are you seeing an inflection point and kind of interest in green and sustainable products? And just generally, how would you characterize the discussions right now? Are customers still in the fact-finding kind of stages of things, trying to figure out what they should be doing going forward? Or do you think they're actually ready to start buying kind of green material on the near term?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Alex, and I'll take that one. I'd say that over the course of this year or really the end of last year, we've truly reached an inflection point. And I think we're a bit beyond just general interest and actually starting to see a real beginning of some customers and consumers that are really looking to create deals.\\nAnd so we have a number of areas that we're working on.\\nAs you know, we've just launched EcoSource, which is this new green alumina product, which is brand new.\\nSo that's something that is just under development and starting to have conversations now. But I would say that even given all the craziness that happened because of the COVID-19 pandemic, we continue to see a great amount of interest and more and more discussions that are turning into more discussions around potential contracts.\\nI think we're seeing more and more of that.\\nSo I'm really quite pleased at how quickly that has developed when you think about the fact that, really, this is becoming more and more on investors' dashboards really over the course of the last 12 to 24 months, and it's pretty quickly turned into what can actually be orders and changes. I would say that the market is still developing how that should be priced.\\nSo I think that's still in front of us how to determine that. I know there's a bunch of different potential options that are being proposed. From our standpoint, really having those discussions with the customers, explaining what Alcoa can do differently, and that is dependent upon the product that you choose, I think it's the right discussions to be having. And again, I'd get back to the simple fact that I think Alcoa has a real opportunity and a real benefit here to our long history, and in the end, to the portfolio that we operate today, and even more importantly, we'll be operating down the road.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And if you don't mind, if I jump in a little bit on that, Roy.\\nJust to highlight EcoSource, and I don't know how much time that you've saved looking at EcoSource. EcoSource is a big deal. EcoSource allows our customers to get a certified low-carbon content alumina. And AWAC, our joint venture, is uniquely positioned to be able to sell low-carbon content, alumina. And as somebody pointed out to me, it's very difficult to change and very expensive to change your power source for a smelter. But now with EcoSource, you can get a certified low-carbon alumina that fundamentally changes the carbon content of the aluminum smelter makes by buying the right source of alumina.\\nSo a little bit of a salesman job there. But it's actually a pretty big deal that for us, we offer a full suite of sustainable products in the aluminum space. And I believe we're the only ones that are offering a low-carbon content alumina source.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"And sorry, can I just follow-up? Like how much EcoSource alumina could you produce theoretically if everybody wanted it?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"All of our refineries can produce EcoSource. The thing that you would be getting with EcoSource is that you get a certification that the alumina that you get is low carbon emitting.\\nSo it's a certification process that you can get certified that we are -- the process in which we make alumina cuts the carbon emissions in half versus the industry average.\\nSo at this point, you can buy alumina from us or you can buy EcoSource, but EcoSource is actually certified that it's low carbon.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And let me just -- Alex, if I can just add one layer on top of that as well. And this really gets back to the purpose behind the strategy and what I've talked about from the long term. When you have a portfolio of very, very low-cost aluminum refineries that also happen to be very, very low-carbon content, it means that you can transition to green products and have sufficient green products to really make a difference not only for Alcoa, but make a difference in the marketplace. And I'd tie that back over to the work that we're doing from the Aluminum segment as well in our portfolio is that, as we go into the future, we'll again have a low -- very low-cost portfolio, but then also the lowest carbon content across the board of all other aluminum producers.\\nAnd so it helps you to win as the world turns to green aluminum, it actually gives you a sustainable advantage because your portfolio is sustainable and renewable and has these characteristics across the board.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from David Gagliano with BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"A lot of my questions have already been answered, but I guess I just wanted to pick up on the last line of question with regards to the EcoSource and the alumina low-carbon content. How do you plan to price this? And what are you hearing from customers? Or do you plan to price EcoSource differently than the rest of the alumina?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So that's a good question, Dave. And I'm going to be honest, I'm not going to give you much of an answer because that is something that we're working on as we speak and something that we're discussing with our customers.\\nAnd so realistically, to talk about a strategy there is not in the cards, I would tell you that we think there is real value both to the certification of carbon content as well as the ASI certification that really takes it a step further into social responsibility and environmental awareness, et cetera.\\nSo I would argue that there is space for a premium. We just -- we're just still working on exactly how that will look as we deal with this on a customer-by-customer basis.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay. And then just one clarification question regarding fourth quarter. In the Aluminum segment, obviously, you called out this $50 million incremental headwind, excluding FX and commodity changes.\\nIf you assume current FX and commodity changes, would those changes offset that $50 million headwind? And the other part of that, for the Alumina segment, the down quarter-over-quarter in 4Q, does that take into consideration FX as that flow through 3Q results as well?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo all of them exclude FX.\\nSo whenever we give guidance, Dave, it's exclusive of metal prices and FX.\\nAs far as the alumina piece goes, we said it would be really the energy side and some of the mix. And as far as your question in regard to whether LME and FX would offset that $50 million, clearly, at this point, it's early in the quarter. Metal prices are better, premiums are a little bit worse than where they were in the third quarter. We give you sensitivities to all of that.\\nSo as we go through the quarter, what you can do is just build in your sensitivities and determine where we end up based on that $50 million.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from Michael Dudas with Vertical Research. Please go ahead.\"}, {\"speaker\": \"Michael Dudas\", \"content\": \"Turning to China.\\nYour assessment of, as you indicated, very strong demand. Certainly, there's been some changes on the flows on the alumina side. Is -- or capacity situation going to continue to expand in China? And then the threat of restarting excess exports into the marketplace into 2021 something that investors should give a real focus on as they're trying to figure out where aluminum pricing might wash out heading into next year, assuming we continue to get a COVID emerging recovery in rest of world?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Michael, I appreciate the question.\\nI think the answer is pretty simple, yes.\\nI think that's all -- those are all considerations that investors should have in mind. It would be quite honest, it's something that we do have in mind.\\nI think the benefit that we've seen is that China's demand has really snapped back. I mean, if you want to look at a definition of a V-shaped recovery, when you look from really Q1 into Q2 and then on into Q3, they really have recovered very quickly. And you look at that, pretty broad-based through transportation, construction, packaging, all the different areas, really, particularly in July and August, we've seen a very strong snapback.\\nSo demand, I think, is back where it should be. And when you look at some of the support mechanisms that they've been rolling out, I think that is very helpful and very supportive of that demand continuing.\\nI think you've also seen that, that supply continues to come online. It's certainly coming online at a slower rate than it has before.\\nYou're also seeing them move more towards provinces where they have renewable energies available.\\nSo they are doing work in order to shift their portfolio.\\nI think the fundamental question is, how demand then connects back over to supply and then how that connects into pricing? And so that, I don't think I have a crystal ball, nor would I take a guess in where it leaves us. But I would say that China has been very constructive in trying to actively manage how their demand is growing and try and incentivize it. And then also have been very careful to enforce the rules they have in the book around capacity -- available capacity to bring online and ensuring that it has both the operating permit, but also an environmental permit.\\nSo I'd say that over these last couple of years, China has been very careful to enforce its rules, and that's been very welcome from my perspective.\"}, {\"speaker\": \"Michael Dudas\", \"content\": \"That is encouraging. And how -- my second question was, how much is China on board with low-carbon issues in the aluminum industry? And what's the ability for the country to -- you kind of mentioned they're trying to shift their portfolio, but they're going to be somewhat limited in what they have and where they can go to get those sources.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nAnother really good question.\\nI think it's -- I think when you look at the way that the industry has developed outside of China, and it's so much tied over to renewable energy, simply because of the low-cost price of -- the low-cost energy was carbon free. It was typically hydropower.\\nSo we look at our portfolio, and it's not universal, but we're on that -- going in that direction. It's been very much based on renewables because that's how the market developed. In China, it's been very much more based on coal and the relative inexpensive available coal in the country, large coal reserves.\\nAnd so the carbon content, if you look at the chart, and we published it a few quarters ago, it's staggering when you look at how skewed towards the higher part of that carbon content curve in aluminum, and quite frankly, in alumina as well.\\nI think there is an acknowledgment, and you see that -- an acknowledgment by the Chinese that this is an issue, and you see that because of some of the announcements they've made about moving into provinces that do have hydropower available.\\nI think that is, to a certain extent, limited by how much hydro they can bring online and how much they want dedicated into the aluminum industry.\\nI think it will take time, although the Chinese are very good at constructing plants. But I think it's also, to a certain extent, supportive of the development of the green market in general and can perhaps even accelerate and hasten it as we look at people -- as the Chinese and the rest of the world really starting to look at the carbon content, and therefore, it becomes more and more transparent, what different classes of metal might be.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question will come from John Tumazos with John Tumazos Very Independent Research.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"I was reading the alumina limited disclosure to prepare and looking at your equity line in alumina, it looks like the modern equity stake lost $21 million year-to-date. It is your newest refinery. And presumably, the ore grades and strip ratios, et cetera, were attractive or you never would have gone in. Could you tell us why it doesn't perform as well as your other refineries? There appears to be a pretty big performance differential from a P&L standpoint.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, John.\\nLet me take that question. The modern refinery does perform very well, actually. When you see that equity pickup, what you're seeing is the share of earnings post interest and post depreciation.\\nSo it's not an EBITDA number, it's a post depreciation, post interest expense net income number.\\nSo at the market level, that was in the third quarter, that refinery lost money at a net income level, but actually operates and performs extremely well. And we've been very pleased with the overall operation of the modern refinery and the modern smelter to add on to it.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Does the equity number that we see also have taxes in it?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"It does.\\nSo you're looking at a post -- you're looking at essentially our equity earnings that are post taxes, post interest, post depreciation.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"So the way the numbers are reported, it looks like the alumina refinery earned your cost of capital, maybe 4 quarters since 2017.\\nSo the capital and tax burden is a good bit.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I'd have to look back at the numbers to confirm that, John. What I can tell you is that, that project -- it was the project finance.\\nSo at this point, we're now paying back the debt. And it was -- both the refinery and the smelter were fairly expensive to build, and at the time, had projections of higher metal prices and alumina prices.\\nSo at this point, as you can see from our disclosures over the last few years, we've not earned a dividend out of that venture, not out of the refinery or out of the smelter. But we're very focused on making sure that the venture starts to pay dividends when the cash flow is available.\"}, {\"speaker\": \"Operator\", \"content\": \"And our final question today will come from Paretosh Misra with Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"So first, just going back on the green aluminum discussion. I'm guessing a good market to get some sort of price premium for those -- for that green aluminum products would be the packaging sector.\\nSo just curious, do you sell much into that end market? Or those beverage can makers primarily buy scrap?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Paretosh, it's going to be hard to get down into that level of detail.\\nI think we've had conversations with a number of different customers. And as you know, some of our competitors also have similar or somewhat similar green products as well.\\nSo I think there is a move from can makers specifically, step into that market and to look for ways to lower their carbon content.\\nAs you know, we've got a rolling mill that does make can stock.\\nHowever, a lot of that metal feed comes from our Warrick smelter.\\nAnd so right now, probably not perfectly positioned in order to turn that into a green aluminum, although that's something that we'll be considering for the future. But at the same time, I think those discussions are ongoing, I think we are seeing more and more discussions about premium and firming up how that will look like in the future. And again, I think it's a great opportunity, and I think packaging itself is a great place for us to put more aluminum.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Yes. Agree. That's very interesting. And just another one on that, and that will be the last one. I'm seeing some of the plastic companies have also started exploring the idea of recycling plastic, perhaps not all types of plastics, but maybe 6 out of 7.\\nSo are you also seeing increased competition from plastic in some of your markets? Or you think aluminum still, by far, remains the preferred material, at least from the recycling point of view?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. We've never seen plastic recycling programs that work as well, as aluminum recycling programs. And obviously, it will not be the expert on where some of the plastic manufacturers, how they're trying to build up those recycling programs. But I'd say it's taken time to develop aluminum recycling. Also, I'd say that aluminum offers other real benefits like the way that the cans are made, the stackability, the ability to transfer cold from your refrigerator into your drink and beverage of choice.\\nSo I'd say that I have no doubt that plastics will be trying to make an end run into some of those markets again. But at the same time, I think that aluminum just offers a lot of advantages. It offers a pretty reasonable price, and in the end, I think, will be the metal of choice. And I'll tell you flat out, that's part of our job is to make sure that, that actually happens, and that we smartly and thoughtfully explain the benefits from bauxite all the way down to that rolled product, what green aluminum that has green alumina content inside and follows the -- all of the ASI certifications for social responsibility, et cetera. The difference that makes and how that, in fact, not only strengthens but really just brings forward the value proposition of aluminum beverage cans or any other market.\\nSo we'll be working on it.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And if you don't mind, Roy, I'll just share some additional facts out there before you prepare your closing remarks.\\nJust to be clear, Paretosh, aluminum, unlike plastic is infinitely recyclable, all right? So it does not get down cycled in the process.\\nSo you can recycle it on an infinite basis. It uses about 1/20th or 5% of the energy to recycle an aluminum can versus create a new one.\\nSo tremendous economic benefits to recycling aluminum and something like 75% of all the world's aluminum ever made is still being in use, just because it is the one recycling stream that actually is economically viable.\\nSo we think there's a tremendous future for the economic and environmental benefits of the aluminum.\\nSo sorry to get on the soap ops there, but it's a great metal into the future.\"}, {\"speaker\": \"Operator\", \"content\": \"Ladies and gentlemen, this will conclude the question-and-answer session. I'd like to turn the conference back over to Roy Harvey for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Perfect. Thanks, Cole.\\nSo I'd like to thank everybody for their time today. I'll summarize simply by saying that I'm very proud of what we've achieved, what our Alcoans have achieved. I'm also very much looking forward to the work ahead because as we discussed a number of times in a number of different places, there still is work to be done in order for us to continue to drive towards that strategy. I appreciate you following our story and look forward to updating you again next quarter. Thank you, and have a good evening.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference has now concluded. Thank you for attending today's presentation.\\nYou may now disconnect your lines at this time.\"}]"


