Alcoa Corporation

Good afternoon and welcome to the Alcoa Corporation first quarter 2020 earnings presentation and conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.

Thank you, Operator, and good day, everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer, and William Opplinger, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Roy and Bill. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website. With that, here's Roy.

Thank you, Jim, and thanks to everyone for joining our call. We will discuss our first quarter results in a moment, but first I want to pause in memory of Paul O'Neill, the former CEO of Alcoa Inc. He passed away on Saturday here in Pittsburgh. Mr. O'Neill was a visionary leader and mentor, including to many in our company today. His legacy lives on at Alcoa. His principle to always focus first on safety and the protection of human life is timeless, especially as we face the current challenges. Our sympathy goes out to all who loved and respected him. Now this earnings call is going to be different. Well, we had a solid quarter and we'll take the time to explain our results. We are living in unprecedented times. So before we discuss the quarter, I will talk about the impacts of COVID-19 and what we're doing as a company in response. The pandemic has affected not only the way we work and interact, but our global economy as well. While a lot has changed in the world, our Alcoa values serve as unwavering guideposts. Those three values are fundamental to everything, especially in times of crisis. We've kept them at the forefront. There is significant uncertainty due to the pandemic and its effect on the world's economy. As such, we've decided to withdraw our full-year projections on global supply and demand balances. While we expect aluminum demand to be affected by government lockdowns and temporary closures from some end-use manufacturers, the range of scenarios is too broad to forecast projections with a high level of confidence. We are closely monitoring our markets and will talk today about what we're seeing in our three market segments and how these changes impact Alcoa. In addition to our third-party sales of bauxite and alumina, we produce a final commodity product, aluminum, that can be sold into the terminal market. Thus, shipments can continue, unlike some other downstream industries, but given the build of commodity inventories, current dynamics can create longer-term supply-demand impacts once we see demand return. Just as our values have guided our response efforts Staying on course with our strategic priorities has enabled Alcoa to enter this period from a position of strength. Over these last several years, we've taken numerous actions to improve our business, and we implemented a number of actions earlier this year to continue that momentum. Today, we'll detail some additional actions to effectively manage our cash in 2020 due to the uncertainty of this pandemic. Taken together, these new and existing initiatives, including the sale earlier this year of our former Gum Springs plant, will total $900 million in cash actions for the year. This will enhance our ability to weather this crisis and continue to improve for the future. Finally, as you recall, it has been our practice to report any serious safety incidents as part of our quarterly earnings announcement. I'm deeply saddened and disappointed to report a workplace fatality, a tragedy unrelated to the current health crisis. On February 10th, a contracted worker died after sustaining injuries at the Pulsos de Caldas facility in Brazil. This is unacceptable, and we are working to make sure this doesn't happen again. While much focus is currently on COVID, we are reinforcing to everyone at every location that safety is our most important priority. And I would like to thank all of our employees for their efforts through this health crisis. The everyday actions to protect the safety of their fellow workers and to keep our plants operating makes me proud. Now, I will discuss Alcoa's specific actions related to COVID-19. Our first and most important objective is the health and safety of our global workforce. Across our facilities, we have comprehensive measures to minimize the risk of exposure to this virus. We have implemented response and preparedness plans to protect our people, our business, and our communities. We are following protocols that align with the US Centers for Disease Control and Prevention, the World Health Organization, and other public health authorities where we operate. Measures to protect our people include adjusting shift patterns, instituting additional hygiene protocols, and ensuring the exercise of social distancing measures. Most of our administrative offices are closed as we've authorized employees to work from home where practical and possible. We also acted quickly to restrict all non-essential business travel, beginning in late February and currently continuing. Our company's global crisis response team is meeting frequently and is continuously tracking any reported cases and ensuring that those who may be ill or were exposed to the virus observe quarantine protocols. In addition to the protection of our employees and our operations, we're supporting our communities. The Alcoa Foundation has allocated a total of $4 million that can be used in our local communities for humanitarian aid projects. Our locations are working with qualifying nonprofits to allocate this funding for the greatest impact. Now, turning to our operations. We are still running our current portfolio of bauxite mines, alumina refineries, energy assets, and aluminum manufacturing facilities. We continue to provide essential products and materials that are fundamental for society and the world's economies. Given the uncertainty of the current climate, we're taking prudent steps to manage costs without compromising the safety of our facilities. First, we have instituted restrictions on new hiring, focusing only on what is essential to support the continued safe and effective operation of our facilities. Second, we are reviewing all non-critical maintenance activities that can be safely deferred. And third, we are also stopping or delaying the relining on some of our smelting pots, depending on the individual circumstances at specific facilities. At the ABI smelter in Beconcourt, Quebec, for example, we've slowed the restart, which is currently 85% complete, to comply with restrictions in the Canadian province. The return to full operation was originally expected to be fully complete in the second quarter of 2020. and the timing for the full completion will be evaluated in the months ahead. Now, let's discuss our three product segments and the impacts caused by the pandemic. Starting with bauxite, throughout the first quarter, we saw steady demand outside of China as refineries largely operated without disruption. From a cost standpoint, most of our bauxite mining expenses are fixed in nature, apart from diesel fuel, which we purchase at market rates. As noted here on slide 7, our bauxite shipments and pricing in the first quarter were largely unaffected, and we expect Alcoa's third-party bauxite shipments and pricing for the second quarter to remain relatively stable. Turning to Illumina, our shipments were largely unchanged in the quarter. We have a strong cost position due to our integrated bauxite positions. And given the quality of Alcoa's bauxite and Alcoa's refinery design that is specific to each type of bauxite, we use less caustic soda on a per ton basis than competitors. We also have an advantage in that when customers are impacted with curtailments, we have the ability and commercial presence to shift to spot sales. For alumina, shipments are continuing, but with a substantial pricing decline in the second quarter. This is a dynamic I'll discuss on the next slide as well. In aluminum, Alcoa prices its products using the London Metal Exchange aluminum price, adding relevant regional and product premiums for delivering into the markets to which we sell. From a cost perspective, energy represents one of the largest input costs. Approximately 70% of our smelting production is linked to aluminum prices or short-term wholesale power markets. Also, As prices fall, other input costs typically do as well, such as carbon, which we purchase quarterly. We produce a mix of higher-margin value-add primary aluminum products as well as lower-margin commodity-grade products at our smelters and integrated casthouses. In our products, we have seen demand impacts, so we have started to shift some of our sales from value-add castings to commodity-grade products. And we will see this trend continue. In the second quarter, we anticipate converting around 20% of previously allocated production from value-add product sales to commodity-grade ingot sales, as some customers request shipment postponements or declare force majeure. Most of the decrease in our value-add product sales is due to weakening demand from customers serving the transportation sector, followed by customers in building and construction. This mirrors trends in the broader market, as these are the two aluminum end-use sectors most likely impacted by the economic impacts of COVID-19. The shift from value-add to commodity-grade adversely impacts our revenue. This loss of product premium will be coupled with the substantial decline in aluminum pricing over the first quarter, which I will discuss next. Considering the current uncertainty in the markets, I believe that it is appropriate to lay out the facts and trends from the first quarter to explain what we are seeing. Lower prices, inventories that are higher than last year, and a growing number of producers underwater financially. Aluminum demand is likely to be impacted significantly by government lockdowns and plant closures, starting in China and moving around the world to two of our major markets, Europe and North America. As I noted earlier, out of the different aluminum end use sectors, this impact is likely to be felt most strongly in the transportation sector, where automotive plants have been shut down for varying lengths of time, followed by the building and construction sector, where projects have been slowed or delayed in the first quarter. While aluminum demand is likely to have decreased in the first quarter of 2020, in particular in China, primary aluminum smelters continued to produce without significant interruption for most of the quarter. This resulted in an over 2 million ton increase in global inventories, largely seen so far in China. While we normally see some stock building in China in the first quarter due to the Chinese New Year holiday, this year's increase in inventories was likely three to four times the size of the Chinese stock build we saw during the first quarter of 2019. Given these dynamics, aluminum and alumina prices decreased over the quarter. These lower prices have driven significant levels of production into cash negative territory. We estimate that 60% of Chinese smelters and 20% of smelters in the world outside of China were in a cash negative position for the month of March. We also estimate that 40% of Chinese refining production was cash negative for the same period. In turn, we have started to see the beginning of a supply response. In aluminum, it has been reported that smelters have cut 1 million tons of annualized capacity in China and 400,000 tons of annualized capacity outside of China between March and April. In alumina, Chinese refineries cut 6 million tons of annualized capacity in February, with 2.5 million tons remaining in a curtailed status today. I would call your attention, however, to the fact that these dynamics and prices can change dramatically. Since March, we have seen a decline in alumina prices, which creates a larger group of underwater refineries, but with corresponding input cost relief on smelting. Most important, however, is the relationship between supply, demand, inventories, and pricing. There is near-term support to the industry given the ability to deliver aluminum into inventory. However, this relief can quickly become a long-term drag given the new demand fundamentals. Looking forward, what is clear is that the ultimate supply-demand balances this year will be determined by a few factors. First and foremost, how fast the spread of COVID-19 is brought under control. Second, Once the pandemic is under control, the speed at which economies recover will depend on how governments lift lockdown measures and implement stimulus programs. With the return of economic activity, aluminum demand will pick up across its broad set of end-use markets, which includes transportation, construction, packaging, machinery, electrical, and consumer durables. Third. the entire aluminum value chain will respond to the pricing and demand environment as it shifts and changes. This is where we could see further capacity curtailments, depending on the strength of demand. It is clear, however, that the current market is in an oversupply situation. Alcoa will continue to monitor this situation and may need to make further curtailments if this supply and demand situation persists. Needless to say, We will discuss these trends in more detail as the year progresses and as more clarity develops about the ongoing situation. Next, I wanted to lay out a simple timeline that summarizes the actions we've been taking to further improve our company, including the most recent initiatives associated with our response to current market conditions. We have been consistently focused on acting smartly through the cycle. including preparing for downside scenarios. And we have worked tirelessly to strengthen our balance sheet. We have initiated programs to strengthen our portfolio and company for the long term. I am pleased that we started deploying these actions during better times. They provide a solid foundation and clear pathway during the current challenges. Let's turn to the information in slide nine. First, starting on the left. In October of 2019, we announced key strategic actions that included a new operating model that reduced overhead and made us a leaner organization. That is important because it enabled faster decision-making. The model is now fully implemented and will provide $60 million in annual savings beginning in the second quarter of this year. At that same time, we announced a plan to generate between $500 million and $1 billion through the sale of non-core assets. In January of this year, we completed the sale of our Gum Springs plant in a deal worth $250 million, and we will continue to pursue the remainder of this target. Our other strategic action was the launch of a multi-year review of our operating portfolio, focused on 4 million metric tons of global refining capacity and 1.5 million metric tons of smelting capacity, which is approximately 50% of our aluminum portfolio. Today, we're announcing an action connected to our portfolio review, the curtailment of the remaining capacity at our Intalco smelter in Washington State. While our employees have worked tirelessly to improve the facility, the smelter faces significant cost challenges that have only been exacerbated by these poor market conditions. In the first quarter of 2020, Intalco lost $24 million and aluminum prices have fallen more than 20%, down 45% from highs in 2018. We recognize the impact this decision has on our workforce, so we will ensure appropriate support as we work to safely curtail the facility. As I've said before, we owe it to our employees and communities to work through this portfolio review as quickly as possible. and we will strive to accelerate this process to provide clarity for the future. Next, in the middle of this chart, in February, we announced two planned programs to further our improvement in 2020. First, driving leaner working capital that should result in savings between $75 and $100 million by reducing inventory and optimizing contract terms. Second, We continue to expect approximately $100 million in sustainable and annual productivity improvements. These previously announced actions provided a head start on what we're doing next, implementing comprehensive actions to conserve and manage our cash during the current down cycle that is magnified by the impact of COVID-19. On the right-hand side, we have our COVID-19 related actions to date. We are reducing our annual capital expenditures, effectively stopping work on most return seeking capital projects for the remainder of the year. We are evaluating various governmental programs in the jurisdictions where we operate, and we intend to use provisions in the U.S. Government CARES Act to defer this year's pension contributions. We will also implement other across the board spending cuts, which Bill will discuss with more details shortly. Importantly, All of these initiatives, including the one completed asset sale, are expected to total $900 million in cash actions this year. Again, our work to hone our strategy gave us a head start to manage through this downturn, and we will move aggressively to strengthen our company so we can thrive in the future. So with that, I'll turn it over to Bill to dig into the details on the first quarter results and our cash management strategies. Bill, please go ahead.