Alcoa Corporation (NYSE: AA) Q4 2020 earnings call dated Jan. 20, 2021
Good afternoon and welcome to the Alcoa Corporation Fourth Quarter 2020 Earnings Presentation and Conference Call. [Operator Instructions]
I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.
James Dwyer — Vice President of Investor Relations
Thank you and good day, everyone. I’m joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer and William Oplinger, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Roy and Bill.
As a reminder, today’s discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the Company’s actual results to differ materially from these statements are included in today’s presentation and in our SEC filings.
In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today’s presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website.
With that, here’s Roy.
Roy C. Harvey — President and Chief Executive Officer
Thank you, Jim, and thanks to everyone for joining this call today. Obviously, 2020 was a historic year with the world united in fighting through the challenges associated with the global pandemic. Throughout this turbulent time however we stayed true to our Alcoa values and accomplished much in an unprecedented year. We focused on our people, making sure we took every possible steps to protect our employees and contractors and to support the communities where we operate. Due to teamwork across Alcoa, we not only kept our operations running efficiently, we improved our processes and made our Company even stronger. Bill will discuss the specific financial results shortly, but it all culminated with a solid fourth quarter.
We had a higher sequential quarterly adjusted EBITDA and we also recognized quarterly improvement in revenue. Both prices and demand improved in the fourth quarter including for value-add aluminum products. And for the full year, we made significant progress in improving our cost structure with our multi-year strategy and we will highlight many of those achievements during this call today.
First, however, I would like to address safety. Despite so many accomplishments in 2020 and as reported last April, we sadly did not achieve our most important objective. A contracted worker died on February 10th after sustaining on-the-job injuries at our Pocos de Caldas facility in Brazil. This was an unacceptable tragedy and we’ll work to make sure it does not recur. This tragic accident demonstrates that we must be ever vigilant with our safety practices and must remain focused on each and every task at hand. Safety is embedded in the three Alcoa core values you see on the left hand of this slide. And those three simple values continue to guide us. In fact, our response to the pandemic demonstrated how a relentless commitment to these values can deliver positive impact. Not only did we sustain our operations, we also set annual production records in both our Bauxite and Alumina segments. In aluminum we continued to improve our cost structure and successfully completed the full restart of the ABI smelter in Becancour, Quebec and the curtailment of the Intalco smelter in Washington State. Together these two actions resulted in an $86 million improvement in EBITDA in 2020 over 2019.
Importantly 2020 was a year with significant accomplishments across Alcoa. We started the year with the full implementation of our new operating model, which reduced overhead costs and improved overall efficiency. Before we encountered the impacts of pandemic, we had already put in place aggressive targets for non-core asset sales over a 12 to 18 month period and year-over-year improvements for working capital and productivity in 2020. With the economic uncertainty created by this pandemic, we also implemented additional actions to generate and protect cash. We finished the year meeting those targets. We met our combined objective on working capital and productivity and our announced non-core asset sales put us at the top of our expected range. Those and other actions during the year helped us exceed our target of $900 million in cash actions.
In November 2020 we announced the divestiture of our single rolling mill located in Indiana at Warrick Operations in a $670 million transaction expected to close in March of this year. Finally, on this slide, our strategic priority to advance sustainably provides many new opportunities and we will talk later today about how we are leveraging our industry-leading performance to succeed in a marketplace expecting and demanding strong ESG performance.
So with that, Bill will now detail the results.
William F. Oplinger — Executive Vice President and Chief Financial Officer
Thanks, Roy. The 2020 fourth quarter saw revenues exceed third-quarter levels on stronger aluminum prices. Revenues were up $27 million compared to the prior quarter and lagged to the fourth quarter of 2019 by $44 million on lower alumina prices. Fourth quarter earnings improved versus both the third quarter and year-ago quarter either including or excluding special items. Special items in the fourth quarter of $53 million primarily related to the US pension lump sum settlements.
The net loss attributable to Alcoa Corporation improved $45 million to $4 million, up $0.24 per share and was $1.61 per share, better than the prior year. The adjusted net income of $49 million or $0.26 per share was $1.43 per share, better than the prior quarter and $0.57 per share higher than the prior-year fourth quarter. Also on an adjusted basis compared to the previous quarter, EBITDA, excluding special items, improved $77 million to $361 million and improved $15 million compared to the fourth quarter of 2019.
For the full year, revenues declined $1.1 billion to $9.3 billion on lower alumina and aluminum prices, while the net loss attributable to Alcoa improved $955 million to $170 million primarily due to lower restructuring charges. Adjusted net loss for full year 2020 was $215 million, down $31 million from 2019.
Let’s look closer at factors driving adjusted EBITDA in the fourth quarter. Adjusted EBITDA, excluding special items, increased $77 million in the fourth quarter with $39 million higher earnings in the segments and $40 million from favorable inter-segment eliminations. Overall favorable market price impacts totaled $92 million where higher metal and alumina prices were partially offset by a weaker US dollar. All other factors combined were unfavorable $15 million.
Energy costs were higher in smelters in Norway and Spain and in Brazil refineries. In price mix, lower CBG bauxite prices and unfavorable Alumina segment contract mix outweighed improved product mix in the Aluminum segment. Volume was unfavorable primarily due to lower CBG and [Indecipherable] third party bauxite shipments.
Production costs were up sequentially in the Aluminum segment where labor costs increased after summer holidays, increased pot relining and timing of maintenance activities and to work power plant outage and related costs. Production costs were also up slightly in Alumina on higher Bauxite freight costs and in Bauxite on maintenance timing. Other impacts totaled $54 million sequentially and reflect the impact of many of our strategic key actions. The Intalco curtailment contributed $10 million to EBITDA improvement and $12 million was related to the Section 232 tariff, refunds and reversals. Trading activities and equity earnings and non-operated mines in Bauxite contributed $21 million.
Moving to cash. Fourth quarter liquidity remained exceptional with $1.6 billion in cash on the balance sheet. Our year-over-year cash balance increased $728 million primarily due to the net proceeds of $736 million from our July debt issuance. Sequentially, our cash balance decreased $129 million. At the end of the full [Phonetic] we contributed $250 million to our US pension plans. That contribution made in late December instead of in early January saved us $6 million in pension related costs.
In 2020 sources of cash totaled $2.2 billion and uses of cash totaled $1.5 billion. Removing the debt proceeds of $736 million, year to date sources of cash were $1.5 billion with an $8 million of 2020 uses a reflection of solid operating performance and our successful $900 million cash actions program.
Given our substantial cash balance at year-end and the expected influx of cash on closing the Warrick rolling mill sale later this quarter, let’s review the framework that guides our capital allocation decisions. The capital allocation framework has three major components. First it starts with the target cash balance of $1 billion, which as our history has shown can be higher or lower than target based on market conditions. In 2020 it has been prudent to carry more cash than our target. Second, our next use of cash is to sustain and improve our existing operations with capital expenditures. Our 2020 capital expenditures totaled $353 million, but we expect an increase to roughly $425 million in 2021 as we increase return seeking capital spending on high return small projects and increase sustaining capital for major mine moves and residue management projects. Third, we expect to use excess cash to maximize value creation in four ways not listed in any priority order.
We target adjusted proportional net debt of $2 billion to $2.5 billion within the next three years. That target includes our pension and OPEB net liability and we believe it generates our optimal WACC. Returning cash to stockholders, we have a buyback authorization in place. Third, transforming the portfolio to lower cost to improve earnings through the cycle while improving its sustainability profile and investing in medium-sized value-creating projects. We will decide between these four options as we continue to review our cash balance and market conditions.
Now let’s look at other financial metrics. Full year 2020 free cash flow less non-controlling interest distributions was negative $142 million and includes our recent $250 million US pension funding. Working capital management has been solid. Days working capital improved four days year-over-year on lower inventories and higher payables and increased one day sequentially to 23 days due to higher receivables. Our key balance sheet metric proportional adjusted net debt in 2020 increased by $105 million to $3.5 billion, primarily a result of lower pension and OPEB discount rates. While our pension net liability remained at $1.5 billion, our OPEB liability increased to $900 million.
Turning to our $900 million cash actions program. Early in 2020, we announced a comprehensive cash program totaling $900 million. It was a successful cornerstone of our response to conserve cash during 2020 volatile market conditions and had three components. The first component was the 2020 cash impacts arising from our three key strategic actions announced in October of 2019. The new operating model saved roughly $45 million in overhead costs and our entire business benefited from increased operational and commercial focus. We sold the Gum Springs treatment facility for $250 million and received the first $200 million early this year with another $50 million to be received after certain conditions are met.
While we announced the sale of the Warrick rolling mill for $670 million, the cash of $587 million from the sale will be received at closing slated for the first quarter of this year. We completed the Intalco curtailment last quarter and saved $21 million.
The second component was the 2020 programs announced last February, comprised of lower production costs and working capital reduction together targeting $175 million to $200 million of improvements. Despite recent higher sales prices increasing receivables, we achieved $184 million of the target. Without the $82 million of higher working capital related to union actions in San Ciprian, we would have achieved $266 million in working capital and production cost improvements.
Third component was COVID-19 specific responses. We exceeded our reduction targets for capital expenditures and ARO and environmental spending by a combined $35 million and were within $5 millions of the target for other spending. While we had initially planned on taking advantage of the CARES Act by deferring pension contributions of $220 million to early January of 2021, we made a $250 million contribution late in December, which generated a $6 million refund of PBGC premiums.
Now let’s review the outlook for 2021. This outlook reflects an expected continued progression to less volatile and improved markets. As we’ve noted in recent quarters, our outlook could be impacted by changes in market conditions, especially impacts related to the ongoing COVID-19 pandemic. Also remember that the Warrick rolling mill has triggered held for sale accounting. So in the first quarter while the income statement treatment is unchanged, the Warrick rolling mill assets and liabilities are all classified as current assets and liabilities. Currently for 2021 we expect increased shipments in the Bauxite and Alumina segments and lower shipments in the Aluminum segment, primarily a result of the upcoming sale of the Warrick rolling mill and the completed Intalco curtailment.
For EBITDA impacts outside the segments, we expect transformation costs of $65 million higher than the cash conserving result in 2020. We expect other corporate costs to increase slightly to $120 million, partially due to currency impacts. Below the EBITDA line, we expect depreciation to increase to $675 million on capitalization of major projects. In currency movements the first quarter is expected to be roughly $15 million higher than the rest of the year. Non-operating pension and OPEB expense is expected to improve approximately $33 million in 2021 due to lower interest costs in the plan. With the current capital structure we expect interest expense to increase to approximately $165 million. Our operational tax rate was 130% last year with expense of $226 million. The expense and rate will vary with market conditions and jurisdictional tax profitability.
Reviewing some of the key cash items. We expect pension and OPEB funding to be approximately $315 million assuming no use of the available $500 million pre-funding balance. Return seeking capital expenditures will increase slightly to roughly $50 million, up from the $35 million in 2020. Sustaining capital expenditures at approximately $375 million reflect the large but infrequent mine moves and residue storage area projects occurring in the near term. Environmental and ARO spending is expected to rise to approximately $150 million, which represents a more normalized near term spend but higher than the COVID constraints 2020 actual spending.
Looking just at the first quarter, current metal and alumina prices are expected to drive EBITDA higher with some partial offsets. Sequentially, adjusted EBITDA in the Bauxite segment is expected to be $45 million lower due to lower internal bauxite pricing and an additional $25 million lower due to lower earnings from minority owned mines and non-recurrence of favorable revenue true-ups in the fourth quarter of 2020. The Alumina segment will see the offsetting benefit of $45 million from lower bauxite internal prices, partially offset by $15 million of higher energy costs and seasonal maintenance costs.
In the Aluminum segment alumina costs are expected to be $20 million higher sequentially. Other items, excluding metal prices and currency, are expected to be unfavorable $10 million sequentially. As a result of our portfolio changes, we have reduced the inter-segment elimination sensitivity for a $10 per ton change in API by $1 million to a range of $7 million to $9 million. In the first quarter, we also expect related changes in inter-segment inventory volumes and margins to add an additional $10 million sequential benefit to the inter-segment eliminations. And our annual adjusted EBITDA sensitivity is found in the appendix have also been updated but assume full operation of San Ciprian smelter, which is currently not making sales due to the strike. Approximately 50,000 tons of San Ciprian metal did not ship in the fourth quarter. In addition, based on expectations of recent improved pricing driving higher pre-tax earnings, the Company expects first quarter 2021 operational tax expense to increase to approximately $65 million.
With that let me turn it back to Roy.
Roy C. Harvey — President and Chief Executive Officer
Thanks, Bill. As we turn to our markets in the fourth quarter, we saw strong improvement in prices for both alumina and aluminum each rebounding due to stronger demand and finishing near their 2020 peaks that were well above the lows in April. A broad recovery in the markets from COVID-19 impacts, particularly in China, supported the resurgence in the fourth quarter in aluminum demand with the price rally reinforced by a weakening US dollar as prices ended 2020 higher than a year earlier. In December of 2020, less than 5% of global smelting and refining capacity was cash negative.
The recovery in global aluminum demand has been driven by a few notable items. First the reestablishment of more normal operating conditions due to reductions in COVID-19 infections in certain jurisdictions, particularly in China. Next, the ability of global manufacturers to mitigate the risks from the pandemic and continue operation. Also monetary and fiscal stimulus programs have accelerated stronger demand in aluminum’s end-use market and that effect is expected to continue.
Now looking ahead to our outlook for global aluminum consumption in 2021. In China where 2020 consumption exceeded 2019 levels, we expect consumption to grow again this year by about 5% year-on-year. In the world, ex-China where consumption contracted in 2020 we expect 2021 consumption to grow by about 10% year-on-year. This would be only the second time we have seen double-digit growth in the past 20 years.
Globally, 2021 consumption is expected to grow by about 7%, the highest global growth rate since 2014. The speed of recovery from COVID-19 and the impact of additional stimulus measures will be key drivers in achieving this growth rate. At the same time, 2021 smelting supply growth led by China is projected to be lower than demand growth. As a result, the global primary aluminum market should be closer to balance this year.
Now turning to Alcoa’s own commercial performance. In Bauxite increased volume in the fourth quarter offset quarter-on-quarter price decreases. In 2021, we expect third party bauxite shipments to increase as we continue to boost production. In alumina in the fourth quarter API pricing edged higher quarter-on-quarter. We expect our smelter grade alumina shipments to remain stable in 2021.
Finally, in Aluminum, as we mentioned in both the second and third quarters, sales of value-add products were negatively impacted from the pandemic with the second quarter as the low point. After the 11% sequential improvement in the third quarter, we saw an additional 13% volume growth in the fourth quarter, particularly due to the automotive sector.
In 2021 with demand continuing to improve and considering the impact from portfolio changes, we expect our value-add product volumes to represent almost half of our third-party shipment and to grow approximately 5% year-on-year. While uncertainty remains, we see clear signs that give us confidence that demand in our markets is recovering. As I mentioned earlier, we are making significant progress in strengthening our Company. We are creating a cycle proved set of assets driving for continued improvement in our three segments and leveraging our existing sustainability advantages. As Bill discussed in his remarks, we exceeded our target for cash actions in 2020 and that included the items highlighted on the graphic.
First, in October of 2019 we launched a multi-year strategy that included three key strategic actions. We implemented a new operating model that reduced overhead expenses and brought decision-making closer to our location. That was fully implemented in 2020 and has brought cost saving and improved operational and commercial performance. We announced our intention to generate between $500 million and $1 billion to the sale of non-core assets during the 12 to 18-month period. With the sale of Gum Springs completed in early 2020 and the announced sale of the Warrick rolling mill, we’ve met this objective and will close this program near the top end of this range. Still, we will continue to evaluate additional opportunities for the sale of non-core assets, determining whether such decisions bring value for our Company and are in accordance with our strategy. We continue to progress in our five-year review of our production assets that includes a range of potential outcomes for these facilities, significantly improved competitive positioning, curtailment closure or divestiture. The review includes 4 million metric tons of global refining capacity of which 2.3 million metric tons has been permanently closed since the announced review. In smelting the review includes 1.5 million metric tons of capacity and the Intalco curtailment reduced that goal by 230,000 metric tons.
Second, through the 2020 programs we implemented improvements that resulted in leaner working capital and improved productivity gain. The benefits from those process improvement will carry forward and help us in 2021 and beyond. And third, we implemented in 2020 specific actions to generate and protect cash during the volatile market conditions from COVID-19. I’m very proud of the contribution of all Alcoains [Phonetic] in making these accomplishments possible.
Next, as we move into 2021 we have some near-term actions on our radar. We expect to successfully close the sale of the Warrick rolling mill, which includes separating the assets that will belong to Kaiser Aluminum from the smelter in the power plant that we will continue to own. We will continue to seek resolution to the ongoing situation with the San Ciprian aluminum smelter in Spain. We are continuing to examine alternatives, including a potential sale of the smelter to a state-owned company.
Next, we are working on options for the Portland aluminum smelter in the State of Victoria in Eastern Australia, which faces challenges from a difficult energy environment. To find a long-term workable solution there are two key requirements, an internationally competitive power price, including generation and transmission fees and flexibility to manage the continued risks of grid instabilities. We are encouraged by positive engagement with stakeholders in Australia, including the federal and Victorian Government and energy generators. All of this work positions each of our segments for an even brighter future, driving improvements in our cost position and demonstrating our differentiated approach to sustainability across our entire value chain.
In our Bauxite segment we will defend our first quartile cost curve position while we continue to leverage our sustainable mining practices, including world-class rehabilitation and working with our communities. In our Aluminum segment we will also defend our first quartile cost curve position and our rank as the lowest carbon intensity producer globally.
As the largest third-party provider of aluminum, we will continue to lead on sustainability, such as in the reduction of water and land use and in our marketing of the world’s first ever and only low-carbon alumina brand EcoSource. And in our Aluminum segment, we will drive to a first quartile cost curve position and through our five-year portfolio review, we expect to have the lowest carbon emissions per ton of global aluminum producers. This requires an increase of renewable electricity from 73% currently through a projected 85% of our energy consumption.
As you can see, the right financial decisions will also lead us to a best-in-class sustainability position. I’d like to explore how we believe these changes can drive value for the long term. As a pure play aluminum company active in all segments of upstream production, we have a unique opportunity to define what it means to be sustainable in the aluminum industry. We are positioned well to supply sustainably produced products and to differentiate ourselves from other producers. We’ve always been a recognized leader in sustainability. For example, we have been named every year to the Annual Dow Jones Sustainability Indices. And in 2020, we continued to certify additional operating asset to the Aluminum Stewardship Initiative, the industry’s most comprehensive third-party validation of responsible production. We have earned ASI certification in all three of our product segments, bauxite, alumina and aluminum.
As we move forward we’ve identified three key value drivers in our sustainability strategy. First on sustaining operation. Alcoa has a comprehensive set of mining practices serving as a blueprint on how to operate responsibly in areas with important biodiversity such as the jarrah forest of Southwest Australia and the Amazon rainforest of Brazil.
In the jarrah forest we identified species of conservation significant avoiding critical habitat and adapting mine plan to minimize disturbance. At [Indecipherable] we use comprehensive forestry techniques to ensure that the rich and fragile ecosystem of the Amazon has returned as close as possible to its original status.
Our reputational expertise and strong management system, which includes proactive engagement with our communities, is an advantage when renewing existing permit, expanding our mine or considering future growth opportunities.
In the middle of this chart, we show how we actively work to mitigate risks to our business. From a climate perspective we have acknowledged the scientific evidence of climate change and we have clear targets to further reduce our corporate wide emission. We are also working to minimize costs associated with mine rehabilitation, while continuing to demonstrate best-in-class technologies, including the full implementation of the global industry standard on tailings management, which was developed in 2020 by a multi-disciplinary panel, including the International Council on Metals and Mining [Phonetic], of which we are members. While the global standard is now in place for impairment, we’re also working to reduce the amount of material that needs to be stored through opportunities for reuse. In late 2020, for example, we became a member of a four-year project that will work to transform bauxite residue into a reactive material suitable for new low-carbon cement products. The project includes 20 partners from across 12 European countries with support from the European Commission. In parallel, our teams are working with the International Aluminum Institute to identify potential pathways for the adoption of bauxite residue in cement production and use.
For water we have established targets to reduce its use in scarce regions. For example, we’ve now installed press filtration technology at the Kwinana and Pinjarra refineries in Western Australia. Together, they have the capability to reduce freshwater used by approximately 2.2 gigaliters with more than 500 million gallons annually.
Also, we continue to focus on lowering costs and driving efficiency, including through digital solutions. Last year we established an operations group focused on digital transformation as part of our continuous improvement program. This group is working to make operations safer, cleaner, less physically demanding and more productive with everything from drones, remote sensing and machine vision. Just one example includes our work on digital twins which involves continuously copying data from our real world processes and then using models to demonstrate recommended performance improvement. In the Western Australia refineries, the digital twin work has already helped to optimize real-time gases. In 2020 alone it has generated $1 million in savings while progressing us toward our sustainability goals. All of this work, of course, helps drive our third point of improving profitability over the long term. We believe we can leverage our existing sustainability platform to innovate and grow our family of products. Put simply, demand for sustainable products is increasing. Our existing Sustana family of products is the most comprehensive in our industry. Across our segment, we continue to partner with customers who want to reduce their carbon footprint and work with companies like Alcoa that demonstrates a commitment to sustainability.
We are also innovators. In aluminum we invented the technology behind ELYSIS, a revolutionary breakthrough smelting process that redesign the traditional process for electrolysis. It eliminates all direct greenhouse gas emissions and mix pure oxygen as a byproduct. Plus it shows the promise of improving both production costs and output when compared to a same size smelting well.
As part of this joint venture company, we’re working to commercialize this technology over the next few years. So it can be license for either retrofit, for existing smelters or the construction of new one. We’re making progress. In December ELYSIS announced the completion of construction on its new R&D center in Quebec. It will further advance the work first discovered at our Alcoa technical center outside of Pittsburgh, which will continue to play an important development role.
In closing, I want to step back and reinforce a few important points. I opened today with our values and I’m closing by highlighting our three strategic priorities. They have provided a roadmap as we steer this Company in accordance with our value. In a commodity environment, we consistently work to be low cost and that entails reducing complexity. Our priority to drive returns includes plans to improve margins across our products. And finally, we intend to advance sustainably in all aspects of our business, economically, environmentally and socially. My final key point today aligns with our values and our priorities.
First, during the COVID-19 pandemic we kept our operations running and running well. Despite the challenges from a tumultuous year we were able to achieve results beyond expectation and we will continue to focus on keeping our operations safe, following all health-based protocols.
Second, I’m proud of the team work in 2020 that allowed Alcoa to not just stand up in the face of adversity but to move this Company forward during such a challenging time and in accordance with our strategy. We met many goals last year, cash management, non-core asset sales, working capital and productivity. All of this and more will improve this Company for the long term.
Finally, as the world begins to emerge from the current health crisis, we are well positioned to meet the demands of improving markets. Alcoa represents the element of possibility. And I’m excited about the opportunities our Company will capture ahead to serve our market, our customers and the world.
Thank you for your time today. Bill and I look forward to your questions.
We are still processing the Q&A portion of the conference call. We will be updating it as soon as we analyze and process the con call. Stay tuned here for more updates.