# call

companyname: Alcoa Corp
symbol: AA
date: 2017-10-19
year: 2017
quarter: Q3
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation Third Quarter 2017 Earnings Presentation and Conference Call. All participants will be in 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. I'd now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.\"}, {\"speaker\": \"James Dwyer\", \"content\": \"Thank you, Denise, 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. Also a note on financial statements methodology; because Alcoa Corporation commenced operations as a standalone public company on November 1, 2016, the financial statements are a combination of financials carved out from Alcoa Inc. prior to November 1, 2016, and actual results of Alcoa Corporation thereafter.\\nFor example, the third quarter 2016 results are entirely on a carve-out basis, while the 2017 quarterly results are entirely actuals.\\nFinally, as previously announced, the earnings release and slide presentation is available on our website. With that, here's Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim. I\\u2019d like to welcome to our call. Alcoa Group profits over the third quarter, most notably in our aluminum segment and we continued to benefit from favourable commodity markets.\\nGiven our solid results in the first nine-months of the year and based on higher alumina and aluminum pricing, we are raising our profit outlook for 2017.\\nWe continue to execute on our three strategic priorities; we built our cash position to strengthen the balance sheet and we took additional steps to reduce complexity in our company and to drive returns for our stockholders. It has been an exciting quarter with achievement across our three segments.\\nLet start with a few highlights; we reported adjusted net income of $135 million or $0.72 per share. We generated $561 million in adjusted EBITDA excluding special items, up 16% sequentially on higher metal prices, volume growth in bauxite and aluminum and strong earnings from our energy assets.\\nFor the second consecutive quarter, our cash position increased more than $150 million and our cash balance at the end of the third quarter was $1.1 billion. With a focus on driving value from our operations, we completed two restarts in our aluminum segment and now the partial restart of the Warrick smelter in Indiana is underway to support growth for the adjacent rolling mill. Earlier this month, we terminated a long-term power contract tied to our curtailed Rockdale smelter in Texas, an action that is expected to improve earnings beginning next quarter.\\nWe continue to see strength in our markets, and we\\u2019re raising our full year view of global aluminium demand. The change is related to increased pull for aluminium in China, where the government is also enacting supply side reforms that are resulting in capacity curtailments. This dynamic is moving the global aluminium market from a slight surplus in to relative balance.\\nAs in the last quarter, the strength in the market continues to push alumina and aluminium prices higher and has stoked inflationary pressure on raw materials and energy. Based on higher alumina and aluminium prices Alcoa has increased its projection for full year adjusted EBITDA to approximately $2.4 billion. This improved projection up from last quarter\\u2019s estimated of 2.1 billion to 2.2 billion implies over $800 million in adjusted EBITDA for the remainder of the year. With that, I\\u2019ll turn it over to Bill for a closer look at the third quarter financials and our full year outlook.\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"Thanks Roy. Sequentially, revenues are up 4% increasing $105 million to $3 billion with higher shipments in our bauxite and aluminium segments and higher aluminium prices. Compared to last year revenues are up 27% on both higher alumina and aluminium prices. Net income attributable to Alcoa Corporation was a $113 million or $0.60 per share increasing $38 million sequentially or 51% primarily due to higher business segment earnings. Adjusted net income as Roy said excluding special items was a $135 million or $0.72 per share. Special items totalled an unfavourable $22 million after tax. To provide more transparency we sorted the special items by income statement category and present them on a pre-tax and pre-non-controlling interest basis.\\nWe have also included an appendix schedule with each special item and its net income impact. Within in COGS and SG&A, we have special items related to the restart of the Warrick and Portland smelters for $25 million, plus the settlement of several Brazilian tax cases for $11 million. By settling these tax cases now, we were eliminate approximately $50 million of future exposure. Within restructuring we reversed the Warrick closure reserves of $29 million partially offset by charges related to office closures including the New York office and take-or-pay contracts at curtailed locations.\\nNow just look at our adjusted EBITDA and income statement after special items.\\nOur third quarter adjusted net income at $135 million are 16% higher than the second quarter. Compared to the year prior our adjusted net income improved $230 million. Adjusted diluted earnings per share improved $0.10 sequentially to $0.72 per share and grew $1.24 per share year-over-year. Adjusted EBITDA excluding special items reached $561 million in the third quarter, up $78 million sequentially and nearly doubled year-over-year up $277 million or 98%. On a sequential basis, our EBITDA margin increased 200 basis points to 18.9% primarily due to higher earnings in our aluminium segment. Year-over-year our margin improved 670 basis points on higher alumina and aluminium prices. In the third quarter, SG&A and R&D expenses totalled 2.6% of revenue. SG&A and R&D expenses declined sequentially and year-over-year both in absolute and percentage terms.\\nFor items below the EBITDA line, depreciation increased $4 million sequentially, primarily due to increased volume at the Juruti mine. Other income expense of $16 million of expense decline $28 million sequentially primarily due to foreign currency translation effects and lower equity income.\\nOur operational tax rate depends heavily on the jurisdictions where we have profit and losses. In the third quarter the rate was 39%, an increase 640 basis points. US losses increased due to a variety market based factors including unfavourable LIFO adjustments and higher inter-company profit eliminations. The increased tax rate had an unfavourable impact on net income of approximately $13 million this quarter when comparing against the average operational tax rate in the first half of 2017. Net earnings attributable to non-controlling interest decreased $10 million sequentially to $62 million due to lower earnings in our AWAC joint-venture.\\nLet\\u2019s take a deeper look at the factors driving adjusted EBITDA. Sequentially, adjusted EBITDA is up $78 million with numerous improvements more than offsetting a weaker US dollar and raw materials inflation. To cover the unfavourable impacts first foreign currency changes of negative $49 million were driven by the weaker us dollar especially against the Australian dollar. The $39 million raw materials inflation was due to higher prices for carbon materials and smelting and for caustic and lime in refining. These two factors however were more than offset by many positives. Higher metal and alumina market prices added $52 million, volume increases in bauxite and aluminum contributed $21 million. The aluminum segment drove improvements in both price mix and net productivity. Improvement in the cast houses product mix drove the majority of the $14 million price mix improvement and net productivity picked up $4 million due to the segments labor and maintenance spending improvements. Favorable energy performance increased earnings $37 million driven by improved pricing and higher volumes in Brazil, higher seasonal power cost at smelters primarily in Intalco were a partial offset to that. The $38 million benefit in the other category was mainly driven by the Rockdale plant outage occurring in the second quarter, better results in the bauxite segments equity mines due to production increases and lower workmen\\u2019s comp cost.\\nAs for business segment performance, our aluminum segment drove improved segment earnings.\\nThird quarter \\u201917 adjusted EBITDA in our segments totalled $619 million, up $73 million sequentially.\\nOur aluminum segment was up $82 million and bauxite segment gains partially offset lower alumina segment earnings. Take a closer look at each of the segment sequential comparison, bauxite adjusted EBITDA rebound at $15 million largely on higher volumes, alumina adjusted EBITDA declined $24 million, primarily due to a $25 million unfavourable impact from foreign currencies and $17 million impact of higher raw material and caustic prices. These negative drivers were partially offset by higher API prices and lower energy cost. In aluminum, adjusted EBITDA jumped 37%, up $82 million to $303 million. Higher metal prices and lower alumina cost drove $61 in improvement. Energy was up 33 million partially offset by 22 million of unfavourable raw material cost. In particular, the Brazilian hydroelectric assets produced adjusted EBITDA of $63 million, as we executed our volume shift in to the third quarter and energy prices increased.\\nThe third quarter however is the year\\u2019s high watermark for the Brazil Hydros and the expected adjusted EBITDA to a decrease of approximately $50 million sequentially due to the current drought conditions in the region.\\nNow let\\u2019s look at our non-segment adjusted EBITDA results. Combined our three non-segment adjusted EBITDA line items improved $5 million sequentially and totalled $58 million.\\nOur transformation entities plus our legacy, pension and OPEB cost totalled $25 million in the quarter, decreasing $15 million sequentially primarily due to the planned maintenance outage at Rockdale that was completed in the second quarter. In the third quarter, Rockdale was $11 million of the total transformation expense and its $44 million year-to-date. LIFO and metal price lag turned unfavourable this quarter and increased cost $12 million. Year-to-date LIFO and metal price lag totalled negative $15 million.\\nFinally our pension/OPEB add back now excludes pension service costs better matching this years\\u2019 adjusted EBITDAC to next year\\u2019s EBITDA, when an accounting standards update on retirement benefits accounting will take place.\\nLooking at cash generation, at the end of the third quarter, as Roy alluded to; our cash balance had grown to over $1.1 billion, primarily due to free cash flow of $288 million in the quarter and $514 million year-to-date. This $1.1 billion cash balance is before making the October payment for the Rockdale contract settlement. The key driver of cash used for financing is dividends paid to our AWAC joint-venture minority partner and dividends totalled $89 million in the third quarter.\\nAdditionally, in the third quarter, early payment of $41 million of Brazilian debt related to our hydro facilities is included in cash for financing, partially offset by proceeds from exercise of employee stock options. The key driver of cash provided from investing its capital expenditures which increased to $96 million in the third quarter, it also includes an additional $8 million investment in the Ma\\u2019aden rolling mill.\\nNow let\\u2019s move to the financial metrics.\\nOur balance sheet and related financial metrics continue to strengthen and on September 5, Moody\\u2019s upgraded our debt rating to BA2 with a stable outlook.\\nOur debt is not rated BB plus by Fitch, BA2 by Moody\\u2019s and BB minus with a positive outlook by S&P.\\nIn addition to our $1.1 billion cash position, today\\u2019s working capital has been steadily improving throughout 2017, now at 17 days in the third quarter compared to 18 days in the second quarter and 19 days in the first quarter. Capital expenditures now totalled $255 million year-to-date.\\nThird quarter spend was $96 million up $8 million form the second quarter. The return seeking capital spending was $37 million and sustaining capital was $59 million. We anticipate this spend to continue to accelerate in the fourth quarter.\\nOur 2017 year-to-date annualized return on capital at 6.3% is up 4.8 percentage point compared to our full year 2016 level. Leverage improvement continues with net debt of $285 million and net debt-to-adjusted EBITDA of 0.15 times. Net debt reflects $41 million as I mentioned before Brazilian debt repayment in the quarter. The pension and OPEB net liability is $2.8 billion. We re-measure the pension\\u2019s funds\\u2019 assets only at year-end.\\nSo the changes in the first three quarters only reflect changes in the pension liability.\\nNow let\\u2019s review our full year 2017 outlook.\\nAs Roy mentioned, we are increasing our full year EBITDA outlook to approximately $2.4 billion, up from a range of $2.1 billion to $2.2 billion. This higher EBITDA outlook is based on improved market pricing, partially offset by lower earnings from our Brazil Hydros due to the drought, expected higher input cost and higher and accompanied eliminations and LIFO cost.\\nAs noted in the assumptions while our October ATI is already set on September spot prices, we are using $470 per ton from unpriced alumina sales.\\nWe\\u2019re holding our shipments outlook unchanged for all segments.\\nOn the full year financial metrics we made several adjustments and let me run through them quickly. Transformation and legacy pension OPEB is now approximately $115 million improving $35 million from our prior outlook, resolving the Rockdale contract and other lower transformation costs are the key improvements. Other corporate expenses are increasing $35 million to approximately a $185 million. This change is solely due to expected inter-company profit eliminations from higher market prices. Interest is improving $5 million to $105 million. We further defined our operational tax rate to between 35% and 40%.\\nAs you know it depends on the relationship of market prices and earnings in our many tax jurisdictions. We\\u2019ve improved our pension OPEB outlook $5 million to approximately $225 million. We\\u2019ve reduced our return seeking capital by $10 million to $140 million based on spend timing of a few major projects.\\nFinally, we\\u2019ve improved environmental and ARO spending to approximately $125 million down from a range of $120 million to $140 million.\\nBefore I turn it back to Roy, a few comments on how we approach capital allocation in driving stockholder value.\\nFirst and foremost we are a commodity sector company operating entire end markets that see significant price volatility, so we take a conservative approach to capital allocation.\\nFirst we target a healthy cash reserve, which in today\\u2019s market we\\u2019ve set at roughly $1 billion. This cash balance provides the flexibility to weather market downturns without sacrificing operating stability or needing to sell assets to generate cash.\\nSecond, we spend the capital required to sustain our asset base in our current operations.\\nWhile the spending can sometimes be uneven, our target is $300 million per year.\\nThird, we invest capital in value creation activities, typically a return seeking capital expenditures with high [MPVs] target and returns well in excess of our cost to capital. Depending on the project pipeline and market conditions we target spending a $100 million to $200 million per year.\\nWhile not a capital project, you can think of our Rockdale contract resolution as a significant value creation activity. Fourth, over the next several years we expect to optimize our capital structure and reduce our weighted average cost of capital through liability reductions. By managing these priorities, we aim to return cash to stockholders in a sustainable way such as through dividends of share buybacks. When allocating capital and in all of our business decisions, we keep in mind our valuation framework. We look to improve the enterprise value of each of our businesses and reduce or eliminate non-segment expenses to create the highest to the greatest possible enterprise value for Alcoa. From there we convert enterprise value to stockholder value by optimizing our balance sheet and accounting for minority interest.\\nSo with that, let me turn it back over to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks Bill. I\\u2019ll begin with an overview of the markets and our fundamentals driven outlook for bauxite, alumina and aluminum.\\nFor bauxite, the market remains in relative balance. We now expect more Chinese demand since our estimate last quarter, and we anticipate lower exports from Indonesia, Malaysia and Guinea. Due to those two factors, we believe the potential stockpile growth in China will be two-thirds lower than last quarters\\u2019 outlook.\\nFor alumina, our forecast remains balanced.\\nWe expect China to curtail refining capacity during the winter heating season for environmental reasons and have also considered demand reductions due to the same program effect on Chinese smelting capacity. We\\u2019ve also incorporated the impact from enforcement of operational and environmental permits across China. In Aluminum, we continue to see strong demand and we are again increasing our global annual aluminum demand growth outlook by 25 basis points to a range of 5% to 5.5%. This revision includes a higher demand forecast in China, driven by strong growth in ultra-high voltage electrical applications, as well as growth in China\\u2019s two largest aluminum consuming sectors, transportation and construction. This increased demand is met by lower expected supply in China due to the government enforced curtailments.\\nSo we are reducing our predicted 2017 surplus forecast for China. Outside of China, we are maintaining our demand growth figure without lowering our supplier expectation. In sum, our aluminum forecast has improved and now shows the market relative balance in 2017.\\nNow I\\u2019ll spend a few minutes describing the supply side policy activities in China. A key market driver for global aluminum over the last quarter has been mandated supply side reforms from China. Last quarter, we discussed to significant policies managed through two Chinese government agencies.\\nThe first concerns operating licenses and is enforced by the National Development and Reform Commission or the NDRC.\\nThe second is the winter curtailment program managed by the Ministry of Environment Protection or the MEP. We now estimate as much as 7.6 million metric tons of total annual capacity could come offline. Since July, we have seen an important tranche of this capacity already curtailed currently totalling about 4.5 million metric tons per annum. 4.4 million of which is a result of the NDRC curtailments of unlicensed smelters. It is important to note that in order to restart the NDRC shuttered capacity would require a transfer of existing or approval of new operating permits, assuming the policy continues to be in forced. And as we\\u2019ve seen existing permits available for transfer have become scarce and with inflating prices. Approximately 3.1 million metric tons of annual capacity could still be shuttered as the result of the MEP\\u2019s curtailments during the winter heating season to improve air quality.\\nHowever, as these curtailments are said to start in mid-November and still lacked strict rules for calculating required curtailments, it is too early to determine their final impact.\\nTurning to alumina, the significant reduction in operating capacity in Chinese smelting also impacts the Chinese and global aluminum markets.\\nWhile curtailed smelters inevitably reduce alumina demand, we have still seen a nearly 50% increase in alumina prices over the past three months and have seen more buyers than sellers in the Chinese and global markets in these last few critical weeks. There are four key factors that help to explain these developments.\\nFirst, the announced MEP curtailment program has become more tangible in the last week, and would impact up to 10.7 million metric tons of annualized aluminum in China, with little unsold supply outside of China available to the end of 2017. Thus you see erosion demand due to the NDRC and MEP\\u2019s smelting program, but a natural partial offset due to the MEP\\u2019s refining program.\\nSecond, Chinese government regulators are curtailing bauxite mining in region such as Hunan and Shanxi in response to continued environmental inspection and recent serious safety incidents that have further highlighted potential impact to refineries that consume domestically source bauxite. Inventories only buffer that\\u2019s reduced supply for a limited period.\\nThird, higher prices for raw materials including global caustic, Chinese coal and domestically sourced Chinese bauxite are contributing to higher alumina prices on a cost push basis. This represent a longer term trend, but is not yet reached an inflexion point. Fourth and finally, Chinese smelters continue to demand alumina for expansion projects and for normal winter stockpiling activities.\\nWhile some of this alumina will not be consumed this year. These buyers add alumina demand in both 2017 and 2018 and are impacting the prices today. In summary, curtailments are occurring all along the value chain in China, bauxite mines, alumina refineries and aluminium smelters. Through supply side performance, China appears to be on track to demonstrate more responsible management of their aluminum industry and sensitivity to environmental permitting and impacts not before experienced.\\nNow let\\u2019s consider how these market tailwinds connect with our operating assets to create stockholder value. With our revised EBITDA goal and our published sensitivities, the impacts to our bottom line from improved pricing is clear.\\nNow I\\u2019d like to discuss how other factors across our business influenced the value of our company and create sustainable stockholder value throughout the market cycle.\\nAs Bill said earlier, we continuously look to improve the value of each of businesses to drive results, and our operational decisions have better enabled us to catch a growth and improve earnings. Taking a closer look at the strength across business segments, in bauxite our very low second quartile position acts as a competitive advantage.\\nOur bauxite segment is growing third party sales and expanding production in Juruti, Brazil to meet rising demand, while also continuing to supply our refineries. And in Australia, we are increasing our ability to export bauxite to meet rising Chinese demand.\\nOur alumina segment operates low cost assets with a very competitive first quartile cost position. With refineries in Brazil, Spain and Australia, our alumina business has access to both the Atlantic and Pacific markets.\\nOur alumina system is seeing strong production growth led by our Pinjarra refinery in Australia, demonstrating our ability to successfully operate these assets.\\nOur aluminium portfolio is mid-second quartile with a vertically integrated carbon anode supply. In Australia we completed the restart of our Portland aluminium smelter that restored the capacity loss from a power outage last year, and we are focused on a longer term solution to make this plant competitive beyond our four year agreements. In the US, the restart of the Lake Charles calciner in Louisiana enables Alcoa to produce more calcine coke internally and reduces the cost to make our own anodes. And the partial restart of the Warrick smelter should significantly improve profitability of the integrated sight and support anticipated profitable production growth for the rolling mill.\\nWe will continue to review our curtailed assets and weigh the potential for restarts against a variety of factors. But our ability to maximize stockholder value does not end with our operations.\\nWe also have financial levers that can make our company stronger and drive long term value. In corporate, we have reduced future costs by terminating the Rockdale power contract.\\nWith the Rockdale and Warrick decisions combined, we expect to improve adjusted EBITDA by more $120 million on an annualized basis, once the smelter restart is fully operational by the end of the first half of next year.\\nIn addition, we continuously look to manage all our financial considerations, and as Bill mentioned we repaid $41 million of our Brazilian debt in the third quarter. This in combination with our strong cash balances are important steps to continue strengthening our balance sheet. And finally, we hold ourselves accountable through our stated priorities.\\nAs we enter the fourth quarter, we continue to focus on these three simple ideas; reducing complexity, driving returns and strengthening the balance sheet. What we\\u2019ve done so far this year fits within each of these priorities. We delivered strong profitability in the third quarter and with higher alumina and aluminium pricing, we expect a strong end to 2017, with fully year adjusted EBITDA of approximately $2.4 billion. We remain focused on a very disciplined capital allocation strategy, while meeting our legacy responsibilities.\\nOur three strategic priorities have guided our actions so far in 2017, and we believe those actions are driving gains in sustainable stockholder value. With that, I\\u2019d like to invite any questions that you might have for either Bill or me.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you Mr. Harvey. (Operator Instructions). And your first question will be from David Gagliano of BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"I just have a couple of knit picky or numbers types question behind some of the assumptions.\\nYou may have touched on the first one in your prepared remarks.\\nSo I just want to clarify a little bit, on the outlook the text says the outlook is based on alumina price of \\u2013 API price of 470 for unpriced sales for the fourth quarter. And what I\\u2019m wondering is, we\\u2019ve got the 30 to 60 day lags for your prices.\\nSo dos that 470 assumptions mean for the remainder of the quarter or does that mean for all of Q4 volumes price to 470?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"It\\u2019s a great question Dave and we tried to make it as clear in the release, but let me try to clarify it even further. That means that we have a lag on pricing.\\nSo we have approximately a 30 day lag on alumina pricing and at this point approximately half of the quarter is already prices and so that would be the assumption around the remainder of the quarter.\\nSo that\\u2019s was baked in to that $2.4 billion estimate.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"And then just on slide 15, there\\u2019s all of the line items. We did notice the other corporate expenses which have been running 30 million per quarter that number is expected to be closer; it looks like closer to 100 million in the fourth quarter.\\nSo the two-part question there, what\\u2019s behind the jump and is that factored in to that $2.4 billion EBITDA target as well?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"It is absolutely factored in to that $2.4 billion.\\nSo just to be clear that 2.4 billion includes all of the things we\\u2019ve discussed today. And again a really great question around other corporate expenses let me make that very clear. We do segment eliminations in corporate and so as profitability runs up in our upstream parts of our business bauxite and alumina as they sell to the aluminum segments, we eliminate that profitability if that product has not shipped.\\nSo any inventory that still sits there for aluminum that has alumina content, you have to eliminate the profitability.\\nSo the sole reason for that higher other corporate expense, it is due to higher profitability in our alumina segment that sits in inventory.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"So just to clarify, so then that would continue at that rate, sort of the fourth quarter rate moving forward as the profitability stayed at that level or would it start to come down again?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"Well it depends on what inventory does in 2018 and we will give you good guidance starting in 2018 for full year 2018. But that is, like I said, it\\u2019s based on the fact that alumina prices have run up so quickly and you\\u2019ve got profit sitting in inventory.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question will come from Jorge Beristain of Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Jorge Beristain\", \"content\": \"I guess just also a kind of minutia financial question, but with the pre-pay of Rockdale where are we going to see the benefit start to flow in your adjusted EBITDA [cable] or the reconciliation you\\u2019ve got like a corporate expense like, you\\u2019ve got another line, and where should we make those adjustments once you start saving that money?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"Well it is on page 15; it will be on the transformation and legacy pension OPEB. And in the reconciliation it is not going to be in corporate expenses, I don\\u2019t believe.\\nI think it will probably be in the other category Jorge.\"}, {\"speaker\": \"Jorge Beristain\", \"content\": \"Sorry, it\\u2019s the first other category or the second other category?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"It\\u2019s in the last other category.\"}, {\"speaker\": \"Jorge Beristain\", \"content\": \"Okay, got it. And just the other question was on Warrick; obviously everything has turned on a dime because of China\\u2019s environmental moves of late. But on Warrick what would it take you guys to get across a decision line on restarting the remaining, I think it\\u2019s a 100,000 tons that are still idle there?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"Well let\\u2019s get the first three lines up and running and when we get those first three lines up and running, we\\u2019ll evaluate the other two lines. At this point, we are very focused on one delivering the restart on time or quicker that what we had committed to you and making sure that we have cost control.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And Jorge, it\\u2019s Roy. We scan across all of our curtailed facilities.\\nSo to see whether any restarts of those assets, whether it\\u2019s partially curtailed or fully curtailed would make sense. And we weight that against market factors, we weigh it against prevailing and future expected pricing and we also look at what it would take in order to restart it.\\nSo it is a question we ask ourselves very frequently. We just finished two restarts, and we are just getting started on Warrick, so we take that question very seriously.\"}, {\"speaker\": \"Jorge Beristain\", \"content\": \"Got it. And just quickly I wanted to verify, Bill you mentioned that the headwind for energy in Brazil is \\u201850 million\\u2019, 50 or 15?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"50. And again going back to Dave\\u2019s question that\\u2019s already factored in to the $2.4 billion.\\nSo even with that headwind in the fourth quarter we\\u2019re anticipating greater than $800 million of EBITDA in the fourth quarter at those assumptions.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question will be from Novid Rassouli of Cowen & Company. Please go ahead.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"So starting with bauxite, we\\u2019ve seen a steady increase in your third party realized prices. I just wonder if you can kind of speak to the trend there, what\\u2019s the primary driver and maybe how you guys see that developing in future quarters.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Let me hit that from a qualitative standpoint and then see if that answers your question.\\nSo as you can imagine our bauxite sales are based off the source location of where that bauxite is coming from, and also about whether those contracts happen to be FOB or CIF.\\nSo it depends whose paying for freight.\\nSo we\\u2019ve approached the bauxite market here in the beginning at the place, but we want to make sure that we can get good solid returns for any investment that we put in the ground and we also wanted to start to build real relationships with our customers.\\nAnd so as these new contracts come in to place and as we grow production in each of our mines, the revenue profile and more importantly the margin profile is going to really depend on the quality of bauxite, the source mine and then the customer in question.\\nSo it\\u2019s a growth business, it\\u2019s a place where we have lots of opportunities. But we look to make sure that those opportunities are matched with customer demands.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"Got it. And then you guys have done really great job of kind of laying out the drivers of alumina prices and the different things that China is doing. But I just wanted to get a sense of what you guys think moving forward, and the sustainability of these actions, because we\\u2019ve seen other markets where China has taken action and we\\u2019ve seen a big increase in prices caused one that comes to mind. And then later on they kind of loosened up. They responded to the price spike.\\nSo just wondered if you guys are thinking, given how violent we\\u2019ve seen this moving alumina prices. I guess the commitment to these actions. What your thought process is on that?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So let me address that one. There are two programs; one of them is the NDRC program that deals with operating permits essentially.\\nSo these are curtailments that are already completed and are driven simply by the fact about whether they had gone in and asked for the permit before they started operations.\\nSo its retirement of capacity that simply not permitted to be operating. That one, as long as they enforced the program means that those plants cannot return until they are either new permits or they purchase permits on the open market. And permits purchased on the markets are becoming quite expensive and we\\u2019ve actually seen those prices increase.\\nSo that program seems to have a lasting impact. Again it depends upon Chinese policy, but we don\\u2019t see any move in across the markets in any of the discussions that we\\u2019ve had that give us a sense that they are thinking about rolling that back.\\nOn the MEP side, which is the winter curtailments, that one has been announced officially for the 2017-2018 heating season.\\nSo at this point we are certain that it\\u2019s going to occur. There\\u2019s still some questions whether they calculate it based on operating capacity or total capacity, and that will be clarified on a province-by-province basis. But we feel pretty confident that that will occur over the course of those critical months, between November 15 and March 15. The interesting question what you\\u2019re asking is about what happens in future years? We obviously take a very deep look at that; we\\u2019ll talking about 2018 balances here in just a few months. We\\u2019ve heard the rumour that they are going to continue to enforce this policy through 2022, when they have the Olympics in Beijing, the Winter Olympics. But again we will watch how that market develops and it also depends a bit how much production they bring on line. And these are very targeted towards certain provinces; they are very much in tune with trying to get their citizens to be able to breathe.\\nSo in many ways that\\u2019s a very sensible policy, because it gets the desired action at the right time. That said, it\\u2019s pretty difficult to cycle smelters up and down.\\nSo it\\u2019s hard for us to imagine it is Alcoa that we would be doing a 30% curtailment in a smelter on an annual basis. It\\u2019s just hard and costly to restart.\"}, {\"speaker\": \"Operator\", \"content\": \"Your next question will be from Timna Tanners of Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"What a wild 12 months if you think about where you\\u2019ve come from. Obviously it\\u2019s an amazing move. And I just wanted to ask since our (inaudible) was at the forefront of cutting capacity more than any another aluminum and alumina producer.\\nIf you could give us a little bit color in of how you think about which ones that you would consider restarting and under what conditions? I know you talked about Wenatchee in the past and perhaps the assets in Brazil.\\nSo if you can give us a little bit more color on that.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yeah, and we\\u2019re actually not going to signal any restarts that we haven\\u2019t already signalled in the market. Again it\\u2019s a combination between what\\u2019s happening on the ground.\\nSo if you take Brazil as an example, it\\u2019s discussion with the Brazilian energy supplier, what\\u2019s happening with the Brazilian real, it has to do with domestic consumption of aluminum.\\nSo it\\u2019s a complicated question. I appreciate the reference to our 12 month life cycle and we\\u2019re coming back to that later as we end our call. But when you think about where do we real opportunities in order to bring additional capacity online, its Brazil, it\\u2019s the United States, particularly out in Wenatchee. There\\u2019s still a couple of lines and work.\\nWe have some additional capacity on top that we can bring to bear. There\\u2019s some curtailed capacity in Spain, obviously a very different market and some curtailed capacity in Australia as well as the Portland smelter. Each of these have the challenges in order to bring them online particularly energy challenges and also technology challenges.\\nSo we take a very close look at what\\u2019s happening to the market. We think about current pricing, but we don\\u2019t rely on pricing lasting forever and we think what those fundamentals look like and how we could address the particular markets in question. And I would also say that we have a point comfort in the alumina segment in the US, down in Texas. That one was curtailed about a year ago at this point or a little bit less than a year ago. That\\u2019s another place where we have a serious think of prices of $480 per ton of SGA alumina. It is an opportunity that we are analysing very deeply.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"And then my follow-up is obviously one of the big drivers of the higher prices, higher costs and we know the bauxite and alumina basis. But if you could talk a little about your caustic and pet coke position, I know you mentioned the anode advantage at Lake Charles. But are there any other measures that you can do to mitigate some of the cost inflation on those items?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"We worked across the board to try and find ways to procure smartly. Part of that is to do backward integration, the Lake Charles calcine is a great example of a place where we can buy uncalcine coke and turn that in to calcine coke and also have the ability to produce anodes should we chose to.\\nSo we look at each of these raw materials.\\nWe have the ability to leverage between markets, so when you look at caustic as an example, you\\u2019ve got Southern US and you got China and you look for ways in order to improve pricing between them. On caustic, you also have the advantage of using bauxite that is relatively low \\u2013 that is a low consumption of cost which is an advantage as well.\\nSo across each of the raw materials we\\u2019re always looking to see how can we find an advantage, because it very much is a competition.\\nAnd so it\\u2019s a fight that we have day in and day out in order to maintain and preserve the competitiveness of each of our smelters. And we also spend time on the operational side in order to improve our consumption factors or to find ways to consume coke or pitch that might be of a different quality that allows us to actually buy from brand new sources that we hadn\\u2019t thought about before.\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"And two more comments on that Timna. We did, I thought a pretty good job last quarter of explaining the caustic advantage that we have and we tried to put some numbers around it. One thing we are seeing is that alumina cost curves are steepening and that\\u2019s as expected and clearly a steeper cost curve is better for a very low cost producer.\\nJust to be clear and I think you mentioned it in your prepared remarks Roy, we have the latest cost curves in the appendix and you can see that both alumina and metal businesses have improved on the cost curves. And then secondly, Roy eluded to the restart of the Lake Charles calciner facility, which can generate around 280,000 metric tons of calcine coke tremendously gives us an advantage when we\\u2019re buying green coke and buying calcine coke to have that facility up and running.\"}, {\"speaker\": \"Operator\", \"content\": \"And next question will come from Piyush Sood of Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"First question and its going off Timna\\u2019s question, is it a date around which when you have a make a decision on the Wenatchee start. The reason I\\u2019m asking is, it will help us figure out the transformation for next year.\\nSo the guide in 2Q was about say 150 of which 65 was dropped in.\\nSo that doesn\\u2019t affect you in 2018, but you may have transformation expenses from Wenatchee next year, if you don\\u2019t restart this smelter.\\nSo should we stay around 2017 levels for next year or any positive commentary on how we should think about the moving pieces?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"I\\u2019m glad you said moving pieces, because it will be a lot of moving in to 2018 specifically around transformation, and we announced the Rockdale deal just to be clear if we haven\\u2019t hit it enough. Rockdale is going to be $60 million to $70 million pre-tax and post-tax benefit, right, because we don\\u2019t have a tax expense in the US associated with Rockdale.\\nSo that\\u2019s a fairly large favorable impact in transformation.\\nWe will be evaluating Wenatchee, we are in the process of evaluating Wenatchee.\\nYou know that we have a large substantial payment that needs to be made in the first half of next year, if we don\\u2019t restart that facility.\\nSo we\\u2019ll be going through that analysis, as Roy said that and all the other curtailed facilities over the next few months.\\nSo more transparency to come in January specifically around transformation just like we did this year.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Maybe I missed this one, but what was the EBITDA from the rolling business in 3Q?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"EBITDA in the rolling business was $4 million. It was down on a sequential quarter basis. We had a couple of operational issues that caused us to have lower than expected shipments out of the rolling mill. But that mill is still on target to do what we wanted to do this year. And as we said we\\u2019ll get a significant benefit with the restart of the smelter.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And I\\u2019ll take the opportunity just to chime in.\\nOur rolling business is one where we have real serious work to do in order to make that an attractive asset for us.\\nHowever it\\u2019s work that we are very focused on. The smelter restart is just one aspect of it.\\nWe\\u2019re also looking to improve the volumes running through the mill, look to bring in new customers and to make our rolling business much more attractive.\"}, {\"speaker\": \"Operator\", \"content\": \"And next question will come from Alex Hacking of Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Just coming back around to the cost inflation now you\\u2019re seeing from raw material NFX, is there any way you can quantify the incremental impact you expect there in the fourth quarter? And then sort of attached to that, do you do any hedging on FX or input cost? And is that something that if you don\\u2019t do it today that you are evaluating?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"Yes.\\nAs far as any further guidance around the fourth quarter, we have in that $2.4 billion we have assumed $0.78 Aussie dollar.\\nSo returning a little bit back down from the $0.80 that it was in at the end of the third quarter. And we have anticipated higher raw material cost in that number.\\nSo approximately and I believe off the top of my head around $40 million of higher raw material cost is included in that $2.4 billion already.\\nSo that is all inclusive in that number. And hedging you had asked about hedging. We do minimal hedging.\\nWe will from time to time do small amount of hedging for a specific asset.\\nSo for instance the Portland restart when we decided to restart Portland, we put some currency callers in place to manage our Portland exposure. From time to time when we have a large capita project and we know that we will be spending money in non-US dollars, we will occasionally hedge that, but no significant hedging programs either on the input cost side or on the currency.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"And then just as a follow-up, again if we think back a year ago which does seem like a long time ago.\\nYou guys had identified, I think it was something like 18 projects that would generate about $300 million of EBITDA benefits. Maybe a year later you could kind of give us an update on where the way you spend on that program and should we start to see some of those EBITDA benefits coming through in 2018. Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I\\u2019ll hit that one first.\\nSo, the intention of putting some numbers out there was to help to start to get all of our analyst comfortable with what can we bring to bear over the next three to five years really. A lot of those projects are ongoing. The market changes tend to also change some of our prioritization and what we\\u2019re doing.\\nSo the simple fact is that we\\u2019re on track, we\\u2019ve increased our growth expenditure for this year.\\nWe\\u2019re growing or we\\u2019re doing smart things in each of our businesses. The interesting thing is that we have the opportunity to invest in across the value chain because we\\u2019ve got so many good high return on projects that have not been to bear in prior years that we can immediately put in to place. And at a time of inflating prices, they become that more attractive.\\nSo we don\\u2019t have a quantitative update to what the number of project is and what the return will be. I would assume that\\u2019s something that we\\u2019d be updating as the New Year starts.\\nHowever what I can tell you is that, when we look at what we\\u2019re bringing to bear this year, and what we already have in place for the next couple of years, we\\u2019re working to make that number more attractive and better.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question will come from Curt Woodworth of Credit Suisse. Please go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"I was looking at the China supply-demand balance that you guys offered us at the start of this year, which was a surplus of between 2.1 to 2.3 and now the surplus view is 1.8 to 2.\\nSo you\\u2019ve taken it down 300,000 tons, yet we\\u2019ve got [4.4] close from the permitting issue of potential 3.1 around seasonal cuts.\\nSo I\\u2019m just curious as to kind of why I guess I would have thought that certainly giving the permitting issue the surplus would have come down a lot more or maybe relative to the thinking at the beginning of the year.\\nSo I\\u2019m just curious what the offsets were maybe to the analysis you did in Jan relative to what you think today.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Remember when we put our estimates together, it incorporates what we are expecting to happen in the market, because I\\u2019m trying to remember back to when the MEP programs were first announced. And I don\\u2019t know whether they were announced at the beginning of the year. But we already had an expectation for what we thought would be expansions, and we also had an expectation for what we thought would be curtailments. And I remember the pricing environment at the beginning of the year was also incredibly different from where we sit today.\\nSo in that pricing environment and I\\u2019ll miss the absolute percentage, in that particular moment, I think there was something like 15%, 20% or 25% of Chinese smelting that was under water.\\nSo we made an assumption about what expansions were going to come on line. We made an assumption about what curtailments could actually occur from financial motivations.\\nThe other interesting thing and I\\u2019ll add one more piece to that analysis is that, when you think about what\\u2019s happened this year we have seen a very large sea change in how much smelting capacity was actually brought offline. And differently than what we had assumed at the beginning of the year, it\\u2019s not the older higher cost capacity coming offline. It is the newer unpermitted capacity that is coming off.\\nSo it\\u2019s the stuff that sits at the bottom of the cost curve, not the stuff that sits at the top of the cost curve.\\nSo those are made by decisions in China, however we are seeing a large number of smelters idle themselves or idle partially that we never would have intended for financial purposes.\\nSo it\\u2019s these changes in the Chinese programs have really taken us for a very different ride that what we had expected at the beginning of the year.\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"And I\\u2019ll make one minor note. One thing to keep in mind is not to mix annual number with 2017 numbers.\\nSo the numbers that we\\u2019re giving you as far as the curtailments in Roy\\u2019s deck are annualized curtailments. They have occurred during the course of the year and clearly anything that\\u2019s occurring in October and November is going to have a very small impact on 2017 supply-demand deficit and surplus, but a bigger impact going in to 2018.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay, that makes sense. And then with respect to that win when you think about the illegal cuts that have already occurred, I guess there\\u2019s been more discussion around basically the illegal cuts could contribute to the seasonal mandate from the MEP. And if you look at the aluminum market its up 50% in the past two months but the Shanghai aluminum price is actually down.\\nSo do you think that the market is signally that? Have you guys heard anything with regards to how that can play out in terms of the illegal cuts counting towards seasonal mandate?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So the way that we\\u2019ve dealt with that is in our estimate for both of the programs or particularly the MEP program, we\\u2019ve tried to reflect both the largest impact in what we think is that smallest impact.\\nSo that potential bar is meant to represent the difference between those two extremes with the likely outcome somewhere between the two of them.\\nSo the good news is that you\\u2019ve got a very defined already curtailed amount which is NDRC and a little bit of MEP.\\nYou\\u2019ve got announced curtailments in MEP which are with the provinces have already started to fill out what the rules of the game are going to be. And then you\\u2019ve got that white section of that slide which is really that play that still sits within there. And remember these are annualized numbers that you see.\\nSo the actual impact on 2017 from the MEP program is important but it\\u2019s not the majority. NDRC is what\\u2019s really driving the dynamics for 2017.\"}, {\"speaker\": \"Operator\", \"content\": \"And the final question will come from Justin Bergner of Gabelli & Company. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Just to pick up where the last question left off, the NDRC curtailments are now running at 4.4 million tons versus in expectation of 3.7 million tons in your 2Q presentation. What changed there?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"What really changed, and again in the 2Q estimate that\\u2019s exactly what they were, they were estimates. We went back and we looked at where we believe the permits were and what some of the commentary in the market happened to be.\\nAnd so it was meant to be as good an estimate as we could possibly provide. The benefit that we have now is that each of these has been announced and has been also confirmed through analysts, through on the ground people that monitor total capacity, as well as what we are seeing actually come out smelter curtails, where are you seeing the alumina go and then we actually see some of the smelting, the integrated supply chain smelting in aluminum and alumina producers trying to sell some alumina because of those curtailments.\\nSo really the growth between Q2 and Q3 was driven by a more aggressive impact to some of the large private players.\\nAnd so we\\u2019ve actually seen another tranche of unpermitted capacity to come down regardless of how well politically connected they happen to be.\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"And two last comments, we have to remember that we started with two plus 26 cities and then we went to two plus 26 plus three.\\nJust most recently we\\u2019ve heard that Shandong is going through a curtailment. And I really want to give some credit to our market research, because our market research team in July came out and said around 6.1 million annual ton and up until just a few days we were around 6.1 million annual tons.\\nJust some of the most recent curtailments over the last three, four, five days has bumped us up to this potential of 7.6.\\nSo our folks both in China and here in Pittsburgh have been pretty accurate.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"And then the ex-China deficit, why is that increasing on the aluminum side versus your prior forecast?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"It\\u2019s driven by our expectation for supply, and to be rather direct, there\\u2019s been some supply disruptions at a few smelters around the world that\\u2019s shaved off a little bit of that capacity.\\nSo nothing earth shattering in how we\\u2019re analysing that.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"And then lastly on a different topic, you mentioned a 120 million benefit from the Rockdale agreement and the Warrick restart.\\nYou mentioned that you are 60 to 70 from Rockdale. Does that mean the Warrick is 50 million to 60 million beneficial to annualized EBITDA?\"}, {\"speaker\": \"Bill Oplinger\", \"content\": \"When fully operating, which will be in the second half of next year.\\nSo we will get it operating at the beginning of 2018 and it will be fully operational at the end of the first half and we should see that full [balance] at going in to the second half.\"}, {\"speaker\": \"Operator\", \"content\": \"And ladies and gentlemen, this will conclude the question-and-answer session. At this time I would like to hand the conference back over to Roy Harvey for this closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Denise. In conclusion, it was on this day, one year ago that Alcoa Corporation stock first began when issued trading. Since that day when our stock closed to $22.50 per share, our stockholder value was increased more than 110%. With our first anniversary as an independent publicly traded company quickly approaching, we are happy with how our markets have developed. And more importantly we are also pleased with what we\\u2019ve accomplished over this year to create sustainable lasting value for our stockholders. We look forward to continued momentum for the remainder of 2017 and beyond. Thank you for your time today and back to you operator.\"}, {\"speaker\": \"Operator\", \"content\": \"Ladies and gentlemen, the conference has now concluded. Thank you for attending today\\u2019s presentation. At this time, you may disconnect your lines.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2018-01-17
year: 2017
quarter: Q4
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation Fourth Quarter 2017 Earnings Presentation and Conference Call. [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, Austin, 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. Also, a note on financial statements methodology. Because Alcoa Corporation commenced operations as a stand-alone public company on November 1, 2016, the financial statements are a combination of financials carved out from Alcoa Inc. prior to November 1, 2016, and actual results of Alcoa Corporation thereafter. Accordingly, the fourth quarter 2016 results are part carve-out and part actual results, while the 2017 quarterly results are entirely actuals.\\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. I'd like to welcome everyone to our call. Alcoa significantly grew profits in the fourth quarter, most notably in our Alumina segment as we continue to benefit from favorable commodity prices. We reported an adjusted net loss of $196 million or $1.06 per share largely due to the decisions aligned with our strategic priorities. On an adjusted basis, net income was $195 million.\\nOur fourth quarter results represent our highest adjusted EBITDA since our launch just over a year ago. We generated $775 million in adjusted EBITDA, excluding special items, up $214 million sequentially primarily on higher alumina prices.\\nWhile this is up nearly 40% from the prior quarter, 4 short-term operational and financial impacts contributed to results that were about $50 million lower than our stated expectations. Those 4 things were roughly equal in impact.\\nFirst, beginning in Brazil. A drought caused our Juruti mine on the Amazon River to experience an acute water shortage that constrained our bauxite washing capacity with follow-on impacts to our Brazilian S\\u00e3o Lu\\u00eds refinery.\\nSecond, that same drought also affected profits from the Brazilian hydropower system.\\nThird, in Spain, where we are exposed to market power pricing, our smelting system experienced significantly higher power prices.\\nFinally, we have lower-than-expected global alumina shipments due to weather delays and difficulties with shiploading.\\nWhile some of these impacts were unforeseen shifts in the market, others highlight opportunities to improve our operating system.\\nWe have taken actions to address those items within our control and avoid this from recurring. From a cash perspective, we reduced our days working capital to 11 days and generated $455 million in cash from operations, increasing our year-end cash position to just over $1.3 billion. This past quarter, we continued to aggressively execute on our strategic priorities to reduce complexity, drive returns and strengthen the balance sheet.\\nAs we grew our cash balance, we also took decisive actions to address legacy smelting issues in the U.S. and in Italy. And due to our stronger position, we successfully renegotiated our revolving credit agreement and gained greater flexibility to execute our capital allocation strategy. It has been an exciting quarter and first full year for us.\\nAs I look back over 2017, we had a very strong first full year. A favorable market environment helped to significantly increase both revenue and earnings compared to 2016. Strong markets, combined with a disciplined focus on our strategic priorities, enabled us to strengthen and position our company for the future faster than we had anticipated. We achieved adjusted EBITDA for the year of $2.35 billion, an amount more than twice what we earned in 2016.\\nOur cash from operations and free cash flow were also very strong in 2017.\\nWhile we invested some of our cash flow to eliminate long-term liabilities and debt, we still grew our cash balance by more than $500 million over the course of the year. We refocused our global company and operations driving accountability and with faster decision-making.\\nOur efforts on operational excellence produced annual production records across our Bauxite, Alumina and Aluminum segments. Buttressed by our key objective to drive returns for our stockholders, we completed and initiated capital projects that will strengthen our 3 product-focused businesses. Each of our segments made progress this year. In Bauxite, we initiated exports from Western Australia and, in 2017, achieved third-party sales from all of our major mining operations. In Alumina, we had internal records for global energy efficiency and production records at our 3 largest refineries.\\nWe also achieved nameplate capacity for 1 month at the end of the year in our Saudi Arabian joint venture. In Aluminum, we restructured and simplified our organizational structure, successfully restarted our Portland aluminum smelter in Australia and began the partial restart of the Warrick smelter in Indiana. This project is moving quickly, and we're on track to complete the restart in the second quarter of 2018. And as part of our goal to reduce complexity, and perhaps our most visible change, we decided to move our global headquarters back to Pittsburgh. It demonstrates our commitment to a smaller overhead structure and a clear-sided focus on profitable and successful operations. Not all the decisions, however, have been easy.\\nAs you saw in our earnings release, we announced today an important decision regarding our pension plans in the United States and Canada.\\nFirst, decisions that directly affect our employees, especially those who have been with Alcoa the longest, are difficult. The pension and other postretirement benefits are by far our largest liability, making change necessary.\\nSo to reduce this liability and to strengthen the balance sheet, beginning in 3 years, salaried employees in the U.S. and Canada will no longer accrue retirement benefits under the defined benefit pension plans. The approximately 800 employees affected will instead receive benefits for retirement through defined contribution plans, which are already used by our other salaried employees. Beginning in January of 2021, Alcoa will contribute 3% of eligible compensation to the retirement savings plans for these affected employees in addition to the existing savings match that Alcoa already offers. Also in 2021, the company will end its contribution toward pre-Medicare retiree medical insurance in the U.S. Bill will address our current pension and OPEB liabilities and provide additional details regarding the changes that we are making. In Canada, we also recently decided to lock out the union membership of ABI smelter in Becancour, Qu\\u00e9bec after the union rejected our proposed labor contract. Management employees are now operating 1 of the 3 potlines at the location. We made it clear to the union that our best and final offer would have provided competitive wages and benefits while taking into account market dynamics and the need to strengthen Becancour for the future.\\nNow we are focused on providing support to the management employees as they safely operate the plant at reduced capacity. We've made certain adjustments related to the Becancour facility within both our financial and operational outlooks, and Bill will discuss this further. I would like to emphasize that we do not make these decisions lightly, and we have considered the real impact on our employees. We always operate within our 3 stated values with the end goal of building a stronger Alcoa, one that is resilient through market cycles, provides our stockholders with a financial return and allows all stakeholders to succeed. With that, I'll turn the call over to Bill to discuss our financial results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy. I'll briefly run us through the financials. Sequentially, revenues are up 7%, increasing $210 million to $3.2 billion on higher shipments in our Alumina segment and higher alumina and aluminum prices. Compared to last year, revenues are up 25% on higher prices for alumina and aluminum and higher shipments across all 3 segments. In the quarter, the net loss attributable to Alcoa Corporation was $196 million or $1.06 per share primarily due to restructuring costs associated with the resolution of the Rockdale Energy contract and the announced closure of their Rockdale operations. Special items in the quarter totaled an unfavorable $391 million pretax with the largest amount resulting from the Rockdale contract termination and closure decision. Out of the $391 million, $297 million is restructuring comprised of the Rockdale contract termination, Rockdale plant closure, and take-or-pay energy contracts that curtailed smelters, less a reversal of a reserve for an Italian power matter. $39 million of special items and COGS associated with the restart of the Warrick smelter that Roy mentioned previously. Combined restart cost for Warrick have been slightly higher than we had previously estimated, but execution of the project remains on track for completion in the second quarter of 2018. And lastly, $68 million of discrete tax items are primarily deferred tax asset revaluations in foreign countries as well as a $22 million charge related to the U.S. -- the new U.S. tax legislation.\\nNow let's look at our adjusted EBITDA and the full income statement after special items.\\nOur fourth quarter adjusted net income at $195 million is 44% higher than the third quarter. Compared to the prior year, our adjusted net income improved $169 million. Adjusted diluted earnings per share improved $0.32 sequentially to $1.04 per share and grew $0.90 per share year-over-year. Adjusted EBITDA excluding special items reached $775 million in the third quarter, up $214 million sequentially as the entire sequential revenue increase of $210 million flowed through to the adjusted EBITDA. Adjusted EBITDA is up $440 million versus the prior year. A couple of notes. On a sequential basis, our EBITDA margin increased 5.5 percentage points to 24.4% primarily due to higher earnings in our Alumina segment. Year-over-year, our margin improved over 11 percentage points on higher alumina and aluminum prices. In the fourth quarter, SG&A and R&D expenses totaled 2.5% of revenue.\\nFor items below the EBITDA line, depreciation, depletion and amortization declined $7 million sequentially primarily due to currency movements. Other income and expense at $10 million improved $6 million sequentially primarily due to improvements in equity income.\\nOur operational tax rate depends heavily on the jurisdictions where we have profits and losses. In the fourth quarter, the rate was 37.1%, an improvement of 2.1 percentage points. Net earnings attributable to noncontrolling interest increased $90 million sequentially to $152 million due to higher earnings in our AWAC joint venture.\\nLet's take a deeper look at the factors driving adjusted EBITDA. Sequentially, adjusted EBITDA is up $214 million with higher pricing and other improvements more than offsetting unfavorable energy and raw material costs. There are 3 key parts to this quarter's story.\\nFirst, higher metal and alumina market prices and unfavorable currency added $320 million.\\nSecond, energy and raw materials headwinds, unfavorable energy performance decreased earnings $100 million driven, as Roy had said, by drought conditions in Brazil and increased Spanish power market prices. The $15 million of raw materials inflation was due to higher prices for carbon materials and smelting and for caustic and refining.\\nThird, net productivity offset everything else. Net productivity and other improvements more than offset weaker price mix primarily in the Alumina segment.\\nAs far as the -- let's turn to the business segment performance.\\nOur Alumina segment's adjusted EBITDA, up 177%, drove improved total segment earnings. 4Q '17 adjusted EBITDA in our segments totaled $902 million, up $283 million sequentially.\\nLet's take a closer look at the sequential comparison for each segment. Bauxite adjusted EBITDA declined $7 million primarily due to the operational issues mentioned by Roy at the Juruti mine. The Juruti mine issues also had an unfavorable impact of $4 million on our Alumina business. Alumina adjusted EBITDA increased $359 million primarily due to higher index prices. Productivity improvements, increased volumes and favorable currency partially offset unfavorable price mix and raw material impact. In Aluminum, adjusted EBITDA was $234 million. The lower Brazil hydro earnings and higher energy cost in Spain as well as the higher raw material cost for alumina and carbon were partially offset by higher metal prices and productivity improvements.\\nLet's take a look at our nonsegment adjusted EBITDA results. Combined, our 3 nonsegment adjusted EBITDA line items changed $69 million sequentially and totaled $127 million.\\nOur transformation entities plus our legacy pension and OPEB costs improved $21 million in the quarter partially due to the termination of the Rockdale power contract. LIFO and metal price lag was unfavorable again this quarter and increased cost $42 million due to rising alumina prices and the increased value of the inventory held at smelters. Rising alumina prices also impacted our other corporate expenses line item, which increased $48 million sequentially due to higher intercompany profit eliminations primarily between our Alumina and Aluminum segments. If we look at cash generation as of the end of the year.\\nOur cash balance had grown to $1.36 billion primarily due to free cash flow of $305 million in the quarter and $819 million year-to-date. This $1.36 billion cash balance is after making the $238 million payment for the Rockdale contract settlement in the fourth quarter.\\nNow let's move to the other financial metrics.\\nOur balance sheet-related financial metrics continue to strengthen. And as Roy mentioned, in December, S&P upgraded our credit rating to BB with a positive outlook. Days working capital has steadily improved during the course of 2017, now at 11 days in the fourth quarter compared to 17 days in the third quarter and 14 days at the end of 2016. Capital expenditures totaled $405 million in 2017. Fourth quarter spend was $150 million. Return-seeking capital spending was $35 million, and sustaining capital spending was $115 million. We had anticipated the spend to accelerate in the fourth quarter, and we are pleased to start recognizing some of the benefits of these key projects.\\nOur 2017 return on capital at 7.6% is up 6 percentage points compared to 2016. Leverage improvement continues with net debt of $54 million and net debt to adjusted EBITDA of nearly 0. The pension and OPEB net liability is $3.5 billion, and I'll address that in the next slide. Recall that we remeasure our plans once each year at year-end, so we are seeing the full effect of the annual remeasurement in this quarter. The main driver of the year-over-year increase was the 44 basis point drop in pension discount rates causing a $400 million liability increase.\\nIn addition, asset returns of 4% were lower than our expected return of approximately 7.5% causing a $200 million increase in the liability. Roy mentioned that we're taking some actions on the net liability side, so let me highlight a couple of those.\\nFirst, we restructured our U.S. plan asset portfolio and investment strategy to more closely align with our peer group. When our investment strategy was defined prior to the company's separation, we had a complex and defensive portfolio, which hasn't provided the returns expected. By the first quarter of 2018, we will have unwound that strategy and also change the number of asset managers.\\nAs Roy mentioned, we also made the hard decisions regarding liability management. Freezing the U.S. and Canadian salary plans and eliminating the retiree medical sub-fees will reduce our liability by $35 million in the first quarter of 2018.\\nGiven our strong cash generation, we're planning discretionary contributions into the plans in 2018. These contributions will position us for annuity purchases that will transfer the most of the risk and cost possible without increasing our minimum required contributions. With $300 million of discretionary funding, we would expect to annuitize over 9,000 retirees.\\nWe have further defined our capital allocation model on the next slide.\\nAs we've mentioned previously, we're a commodity sector company operating in markets that see significant price volatility, so we take a conservative approach to capital allocation.\\nFirst, we target a healthy cash reserve, which we have set at roughly $1 billion. This cash balance provides the flexibility to weather market downturns without sacrificing operating stability or selling assets to generate cash.\\nNext, as mentioned on the prior page, we expect to spend roughly $300 million to sustain our asset base and current operations and invest $150 million in return-seeking capital projects to drive value creation.\\nWe are focused -- also focused on optimizing our capital structure and reducing our weighted average cost of capital through liability reductions. In 2018, we expect to make additional payments of approximately $300 million into our pension plans to reduce our liability, position for annuitization and improved flexibility of future funding requirements. After completing these payments, we plan to split any excess cash above our targeted $1 billion cash balance between further delevering the balance sheet and returns to shareholders through either dividends or stock buybacks.\\nHere's a brief update on some of our value creation return-seeking capital projects. Spending on most capital projects occurs over multiple years, so we've honed in on projects reaching substantial completion in 2017 and 2018.\\nFor 2017, our total return-seeking capital expenditures was $118 million. Over 2/3 of that spend, roughly $80 million, were for major projects that were substantially completed in 2017. Their combined estimated return over expected project life is an IRR of approximately 50%. Similarly, for 2018, roughly $95 million of our approximately $150 million expected return-seeking spend is for major projects to be substantially completed in 2018. Those projects show combined estimated returns of nearly 45%. The high return projects are across all of our business units and around the world.\\nSo let me turn to the outlook for 2018.\\nFor 2018, we expect to deliver between $2.6 billion to $2.8 billion in adjusted EBITDA. This EBITDA outlook is based on an LME price of $2,200 and API price of $390 with $400 million of raw material cost increases included as the key headwind.\\nOur shipments outlook for 2018 is in line with 2017 actual results, except for slightly lower aluminum shipments primarily due to the ABI curtailment. Each year, the first quarter tends to be our lowest shipment quarter due to fewer days in the quarter and scheduled maintenance creating a $40 million sequential headwind.\\nAs seen in 2017, we expect our second half of 2018 to be stronger than the first half. Outside of the segments, our full year outlook is improving on several fronts. Transformation and legacy pension, OPEB expense is improving by $53 million to approximately $50 million. Resolving the Rockdale contract is the primary reason for that change. LIFO and metal price lag was an unfavorable $65 million in 2017 and will vary in 2018 with prices and inventory levels. Other corporate expenses are decreasing $10 million to approximately $150 million as we expect lower intercompany profit and eliminations, but this will still vary depending on metal and alumina prices. Below the EBITDA line, nonoperating pension OPEB is estimated to be roughly $160 million. This change is a result of the FASB accounting standards update on compensation and retirement benefits. We anticipate our operational tax rate to be consistent with 2017 and will be between 35% and 40%. Rate depends on market prices and earnings and many tax jurisdictions, and this rate incorporates our current understanding of the U.S. tax law changes. And finally, net income of noncontrolling interest will be 40% of our AWAC joint venture earnings primarily the Bauxite and Alumina segments, which have a 30% to 35% operational tax rate. Cash flow uses reflect both the increase in minimum funding requirements for pension and the discretionary payments of $300 million.\\nWe expect stable levels of return-seeking and sustaining capital expenditures estimated at a combined $450 million. And we will make our last DOJ and SEC payments of $74 million in the month of January.\\nSo this month, that will be done and behind us.\\nFinally, we expect a consistent level of environmental and ARO spending in the range of $110 million to $130 million.\\nLet me turn it back over to you, Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you very much, Bill. I'll begin with an overview of the markets and our fundamentals-based outlook for bauxite, alumina and aluminum as we enter 2018.\\nFor bauxite, we ended 2017 with a balanced market. 2018 will likely seek Chinese stockpiles grow as Chinese refineries continue to have an appetite for imported bauxite and supported by increased Indonesian exports and continued production growth in Guinea.\\nFor alumina, we estimate that we ended 2017 in a balanced market.\\nFor 2018, our forecast also remains balanced.\\nFor environmental reasons, we have seen China curtail some refining capacity for the winter heating season between November 15 and March 15, and we anticipate that they will do so again next winter.\\nWe have also incorporated the impact from the disruption at the Becancour smelter in our world ex China alumina balance figures. In aluminum, we finished last year with strong demand growth above 5%, and we continue to see strong demand growth in 2018 in the range of 4.25% to 5.25%. Outside of China, we are expecting even higher primary aluminum demand growth in 2018 relative to 2017 driven by macroeconomic and end use market improvements.\\nWe also see supply reductions in part driven by the smelter disruption at Becancour. In China, we are forecasting a lower surplus than we saw in 2017 driven by still robust demand growth in 2018 and relatively lower-than-expected supply growth due to the policy-driven curtailments we expect to impact the start and end of this year. Supply growth is also expected to remain disciplined as China enforces its capacity and permitting framework.\\nIn fact, the Chinese government reaffirmed its commitment to enforcing this framework earlier today in a policy announcement and set a deadline for the end of 2018 for smelter operating permits to be exchanged.\\nWhile the exact impact of this deadline remains open, China is signaling that it is serious about supply reform in the aluminum industry. In sum, the alumina market ended 2017 in balance and is projected to be in a deficit in 2018.\\nNow let me spend a few minutes describing the supply side policy activities in China.\\nAs we discussed last quarter, a key market driver in both the aluminum and alumina markets has been policy-led curtailments in China. In 2017, we saw 4.5 million tonnes of aluminum capacity curtail as a result of NDRC program targeting unlicensed smelters. To restart, this capacity requires transfer of existing permits, which are limited in number. And as we learn today, this transfer must be completed by the end of this year. In the 2017 to 2018 winter heating season, we have seen curtailments of 3.5 million tonnes of alumina refining capacity and 0.9 million tonnes of aluminum smelting capacity. The enforced curtailments were less than those implied by previous Chinese government announcements for two reasons, First, provincial governments recently provided more specific guidance on the curtailments since our last earnings presentation, which slightly reduced the levels of impacted capacity. And second, there has been a mixed record on provincial enforcement of the policy, especially where NDRC and MEP curtailment policies overlap. Nonetheless, it appears that the broader program of MEP winter heating season curtailments across not only the aluminum industry but also the steel, cement, coal and other industries is having its desired impact of improving air quality in the targeted areas.\\nAs such, at least one province, Henan, has announced its intention to continue this curtailment program into 2018 to 2019 winter heating season. With that example in mind, we expect that this program will continue next winter in the other targeted provinces as well.\\nNow let's look at a few key indicators of aluminum market cost and profitability.\\nWhile many industry analysts have focused solely on policy-driven curtailments in China, we also anticipate that additional smelting curtailments could be possible based on economic factors. Smelters in China faced increasing economic pressure toward the end of 2017. Costs have risen in China more than outside of China driven by steeper increases in prices of alumina, energy and carbon.\\nAdditionally, the world, ex China, experienced a more significant price recovery during the fourth quarter than did China.\\nAs a result of these factors, Chinese smelting margins have been under significant pressure.\\nIn fact, we estimate that more than half of Chinese smelting production was unprofitable in the fourth quarter.\\nWhile Chinese smelter margins have improved somewhat in January, economics like this make it more likely that we could see additional economically driven curtailments in China in 2018. Also, this combination of policy and economics has brought more stability to the Chinese market. At the start of 2017, economics dictated that some smelters would be forced to curtail to preserve cash as the projected Chinese surplus increased.\\nAs the year progressed, China's new focus on supply management determined how and where these curtailments should occur. This contributed to a more stable and orderly aluminum market in China.\\nAs we mentioned earlier, we still anticipate China to be in aluminum surplus in 2018.\\nHowever, there are positive developments in China as demand grows strongly, supply reform continues into the new year, including with today's announcement, and economics continue to apply pressure to supply.\\nOur actions this quarter and this year helped prepare us for whatever the market brings in the coming months and years. With a stronger balance sheet and portfolio, we can continue to invest in our businesses through the cycle while holding ourselves accountable to operate our portfolio to maximize our cash generation. Throughout 2017, we focused on three simple objectives, to reduce complexity, drive returns and strengthen the balance sheet. Everything we've accomplished this year, our restarts and closures, the headquarters move to Pittsburgh, our pre-projects and production records, our new revolving credit agreement and our cash generation and strong profitability, our employees achieved through our strategic priorities. And in the process, they strengthened Alcoa's foundation. And following the first year of strong financial results, we anticipate more growth this year. We project adjusted EBITDA excluding special items of $2.6 billion to $2.8 billion. In 2018, we will remain steadfast in our priorities, continuously identifying savings, profit drivers and new ways to strengthen the balance sheet. In doing so, we'll add building blocks upon our solid foundation to drive returns for our stockholders and ultimately create the Alcoa of the future. With that, I'd love to hear some questions out there for either Bill or I.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions]. And our first question comes from Timna Tanners with Bank of America Merrill Lynch.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"So I'm going to ask two questions. And the first one is I appreciate your perspective on China and certainly the step downs are compelling. But I was wondering, are analysts in China a bit worried about 5 million tonnes of alumina capacity coming back online? And lower alumina prices means the aluminum producers, as you mentioned, are making a margin again. These high aluminum and alumina prices seem to be inviting new capacity or talk of new capacity not just in China. But this morning there was an article in AMM on a new producer starting up potentially in the U.S.\\nSo can you talk us about what you're seeing on the risk of new capacity if you think it's going to be an issue materially going forward?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Timna, let me try and address that.\\nSo as you know, we try and incorporate our expectation for likely restarts and likely new capacities come online, and we are aware that there are a number of new refineries that have been under construction and that will be coming online.\\nNow that's a bonus or a positive thing for us because we have the opportunity to sell bauxite, but also it tends to change the balances between alumina supply/demand and, in the end, also has impact on aluminum supply/demand because of the underlying economics.\\nSo we try and take a pretty balanced view and, in fact, do a refinery by refinery review to try to see what we really think is credibly possible to restart or to be turned -- brought online.\\nAnd so I think the main answer to your question, Timna, is that economics are going to the help prove how those supply/demand economics pull through.\\nSo what we have seen in China is that the market reacts pretty quickly to the changes in the -- in pricing scenarios.\\nAnd so right now we continue to see a market where you see a balanced supply and demand in alumina, and you've seen the impact on smelters and downstream.\\nSo I think our view of the market says that both economics and then also the policy side of China is going to keep us more or less in a balanced condition even with those new -- even with the new and restarted portions of capacity coming back online.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. Great. And then if you could provide a little bit more color on your guidance.\\nSo clearly, if we just implicitly look at fourth quarter EBITDA and annualize it, your guidance is below that and the biggest buckets are alumina prices coming down, it seems like, and then some puts and takes. But am I missing any big items? And can you help us understand in the guidance why flat volumes? Is it Becancour coming off, anything else coming on? Is there Wenatchee assumption in there?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, so I'll handle that one, Timna.\\nIf you simply take the fourth quarter and annualize it, you have to factor in the guidance around higher raw material cost.\\nSo we are guiding to approximately $400 million of higher raw material costs. And then also, the fourth quarter would have seen higher alumina prices, and so the alumina assumption that we've built in is lower than what we saw in the fourth quarter. And then the other -- I guess, the other major impacts, metal prices ride along the same lines, and currencies -- with the dollar weakening, currencies are a negative impact also in the guidance.\\nSo as far as the volume question goes, we're seeing creep in both the bauxite and on the alumina side, so we're going to pick up some incremental volume there. But we've also built in -- on the aluminum side, we've built in the Becancour curtailment for the full year.\\nSo we have that running at 1 line, which essentially loses 200,000 tonnes of volume out of the numbers.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Curt Woodworth with Cr\\u00e9dit Suisse.\"}, {\"speaker\": \"Curtis Woodworth\", \"content\": \"Yes, I also had a question on the guidance, too, Bill, because you also had a $55 million LIFO hit this quarter and then you talked about a $50 million impact from the drought and some of the operational issues.\\nSo that would put your run rate and EBITDA closer to $3.5 billion. And then your LME assumption's, I think, 100 a tonne above what it was this quarter, that would give you another $200 million. And I hear you, the alumina price is lower. But it seems like on a like-for-like basis, you'd be closer to maybe $3.6 billion run rate? So is it -- like, do you feel like you're being conservative in the guidance? Is that math somewhat incorrect? And can you talk about what your assumptions are for FX and what the impact of that was on the guide?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, sure. I guess, some of the big impacts from what you're looking at is, in the fourth quarter, as we discussed, the alumina prices were a little bit higher. The one-time impacts that Roy alluded to, I would say won't recur.\\nSo if we were to look at the fourth quarter, I'd say we made $775 million, we'll take you up to around $825 million on a run-rate basis. Then you get the $400 million of higher incremental raw material costs, roughly $100 million of higher currency costs during the course of the year, and that gets you -- should get you back down to the $2.6 billion to $2.8 billion range if you do it that way.\"}, {\"speaker\": \"Curtis Woodworth\", \"content\": \"Okay, that's helpful. And then just on the discretionary payment into the pension. Does that capital payment count against the capital return basket that you were provided for when you renegotiated your revolver, which I think gave you $350 million this year, plus I think you had a carryover benefit from last year, so you had, I think, roughly $525 million of total capital return this year so...\"}, {\"speaker\": \"William Oplinger\", \"content\": \"The $300 million does not account for that capital return.\\nSo you're doing the math right in our revolver. And just to be clear on that, so the thinking is that we make a $300 million discretionary payment to the pensions. We currently sit with cash at $1.36 billion. And then any incremental cash above that $1 billion will be split between delevering, further delevering, and returns to shareholders. And the next logical question that I'm sure people ask is how we do this return to shareholders.\\nWe haven't decided yet. And when we get to the point of doing those, we'll announce how we're going to do it.\"}, {\"speaker\": \"Curtis Woodworth\", \"content\": \"Do you think it's likely you'll initiate a dividend policy this year?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"It's likely that we will return cash to shareholders this year.\\nSo we haven't decided whether it's a dividend, a special dividend or a share buyback at this point.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from David Gagliano with BMO Capital Markets.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Just to keep along the same lines of some of the questions earlier. I just want to clarify, Bill, you just mentioned some numbers, but I apologize, it's still not adding up to me.\\nSo $775 million 4Q, add $50 million back, $825 million, which annualizes, obviously, $3.3 billion. And then you gave a $500 million of negative, which is $2.8 billion, so that's a high end of the range. What else is it like -- how much for Becancour, for example, for that 200,000 tonnes? What's the financial impact in the EBITDA for that assumption?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. And that's a good point, Dave. Becancour is included in those numbers so you have to back out something for Becancour.\\nNow given the fact that we're in the midst of the situation at Becancour, we're not providing guidance on the specific financial impact of the lockout, but you can see what the tonnes impact is, and that should give you an idea of how much that negatively impacts us.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"So $2.6 billion to $2.8 billion is before Becancour, okay.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I'm sorry, it includes Becancour.\\nSo the negative impact of Becancour is built in to the $2.6 billion to $2.8 billion.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question comes from Piyush Sood with Morgan Stanley.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"First question, seems like caustic prices have starting to soften recently.\\nSo just want to understand the caustic price or maybe the price change underlying your assumptions so that we can kind of flex the guidance as we want. Or another way to ask that question is, of the $400 million higher costs, how much of that is from caustic?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo Piyush, great, great question. Out of that $400 million of higher cost, it's pretty evenly broken down between higher caustic.\\nSo roughly 50% of that is higher caustic, and the other 50% is carbon products on the smelting side.\\nAnd so for assumption's sake, I think you can use $200 million and $200 million for each of those.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"That's helpful. And the transformation guidance appears to exclude any cost associated with Wenatchee settlements.\\nSo I just want to understand what's the time line to make a decision. And it seems the decision would, one way or the other, impact cash generation this year.\\nJust want to get a sense of kind of the timing and the magnitude that we should look at.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo the timing is the middle part of this year. It would be around, I believe, June or July. And the amount is around $63 million. We've not made a decision on whether we would restart Wenatchee at this point, and we'll be running through the numbers and discussions with Chelan PUD in the first quarter of this year.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"All right. And last one from me and I'll get back in the queue after that. The aluminum sensitivity in the back, it's gone down to 203 for every $100 change from 215.\\nSo the difference is probably just ABI, or is there some additional cost baked in?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"It's ABI, ABI.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question is from Alex Hacking with Citi.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Roy and Bill, I have a couple of clarifications if it's okay.\\nFirst one is on the $400 million projected cost increase. Can you just clarify what's the baseline for that? Is that versus FY 2017 or is that versus 4Q levels?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"FY '17.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Okay, so on a full year basis. And then the second question is around the timing of potential capital return to shareholders. I guess when are you going to -- how periodically will you assess this? Will this be something that you'll do at the end of the year with excess cash, something you'll do every quarter, every 6 months? I just want to know what's the timing there?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Alex, we'll be doing the analysis at the end of each quarter, but I believe that it would be best to assume that if we are in a position to make a return to shareholders, it would be in the second half of this year.\\nSo we will watch cash flow come in during the course of the year.\\nYou know we like to keep $1 billion of cash just for the strength of the balance sheet, so we'll watch it come in during the course of the year. And if we make a return to shareholders, it will be in the second half.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Okay. That's clear. Actually, can I just go back to the first question, if I may? You said that the $400 million is versus full year '17? But then when we were talking about the guide of 3.3 -- sorry, the guide, if you annualize what's in the fourth quarter, right, you then will kind of take off $400 million for cost. But that $400 million increase should be less than versus 4Q, right, because cost was rising all year. Again, I don't know if you -- do you kind of see where I'm going? Like I see sort of an inconsistency there.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, I see where you're going.\\nSo just to be clear, if you take the full year '17 adjust for metal prices, adjust for API, back out the forex impact of rising currencies and then back out the raw materials of $400 million, you should get very, very close to that range of $2.6 billion to $2.8 billion in guidance.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question is from Novid Rassouli from Cowen and Company.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"The first one is just on your Slide 23.\\nSo it looks like the lion's share of the curtailments are coming from this NDRC curtailed capacity. I just wanted to see if you could walk us through maybe -- you mentioned the permits, the licensing. Maybe if you could just kind of walk us through the procedure for acquiring operating rights and how that might look. If it's even possible, what the time frame is.\\nJust trying to get a sense of how sticky that is there.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Sure, Novid.\\nLet me give a shot at it, and Bill can chime in as well.\\nSo essentially what happens -- this is a policy that was originally put into place in 2015, and it was really during 2017 that we started to see real on-the-ground enforcement, and that included real environmental and operational reviews to see what plants were running and whether they were actually permitted.\\nSo the real game changer in 2017 was that they took action. And instead of allowing excuses, they actually -- we actually saw all unpermitted capacity come off-line.\\nSo that's really the big changer in 2017.\\nNow going forward, let's say, let's take 2 different situations.\\nLet's say that you have capacity that you've already built but that does not have an operational permit.\\nYou have two routes in order to find a permit for that as per the rules that have been established.\\nThe first route is to go out into the market and actually acquire a permit from somebody else.\\nSo that would mean the closure of another Chinese plant that would be willing to sell those rights.\\nNow as you can imagine, you're seeing those rights, those operating rights, increase in price pretty significantly.\\nSo the other method that you have would be to curtail your own production. And essentially, what the Chinese government has done is they've established a ratio for aluminum specifically that says in order to gain a permit, you need to close 1.25 tonnes of older capacity.\\nSo that ensures that you're not bringing new tonnes online that doesn't have a corresponding curtailment inside your own portfolio or purchasing it on the market and having a curtailment in somebody else's portfolio.\\nSo if you have new -- so that's the example of capacity that's come off-line as a result of these curtailments or closures over the course of 2017.\\nIf you have a new smelter that you want to bring online, some of the -- there will be some new production that was permitted back in 2015, 2016.\\nAnd so you will see some growth this year, which is the result of prior actions and prior permits being granted. Any new added capacity would then need to go through that same set of requirements that the curtailed capacity has.\\nSo they either need to acquire it from somebody else, or they need to find some way to close their own smelting capacity in their portfolio.\\nSo it really is a pretty restrictive process. It ties back to the Chinese government's declaration that aluminum is oversupplied, and therefore, the more that China enforces its policies, the more traction we have to see them start to reduce that surplus and, at some point, get into a balanced condition. Does that make sense, Novid?\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"That does.\\nAnd so clearly the first option is a zero-sum game, someone swaps their permit.\\nThe second option, you're saying you cut for every 1.2 tonnes of older capacity, then you can restart -- I'm just trying to get a sense if the second option is also a zero-sum or how that works.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"It's also zero-sum with one exception, which is that there's a few smelters that are coming online just now that have permits that were already granted.\\nSo it's just a bit of a legacy issue that's coming to bear now. And all that's incorporated into our supply-demand balances.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"Got it.\\nOkay. And then just my second and last question, as far as inventories, we've been seeing aluminum ingot inventories rising in China. And then at the same time, we've been seeing alumina prices, it looks like, stabilizing somewhat on declining port inventories. I just wanted to see if you guys can maybe speak to inventory levels briefly and maybe how we're setting up going into 2018 relative to what -- how we entered 2017 and how you guys are thinking about that.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Novid, and realistically when you step back and look at it, inventories are following the supply-demand balances pretty close.\\nSo when you're running a structural deficit outside of China, then what we're seeing is that inventories have been continuing to decline year-over-year.\\nAnd so the beginning of 2017, we're already starting to see some relief from those large inventories built up during the great financial crisis. And what we're seeing over -- at the end of 2017 is those inventories have continued to come down.\\nSo that's a very welcome story, and that looks at all inventories, whether it's on warrant or off warrant. In China, again running a structural surplus, what we have seen are that inventories are growing.\\nAnd so particularly over this last period where we had less winter curtailments than were expected, we've continued to see those inventories creep up.\\nSo the good news on the inventory story in China is that we're still relatively light when you think about what is necessary in order to support such a large and intricate smelting -- large and intricate aluminum industry inside of China.\\nHowever, unless they fix their supply versus demand issue and stop generating a surplus, they're going to continue to see those inventories increase.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question is from Chris Terry with Deutsche Bank.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"A couple of questions from me.\\nYou've talked about this quite a bit on the dividends versus buyback angle. It seems like you're not going to give too many more hints away on that. But just in terms of the spending throughout 2018, I think you said you'd pay the $300 million liability in 1Q. What's the CapEx profile throughout the year in terms of the sustaining business and the value creation $150 million? Is it more two half-weighted? Or how do we think about that?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, it's traditionally more second half-weighted than first half.\\nIf you look at how we spent in '17, it's not dissimilar to how it will be spent in '18.\\nSo we typically ramp up the projects during the course of the year and spend more in the second half.\\nSo to be clear, we're anticipating $450 million of CapEx. $300 million of that is sustaining, $150 million of that is return-seeking. The $300 million that we make in the discretionary contribution to the pension plan won't necessarily all be made in the first quarter.\\nSo I don't want you to come away with thinking that we make that contribution in the first quarter.\\nWe will look during the course of the year and see when the best time is to make that contribution. But I would anticipate it to be, in the first half, maybe spilling over a little bit into the third quarter.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"Okay. Sure. And then in terms of the other -- the costs for the caustic and the carbon, the additional $400 million, going forward and into future periods, are you going to look at how you negotiate that with suppliers and potentially lock it in a different way to mitigate that? Or is it just going to be more of the same going forward in terms of you'd just be at the mercy more of the market?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. That's a great question, Chris, but it's not one that I'm necessarily going to answer. To be quite honest, we have a very active procurement group.\\nWe are very focused on what we see happening in the market, and our strategy is determined from how we read that.\\nAnd so we make adjustments as we go along, and to be quite honest, we wouldn't necessarily telegraph that to the market or to our suppliers. I would bring up one very -- a couple very specific points for caustic. Frustrating thing on caustic is that it takes 5 to 6 months for it to flow through our P&L.\\nSo we're just seeing the increases that really started about 6 months ago or more coming to our financials right now. That's the unfortunate thing. The positive thing on caustic is that because of our bauxite, because we have a lower reactive silica, it means that our impact in caustic while frankly it's a large impact, what we see is that some of our competitors have an even larger impact because they have a higher caustic usage per tonne. And on the bauxite side, it means that we make a very strong business case for our customers to consider and to pay for the bauxite supplies that we can supply to them.\\nSo caustic raw material price increases are never particularly welcome.\\nHowever, I think it is a competitive advantage that Alcoa has in both our bauxite and alumina businesses.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"Okay, makes sense. And the last one from me, just Becancour.\\nIn terms of the two potlines that are off at the moment, will you be able to restart those pretty quickly once the workforce allows it back in? Or how do you keep those in the meantime?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so essentially, we've done everything we can to put those two lines into as good a shape for restart as we possibly can. And in fact, that was part of our reasoning behind the lockout, is that we wanted to make sure that the instability in the line that there has been through these negotiations, we control it and we prepare it for restart best we can. That said, Chris, it does take some real effort in order to restart them, and there is some cost involved.\\nSo while we can do it as easily as possible, it takes some time, and it does cost some money.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And to bookend it a little bit, we restarted Portland this year. And I think from start to finish, it took us about 6 months in Portland. We're in the process of restarting Warrick.\\nNow I would not compare Becancour to Warrick. Warrick had been down for a while and was in worse shape, but it's going to take us nine months from start to finish in Warrick to restart it.\\nSo Becancour is bigger than both of those, but it's also newer.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question is from David Lipschitz with Macquarie.\"}, {\"speaker\": \"David Lipschitz\", \"content\": \"Two quick follow-ups. Most of my questions have been answered.\\nSo in terms of the production guidance for the year, the ABI, you're saying, is not included. It's basically considered the 1 potline and that's it, and that's how you've done your production forecast? I just want to make sure that was clear.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, when we say not included -- we have included running 1 potline at ABI.\\nAnd so if you see the '17 to '18, there's actually a dip in shipments in aluminum. That is due to the fact that we've taken out a couple hundred thousand tonnes of capacity at ABI.\"}, {\"speaker\": \"David Lipschitz\", \"content\": \"Okay, I just want to make sure. My second quickly and following up on a previous question.\\nIn terms of either buybacks or dividends, past the second half of this year, I think what he was trying to get at is like we get into 2019, is that something if you do more specials that every quarter you look at it and do it the next quarter? Or is it going to be once a year? Or how will that play out, I think, just the starting of it in the second half of the year?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo the capital framework that we discussed in the call today is for 2018. We'll reevaluate that as we go into 2019, and that will be based on what market prices look like and what cash generation looks like.\\nSo again, in the second half, assuming the cash flows are strong, we'll be making those decisions around capital return, and we will let you know.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Arjun Chandar with JPMorgan.\"}, {\"speaker\": \"Arjun Chandar\", \"content\": \"Just on the capital allocation front once again.\\nYou mentioned splitting your excess cash above $1 billion half-and-half between returns to shareholders and delevering. I was wondering if there's a specific leverage target including the pension liabilities closer to today's news around the defined benefit pension plan as to when if you would change that allocation on excess cash above that $1 billion?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo we're going to make the $300 million discretionary contribution this year. When we look at our capital allocation framework, the key variable that we're looking at is our weighted average cost of capital. We fundamentally believe that today, with the leverage that we have between the debt and the underfunded pension and OPEB liability, that our WACC is suboptimal, and that it could be further optimized by paying down either the pension deficit or a part of the debt.\\nSo the question is how much is enough. And if we were to ballpark it, I would suggest to you that probably $750 million to $1 billion of debt and OPEB -- I'm sorry, debt and pension reduction would be the optimal capital structure for us at this point in the cycle so -- I'm not counting the $300 million towards that.\\nSo the $300 million would go towards the $750 million.\\nSo it would mean an additional $450 million to $700 million in overall debt reduction over the next few years.\"}, {\"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 very much, operator, and I'd like to thank Jim and Bill as well. 2017 was a pivotal year for Alcoa Corporation. It was our first full year as a standalone company. We've made a significant amount of progress on our strategic priorities, and we're in a stronger position today than when we launched just over a year ago. We recognize that there is still lots of work to be done, and we look forward to 2018 and beyond. I appreciate everybody's time today and all the questions. Back to you, Operator.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference has now concluded. Thank you for attending today's presentation.\\nYou may now disconnect.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2018-04-18
year: 2018
quarter: Q1
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation First Quarter 2018 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, Austin, and good day, everyone. I\\u2019m 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. Also, a note on our financial statements.\\nOur presentation today for the current period as well as prior periods has been updated in accordance with the Financial Accounting Standards Board\\u2019s recent change to the presentation of non-service pension and OPEB costs. This change resulted in Alcoa moving such costs out of EBITDA and into other income expense.\\nFinally, as previously announced, the earnings release and slide presentation are available on our website. With that, here\\u2019s Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim. I\\u2019d like to welcome everyone to our call. Amid unprecedented events affecting our markets, Alcoa\\u2019s profits remained resilient in the first quarter. We reported adjusted net income of $150 million or $0.80 a share on an adjusted basis, excluding the favorable impact of special items. Net income was $145 million or $0.77 a share. We generated $653 million in adjusted EBITDA excluding special items.\\nWhile this is down sequentially due to reduced alumina prices for the first quarter, recall that our fourth quarter adjusted EBITDA was our highest since our launch in November 2016. And from a cash perspective, we reduced our days of working capital by 1 day versus the year-over-year quarter and maintained the strong cash position of $1.2 billion.\\nNow, I\\u2019ll turn to safety, which is our number one priority for everyone who walks through our doors. Because keeping our people safe is key to Alcoa\\u2019s overall long-term success. Beginning today, we\\u2019ll report on safety in each of our earnings presentations. We\\u2019ll focus on serious injuries, and by that, we mean injuries that are life-altering or life-ending. Last quarter, we had one serious injury that took place at one our facilities in United States.\\nSpecifically, an employee\\u2019s gloved hand was pinched in machinery during the maintenance task, resulting in the partial amputation of his thumb.\\nOur goal is to ensure that everyone leaves Alcoa facilities safe and unharmed.\\nWe will continue to refine our safety systems and programs and make further improvements to eliminate serious injuries and fatalities from every one of our operations. From a business point of view, this past quarter, we continued to aggressively execute on our strategic priorities to reduce complexity, drive returns, and strengthen the balance sheet. In the U.S., our smelter restart of Warrick Operations in Indiana is on target to be completed by the end of this quarter. That restart will supply metals the onsite rolling mill, enabling it to add production volume while supporting our goal to reduce complexity and drive return. To strengthen the balance sheet, in January, we announced the freeze to defined benefit pension plans and other post-employment benefits for salaried employees in the U.S. and Canada, effective in 2021. To further reduce volatility risk from our pension obligations, earlier this month, we also signed group annuity contracts for retirees and their beneficiaries in Canada. Those contracts transferred approximately $555 million in obligations and related assets from the Canadian pension plan to three insurance companies.\\nAs I mentioned earlier, we\\u2019re seeing a confluence of events in our markets. U.S. government imposed a sanction impacting the entire aluminum value chain, tariffs affecting aluminum and supply disruptions in alumina. But, with strong assets stretching from bauxite to alumina and to aluminum, Alcoa is well-positioned to capitalize from this volatile market environment in which we are now projecting global deficits for both alumina and aluminum. And lastly, based on the current market prices, we have updated our full-year projection for adjusted EBITDA, excluding special items, the range is now $3.5 billion to $3.7 billion, up from the projection of $2.6 billion to $2.8 billion that we provided in last quarter\\u2019s earnings release. Please keep in mind however that the high volatility in pricing across the aluminum value chain could impact this range, either positively or negatively. There is a lot to review this earnings period. And with that, I\\u2019ll turn it over to Bill for more detailed look at our first quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy. And let\\u2019s start with the income statement. Sequentially, revenues are off 3% on seasonally lower shipments while higher aluminum prices partially offset lower alumina prices. Compared to last year, revenues are up 16% on higher prices for both alumina and aluminum. In the quarter, the net income attributable to Alcoa Corporation was $150 million or $0.80 per share. And as Jim mentioned earlier, for comparability, we have revised 2017 numbers to reflect the 2018 pension and OPEB accounting presentation change. Special items in the quarter totaled a favorable $5 million after-tax, Warrick smelter restart costs, the tax impact on special items and ABI bargaining agreement related costs were more than offset by credits associated with the January changes to certain pension and other postretirement medical benefits, and gains on mark to market energy contracts.\\nNow, let\\u2019s look at our adjusted EBITDA and the income statement after special items.\\nOur first quarter \\u201818 adjusted net income was $145 million or $0.77 per share, 26% lower than the fourth quarter of \\u201817 but 24% higher than the prior year. Adjusted EBITDA excluding special items was $653 million, down $143 million sequentially, primarily due to lower aluminum prices and higher raw material costs, but up $99 million versus the prior year. In the first quarter, SG&A and R&D expenses improved to 2.4% of revenue. A few items of note below the EBITDA line. DD&A increased $7 million sequentially primarily due to amortization of pre-mining costs.\\nOur operational tax rate depends heavily on market conditions, which drive where we generate profits and losses. In the first quarter, the rate was 31.9%.\\nLet\\u2019s take a deeper look at the factors driving adjusted EBITDA. Adjusted EBITDA is down $143 million sequentially and alumina index prices contributed $146 million to the decline. API based sales prices [ph] declined in the first quarter while due to lack of the smelters, expense was impacted by the higher alumina pricing of the fourth quarter. In effect, higher metal prices offset all other impacts. Taking more detailed view of items not related to indices, the volume impact is very close to the $40 million outlook I provided last quarter, due to fewer days in the quarter and scheduled maintenance overhauls across the Company. Maintenance work was also the driver for operational impacts. Higher raw material costs also expected, we are seeing in smelting carbon products and refinery caustic prices. Positives this quarter were in alumina price mix where we increased our percentage of contracts priced on API to roughly 95% and in energy costs where Brazilian hydro earnings rebounded from their fourth quarter low, and some of our smelters saw seasonally lower power costs.\\nLooking at each segment\\u2019s contribution. Bauxite adjusted EBITDA improved $5 million with higher sales prices more than offsetting slower volume. Alumina adjusted EBITDA declined $170 million, primarily due to lower alumina index prices, seasonally lower volume and unfavorable currency. The previously mentioned improvements in our contract mix more than offset all other cost increases. In aluminum, adjusted EBITDA was $153 million, down $93 million as higher alumina costs from last quarter\\u2019s prices flowed through the P&L. Higher metal prices and higher Brazilian hydro earnings offset higher raw material costs and all other cost impact.\\nFor EBITDA impacts outside of the segments. Transformation EBITDA impacts were unfavorable in the first quarter as the major maintenance outage occurred at Suriname project and remediation activities ramped up especially at close locations in Australia. To provide more visibility into corporate expenses and the group similar accounting impacts together we have combined all corporate inventory adjustments, LIFO, metal price lag and intercompany profit eliminations into one line item and revised fourth quarter \\u201817 for comparability purposes. Previously, LIFO and metal lag were together, but profit eliminations were in other corporate. In the fourth quarter \\u201817, LIFO and profit eliminations were both large negative EBITDA impacts. In the first quarter of \\u201818, corporate inventory accounting impact turned favorable as following alumina prices resulted in lower intercompany profit eliminations and there was very little LIFO impact in the quarter. Metal lag is smaller but positive impact as well.\\nNow, let\\u2019s look at our cash balance and flows for the quarter. At the end of March, our cash balance decreased to $1.2 billion, primarily due to seasonal increases in working capital, higher dividends paid to our minority interest partner, semi-annual bond interest payments, as well as our final $74 million to the DOJ and SEC.\\nNow, let\\u2019s move on to the progress on capital allocation and other financial metrics.\\nOur first quarter \\u201818 performance is aligned with our 2018 capital allocation framework.\\nWe\\u2019re maintaining our cash balance above a $1 billion and continue to target our 2018 sustaining and value creating capital spending levels.\\nOur pension and OPEB net liability is now $3.3 billion, reflecting the pension freeze and changes to retiree medical benefits we made in January, but not our most recent action regarding Canadian pensions. Last week, as Roy said, we funded $95 million to facilitate our first annuitization of pension benefit.\\nAs noted in our April 3rd press release, we will see the full cash earnings and net liability impact of the Canadian annuitization in our second quarter results. The non-cash special charge to earnings will be $175 million pre-tax or $128 million after-tax. This transaction is our first step in $300 million of additional contributions to optimize our liabilities.\\nWe also plan working on a annuitizing a portion of our U.S. defined benefit pension plan.\\nNow, let\\u2019s look at our outlook for the rest of the year.\\nAs is our practice every quarter, we\\u2019ve updated our adjusted EBITDA outlook, based on recent market prices. It\\u2019s now between $3.5 billion to $3.7 billion based on $2,300 LME and $500 million alumina price index; a Midwest regional premium of $0.21; and an Australian dollar of $0.78, as well as our latest view of other regional premiums, currencies and raw material price impacts.\\nOur final three quarters will not be identical.\\nHowever, because of price lags, timing differences, seasonality and other factors, we expect our third and fourth quarter EBITDA to be roughly 20% higher than the second quarter of \\u201818.\\nAs Roy talked about and he\\u2019ll talk in more detail here in a minute, we\\u2019re in a very volatile price environment and future price changes could move our \\u201818 outlook higher or lower.\\nAs a point of reference, had we used the pricing assumptions from our fourth quarter \\u201817 earnings call in this outlook, we would still be in the range of $2.6 billion to $2.8 billion adjusted EBITDA. In non-segment EBITDA impacts, the outlook for transformation costs at $13 million has improved by $20 million due to lower net expenses at our closed locations, and other corporate has improved $10 million. The corporate inventory accounting outlook now including LIFO, metal price lag and intercompany elimination varies and will depend on future prices.\\nOur current full-year estimate is a cost of approximately $60 million based on our updated EBITDA outlook. Below the EBITDA line, there are two changes to the previous quarter\\u2019s outlook. We\\u2019ve refined our depreciation forecast and increased the depreciation outlook to approximately $775 million. We\\u2019ve also refined the tax rate.\\nOur tax rate is very dependent upon our mix of earnings across the world.\\nOur current EBITDA estimate drives the full-year operational tax rate of approximately 35%.\\nAlthough the second quarter rate could range from 37% to 40% to catch up from the lower 31.9% tax rate in the first quarter of \\u201818.\\nOur shipments and cash flow impact outlooks remain unchanged from last quarter.\\nOur only direct shipments contracted to Rusal entities for the rest of this year were 800,000 tons of bauxite, and we\\u2019re in the process of placing those tons with other buyers now.\\nLet me turn it back over to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Bill. And as we\\u2019ve both noted, we\\u2019re experiencing considerable price volatility as illustrated here with spikes in both aluminum and alumina markets. The chart in the left shows average LME plus regional premiums weighted for Alcoa\\u2019s primary aluminum regional market exposure. And the right chart shows the spot alumina price FOB Western Australia, neither incorporate price increases from this week.\\nAs you\\u2019re aware, there are major external factors and uncertainties affecting our markets. Starting with the series of U.S. government actions that include Section 232 tariffs, Section 301 tariffs and the recently announced sanctions on Russia.\\nWe\\u2019re also seeing disruptions in alumina supply in Brazil and potentially elsewhere. In China, environmental and supply management regulatory reforms are having varying impacts.\\nWhile winter curtailments were less than expected, the Chinese government appears to be driving more aggressive supply side reform.\\nIn addition to curtailing smelter capacity operating without licenses, the government is now considering a draft plan that would implement controls on unlicensed coal-fired power plants that supply the grid as well as many aluminum smelters. If those draft regulations were to take effect, they could potentially raise Chinese smelter cost and slow net capacity additions.\\nWe will be closely watching these developments. Alcoa\\u2019s globally diversified portfolio and long positions in bauxite, alumina and aluminum make us uniquely positioned to capture benefit during such period of volatility.\\nOur bauxite portfolio with locations in Australia, Brazil and Africa has a first quartile cost curve position with high quality bauxite which is particularly valuable when caustic prices are higher for refineries.\\nOur alumina [ph] portfolio is also positioned in the first quartile of the cost curve and is one of the world\\u2019s largest refinery portfolios. With locations in each of the four key markets, we have a unique global position and significant exposure to increasing alumina prices.\\nOur aluminum smelters primarily serve the U.S. and European markets, and of our 3.4 million tons of total smelting capacity we have about 900,000 metric tons of curtailed capacity in each of these four markets. Taking all these factors into account, we see clear advantages for Alcoa in each of our products and markets.\\nWe have significant North American metal market exposure with nearly half our ton sold at the Midwest premium.\\nAs you know, the Midwest premium has more than doubled this year. And our exposure to the LME aluminum price is even greater as it applies to all of our aluminum produced globally. Thus we continue to monitor global and regional market prices and other factors in deciding whether to restart some of our curtailed capacity, which is mostly in the United States and Brazil. If the market, power cost and restart requirements are favorable, we could increase our exposure to positive market factors. In alumina, our third-party sales are market-based, with roughly 95% price on the alumina price index or spot prices. Publicly quoted alumina indices are at all-time highs.\\nAs with the smelter business, depending on expected long-term domestic dynamics and refinery specific factors, we could consider restarting some curtailed capacity. In bauxite, the picture is less clear. There is uncertainty around the global trade flows due to previously mentioned market development. Nevertheless, we are well-positioned across the globe to serve a nascent third-party market with potential expansions at each of our mines.\\nAdditionally, much of our bauxite is low and reactive silica, so our customers can avoid the increased expense from higher caustic prices.\\nNow, I\\u2019d like to turn to our outlook for the three products. The market moving factors mentioned previously are likely to push the alumina and aluminum markets into deficit conditions this year. In bauxite, as we said last quarter, 2018 will likely see Chinese bauxite stockpiles grow.\\nOur outlook for Chinese bauxite demand has increased slightly, but we expect it to be supported by Indonesian exports and increased supply growth from Guinea.\\nFor alumina, our global forecast is for a deficit market with competition among consumers for available alumina tons. In China, we have seen curtailments of some refining capacity during the winter seeding season which lasted through March 15. And while we expect most to restart, we anticipate those same Chinese refineries will likely curtail again next winter for environmental reasons.\\nWe expect that China will import 1.5 million tons of alumina, a smaller number than we have seen in previous years, driven in part by slower Chinese alumina demand growth. Outside of China, large supply disruptions in the Atlantic region have cut alumina supply substantially. In aluminum, the market is projected to be in deficit in 2018 and we continue to expect strong global demand growth in the range of 4.25% to 5.25%. Announced smelter restarts in the U.S. are not likely to achieve full production run rates until 2019, and we see potential supply reductions on the horizon driven by challenges in procuring alumina.\\nWe also expect world ex-China primary aluminum demand growth in 2018 to be higher than last year, driven by robust end use market growth in both developed and emerging markets. In China, we are forecasting a lower surplus versus 2017, as projected demand growth should exceed supply growth this year. Supply growth is expected to remain disciplined as China continues to enforce its aluminums smelter capacity and permitting framework, and possibly implement controls on coal-fired power plants, many of which directly supply smelters. Again, as mentioned earlier, considerable uncertainty remains in the market, driven by multiple trade actions, sanctions and third-party supply disruptions that could impact the balanced [ph] estimate as this year progresses.\\nSo, to sum up, first, we remain focused on what we can control. And we continue to execute on our three strategic priorities.\\nSecond, we are seeing an unprecedented confluence of events and volatility, which is creating a positive market environment for us.\\nThird, Alcoa has a unique and well-positioned global portfolio across all three of our products. Fourth, based on current market prices, we have raised our outlook for full-year adjusted EBITDA excluding special items to $3.5 billion to $3.7 billion.\\nLastly, we\\u2019ll continue to adhere to our 2018 capital allocation framework to improve the business and if available, to return cash to our shareholders in the second half of this year. We recognize that market volatility can move in either direction. Still, current market conditions offer us an opportunity to accelerate the execution of our three strategic priorities and will help us to fundamentally strengthen Alcoa for the long-term. We believe that Alcoa\\u2019s future is increasingly bright. With that, Bill and I would be happy to take your questions. Operator, if you could please remind the participants of the protocol. And let\\u2019s go ahead and get started.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions] Your first question comes from Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, guys. Thanks for taking my questions. Mainly, I wanted to focus on the potential for restart.\\nSo, as we\\u2019re seeing the topical events coming to the market in the last couple of weeks, what is that the you remind me focusing on? Is it the sustainability of pricing, what your customers want or what are the data points you\\u2019d look for? And can you comments specifically around Point Comfort please?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Chris, absolutely. And I think, the answer is all of the above. When we think about restarts and we think about how to put together a financial analysis of how that restart could affect us, we look at current pricing, but more importantly look at long-term pricing.\\nWe also look at the cost of the restart, the available tax incentives that might be in the jurisdiction, the local supply-demand calculations, the potential modifications of power contract et cetera, as well as availability of workforce.\\nSo, we really look across a broad range of input and output to try and make a decision that is best for the long-term business.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"And then, the last one for me, just around the bauxite.\\nYou touched on it in your remarks, but can give a little bit more color on where those tons could go from Ireland [ph] to where exactly?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. We didn\\u2019t actually say from Ireland.\\nSo, the -- what we said was there is about 800,000 tons of production that we had committed to sell to Rusal this year, given the sanctions that we\\u2019re going to be abiding by.\\nWe\\u2019re in the process of placing those in the market currently. And we\\u2019re confident that we can get those placed this year.\"}, {\"speaker\": \"Operator\", \"content\": \"Your next question is from Novid Rassouli with Cowen and Company. Please go ahead.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"Hi, Roy and Bill. Thanks for taking my questions. Starting with the alumina deficit projection of 300,000 to 1.1 million tons for 2018, what is the assumption made for the length of the outage at Alunorte that\\u2019s built into that assumption?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Novid.\\nSo, what we\\u2019ve assumed is a 6-month outage.\\nWe\\u2019re really trying to look at what\\u2019s happening on the ground take what is the -- take what is apparent today and use that in those balances, so 6 months.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"And that, I think the number that\\u2019s been talked about is like a 2-month of ramp to get it back to full production.\\nSo, that assumes that at the end of that 6 months, they\\u2019re running back with those turn of 242,000 tons essentially on a monthly basis?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. I don\\u2019t think we can comment exactly on how they have performed their curtailments. It depends on -- it depends on how they\\u2019ve been operating and whether they put the put it essentially on a longer term curtailment program, or still trying to have it ready to restart quickly.\\nSo that\\u2019s a question for them, not us.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"Got it. And then your outlook for balanced bauxite market, does that include any impacts from the Rusal sanctions in that outlook?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"At this point, we haven\\u2019t baked in any Rusal impact into the outlook, it\\u2019s just too early and too fresh of information to build it in.\"}, {\"speaker\": \"Novid Rassouli\", \"content\": \"Okay. And then, one last one for me. Are you beginning to see any alumina exports out of China, given the spread between the domestic prices in China and FOB Australia?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"When we look at the financials, it\\u2019s certainly a possibility.\\nWe have no confirmations right now of alumina exiting China, but certainly it is a possibility in the future.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question is from David Gagliano with BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Thanks for taking my questions. I just -- I wanted to just drill down a little bit on the commentary on the idle capacity, potential restarts in alumina.\\nAs you do your analysis, I was wondering if you could share a little more detail. What are the restart costs for that capacity, say the 2.5 million tons called out on page 18 on average or in aggregate. What\\u2019s the timing of restarts? When should we expect to hear commentary on that? What\\u2019s the reasonable cash cost assumption for that production, once it restarted? And then, my last question as you think about the pros and cons of restarting aluminum an alumina, would you restart that idled alumina capacity all for third-party sales, or would it only be done in conjunction with smelting restarts?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nI think it\\u2019s very dependent upon each of the idled facilities. And smelting is very different than refining.\\nSo, each one has its own set of cost associated with it. It depends how the curtailment actually took place. It also depends on how quickly you can get it, put back into service. And then, I think what you\\u2019re going to find is that there is typically a window between 6 months to even 12 months or more that would take in order to rally, prepare everything and actually bring the capacity back on line.\\nSo, when we think about the analysis that we do from a financial perspective, while we take into account current pricing, we have to be thinking about what the pricing will look like 6, 12, 18 months out as a starting point.\\nAnd so, we take great care in making those decisions.\\nAs far as when we perform those analyses for weather it would be refining or smelting, we look at this pretty frequently.\\nWe have a series of programs that are ongoing to understand what would be necessary in order to restart capacity and what would we need to believe from a market standpoint, and we would let you and the rest of the market know as soon as we were to make a decision.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"That\\u2019s all good, Roy.\\nJust to put on the smelting side a little bit in the perspective on Warrick, we have talked about when we restarted Warrick. Warrick ultimately is going to cost us probably between $70 million and $75 million in total restart cost. And that\\u2019s roughly 160,000 metric tons of smelting capacity. And from start to finish, it will take us nine months to a year on the Warrick side.\\nI think, if we\\u2019re looking at for instance at Point Comfort on refining, probably again, nine months to a year before we get the first alumina out of there, and it would be a fairly expensive restart.\\nSo, those are all the things that go into our analysis.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And keep in mind, one more thing as well David, the interplay between alumina and aluminum pricing.\\nSo, when we look at costs for a smelter, we also think about availability of alumina and pricing of alumina and so as well as obviously bauxite for alumina as well.\\nSo, it\\u2019s pretty complex set of equations.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And one last one, we can keep adding on, but one last comment. Largely, the smelters, when I say largely, the smelters that are curtailed, were higher cost smelters. That\\u2019s why they are curtailed, same was Point Comfort.\\nSo, when you ask about cash cost, Point Comfort is not a low cost refinery.\\nSo, if we -- as we go through the analysis, we have to take in all of that -- all those thoughts into a restart consideration.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Thank you very much for the additional details.\\nJust around that, so just specifically focusing on Point Comfort, I got nine months to a year. What about sort of the -- what\\u2019s a reasonable cash cost and capital costs, cash cost moving forward, capital costs to restart?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, I don\\u2019t think we reveal details about very specific assets.\\nSorry, Dave.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Just in general, can you just give us your early read, your early thoughts? Obviously unprecedented moves in alumina here and aluminum in early stages for different reasons, but now recently obviously tied to some of the rush and stuff. Can you give us a sense what your thoughts are with regards to the ultimate outcome here on the Russian sanctions.\\nSo, these materials show up elsewhere? What are you hearing from your sources?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So, I think it\\u2019s incredibly complex and difficult to predict.\\nSo, when you look at it from Alcoa\\u2019s perspective, we will be very careful to comply with U.S. government sanctions, and that\\u2019s Bill specifically mentioned the 800,000 tons of bauxite that was destined for Rusal but now will be redirected. When you step back and think one of the broader issues in the industry, the key question is whether those facilities continue to operate and where will the material actually go.\\nSo, I think we\\u2019re just at the very beginning, both for Alcoa but also for the broader market of trying to determine what is the outcome here and then how does that metal shift in and what actually happens on a production basis.\\nSo, I think that\\u2019s as far as we can actually predict what\\u2019s going to happen right now.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And then, the near-term, just to put a little more color on it, in the near-term, the alumina market is tight.\\nYou see it reflected on a daily basis in the prices, but alumina market is currently -- is tight. And you saw that we are projecting now a deficit in alumina for the year. But in the near-term, it\\u2019s tight.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question is from Matthew Korn with Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Let me shift a little bit, ask about raw materials. Last quarter, you noted that input costs, carbon costs are running higher than expected and they serve as an offset to the margins in your base case. Should we expect any new phase of cost pressures from the dislocation and the urgency that we\\u2019re seeing in the market today. Is there any new lift in your input costs that you\\u2019re folding into your current guidance?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. In the current guidance, we still have approximately $400 million of year-over-year higher input costs. Those input costs have shifted a little bit in that and that\\u2019s similar to the prior guidance. We said $400 million in the prior guidance also. The mix of the input costs has shifted a little bit. Higher costs on the smelting side, specifically around carbon products, coke and pitch, and slightly lower cost around caustic and refining.\\nSo, if I were to split it, over half of that is coming from carbon products and less than half of that\\u2019s coming out of -- on the caustic side.\\nSo similar to what we guided to before, this dislocation in the market is slightly different and ones we\\u2019ve seen historically. At this point, we are -- as I\\u2019m saying, we\\u2019re essentially not seeing higher input costs being reflected in the numbers at this point.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"If I could add one piece to as well. What\\u2019s happening in the marker right now is really disruptions to supply.\\nSo, if anything, it\\u2019s actually lowering demand for some of the raw materials while the demand for the downstream products, aluminum or alumina continues to be strong.\\nSo, when you think about a disruption for example in Brazil, that\\u2019s actually freeing up cost on to the market. And therefore it could have a positive impact.\\nSo, it\\u2019s certainly interestingly time.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Well, that\\u2019s a good point, segues into my second question. And I saw that you made no change to your total or your original demand growth projections. And I have to imagine there is some element of panic buying today, when looking around and not sure about that supply. But, if you\\u2019re looking at through that panic, are you seeing any indication downstream that the threat of high prices, the volatility in that price, the uncertainty on policy that\\u2019s driving things week-to-week, so that\\u2019s having any effect whatsoever on your end buyers?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So, it\\u2019s still early in this latest upswing. But to this point, we\\u2019ve really not seen any kind of demand destruction. And I think you\\u2019re seeing some questions, particularly in the U.S. as you think about tariffs and how they can impact consumers in the U.S., some questions about whether the regional dynamic shifts a little bit.\\nHowever, we\\u2019ve not seen any. We take a pretty close look at demand as you can imagine, and we\\u2019ve not seen any impacts yet.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question is from Piyush Sood with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Couple of questions.\\nFirst one, you\\u2019ve addressed bauxite sales to Rusal that they need to be redirected. I wanted to ask you about -- alumina. [ph] So, I just want to understand, if you were buying alumina from either Norsk Hydro or Rusal for any location and with all the disruptions we are seeing, has there been any negative impact on you?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"No.\\nWe have no further impact that we have to mention.\\nWe are not a buyer of alumina, because we are long essentially when you look at our portfolio. I don\\u2019t mean that there aren\\u2019t swaps.\\nHowever, the only impact that we really have that we\\u2019ve mentioned here is the Rusal tons that we freed up.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, on the bauxite.\\nSo, no impact on either alumina or smelting price.\\nSo, it\\u2019s just on the bauxite side.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"That\\u2019s good to know. And the second one, prefunding pensions is probably a good idea until September, since you get a larger different tax asset.\\nSo, you haven\\u2019t changed your guidance for voluntary contribution for this year.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"No.\\nWe haven\\u2019t changed it.\\nWe haven\\u2019t changed it. We said we will voluntarily contribute $300 million. We\\u2019ve already done $95 million in the Canadian pension. In the capital allocation program, we have said that excess cash above the items that we have talked about keeping $1 billion cash in the bank, sustaining capital growth capital, the mandatory pension contribution and the voluntary pension contribution.\\nWe will split that 50-50 between returns to shareholders and further delevering, likely that if we get into that further delevering it would go more towards funding the pension.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"And so, essentially there is some room to raise it if needed for the year? And it\\u2019s not really decision left to next year?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. There is -- maybe I\\u2019m not understanding the question. But yes, I mean if we get to a point where we have excess cash flow above all those requirements, it will be split 50-50 and most likely it will go on the delevering side into prefunding the pension.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Okay, understood. I\\u2019m sorry, last one if I may.\\nIf you happen to kind of restart aluminum smelting in Brazil, I just wanted to understand electricity sourcing and alumina sourcing, how you feel about that? And how easily would that be available?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"That all goes into the calculus on restarting any asset, whether it\\u2019s Brazil or in the U.S. And many things, as Roy talked about earlier, many things go into that consideration.\\nOne of the key considerations is availability of raw materials and long-term prices and long-term assumptions.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Just to add on to that as well, Piyush, when you think about having sufficient alumina to run a smelter, we always look at our businesses as separate entities.\\nAnd so, we don\\u2019t think about any kind of subsidization.\\nSo, if we have an opportunity to sale alumina at a better pricing, we\\u2019re not going to start the smelter to consume that alumina, we\\u2019d rather take it to market.\\nSo, we look at each decision as very separate but then analyze just as Bill said, how we make sure that we have sufficient raw materials to have a profitable business.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"I know you have mentioned that there is a lot of volatility and that\\u2019s really difficult to comment on the outlook. But, I really think, it would be great to get your perspective in terms of the duration, even if it\\u2019s a question of just rank ordering the three or four factors driving the market, whether that\\u2019s section 232 or that Alunorte facility being down, Russian sanctions or China crackdowns. Can you put them in order or put the ones, talk a little bit more about which ones could be stickier than other ones?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Let me take a try at that Timna, and see if I could give you a little bit of extra detail.\\nSo, when you look at the 232 tariffs, the real question that comes down is how are those tariffs enforced, really, what countries are accepted and then are quotas actually placed? And quotas are what can really change the dynamics for product, specific product where material is coming in.\\nSo, the important thing to look at there will be whether -- how that develops, whether quotas are put in the place. 301 tariffs, those are still relatively vague. And then also, the Chinese response to those tariffs could have more impact as well.\\nSo, I think those are still relatively undefined and certainly no real understanding of how long they could last, and what product they could actually impact.\\nSo, more to come on that one. From the sanction side on Russia and on Rusal specifically, I think what we\\u2019ve seen in the past is that sanctions tend to be stickier.\\nHowever, we live in an environment where I don\\u2019t think there\\u2019s a lot of guarantees about anything.\\nSo, we will see how that develops. But it\\u2019s certainly throwing a lot of the market into an uproar and you see a lot of activity right now in alumina, in bauxite and in aluminum to compensate for those sanctions being put in place.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"And I think you missed on Alunorte but that\\u2019s a tough too, and I recognize.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. On Alunorte, we -- as I said, Timna, we\\u2019ve got built in six months into our estimates. Where that goes that\\u2019s tough to say, but we have got six months to build this. And as far as China goes, you\\u2019ve heard Roy and I speak in the past, China seems to be spending in the right direction. And the focus on environmental concerns, the focus between the NDRC and the MEP programs maybe didn\\u2019t get as much capacity offline in the fourth quarter as what we had anticipated, but it certainly seems like they are moving in the right direction and some of this latest feedback associated with power plants and actually potentially looking at going after overcapacity in power plants is positive for our industry also.\\nSo, it\\u2019s hard to order the four, but the four are as we have said already converging to have really unprecedented impacts on the market.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"And my only other question, I know we have asked you a lot about Alcoa\\u2019s plans to restart capacity, but can you give us any comments about some of the other players and what they might do, just broadly speaking. Obviously some don\\u2019t have the option or the luxury of contemplating restarts? But, considering people are bit concerned that given this rapid rise in prices, there could be a lot of restarts, do you think that that\\u2019s a risk and why?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nI think, it\\u2019s still to be determined. Remember that our restarting smelter needs to find alumina and they need to feel that they have the right business case to pay for the alumina which is actually rather dear right now. Outside of that, I think each restart of its own restart, it takes a period of time. And I would assume that every other company is doing the same analysis as us trying to think how are these surprises going to develop for the next three to four years, which is typically what\\u2019s necessary in order to payback a restart.\"}, {\"speaker\": \"Operator\", \"content\": \"Your next question comes from Justin Bergner with Gabelli & Company. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"I just wanted to drill down a little bit more on the aluminum market. How much of the change in the deficit that you forecasted is due to our Alunorte versus Rusal. And could you maybe just comment on Rusal as it relates to sort of the refinery supply challenges versus the smelting supply challenges?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So, on the alumina market, right, Justin?\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Yes.\\nOn the aluminum market.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo, the only impact that we\\u2019ve incorporated into these balances is six-month outage of Alunorte. And remember that\\u2019s meant to placeholder and does not predict actual outcomes. I mean, if you look to Norsk Hydro and the government of Brazil in the State of Para in order to determine how long that will actually be out. From a Rusal perspective, because there is so much uncertainty, we\\u2019ve not made any assumptions about refineries not being able to operate or changes in the supply demand. Those supply demands look added on the global basis and do not try to predict regional characteristics.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And in the case of Alunorte, Alunorte is around 6 million metric ton plant, they\\u2019re curtailed down to about 50% and we\\u2019re assuming it occurs for six months.\\nSo, that means there is about 1.5 million metric tons that are out of our supply demand picture on alumina.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"And then just a follow-up on that topic. People speculate as to where Rusal\\u2019s metal can go in terms of countries that will take shipments. But, just, how will Rusal supply the bauxite for its refiners, the parties like yourself and Rio Tinto are no longer supplying bauxite to, and what other options as far as you understand?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I think, it\\u2019s a good question, Justin, and I don\\u2019t think we have an answer for you.\\nSo, it\\u2019s all tied up with who feels impelled by the U.S. sanctions and the direct and indirect impacts on financial institutions et cetera who will be willing to do that.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"What we do know is it won\\u2019t be from us.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Bill. Exactly.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Would Indonesia be fair game or it\\u2019s TBD?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I think it\\u2019s to be determine, I think you need to ask to players in Indonesia.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Curt Woodworth with Credit Suisse. Please go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"So, there was a I guess report by CRU saying that alumina cargo traded $800 a ton yesterday. I was curious, where do you think the Atlantic basin alumina price is today? And if the economics of that market get to such a level, would you contemplate taking smelting capacity down to free up more merchant alumina? Would that make sense at all? And then, with respect to Rusal supplying, I guess metal in the downstream consumers in Europe, are you seeing any change in the value of shape [ph] premium or demand from your cast houses, from fabricators or downstream users that need to offset that metal? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Curt.\\nSo, let me get the first one first.\\nI think the one of the interesting things about the alumina [ph] is that it happens on a transaction-by-transaction basis. And the way that the indices are put together is that each of those transactions impact the final index outcome.\\nSo, I think the less transaction is the best approximation that you have at the market. And you need to try and get into the thought about what are financing terms and what are delivery terms et cetera. I don\\u2019t think, I have any additional conclusions, and we\\u2019ve seen what that transaction is and it indicates where we are. From the standpoint of what we think about bringing down smelting in order to take advantage of aluminum prices, we talked a lot about restarts. I would also say that we also take a pretty close look at each of our operating facilities to make sure that they are generating value. And again, we break our business into the three products and we\\u2019re pretty rigid about making sure that we\\u2019re not subsidizing a smelter by sending them alumina.\\nSo, we take good hard look at that.\\nThe other question\\u2026\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Shape premiums and are we seeing impact to our customers?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nI think we\\u2019re still pretty early in the process.\\nSo, I don\\u2019t believe that we\\u2019ve seen any impacts from shape premiums. And if you can imagine, there could be impacts because of the tariff structure happening inside the U.S. as you think about 232 tariffs and 301s and whether quotas are put in the place or not. And when you look at Europe specifically as well, I think that that story is still to be written, and it\\u2019s really a question of what they\\u2019re -- how that material gets to market.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"If I could add two minor points to that.\\nOn the API question and the $800 trade that allegedly occurred.\\nWe are seeing Atlantic premiums be much higher than they\\u2019ve historically been. And another indication of exactly how short the alumina market is.\\nSo, we\\u2019ve seen Atlantic premiums which normally traded at discount to API prices jump up to around $50 a ton.\\nSo that gives an indication. And as far as the question around would we consider curtailing smelting capacity, it\\u2019s exactly the converse of our restart discussion.\\nAnd so, you think about would we curtail to sell alumina, all those same factors are going into that decision, whether you would restart, do we think alumina prices are sticky and here to stay, and all the impacts that go with that.\\nSo constantly, evaluating those decisions.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay. And then, just one quick one.\\nOn the pension, I think you said your $3.3 billion, or legacy liability and you have $300 million more to fund. And at the same time, we\\u2019ve seen interest rates move up a lot.\\nSo, could you give any kind of a pro forma or guesstimate on what you think that liability would look like, if you took spot interest rates, market value the assets and then assume the pay-down that you have planned?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, it\\u2019s always a dangerous game projecting when you have got interest rates included. If we were to hit our expected rate of return which is 7% and if we were to leave discount rates at the same level that we ended at the end of this year, and we make the mandatory and discretionary contributions that we\\u2019ve talked about, that liability should be somewhere south of $3 billion.\\nNow that does not bake in any higher interest rates and it assumes that we hit our 7% expected rate on return. One more piece of data I can help to inform in the analysis is that currently 25 basis-point change in discount rates would mean about $200 million impact on the liability. That\\u2019s slightly less than what we have said historically, and the reason is we are in the process of derisking the pension plan with the contributions that we\\u2019ve made in Canada. To be clear, in Canada, we are going to take roughly $550 million of those liability and assets off the books through that derisking strategy.\\nSo,. knock on wood, I think we are making good progress on the pension and OPEB liabilities.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"And given the move in interest rates year-to-date, would you expect that if we stay at this level, you would change the discount rate?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Given the move in interest rate, yes, I mean, just to be clear, on the discount rate calculation, it\\u2019s essentially a 15-year corporate bond, roughly a 15-year corporate bond rate.\\nSo, it\\u2019s got both the 15-year treasury included in that and a spread on top of that. And through the first quarter, both of those went in our favor.\\nSo, rates were up in the first quarter.\\nNow remember, we only do revaluation at the end of the year. We did a revaluation in middle part of the first quarter for the Canadian assets because we were making those contributions.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from David Lipschitz with Macquarie. Please go ahead.\"}, {\"speaker\": \"David Lipschitz\", \"content\": \"Quick question on the alumina market. Do you have anything that\\u2019s purely, like it may be under a long-term contract or something like that that\\u2019s not tied to API that\\u2019s on a pure spot that some of these are cargo to mile that you could just sell it?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"In alumina, we keep open positions to be able to sell in spot. But, that doesn\\u2019t necessarily mean we keep them at all times.\\nSo right now, if we don\\u2019t have excess alumina to be selling out into the market but we do look forward in future months and we evaluate our essentially our own personal supply demand balance to see what aluminum is to be made available.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And the other thing to keep in mind is that API should largely represent spot on a little bit of a lag, right. The API price for us is a combination of Platts and CRU estimate.\\nSo, it should largely represent the spot price. 95% as of this year, 95% of our contracts are on API.\\nSo we only have 5% of the contracts are on any type of a long-term contract.\"}, {\"speaker\": \"Operator\", \"content\": \"Next question is a follow-up from David Gagliano with BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Just real quickly on the -- just want to make sure we are calibrating our short-term numbers correctly. I heard the comment 20% higher 3Q, 4Q versus 2Q. I was just trying to figure that out just because with alumina, you got your costs that are lagged a quarter, your price lagged a month. I\\u2019d think it would have been the opposite.\\nYou get a blow out in the second quarter and then a little bit of a reversal, i.e. bit of squeeze in the third quarter. What am I missing there?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, first thing you\\u2019re missing is we said 25%, not 20%. And the second piece is on the revenue side, it does take time for that -- for those higher prices to flow through.\\nAnd so, in the face of alumina, what we\\u2019ve said is, we\\u2019re assuming $500 alumina price index going forward.\\nSo, it will take time for all of that benefit to flow through, and that should come in the third and the fourth quarter.\"}, {\"speaker\": \"Operator\", \"content\": \"Next question Matthew Fields with Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Matthew Fields\", \"content\": \"Hey, guys. I wanted to follow-up on Curt\\u2019s question earlier about the downstream customers. We saw an announcement from Novelis saying that Rusal was a small supplier for us in Asia and we\\u2019re going to have to change supply. Have you started to sort of see incoming quarries from some of these fabricators about picking up supply where Rusal was a player in your supply chain?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. We typically don\\u2019t delve into customer-by-customer discussions. I\\u2019ll tell you that there is a lot of interest rate now, particularly in our alumina supply and in aluminum.\\nAnd so, I\\u2019d say that, yes, we\\u2019re talking with a lot of different people and coming and becoming -- working on making deals with each and depending and what we have as far as availability.\"}, {\"speaker\": \"Matthew Fields\", \"content\": \"Can you give us some color whether that\\u2019s fabricators or distributors, and if there is any regional bias to that discussion?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I think, when you look at Europe, there is a lot of questions about Rusal, but there are also are in the U.S.\\nSo, I don\\u2019t think, I have -- I don\\u2019t think there is a bias to one type of customer or not?\"}, {\"speaker\": \"Operator\", \"content\": \"Your last question today will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"I have question about the balance sheet. There is four accounts for fair value of derivatives. And assets are 151 and liability is 579. Why are there four different accounts? Are they segregated based on financials versus hedging, it was premium or how is it so complicated?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo, how is it so complicated? There are four separate accounts. There is current and there is non-current.\\nSo that gets you two sets of accounts right there. And there is assets and there is liabilities.\\nSome of the power contracts are in asset position.\\nSome of the -- these are largely -- just to be clear, these are largely embedded derivatives associated with power contracts.\\nSome of the power contracts are in an asset position, some of the power contracts are in a liability position. The way these work is that as a percent of LME, as power prices go up, I\\u2019m sorry, as LME prices go up and go down, some of our contracts, the power also -- price also goes up or down.\\nSo, you saw some fairly large changes in the liability accounts this time. And that\\u2019s because of the change in the LME. They will fluctuate over time. Essentially, John, it\\u2019s just embedded derivative accounting associated with LME linked power contracts.\"}, {\"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, operator.\\nSo, we\\u2019ve got a good solid start to the year. And we\\u2019re looking forward to an even stronger remainder of the year as Bill foreshadowed.\\nWe continue to be very focused on our three strategic priorities and we also clearly see our role to drive as much market upside as possible to the bottom line so that we can make Alcoa stronger, faster. It\\u2019s an exciting time as you saw from all the questions to be part of the aluminum industry. And we believe that our 130 years of heritage and history helps position us to have an incredible future in front of us. I appreciate everybody joining us and look forward to speaking again here a few months down the road. Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference is now concluded. Thank you for attending today\\u2019s presentation.\\nYou may now disconnect.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2018-07-18
year: 2018
quarter: Q2
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation Second Quarter 2018 Earnings Presentation and Conference Call. All participants will be in 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. 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, Austin, 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. Also, a note on our financial statements, consistent with our first quarter earnings presentation our presentation today for the current period as well as prior periods has been updated in accordance with the Financial Accounting Standards Board\\u2019s recent change to the presentation of non-service pension and OPEB costs. This change resulted in Alcoa moving such costs out of the EBITDA and into other income expense.\\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 thank you to everyone for joining our earnings call. We had a very active second quarter.\\nWe continue to address our pension liability through contributions and annuity purchases, we closed a $500 million bond offering, and we launched the joint venture to support aluminum smelting research and development.\\nHowever, we also had an unexpected operational issue with our work smelter restart, as well as instability resulting in reduced alumina production versus our expectations. Amid all this activity, markets in U.S. trade policy also remain dynamic. With that backdrop, let's review our second quarter results. We reported net income of $75 million or $0.39 a share. On an adjusted basis, excluding special items, net income was $286 million or $1.52 a share. We generated $904 million in adjusted EBITDA excluding special items.\\nWhile this is up 38% sequentially, there were trade actions and operational factors that affected the quarter, which also play into our lower 2018 outlook. From a cash perspective, we ended the quarter with a balance of $1.1 billion. Because safety is our first and most important priority, last quarter we began reporting on safety in our earnings presentation.\\nOur focus is on preventing serious injuries, meaning injuries that are life altering or life-ending. In the second quarter, we had one serious incident at one of our smelters in Norway. A maintenance worker seriously injured his hand while using machinery, resulting in damage to the hand skin, muscles and tendons that may likely affect the hand's movement. There are many lessons to be learned from this incident and it reinforces our resolve to improve fatality and injury prevention. Every day, we work to ensure that everyone who walks through our doors is safe. To that end, we remain focused on managing our top risks, making our safety requirements more protective and providing tools to bolster our safety culture through training and best practices. This past quarter, we continue to strengthen our company by executing our strategic priorities. We introduced new tools to reduce complexity in our company and drove returns from our operations. To lower the company's volatility risk from pension obligations and drive long-term strength in our balance sheet this quarter we used proceeds from a debt offering and available cash to reduce our net pension liability by $605 million. Guided by our strategic priorities, we also made decisions on U.S. smelting assets in Indiana and Washington State. Beginning in Indiana, two of the three potlines that were part of the announced restart up work operations are now producing metal. We've also decided to continue with the restart of the third line that suffered a temporary power outage in May. That potline should be up and running by the end of this year.\\nAs a reminder the motivation for the work smelter restart is to provide an efficient source of metal to the onsite rolling mill so that it can improve production volumes, while lowering overall cost per ton in support of our goals to reduce complexity and drive returns. In Washington State, after evaluating options for our Wenatchee facility, we decided not to restart the smelter at this time, which triggered a payment that was part of an electricity supply agreement. We're also permanently closing one of four already curtailed potlines.\\nWhile the closed sections of the Wenatchee site will be evaluated for potential redevelopment that work will not affect the remaining curtailed potlines. Last quarter, we introduced a new joint venture to scale up an R&D project that produces carbon-free aluminum. The breakthrough technology represents a year\\u2019s worth of Alcoa research and development, but there is still more work to do to commercialize this innovation.\\nTurning to our markets, we're projecting a larger aluminum deficit for the year, but also see the bauxite market moving to a surplus. The alumina market continues in a deficit. And lastly, as I alluded to earlier, due to current market prices, trade actions and operational factors, we are reducing our 2018 outlook to a range between $3.0 billion to $3.2 billion, down from $3.5 billion to $3.7 billion.\\nWhile some of the factors that influenced our outlook are outside of our control, operational stability this quarter was not as expected.\\nOur focus in the second half is to regain consistent stability at each of our operating locations. There is a lot to review this earnings period.\\nSo, with that, here is Bill for more detailed look at our second quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy.\\nLet\\u2019s start with the income statement. Sequentially, revenues are up 16% on higher alumina and aluminum prices. Compared to last year, revenues are up 25% also on higher prices for both alumina and aluminum, which were up 49% and 19% respectively. In the quarter, the net income attributable to Alcoa Corporation was $75 million or $0.39 per share on a 188.7 million shares outstanding. Special items in the quarter totaled $211 million after tax and non-controlling interest, driven by three items, two were previously announced.\\nThe first is the Canadian pension annuitization settlement in April, which is $122 million after tax. And the second is the recently announced Wenatchee power contract payment at potline closure in June that was $73 million both pre-tax and after tax.\\nThe third item results from the final arbitration of a bauxite mining services contract at our now-closed Suriname mine and refinery. We paid cash of $29 million with the net earnings impact of $17 million after tax and non-controlling interest in the quarter.\\nOur second quarter 2018 adjusted net income excluding special items was $286 million or $1.52 per share; roughly double the first quarter of 2018 and 147% higher than the prior year. Adjusted EBITDA excluding special items was $904 million, up $251 million sequentially, primarily due to higher alumina prices and up $399 million over the prior year also due to higher market prices.\\nOur second quarter EBITDA margin was 25%. In the second quarter SG&A and R&D are down $2 million on a sequential basis and are down $5 million year-over-year. A few items to note were the EBITDA line on a sequential comparison basis. Other expenses declined $35 million, primarily due to favorable foreign currency impacts as the dollar strengthened. Interest expense increased $3 million, primarily due to the $500 million bond offering that Roy talked about that closed this quarter.\\nOur operational tax rate in the second quarter landed at 33.3% as earnings improved in low tax rate jurisdictions.\\nTurning to the bridge, sequentially adjusted EBITDA is up $251 million.\\nLet\\u2019s review some of the bridge categories, higher alumina and aluminum prices and a stronger U.S. dollar contributed $365 million to the increase. Taking a look at items not related to price indices, fixed price contracts and other contract pricing in our alumina segment were a $30 million offset to the higher API prices impacting price and mix. Maintenance work and planned outages in our refineries, as well as at our Juruti mine were the key drivers for operational impacts, also higher Spanish power prices were negative contributor to the $22 million unfavorable energy impact. Higher prices for caustic and carbon products are lagged and hit the income statement this quarter, driving the raw materials impact. One new and recurring unfavorable impact is tariffs on our imports into the U.S. mostly from our Canadian smelters, which you see in the other category. Starting in June at $15 million, in the month, we expect a $12 million to $14 million negative monthly impact as long as tariffs are in place, reducing some of the benefits we would otherwise see from the higher Midwest premium. Simply put, for our Canadian production, we will either pay tariffs on metal we import into the U.S. or we will sell it outside the U.S. at a lower premium. Favorable market prices drove substantial earnings increases in the alumina and aluminum segments. Alumina adjusted EBITDA improved $246 million, primarily due to higher alumina index prices with offsets from unfavorable price mix and lower volume and other cost pressures. In aluminum, adjusted EBITDA was $231 million, up $78 million due to higher metal prices. Lower alumina costs were offset by higher energy and raw material costs, as well as the aforementioned tariffs. Bauxite adjusted EBITDA declined $10 million driven by Juruti operation cost and unfavorable pricing due to higher freight rates, partially offset by higher volume. Outside the segments, corporate inventory accounting will reverse to become a negative impact. In the first quarter, alumina sales prices fell.\\nSo LIFO and intercompany profit eliminations were favorable. In the second quarter, alumina prices rose, so corporate inventory accounting impacts were unfavorable. At the end of June our cash balance decreased to $1.1 billion, primarily due to increases in working capital from higher alumina, metal and raw material prices. Dividends paid to our minority interest partner, funding the Canadian pension annuitization and a $62 million payment on an electricity supply contract for the idle Wenatchee smelter.\\nWe also made discretionary U.S. pension payments of $500 million, the entire proceeds of our debt offering are closed in the quarter. In total, second quarter cash from operations and free cash flow include $605 million of discretionary and pension funding. The actions we've completed thus far in 2018 have been aligned with our capital allocation framework.\\nOur consolidated cash balances stayed above $1 billion with continued work on our 2018 sustaining capital and value creation projects. And of the initial $300 million of liabilities optimization, in the second quarter we funded $105 million into our Canadian pension plans. In the third quarter, we expect to complete this phase of liabilities optimization through discretionary pension contributions and debt reduction.\\nWe expect to provide an update on cash returns to stockholders later this year, because our cash tends to be generated in the second half the year. That timing allows us to review a solid forecast to full year cash flows, as well as estimate any substantial cash requirements in early 2019. Quick review of our pension and OPEB accounts where we continue to work down the net liability. The net liability is now $2.7 billion down from $3.5 billion at year end 2017. The reduction includes the $500 million of debt proceeds. The $105 million Canadian pension plan contributions and approximately $70 million from the pension plan freeze and OPEB changes. The $2.7 billion does not include any benefit from annuitizations of certain other U.S. pension plan for the third quarter. All plans will be fully re-measured at year-end factoring in demographic changes, discount rate changes and investment performance.\\nAs Roy said, we've updated our full year 2018 adjusted EBITDA outlook. It now ranges between $3.0 billion to $3.2 billion based on recent price levels, including a $2,100 LME, $465 API, and a Midwest regional premium of $0.20, as well as tariff impacts on our U.S. imports, operating factors and slightly lower alumina shipments.\\nOur final two quarters will not be identical because of pricing lags, improved volume and operational impacts we expect our fourth quarter EBITDA to be roughly 10% higher than the third quarter. Related to the expected price changes, we now estimate that corporate inventory EBITDA impacts, including LIFO and metal price lag and intercompany eliminations will net to zero for the year. Below the EBITDA line, there are two offsetting changes, we've improved our non-operating pension and OPEB expense $10 million to $150 million and we've increased our interest costs $10 million to reflect our recent bond offering.\\nOur consolidated full your operational tax rate remains approximately 35% and our year-to-date rate is 32.8%.\\nSo to catch up we expect the third quarter rate to be in the range of 40%. And cash flow impacts are minimum required pension and OPEB funding estimate is improving $25 million and our additional pension funding is increasing to $700 million, reflecting the use of proceeds of our recent bond offering. We now expect our return seeking capital expending to be approximately $120 million, primarily due to timing on a spend on our Australian bauxite export infrastructure projects.\\nLet me turn it back over to you, Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Bill.\\nFirst, I'll begin with a look at the bauxite alumina and aluminum market.\\nWhile we continue to expect 2018 deficits in both the alumina and aluminum markets we\\u2019re now projecting a larger aluminum deficit than estimated in the first quarter and see bauxite moving into surplus. Beginning with bauxite, and as noted last quarter, 2018 will likely see Chinese bauxite stockpiles grow.\\nWhile our outlook for Chinese bauxite demand has increased slightly, we also expect increased supply growth in Guinea and lower demand from the world ex-China. This surplus continues to be purchased by Chinese customers to serve as operational stockpile. In the alumina market, large supply disruptions in the Atlantic continue to keep alumina supply at relatively lower levels and in deficit for the year. In China, we believe that some refineries have been operating at higher run rates incentivized by economics that made Chinese alumina exports profitable mid-quarter.\\nWe also expect China to import 500,000 tons of alumina in 2018, the smallest amount we've seen in recent history. This is due to few alumina tons available for import outside of China, as well as relative pricing between these two markets. In aluminum, we are increasing our deficit forecast for 2018 to range between 1.1 million and 1.5 million metric tons, up from last quarter's estimate of between 600,000 and 1 million metric tons. Global aluminum demand growth remains the same from last quarter projected to be between 4.25% to 5.25% in 2018. In China, we are forecasting a smaller aluminum surplus for this year as announced smelter projects are delayed by the time needed to obtain government approval for operating lags.\\nIn addition, the Chinese government has indicated its desire to further regulate coal-fired captive power plant, which if implemented could add to the power cost and smelting costs in China.\\nWhile we await the exact impact of this draft policy, China is signaling that it is serious about supply reform in both its aluminum in domestic power industries. In the United States, announced smelter restarts are set to come online later than originally anticipated. And the mix of temporary exertions and curtailments have reduced smelter supply out locations in the U.S., Europe and Brazil. Again as mentioned last quarter, considerable uncertainty remains in the markets driven by multiple trade actions and supply disruptions that could impact these balance estimates for the rest of 2018 and into next year.\\nNow, I'll turn to U.S. trade policy and our view on how it affects the U.S. and global aluminum industry.\\nLet me begin by saying that we appreciate the administration efforts to address challenges that U.S. aluminum industry is facing.\\nHowever to support U.S. producers and consumers long-term two structural issues in the global aluminum market must be addressed.\\nThe first, despite China's progress to reform its aluminum industry is the unfairly subsidized smelter capacity in China that has resulted in an unleveled playing field and surplus production. And secondly, is the persistent operation of uncompetitive money losing capacity worldwide. Unfortunately tariffs on U.S. aluminum imports do not remedy these underlying structural issues of the U.S. and global aluminum industries.\\nLet's look at how U.S. tariffs are affecting the market. The chart shows the size of the U.S. aluminum market broken out by operating capacity and imports. The amount of smelting capacity announced for restart, the change in imports and the 2019 estimated market demand. Directly below the chart is also the amount of curtailed U.S. capacity available for restart.\\nHere are the key takeaways.\\nFirst because tariffs are driving only a limited increase in supply, U.S. imports will remain essential. In a 5.7 million metric ton U.S. market, restarts attributed to tariffs have totaled 300,000 metric tons all of that from competitors.\\nAs for Alcoa, our sole U.S. restart in Indiana is based on cost efficiencies. By bringing part of the work smelter back online, we provide a very specific benefit to our onsite rolling mill that improves its operational and financial performance. In Washington State, our financial imperative does not currently exists for our Wenatchee and it remains curtailed.\\nWe also have curtailed capacity at two other U.S. locations. Most importantly, even if all U.S. curtailed capacity was back online and producing metal. The U.S. would still need to import the vast majority of its required primary aluminum with approximately 60% from Canada, which is key to the North American supply chain. Canada is an important source of metal for U.S. aluminum consumers. We operate three smelters in Canada and were disappointed that it was not excluded from tariffs.\\nSecond, tariffs have so far yielded mixed results.\\nWhile tariffs have pushed the Midwest premium higher providing U.S. aluminum producers with a benefit, there is no long-term certainty to the duration of those tariffs. Tariffs also distort the market by incentivizing the restart of aged inefficient capacity, which contributed to curtailments and closures in the first place. The newest U.S. smelter is about 40 years old. Shielding uncompetitive smelters from the realities of global supply and demand has resulted in frequent oversupply in the global market for the last decade. 232 tariffs are also increasing cost for U.S. downstream manufacturers and will have an impact on their global competitiveness, on U.S. consumers and eventually underlying demand for aluminum in the United States. In short, tariffs will not solve the challenges faced in the aluminum industry. Still, the U.S. hold real advantages that can incentivize the development of a competitive aluminum smelting industry. To be able to compete on a global scale and to make an aluminum investment attractive, producers need four main things. Favorable local and global market dynamics, capital costs that can support healthy returns, attractively priced long-term energy and a competitive regulatory environment. Globally competitive capital costs are a particularly intractable issue, requiring a concerted effort by the U.S. government to incentivize conditions in the U.S., while cooperating with our allies to eliminate unfair subsidies abroad.\\nLastly, the industry also needs investments in research and development to support new smelting technology to produce innovative products for future consumers. In May of this year, Alcoa, together with Rio Tinto announced the joint venture with the Government of Quebec to commercialize a process that makes a new product, carbon-free aluminum. The joint venture known as Elysis, has support from Apple and the Federal Government of Canada. With a combined CAD 188 million, the patent-protected technology invented by Alcoa eliminates all direct greenhouse gases producing pure oxygen as its byproduct. The JV will drive larger scale development and commercialization of the process with the technology package planned for sale beginning in 2024. If successful, Elysis would provide a retrofit or Greenfield option, would reduce both operating and capital costs and would provide a unique product advantage.\\nWhile we are very excited about the new JV and the technology, I do want to stress that this is still an R&D project with the associated execution risks and project milestones.\\nWe will update you in the future as we progress with the development. In closing, we continue to use our strategic priorities to strengthen our company\\u2019s foundation for a brighter future.\\nWe\\u2019re simplifying our internal processes, driving returns from our assets and addressing our balance sheet liabilities. In the second quarter, we drove the benefits of favorable markets to our bottom-line and grew adjusted EBITDA by over $250 million sequentially.\\nAs we look to the rest of the year however, we\\u2019re reducing our 2018 outlook to reflect recent market prices, tariffs on aluminum imports, increased energy costs and operational impacts. And lastly, in line with our capital allocation plan, we used debt proceeds and available cash to reduce our pension liability by $605 million.\\nWhile we can\\u2019t predict how markets and trade policy may change, we will focus on what we can control. That includes improving the stability and reliability of our global operations.\\nOur employees are the best in the metals and mining business and I know they share this determination with Bill and me.\\nAs we enter the second half of the year, we will continue to find new ways to strengthen the company and drive value for stockholders through all market cycles. With that, Bill and I would be glad to take your questions. Operator, could you please remind us of the protocol and let\\u2019s get started?\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions] Our first question will come from Matthew Korn with Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Good afternoon, everyone. Thanks for taking my questions.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Matthew.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"So, could you explain a little bit more, maybe I missed it before, but just please the issues with the alumina production where and why and whether resolved? And Bill, you may have touched on this a little bit, but where else were the operational challenges that were unexpected? Is this mostly again in the work restart?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yeah, so there is two areas of operational challenges in the quarter, the first was on the alumina side. Couple of different plants with some operational issues, we had higher raw material usage in our Spain facility. We had lower yield than what we had hoped for in one of our Western Australian facilities and a boiler outage in a facility down in Brazil. Outside of the alumina segment, we saw a little bit of weaker performance than what we had hoped for in our work facility in part because of the loss of the line in for the restart that we had.\\nSo those are the two big operational issues experienced in the quarter.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it. And I see you only made a small downward adjustment in alumina side.\\nSo those are largely now behind us?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"The biggest part of them was behind us in the second quarter. Part of that adjustment was a lowering in the second half also.\\nSo that's our forecast for the year.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it. Appreciate it.\\nSecondly, thank you very much for outlining the tariff effect so far, and your outlook there. Do you have any dialogue with the government on this, either with the administration or those in Congress who are seeming to start to show some recognition that there are some negative effects? And then secondly, is there anything you anticipate as a spillover either good or bad on this most recent set of proposed Chinese tariffs so there's any effect along your old production chain there? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Sure.\\nAs you can imagine, we maintain pretty active dialogue with a lot of different groups in Washington.\\nWe have active discussions with the administration and with different parts of commerce department and elsewhere.\\nWe also talk with different members of Congress, et cetera.\\nSo we have an active dialogue and what I would say is that I think they understand what we've outlined as our focus on the global industry, and also our focus on the U.S. side of the industry.\\nAnd so that's something that we are constantly driving and we're constantly communicating, and constantly educating.\\nSo it's not yet resulted in where we want to be, which in the short-term are the elimination or the allowance of the Canadian exceptions on tariff. And realistically, what we really like to foster is a long-term dialogue about how we drive a much more level playing field around the world.\\nSo we keep that constant communication.\\nThe second question, remind me what the second question was.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Just on the Chinese\\u2026\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, thank you.\\nOn the impact of the latest round of discussions the larger potential tariff talked about from the U.S. side, and then also the retaliation from the Chinese side. There's no direct impact on the aluminum industry itself, there is an indirect impact in that it creates some questions about the general economy, could have impacts on how commodity flows and expectations about commodities. But there really are no direct impacts on us.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Appreciate it. Good luck.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Curt Woodworth with Credit Suisse. Please go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Yes. Hi, good afternoon.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Curt.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"I was wondering is there any ability for you to change the importer of record, [indiscernible], I believe you're responsible for the tariffs because of that designation, whereas, and I think a lot of other products, the trader or the consumer would be listed at that.\\nSo if you had any dialogue with your customer base around sharing the burden of the tariff. And then, there is a product exclusion process for products that can be made here, right.\\nSo it's sort of an odd situation that you as the producer would be the one to argue for that. But have you filed an exclusion request with regard to your exports with commerce?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so, a few questions in there. What you're seeing in the market is the beginnings of discussion around duty paid versus duty unpaid market.\\nAnd so that's a sort of a natural process we've seen in Europe, we've seen it elsewhere. But it's a natural process that starts to make those discussions a bit more transparent. The simple fact is, is that Midwest premiums are experienced across North America, but because of the tariffs you\\u2019re really only realizing the full impact of those Midwest premiums if you produce in the United States.\\nAnd so while there is a lot of discussions around that and there are specific contracts, I think the market is moving more towards the duty paid versus duty unpaid kind of methodology. On your second question. What was the second question, Curt remind me?\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Have you filed a request for exclusion to be\\u2026\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"On the request for exclusion, yes, thanks.\\nSo we have not filed any request at this point. And we obviously keep very close to that process. It is something that we continue to analyze.\\nAnd so it's obviously we would let our investors know if we were to choose to do that, but nothing filed at this point.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay. And then just a follow-up question on capital return, the balance sheet still fairly underlevered from the debt perspective.\\nYou raised debt to pay down the pension still generating pretty healthy free cash. Can you comment on your desire to accelerate capital return to the equity holders either dividends or buybacks. And can you just remind us of the size of your basket in terms of how much you could buyback? And then how much of that would go away if you don't utilize it this year? Because I believe there is like only a 50% carryover, which you already have.\\nI think last year's carryover also affected this year. Thank you very much.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, so I'll address that one.\\nSpecifically, the ability to return cash to shareholders is around $437 million in 2018.\\nAs you know and I think I alluded to in my comments, a lot of our cash flow generation occurs in the second half of the year.\\nWe have said publicly that we will be returning above and we have a very formulized capital return structure that focuses on having $1 billion of cash sustaining the operations paying down some of the pension liabilities. Once we've done all of that, we will return 50% of excess free cash flow to shareholders and use 50% for delevering. We'll be making those decisions in the second half, and we'll let you know when we\\ufffd\\ufffdve made the decision. At this point, thinking through the options between share buybacks and dividends and just don't have an answer for you at this point, but we will in the second half.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, it's in active discussion in our Board. How should those capital returns look, and it's obviously a very welcome discussion and one that we're taking very seriously.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Understood, thanks.\"}, {\"speaker\": \"Operator\", \"content\": \"Your next question comes from Timna Tanners with Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Great, thanks very much. Wanted to just probe a little bit more some of the comments about the broader markets. And I know in the last conference call we got you to give us some anticipation in terms of the norte restart. I was wondering if you can comment on any expectations you might have there. And with regard to RUSAL resuming normal operations?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes Timna, so let me hit on those two. Starting with Alunorte, we're very careful not to express opinions on how and in what method competitors are working to bring back production online.\\nAs you know, Brazil is a very complicated environment particularly right now. We do see in our operations there is increased oversight. We welcome and do a lot of work to connect with the communities and connect with the local, regional and then federal regulators as well. But it's -- have a real impact on our alumina markets today. From an outlook perspective, I'll remind you what we said last quarter is that we were assuming a six month outage.\\nWe have bumped that up now simply because more time has passed and we haven't yet seen a resolution to it. And I just want to say that we've included that as a placeholder not to try to take position about when and how that will come back on again. But rather watching a bit removed to see how [indiscernible] norte deals with that situation.\\nOn the RUSAL side, I think what we've seen is that there is a pause, there is really two aspects to this.\\nThe first is that because there is this period until October has given the market some breathing room to be able to start to adapt. That actually also coincides with when a lot of customers are looking for that next set of contracts.\\nAnd so it's given the market time to adapt.\\nSo I'd say a lot of those immediate impacts at least come down a little bit, while we\\u2019re waiting to see what the final outcome will be.\\nThe second side of that is that right now I think a lot of people in the market are expecting there to be some kind of resolution to that.\\nHowever, there is still a lot of caution as to whether that material, whether it\\u2019d be alumina or whether it\\u2019d be aluminum, whether that material will be available to the market.\\nAnd so, that is still a story underdevelopment and we\\u2019ll see where that takes us.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Got it. I appreciate that. Obviously, difficult confusing times with regards to that outlook. But my other question is really on the bauxite market, it\\u2019s not only pretty opaque for us on the outside here and it is interesting to hear you talk about the new oversupply outlook. Can you talk to us a little bit more about how that impacts Alcoa in particular, you have -- you\\u2019ve said in the past you have a premium product. Do you still expect that premium to withstand and do you still expect to be able to grow production and plan to as you\\u2019ve talked about in the past? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Sure. And let me start commenting and then Bill might want to chime in as well.\\nSo, from our perspective, we tend to look at our bauxite growth projects as very much tied to customers in the market.\\nSo, as we think about doing expansions, we\\u2019re very focused on who will be the final recipient of that product. And we do that because we want to be sure that we\\u2019re extracting the value for the quality and consistency in delivery particularly of those reserves.\\nSo, I would say that while the current market because of so much -- because there has been this growth of supply in Guinea, we\\u2019re careful and cautious about it. But I would say that we\\u2019re still looking towards investing in that business because from a long-term or even medium-term perspective there is a significant amount of demand in China.\\nOn the pricing side, there really is no single solution; you look at API, the alumina price index in our alumina market. There really is no single solution in bauxite yet. That is a market that is still being determined. And to a certain extent, there are some contracts that are priced with transportation embedded in pricing and others that are priced without.\\nAnd so, the pricing, to be quite honest is opaque, but you also see some factors that are in the favor of positive pricing, but also factors that are turning negative.\\nOn the favorable side, you\\u2019re seeing some price inflation and some difficulty because of environmental regulations and inspections happening in China. And that means that there is less available bauxite inside of China. And to a certain extent, they are using some of this Guinean bauxite and other sources to offset that.\\nOn the global side as you see freight rates creeping up. That actually makes -- that makes some of the further distanced bauxites a bit more disadvantaged when compared to material source from Australia as an example.\\nSo, it\\u2019s a complex market. I would say that we\\u2019re still committed to growing that market if we find the customers on the other side that will make the sale of those with our reserves in the ground make it profitable for Alcoa to take them out of the ground and sell them.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay, make sense. Thanks a lot.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Timna.\"}, {\"speaker\": \"Operator\", \"content\": \"Your next question comes from Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, Roy and Bill, a couple of questions from me.\\nThe first one just thinking about the capital management, maybe coming at it from a different angle. The $2.7 billion of unfunded pension and OPEB, where do you eventually want to get that number to, are you happy with where that\\u2019s at today? And I guess with the slide 15 where you\\u2019ve got the $700 million of additional pension funding in the FY2018 outlook, with the $500 million bond and I think you said $300 million at the start of the year, have you decreased that from what was implied at $800 million down to $700 million or did that change as a result of the bond that was issued?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, good questions, Chris.\\nWe\\u2019re sitting at currently -- as we said, $2.7 billion of pension and OPEB. To be clear, we would like to be largely out of the pension business in the next decade.\\nAnd so, that\\u2019s our goal. And out of that $2.7 billion I believe roughly $1.6 billion off the top of my head is the pension and the OPEB is around $1.1 billion.\\nSo, with that as a long-term goal to be out of the pension business and when I say out of the pension business that means fully -- either fully annuitized or immunized versus interest rate changes. With that as the goal, we said this year that we would be contributing $300 million towards either pension or delever. We went out and we did the $500 million debt offering and we committed that to the pension. And that leaves $300 million for either further pension reductions or some form of deleveraging.\\nSo at this point, we've committed to around $200 million of further pension reduction and that would imply about $100 million of deleveraging, which most likely would occur through the Brazilian debt, we have about $137 million of Brazilian debt.\\nSo I hope that's clear. And just to reiterate it, $500 million of that we borrowed, $300 million of either pension or delevering. At this point we're saying $200 million towards the pension and $100 million towards delevering.\\nAs far as where we want to get long-term with the pension.\\nAs I said we'd like to get out of the business, but overall I think we could see a further $400 million to $700 million over the next few years of either delevering or contribution to -- excess contributions to the pensions.\\nSo when we look at our capital structure, we think we'll be in an optimal capital structure, if after we've done all of our actions this year, and then we do an additional $400 million to $700 of deleveraging in the future.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay that's clear. And then so my other question just related to the energy business. Last year, you had a big step up from 2Q into 3Q with some seasonality. Is there anything expected with that. Was that a one-off last year or should we expect a similar pattern in 2018?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Recall, last year we had a big step up from second quarter to third quarter and then a tremendous fall off third quarter to fourth quarter.\\nSo if you recall in the third quarter to fourth quarter I think we saw something like a $55 million to $60 million decline on the energy side. At this point and it's very, very hard to forecast energy prices in Brazil. But at this point, the energy situation in Brazil from a pricing standpoint looks pretty constructive.\\nSo we are saying that we believe that ratably during the course of the year you're not going to see a significant jump up in the third quarter or a fall-off in the fourth quarter.\\nSo pretty consistently good in the third and the fourth quarter.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay, thanks. And just the last one, Beck and Core [ph] any update there?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so we've actually come back to the negotiating table.\\nHowever, as we've said before on this call and at the Annual Shareholders Meeting, we're focused on a long-term solution for that plant, a long-term competitiveness versus competitors around the world. And also it's a plant where we'd like to be investing long into the future.\\nSo we look at this as -- we look at these discussions as an opportunity to affect real change to ensure that we don't have these types of arguments in the future. And that we can really set what could be a world-class facility up for long term success.\\nSo we're continuing to discuss, we have no update as far as when those discussions will conclude.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay.\"}, {\"speaker\": \"Operator\", \"content\": \"The next question comes from Piyush Sood with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Good evening and thanks for taking the questions.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hi, Piyush.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"You guys talked about the operating issues in alumina, we can kind of see it in the bridge. Could you also talk about what's the $30 million sequential impact in 2Q related to? And does that also include something from operations or is that something completely different?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes that's something completely different. There is two major components to that.\\nIf you look at the left hand side of the bridge, we capture what changes occur from the alumina price index. And then in the price mix category we capture any deviation from alumina price index contracts.\\nSo there is really two components to that.\\nThe first is timing of shipments and when they occur during the course of the quarter. And what API is achieved in those timing of shipments that's roughly half of the impact. And then the second half of that impact is there are still some contracts that have slightly different pricing mechanisms that may be API on a lag or API, variations from API and that's the second piece of that $30 million.\\nSo no operational impacts included in that number purely variations off of the alumina price index.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"That's helpful. And on -- similar question on bauxite side, price mix of minus 6 other of minus 6, it's kind of a relatively high number for the amount of EBITDA bauxite generate.\\nSo, if you could talk about that as well?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, so I can address the price mix in bauxite. The bauxite prices, even though realized prices are showing a slight increase on a sequential quarter basis. Underlying prices once you strip out the impact of freight actually went down in the quarter.\\nSo from a margin perspective, you see a negative flowing through margin. I would have to look at what the other impact is in bauxite and I'm sure you can follow-up with Jim later tonight.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I would remind you also in bauxite of one additional factor. Remember that at the end of last quarter was when the RUSAL sanctions were first announced.\\nAnd so some of those shipments that were intended to RUSAL were redirected at that point.\\nSo that also has us an impact that occurred during this quarter.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Okay, understood. And you did mention that if I heard that correctly, the ability to return cash this year is about $437 million. What do you have now, what's the number for next year?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Piyush, it will be based on -- there is a component of it that's based on how much we return this year.\\nSo there is a flexibility in next year\\u2019s if we don't return cash this year. I just -- I don't know the number off the top my head, Piyush.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Okay, thank you and I'll get back in the queue. All the best guys.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Good. Thanks, Piyush.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question is from Lucas Pipes of B. Riley FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Hey, good afternoon, everybody.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Lucas.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"I wanted to follow-up on one of Chris Terry's question in regards to the pension. When I look at slide 28, it shows about the $300 million of the minimum pension funding, $700 million of additional pension funding and then the $125 million of OPEB payments. If I follow the response to Chris's question correctly, it would suggest that there is maybe just about $200 million left under that additional pension funding, is that right?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"There is around $100 million left on the additional pension funding, discretionary pension funding this year.\\nSo if you follow through the logic, I think we say $700 million of discretionary pension funding, $500 million of which we've already done through the debt offering that we did. We did $100 million to facilitate the annuitization of a large portion of retirees in Canada. And if we're going to do $700 million this year that would leave another $100 million to be done in the third quarter.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it. And all the other pieces of that table those payments have been made?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"There are some of those payments that will -- so which page, page 28?\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Page 28.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"The minimum pension funding that will be made ratably during the course of the year, right.\\nSo that has not all been made in the first half. There are still some of that gets made in the second half\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it, got it. Very helpful, thank you for that. And then, you see both alumina and aluminum markets in deficit and you have some capacity that is curtailed in both of those sectors, what would it take for you to bring on -- to restart additional capacity?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So, that's a calculation that we do really on a pretty frequent basis to be quite honest.\\nAnd so we look at the curtail capacity we have around the world some of it\\u2019s in the United States, some of it\\u2019s elsewhere. The fact is that we look at that on a pretty robust basis depending on market conditions of course and what we think as far as short-term as well as medium and long-term pricing. But we also look at local conditions, the ability to actually sell that product that smelter or that refinery might happen to make. And we look for good sources of power, how that impacts the raw material markets. It\\u2019s a pretty complex and a complex calculation.\\nAnd so, each of those has a very different set of drivers that would make it actually profitable.\\nSo, look at S\\u00e3o Lu\\u00eds down in Brazil as an example of that. It\\u2019s a place where it\\u2019s a competitive plant. There is real demand inside of Brazil that today is not being addressed, but we would need a good medium-term power contract that could help make that plant competitive on the global scale.\\nSo, we keep an eye on supply and demand locally and then globally. And we also have a very close eye on what the financial characteristics are.\\nSo, there is not -- it\\u2019s not as simple as a particular breakeven price for each of the plants, but of course pricing both on aluminum as an output and alumina as an input are both important.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And if I could circle back to your original question while Roy was addressing your question. Out of the $300 million of required pension funding, about a third of that has already occurred during the course of the first half.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it. Very helpful gentlemen, I appreciate it and best of luck.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"Our last question comes from Justin Bergner with Gabelli & Company. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Good afternoon, Roy. Good afternoon, Bill.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Justin.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"The energy headwind of $22 million this quarter, could you clarify that a bit? And then I guess the flat rolled EBITDA was breakeven after doing $11 million in the first quarter, any sort of clarity there would be helpful too?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, so the energy impact, biggest piece of that is Spain, Spanish energy cost. We\\u2019ve seen Spanish energy costs increase in the second quarter.\\nThe other components that are smaller, they are in places like Norway and the Pacific Northwest.\\nSo, we\\u2019re seeing increases in those areas. What was the second question?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Flat-rolled.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Flat rolled, flat rolled results. Flat rolled was negatively impacted by the fact that we didn\\u2019t have the third line up and running. Flat rolled had a number of negative impacts in the second quarter also higher transportation cost, specifically outbound transportation cost.\\nWe\\u2019re projecting that flat rolled improves seasonally in the third quarter and the fourth quarter.\\nSo, we are projecting that that rebounds fairly nicely in the third quarter and the fourth quarter.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay, great. And then a question on the alumina market, it seems like the deficit is about the same -- the forecasted deficit is the same as it was coming out of the first quarter, I just wanted to make sure that was correct because it seem like qualitatively suggest that things might be a little bit tighter there? And I guess the second part of the question is if Alunorte is going to stay down longer, what do you think is causing the pricing in the alumina market to be a little bit softer than you anticipated a quarter ago or that the market was pricing in a quarter ago?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, let me address the second one real quickly and you can go back to that. I mean if you recall a quarter ago, we had the RUSAL sanctions hanging over the market and we saw alumina prices spike up to very high levels. And I think as Roy addressed in his comment, I believe some of that concern around the RUSAL sanctions has come out of the marketplace. And probably the biggest driver currently in the alumina market is the fact that Alunorte is down still.\\nSo, that\\u2019s why you\\u2019ve seen alumina prices go from their highs right after the RUSAL sanctions that are announced down to the levels that we\\u2019re at today.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"But again, you can also watch how that price is setting on a daily basis and see what transactions are feeding into that.\\nJust today we had a pretty significant increase and it reflects that there is simply not enough alumina in the market to fulfill all of the demand. When you sort of step back and compare first quarter, our first quarter estimate versus this quarter\\u2019s estimate, there is gives and takes.\\nSo, as you pointed to Alunorte is we built in a longer period, where that\\u2019s going to be down.\\nSo, that is less supply coming to the market. But we've also seen China ramp up some of their alumina capacity.\\nNow China tends to be the marginal player and they ramp it up when there is an advantage of them to -- when they have a cost advantage or a price advantage to sale either in market or out of the market. What's been different in this downturn, what's been different in this latest pricing environment is the fact that the differential between outside of China prices, and inside of China prices has actually driven some of that material to be exported.\\nNow that tend to be a pretty costly process, but it tends to keep those two markets more or less in check.\\nSo you\\u2019ve seen a little bit more production coming from China, a little bit less production coming from outside of China. And that's tended to keep the market in relative balance compared to last quarter to this quarter. Again, it's in a deficit situation, which is really what's driving the fact that on a relative basis alumina is priced relatively expensively compared with aluminum.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Great, that was very helpful. Thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next question comes from Alex Hacking with Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Hi guys. Thanks Roy and Bill. My first question, in the guidance you've talked about higher energy costs, could you quantify that please? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, versus guidance.\\nSo in the reduction in the guidance there is about $50 million of higher energy costs globally. Again that is somewhat higher oil and gas prices. And then electricity prices in Spain, Norway and the Pacific Northwest.\\nSo in the guidance change, there is $50 million of higher energy costs.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay, perfect. And then my second question is more of a market question.\\nYour view on the cost curve, I recognize it's a moving target. But at today's prices, what percentage of Chinese aluminum production do you think is profitable. Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Aluminum production, Alex?\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Yes, aluminum. Yes.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo we keep very close track of that. And it tends to move on a month-by-month basis.\\nAs we look at the way the pricing is done inside of China versus where it sits on the cost curve.\\nOur estimate is a little bit less than 40% unprofitable [ph] at this point.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay, perfect. I appreciate the color. Thank you very much.\"}, {\"speaker\": \"Operator\", \"content\": \"And our last question today will come from John Tumazos with John Tumazos Very Independent Research. Please go ahead.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you very much.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hi, John.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Good evening, thank you. The Chinese as you know, shut about a quarter of their alumina output by November-December versus June output peaks last year. How do you think they're going to evolve with the increased alumina output to export? Are they going to shut all those down again in November?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So let me take my best shot at that. Obviously it's a complex environment.\\nSo I would say that you've seen both Chinese acting on the discrepancy between outside of China, inside of China prices and that's actually incentivize production.\\nHowever at the same time, you've also seen that a movement inside of China because prices are not particularly attractive to be careful about what production is done.\\nAnd so you've got sort of the odd situation where you've seen some increase in production in alumina, but then you've also had some of the producers actually talking about maintenance outages and actually curtailing some of the facilities.\\nSo it's hard to define exactly what will come from that market. What I would say though is that Chinese tend to act in a very economically rational manner when it comes to the alumina market.\\nSo in that variation between the two markets gets to a point where it justifies shipping the alumina back to a port, turning it from big bags into a bulk shipment giving it overseas to the customer, which all has costs involved.\\nI think we find that the Chinese produce and then they ship it. But that tend to then bring those two markets that sort of that umbilical core that bring the two markets back into relatively balanced positions.\\nAnd so they act economically. They tend to curtail when prices come down, they tend to restart capacity when prices come up. And then you have the added dimension of what will happen with the winter curtailment, et cetera. There was not a big impact of winter curtailments last year.\\nHowever that is a program still to be defined for the end of this year and the start of next.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And just to add on a small point to that Roy, I thought you made it well, but we have really started to watch the arbitrage for alumina between China and the rest of the world. In the April timeframe the time that I referred to when we saw the RUSAL sanctions come online and alumina prices went up sharply. We saw that arbitrage window open fairly large. And interesting enough, we saw exports in May. And that arbitrage window subsequently closed in June, the arbitrage actually went negative. In early July, there is still a small arbitrage window. We don't have yet the June export numbers for China. But to reiterate what Roy said, the Chinese industry is pretty economic when that arbitrage window open, we almost immediately saw exports flow out. And when it closed we saw those exports slow down.\"}, {\"speaker\": \"John Tumazos\", \"content\": \"Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you for the question, John.\"}, {\"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, operator. I'd like to thank everybody for their time today. To sum up, as we enter into the second half 2018, we will continue to execute on our strategic priorities and we are very focused on building a stronger Alcoa. It is during times of high uncertainty and volatility where our actions and decisions can have the most and longest term impact.\\nWe have lot to do and we are clearly focused on it. We remain committed to driving value for our stockholders. I'd like thank you for your time today. And I'll turn it back over to the operator now.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference is now concluded. Thank you for attending today's presentation.\\nYou may now disconnect.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2018-10-17
year: 2018
quarter: Q3
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation third Quarter 2018 Earnings Presentation and Conference Call. All participants will be in 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. 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, William, 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. Also, a note on our financial statements, consistent with our first and second quarter earnings presentations our presentation today for the current period as well as prior periods has been updated in accordance with the Financial Accounting Standards Board\\u2019s recent change to the presentations of non-service pension and OPEB costs. This change resulted in Alcoa moving such costs out of the EBITDA and into other income expense.\\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 I appreciate everyone joining today\\u2019s third quarter earnings call. Since we launched Alcoa Corporation as an independent, publicly-traded company almost two years ago, we\\u2019ve used our strategic priorities to reduce complexity, drive returns, and strengthen the balance sheet to position our company for a brighter future. In that time, we\\u2019ve streamlined our structure and processes, we\\u2019ve pushed our operations to drive returns, and we\\u2019ve addressed a significant portion of our liabilities.\\nAs a result, Alcoa is much stronger today when we launched in late 2016.\\nAs proof of our strategy\\u2019s success, we\\u2019re pleased to announce today a $200 million stock repurchase program. The program is a key component of our 2018 capital allocation framework and a commitment we made to stockholders. We\\u2019ll provide more details on the repurchase later in the call, but for now, let\\u2019s review our third quarter results. We reported a net loss of $41 million or $0.22 a share as we proactively continue to address our net pension and OPEB liability. In the third quarter, we used $194 million in available cash to further reduce both our net pension liability and to repay debt. On an adjusted basis, excluding special items, net income was $119 million or $0.63 per share. On an adjusted EBITDA basis excluding special items, we generated $795 million, up 37% year-over-year. And from a cash perspective, we closed the quarter with a $1 billion balance.\\nTurning to our business update, I\\u2019ll start with safety.\\nOur most important measure across our global operations, and as a reminder, our focus is on preventing serious injuries defined as life ending or life altering. We had one serious injury during the quarter, specifically an employee at one of our U.S. smelters experienced a life-threatening case of heat stress and after ending his shift suffered a seizure. He was transported from our facility to an intense care unit, and the employee is now recovering at home. After this incident, we strengthened and re-communicated the safety leadership standard for heat stress prevention at every one of our locations. Most importantly, this standard is included as part of an ongoing improvement initiative that will evaluate and improve how we manage all critical risks across our operations.\\nThis quarter, we made further progress in reducing the liability from pensions and other post-employment benefits. It now stands at $2.2 billion, down $500 million sequentially and a sizable improvement from $3.5 billion at the end of 2017.\\nOn the labor front, union employees who had walked out of our mines and refineries in Western Australia are back at work and are voting this week on a new proposed labor agreement. Today, in Spain, we announced our intention to begin the formal consultation process for collective dismissals that will affect all employees at our Aviles and La Coruna aluminum plants. These types of communications are never easy because of the personal impact they have on employees, their families, and communities. But these two plants in Spain have inherent structural issues, including older, less-efficient technology, which makes them globally uncompetitive.\\nWe are committed to minimizing the impact of any outcomes on employees, and we'll negotiate with workers' representatives on reaching a social plan.\\nTurning to our markets, we will provide our outlook for the remainder of what has been a very interesting and volatile year. At a high level, we continue to project a global deficit for both alumina and aluminum and see the bauxite market remaining in surplus with increasing stockpile growth. And while markets may remain volatile, we are modifying our projection for full-year adjusted EBITDA, excluding special items to range between $3.1 billion and $3.2 billion, targeting the upper half of the range announced last quarter. And lastly, to strengthen the organization and support our operator-centric approach, effective November 1, the Presidents of our bauxite, alumina, and aluminum segment will report directly to me.\\nIn addition, at that time, Tomas Sigurdsson will assume the role of Senior Vice President, Strategic Alliances. He will continue to report to me with primary responsibilities for managing and developing the company's key strategic relationships. The Chief Operating Officer role will be eliminated. With that, Bill is ready to give us a detailed look at our third quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy.\\nLet's start with the income statement. Sequentially, revenues are down 5% on lower aluminum prices. Compared to last year, revenues are up 14% on higher prices for both alumina and aluminum. In the quarter, the net loss attributable to Alcoa Corporation was $41 million or $0.22 per share on 186.5 million shares outstanding. Special items in the quarter totaled $160 million after tax and non-controlling interest, of which $174 million relates to recent pension and OPEB actions in our U.S. plants. In August annuitization, we transferred pension assets and liabilities totaling approximately $290 million to a third-party insurer, who assumed benefit payments for roughly 10,500 plan participants. Also, effective September 1, 2018, we ceased providing salaried retiree life insurance. All other items netted to a positive impact of $14 million.\\nOur third quarter adjusted net income excluding special items was $119 million or $0.63 per share. Adjusted EBITDA, excluding special items was $795 million, down $109 million sequentially, primarily due to lower metal prices.\\nOur third quarter EBITDA margin was 23%. Few other items of note on a sequential comparison basis, currency moves impacted several areas on the income statement this quarter, including helping drive lower SG&A and R&D expenses as well as lower depreciation.\\nOn the unfavorable side, lower foreign currency revaluation benefits netted to higher other expenses. Interest expense increased $4 million in the third quarter due to the $500 million bond offering that closed in May.\\nOur operational tax rate in the quarter was 45.6%, as rising alumina prices changed our mix of taxable earnings and non-taxable losses, and we increased our provision by $48 million to catch up the lower rates recognized in the first half of the year.\\nLet's take a look at the drivers of the sequential change in adjusted EBITDA. Lower metal prices and higher alumina costs in our aluminum segment drove $175 million of the decrease. The stronger dollar provided currency benefits of $32 million. Positive price mix in the third quarter was primarily in our alumina segment.\\nFirst, the negative alumina price mix from the second quarter did not recur generating a sequential benefit; second, shipment timing meant some cargos were priced in more favorable pricing periods than in their shipment month and full-year contracts were trued up to reset higher market prices. We do not expect the sequential benefit to recur in the fourth quarter. Stronger energy sales in Brazil completely offset higher power costs at several of our smelters, especially in Spain, and as expected, raw material costs continue to increase in both the alumina and aluminum segments. And the sequential impact of a full quarter of Section 232 tariffs is $19 million and is included in other.\\nWhile we paid tariffs mostly on Canadian production that's not the entire Section 232 Tariff story.\\nOur U.S. smelters benefitted from tariffs pushing up the Midwest regional premiums so the impact of tariffs in the quarter compared to not having tariffs was a net benefit to Alcoa of $27 million.\\nNow let's shift our focus to the segments. In the segments bauxite, adjusted EBITDA improved $6 million on favorable currency and price mix, partially offset by lower earnings at the equity owned mines. Alumina adjusted EBITDA improved $22 million favorable price mix and currency overshadowed the lower alumina index prices, unfavorable operational impacts and higher raw material and energy costs. The Aluminum segment down $158 million, primarily on lower metal prices and higher alumina costs. Bright spots were strong sequential improvement from the Brazil hydroelectric facilities and flat rolled products. Outside of the segments, corporate inventory accounting improved sequentially, but volatile alumina prices have made it difficult to predict.\\nFor example, in the last two weeks of September, alumina prices dropped from $625 to $458 at month end, so actual results changed substantially from the outlook we\\u2019ve provided at the mid-month.\\nTurning to cash.\\nOur cash balance is slightly over $1 billion at the end of the third quarter, we continue to use available cash to strengthen the balance sheet and improve the business, two points to make here.\\nFirst, over the last three quarters, strong cash flows have allowed us to make additional, discretionary and one-time payments, totaling nearly $500 million to strengthen the balance sheet, including additional pension funding, debt repayment, and legacy payments and settlements.\\nSecond, in the third quarter alone, substantial cash flows allowed us to make a pension and OPEB payments of $299 million including $100 million of discretionary funding into certain of our U.S. pension funds, dividend payments to our minority interest partner of $181 million and $98 million in debt payments including prepaying $94 million of debt in Brazil, as part of our capital allocation framework.\\nThis quarter, we continued strengthening the balance sheet, pension and OPEB net liability is down to $2.2 billion and our net debt to EBITDA is down to 0.26 times. Return on capital continues to strengthen and is at 12% on an annualized year-to-date basis.\\nOur days working capital this quarter was 26 days, up 2 days from the second quarter and up 9 days versus the third quarter of last year. The year-over-year change in inventory days is primarily related to the higher cost raw material inventories and system, and inventory build for the work restart. Higher days sales outstanding and lower days payable are primarily due to recent higher alumina prices.\\nWe expect sequential improvement from the third quarter DWC to the fourth quarter DWC, but the amount will be dependent on sales price changes.\\nNow let's discuss the improvements in pension and OPEB.\\nAs I said, we continue to decrease our net pension and OPEB liabilities, and net liability of $2.2 billion is down from $3.5 billion at the end of 2017 and down from $2.7 billion at the end of the second quarter.\\nTaken many actions throughout the year, and this quarter, we annuitized $290 million in gross liabilities related to our U.S. pension plan. We contributed $100 million in discretionary funding and ceased our salaried retiree life insurance program. These actions drove a reduction in the net liability of almost $200 million, with the actions taken in Canada and the U.S., we re-measured the effective plants for changes in the discount rate and other factors, we re-measured 62% of our Canadian plants in April and 97% of our U.S. plants in July, these interim re-measurements reduced to the net pension liability by approximately $200 million. All plants as we usually do will be re-measured at year-end, factoring in demographic changes, discount rate changes and investment performance, after our actions, our current sensitivity is in approximately $170 million change in net pension and OPEB liability for every 25 basis points change in the applicable discount rates, that's down from $220 million from the end of 2017 based on the actions that we've taken this year.\\nAs Roy mentioned and fully aligned with our 2018 capital allocation framework, our Board of Directors has authorized a $200 million stock repurchase program, we expect to start the program this quarter and repurchases will be based on cash flows, market conditions and other relevant factors. Shares purchased will be retired not held in treasury stock.\\nFor the rest of the year, we expect to have addressed all components of the 2018 capital allocation framework, cash balance maintained at least $1 billion, roughly $300 million of sustaining capital expenditure spent, lower return seeking capital expenditures now expecting approximately $100 million. The recently completed $300 million liability optimization and with the newly announced stock repurchase program returning cash to stockholders. We've been focused on the capital allocation program for 2018 in January, we'll provide an update on our future capital allocation framework in that next iteration as we did for 2018, we will be balancing many factors in light of expected market conditions, challenges and opportunities, including, maintaining liquidity, throughout the year, investments required to sustain the business and drive value, optimal capital structure and returning cash to stockholders.\\nNow let's review the full-year outlook for 2018.\\nWe are tightening our full-year adjusted EBITDA outlook to $3.1 to $3.2 billion based on unpriced sales at $2,000 LME, $500 API and $0.20 Midwest regional premium.\\nSome slight changes in the full year shipments outlook for Bauxite and Alumina, we've adjusted the shipment outlook ranges downward, down to 1 million tons in Bauxite & 100,000 tons in alumina, aluminum shipments outlook is unchanged.\\nFor full year 2018 earnings, we're expecting modest improvements in several categories, transformation impact is improving $20 million on lower net spending, primarily in selenium.\\nOur corporate is improving $15 million on lower overhead spending and currency benefits. Net pension and OPEB is improving $10 million as a result of our recent actions and depreciation and amortization is improving $35 million primarily due to foreign currency benefits.\\nWe expect our full-year operational tax rate to be approximately 38%, also, we expect some full year cash use is to be slightly lower than what we had previously projected, minimum required pension OPEB funding is down $10 million to $415 million, return-seeking capital expenditures are down $20 million to approximately $100 million, due to slower spending on the Western Australia port expansion and currency benefits. And lastly, environmental and ARO spending will be at the low end of the previous range of approximately $110 million. I'll turn it back over to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Bill. I'll begin with a look at our markets.\\nWe continue to expect 2018 deficits in both the alumina and aluminum markets, but now see bauxite in a larger surplus.\\nAs we've noted in our presentations throughout this year, we're likely to see Chinese stockpiles grow in 2018.\\nWhile we're expecting a slight increase in Chinese demand for seaborne bauxite, it is more than offset by higher demand [ph] in bauxite supply.\\nAs has been the case in the past, Chinese customers use the surplus to bolster operational stockpiles. In alumina, the market continues to be in deficit.\\nWhile alumina demand is down compared to our estimate last quarter that is being offset by ongoing supply disruptions that are keeping alumina supply at relatively lower levels.\\nWe have revised our expectation for Alumina trade flows and are now projecting that China will be a net exporter of approximately 300,000 metric tons of alumina in 2018. This is being driven by relative pricing between the two markets and continued tightness in the World ex-China. In aluminum, we continue to forecast a deficit for the year.\\nWe have reduced our estimate of Chinese aluminum supply due to curtailments and delayed expansions.\\nHowever, that supply reduction has been matched by a reduction in demand growth, as a result, we have reduced by 50 basis points our 2018 global demand growth figures from 4.25% to 5.25% last quarter to 3.75% to 4.75% this quarter. The causes of this lower demand growth come from both China and the rest of the world. Data released over the past two months have shown that in China, the transportation in the electrical sectors particularly had weaker year-over-year growth than projected. Outside of China, we are forecasting lower demand growth in several countries dealing with significant economic issues, including Turkey, Iran, Argentina and Venezuela.\\nAs we mentioned earlier this year, considerable uncertainty remains in our markets, driven by supply disruptions and policy and trade actions taken by governments in the United States, China and elsewhere. These dynamic conditions could have impact in the last quarter of 2018 and into 2019.\\nNext, here is the 2018 view of our three markets, represented on global cost curves.\\nWhile cost curve positions only reflect a portion of our story, they do provide some important inside.\\nOur bauxite cost structure remains highly competitive at the 20th percentile. Producing approximately 44 million metric tons per year, we continue to partner with third-party customers that value the high quality consistently delivered bauxite that Alcoa provide. Alumina, made a small move up to cost curve from the 12th percentile last year to the 15 percentile this year.\\nAs the largest producer of alumina outside of China and the largest commercializer of third party alumina, our Alumina segment will produce approximately 13 million metric tons with more than two thirds sold externally.\\nThe third cost curve aluminum shows an increase from the 37th percentile last year to the 58th percentile this year. With such a change, I'd like to discuss the underlying fundamentals in more depth.\\nLet's start with a closer look at alumina prices and what has been a truly extraordinary year for the raw material.\\nAs you can see on the left, Chinese alumina prices depicted in gray are typically higher than Australian alumina prices. Since China is usually short alumina, its pricing relationship has enabled alumina to flow from the rest of the world into China to fill its deficit.\\nHowever, something interesting has happened in 2018. The world ex-China alumina market has experienced a lot of turbulence, driven largely by the supply disruptions in Brazil and to a lesser extent elsewhere. This has pushed world ex-China alumina prices up and over Chinese alumina prices. This pricing inversion has produced a number of direct impacts including higher refining margins for producers outside of China shown below the graph for our Alumina segment and net exports of alumina from China that we mentioned in a prior slide. This unique situation has also had knock on impacts in the aluminum market.\\nTurning to the right side of the slide. We see that smelting costs have increased and that Alcoa's smelting cost position has moved up from the second quartile last year to the third quartile this year.\\nWhile the partial restart of our Warrick smelter contributed slightly to this move, the more significant driver by far has been alumina prices.\\nIn fact higher alumina prices outside of China have given our Chinese competitors a relative benefit of about $200 per ton year-over-year. That relative change in Alumina cost has moved our smelting portfolio up the cost curve and into the third quartile.\\nHowever, we recognized that the current dynamics, which have pushed world ex-China alumina prices above Chinese alumina prices may not persist. China is building new smelters that are expected to increase alumina demand in rest of world supply disruptions are likely to be resolved at some point. Those factors could restore the traditional market dynamic essentially restarting the rest of world exports of alumina to china. If that happens, if China returns to importing alumina if price moves back above rest of world prices then we would expect our smelting cost position to benefit from those changes and move back into the second quartile as illustrated by the dotted line. This situation illustrates that our markets are volatile, while prices for our products and our raw materials continue to move at times in dramatic and unpredictable ways we maintain our focus on continuously driving out cost and improving the efficiency of our global assets. Alcoa have a strong integrated position in the aluminum value chain, including third party sales in each of our three segments.\\nOur alumina business is unrivaled. We're the world's largest producer outside of China.\\nSo while increased alumina prices represent an added cost for our smelters, Alcoa benefit overall due to the strength in third party alumina sales.\\nNow let's look at how we can create value through all market cycles. Since launching as an independent publically traded company, we've been focused on creating sustainable value in all parts of our business so we can succeed for the long-term through the market cycles. To achieve that objective, we've been pulling on both business and financial levers in alignment with our three strategic priorities. This slide demonstrates a simple model for how we approach the creation of value across both areas. I'd like to give a few examples to illustrate each lever.\\nWe continue to focus on improving the underlying results of our operations in each of the three businesses. The restart of our work smelter due to reach conclusion at the end of this year provides a true benefit to our rolling mill, improving its operational and financial performance.\\nAdditionally, we're investing approximately $100 million in return seeking capital projects this year. These investments will help us to improve operational efficiencies or keep production at several of our refineries and smelters, enable further cost reductions in our flat rolled business and promote future growth in bauxite.\\nWe\\u2019re also actively managing our assets to control operating costs and improve the stability and efficiency of our overall portfolio. This has required some difficult actions, such as the ongoing labor issue at the B\\u00e9cancour smelter in Quebec, in today\\u2019s announcement that affects employees at two of our Spanish smelters. Actions and announcements that affect employees are not taken lightly, but we must always consider the long-term success of each of our operations.\\nOur ability to maximize stockholder value also include several financial levers. Aligned with our strategic priority to strengthen the balance sheet and as Bill detailed, we have substantially reduced our net pension and OPEB liability this year. Reducing the size of our liability is important because it also lowers the company\\u2019s risk associated with the volatility of our pension and OPEB obligations. We remained focused on this liability and we will look for opportunities to reduce it further overtime.\\nWhile we\\u2019ve used available cash to optimize liabilities, we also regularly seek opportunities to either sell or generate income from our idled assets, to help minimize or offset some of the cash impact at these sites.\\nOn the cash and equity investment side, we are focused on maintaining our target cash balance for the business and we continue to make progress with our joint ventures.\\nAs we shared with you last quarter, we are working to develop and commercialize our carbon-free smelting technology with our Elysis joint venture, which launched in May. These are example of how we are thoughtfully and rigorously improving the underlying value and strength of Alcoa for our stockholders, while there is still much to do it is clear that we\\u2019re making progress. In closing, since our launch we\\u2019ve used our strategic priorities to strengthen our company for a brighter future, we have simplified our structure, generated returns from our assets and addressed our balance sheet liabilities.\\nAs a result, the company is stronger today than it was in 2016 and our significantly smaller pension and OPEB liability, our operating results since launching nearly two years ago and our stock repurchase plan point to the success of our strategy.\\nWhile we\\u2019re mindful that volatile market conditions may persist, we\\u2019re targeting the upper half of the projected EBITDA range announced last quarter. The new projection is now between $3.1 billion and $3.2 billion.\\nNow into the fourth quarter, we look forward to strengthening our company even further for a strong close to the year. With that, Bill and I will be happy to take your questions. Operator if you could please remind us of the protocol and let\\u2019s go ahead and get started.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be from Piyush Sood with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Roy and Bill, congratulations on a strong quarter. Good to see a large $200 million buyback plan, what was your thinking about starting with only a buyback and not a mix of a regular say, a 1% small dividend and the remaining through buyback.\\nJust want to understand the thinking behind the decision?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Sure. Thanks for the question, Piyush. We -- since we announced the capital allocation framework over the last year, we've been talking to a lot of investors during the course of the year. And in general, we felt that investors favored a buyback over a dividend, and the reason being is that it provides the opportunity for the shareholder to take advantage of the capital return if they desire, and then also, it provides us flexibility on when to execute upon it.\\nSo we ended up going with the buyback.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Fair enough. And one more from me, and I'll get back in the queue.\\nSo the U.S. MCA has been signed, and there is a possibility that we could see Section 232 Tariffs in calendar converted into quaters.\\nSo if that happens, your import bill will come down, but what do you think that does to U.S. Midwest premiums? Should we expect to floor in the high teens cents per pound at this point assuming that it's more like a duty paid premium at this point?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Piyush, I appreciate the question. To be quite honest, we don't typically speculate on where regional premiums will go one direction or the other.\\nWe continue to be very focused on two things I'd like to highlight.\\nFirst and most important is that, we're trying to deal with Chinese overcapacity, so we're trying to make sure that we can align all of our global partners around the world of market-based economies to try and ensure that we have a level of playing field as possible. When it comes to the Section 232 Tariffs, we're focused on ensuring that Canada remains tariff free for all of the exports into the United States, and we're also very focused on being able to discuss and talk with the administration in the United States, in Canada, and elsewhere, and how we can make sure that we have -- we're applying the right kind of pressure on China in order to reel in increasing production.\\nAnd so, I understand where your question was going, but I also think it's somewhat unpredictable as to where this process will end up as part of whether it's part of the U.S. MCA or whether it's a separate process, where the Section 232 issues are resolved between the United States and Canada.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"And sorry one more question, and this is more to just clarify a comment. Bill, when we were thinking about making a sequential bridge 3Q versus 4Q, should we exclude $60 million price mix benefit in the Alumina segment? And is there any other 3Q bridge item you think it's non-repeatable?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I think going into the fourth quarter, the price mix impact in the alumina side will vary depending on what prices end up being during the course of the quarter. And with the volatility of API prices that we've seen, it's pretty difficult to predict. With that said, out of the $60 million, $30 million was the non-recurrence of a negative that had occurred in the second quarter and $30 million was the benefit of having a positive shipments in the third quarter.\\nSo if you're going to back anything out, I would say the $30 million that occurred in the third quarter will not recur in the fourth.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"All right. Thanks, guys. And once again congratulations on the quarter.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Piyush.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next questioner today will be David Gagliano with BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Hi, thanks for taking my questions. I just have a -- I have a two or three, relatively minor questions, but I just wanted to cross a few off of the list in terms of the numbers here.\\nFirst of all, the $30 million quarter-over-quarter improvement in EBITDA contribution from flat-rolled business versus the second quarter, is that new level of EBITDA contribution for flat-rolled reasonable moving forward?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, we saw good improvement in flat-rolled in the third quarter, and -- but there was really two things driving it.\\nThe first was better volumes in flat-rolled, which I think is sustainable. And the second is we did have some one-time inventory adjustments in the flat-rolled segment that were positive impacts that -- that were really catch-ups from the first two quarters of the year. I would suggest to you going into 2019 Dave that we're targeting around the $25 million run rate result in the flat-rolled business on a quarterly basis. That may vary during the course of the year. There's a little bit of seasonality in that business, and that first half is typically not as strong as the second half., but we'd be targeting around that level of performance in our flat-rolled business.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay, that's helpful. Thanks. And then just -- could you just give us the average alumina costs -- alumina cost that flowed through the aluminum segment in the third quarter?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I don't have that one, Dave, so you'll have to follow up with Jim after the call.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay, I will. And then the last one, just from the closures, the two smelters in Spain, I realize they were relatively small and likely even smaller from a profitability contribution perspective, but I was wondering if you could give us a bit of a framework around on expected benefits, however, you want to frame it perhaps relative to the most recent quarter on an EBITDA basis once those are shutdown?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Dave -- how you're doing. It's Roy. I appreciate the question, to be quite honest, for Spain, because we're just starting this consultation process and it is a very formal process of discussions with the workers' representatives.\\nI think right now, it would simply be too early to comment on changes quarter-over-quarter.\\nSo, I think we'll leave that one for a future discussion once we reach the end of that process.\"}, {\"speaker\": \"David Gagliano\", \"content\": \"Okay. Understood. Thanks very much.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Dave.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner will be Chris Terry with Deutsche Bank. Please go ahead with your question.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hi, Chris.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi there. Hi Roy and Bill. A few from me, I'm just following up on the detail from the 3Q. Can you just talk through the conversion costs in the smelting just around electricity carbon et cetera.\\nI think that's where a lot of the break came versus analysts' expectations.\\nSo just trying to get a gauge of the numbers heading into 4Q?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, it's always hard to judge against analysts' expectations, right? So as we look at it, I would say there is a couple of areas from improvement versus maybe where we're looking at it. We think the flat-rolled products business probably did a little bit better than what people had expected. The hydros in Brazil did very, very well in the third quarter. And then as far as the cost and the smelting business essentially came in line, where we were anticipating them. Year-over-year, just to be clear, we talked about raw material costs year-over-year of around $400 million, that is a little bit less, we're taking that down a little bit from where that 400 million was, but that is not in the smelting business that's more on the refining business, we are seeing a little bit lower costs in refining. But on the smelting side, costs came in about where we anticipated, coke prices have seemed -- have flattened out a little bit, pitch prices continue to go up. But, overall where we expected.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. Thanks for the details there. And then just overall, thinking about the pension versus buyback versus dividend debate. What's the timing you expect to do the actual $200 million buyback and how will you actually decide when to do that? Is it realistic that you actually complete that buyback in the next year?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Well, we will start it -- we'll kick it off in the fourth quarter. I'd remind you that the buyback was an integral part of the capital allocation program that we announced over a year ago.\\nSo we committed to our investors that after having done all the various things that we had talked about including holding cash on the balance sheet of $1 billion, $300 million of sustaining capital, $300 million of optimizing the liabilities, we would do a return to shareholders, and the commitment was to return excess cash above $1 billion. And at this point, we're projecting that we'll do $200 million, haven't given a timeline on how quickly it will be done, but we'll get it kicked off in the fourth quarter.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay, great. And the last one from me just on the Western Australian operations, are there any -- I guess bonus payments or one-off fees we should expect in the fourth quarter coming through the result?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I'd say that we still have a road ahead of us in Western Australia.\\nSo I don't think we could speculate on any kind of bonus payments, because we still need to get to an agreement that our workers have ratified and agreed to.\\nSo still some work ahead on that one.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay. Thanks guys. I'll leave it there.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Chris.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next question from Curt Woodworth with Credit Suisse. Please go ahead with your question.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Hi, good evening.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Curt.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"So, just drilling down into your cost structure for the smelters, you do provide pie chart looking at the breakout. And it seems a little odd that the alumina cost would be flat at 42% quarter a quarter given that my numbers alike alumina price went from $380 to $520. And if you just sort of calculate the implied delta from your pie chart it\\u2019s about a $50 per ton, delta versus $142.\\nSo I have a feeling that maybe that\\u2019s part of the delta here in the modeling, can you talk to that?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, it\\u2019s really difficult to walk you through your model on the call, but essentially -- yes, go ahead.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Why would the cost be 42% both quarters, when you had a massive inflation in alumina sequentially.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Well, if you look at the -- just the 90 day lag of API, right.\\nSo, yes, we did have an increase in alumina cost in the third quarter associated with the 90 day lag of API. It really is dependent on some of the timing of shipments that we had in alumina into our smelters. And at this point, we saw a little bit of a jump up in alumina cost in the third quarter that are reflected in the results. We'll see a little bit more impact in the fourth quarter as we get into the fourth quarter.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Okay. It just seems like a pretty big delta. Because like the API lag is $140, so call it $280 on a cost number, say 25 -- okay, that's fine. And then I guess the second question is just thinking about the cadence of cost going forward in smelters outside of alumina.\\nSo you talked about I think Spanish power was higher this quarter, coal-fired pit flat was going up, coke flat, do you think that cost peak in the 4Q or do you get further inflation into 1Q given where the lags are? If you kind of assume that we stay flat where we are?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Let me hit that and Bill can maybe you jump in a few additional details as well.\\nSo when you look at the important components, power is one that will depend on a lot of different factors depends on what's going on in energy markets around Europe or North America and the rest of the world.\\nSo that one will depend on market conditions. Coke and pitch are two carbon materials both seem to have reached a bit of a flattening off point from where they have been in our rising environment over the last year and half.\\nAnd so that means that we should start to see some stability in those costs going forward. The caveat I would make is that it depends a lot on what's happening in the general aluminum industry. If we see growth of expansions or growth inside of China, you might start to see some of those materials with additional demand for the opposite. And it's also tied over with what's happening in the pricing environment for aluminum. What I would say is that when you look at the price of aluminum today, and you think about where that sits relative to full cost structure both alumina, but then all these other components you're at a point where half of smelters outside of China are now cash negative and under water. And that simply means that there is very little incentive to continue to operate many of those plants and certainly no incentive to invest.\\nSo I think that -- I think, when you look at how the raw materials connect with what's happening in the pricing environment today there really isn't a lot of room unless aluminum prices to go up for raw materials to continue to increase without starting to see a significant supply reduction. Because plants can't continue to operate at these types of cash losses.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Totally agree.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And to put some finer point around it. When we look out at coke prices for instance, we think they've peaked largely in the third quarter, coke should come off our view a little bit in the fourth quarter. Pitch should stay around flat, pitch as Roy has said has been persistently high. And we should start seeing some of the decline in caustic prices flowing through our results in the alumina business.\"}, {\"speaker\": \"Curt Woodworth\", \"content\": \"Got it, all right. Well, I really appreciate it. Thanks for your time.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Curt.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Timna Tanners of Bank of America Merrill Lynch. Please go ahead with your question.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Yes, hey guys. Good afternoon.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Timna.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"First off I was wondering if you could talk to us a little bit about how RUSAL\\u2019s uncertainty or the operating status of -- or the uncertain operating status of RUSAL is affecting you. Curious because of negotiating season perhaps if that's a factor.\\nYou are the world's largest alumina supplier and then their status being uncertain. I'm just curious how that how affected you and how you see that affecting you to the extent that you can elaborate on that near-term?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Timna, so I think there is an impact on the uncertainty around whether what will happen with sanctions on RUSAL that impacts the general market.\\nAnd so much like everybody else that impacts us on how the pricing trends are going and how people are enter or not entering into contracts. When you think about where we stand I think we have a period of time where you can continue to enter into contract.\\nHowever that you don't have any assurance of supply of physical supply. Because if those sanctions continue, that's going to create an inability for them to sell product into Western companies.\\nSo from our perspective, we're just at the very beginning of what we call the mating season, when we start to get into aluminum and elsewhere, some of those 2019 contract. The fact is that that certainly supports our discussions and our arguments with our customers because they see us as a reliable supplier that won't be subject to these types of sanctions. But we're still pretty early in the process.\\nAnd so, I'd say that everybody's still is waiting to see what happens in these next critical weeks. From a premium standpoint, I think we've seen some increases in premiums both in North America, but also in Europe.\\nAs we go into this next season we're starting to see some opportunities in the premiums as well.\\nAlthough still again, we're just at the beginning of that critical period, so more to come.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. I mean, given that alumina supply is uncertain in your supplier and assuming that this can continues to get kicked. Is it not -- can you not say that you're getting more appetite as a second supplier or as an alternative supplier to some of those aluminum smelters that used to depend on RUSAL. Or I mean, is there -- is that not a likely benefit to you, I'm just not understanding if you\\u2019re just reluctant to say because you're in negotiations if there's something else going on?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so for alumina specifically, I think, RUSAL is important but also the shortness of the market outside of China is also very important.\\nSo absolutely, we have a lot of interest in additional cargoes of alumina. And when we look forward it's typically not the same type of next year contracting period it tends to be longer term contracts. But when we have any available cargoes, and we do try and keep a certain number of cargoes that we can sell either on a spot basis or on an API basis, there is a significant amount of interest. And that's pretty typical for us because we have very high quality aluminum, but I think that is particularly important now because of the uncertainty around RUSAL, but also the uncertainty around other places where there's instabilities and uncertainty of supply over these next three, six, twelve months.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay, thanks. And then just my second question, just high level, I\\u2019m fascinated with this continued alumina price out performance relative to aluminum.\\nYou\\u2019ve seen it in your results we\\u2019ve been talking about this for a while. And I know you\\u2019ve also mentioned for a while the Chinese aluminum producers are not profitable. And I\\u2019m just wondering how did your economists are forecast project this playing out? And not just in China but even here in the U.S., there\\u2019s some capacity restarting despite these really high alumina prices.\\nSo I'm just wondering, do you think at some point it stifles some of the restarts that are being discussed as a new capacity, or do you think we could see a protracted period of divergence between the commodity prices? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So in aluminum specifically or alumina. The mix between aluminum and alumina prices.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"The divergence, how long can we see that vast divergence in the aluminum producers hit pretty hard and is not loss making in some cases, right? As you said in the past that that just continues to play out, I\\u2019m wondering how long can these Chinese producers be lost making, how long can these U.S. producers talk about restarting despite high alumina prices that don\\u2019t make them economic?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So remember first of all that there\\u2019s a pretty significant difference between the rest of world and the Chinese market.\\nSo again, going back to the one slide that I presented it\\u2019s -- we\\u2019re actually finding that today, it\\u2019s the rest of the world aluminum producers that are underwater and not necessarily China. Because there\\u2019s a $200 per aluminum ton difference in the cost of alumina.\\nAnd so it\\u2019s creating this pull, because there is such a high price for alumina outside of China. It\\u2019s starting to create this export connection that then starts to supply the rest of world market.\\nNow that\\u2019s all predicated upon what\\u2019s happening in Brazil also to a certain extent like you were just asking on RUSAL.\\nSo how long can that last, it\\u2019s really a question of when Alunorte they can restart again and under what conditions. And it\\u2019s also dependent on how much exports China can get out. It is a very laborious and cost inefficient process to go from a refinery to big bags then cut open the big bags to put it onto a bulk carrier.\\nSo it ends up creating inefficiencies and frictions in that whole system.\\nSo in the meantime, I think, it\\u2019s -- when you have this divergence where aluminum prices really haven\\u2019t shown a reaction to that inflation of alumina prices, it makes it very hard to be a smelter particularly outside of China. And in alumina it means that it\\u2019s an opportunity to operate, to sell, to find those spot cargos, but there is no real certainty around how long that market will stay like that, it\\u2019s really a matter when supply comes back on?\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Got you.\\nOkay, thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Timna.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner will be from Matthew Korn with Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Hey, thanks guys, appreciate you taking my question. I had a bit of a market question for you. China has been making some aggressive signals on their scrap import policy for metals non-ferrous metals in particular, where they want to go over the next two-three years. Does this change in your view the calculus for users of aluminum as they are looking at primary, the cost of primary, costs of investing these more secondary. Do you think there\\u2019s any potential to see substantial lift in the use of scrap in North America or other ex-Chinese markets. In the end, does that matter for the markets that you\\u2019re selling into?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, and Matthew thank you for the question.\\nI think the answer is yes, it does have an impact.\\nSo the less scrap that flows and take the United State specifically, the less scrap that flows from the U.S. to China as an example, it means that you\\u2019re -- there is more plentiful scrap available inside the U.S.\\nAnd so you\\u2019re starting to see downwards change or an increase of the discount to what is regular prime P1020 metal.\\nAnd so because that happens, it starts becoming even more attractive to use the scrap and in a time where you\\u2019re actually seeing the cost of bringing metal in, importing metal increasing, it\\u2019s starting to act as a way for them to avoid the imports and actually start to bring that into their process.\\nSo, what does it do, it helps to bring down in general the price of production for the U.S., which has been offset by the fact that metal in the U.S. is now more expensive than it is in the rest of the world.\\nAnd so that have a bit of an offset to some of those impacts that are happening because of the tariff situation right now. I don\\u2019t think because of the U.S. is such a short market, because there are so many imports of metal in order to fill the consumption of aluminum in this country. It hasn\\u2019t been a significant impact right now, but the more -- the less scrap China takes the more that will end up being used in the U.S. or elsewhere.\\nSo it starts to have more and more of an impact going into the future.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it.\\nLet me follow that up with another question on China then. There has been a lot of mix messages coming out of the government arguably on the way that the pollution controls are going to be applied over there this coming winter season. Do you see any risk around the production restrains being substantially diluted this year versus last and how might that play out for aluminum versus alumina if that indeed the case?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so first and most importantly, we incorporated into our 2018 balances and then we\\u2019ll also incorporate into our 2019 balances, our best estimate of what all the impacts have and particularly including the winter curtailment.\\nI think your point is well taken in that, we expect winter curtailments to be less than they were last year. At the same time, I\\u2019ll also argue that winter curtailment program was the lesser important of the two important changes in China, the first being winter curtailments but the second and much more important was the enforcement of the operational permit.\\nSo, what I think has the biggest impact is the fact that there is still are serious requirement in order to bring down or shutter older capacity transfer those operating permits to any new expansions or existing capacity that is unpermitted before it can ever start inside of China.\\nSo I think that the point is yes, there\\u2019ll be less winter curtailments, it\\u2019s already incorporated into our balances, so I think that is part of what we\\u2019ve already been talking about. But again, as long as China continues down this path of enforcement of environmental controls and operational permit, it does start to create a more level playing field. And we\\u2019re now seeing a lot more action less so in aluminum was already pretty well active, but we\\u2019re also seeing a lot of work inside of bauxite that\\u2019s constraining bauxite export ensuring that bauxite mines have the permits in place. And that they are following operating practices, it tend to bring the cost of bauxite up for those alumina refiners inside of China.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it. I appreciate it. Best of luck.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Matthew.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions] And our next questioner today will be Lucas Pipes with B. Riley FBR. Please go ahead with your question\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Thanks, for taking my questions and great job this quarter. Roy and Bill I wanted to follow-up a little bit on your capital allocation strategy. And you've made a lot of progress on optimizing your liability.\\nSo as you look into 2019, and obviously market conditions has been pretty volatile. But should we continue to think about a 50-50 split of cash between optimizing liabilities and capital returns if it is in excess of $1 billion?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, Lucas, let us get through 2018 and we'll come out with a capital allocation program in early 2019 for 2019 and potentially even for longer than 2019.\\nAs we go through 2018, we still have to execute on the share buyback of the $200 million. We've talked about the fact that once they -- once we achieved all the goals of the capital allocation program we'll be returning cash to shareholders in addition to further delevering.\\nSo we still have that to do.\\nSo let us get through 2018 and see what the balances look like at the end of 2018 and early 2019 we'll let you know what the allocation program looks like.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"And maybe really quickly on the balance at the end of 2018. If I recall correctly, you generate more cash in the second half of the year and I think even more in the fourth quarter.\\nSo at the midpoint of guidance, do you have a rough sense excluding any share repurchases where your cash balances would shake out December 31st.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"We don't provide an exact guidance on that. But what I would tell you is that we talked about splitting excess cash above $1 billion between share repurchases and further delevering. We've announced the $200 million program.\\nSo it should give you a pretty good indication of where we anticipate cash to end before any share repurchases.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it, okay.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And you're right. We generate a lot of cash in the fourth quarter typically if you look back at our fourth quarter even as part of [indiscernible] we generated a lot of cash in the fourth quarter.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Okay. All right. Well, I appreciate the detail. Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Lucas.\"}, {\"speaker\": \"Operator\", \"content\": \"And our next questioner today will be Justin Bergner with Gabelli & Company. Please go ahead with your question.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Thanks guys for fitting me in. The step up in the profitability of flat-rolled, which I guess you alluded to being about $25 million per quarter run-rate in 2019. How much of that is just related to the Warrick restart and how much of that is due to other factors? Because that's obviously a much, much higher run-rate than anything in recent history.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, I don't have the exact breakdown of the percentages. But I would say less than half of that is related to the restart of the smelter.\\nWe have grown and are in the process of growing our shipments out of that mill from when we got it from 600 million pounds to over 720 million pounds this year and would like to see it higher going forward. We've been able to put a lot of volume through the mill. And we'd like to see stability of returns and stability of the results out of that mill.\\nSo projecting at about that rate going into 2019. And I'd personally believe that mill has a bright future and can do better than that run-rate.\\nSo that's where we're at today.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay, great. And then one additional question, I think you mentioned a $27 million net benefit from the tariff regime this quarter, if I heard you correctly. How did you calculate that, or what Midwest bump did you assume to get to that?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I don't have the Midwest bump. What I can tell you is roughly on a gross basis we had roughly $56 million of the improved revenue and $29 million of higher costs on a year-over-year basis. And that's what you see the $27 million benefit. I don't have the calculations in front of me, but I'm guessing that's probably around a $0.10 benefit from the premiums, which would make the math pretty simple. But around a $0.10 improvement in premiums.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay, thank you for taking my questions.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Justin.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Alex Hacking with Citi. Please go ahead with your question.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Hi, Roy and Bill.\\nOur main questions were answered.\\nSo I'll refrain from asking a question and follow-up with Jim later. Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Alex.\"}, {\"speaker\": \"Operator\", \"content\": \"Okay. And the next questioner will be from Paretosh Misra with Berenberg. Please go ahead with your question.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Hi, guys.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Paretosh.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Hey.\\nSo just a couple of quick ones.\\nSo one I don't know if you already said that on the call. But can you provide the caustic and all the dollar assumptions that are baked in your guidance for the fourth quarter?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Don't have the caustic number per se in front of me and I believe the Aussie dollar is $0.72.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Got it. And then second on the bauxite side, in the bauxite business, what kind of growth opportunities you have still available in Australia and what are the bottlenecks? Is it permitting or the infrastructure or what is that?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, so the first and most important is that we want to for any growth project we need to make sure that we have a reliable customer at the other end that is going to pay us fair value for what we believe is very high quality bauxite, particularly at a moment where caustic prices are high.\\nSo and quite simply, there are customers out there and part of what we've been doing over the last couple years is finding ways to work with them and to build those partnerships.\\nSo that's very positive thing. In Australia, Western Australia particularly, we have the ability to increase our production. Right now we have an operating permit in order to export up to $2.5 million.\\nWe will need to renew that coming up in about a year. But also we\\u2019re able to get close to the 2.5 million tons out. But we do have some logistical bottlenecks, make sure that we can do it at an economic -- a very economic way, essentially to lower the cost of logistics from the mine to the port and then get it over to our customers.\\nSo still some growth that we can see in there. And in fact, some investments that we\\u2019re planning on making that once we finish the permitting process that makes it more attractive financially.\\nWe also have opportunities in Guinea and in Brazil. It depends a bit on what\\u2019s happening with freight rates and prices of bauxite. But again, I think the qualities that -- and the consistent delivery that we have of bauxite helps to make that a very attractive business going forward Paretosh. Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And Paretosh, I did check it is $0.72.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"I see, thank you.\"}, {\"speaker\": \"Operator\", \"content\": \"And our last questioner today will be Andrew Cosgrove with Bloomberg Intelligence. Please go ahead with your question.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Hi, guys. Thanks for taking my question.\\nJust quickly on caustic, just looking at the -- how the Southeast Asia and Northeast Asian prices collapsed more recently and how they\\u2019ve compared to your costs or your aluminum implied costs back in 2017. Is it kind of fair to assume that those alumina costs might come back into play that we saw mid-2017 as we move throughout 2019, considering the drop we\\u2019ve seen?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo it\\u2019s hard to say, we have seen in aggregate caustic and this does not bifurcate between Asia and rest of the world. But caustic prices kind of peaked out at $630 a metric ton at the very beginning of this year and have trended downward from there. That\\u2019s up sharply from what we\\u2019ve seen in the third quarter and fourth quarter of last year.\\nSo that we have about a six-month lag on our caustic costs.\\nSo we will continue to see those higher prices that we\\u2019ve seen earlier in the year. But they will, assuming the prices continue to trend downward, they\\u2019ll continue to come down.\"}, {\"speaker\": \"Andrew Cosgrove\", \"content\": \"Okay.\\nJust wanted to -- just double check that.\\nOkay, thank you. Won\\u2019t keep you guys any longer. Appreciate it.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Good. Thanks, Andrew.\"}, {\"speaker\": \"Operator\", \"content\": \"Okay. And this will conclude our question-and-answer session. I would now like to turn the conference back over to Roy Harvey for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Good. Once again, I\\u2019d like to thank everyone for joining us today.\\nAs we approach our two year anniversary next month, we remain focused on our strategic priorities to reduce complexity, drive returns, and strengthen the balance sheet.\\nOur company is much stronger today. It\\u2019s clear that our strategy is working and we will continue to build upon our solid foundation for an even brighter future. Thank you, and William, back over to you.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you, and the conference has now concluded. Thank you all for attending today\\u2019s presentation. And at this time you may now disconnect your lines.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2019-01-16
year: 2018
quarter: Q4
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, everyone, and welcome to the Alcoa Corporation Fourth Quarter and Full-Year 2018 Earnings Presentation and Conference Call. All participants will be in listen-only mode. [Operator Instructions] And please note that today's event is being recorded. And 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, William, 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. Also, a note on our financial statements. Consistent with our three previous 2018 earnings presentations, all comparative prior periods have been updated in accordance with the Financial Accounting Standard Board's recent change to the presentation of non-service pension and OPEB costs. This change resulted in Alcoa moving such costs out of EBITDA and into other income/expense.\\nFinally, as previously announced, the earnings release and slide presentation are available on our website. With that, I\\u2019ll turn it over to Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Jim, and thank you to everyone for joining today's earnings call.\\nOur fourth quarter and full-year 2018 results reflect our determination to accelerate the strengthening of Alcoa. Despite sequentially weaker markets, we had a strong fourth quarter with higher profits in our Bauxite and Alumina business units. And with the help of higher market prices earlier in the year, we increased annual profits, addressed liabilities, significantly strengthened our balance sheet and began to return cash to stockholders. We've built upon the progress we've made since our launch, and by executing our strategic priorities to reduce complexity, drive returns and strengthen the balance sheet we're better positioned to thrive through market cycles. But as we turn to 2019, markets have trended lower and there is increased uncertainty surrounding global trade. This has created a dynamic environment for input pricing and product pricing.\\nOur businesses, however, are ready for these challenges, and we are determined to drive improved operations, react smartly and with urgency to changing market conditions and to further strengthen our Company's foundation. With that, let's get started with an overview of the fourth quarter. We reported net income of $43 million or $0.23 a share. On an adjusted basis, excluding special items, net income was $125 million or $0.66 a share. On an adjusted EBITDA basis, excluding special items, we generated $749 million and reported solid cash generation.\\nTurning to our businesses, and beginning with safety. The fourth quarter was free of serious injuries. We're very happy with this achievement and we look forward to building upon it as the year progresses. Operationally, in Alumina, our Pinjarra refinery in Western Australia, one of the largest in the world, attained a fourth quarter production record.\\nOur Alumina segment also reported a rise in quarterly profit. In Aluminum, last month we curtailed half of the one operating potline at the Becancour smelter in Quebec, Canada. This will enable our salaried employees to continue to run this portion of the line safely with a smaller workforce. Meanwhile, we continue to work on reaching a new labor contract with the unionized workforce. Also this quarter, we began to buy back shares under the stock repurchase program announced in the third quarter, and we successfully amended our revolving credit agreement, reflecting our improving financial profile.\\nLastly, overnight in Spain, we reached a tentative agreement with the workers\\u2019 representatives at our Avil\\u00e9s and La Coru\\u00f1a aluminum plants related to the collective dismissal process that we announced in October. The workforce is expected to vote on the tentative plan by the end of the month. The plan calls for the curtailment of the smelters at both plants. The casthouses at each plant will remain in operation and the paste plant at La Coru\\u00f1a will continue to operate.\\nOur social plan included in the tentative agreement preserves a portion of the jobs of the two facilities and includes retirement packages and potential relocation to our San Cipri\\u00e1n facility. Taking a broader look at 2018.\\nAs I mentioned earlier, we can see a strengthening Alcoa, and it's visible across safety, our balance sheet and our financial performance. Compared to 2017, we grew revenue and net income, and we increased adjusted EBITDA, excluding special items, by 27%, reaching $3.1 billion. We reduced our pension and OPEB net liabilities by a third, enhancing our balance sheet, all while maintaining a healthy cash balance. In safety, we experienced three serious injuries in 2018, but we were grateful to have no fatalities last year.\\nOur focus across the year has been to revitalize our safety program and we look to improve safety further this year and beyond. Despite operational issues earlier in the year, we saw annual production records at two of our aluminum plants and two of our bauxite mines. We completed the partial restart of our Warrick smelter to support profitably growing our can sheet business and we launched a joint venture to develop our carbon-free aluminum smelting technology. We're proud of what we've accomplished in 2018 and how this work has positioned us for the coming years. Furthermore, with two years of actual results now behind us and given industry practice and market volatility, we are amending the way that we provide annual outlook information to more fully describe business drivers rather than point-in-time estimates. Bill will offer more details on this change. With that, I'll turn it over to Bill for a detailed review of fourth quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy.\\nLet's start with the income statement. Sequentially, revenues are down $46 million on lower aluminum and alumina prices. Compared to last year, revenues are up $170 million, primarily on higher alumina prices. In the quarter, the net income attributable to Alcoa Corporation was $43 million or $0.23 per share on 188.2 million shares outstanding. Special items in the quarter totaled $82 million after tax and non-controlling interests. Of the $138 million of restructuring before tax and non-controlling interests, $107 million was to establish an allowance on Brazil state VAT credits.\\nWhile the Company retains the ability to utilize the credits in the future, only the restart of our Sao Luis smelter provides the opportunity to monetize the credits. Amid unfavorable market conditions and with the current inability to obtain a favorable power contract, we felt it necessary to stop recording additional VAT credit and to establish an allowance on the current balances. We still believe the Sao Luis smelter assets are valuable for the future and continue to maintain the smelter assets. Other restructuring charges of note include $12 million for pension and OPEB actions and $8 million for take-or-pay contracts at idled facilities.\\nNow let's look at the income statement, excluding special items.\\nOur fourth quarter 2018 adjusted net income, excluding special items was $125 million or $0.66 per share. Adjusted EBITDA excluding special items was $749 million, down $46 million sequentially primarily due to lower metal prices.\\nOur fourth quarter EBITDA margin was 22%. A few other items of note on a sequential comparison basis: other expenses increased $25 million due to losses in the Aluminum side of our Saudi joint venture and lower foreign currency benefits.\\nOur operational tax rate in the quarter was 38.8%, 6.8 percentage points lower sequentially. In the third quarter, we had a higher tax rate to catch up our full-year rate as rising alumina prices changed our mix of taxable earnings and non-taxable losses.\\nOur share count decreased 0.5 million shares due to stock repurchases and a decrease in common share equivalents. In the fourth quarter, we repurchased 1.7 million shares for $50 million, an average price of $29.01. Commodity pricing changes had both positive and negative impacts this quarter, and even with improved volume, drove slightly lower sequential result. Negative drivers were lower metal prices, unfavorable contract pricing true-ups in our Alumina segment compared to favorable true-ups last quarter and lower energy prices in Brazil. Major positives came from improved sales volume due to higher production in all three segments.\\nThe other major benefit came from lower quarter-end prices driving positive corporate inventory accounting impacts compared to negative impacts last quarter. Raw materials cost increases have moderated and even provided a slight benefit this quarter.\\nNow let's shift our focus to the segments. In the segments, Bauxite adjusted EBITDA improved $4 million on increased production from the Huntly and CBG mines. Alumina adjusted EBITDA improved $23 million. Strong production recovery and higher API prices were offset by the favorable pricing true-ups from last quarter turning negative this quarter. The Aluminum segment was down $126 million, primarily on lower metal prices and lower earnings from our Brazil hydro assets. Higher alumina costs continued to flow through the segment, which offset the volume gains from the business. Outside of the segments for the quarter, non-segment impacts netted to positive $9 million. Corporate inventory accounting was a benefit as alumina and aluminum prices dropped at quarter-end. In the fourth quarter, we ended the year with cash of $1.1 billion, up $91 million sequentially and down $245 million year-over-year.\\nAs noted earlier, $50 million of share repurchases took place in the quarter, with a matching amount used to reduce debt and make pension contributions. A quick review of our major cash sources and uses for 2018, our total sources of $2.2 billion were comprised of $1.6 billion in operating cash flow and $600 million of debt issuances and other sources. Uses were in three major categories, pension/OPEB, minority interest distributions and capital expenditures and other. We funded $1.1 billion in the pension and post retirement benefits programs, including $412 million of required funding, $225 million related to annuitizations and discretionary contributions and $500 million building a pre-funding balance with proceeds of May\\u2019s $500 million bond offering. Separate from pension, the largest outflows of cash were net distributions to our joint venture minority interest partner of $678 million and roughly $400 million of capital expenditures.\\nNow let's take a look at the balance sheet.\\nThis quarter, we continued strengthening the balance sheet.\\nOur net debt to adjusted EBITDA is down to 0.2x. Return on capital for fiscal year 2018 is 11.9%.\\nOur fourth quarter days working capital was 22 days, down four days from the third quarter, and an 11-day increase year-over-year reflecting higher raw material prices, lower buy resale activities and timing of vendor payments. Most importantly, our pension and OPEB net liability ended the year at $2.3 billion, down $1.2 billion year-over-year. Sequentially it was up $200 million after a year-end remeasurement as unfavorable asset returns due to the global market decline in the fourth quarter overshadowed slightly improved discount rates. The year-end remeasurement offset earlier favorable interim remeasurements. We've completed our 2018 capital allocation framework and as previously mentioned, we started a stock repurchase program and repurchased 1.7 million shares. These shares were retired and not held in treasury stock.\\nOur future capital allocation framework follows a theme similar to 2018.\\nWe will continue balancing many factors in light of expected market conditions, challenges and opportunities, but foremost, we\\u2019ll be maintaining liquidity and managing investments to sustain the business and drive value.\\nWe will also continue our drive toward attaining in an optimal capital structure, returning cash to stockholders and when appropriate, investing in value creating growth projects. The measure attaining an optimal capital structure, we're using an adjusted net debt metric on a proportional basis. At year end 2018, it was $3.3 billion and our target over the next three to five years is to reduce it to $2.0 billion to $2.5 billion. Important to note that this range can be achieved by making our minimum required pension and OPEB payments, assuming we achieve our expected asset return and no change in discount rates.\\nWe have $150 million remaining under our existing $200 million repurchase authorization, as with our adjusted net debt target, we will execute the repurchase program based on cash flows, market conditions, and other relevant factors.\\nNow let's review the full-year outlook for 2019.\\nAs Roy mentioned, due to its limited utility to investors and unprecedented market volatility, we're eliminating the quarterly point in time full-year EBITDA outlook. Instead, adding more cash flow information on the outlook page and adding another page of business commentary in the appendix. Starting with the income statement, in the segments compared to 2018, we expect that 2019 bauxite shipments will be flat to up 1 million tons and alumina shipments will be flat up 100,000 tons. Alumina production gains will translate into fewer purchase tons in 2019. Aluminum shipments will decline 500,000 to 600,000 tons year-over-year, partially a result of the expiration of the Tennessee tolling agreement. Outside the segments, we expect transformation to be in the range of $10 million to $20 million primarily due to lower power revenues at Suriname. In 2019, we will stop using LIFO inventory accounting, and metal lag will be included in the Aluminum segment, leaving intercompany profit eliminations as the sole corporate inventory impact. We plan to restate 2018 financial results in the first quarter, but the impact will be insignificant for the year.\\nMoving forward, intercompany profit eliminations will vary based on ending period prices and inventory levels, and we're including a sensitivity in the appendix. Other corporate expense will increase approximately $20 million due to higher resource unit and labor costs. Below the EBITDA line, there are anticipated improvements in depreciation, depletion and amortization, down $33 million to $700 million and net pension and OPEB expense is improving roughly 20% down $24 million to $115 million. Interest expense is essentially flat year-over-year.\\nWe expect our 2019 operational tax rate to range from 45% to 55%, our result of losses in non-tax paying jurisdiction and that's dependent upon market conditions. Based on today\\u2019s spot prices, we would be toward the top end of that range. In our expanded cash flow section, we have some key expectations. Minimum required pension/OPEB funding is down 27% from $412 million to $300 million.\\nAdditional liability optimization via debt reduction or pension funding as well as stock repurchases will be based on market conditions and cash availability. Sustaining and return seeking capital expenditures are set the same as last year's targets at $300 million and $150 million respectively, because we saw higher earnings in 2018 in tax jurisdictions paid on a lag basis, we expect previous period tax payments to increase by approximately $200 million to approximately $360 million in 2019.\\nWe have completed our payment schedule for the DOJ, SEC settlement. Environmental and ARO spending is expected to be back to its previously targeted range, $110 million to $120 million. In cash impacts of restructuring charges, for example, Wenatchee power payment, we're $103 million in 2018.\\nAs Roy noted earlier, we have reached tentative agreement with the Works Councils at our Avil\\u00e9s and La Coru\\u00f1a smelters. Upon ratification by the workforce, we would expect 2019 restructuring cash impacts to range from $90 million to $115 million.\\nIn addition, depending on the ultimate outcome of the process, the Company could incur further charges ranging from $125 million to $135 million, of which 75% would be non-cash. The remaining 25% would result in cash outlays after 2019. In the appendix, you'll continue to find the cost and EBITDA sensitivities as well as a discussion of key business considerations. Those considerations include, for example, the expected sequential impacts of favorable alumina contractual pricing of approximately $30 million and lower alumina cost in the smelters of $40 million to $45 million as well as anticipated unfavorable impacts of increased maintenance activities in the Aluminum segment of approximately $30 million and roughly $15 million lower earnings in the rolling business.\\nSo with that, I'll turn it back to you, Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Bill.\\nTurning to our market outlook.\\nFirst, I'd like to highlight, why we're excited about the future of our aluminum market. Beginning on the left hand portion of the slide, long-term demand growth is expected to remain robust in the next five years. When looking at expected consumption growth, aluminum continues to outpace competing materials.\\nWe expect that demand growth for primary aluminum will remain strong at a 3.4% compound annual growth rate to 2023.\\nWe are also fortunate to have a well diversified base of sectors that consume aluminum.\\nIn fact, no one sector makes up more than about 25% of aluminum demand. The three largest sectors, construction, transportation and packaging are each expected to have significant growth worldwide in the next five years.\\nWe expect transportation demand for aluminum, for example, to grow at a 3.9% compound annual growth rate supported by trends that include rising wealth in emerging economies in the light weighting and electrification of vehicle fleets. The Electrical sector is also expected to contribute significant demand growth by 2023. Especially in India, a country that is responsible for almost 1 million tons of growth during this period. In the developed markets of North America and Europe, where most of our production is located, aluminum consumption growth is expected to outpace positive overall GDP growth. Positive economic growth in both mature and emerging markets will therefore provide a steady source of demand growth for the many critical end products that rely on aluminum in their supply chains, while new aluminum supply will come on line over these five years. In the near-term particularly, we expect that supply growth will not keep up with consumption.\\nGiven a more restrictive approach to operational permitting inside China and the clear capital cost disadvantage restricting new supply outside of China, 2018 saw a primary aluminum deficit worldwide and we expect another deficit for 2019.\\nNow we'll look more closely at our balance estimates for each of our three markets. Starting with the bauxite market. We see the 2018 bauxite surplus continuing into 2019, as exports from Guinea, Australia and Indonesia climb year-over-year. Chinese customers stockpile bauxite strategically due to uncertain sourcing both within and outside China. And this surplus will likely enable them to grow that stockpile again this year. In alumina, as you know, 2018 was an extraordinary year as third-party supply disruptions in Brazil and other factors pushed the market into a deficit.\\nFor 2019, we're forecasting an alumina surplus in China, driven by refinery expansions and lower than previously expected smelting production due to economic and environmental reasons. In the world ex-China, we expect the market to be approximately balanced, as refining expansions keep pace with rising demand. Lacking concrete information about if or when third-party disruptions maybe resolved, our estimates assume that the status quo will continue.\\nFinally, we continue to see aluminum in a deficit as we did in 2018. Lower margins have led to many economic curtailments of smelting plants during 2018, including several in China that curtailed all or part of their capacity during the fourth quarter.\\nAs I mentioned on the previous slide, demand growth for primary aluminum in 2019 is expected to be robust, with global consumption growth in a range of 3% to 4%, driven by continued strong growth in China as well as in developed and developing markets elsewhere.\\nWhile the global aluminum market is projected to be in deficit again this year, prices today are creating unsustainable margins for the aluminum industry. We estimate that between 30% and 45% of global smelters are cash negative at recent prices. China exported 5.8 million tons of unwrought and semi-finished aluminum products in 2018. That's a 21% increase over 2017. What's more, those exports are enabled by outsized government support, the weakening Chinese yuan and an unlevel playing field. 5.8 million tons is a very significant quantity, equivalent to about 20% of ex-China primary consumption in 2018. That large outflow of metal competes with ex-China semi-finished production, lowering primary aluminum demand, and contributes to depressed pricing. The depressed margins we're currently seeing have also occurred in the past several years, but only for short periods of time. Today's low margins cannot sustain our industry and are therefore not viable over the long-term.\\nLooking back, since November of 2016, we've made great progress in our first two full years as an independent publicly traded company.\\nAs we prepared to separate from our parent company in early 2016, aluminum prices were at multi-year lows and aluminum prices remained weak. To improve our positioning to be a stand-alone company, we executed a comprehensive strategy to strengthen our portfolio as we continually strived to be a low-cost industry leader across bauxite, alumina and aluminum products. In November of that year, we began operating as an independent entity with excellent prospects for the future.\\nWith the launch behind us, in 2017 we introduced three strategic priorities, reduce complexity, drive returns and strengthen the balance sheet, as the building blocks for a stronger Alcoa. We've used these priorities to streamline our processes and procedures and drive returns from our assets. With a benefit of favorable markets, we were also able to address a significant portion of our legacy items, most notably, our pension and OPEB liabilities, but also other major items such as the long-term power contract associated with our closed Rockdale smelter that was an annual drag on earnings of approximately $60 million to $70 million. We closed 2018 with $3.3 billion in adjusted net debt, down from $3.8 billion in 2016, and we've grown our adjusted EBITDA, excluding special items, nearly three times that of our 2016 carve-out financials. Due to our financial performance and as proof of our strategy's success, we've started to execute our announced stock repurchase program, a key component of our 2018 capital allocation framework.\\nAs we enter our third year as Alcoa Corporation and with a focus on strengthening our Company for the long-term, we'll begin to use our solid foundation to judiciously creep and grow our assets were sustainable value drivers exist.\\nWe will also use innovation like our Elysis technology to disrupt the aluminum industry of the future.\\nLastly, we will lead with our reputation.\\nOur values, and our expertise, which is what makes us uniquely Alcoa to be the partner of choice on new projects all with the goal of providing consistent returns for our stockholders. In closing, as markets trend lower here at the start of 2019, we will continue to drive improvements so we can be competitive through all cycles and react smartly and with urgency to these dynamic conditions.\\nAs 2019 progresses, we'll continue to prioritize safety across the Company. We see a direct connection between an efficient and effective safety system into our operational and financial performance.\\nWe will also remain focused on our strategic priorities. We plan to increase operational performance, improve the stability of our alumina operations, increase or creep volumes in all our businesses, and resolve labor issues in a way that enhances the long-term viability of our operations. We plan to drive improvement in controllable areas within the business, but be flexible and nimble enough to react to either favorable or unfavorable changes in market conditions. Throughout this year, we'll evaluate and prioritize future growth options while we continue to optimize our capital structure. Bill and I are proud to be supported by our employees across the globe and what we've accomplished as Alcoa this past year. We stand ready with an even stronger company than the prior year to address the challenges and seize the opportunities that 2019 may bring. With that Bill and I would be glad to take your questions. William, if you could please remind us of the protocol and we can get started.\"}, {\"speaker\": \"Operator\", \"content\": \"Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And the first questioner today will be Timna Tanners of Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Hey, happy New Year guys.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey Timna.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Thanks for all the great detail. I guess I had to laugh when I saw the simplification is still a priority because I went to Slide 31 and I got really confused.\\nSo I was hoping you could help without getting too into the minutia, sort of through what those components are? Are those above and beyond kind of the discussion that Bill gave us earlier? Or are those already in guidance? For example, when you talk about the mix and the pricing, is that something that would already be reflected in your sensitivity charts or tables or is that something that's separate?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Timna, it's probably a little bit of a combination.\\nSo if we just briefly run through it, the first of all, it talks about the operational stability and improvement that we expect to see out of alumina, which we highlighted that we had some difficult times this year and we're expecting to recover from that, picking up some of the \\u2013 we're picking up some of the \\u2013 overcoming some of the negativity we saw in the fourth quarter on the alumina price mix column.\\nSo picking up $30 million there, giving you an estimate of the flow-through of alumina into smelting and that's the $45 million. And then the next two are really outsider sensitivities, right. We don't give you a sensitivity on maintenance spend or what flat rolled products is going to look like in the first quarter.\\nSo we've provided that here for you. And then the second last one is about raw materials. There's so much uncertainty around raw materials right now. It's a very, very difficult to predict where raw materials are going to end the year.\\nSo we're just trying to point out to you what they look like in the first quarter. And then the last bullet point is really a substitution for some of the prior guidance that we've given around intercompany profit elimination.\\nYou know now that we're off of LIFO. I alluded to that in my comments.\\nSo LIFO is now gone.\\nSo this is just something that will help you understand where the intercompany profit elimination will be based on different API prices.\\nSo it's a mixture to answer your question.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. That's helpful, and I'll go through that in more detail separately. And then I was just wondering, I know that it's really fresh talking about the advances in Spain. But just, you know, as you talk about the landscape over the past year, it had me thinking about where the Company's footprint wants to be going forward in current market conditions.\\nYou've talked on the potential to restart the refinery in Brazil.\\nYou're producing less in Canada. Can you talk a little bit about how you see the footprint evolving or is this that the ideal footprint for the Company in the current circumstances? And can you give us any color on the impact of the Spanish shutdown for operations? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Timna.\\nSo let me start at a high level and then I'll get a little bit more granular because I think it becomes a different question and a different answer for each of the facilities. When we look at our portfolio right now, I think we feel that in the world in which we've been living for this past year, it's the right portfolio, and I'd remove Spain from that because we've obviously been having the discussions around the Spanish restructuring.\\nHowever, that doesn't mean that we are very focused on both looking at our current facilities given this new set of pricing conditions and also looking at our footprint and thinking about what is it that we're trying to do with the future.\\nAnd so very simply, we see that the value isn't in the number of tons that we produce, but in the fact that we have a low-cost, high-quality portfolio that allows us to both weather the downturns, but also do a smart job at strengthening ourselves and also improving our production capacity at our current locations when times are better. And that is a constant process.\\nSo when you then sort of zoom in and look at this on a case-by-case basis, and so one example that you mentioned was in Brazil where we have been idle smelter. It's a relatively competitive smelter, but that lacks a power contract that makes it competitive in today's world. That's something that can shift relatively quickly. It depends on the Brazilian real. It depends on market conditions both inside of Brazil and outside of Brazil. And it also depends on our ability to negotiate with the government, both the regional and national government of Brazil to find a long-term power contract.\\nWe continue to look at each of our locations to see what can we do to make them stronger, whether there is any justification for a restart, and additionally, and this becomes particularly important at times like today where we see relatively strong alumina prices and weaker aluminum prices, we also look at our portfolio to do two things. Number one, make sure that when we restart failed electrolytic parts, whether we choose to bring them back on line again, which is very much a variable cost exercise or whether we actually choose to look at a longer-term curtailment of a part or all of the facility.\\nSo it's a rather long-winded answer to your question.\\nHowever, it really is a constant exercise and something that we ask each of our businesses, Bauxite, Alumina and Aluminum, to be constantly evaluating where they are and ensuring that that then matches up with what we see as the long-term fundamentals of our business.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. Thanks for that.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Alex Hacking with Citi. Please go ahead.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Yes. Thank you for the question. I guess the first question would be around the adjusted net debt goal.\\nYou mentioned that you can get to that target just based on the mandatory minimum OPEB pension payments. I guess what would trigger you or what would trigger you to pay above those levels in order to accelerate that target? Would it just be based on free cash flow levels? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. Good question, Alex.\\nAs I said, we've got a target that is three to five years out there. If we achieve our expected return on assets in the asset portfolio for the pensions of 6.75% and discount rates don't change, then we would be able to achieve that target without making any discretionary contributions to the pension above and beyond the mandatory. If we were to find ourselves in a position where we don't achieve the expected return on assets or discount rates were to decline from where they sit today, we would have to make contributions to achieve that net debt target.\\nSo that's why we basically are putting the net debt target out there saying, hey, we should be able to achieve it with the mandatory contributions, but if we don't get the expected return on assets or if discount rates change on us considerably we would need to make contributions.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Okay.\\nSo just to clarify, therefore you would anticipate making no voluntary contributions this year or in 2019 unless there's unexpectedly poor asset performance?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, the only caveat that I would have on that is, if we choose to do some level of further de-risking, we've done de-risking in the pension plan in 2018. We contributed whatever, $1 billion of cash into the pension plan to be able to take a considerable amount of the liability off the balance sheet. But at this point, I'm not anticipating that we would make considerable contributions beyond the mandatory.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Okay, thanks. And then I guess just my second question on flat rolled. Are you still comfortable with the guidance that you gave on the last call of around a $25 million run rate? I noticed in the commentary that in the first quarter, you expect it to be quite a bit weaker than that, but you did say last quarter that it would be weaker in the first half.\\nSo is that previous guidance still good?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. We gave previous guidance of about $100 million for the year. We're still targeting for $100 million for the year. And as we say, the first quarter will be a little bit weaker than the fourth.\"}, {\"speaker\": \"Alexander Hacking\", \"content\": \"Thanks a lot.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Chris Terry with Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"Hi, Roy and Bill. Yes. I just wanted to feed off the question that Alex was asking around the cash flows just now. On Slide 15 and 16, in terms of the $150 million you still have remaining in the buyback program and just tying that to what you actually bought back in the latter part of the fourth quarter. Is the speed of the buyback program that you spend entirely dependent on the EBITDA you're actually generating at the time and also the minimum required pension of the $300 million that you're going to spend during this year? Just trying to get an idea of how you prioritize the buybacks against the other buckets that are mentioned on Slide 15 for the excess cash. Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, so it will be based on having excess cash.\\nSo I think to answer your question, you said, hey, will be based on EBITDA. Yes, I mean ultimately as EBITDA translates into cash flow, it will be based on having excess cash. And during the course of the year, we will make the determination \\u2013 if we have that excess cash, we'll weigh it versus the other options that we've laid out in the capital allocation framework, and that's the three things that we talked about there, which is returning cash to shareholders, potentially further delevering and looking at long-term growth opportunities and make a determination.\\nSo if there is excess free cash flow, we'll evaluate those three, given the long-term capital allocation program that we've announced.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"Okay, thanks.\\nSo it looks like Slide 16 is going down the right hand side of the FY 2019 outlook, so $300 million sounds like it's pretty fixed and all the capital expenditures.\\nSo just thinking about the buyback program, it really would just come down to what you generate during the year, for example, going back, back CapEx or look at other items within that framework?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. The $300 million, if you look at us historically, it's been pretty steady over the last few years, $300 million of sustaining capital. Goes up or down a little bit over the last few years, but $300 million is pretty good number. And then $150 million of return seeking, that's the \\u2013 we came out with $150 million return seeking target for 2018. We underspent that as the return seeking projects came available. We made decisions around how quickly to implement those. But that would be the target for 2019.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"Okay, thanks. And just the last one for me. The Slide 19, balances on each of the end markets. What have you assumed for Alunorte on the alumina balance? Thanks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So on the alumina balance, we assume essentially status quo as of today.\\nSo there is no assumed restart, and not because we're taking a position on that, but simply because we wanted to put a stake in the ground as what does the market look like prior to the return. And it's the same impact on aluminum as well with Albras, which is connected over to Alunorte.\"}, {\"speaker\": \"Christopher Terry\", \"content\": \"Okay. Thank you. That's it for me.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Matthew Korn with Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Hey, good evening, everybody. Thanks for taking my questions.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Matt.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"A question on the situation in Spain. Could you explain a little bit more next steps on the worker negotiations there? You say the release, there's a vote at the end of the month. Does that need approval by the provincial government? Are there any other hurdles that you're going to need to clear before you can move forward there?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Matthew, let me take a stab at that one.\\nSo essentially the process is pretty well laid out from here going forward, and I'll give you some caveats about what will happen.\\nSo first of all, we have an agreement with the workers' representatives and so that is a very positive step. The next step and this will happen in about a week, is that the workers will then have their option to opine about that.\\nSo assuming that they agree, that essentially means we go into the program as it's already defined.\\nAnd so we start curtailment and the workforce will participate in those activities and then we'll continue on to the rest of what you've seen there.\\nWe will continue to operate the casthouses.\\nWe will keep those plants for six months, until the end of June in a position where it can be restarted, and we'll look to see if there is someone that wants to step into those operating positions. If the workforce would choose not to agree with the program as laid out, we then have 15 days in order to decide how we react to that choice. Again, that's a very prescripted legal process inside of Spain.\\nHowever, I wouldn't want to try and foreshadow what the decision would be at that particular moment.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"I appreciate it. Thanks for the clarity. I also want to dig a little bit more on some of your market outlooks on the different commodities. In alumina, China is ever the linchpin there. How much additional refining capacity are you counting on in that base case for Chinese alumina supply in 2019? Then, because it's connected, I guess what's your next view on Chinese smelter production into next year?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. And it's hard to pin down what should the exact number be. And I think you're touching on this, Matthew, because the fact is, the Chinese, if anything, are very reactive to the way that the pricing happens to be pointing them.\\nAnd so we saw very quickly at the end of this year that when that gap between global pricing and Chinese pricing was in their favor they were able to export and when that gap closed they very quickly stopped exporting.\\nAnd so as we build our balances, we always take into account how we think conditions should develop on the ground.\\nAnd so that's a bit of a caveat of how we try to build that. And inside of that, we then think about what new capacity has been announced, how will the capacities then adapt to that particular situation that we find ourselves.\\nSo for alumina, I'm trying to think back \\u2013 I don't have the number right in my mind, and I don't have it right in front of me either. Essentially what we've done is we've taken the announced new facilities coming on line, and there have been a few of those. We've taken into consideration also the relatively short-term winter curtailments, and we did have one curtailment that was announced and has been acted upon. And we then brought that into what we think that supply/demand balance would be inside of China.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"I appreciate it. Good job with everything, guys, in what's been a really challenging year.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Thanks, Matt.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Piyush Sood with Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Roy, Bill, congratulation on the quarter. A couple of questions.\\nFirst one, you were forecasting a deficit in aluminum in 2018, and now, a bigger deficit in 2019.\\nJust want to understand how do you account for China's 5 million ton plus exports in this? So without Chinese exports, would world ex-China be in a much bigger deficit? Just want to understand your \\u2013 how you account for those flows. And also, why do you think aluminum prices are where they are right now despite these large deficits?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So let me answer your deficit question first and then we can step in and talk a little bit more about the price question.\\nSo remember when you look at that page, it is specifically dealing with primary aluminum balances.\\nAnd so that has advantages and it has disadvantages. It's a relatively simplified world view.\\nSo inside of that, let's take the China balance very specifically. Inside of that, if they are producing semi-fabricated products that are actually intended for export, it still counts as Chinese demand because it's consuming primary material either as that first, very basic primary product or as molten metal that's included in Chinese demand. If that then is exported, that then becomes an input into what is being consumed outside of China.\\nSo when you look at the rest of world demand, there is actually an impact of those 5.8 million tons that are falling out. There is a negative impact because now you're not just demanding primary aluminum to go into those semi-fabricated products.\\nYou're actually consuming some of that Chinese material.\\nSo essentially, the impact on the global balances is negligible because it is embedded in the way that we're doing these primary aluminum balances.\\nHowever, it does serve in two ways. It serves as a connection between the two markets. But then it also serves \\u2013 it allows this overcapacity in China to be turned into products and that then \\u2013 those products are then exported and sold outside of China.\\nAnd so it does very much have an impact on what's happening with global supply and demand balances, but it also has an impact on what's happening in aluminum pricing.\\nSo I'll use that to move right into your second question.\\nSo first and foremost, I think it's obvious that there's a lot of talk right now about global trade, about what investors feel about future demand and economic activities, et cetera.\\nSo certainly there is an overarching overlay of what's happening in the general market. Inside of our market, specifically, I think it's very much the discussions that are happening right now about overcapacity that's having an impact on short-term prices, when you look at some of the most recent developments, the OECD study that looked at subsidies inside of the aluminum industry that found that China was very much an outlier, both on the size of the subsidies that are given to producers, but also the availability of those subsidies to its own specific domestic producers.\\nAnd so as we see that overcapacity develop and as China essentially moves from being just a primary producer into a semi-fabricated producer, it tends to give a negative pall to the broader market.\\nAnd so as we saw that extra million tons being exported in the form of semi-fabricated products, we believe that it's had a negative impact on pricing as the market has seen that material that doesn't necessarily flow to the U.S., for example, but can flow into the global market, whether it's in eastern Asia or Europe or other parts of the world.\\nAnd so when we look at both the broader economics, but then also the dynamics of this over overcapacitization and overproduction inside of China, we believe that those things are having an outsized impact on prices. One more comment though, and I'll link this back to my comments at the beginning, the simple fact is in the pricing environment in which we live today, and when you look at the economics of producing aluminum, these prices cannot be sustainable. They can't be sustainable because half of all capacity in China is now losing cash. And again, China tends to act pretty economically rationally when it comes to these types of decisions. When you then look at the whole world, it's somewhere between 35% and 40%, of all smelters, and weighted toward China, that are currently losing money as well.\\nAnd so that means that the pricing as it is right now certainly doesn't sustain continued production at these levels, much less ever incentivize new capacity to come online.\\nAnd so it's an unsustainable margin trend that we found has occurred in prior years, but has been pretty quick to self-correct simply because it is not something that can continue and therefore justify by continuing to produce.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"That's helpful. A question on Slide 16. The prior period taxes of $360 million, just want to understand if what's attributable to you versus Alumina Limited, should we assume a split around 60/40 or anything you could talk about that?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. It's a great question. And it should be \\u2013 you should note that it's a line item that we haven't provided in the past, and we're making sure that people understand that we do have trailing tax payments that have to be made largely and predominantly in Australia, right, because our AWAC enterprise makes a lot of the money that it makes in Australia.\\nSo a big piece of that would be a 60/40 split because it's in the AWAC enterprise.\\nSo good question, Piyush.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"All right. And thank you. And last one. Slide 31, when we think of alumina operational stability, should we think of it as a second-half transition or can that happen in maybe 1Q or 2Q?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I'll let Roy talk about it, but I guess my view is, we started to see some of that stability come back in the fourth quarter already.\\nIf you look at the fourth quarter numbers, we started to see that stability versus what we had seen in the second and the third quarter. And in my view, we've largely regained much of the stability that we have around the system.\\nSo I think we should start to see that in the first half already.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. I completely agree with Bill.\\nOur expectation is that we see a stable Alumina business through the entire 12 months.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Thanks guys and all the best.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Piyush.\"}, {\"speaker\": \"Operator\", \"content\": \"And the next questioner today will be Lucas Pipes with B. Riley FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Hey, good afternoon, everyone. Wanted to ask a quick question on the buyback of $50 million during the fourth quarter. Could you share with us kind of at what price you were buying back stock? And then also, why not more? And when do you intend to increase purchases again? Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Sure.\\nI think the average price was $29.01 in the $50 million that we spent. And the question of why not more. We had a capital allocation program that's at \\u2013 we wanted to target a minimum threshold of keeping $1 billion. We were really looking at cash as it was coming in during the course of the quarter. And then the other key aspect is that we had a fairly short window in which we could buy back.\\nYou know we renegotiated our revolver in the fourth quarter also. In renegotiating our revolver, we were blacked out.\\nSo we had only a short period of time in the fourth quarter in which we were able to be buying back before we then went into the blackout period associated with earnings at the end of the year.\\nSo that's the reason why we did not do more.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it. That's helpful. Hopefully, you will not get another opportunity to buy at $25, but...\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I'm sorry, $29.01.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"No. I was being facetious.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"No. I'm with you. I hope we don't get an opportunity to buy at $25.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"But just another follow-up.\\nI think it was page 16 where you gave the operational tax rate. I'm a little confused about why it's higher in 2019 given the lower alumina price. Could you maybe share a little bit more color on what's driving that increase for the 2019 guidance versus 2018? Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"It all comes down to where you make your profits and the jurisdictions in which you're making profits.\\nAnd so clearly, we didn't provide you a full-year EBITDA guidance, but given today's prices with the alumina and aluminum where it's at, we would anticipate that tax rate, right.\\nSo we're essentially just basically taking the current market prices for aluminum and alumina, trying to determine where we're going to make profits and also have losses. And that's what generates that 45% to 55%. I would point to you that I did make it clear in my comments that at today's prices we'd probably be at the upper end of that.\\nSo it's 50% to 55% range.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Got it.\\nOkay. Well, thank you very much and best of luck.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Lucas.\"}, {\"speaker\": \"Operator\", \"content\": \"And the last questioner today will be Justin Bergner with Gabelli & Company. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Thank you for fitting me in Roy and Bill. Good afternoon.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Justin.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Hi, a couple of quick cleanup questions. Is the cash tax in the book tax \\u2013 is the cash tax rate also expected to be in that 45% to 55% range?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I would have to look, Justin.\\nI think the really key thing for the modeling purposes is that you understand that cash tax catch-up, right.\\nSo that's why we pointed out that it's an incremental $200 million of cash tax catch-up that was associated with profits that we made in 2018 that we have to pay in 2019.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay, great. Yes, I was asking ex the catch-up, but I assume I'll loop up for some more clarity later. In the press release, you mention a $70 million to $80 million benefit from the curtailment proposed in Spain. I assume some of that benefit on the net income line is related to the impairment and reduced depreciation.\\nSo can you give a sense as to how much that should aid EBITDA?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I don't have it off the top of my head.\\nSo you have to circle back with Jim on how much is that? I mean one thing to keep in mind that in Spain, pre-tax and post-tax are largely the same because we've got a valuation allowance on the tax rate in Spain.\\nSo the $70 million to $80 million of net income, the $70 million to $80 million of pre-tax, how much of that is the EBITDA, I'm not certain of \\u2013 how much of that is depreciation, I'm not certain of that off the top of my head.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay, thanks. And then lastly, the maintenance spend tick-up, is that just a first quarter phenomenon? Or is that going to continue throughout 2019 relative to what you spent in 2018?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"That's a first quarter phenomenon. And I guess to circle back to some extent where we started with Timna's question. The reason why we provided that extra page, bullet point guidance is because given the fact that \\u2013 as Roy said, we're not providing the full-year EBITDA guidance. We felt compelled to try to give you some much better insight into both the first quarter and the full-year. But to specifically answer your question, that's as a first quarter guidance item.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And just to add one more piece of information, Justin, just to give you a little bit more of an explanation. The largest part of our facilities in refining happen to be in the southern hemisphere.\\nAnd so we tend to see a reverse trend. It's now the summer months when we tend to see more maintenance happening or some of the larger maintenance activities.\\nSo it tends to be pretty cyclical that the beginning of the year tends to be one of the most important maintenance months for us.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay, great. Thank you for taking my questions.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thank you, Justin.\"}, {\"speaker\": \"Operator\", \"content\": \"And this will conclude our question-and-answer session. I would now like to turn the conference back over to Roy Harvey for any closing remarks.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Great, William. Thank you. And once again, thanks to everyone for joining our earnings call today. Today's results reflect the success of our strategic priorities and how much stronger Alcoa is today than when we launched in late 2016.\\nWe have more opportunities to drive value for stockholders this year and we look forward to updating you again at the end of the first quarter.\\nSo thank you, and William, back to you.\"}, {\"speaker\": \"Operator\", \"content\": \"And the conference has now concluded. Thank you for attending today's presentation. And you may now disconnect your lines.\"}]"


companyname: Alcoa Corp
symbol: AA
date: 2019-04-18
year: 2019
quarter: Q1
json_transcript:
  "[{\"speaker\": \"Operator\", \"content\": \"Good afternoon, and welcome to the Alcoa Corporation First Quarter 2019 Earnings Release Conference Call. All participants will be in listen-only mode. [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, Andrea, 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. 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. A comparison of 2018 impacts can be found in this presentation's appendix and in our Form 8-K filed today.\\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 thank you to everyone for joining today's call. Because we always start with safety, I'll begin then with a quick update on s fire today at our Becancour aluminum plant in Quebec, Canada.\\nFirst and most importantly, we're grateful that there were no injuries associated with this incident.\\nAs for the fire itself, it was located in the casthouse and local firefighters extinguished the fire today at around 1:30 p.m. Eastern time. The aluminum smelter was unaffected and one half of the potline continues to operate normally. We don't have further details nor do we have a financial impact to share at this time. We're currently investigating to determine the cause, and we'll assess the damage once safe to do so. With that, I'd like to turn to our quarterly results.\\nOur first quarter performance reflects the strides we're making in returning stability to our operations, while affecting changes to improve our portfolio and our results. Through an intense focus on safety and operational excellence, we're strengthening our assets through this turn of the market cycle so that they're in optimal condition to make the most of today's tough conditions but more importantly, an improved market environment ahead. Despite lower commodity prices, we grew profits in our Bauxite segment and we achieved healthy profitability in our Alumina segment even with the 20% decline in realized alumina prices. And in Aluminum, we made progress in addressing two of our highest cost smelters.\\nWhile restructuring charges tied to those two smelters were largely responsible for negative first quarter GAAP results, excluding those special items on an adjusted EBITDA basis, our solid operating performance is clearly visible. With that, let's get started with an overview of the first quarter. We reported a net loss of $199 million or $1.07 a share.\\nExcluding special items, we reported an adjusted net loss of $43 million or $0.23 per share. On an adjusted EBITDA basis, excluding special items, we generated $467 million and ended the quarter with $1 billion of cash. From a business perspective, let's begin with safety. We're happy to report solid safety performance with no serious injuries for the second straight quarter. Safety remains a top priority for Alcoa, and we plan to continue progress in this specific area. Reflecting improved operations, our Bauxite and Alumina segments increased production rates in the first quarter. Stability in operations and careful control over our operational and capital expenditures are key hallmarks of our efforts in this reduced pricing environment. In Spain, we reached agreement with the workers' representatives of the Avil\\u00e9s and La Coru\\u00f1a smelters as part of the collective dismissal process announced in October of last year. Under that agreement, the smelters with combined operating capacity of 124,000 metric tons per year were curtailed in February.\\nLooking ahead, we'll continue to review our portfolio of assets for their ability to compete across all cycles.\\nMoving to our markets.\\nWhile we're reducing our estimate for global aluminum demand growth in 2019, we continue to project an aluminum deficit for the year. We'll also look at a favorable trend in global aluminum inventory levels.\\nLastly, we'll provide an overview of our plan to build upon the operational improvements we've made across safety and operations.\\nAs part of that effort, our businesses are driving a renewed focus on Alcoa's business systems and reliability excellence to successfully take us through this and future market cycles. With that, I'll turn it over to Bill for a detailed review of first quarter results.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Roy.\\nLet's start with the income statement. Revenues declined $625 million sequentially and $371 million year-over-year primarily on lower aluminum prices. In the quarter, the net loss attributable to Alcoa Corporation was $199 million or $1.07 per share on 185.3 million shares outstanding. The diluted share count declined 2.9 million shares because equivalent shares are not included in the calculation when there is a net loss. Special items totaled $156 million after tax and non-controlling interest. Of that amount, cost related to the collective dismissal process at our Avil\\u00e9s and La Coru\\u00f1a smelters were $120 million, of which 80% are non-cash. The smelters are curtailed and we're engaged in the process of seeking sale of the assets. Depending on the outcome of that process, Alcoa may incur additional charges in the second quarter of 2019 estimated to range from $70 million to $125 million or $0.38 per share to $0.67 per share to fulfill the collective dismissal agreement social plan. Approximately 75% of that amount would be cash outlays in 2019.\\nNow let's look at the income statement excluding special items.\\nOur fourth quarter adjusted net loss, excluding special items, was $43 million or $0.23 per share. Adjusted EBITDA, excluding special items, was $467 million, down $303 million sequentially primarily due to lower alumina and aluminum prices.\\nOur first quarter EBITDA margin was 17%. Two other items: first quarter SG&A and R&D expenses includes a $20 million charge related to the bankruptcy of a Canadian aluminum customer.\\nOur first quarter operational tax rate was 54.5%, increasing 16.1 percentage points sequentially as the losses in jurisdictions with little or no tax benefit became a larger portion of total earnings.\\nLet's look closer to factors driving adjusted EBITDA in the quarter. Lower market prices for alumina, aluminum and foreign currency drove $309 million of the change. Taking together all other impacts improved $6 million sequentially. A few key points: alumina customer pricing improved sequentially based on non-recurrence of unfavorable pricing true-ups and more favorable timing of shipments; and the Aluminum segment posted gains as they shifted to higher-margin cast and rolled products. Improved raw material cost, primarily favorable caustic prices, more than offset slightly higher smelter power rates. We saw lower shipment volumes due to fewer days in the quarter and refinery calciner maintenance outages at Wagerup and Pinjarra. Higher production cost in the Aluminum segment resulted from increased maintenance and pot relining activity.\\nNow let's shift our focus to the segments. In the segments, Bauxite adjusted EBITDA improved $16 million on higher pricing. Alumina adjusted EBITDA declined $311 million on lower alumina index pricing and shipment volumes. The Aluminum segment adjusted EBITDA was down $46 million primarily on lower metal prices and increased maintenance and relining activity, partially offset by lower alumina costs and the shift to higher margin products. Non-segment impacts netted to positive $65 million, $38 million better sequentially. Intersegment eliminations were a $39 million sequential benefit as alumina and aluminum prices dropped and released profit held in inventory.\\nWe have simplified what was formerly corporate inventory accounting to be solely intersegment eliminations. We no longer use LIFO inventory accounting, as Jim had mentioned, and metal lag is now netted in the Aluminum segment.\\nTurning to the balance sheet. We ended the first quarter with cash of $1 billion, down $96 million sequentially. This change from year-end to first quarter is similar to last year's and relates primarily to our change in working capital days, which increased 8 days compared to year-end.\\nOur proportional net debt remains at $3.3 billion.\\nOur free cash flow net of contributions from and distribution to non-controlling interest was negative $95 million. This cash flow calculation and corporate cash from operations, capital expenditures and the cash flows to and from our minority joint venture partner and correlates better to our change in cash than cash from operations alone.\\nWe have $150 million available under our existing share repurchase authorization.\\nLet's move to the outlook. We've updated the outlook page to show actual results for the first quarter. The full year outlook is unchanged for all line items. A few items to highlight: Our shipments outlook is unchanged for all segments.\\nOur operational tax rate was at the high end of the outlook range in the first quarter.\\nWe expect cash uses for pension and OPEB, capital expenditures and prior period taxes to hit their full year outlook despite their slow start. Cash impacts of restructuring will primarily be dependent upon the cash requirements for the Avil\\u00e9s and La Coru\\u00f1a smelters, which could range from $90 million to $115 million in 2019 but are not yet determined. In the appendix, we've provided sensitivities updated for the recent smelter curtailments. We've also listed additional business considerations for future -- I'm sorry, for further color on the second quarter and the full year, which include positive sequential impacts totaling approximately $85 million to $95 million in the second quarter. These impacts include lower alumina costs in our Aluminum segment. Note that our move from LIFO to average cost for inventories has changed the speed at which alumina costs flow through the income statement.\\nFor comparative purposes, we've provided in a Form 8-K filed today 2018 quarterly financial statement items adjusted for the inventory accounting change, lower raw material costs, primarily caustic and moderating smelter power costs, higher profits in the Brazil hydros and rolling businesses and non-recurrence of the first quarter's customer bankruptcy.\\nNow let me turn it back to you, Roy.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Bill. We now turn to our 2019 market balance estimates, which we're presenting in a new, easier-to-follow format. Beginning with the bauxite market, we expect the continued surplus this year.\\nEven as new pockets of demand emerged, which is inland Chinese refineries historically sourced by domestic bauxite, additional suppliers from Australia, Guinea and Southeast Asia will keep the market oversupplied in 2019.\\nAs the bar chart illustrates, China remains critically short of bauxite. They will maintain and grow a strategic stockpile as long as sourcing uncertainty persists within and outside of the country.\\nMoving to alumina, we continue to expect a long Chinese market and a short market outside of China this year. The expected surplus balance in China is driven by refinery expansions and restarts as well as downward revisions to demand growth from Chinese smelting.\\nFor the world ex China, we've maintained our alumina deficit projection.\\nAs we did last quarter, we assume that the status quo continues at Alunorte refinery in Brazil due to a lack of information about when a restart of idled capacity might occur.\\nFinally, in aluminum, we're reducing our projected global aluminum demand growth for 2019 to range between 2% to 3% from our 3% to 4% projection in the previous quarter. This change is predominantly due to lower demand growth in China especially in the transportation and electrical sectors. Even so, we've only slightly reduced our global aluminum deficit expectation for 2019.\\nWhile demand growth projections are also being revised down for the world outside China, smelting disruptions in Europe, North America and South America will contribute to the world ex China market remaining in the same deficit range of 1.7 million to 1.9 million tons from our last quarterly projection. In China, we see the market imbalance as downward revisions demand growth estimates are mostly offset by higher levels of smelting curtailment. Under these market dynamics, coupled with new, expanded export incentives and a short global market, growth in Chinese exports is expected to make up a majority of that country's primary aluminum demand growth this year as metal flows out of the country in ever greater quantities despite existing trade barriers. Further, U.S. trade policy intended to help the aluminum industry has yet to address Chinese overcapacity and the resulting increased export of semi-fabricated products. Since U.S. Section 232 tariffs were enacted last year, Chinese exports have continued to grow. And as we said last quarter, this large outflow of metal competes with Rest of World semifinished production, lowers primary aluminum demand outside of China and contributes to depressed pricing on the London Metal Exchange.\\nOur industry needs a level playing field, where individual players can succeed through strong operation, sustainable products and a highly engaged workforce.\\nAs evidenced by the report on the aluminum industry from the Organization for Economic Co-operation and Development, we are far from achieving this ideal.\\nAdditionally, we've become increasingly concerned that quotas on Canadian imports to the U.S. may replace tariffs. Canada is key to the North American supply chain and an important source of metal for U.S. aluminum consumers. Most importantly, tariffs have not solved the industry's challenges, which stemmed from highly subsidized smelting capacity in China that has resulted in surplus production. And quotas are also likely to disrupt the North American market and hurt aluminum consumers already paying more for their aluminum inputs than their global competitors.\\nWe are in regular communication with government representatives in this issue, and we'll continue to advocate for a government-led, multilateral solution that addresses China's overcapacity.\\nTurning to another market topic. I'd like to discuss an overlooked trend in the aluminum industry, namely the consistent decline in global inventories over the last decade measured in days of consumption. We see that days of consumption have been on a clear downtrend since the global financial crisis.\\nIn fact, days of consumption are approaching pre-crisis levels and over the last 2 years have been doing so at an accelerating rate. Aluminum prices, however, have remained stubbornly unreactive thus far due to the volume of Chinese aluminum exports hitting the global market. China's exports and the growing consensus about lower demand growth prospects for 2019 have overshadowed this significant decline in inventory days of consumption globally. Nevertheless, our long-term outlook for annual demand growth projected to average over 3% over the 5 years through 2023 remains positive and on track.\\nAs stocks have fed the aluminum deficit market over the past few years, we expect that current and potential future deficits will further reduce the inventory days of consumption globally.\\nNow I'll turn to improvements in our operations. Strong, stable operations are at the heart of our company and are key to Alcoa's future.\\nFollowing some operational instability last year, we've been committed to returning stability to each of our operating locations. That work began with a close review of our assets to determine root causes and spanned all three of our business units.\\nAs part of that initiative, for example, we've improved operational systems at our Juruti mine [ph], addressed asset health issues for bauxite handling and power supply at 3 of our refineries while also completing an in-depth asset integrity review of our refineries. And across all our business units, we're reinvigorating our Alcoa business system and reliability excellence teams. Together, these manufacturing programs provide employee training and strategies to improve efficiency, drive standardized work at the operator level and promote reliable asset performance through both preventative and predictable maintenance. Reflecting operational improvement, our Bauxite and Alumina segments each increased production rates as measured by average tons per day. The Bauxite segment grew its production rate by 6% to 132,000 metric tons per day, while the Alumina segment's production rate rose 2% to 36,000 tons per day. Through a renewed focus on continuous improvement, we've been able to achieve higher levels of operational stability and reliability. We've also made targeted capital expenditures, especially on bauxite, alumina and our rolling business, to sustain and improve operations. And in our aluminum casthouses, we're improving our product mix and selling higher margin products.\\nLastly, in Aluminum, we have taken deliberate actions to reduce uncompetitive smelting capacity by curtailing two high-cost facilities in Spain.\\nAs a result, the Aluminum segment's average tons per day of production has decreased 3%.\\nNow I'll offer some insight in how we use these operational improvements as a firm lever to improve our overall business. By executing our three strategic priorities to reduce complexity, drive returns and strengthen the balance sheet, we have created this strong foundation for Alcoa.\\nAs we look towards the future, we'll remain focused on maintaining the progress and safety and operational stability so that we perform optimally across all market cycles. To keep improvements of our facilities on course, a manufacturing excellence function created late last year supports world-class manufacturing practices by promoting reliability excellence, best practices, robust training programs and research and development. Financially, we'll work to drive the benefits from the current market cycle to our bottom line while also realizing the full benefits of decisions we make across our portfolio. We'll continue to lead innovation in the aluminum industry and we'll review our portfolio of assets for current and future competitiveness to strengthen the long-term position of the company.\\nOur reputation is one of our most important assets, and our environmental, community and customer programs are key to our current and future success. And lastly, we'll continue to strengthen our balance sheet as opportunities arise, all with the aim of providing consistent returns to our stockholders. With that, Bill and I would be happy to take your questions. Andrea, please remind us of the protocol and we'll get started.\"}, {\"speaker\": \"Operator\", \"content\": \"[Operator Instructions] And our first question will come from Piyush Sood of Morgan Stanley. Please go ahead.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Roy, Bill, congratulations on the quarter.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Piyush.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Thanks, Piyush.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"So the first question, could you talk about drivers of sequential increase in Bauxite EBITDA if there was something beyond pricing over there? And as an extension of this, should we think of 1Q as the new run rate? Or is the old run rate of, let's say, $100 million to $110 million, is - that's still the right run rate to use?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So in the first quarter, Piyush, Bauxite did well and so they had better pricing and better volumes. And the better volumes is, to some extent, associated with the recovery in the Alumina business.\\nSo it was a good quarter. I don't think we've given specific guidance around how it will do in the second quarter.\\nSo I think we'll just leave it at that.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Okay. But the pricing benefit you saw probably holds for now or do you think this was a onetime reset that happened in the quarter?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I think the pricing benefit will hold.\\nSo I'm not aware of a onetime reset.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Perfect. Thanks. And the second one is - and it's on ABI.\\nSo I understand you have the negotiations ongoing.\\nSo whatever color you can give, that's good. The question is that you probably -- the union and you guys have probably come closer together on some issues. And on some issues, you're probably further far apart.\\nSo just wondering if there's some sticking point. And if it is overcome, what kind of time line of a restart and what CapEx are we looking at?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Piyush, let me try to answer that best I can.\\nSo as you can imagine, we continue to engage in dialogue with our workforce at Becancour.\\nJust today, we were - there was a continued discussion with the government that is attempting to help conciliate that process. We're just in the midst of looking at what they've called a hypothesis solution. But the important thing is that we are actively working to try and find a way to bridge the difference with our union. To be quite honest, I'm not going to get into very specific details about what we're negotiating.\\nOur purpose is clear at those negotiations. We want to make that plant as competitive as we possibly can for the long term and not just so that we can see that plant operate as is. The intention is to grow that plant's production and to invest because it is a very competitive facility but needs to have the tools necessary so that we can continue to run it more productively and compete on a global scale.\\nSo those discussions will continue.\\nWe are actively engaged with the workforce. We're also actively engaged with the government, and we will continue to make progress there. I would also just highlight briefly that the management team that continues to run that half potline is doing a very good job at keeping that potline safe, secure, operating well and also helps us to understand what kind of improvement can we make for the long term because right now, we have our process engineers and our managers that are seeing those processes firsthand and looking for improvement that can be made in the long term to make the plant more competitive and more productive. When you think about bringing it back, I would say that it is a process that takes time.\\nAs you can imagine, there are a number of pots that need to be brought back online. I'll leave the financial repercussions to Bill, but it's very much a 6 to 9 to 12-month ordeal in order to get that up and fully functioning and depending, of course, on market conditions, availability of raw materials, et cetera.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"That's helpful. Should we look at Warrick as an example for the expense involved?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"I think Warrick ultimately expenses about $100 million when it was all said and done.\\nI think ABI can be done at a lesser rate than that because it's a newer technology and has been curtailed for less time than what Warrick was. And Piyush, let me circle back to your Bauxite question. I was just glancing through the second quarter for Bauxite.\\nI think it's probably a safer assumption to get to.\\nI think, Bauxite did about $126 million this quarter if you take it back to the $100 million to $110 million that you have as your run rate, and the reason being is Bauxite is looking at some maintenance outages in the second quarter that did not occur in the first quarter.\\nSo they typically will do maintenance at places like Willowdale or Juruti in the second quarter that did not occur in the first quarter.\\nSo while the pricing sticks that we alluded to, we will have some higher cost in the second quarter.\"}, {\"speaker\": \"Piyush Sood\", \"content\": \"Thanks, guys. And all the best.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Thanks, Piyush.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Lucas Pipes of B. Riley FBR. Please go ahead.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"Hey, good morning - good afternoon, everybody. Roy, I first wanted to touch on some of the kind of cost-cutting efficiency initiatives that you have been undertaking. It sounds very intriguing and I wondered if you could maybe provide some numbers around it. If we look at year out, what are the potential savings? Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo we haven't put specific numbers about what we're trying to project forward, to be quite honest, Lucas.\\nSo I appreciate the question. What I can give you is some color about the types of things that we're doing and then provide some guideposts about what -- where we can reach.\\nSo these looks across each parts of our portfolio from Bauxite, to Alumina, to Aluminum. And each piece of that obviously offers a different set of initiatives.\\nSo when you look at Bauxite, it's all about how you use that reserve and then how you get it more efficiently to our alumina refineries.\\nSo lots of opportunities to do a better job at evaluating, understanding and then making the right long-term decisions to make that reserve more profitable for us, so good opportunities there, and it allows us to pick up those extra tons. Whether it's for internal use or for external customers, it allows us to pick those up with very little increase in overall fixed cost, then it's just really a cost of - a variable cost.\\nOn the Alumina side, it's all about operational stability. We're in the midst of some relatively small type of creep projects that we had talked about before. But most importantly, it's making sure that we have the reliability of our conveyor belts, the reliability and good process control that we need in order to keep those plants running at full speed, and also our ability to both predict and then turn around to any kind of overhauls, which are extremely important in the Alumina business.\\nSo on Alumina, what you can see is really a return back to the very stable operations that we saw really back in Q1 of last year and Q4 of last year to a certain extent and then build into that the fact that we are constantly, constantly working to debottleneck and creep the facilities. And I'm not talking about brownfield type of actions but really just nuts-and-bolts ways of trying to improve yield.\\nSo you can use that as a guidepost and then build from there.\\nAs you can see, Q1 of 2019 was better than Q4, which was better than last year's Q1 as well. In Aluminum, I think some of the -- we have the same type of reliability, pot turnaround.\\nWe have a lot of those same type of reliability excellence opportunities and stability opportunities. But more importantly, it's about some of the strategic decisions that we're making.\\nSo I would illustrate the fact that bringing down those two potlines and we continue to run the casthouses. But the two potlines coming down, I believe, we've estimated between $65 million and $75 million of improvement based on last year's profitability.\\nSo as you think about how that flexes with today's current environment, making changes like we have in Avil\\u00e9s and La Coru\\u00f1a have a very relevant and very important impact on our bottom line.\\nAnd so those, I think, you can use in order to model and estimate what kind of improvements we can make to the portfolio.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"That's very helpful. Thank you for that detail. And then my second question regards the potential shift towards quotas in the U.S. Can you opine a little bit more about what the potential implications are for your business if such a switch were to occur? What's - what could be a best case for you under a quota system? What could be a worst case, base case, et cetera, what are the different scenarios we'd have to consider? Thank you very much.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, Lucas, and that one is - it's hard to really predict the impact simply because of the rules of the game can vary so significantly depending on the scheme that might be put in place.\\nSo let's start with some basics and what I would say are sort of our starting position. The simple fact is that we're looking at the consumers of aluminum in the United States and trying to see how we can make them more successful, more successful at beating back competition from Europe, Australia and, importantly, China.\\nAnd so we're trying to make sure that they have the best foot forward.\\nAnd so when you think about the tariff environment that we live in today and the fact that the U.S. is an import-dependent aluminum consumer, it means that they are now paying more for their aluminum than are their competitors overseas.\\nAnd so it creates strange events, like more cans, more aluminum cans coming from Mexico and also more can sheet going from China into Mexico.\\nAnd so this creates distortions in the market and makes it harder to compete for a U.S. consumer.\\nSo from our standpoint, tariffs are not having the desired impact and they are hurting the downstream industry. The next step then is, what happens with quotas? Depending on the quota regime put into place, what you can see is the rush of metal coming in and then running up against the hard quota depending on what percentage of prior year's production is considered.\\nAnd so even worse than just increasing the cost of U.S. consumers, you could actually find situations where U.S. consumers cannot source the material that they need because other products have been brought in, in their place. And realistically speaking, that can be brought in simply for financial reasons, not for actual aluminum consumption reasons.\\nAnd so that could drive shortages of key products or paradoxically, it could drive the import of material from China, it could drive the import of material from other parts of the world rather than it coming from what is the natural supplier, which is Canada, where much of the casthouse production of the primary - of primary metal has been destined to go directly into plants like Warrick or some of the other U.S. consumers.\\nSo a quota system makes it very complex. From an Alcoa standpoint very specifically, we've not talked through specific numbers. The fact is right now, we are paying, I think, $32 million.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, it's $32 million.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"$32 million of...\"}, {\"speaker\": \"William Oplinger\", \"content\": \"We had estimated it as around $12 million a month, but the actual number in the first quarter versus first quarter last year is around $32 million.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And so if you then take that and say, hey, if there's a quota system where no tariff is, the improvement for Alcoa can be the elimination of those tariffs at the expense of long-term demand of aluminum is the U.S. as the material simply aren't available for consumption.\\nSo there can be a positive short-term impact but we - in Alcoa, we are much more focused on the long-term dynamics of the U.S. market and also of the global market, where what we really need is a level playing field, where we can all compete, where we can all work to make our plants better and make the right products for the right customers and see an orderly business where that competition is really level and fair.\"}, {\"speaker\": \"Lucas Pipes\", \"content\": \"That's very helpful. I have many more questions, but I'll turn it over. Thank you very much.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Lucas.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Alex Hacking of Citi. Please go ahead.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Yes, thanks for the call. My first question is an accounting question. The $20 million charge related to the Canadian bankruptcy, was that included in adjusted EBITDA and if - for 1Q? And if so, which segment did it flow through? Thanks.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo let me try to make this very clear. It is included as an expense in our adjusted EBITDA.\\nSo if we were -- if you were to choose to exclude it, adjusted EBITDA would be $20 million better. In our view, we included in adjusted EBITDA. And that impacts the smelting segment.\\nSo - and then as we point out in the considerations page, we clearly don't expect that to recur in the second quarter.\\nSo it's an impact that only hits in the first quarter.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay, perfect. Thanks. And then a second question, I don't know to what extent you can answer this because it's a minority investment, but there's been some noise around the MRN bauxite mines in Brazil and their tailing situation there, potential use of upstream tailings dams. Could you give us some color on that, if possible?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes, and I can do that, Alex.\\nSo from a - let's start out from a Brazil perspective.\\nAs you can imagine, the - how government regulators, how local citizens, how everyone is reacting to that particular event is still in the midst of being defined.\\nAnd so the question really becomes, how do those regulations evolve? And for us, with an important footprint in Brazil and that is a direct footprint in places like S\\u00e3o Lu\\u00eds and Maranh\\u00e3o [ph] or in Juruti in Par\\u00e1 state.\\nOf course, we're staying very close to that. But also, it has an impact very specifically on MRN. And for right now, what they've asked is a very detailed and specifically designed review of stability, both short-term and long-term stability of each of those tailings facilities and any kind of residue impoundment.\\nAnd so of course, we're in the midst of doing that for our facilities and MRN is also in the midst of doing that. In our starting premise - and I can share that also MRN starting premise is to assure the stability and to ensure the long-term livelihood of each of those facilities.\\nSo for MRN specifically, they have been working on those studies. They have been submitted to the Brazilian regulators.\\nI think you've seen some of the statements that MRN has made.\\nWe are exercising a significant amount of caution to make sure that we are operating the safest operation for our employees and for surrounding communities as possible. There are some near-term impacts as we sort through the -- as we sort through how we view each of those facilities and as we get those studies done, how we then submit it to the regulators.\\nFor us, it will have an impact of about $15 million in the coming quarter. That is essentially a drop of about 200,000 tons of off-take that we would normally have.\\nHowever, we also see really good progress on that discussion ongoing between our facility, MRN, our joint venture and the local government.\\nSo there still is a good amount of uncertainty less so for Q2 but more for further quarters down the road.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And clearly, that's an evolving situation. And our estimate of earnings, as Roy said, probably in the $10 million to $15 million impact in the second quarter. But that will be - that will evolve and be based on how quickly MRN can get back to full capacity.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"And one more note too, Alex. That is already embedded in the considerations that we provided inside the deck.\\nSo that is not an additional consideration.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay, perfect. And just a follow-up, if I may, like very specifically on MRN, are they actively using any upstream tailings dams? Or have those - or are those upstream dams that they may have historical dams that are not active?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. Right now, I'm trying to think back but I do not believe we're operating any upstream dams. There are some of the current dams that could have an upstream component in the future depending on how those regulations are -- how those regulations develop.\\nHowever, at the moment, they are not upstream facilities.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, we're showing - in the latest impoundment data that we have, 8 upstream facilities that are inactive and minority-owned joint ventures.\\nSo all of the upstream dams in MRN would be considered inactive.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"So what that tells you, Alex, is that it's - it will have an impact depending on how regulations are formed. And our upstream impoundments tend to be much smaller than what you can imagine for some of the larger mining. It will have an impact on how you use those facilities, how long, and then the investments needed in order to continue operations.\"}, {\"speaker\": \"Alex Hacking\", \"content\": \"Okay. Thanks for the clarifications. That was very helpful.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Chris Terry of Deutsche Bank. Please go ahead.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Hi, Roy and Bill. Three questions from me.\\nFirstly, just on the aluminum market itself, what do you see as the price catalyst? Is it just the inventory days continuing to tick down? Do you need to see a policy change on the China exports? Or do you think it's from potential further closures in the industry? That's my first question.\\nThe second is around working capital opportunities. When could they come through in the year? What quarter should we expect those to start to be a benefit? And the third just around the share repurchases, the $150 million. Was the reason for the lack of purchases in the 1Q despite the weaker share price, is that just because of the $1 billion cash balance limit that you've retained? Would you ever go slightly below the $1 billion if you see an opportunity? Or has it got to stay strictly above that level? Thank you.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"So I'll take two and three.\\nYou take one.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"I'll take number one, Chris.\\nSo you asked about the pricing catalyst. And we'll start off with choice D, which is all of the above can be catalysts.\\nAnd so I think you did a pretty good job listing it - listing a number of different things. I would add a couple of items. Number one, I would add the fact that there is a clear connection between uncertainties particularly in the trade environment and what we're seeing both in aluminum demand, which then has a direct impact on what's happening in the pricing equation, but also simply in the pricing of our products and the amount of exports coming out of China, et cetera.\\nSo eliminating some of this trade uncertainty and improving global economy, those are certainly important catalysts for an improving price as well. And I would also - and in addition to the ones that you'd listed, I'd also say that it is vitally important that we start working on some of these long-term issues that I think clouds aluminum. When we talk about the tariff and we already talked about tariffs and/or quotas between Canada and the U.S., when we think about the need to start working against some of these fundamental issues about how global supply and then how global demand reacts to that, I think trying to build that multilateral solution, trying to start foster those conversations rather than some of the issues that we're seeing play out in some of the traded discussions, I think, would be very helpful. And that's why we spend a good amount of our time trying to speak with all of our host government to see if we can't start to address some of those root issues and quite specifically, Chinese overcapacity. And then I'll turn it over to Bill.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo let me address working capital. And clearly, my comments will be -- they'll have a component to them that are projecting forward prices.\\nSo these are -- these comments are based on the fact that we're assuming that forward prices don't move materially from where they are today. We would anticipate the first quarter at the high watermark on days working capital and that we would tend to trend downward on a day's basis to about where we got to at the end of last year. On a dollars basis, that would free up some cash during the course of the year.\\nSo again, it all depends on where prices end up, and those comments are based on the fact that assuming prices don't change significantly on us. If prices were to change significantly, the days basis would obviously change also.\\nAs far as the question around share repurchases, we target to keep $1 billion of cash on the balance sheet. But to be clear, that doesn't mean during the course of a month or the course of a quarter, we don't go under $1 billion. We -- that we typically have working capital usages during the course of a quarter and then we'd build the cash back up at the end of the quarter.\\nSo in the case of this quarter, we had dipped under the $1 billion during the course of the quarter. We've built back up to the $1 billion at the end of the quarter, and that's the target. Is to keep $1 billion of cash on the balance sheet. And then your next question should be, okay, so what's the view of share repurchases? Clearly, we have $150 million left in the authorization, and if the cash balance and market conditions allow us to, we'll execute on the share repurchase program but within the capital allocation program that we outlined at the beginning of the year.\"}, {\"speaker\": \"Chris Terry\", \"content\": \"Okay.\\nJust to circle back to that first question on the aluminum market. Do you see any of the events that are listed or that you listed? Do you see any of those in the near-term horizon? Or do you think this is just a slow-turning ship from your point of view?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Chris, I guess I would say that I can be consistently surprised by how things change pretty quickly on a day-to-day basis.\\nSo I think we're seeing good progress on discussions with China.\\nI think there's a lot going on with the USMCA negotiations.\\nI think those things can change pretty quickly to be quite honest.\\nAnd so certainly not going to predict pricing but I do think that we live in a world where the underlying fundamentals can shift on a daily or weekly basis.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Timna Tanners of Bank of America Merrill Lynch. Please go ahead.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Yes, hey. Good afternoon, gentlemen.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Timna.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"So I just wanted to ask a couple of high-level questions.\\nJust to understand that -- your really well-followed guidance for aluminum, bauxite, alumina demand.\\nOn the alumina side, are you including EGA and are you including anything for Alunorte in your balances? And on the aluminum side, I know you mentioned it was softer because of recent Chinese weakness, but are you assuming that stays status quo? Or are you assuming a recovery?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Okay.\\nSo let me try and remember those two things. Alumina...\"}, {\"speaker\": \"William Oplinger\", \"content\": \"EGA.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"For alumina balance...\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Alumina and aluminum.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"We have....\"}, {\"speaker\": \"William Oplinger\", \"content\": \"EGA and Alunorte.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"We have included EGA, our expectations for EGA inside of our numbers.\\nAnd so that is -- we will not comment on it but we have folded that in. They continue production over the course of this year and ramped it up.\\nFor Alunorte, we assumed the status quo.\\nAnd so as you think about and as you listen to what Norsk Hydro says about that facility, if you believe they will come back online, you'll need to add that both to our alumina balances but then also think about the knock-on impact on Albras.\\nSo our balance assumes the status quo of 50% operations. On your second question which was around recent Chinese weakness, so that one - let me look at it in a glass half-empty, glass half-full standpoint.\\nSo glass half-empty, we base our projections on data.\\nOf course, there is a projection to it. We're now through the first quarter but we base - the reduction that we've looked at this quarter versus last quarter very much is based on data that's come out recently from China.\\nSo from a glass-half-empty standpoint, it says that there's a reduction in aluminum demand here in the first quarter and we projected that into the rest of the year. What is not incorporated in the glass half-full is that really just recently, there was an announcement about a stimulus program and we're already starting to see the impact of that program. That stimulus and those effects have not been incorporated.\\nSo just as an example, we just got a data point, I believe it was this morning. That is not part of the global -- that expectation among demand and therefore the balance.\\nAnd so as those stimulus measures take effect, that will be upside to the current projection that we've made, of course considering the gives and takes of any projection.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. That's really helpful.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And just to add to that, when we're doing Chinese demand growth, we're building it up from a bottoms-up perspective, industry by industry.\\nAnd so that's how we come up with our numbers.\\nSome of the big industries that we've seen, some of the slowing -- and this is probably nothing new to you, Timna, but transportation, electrical and packaging are probably the three of the four biggest industries that we're seeing in China that are seeing some level of slowing. In our numbers, construction has actually stayed fairly strong. Well I say it's fairly strong, it hasn't deteriorated from the level that it was at when we looked out at the beginning of the year.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Let me add one more brick to that wall, and I agree with Bill's [indiscernible] comment. But also keep in mind that those improvements are very much focused on driving infrastructure and improvements very specifically in China.\\nAnd so as we think about sources of Chinese demand, there's two pieces: There's the exports that they make, which is essentially that first set of semi-fabricated products that they export to the rest of the world, which we've argued is really Rest of World demand that's being pulled to China. But the stimulus measures are real Chinese demand.\\nAnd so those are really a net benefit to the global demand - or global demand and global supply balance because it's actually consuming more aluminum inside of China and therefore has a very positive and additive effect to all the markets.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. Super. I just have one more question and I know that you were really articulate explaining all of the reasons why quotas are bad and all of the reasons why the real problem is finished aluminum production from China.\\nHowever, I still didn't get a sense of whether or not that message is well-understood in Washington. We know there's an army of lobbyists on the same topics in steel, and I just am not clear on whether or not there's the same efforts on aluminum and if we can expect that to be a topic that's well-understood in Washington?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"There's a very similar effort, Timna.\\nAs you can imagine, the aluminum industry is smaller than the steel industry, but I believe the issue is well understood.\\nAnd so I spend a good portion of my time in Washington. The Aluminum Association locked arm in arm from a messaging and from a belief standpoint that -- remember that represents producers and consumers. And I would tell you that also when you look at the Canadian Aluminum Association, when you look at sort of the next level of interlocutors, you're finding that same message that is going to the U.S., Canadian, Mexican administrations that they sort through USMCA.\\nSo I - and just to give it some very personal color, I truly believe that there is an understanding in Washington about how the aluminum industry works because I've personally taken it to them, and I know Tim Reyes, our Business Unit President in Aluminum, has personally taken it to them.\\nHowever, there are also those who don't necessarily agree.\\nAnd so as we sort through this, I think there is a clear understanding.\\nAnd some of the different players understand it well but might not agree, but we also have many that do understand the message and are helping to support trying to find the best solution possible, which, to be quite direct and frank, is the dropping of tariffs between Canada and the U.S.\"}, {\"speaker\": \"Timna Tanners\", \"content\": \"Okay. Thank you, again.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Thanks, Timna.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from David Gagliano of BMO Capital Markets. Please go ahead.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Dave, we can't hear you. Maybe Dave dropped off the line.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Paretosh Misra of Berenberg. Please go ahead.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Thanks. I've got a set of questions.\\nFirst, just curious what you're current leverage target is in terms of net debt plus pension given that you're running it about, what, like $2 billion per year on EBITDA?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes, Paretosh. We provide - at the beginning of the year, we provided a capital allocation framework. And in that capital allocation framework, we provided a proportional net debt target. That proportional net debt target was $2.0 billion to $2.5 billion. We ended the year at $3.3 billion, and we ended the first quarter with $3.3 billion. And I guess the additional color that we said at the beginning of the year was that we thought we could get into that target range just via the mandatory contributions to our pension over the next few years if we get our expected return on assets and the discount rates don't change on us.\\nSo a net debt - I should say a proportional net debt target of $2 billion to $2.5 billion.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Got it. And then second on just thinking about the free cash flow for the year.\\nSo what's maybe a good way to think about the cash tax rate for this year? I see you guys paid $82 million cash tax in Q1.\\nSo that's about 38%-or-so cash tax rate. Is that a good ballpark rate to use for the rest of the year?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes. It will move during the course of the year based on earnings. The one thing that you should keep in mind is that we have the big tax washup in the second quarter. We alluded to that in the outlook page.\\nSo if you go to the outlook page, you'll see, I think -- let me just go there.\\nI think it's close to $300 million in the year for the washup. That's associated with the profits that we made in Australia last year.\\nAnd so last year, in the -- well, this year, we're projecting $360 million associated with the payment of prior period taxes.\"}, {\"speaker\": \"Paretosh Misra\", \"content\": \"Got it. And maybe a last - another quick one on free cash flow, the -- how to pick up the cash flow impact of minority distribution. I mean, the income statement impact that you -- pretty clear how to calculate that CapEx is clear, but just how to think of the actual dividend calculation for this year.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo dividends get paid out today quicker than what they have been paid out historically to our partners. When we went through separation, we changed the dividend policy.\\nSo you can assume that we pay out a proportion of the earnings from the prior quarter to our minority partners. And then we -- and we do that in the month after the quarter end. And then the following month, we clear out any excess free cash flow.\\nSo I think I need to talk to Jim after the call to get a better guidance, but I believe just assume what we're -- what we have on the income statement and that will be pretty close.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Matthew Korn of Goldman Sachs. Please go ahead.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Hey. Good afternoon, gentlemen.\\nJust a couple questions from me.\\nFirst, can you clarify Slide 17? You mentioned as part of the improvements in productivity measures, one of the things you're doing is you're changing to more profitable products and pricing. What does that mean exactly? How and what are you changing? And are the levers that you're pulling that mean -- any kind of meaningful shift in the relationship between your realized prices and the indexes in the foreseeable future as we look ahead?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes. That's very focused on the casthouses particularly in smelting.\\nSo when you think about the -- some of the strategic levers that you have, typically, they're about energy contracts and they're sort of some of the broader issues that sit inside the potline. We just didn't want to lose focus on the fact that we also have very vibrant value-added markets, and those tend to give you consistent profitability based on the supply/demand of that particular product that is not tied to the aluminum cycle.\\nSo we're in the midst of trying to make sure that we are generating as much product as we can, that we're making it to the specification that our customers want and that we're trying to gain market share, which, in the end, helps us to build those casthouse margins into our total profitability.\\nSo it's very focused on casthouses, Matthew.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it.\\nThe second part, you say early in your press release, you mentioned over the course of the call, you continue to review your assets for through-cycle profitability.\\nOver the years, this has largely meant paring down the high cost side and now the investments that you're making, these are all very productivity minded. Is there any appetite for grow -- to grow those assets which -- as you're looking through your portfolio, because of their cost profile, because of their market advantages, where you could see the opportunity to press those advantages through higher volumes sooner than later?\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo the answer is quite simply that, yes, we look across our portfolio for ways to grow profitable facilities. And think about our alumina refining portfolio.\\nWe have very strong plants in Western Australia.\\nWe have a very strong plant in Brazil. And each of those present opportunities for creeping production through debottlenecking activities or even brownfield.\\nAnd so there are lots of opportunities in alumina. There is excess capacity that we have inside bauxite. And to be quite honest, at our smelters that have very competitive power contracts and have attractive technology, there's also opportunities to creep those as well.\\nSo the one piece I would contend with, as you said, sooner rather than later, what I'll say is that, that is dependent on making sure that we understand the investment, we always look at the market into which we are and will be selling, and then we also think about how that cash is then assembled and then how we would fund those activities.\\nSo we are in the process and you can see that in our growth capital of identifying and understanding some of those larger opportunities that we have. And our analysts, while we won't -- while you won't be the first to know, when we start deciding on embarking on those projects, we will definitely let you know.\"}, {\"speaker\": \"William Oplinger\", \"content\": \"And to put some numbers around it, last year, we spent about $100 million in return-seeking capital.\\nYou can this year, we're projecting about $150 million of return-seeking capital. These are not massive numbers, right, in relation to the size of our company, but that incremental $50 million is, in large part, being spent to study some of the debottlenecking opportunities that we have across the three business units.\"}, {\"speaker\": \"Matthew Korn\", \"content\": \"Got it. Fair enough. Thanks, Roy. Thanks, Bill.\"}, {\"speaker\": \"Operator\", \"content\": \"Our next question comes from Justin Bergner of G. Research. Please go ahead.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Good afternoon, Roy. Good afternoon, Bill.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Hey, Justin.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Most of my questions have been answered but just a couple of quick ones. With respect to the rolled products business, I guess the EBITDA took a step down sequentially this quarter but you're expecting it to improve in the rest of the year. Could you just sort of describe the sort of waterfall steps there for that step down in that improvement?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Sure, yes.\\nOur rolled products business, remember, has a smelter included in it now because we've got 3 lines of the work smelter running there.\\nSo the $11 million that we had in EBITDA in the first quarter was negatively impacted by some higher alumina cost and lower aluminum cost -- aluminum prices.\\nAs we look into the second half, we do see a typical seasonality in our business where the second half is stronger than the first half. And we continue to project -- I think we said about $100 million of EBITDA in the -- in January.\\nWe continue to project that $100 million.\\nSo that means that there's a ramp in the second half and that ramp in the second half in part comes from the fact that we -- our power plant runs full out in the second half and we get some better pricing and volumes in the second half in that unit.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay. That's helpful. And then on the, I guess, segment EBITDA bridge appendix slide, just to follow up on the earlier question, the mix benefit in aluminum, was there anything that was idiosyncratic about that? I mean, is that plus $17 million benefit or -- I guess, or higher level of mix something you hope to be able to sustain sequentially going forward?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Yes.\\nSo the mix in the first quarter had 2 components: slightly better mix coming out of our rolling business; and, as Roy alluded to, better casthouse value-added product mix coming out of the smelting.\\nAnd so as Roy talked about, in the first quarter and going into 2019, we've been able to increase our mix, increase some value-added prices and specifically in North America and that should stick during the course of the year.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Okay. Great. And then lastly, the $13 million of raw material tailwinds for the Alumina segment sequentially, could you just clarify what were the drivers there?\"}, {\"speaker\": \"William Oplinger\", \"content\": \"Caustic soda. Caustic soda has come down sharply in price. It takes us time for that sharp price reduction in caustic to flow through our income statement, typically takes a couple of quarters for that to flow through.\\nSo we are now just starting to see the benefit of the lower caustic prices that we were buying in the second half of last year.\"}, {\"speaker\": \"Justin Bergner\", \"content\": \"Great. Thanks for taking my questions.\"}, {\"speaker\": \"Operator\", \"content\": \"Our last question comes from Michael Dudas of Vertical Research. Please go ahead.\"}, {\"speaker\": \"Michael Dudas\", \"content\": \"Thanks for squeezing me in here.\\nJust wanted to follow up on your current remarks about smelter dislocations and your deficit expectations.\\nGiven where prices and economics are in Western World, would you anticipate seeing some more of that -- or seeing that accelerate? Is that going to conflate with what happens with tariffs and some -- and the Chinese situation? Or is that just going to get to a point where you're going to see some more proactiveness from the Western World smelters? Thank you.\"}, {\"speaker\": \"Roy Harvey\", \"content\": \"Yes.\\nSo I think the answer is going to be, it depends. And it depends very specifically on what happens in alumina, to be quite honest.\\nSo one of the big changes that has happened from last quarter to this quarter is that alumina prices are changing.\\nAnd so with an elevated alumina price, it tends to make aluminum smelting unprofitable very quickly.\\nSo depending on your view of what will happen to alumina pricing, that will then have an impact on profitability in aluminum smelters. I would say that Chinese smelters have been quicker to react, although we're also starting to see some smelters outside of China, and I would bring forward our Avil\\u00e9s and La Coru\\u00f1a smelters as a good example of a place where we have taken action and others are taking similar types of actions. But it tends to be very cash-focused. In China, it tends to move pretty quickly. And part of what we've seen here in Q1 is that we've had about 0.5 million tons of curtailment that has come online, which helps to offset some of those demand reductions that we talked about before.\\nSo again, if we start to see some of the upside I talked about because of the Chinese stimulus program, that in turn could give us -- start to build a deficit in China and then it really changes the pricing dynamics of what's happening. But as -- alumina plays a very important part in that. What will happen to Alunorte is important inside of alumina, and so that will help to determine the outcome of that question.\"}, {\"speaker\": \"Michael Dudas\", \"content\": \"That\\u2019s fair, Roy. Thank you.\"}, {\"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 bearing with us. I know we're a few minutes over 6 o\\u2019clock.\\nSo just to sum up very quickly, as we enter the second quarter, we continue to be focused on further increasing operational stability on reliability at each of our locations, and we're also very focused on pulling each and every one of our business levers at each of our facilities to drive value for our stockholders through the market cycle. We'll be - we'll continue to be focused on that through quarter two and long into the future.\\nSo thank you for your time today, and we look forward to sharing more of our progress in July. Back to you, Andrea.\"}, {\"speaker\": \"Operator\", \"content\": \"The conference has now concluded. Thank you for attending today's presentation.\\nYou may now disconnect.\"}]"


