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.

Thanks, Roy. We've streamlined the financial results section, and this first slide provides key financial highlights. Detailed slides are in the appendix. First quarter 2020 revenue was down $55 million sequentially on seasonally lower aluminum volumes and buy-resell activity in aluminum and lower realized aluminum prices. Net income attributable to Alcoa Corporation was $80 million or 43 cents per share and includes the gain on sale of the Gum Springs Treatment Facility. Adjusted EBITDA, excluding special items, was $321 million, generating an EBITDA margin of 13.5%. The adjusted net loss was $42 million or 23 cents per share. Also, on an adjusted basis, the operational tax rate was 78.5%. Let's look closer at factors driving adjusted EBITDA. Adjusted EBITDA, excluding special items, declined $25 million in the first quarter. The strength of the U.S. dollar combined with favorable energy impacts and lower raw material costs more than offset lower alumina and metal prices. First quarter EBITDA includes a $36 million benefit from revaluation of receivables and payables due to substantial changes in quarter and currency rates. In the operating segments, bauxite and aluminum EBITDAs declined sequentially, but were more than offset by improved aluminum earnings. Lower bauxite prices on intercompany sales impacted bauxite segment earnings, but resulted in lower bauxite costs in the aluminum segment. The stronger U.S. dollar created benefits mostly in the aluminum segment, which also saw lower caustic and energy costs. In the aluminum segment, lower realized metal prices were partially offset by lower alumina and carbon costs. Price mix was unfavorable sequentially on the mix of smelter-grade alumina contracts and lower chemical-grade alumina pricing, as well as lower external bauxite prices. Volume was down in all segments on seasonal factors, but driven largely by scheduled maintenance activities in alumina and bauxite. Production costs were unfavorable in aluminum, primarily at Warwick Rolling. In other, transformation costs were higher sequentially due to no longer receiving Cernam energy revenues and the addition of point comfort closure costs. Intersegment eliminations declined $48 million sequentially as more stable aluminum prices meant no further profit was released from inventory. Moving to the key financial metrics in cash. Typical for the first quarter, our day's working capital increased sequentially, up four days to 31 days, but improved four days year over year, and was an encouraging start to our working capital reduction efforts. Capital spending was $91 million, up $22 million year over year, primarily due to a mine move occurring in Australia. These factors combined with lower EBITDA to generate negative free cash flow, less NCI distributions of $212 million. Our key balance sheet metric, proportional adjusted net debt, was flat this quarter and appropriately does not reflect the measurement of pension and OPEB assets and liabilities that occurs at year end. We ended the first quarter with cash of $829 million, down $50 million sequentially. A quick review of our major cash sources and uses for the first quarter of 2020. Our total cash sources were $520 million, consisting of $321 million in adjusted EBITDA and $199 million in net proceeds from asset sales. The largest outflows of cash were $150 million working capital use, $91 million of capital expenditures, $70 million of tax payments, including $32 million in payments of prior year income tax. Net distributions to our joint venture minority interest partner of $31 million, as well as $75 million of pension and post-employment benefits funding made in addition to $15 million related expenses with an adjusted EBITDA. Outflows also include approximately $37 million in restructuring payments, primarily for implementing the new operating model and Spanish smelter divestitures. Now let's take a look at our pension and OPEB net liability, which has impacts on the balance sheet and cash flow. Based on many questions from you, we have summarized the balance sheet and cash flow impacts from our pension plans. Pension and other post-retirement benefits have important balance sheet and cash funding impacts. On the balance sheet, there's three key points to consider. The net pension liability is completely remeasured at year-end, not every quarter, factoring in all payments, funding, asset returns, demographic changes, and discounted using year-end rates. The OPEB liability is similarly remeasured at year-end using a similar year-end discount rate. The pension funds are invested across numerous asset classes, including fixed income. Returns were negative approximately 7% in the first quarter. Pension OPEB discount rate approximate of 10 to 15 year investment grade corporate bond. Even while treasury bond rates fell in the first quarter, discount rate rose roughly 20 basis points from year end to the end of the first quarter. In sum, while asset returns and discount rates are variable and subject to change, if we assume that we receive our expected return on assets for the last three quarters of the year, And we assume that no change in the discount rate occurs from March 31st. And funding and other normal adjustments are in line with our outlook. We would anticipate our year end 2020 pension and OPEB net liability to be approximately the same as the balance at year end 2019. There are several factors that dictate the amount of pension and OPEB funding required every year, and especially in 2020. Funding requirements for 2020 are set and based on smooth asset performance and 25-year average segment rates mandated by the IRS. This year, the CARES COVID-19 stimulus package allows deferment of $220 million of pension payments until January 1st, 2021, and we have elected that option. Thus, funding for pension and OPEB from cash flows in 2020 is estimated to be $180 million down from $400 million. Next year, we could use our $382 million pension pre-funding balance instead of funding the pension entirely with operating cash flows. Let's now look at our debt and cash position. First, we have a very solid credit position with no significant debt maturities until 2024. At quarter end, we had cash of $829 million and no borrowing against our two credit facilities. This month, we amended our revolver to temporarily increase borrowing base availability for the next four quarters. Second, while in February, we disclosed working capital and production cost reduction programs targeting up to $200 million in 2020. And we just mentioned the CARES deferment until 2021 of $220 million in pension funding We are taking several more actions to improve our cash position. They include reducing capital expenditures, $100 million, deferring environmental and ARO spending, $25 million, and a number of other cash conservation measures that are expected to total $35 million. Let's see how it all adds up. Our cash actions announced so far this year add up to an approximately $900 million benefit in 2020. Some cash impacts are ongoing and have an annual run rate, some are one-time savings, and some are deferrals until a later year, but all of them are designed to improve our cash position in 2020. Of the $900 million cash benefits related to our three key strategic actions total approximately $300 million and include overhead reductions, our Gum Springs asset sale, and the Intalco curtailment. The 2020 programs for working capital and production cost reductions target another $175 to $200 million. Another approximately $400 million comes from our newly announced COVID-19 response. While $900 million is in press to start, we're not done. For example, while Gum Springs is our first completed non-core asset sale, we continue to pursue the remainder of our $500 million to $1 billion target. We realize that these exceptional times require continued efforts to maximize all of our cash programs. Finally, let's review our full year outlook for 2020. Our full year 2020 outlook, although being subject to change based upon the evolving COVID-19 situation, is our best current estimate and reflects the actions described earlier. For example, the curtailment of Intalco is expected to reduce our full-year aluminum shipments, so we are adjusting that full-year outlook approximately 100,000 tons to a range of 2.9 to 3.0 million tons. Earnings-related impacts reflect lower spending. We expect transformation EBITDA impacts to improve $10 million to approximately $75 million. We also expect other corporate EBITDA impacts to improve $10 million to approximately $90 million. We expect interest expense to increase slightly to a range of $125 to $130 million, as lower capital spending will mean lower interest to capitalize as part of major projects. Finally, until further notice, we are not providing an outlook for the full-year operational tax rate. With the current situation so uncertain, we cannot predict with sufficient confidence the 2020 taxable earnings across our businesses. The largest changes in our outlook can be seen in our cash flow impact. Minimum required pension and OPEB funding is expected to decrease from $400 million to $180 million, a result of the CARES pension funding deferral until 2021. We're cutting our estimated capital expenditures $100 million, effectively stopping return-seeking capital spending for the rest of the year and reducing sustaining capital spending. We're also reducing environmental and ARO spend $25 million to a targeted $125 million. In the appendix, we also list additional considerations expected for the second quarter. They include, in the bauxite segment, adjusted EBITDA is expected to be $10 million lower, primarily due to non-recurrence of an annual sales contract true-up. In the alumina segment, we are expecting lower raw material costs to yield $10 million sequential benefit. In the aluminum segment, lower alumina costs are estimated to produce sequential benefit of $15 million. And benefits from lower smelter power costs will be more than offset by lower Brazil hydro sale prices, while lower value-add pricing and volumes will be partially offset by production cost improvements, yielding an expected $10 million sequential decline. Due to an unusually large change in quarter-end exchange rates, first quarter 2020 adjusted EBITDA included a balance sheet revaluation benefit of $36 million, and a $41 million sequential benefit compared to the fourth quarter of 2019. Currency changes related to balance sheet revaluations are not incorporated into the currency sensitivities provided for EBITDA. So now let me turn it back to Roy.

In closing, as we move forward through this period of instability and uncertainty, we will continue to execute against our company's three strategic priorities. First, we remain focused on being a low cost producer, which means reducing complexity to better compete through all parts of the cycle in our commodity markets. Second, we intend to improve our margins and invest to drive returns when markets offer us this opportunity. And finally, we are working to advance sustainably, which includes actions toward a strengthened balance sheet, a cycle-proof portfolio, and an enhanced reputation for environmental and social excellence. There are three major points I want to leave you with today. Most importantly, we are focusing on meeting the fundamentals of this crisis. That means continued vigilance and mitigating risks for our people and operations. We are prioritizing keeping our people safe and healthy, keeping our operations running, and helping our communities navigate this crisis. Next, our early action helped us prepare for the economic challenges presented by the COVID-19 pandemic. With a stronger balance sheet, we are well positioned to act smartly and to continue executing on our strategic priorities and the actions that we announced prior to this crisis. Finally, we are adapting to this unprecedented situation quickly. Having a clear direction ensures that our short-term reactions will help accelerate our long-term direction to enhance the competitiveness and profitability of Alcoa. And with $900 million of 2020 cash improvements already underway, it gives us a solid foundation to continue to build our future. And with that, Bill and I are ready to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. When called upon, please limit yourself to two questions. At this time, we will pause momentarily to assemble the roster. And our first question will come from David Gagliano of BMO Capital Markets. Please go ahead.

Okay, great. Thanks for taking my questions. My first question is really just a bit of a clarification question. On the $36 million that was included in the $321 million adjusted EBITDA, where is that in terms of the segment results? Is most of that in the Illumina segment? Or if not, can you break that out by segment, too? That's my first question.

Hey, Dave. Yeah, it's mostly in the alumina segment. So let me give you a breakdown. Two in bauxite, 28 in alumina, and seven in aluminum. And I know that doesn't round to 36, but it's just the rounding.

Okay. All right. Great. Thanks. And then just a bigger picture question. I mean, obviously, if one, you know, plays with the sensitivities and plugs in spot and Even after giving all the benefits for the operating model, the Intalco shutdown productivity improvements, lower costs, it's still a very low run rate EBITDA, at least on the numbers that we're coming up with on an annual basis. I'm guessing a lot of that's the aluminum segment. My question is, what other actions is Alcoa considering at the moment? If, you know, given the backdrop of the big drop in all three of the main drivers, premiums included.

Yeah, let me hit that one first, Dave, and then probably is worthwhile for Bill to chime in as well. I mean, the fact is, is that we're trying to look at this in a very staged methodology. We're trying to read a bit what we're interpreting from the markets. and then take actions that correspond to what we see both in the immediate term and further out. At this point, and you've seen the list of things that we've already put into place, so I'm assuming that you're looking for what else could be done. You know, we've been trying to focus on doing what does not have long-term or create long-term issues or even medium-term issues. So a good example are the mine rules. Continuing with the mine moves because those have immediate impacts if you choose not to do them, just on grades and then also on haul distances. So right now, because we're in the cash position that we're in, and as we project that forward because of the liquidity, we feel that we do not need to take actions that cut deeper into some of those sort of emergency measures that we could take. Now, the fact is, and depending on when we start to see demand return or start to see more of a supply response that starts to bring balance back in and then with the resulting change in pricing, we have a series of actions that we can continue to take. And those actions run the gamut from additional curtailments, looking at each plant on a specific operation by operation basis. It also steps into further capital reductions, choosing to defer more maintenance, et cetera. So there's – realistically, there is a pretty large set of actions that we have chosen, specifically chosen not to move forward with. And thus, as conditions change and as that pricing environment changes, we'll be ready to start stepping into those as a case as that is needed. I don't know, Bill, if you want to add to that.

I don't know that there's a whole lot to add, Roy, other than the fact that, Dave, you've seen us over the course of, what, three and a half years now, and we take action. And we've laid out, you know, we started back in October where we announced the strategic review. We've taken action on the strategic review between the Point Comfort closure and now the Intalco curtailment. You know, we're stripping out the overhead. And then today we announced a series of COVID actions to enhance liquidity. And, you know, we'll continue to do what needs to be done to improve the business. And as Roy said, we're doing it with an eye towards the long term, but we clearly understand the situation in the near term. And it's just a management team that doesn't sit back, and I think you've seen that over the last three and a half years.

I'll chime back in with one more comment, Dave, if you don't mind. You know, I think as we sat here a year ago, And we're really getting deep into some of the strategic reviews and thinking through where does Alcoa need to be for the long term. And obviously, and I'll be the first to tell you, we had no expectation that there would be a global pandemic that would then create the knock-on market impacts. However, when we looked forward, we did really think about what is necessary in order to make our portfolio and stable of operations be as cycle-proof as possible. And so I would argue that the fact that we started moving in October, and that we have been taking, we have essentially a head start and have been taking phased action since then. I am really, really pleased that we did that at that point because it helps us react more quickly and gives us more space and more liquidity so that we can make our actions thoughtful and also make them as powerful and impactful as they need to be. I think since separation, I remember one of the things I have been consistently saying is that We as a company, we want to do smart at the up times, and we also want to do smart at the down times as well. And so that is exactly what we intend to do. And like Bill said, I don't think anybody could say it better. We are a team that chooses to take actions on our own terms so that we can make this company better.

I appreciate that. Thanks for those comments. Just if I could just jump in with one more, the follow-up there. If we've got an inventory problem, we've got a demand problem, and And if that continues to bleed into a, you know, lower for longer pricing problem, like we saw, you know, for, for, for years you know, you know, a while back you know, can you, can you give us a, just a sort of a framework about how much capacity on the smelting side Alcoa is, is willing to take out of the market either on a, you know, on a percentage of production basis, obviously without going smelter by smelter, but you know, just, Can you give us a sense, if things stay the way they are on pricing, say, for the next six months, what should we expect in terms of the next moves on smelting capacity cuts?

Yeah, it's hard to quantify that, Dave, and specifically because it is very dynamic. I mean, as you can imagine, pricing changes depending on what's going on with some of our competitors and around the aluminum industry. The fact is that we announced a million and a half tons of review, and so that is the list of places where we need to be taking action, and those actions can result in improvements to the bottom line. And as you can imagine, there's a bunch of changes going on in some of the input costs. It can mean new power contracts, but it can also mean curtailment or shutdown. So we take that. Very, very seriously. And as you've seen, we've taken a couple steps already in Talco being the one that has the impact on actual operated tons. And Bill, go ahead, because I interrupted you.

No, that's exactly what I was going to say, Roy. I mean, you got to go back to the million and a half metric tons. Out of that million and a half, I believe around 900,000 operating today we announced in Talco. And, you know, we continue to move forward on the strategic review and the current market conditions make that strategic review even more important and, you know, really push us to make decisions quicker.

Okay, that's helpful. Thanks very much.

Our next question comes from Kurt Woodworth of Credit Suisse. Please go ahead.

Yeah, thanks. Good evening. Hey, guys. I'm hanging in there. From a modeling perspective, it's pretty challenging, at least on the smelting side right now, because you've got a lot of delays in your cost structure in terms of you think about 70% of your power costs are LME-linked. Illumina flows through on a six- to eight-month lag. And then right now, obviously, you're probably going to see much lower shade premium if you go more in the ingot away from casthouse products. You know, I guess, you know, the question, and then you have Entalco on top of that. So could you estimate or give us a rough sense for if you were to assume kind of spot assumptions for these things, kind of what the profitability of the smelter business would look like today?

No, you know, Kurt, we don't provide that. I think the best thing that you can do is what you alluded to, and that is, you know, take a look at both the sensitivity stage and the cost structure page, and the cost structure will help you model through, you know, how the costs flow through for the smelting system. So, you know, and then on top of that, we've given you an indication of how much profitability in Talco will contribute this year by the fact of having it, I should say, on a run rate basis by having it curtailed. So you can factor that into the model. And like you said, unfortunately, premiums and value adds have come down. So that's a negative. But we don't provide necessarily a break-even per se or a breakout specifically around the aluminum business.

Okay. And then with respect to the pension and OPEB liability, I mean, the fact that that could be flat this year, despite what we're seeing, is pretty remarkable. And I realize that part of that is the benefit of the CARES Act. But since quarter ends, the S&P is up, I think, roughly 12%. So it seems like you're in a pretty healthy position, relatively speaking, from what I think a lot of us have thought. Could you look to do anything further with your pension in terms of annuitizations and As you get more proceeds from asset sales, are there other things you're looking at with regards to de-risking your pension exposure?

Yeah, so I'm glad you make the point. Just so I clarify my comments, because I think, as you pointed out, it's a pretty interesting perspective. So when we looked at the March end discount rate and when we looked at the March end asset return rate, And we all know that the first quarter on asset returns weren't great. And I believe our asset returns were about minus 7%. And then we factor in that we think we can make our expected return on assets for the last nine months of the year. So we need to earn a nine, I'm sorry, a 6% on the rest of the year assets, which if you consider how low they were at the end of March, it's probably viable. And we bake all that in and assume that discount rates don't change. The pension and OPEB liability would be pretty close to flat year over year. Now, clearly, in this very volatile market, returns are changing daily. Discount rates are changing by the minute. And so, you know, that's just a moment in time projection. But it gives you an indication of where our pension is. So could we do more? Yes, we have the opportunity to do more. annuitization. We consider it from time to time. And as you know, we've got a two to four year plan to get our adjusted net debt down to two to two and a half billion. And the way we're most likely going to do that is through the pension. So I guess to summarize my comments, the pension is a focus area for our company it has been since the first day we originated and we've continued to work it down and we'll be continued to work it going forward because it's part of of the capital allocation model that we've laid out pretty clearly and then just one follow-up um you said the pre-funding balance i think was 380 million post the 220 from cares act i was

of the understanding that you had a $500 million pre-funding from the debt deal you did in 2018. So is some of that pre-funding effectively being diluted by the CARES number, or can you just kind of update us on that? Thank you very much.

Yeah, so a little bit of the pre-funding was used during the course of the year to keep the pensions at the level that they're at. I just want to make it clear. The CARES Act allows us to defer any contributions into the U.S. pensions without using the pre-funding balance. So we will come into the year with, you know, not having made the pension contributions this year. We'll have to catch them up next year. But we will have our full $382 million pre-funding balance available to us. So as you look at next year, If we do choose to push out all of our pension contributions, the pension contributions next year are high, and we can use that pre-funding balance to offset much of the pension contributions next year.

Okay. Thank you very much. Appreciate it.

Our next question comes from Timna Tanners of Bank of America.

Please go ahead. Yeah, hey, good evening, and hope everyone's healthy and all right. Wanted to ask two questions. The first one is, you know, heading into this call, we were struck, our whole metals and mining team was struck with how aluminum was the one commodity, maybe, or the commodity with the least supply response. So you've taken a dent to that with the Entalco difficult decision. But I just wanted, first of all, if you could explain, remind us when you curtail, is that permanent or is that temporary, and how to think about that. And then In the same vein, do you expect other actions by other participants? Because it has been kind of striking how little supply response we've seen relative to other commodities.

Yeah, and thanks for the questions, Timna. I'll try and answer the best that I can. So in Talco, is a decision to temporarily curtail supply? So it doesn't mean or we don't mean to project forward and say whether it will return to operations or won't return to operations. What I will say is that when we make a curtailment decision, we do it not just with the current pricing in mind, but also looking forward a number of years. And so it's not necessarily just meant to represent the world as we see it right this very second. We need to look forward at least 12 to 18 months. And so when we then transition it over to a broader, what do we think is going to happen across the market? I'll be the first one to tell you that we certainly can't project or indicate where our competitors or what they're going to do. When we look at the facts as they sit today, and you see it with the 2.5 million tons of inventory that was put into place over the course of Q1, the fact is that we are in an oversupply situation. And you are seeing the price response, which I realize is very complex and not just supply and demand, but that is obviously the most important long-term aspect of it. It means that we're continuing to – we as an industry are producing more than is required by our customers. And so that would argue with basic economic theory that pricing is going to incentivize that we see curtailment. And when we look around the world, and as you can imagine, this moves pretty quickly, because as we saw, aluminum prices come down over these last couple weeks. It changes the dynamics inside of smelting. But as you look around at what's happening with pricing, both in China and the rest of the world, the fact is there's a pretty significant chunk of underwater capacity. And so you saw that in the presentation. I mentioned that it had changed over the course of these two weeks. But the fact is, the longer that we remain in oversupply conditions, the longer we build up inventories, the longer that the pricing issues could continue. Now, we do expect and hope that demand will come roaring back as some of the social distancing measures come off, some and all of those social distancing measures come off, or if we find a treatment or in the end, if we find a vaccination. So, I think there will be some demand response down the road. But certainly as we look at it today, there is an incentive because of pricing and because of this oversupply condition that will create a pretty serious issue if we don't see that supply response.

Gotcha. Thank you. And the other question I wanted to ask and hopefully just get a little more clarification on is the comments you made about the Castrol products premium. You know, obviously that will come down, but I just wanted to get a little more color about how long that could last, how that transition moves. Is it just a function of some of your higher-end applications for aluminum are not demanding as much, like auto and aerospace, for example, and therefore you're making more commodity grade because there is a demand there, and that just lasts as long as that condition lasts, or is there anything I'm missing?

So on that one, and let me hit it sort of qualitatively, and then Bill can jump in from a quantitative perspective. You have to divide it into two different pieces. There is the premium impact that we were seeing, and this is particularly on the cast product side. We were seeing already some pressure on premiums coming into 2020. COVID has exacerbated that to a certain extent because you've seen a pretty significant demand reduction. But you were already seeing those pressures because because of the short position in North America, because that Midwest premium had come up, even when you consider the fact that a lot of imported metal has to pay the duty. You saw a lot of metal come into North America specifically, and that created a long P1020 position and a long product position, which started to then have an impact on premiums and in the end on both Midwest and then product premiums. And something similar in Europe where you're seeing that the you saw more production come online than you had demand. So that is what essentially is driving some of the product premiums that you're seeing. Some of that will cure itself if you see real curtailment and you see those cast houses come down with the smelters as well. But it also means that that could last a bit longer than just when there are specific COVID impacts. I'd also remind you that in Europe, you typically are negotiating on a quarterly basis. And in the U.S., you're typically negotiating on the annual basis. However, there's a lot of distortions to that this year because you have some decisions being made around push-outs or force measures, et cetera.

And just if I can add, just real simply, Tim, I mean, you see it all over the place. Automotive manufacturers are taking curtailments. um you know just about everywhere our downstream customers uh took uh you know the better part of march and april off or shut down so what we're seeing is things like uh extruders not need billet um foundry alloys uh you know with the wheel manufacturers not needing foundry alloys so instead of making foundry alloys instead of making uh bill it, we're making commodity-grade aluminum, and we sell it to either traders or, you know, ultimately, if we need it to, you can sell it to the LME. But what that means is you're not earning that value at premium. And I think Roy had talked about a 20% decline second quarter to first quarter. So that's the impact of that.

Okay, great. Thanks a lot.

Thank you.

Our next question comes from Carlos D'Alba of Morgan Stanley. Please go ahead.

Hello. Good afternoon, everyone. So the first question is maybe, Bill, can you clarify on slide 16 the comments about linear working capital, the one time $75 to $100 million dollars? um personally this is for for this year we saw in the first quarter uh working capital change what was uh you know a drain to cash flow generation so can you maybe um give a little bit more color as to how you see these uh playing out throughout the year that'll be my first question sure so there's really really two things going on there carlos um you know just naturally with lower

aluminum prices and raw material prices, we should see our inventory values go down. So essentially what we're suggesting to you here is that if you look at the hard dollar days working capital at the end of 2019, which I believe is around $700 million, we're telling you, hey, we should be able to see a $75 to $100 million reduction off of that working capital level that we ended 2019. which results in a cash generation for the year. Now, we say that's one time because we don't know what we're going to do in 2021, but that ultimately ends up as a generation. So as I said, there's two things going on. One is just naturally working capital will come down with lower prices, assuming that lower prices stay where they're at the rest of this year. But on top of that, the new organization structure that we put in place is looking at our supply chain from end to end. Uh, so we are now, uh, you know, now that we've eliminated the business unit, we are looking at, uh, all the raw materials, all the work in progress, inventory, all the finished goods, inventory, all the receivables, all the payables from an end to end perspective with one organization. And they've been tasked with driving out working capital. So the combination of those two naturally lower prices, uh, and the tasks that they're doing should generate that 75 to a hundred million dollars. As you said, we're up in the first quarter. We're always up in the first quarter. It's a replenishment of the pipeline because we tend to see everything get drawn down in the fourth quarter. But we're signaling to you that we'll recover from that first quarter and get to a lower level in the fourth quarter, again, assuming the prices stay where they're at today.

Great. Thank you. And the second question is, other than the reduction in the natural reduction the cash regeneration and performance of the business is there any room for a co-op to reduce the contributions for uh to non non-controlling interest uh given what is going on in the market and in the economy yeah so so and i'll i'll address that one roy the the non-controlling interest carlos is very simple it's 40 of the awac joint venture

gets paid out to our partners. And so the cash flow implications of that is essentially the netting of any investments that we're doing on capital expenditures and the earnings that we make in that section. So there's really no, I should say, flexibility on our ability to pay NCI out to our partners. There's a defined cash management system We make eight dividend payments a year. And when I say we, AWACS makes eight dividend payments a year to Alcoa and to Illumina Limited. So there's very limited flexibility there, which, you know, from our perspective is fine. I mean, that's the way the joint venture was set up.

Right. Okay. And if I may squeeze one more, any comments that you can make on that? ongoing conversations without obviously giving the specifics on the asset sales front, given what is happening right now. Are you even able to engage potential buyers or all of this has been pushed out to when we return to some sort of normality?

So Roy, you want me to take that one too, since that's my area? Yeah, go ahead, Bill. Yeah. So, Carlos, it's a great question. We got Gum Springs done, right? And thankfully, we got Gum Springs done pre-COVID. We got a great value. Just to put it in perspective, Gum Springs, you know, has a value of $250 million. We got cash at $200 million. There's a contingency of another $50 million that will come over time. And recall, that's an entity that had negative EBITDA, right? So it had a minus 12 EBITDA. All right, so we'll take a victory lap real quick on Gum Spring. But as we look forward, yes, COVID-19 has made things go slower, right? And quite honestly, with the volatility in the market, they've made the asset sales a little bit more difficult. That doesn't mean we've let up at all. So we're continuing to push forward. But I would admit to you that things are going slower because, you know, I mean, you well know if you were to take an asset to market today, You can't even really have meetings. You can't have reviews of the assets. So things have gone a little bit slower.

All right. Thank you very much. Good luck, guys.

Thanks, Carlos.

Our next question comes from Chris Terry of Deutsche Bank. Please go ahead.

Hey, Roy and Bill. A couple of questions for me, hopefully short and sharp. Just wanted to start on slide 15. if I may, the $100 that you highlight in reduced production costs year on year, is that your forecast of what will be the benefit from lower raw materials, as in caustic, carbon, diesel, et cetera, or is that something you've achieved regardless of that and there's more potential cost cuts beyond that if raw materials decline from here? Thanks.

Yeah, I'll jump in. The $100 is not raw materials, Chris. The $100 is, when I say not raw materials, it's not the price of raw materials. If we use less cost, if we're smarter about carbon consumption, that counts towards the $100 million. But this is real blocking and tackling on taking costs out. It's productivity improvements. It's looking at MRO and services spent. And you should see this in two places on the bridge, right? You'll see it in the production cost section on the bridge. So when you see at the end of the year how we did against this, you'll see it in production costs. And you may see some of this benefit in volume. So, for instance, if we're able to make more tons with the same cost structure, with the same amount of people, we're getting productivity out of that. So you'll get a little bit of a benefit there. But it has nothing to do with lower raw material costs. You know, at this point, we would be projecting lower raw material costs on a year-over-year basis to be a couple hundred million dollars. So we are really picking up some of the benefits from the lower raw material costs versus what we saw last year. So that's around $200 million in lower raw material costs on a year-over-year basis.

And just to complement Bill's comments, you know, I think we had constructed this program prior to COVID. And of course, we had our pricing issues that don't seem like pricing issues anymore that were happening before COVID ever hit us. One of the things we're trying to do with the new operating model is be very clear about what is in fact in the control of our operations and our plant managers and department managers, et cetera. And so this target is very much looking towards driving improvements that can be sustainable and that are not just based off deferring maintenance, etc. And so it's exactly as Bill said, these are meant to be stuff that are absolutely in our control, that drive productivity, which is more production or lower costs in our plants. And so I can't stress it enough. We see our job as commodity producers to continue to drive our way down the cost curve, and we will We will go after every lever that we can, and we are trying to unleash all of the intelligence we have in our plants and the great workforces that we have to capture those for the long term.

Okay, thanks. That's clear. And then slide 16, quickly, just in terms of the 225, focusing on the run rate bucket, how can you split that up into what's inside the AWEP JV and what's not?

No, I don't think we're prepared to, Chris, at this point.

Okay. And the $100 million of CapEx, isn't some of that deferred? Or do you say that you've entirely saved that $100 million from your previous guidance?

Yeah, you know, maybe some of that will be deferred. We'll assess that going into next year. But, I mean, it's a good point to make. We're being pretty aggressive around lowering capital spending. And as Roy said, you know, we're putting on hold the return-seeking projects, given the market situation that we're in. And we're really aggressively going after the sustaining projects in order to drive cash this year.

Okay. And the last one, if I may, just to square a few different things you've said. So you've obviously pulled the total market outlook for the company, but you're retaining your own volume guidance and you haven't pulled that yourself. Is the methodology there just the part that you see visibility on? Because I was just surprised that You pull one but don't pull the other, given your acknowledgement that the market's oversupplied and further adjustments have to be made. Do you just wait until you've made those, if you make those, and then make the changes after that?

Yeah, I think that's how you should look at it, Chris. I mean, the fact is that if market conditions drive us to another curtailment, we will then modify whichever of the shipment forecasts that we've given you. So this is meant to look at our business as sort of a going concern with the portfolio that we have. It incorporates in Talco, shutting down in the third quarter into those numbers. And if we move to another, if we move to another curtailment, we'll incorporate it at that point.

Okay. That's it from me, guys. Thank you. Chris?

Our next question comes from Alex Hacking of Citi. Please go ahead.

Yeah, thanks, Roy and Bill, and good evening. I guess you mentioned in the slides that you're going to convert about 20% of your value-added sales to Inga. Is that a rough proxy for where you see U.S. and European alley demand right now? or, you know, that value-added sales is into certain segments that are being hit, you know, either worse or better than what you think the overall market is. So I guess anything that you have where you could kind of quantify where you see the different segments would be helpful. And I think also you mentioned earlier in your comments that construction demand was quite weak. Maybe you could follow up on that because, you know, some other – play as in the construction supply chain or say in that construction markets have remained relatively stronger. Thanks.

Yeah, so Alex, let me take a swing at those two. So from the 20% of value-added product sales, I think that is very much meant to be a look into second quarter. And it's specifically looking at second quarter because we typically are bringing in our, we have our actual sales orders come in somewhere between one, two, or three months before they actually materialize. And so at this point, you know, finding ourselves two-thirds of the way through the first month of the quarter, we have a pretty good insight into what's going to happen over the course of Q2. And so I'd say that it gives us visibility there. Now, when we start projecting forward, You know, depending on where that particular business is located and how it is deemed or how it chooses to start coming back as we start to get past some of the worst times around COVID-19, we would expect that to start to return. However, we just don't feel that we have the confidence to – we don't have the confidence to predict when that will be and exactly how quickly that recovery will be at this particular time. So look at that very much as a Q2 indicator, and then we will give you more information as we get down the path. On your question on construction, you know, I'd argue it's a very similar type of analysis. We really were looking at what are we seeing right now in our building and construction segments. And while I think that there is a push to get a lot of that restarted or to get back to more normal times, it does connect over with what we're seeing actually in our customer order book. And so from a Q2 perspective, we are seeing that there is some weakness inside construction, how much of that is using aluminum. And so that's sort of what we find right now, although we do hope that there is a recovery.

Okay, thanks. And then I guess one quick housekeeping question. I think last quarter you guided that bauxite EBITDA was going to be about 35 million lower. You did quite a bit better than that. Was that just FX or were there other factors there as well? Thanks.

Domination of FX and there was a A contract true-up that we alluded to where we sell bauxite during the course of the prior year, and then at the end of the year, you true-up for the actual tons that were mined because we're getting a royalty payment from one of our competitors. And that royalty payment ended up being – that true-up ended up being about $7 million. And so we didn't know that when we gave the guidance. So it's the combination of the strong USD and the true-up payment.

Thank you.

Our next question comes from Lucas Pipes of B. Riley. Please go ahead.

Hey, good evening, everyone. Hope everybody's doing all right. I have another question on the customer side. In terms of aerospace, roughly what percent of revenue is that kind of including value added and everything? And then just to follow kind of up on some of the earlier questions, what sectors – are stickier on the demand side? May it be packaging, for example? What percent of revenue is that? Thank you.

Yeah, let me answer the first question on aerospace, maybe a little bit different than you were asking. Aerospace is a very small percentage in looking at North America as an example of the larger world. It's sort of a 1% to 2% of the total aluminum demand. So I think there is value that sits inside of there for the downstream producers because these are pretty specialized alloys. But from an overall demand perspective of aluminum, it really isn't going to have a large impact. So it's not one of the key drivers. On the what sectors are stickier, you know, I think we're seeing – we're seeing the other sectors outside of building and construction and automotive being a lot stickier than what we're seeing inside of those two particularly. So the can business tends to be able to cope with this. And in fact, you're seeing an increase in demand year on year. And then when you look at how things like consumer durables, electrical overhead wires, et cetera, et cetera, I think the fact is that you're finding things to be relatively sticky. The next question, obviously, is how quickly do we see recovery and do you actually see some of that catch back up as some of the supply and production hiccups occur? And in that one, I don't think we've put an opinion out yet. So we'll have to see how that recovery continues.

And in terms of the percentage of revenue of the stickier parts of your customers? Roughly, what's the ballpark?

You know, I have to admit, Lucas, off the top of my head, I don't recall what the percent of revenue packaging is. We can revert back to you.

Yeah, that would be great. And then just a second question in terms of the international trade flows. Are you seeing any changes there? Appreciate your thoughts. It's something that's come up occasionally. It would be helpful to hear your thoughts on that.

Thank you. And, Lucas, is that in reference to anything specifically or just sort of general trade moving around the world?

General trade moving around the world.

Yeah. You know, I think what I would comment there is that there was a lot of concern about that with China being shut down, you'd see just a lot of issues around trade flows, and particularly when you're bringing in components from China into the rest of the world, North America and Europe. So I think all of a sudden, all of that became a lot of speculation as China starts to ramp back up again in the rest of the world, in U.S. and Europe in particular, where you're starting to see some of these COVID-related impacts. So I don't think we have data that outside of our markets that would be particularly helpful. I think when you look at bauxite, when you look at aluminum flows around the world, when we look at how our aluminum products are moving outside of the conversion to our value add products into commodity grade, which typically will go into either licensed or unlicensed warehouses, I don't think we've seen a lot of distortions outside of freight prices. We've not seen a lot of distortions to trade. Now, once you get into components and things like that, I think you'll need to be asking some of the downstream producers. But from our perspective, we still have materials that are flowing, and we do not have any serious risks on our horizon about getting raw materials into our plants either.

Very much appreciate all the color and best of luck during these challenging times. Thank you.

Yeah, thanks, Lucas.

Our next question comes from Partosh Mizra of Berenberg. Please go ahead.

Thank you. When you look at the aluminum futures curve these days and looking at the low interest rates, do you think this is an attractive market for commodity traders to put on some financing deals, either in China or outside China, similar to what happened in 08-09?

Yeah, to make that a very simple answer to what can be a complex question, the fact is we've seen that aluminum futures curve adapt to make sure that that warehousing play, that essentially that storing of metal, the contango, it essentially reasserts itself so that that is possible. And so whether you look at that as the forward price going up, which would be much less agreeable, the spot price coming down, The fact is we have never seen an environment that has lasted very long where you don't have an attractive trade on putting metal in the warehouses. So right now we simply don't see a bottleneck in that the banks or other traders are not willing to take that inventory on.

I see. And then just going back to BoxSight, is there any other comment you could provide with regard to pricing? as you see it, inbox site business for the rest of the year? Like, is there any other contract that is coming up for TrueUp in the next six to nine months?

Yeah, you know, a lot of our contracts tend to be longer dated, and we do have some spot cargos, and those spot cargos will get priced based on the prevailing market. But a lot of times those will be in places where they'll be closer to partner price at MRN or CBG, et cetera. And so it's a bit of a rarefied market. I think you're talking specifically about bauxite going into China, which is where you have most of the material going. You know, I think what you've seen in China is that you've seen domestic prices start to come down. And I think part of that is going to be the fact that aluminum refineries are – you had a good number of aluminum refineries in the first quarter. And now you're starting to see some of the logistical bottlenecks disappear inside of China. And so you've started to see that some pretty significant downsides in domestic pricing. That said, from an import bauxite price, I think it has made relatively steady. And in fact, one could argue that there might be some downside if there are linkages back over into the aluminum price, whether that is the Chinese or global aluminum price. But from our perspective, really, The pricing environment and the volume environment, we haven't seen a lot of distortions, even in Q1 because of COVID. So it's, for the most part, steady as she goes from an Alcoa realized price perspective.

Thanks, Ryan.

I appreciate the color. Yeah, thanks, Bartosz.

Our next question comes from John Tumazos, a private investor. Please go ahead.

Can you give us a flavor of what are some of the asset sales that might be possible six or 12 or 18 months out when things warm up a bit? Maybe the Point Comfort property in Texas is big and valuable, for example. And would you be a candidate for the federal bailout fund that's intended for airlines or other hard-hit industries? And are there any other federal initiatives that might be practical for Alcoa?

I think I'll try to take all those, John. As far as the asset sales go, we haven't announced specific assets and recall that we have a program that's 500 million to a billion and we've already done the 250. The one asset that is publicly for sale is the Rockdale land. And, you know, it has a list price of $250 million, and we've been working to sell that now for a while. So that is one of the assets that we have publicly said is for sale. As far as your comment around point comfort, yeah, there is value in some of these curtailed sites. And we actively try to maximize the value of those curtailed or closed sites. And in the case of Point Comfort, we've moved to closure, and so we'd be looking at opportunities to maximize value out of that facility. Your question around specifically federal bailout funds, the presentation that you see today is our best view of the opportunities that we have with the programs that have been put in place with the U.S. government. So some of the things that you're seeing in the presentation today, the deferral of the pension contribution is because of the CARES Act. Some of the deferral around some of the costs, specifically in hiring, traveling, other restrictions, we would be taking advantage of deferring FICA contributions. And that's, I think, all companies are doing that currently, and that just came out with one of the new, with the CARES Act also. So what you see today is our best view of what we think we can do with the existing programs. And as far as other programs or other opportunities, you know, I'm not aware of them. I don't know if that addresses your third question.

So we shouldn't think that there's 100 or 500 million loan potential the way that Boeing or General Motors or Ford or an airline might consider. Supposedly, it's like a half a trillion dollar fund.

Yeah, not to the best of our understanding at this point, John. These things evolve fairly quickly, but to the best of our understanding, we are taking advantage of what we can at this point.

Thank you.

Our last question will come from Andrew Cosgrove of Bloomberg Intelligence. Please go ahead.

Hi, gentlemen. Thanks for taking my question. Hope everybody's all right. Just real quick on Illumina. It came in quite a bit above where we kind of thought it would land, pricing, that is. I was just curious if you could elaborate a little bit if there were any kind of fixed costs or index lag associated with pricing in the first quarter.

No, nothing unusual. You know, I would say, again, Illumina segment gets a benefit from the stronger U.S. dollar. So, you see a little bit of that in the results, but nothing unusual on the revenue side.

Okay, great. Yeah. And then the next one was just around the pension. Again, I've kind of belabored at this point, but just to clarify. So next year, I believe the number was between 350 or 400 just on the base. So you have the 220 carryover. Are you saying that, is there a limit to the pre-funding balance you can use to apply against, I guess, that grand total? And then secondarily, Are you saying that the rate of return assumption and discount rate that you walked through before kind of holds? Are you saying that that would eliminate the 220 carryover? Or I'm just kind of curious how that all kind of shakes out.

Yeah, sorry. No, it doesn't eliminate the 220 carryover. So let me just parse my comments. The comments I was making around the pension and OPEB liability is purely from a balance sheet perspective. So you do all that math with the returns at the end of the year. If nothing were to change from March, we would be at the same balance sheet position, which is good, right? That's great news for us. As far as cash contributions, which are run under a very different calculation on pension contributions, the cash contributions, we would be deferring this year, and we don't have to use our pre-funding balance to defer this year. So the minimum required contributions of $220 million, we can push out into 2021. But as you alluded to, we've got, and I'll have the number in front of me, something like $350 to $400 million of pension contributions that we have to do in 2021. So at that point, if we choose, we can use our pre-funding balance to not make those contributions. And there is no limit to the amount of pre-funding balance that we can use in a particular year. The only limit that you have is that it's only there for the U.S. pensions. It's not there for the overseas pensions. But we could use the $380 million next year to offset the large-scale pension contributions that we're going to have because we're deferring this year.

Okay, great. Thank you so much. Yes, very clear. Thanks so much for clarifying. Stay safe.

This concludes our question and answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks.

Thank you, Andrea. And I'd like to thank everyone for your time today and for your questions. We're acting aggressively to improve Alcoa and make it through this uncertain time better and stronger. And as I said, I'm pleased that we were able to get started early to drive improved competitiveness for this company. and that we can build on that strong foundation. With that, we look forward to discussing our second quarter 2020 results in July. Please stay safe and healthy, everyone. Back to you, Andrea.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.