Alcoa : First Quarter 2025 Transcript
AA
Alcoa Corporation
First Quarter 2025 Earnings Presentation and Conference Call
April 16, 2025, 5:00 PM EDT
CORPORATE PARTICIPANTS
William Oplinger - President and Chief Executive Officer
Molly Beerman - Executive Vice President and Chief Financial Officer Louis Langlois - Senior Vice President, Treasury and Capital Markets
OTHER PARTICIPANTS
Timna Tanners - Analyst, Wolfe Research LLC
Bill Peterson - Analyst, JPMorgan Securities LLC
Chris LaFemina - Analyst, B. Riley Securities, Inc.
Nick Giles - Analyst, B. Riley Securities, Inc.
Carlos de Alba - Analyst, Morgan Stanley & Co. LLC
Daniel Major - Analyst, UBS Securities
Katja Jancic - Analyst, BMO Capital Markets Corp
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PRESENTATION
Operator
Good afternoon and welcome to the Alcoa Corporation First Quarter 2025
Earnings Presentation and Conference Call. All participants will be in listen-
only mode. [Operator Instructions] After today's presentation, there will be
an opportunity to ask questions. [Operator Instructions] Please note this
event is being recorded.
I would now like to turn the conference over to Louis Langlois, Senior Vice
President of Treasury and Capital Markets. Please go ahead.
Louis Langlois
Thank you, and good day everyone. I'm joined today by William Oplinger,
Alcoa Corporation President and Chief Executive Officer, and Molly
Beerman, Executive Vice President and Chief Financial Officer. We will
take your questions after comments by Bill and Molly.
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. For historical non-GAAP financial measures, reconciliations
to the most directly comparable GAAP financial measures can be found in
the appendix to today's presentation. We have not presented quantitative
reconciliations of certain forward-looking non-GAAP financial measures for
reasons noted on this slide. Any reference in our discussion today to
EBITDA means Adjusted EBITDA.
Finally, as previously announced, the earnings press release and slide
presentation are available on our website.
Now I'd like to turn over the call to Bill.
William Oplinger
Thank you, Louis, and welcome everyone to our first quarter 2025
earnings conference call.
Alcoa had strong first quarter financial and production results. We
maintained a fast pace of execution on our priorities despite economic
uncertainty, while progressing operational excellence through safety,
stability, and continuous improvement. Underlying the strength of our
performance were positive market conditions.
Let's start with safety. First and foremost, a strong safety culture supports
operational excellence. We had no fatal or serious injuries in the first
quarter, and we continued to improve our safety performance. Operational
stability is evidenced by solid production, where the majority of our
operations improved sequentially on a tonnes per day basis. We also
continued to improve stability at the Alumar smelter in Brazil, currently
operating at approximately 91% percent capacity.
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We completed a $1B debt offering in Australia, using most of the proceeds
to repay existing debt. The new debt has extended the maturities at a lower
after-tax interest expense than our previously outstanding debt.
Lastly, we formed a joint venture with Ignis EQT for our San Ciprian
operations and are now resuming production at the smelter, in accordance
with the viability agreement.
Now I'll turn it over to Molly, to take us through the strong financial results.
Molly Beerman
Thank you, Bill.
Revenue was down 3 percent sequentially to $3.4 billion.
In the Alumina segment, third-party revenue decreased 8 percent on lower
average realized third-party price and lower shipments, due to timing and
decreased trading.
In the Aluminum segment, third-party revenue was flat due to an increase
in the average realized third-party price offset by lower shipments in the
first quarter after strong sales in the fourth quarter of 2024.
First quarter net income attributable to Alcoa was $548 million versus the
prior quarter of $202 million, with earnings per common share more than
doubling to $2.07 per share. The sequential improvement reflects
increased aluminum prices and lower intersegment profit elimination,
partially offset by increased alumina costs and tariffs on our Canadian
aluminum imported into the United States for U.S. customers.
On an adjusted basis, net income attributable to Alcoa was $568 million, or
$2.15 per share.
Adjusted EBITDA increased $178 million to $855 million.
Let's look at the key drivers of EBITDA. First quarter Adjusted EBITDA
reflects higher aluminum prices and lower intersegment profit elimination
which more than offset lower alumina prices. Lower volume, increases in
raw material and energy prices, and higher production costs were more
than offset by improvements in price/mix and other costs. Lower volume
in the first quarter was expected after a strong fourth quarter shipping
schedule, mainly alumina from our Australian refineries. Other costs
primarily relate to intersegment eliminations.
The Alumina segment Adjusted EBITDA decreased $52 million primarily
due to lower alumina prices, lower volume and unfavorable currency
impacts, only partially offset by favorable production costs and other costs.
The Aluminum segment Adjusted EBITDA decreased $60 million with
higher metal prices and favorable currency more than offset by higher
alumina costs, and higher production, energy, raw material, and other
costs. Included in other costs are approximately $20 million for U.S.
Section 232 tariffs of 25% on aluminum imports from Canada which
became effective on March 12th.
Outside the segments, other corporate cost decreased and the
intersegment elimination expense decreased as expected, with
significantly lower average alumina price requiring less inventory profit
elimination.
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Moving on to cash flow activities for the first quarter. We ended the first quarter with cash of $1.2 billion. Strong EBITDA led to positive cash from operations in the first quarter, despite high consumption of cash for working capital build which is typical in our first quarter periods.
Working capital increased as inventories in both segments rose: in Alumina on higher raw material price and volumes, and in Aluminum on timing of raw material and aluminum shipments. Accounts payable decreased following elevated alumina trading payables in the fourth quarter.
In the first quarter, we progressed our objective to reposition debt and de- lever with the issuance of $1 billion of debt in Australia and the tender of $890 million related to our outstanding 2027 and 2028 Notes. It is our intention to continue to de-lever with an initial focus on the remainder of the 2027 Notes.
Moving on to other key financial metrics. The year to date return on equity was positive at 39.1%. Days working capital increased 13 days sequentially to 47 days, the same level year over year but elevated from our year end 2024 level. Our first quarter dividend added $26 million to stockholder capital returns.
We had positive free cash flow plus net noncontrolling interest contributions for the quarter, which includes the 25 million euro contribution from IGNIS EQT related to the San Ciprian joint venture formation.
Proceeds from the debt issuance in Australia, less debt tendered, added $95 million to the ending cash balance of $1.2 billion.
As we turn to the next slide, we would like to share an update on our capital allocation targets. Our overall capital allocation framework remains unchanged. It starts with maintaining a strong balance sheet throughout the cycles, and sufficiently funding our operations to sustain and improve them.
The optimal capital structure for our Company is reached when investment grade leverage metrics are achieved reducing our WACC and creating value for our stockholders through a higher company valuation, lower cost of financing and improved project viability. We want to maintain investment grade leverage metrics throughout all business cycles, not only at the mid or top part of the cycle.
Based on this, we first defined a target for adjusted debt, which includes pension and OPEB liabilities. This target is $2.1 to $2.5 billion. Then, considering our historical use rate of cash, we target a cash balance between $1 and $1.5 billion.
Netting the cash with the adjusted debt results in our targeted range of adjusted net debt of $1 to $1.5 billion. We believe this range fits our profile and anticipated use of leverage as a company.
I want to clarify that we are not committing to receiving and/or maintaining investment grade credit ratings. The credit ratings are assessed by the rating agencies. We want to maintain the flexibility to raise additional debt for strategic opportunities at any point in the cycle.
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Our adjusted net debt was $2.1 billion at the end of the first quarter. As we
get closer to the $1 to $1.5 billion dollar target, we will look at all of our
capital allocation priorities, including cash returns to stockholders, in
parallel to paying down debt.
Turning to the outlook. We have one adjustment to our full year outlook.
We are updating depreciation expense from $640 to $620 million due
primarily to favorable currency impacts.
For the second quarter of 2025, In the Alumina segment, we expect to
maintain the strong level of performance delivered in the first quarter.
In the Aluminum segment, we expect performance to be unfavorable by
approximately $105 million due to U.S. Section 232 tariff costs on imports
of our Canadian aluminum, increasing approximately $90 million
sequentially, as well as operating costs associated with the restart of the
San Ciprian smelter of approximately $15 million.
While the lower average price of alumina will decrease overall Alcoa
Adjusted EBITDA, alumina cost in the Aluminum segment is expected to
be favorable by $165 million.
For intersegment eliminations, with the current market volatility, we
recommend that you use the low end of the sensitivity range in your
models.
Below EBITDA, within Other expenses, equity investment losses are
expected to increase by $10 million in the second quarter. The first quarter
included favorable impacts of $20 million due to foreign currency gains,
which may not recur. Based on last week's pricing, we expect second
quarter operational tax to be a benefit of $50 to $60 million, which includes
timing and catchup adjustments related to lower alumina prices.
In the Appendix to the earnings materials, you will see that our Midwest
paid and Midwest unpaid premium sensitivities have been updated to
reflect the expected trade flows as a result of tariff impacts. We also
revised our regional premium distribution for your reference.
The updates to the Midwest premiums do not include the cost component
of the tariffs. There is a new column on the sensitivity slide for the tariff cost
impact which will appear in the Other bar of our EBITDA bridge. Since the
second quarter will be the first full quarter of tariffs, you should consider a
quarterly tariff cost of approximately $105 million as a baseline, calculated
based on an LME of $2,400 and Midwest premium of $0.39 per pound.
We will update our sensitivities as needed if our trade flows adjust to the
tariff structure.
Now I'll turn it back to Bill.
William Oplinger
Thanks Molly.
Let me take the opportunity to speak to the current status of U.S. tariffs
applicable to the aluminum industry from Alcoa's perspective.
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While the U.S. Section 232 tariff structure has been in place for some time, in March the tariff increased from 10% to 25% and the exemption for Canadian metal imported into the U.S. was removed. This is the most material impact to Alcoa, as approximately 70% of our aluminum produced in Canada is destined for U.S. customers, and is now subject to 25% tariff cost which totals an estimated $400 to $425 million annually. Of course, there is a higher Midwest premium which offsets some of this cost, and certainly benefits our U.S. smelters, but currently the net annual result is approximately $100 million negative for our business.
Next are the IEEPA tariffs on imports from Canada, Mexico and China. Since our aluminum products and the majority of our input materials from Canada and Mexico qualify under the USMCA provisions, Alcoa does not have a significant impact from this tariff at this time.
The reciprocal tariffs specifically exclude Canada and Mexico, as well as aluminum products already subject to Section 232 tariffs, so no impact on Alcoa's aluminum sales. While alumina and other raw materials are excluded from the reciprocal tariffs, there is a portion of our input materials provided by Chinese suppliers that is now subject to the high reciprocal tariff. We expect these tariffs will increase our input cost by $10M to $15M annually as there are no suitable replacement suppliers.
In 2024, the U.S. imported approximately 4.2 million metric tonnes of primary aluminum, with imports of Canadian aluminum representing approximately 70%, or 2.9 million metric tonnes.
The four operating smelters in the U.S. produce 700 thousand metric tonnes of aluminum each year. If all idled smelting capacity in the U.S. would restart, which is approximately 600 thousand metric tonnes, the U.S. would still be short by 3.6 million metric tonnes.
It takes many years to build a new smelter, and at least 5 to 6 smelters would be required to address the U.S. demand for primary aluminum. These new smelters would require additional energy production equivalent to almost 7 new nuclear reactors or more than 10 Hoover Dams.
Until additional smelting capacity is built in the U.S, the most efficient aluminum supply chain is Canadian aluminum flowing into the U.S. That being said, our global smelting portfolio and commercial experience gives us options to shift metal supply as needed if trade policies and economics warrant.
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We have operated for more than 135 years in the aluminum industry. Building on our experience, we will continue our engagement efforts with the U.S. government and policy makers to advocate for the best outcome possible.
Now let's discuss our markets. In alumina, after reaching an all-time high in the fourth quarter of 2024, alumina prices declined in the first quarter of 2025. This was due to relatively higher liquidity, mainly driven by the Chinese refinery ramp-ups and normalized production outside China following several disruptions last year, as well as more recent alumina price declines on softened sentiment given global market uncertainty.
Though the market has resolved most of the issues leading to its tightness in 2024, there is still uncertainty about the timing of the planned refinery ramp ups in Indonesia and India this year. With bauxite prices remaining relatively high, and the current lower alumina price, we estimate that over 80% of Chinese refineries are unprofitable. Additionally, a recent announcement by the Chinese government stated that there would be higher scrutiny on new alumina projects regarding air pollution control, bauxite sourcing and red mud processing, which could bring additional constraints on growth in Chinese alumina production and may accelerate curtailments.
This is a dynamic market and Alcoa's global network of refineries provides security of supply of alumina both to Alcoa smelters and our major customers, which are primarily in the Middle East.
A final point to highlight here is the opportunity we had in the first quarter to capitalize on the tightness in the bauxite market. With the high prices in the first quarter, we participated in the spot market to capture benefits for some volumes from our joint venture in Guinea.
Let's move on to aluminum. The LME aluminum price was generally resilient in the first quarter, even with the decreasing alumina price. With tariff announcements earlier this month, the LME responded by turning lower reflecting the uncertainty of the impact of tariffs on the global economy and aluminum market.
While the Midwest premium increased with the introduction of tariffs, it has not reached the $880 to $990 level which analysts predict supports shipments from any region to the U.S. The logistics still favor shipments from Canada to the U.S. compared to other potential major suppliers. In our view, the Midwest premium has not fully responded due to uncertain market sentiment, as well as inventory build in the U.S. ahead of the tariffs. The depletion of these inventories should trigger some upward response.
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Despite the uncertainty caused by the U.S. tariffs, there were some supportive signs on the demand side in the first quarter, namely the Chinese stimulus and European fiscal loosening. Aluminum supply growth in the first quarter was very limited as smelter ramp ups were offset by the effect of closures that took place at the end of last year.
In North America, our aluminum value add product shipment volumes increased both sequentially and year over year, with healthy demand for slab, billet and rod. However, it is difficult to say whether our customers were anticipating tariffs and therefore buying in advance. In Europe, there were slightly lower VAP volumes in the first quarter compared to the fourth quarter but up year over year with strong demand for rod and slab, and billet demand finally improving. For both regions we saw the negative impact of tariffs in our foundry order book, which is closely tied with the automotive market and faces the largest amount of uncertainty from the tariff impacts.
Turning to Spain. We recently announced the formation of the joint venture with IGNIS EQT to support the continued operation of the San Ciprian complex. The idled smelting capacity is now being restarted to meet our obligation under the viability agreement, which was signed with our workforce when we curtailed the smelter in 2021 due to exorbitant energy prices. We are now focused on safely restarting the idled capacity.
We will focus on repeating the strong operational results delivered in the first quarter. However, we are now adding the challenge of navigating uncertainty in our markets.
It is a good time to consider the actions we've taken both recently and in the past to be well-positioned to address adversity and capture opportunities. As a pure play aluminum company, vertically integrated from mine to metal, with a global footprint and a cost-effective portfolio of assets, Alcoa has the ability to maneuver and respond to challenging and changing markets and policies.
Security of supply, through long-term contracts, is valued by our customers. We also have the most comprehensive low-carbon products portfolio in the aluminum industry, to meet customer needs.
The company has a significant cash balance and a strong capital structure, with no near term debt maturities or other obligations requiring significant cash outlays beyond normal operations.
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We have taken strategic actions that strengthen the company over time,
including the recent acquisition of Alumina Limited and the announcement
of the sale of the Ma'aden joint venture, which is expected to close in the
second quarter. We have a track record of monetizing non-core assets,
including transformation sites, which drive value for our stockholders. We
also executed initiatives to be more cost effective, as demonstrated by
over delivering on our $645M profitability program last year.
These competitive advantages and actions support Alcoa's resilience. In
summary as we close out the presentation, Alcoa had a strong first
quarter, with improved safety and stable production. As a Company, we
made good progress on strategic actions.
Looking ahead, we plan to maintain a fast pace of execution on our 2025
key areas of focus and strategic initiatives, improve the competitiveness of
our operations, and navigate market challenges to deliver value to our
stockholders.
Operator, let's start the question and answer portion of the session.
Operator
We will now begin the question-and-answer session. [Operator
Instructions] Our first question today is from Timna Tanners with Wolfe
Research. Please go ahead.
Timna Tanners
Yeah. Good evening. Hope you're all well. Wanted to ask a little bit more
about the tariff math, if we could. I know that we heard from Molly $105
million quarterly hit and then I heard another $100 million from Bill. I just
want to make sure I understood the distinction there. And I know that in the
past, Molly had talked about tens of millions of impact. I think that was
assuming a higher Midwest premium, but just was hoping for a bit more
clarification, please.
Molly Beerman
Hi, Timna. So, the first $100 million that we talked about, the negative $100
million to our overall business, that is when you consider we are getting a
higher Midwest premium on our U.S. tonnes. That brings a value of about
$95 million. We'll also get a higher value within our Canadian metal sales
into the U.S., that's $222 million. But going against that is the $400 million
that Bill spoke of, the cost of the Canadian tariffs. So, that nets to the $100
million and that's for the year. So, that is a net number, the revenue
considered against the tariff cost.
When I spoke of the $105 million, that is a quarterly figure. That $105 million
is calculated based on an LME of $2,400 and the Midwest premium of
$0.39 and those are the same assumptions that are in the first $100 million
for the company as a whole.
When we spoke, Timna, about the impact earlier, we were using different
Midwest premium assumptions. We had expected that the Midwest
premium would respond more quickly. It is not. It is still down from what we
would hope.
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We see that because of the negative sentiment in the market, as well as
the fact that some tonnes did get stockpiled in inventory in the U.S. ahead
of the tariffs and until that stockpile depletes, we don't have the impetus for
price pressure up.
Timna Tanners
Understood. That's helpful. And then my follow-up on tariffs again would be
any updated thoughts on the stickiness of these tariffs and if sticky, do you
think about restarting Warrick and what timeframe? Thanks a lot.
William Oplinger
Hi, Timna. Thanks for the question. It's hard to make a restart decision
based on a tariff that can change and I really can't comment on the
stickiness because we've seen the volatility of discussions around the
tariffs over the last 60 days. So, we just don't know whether they will stick
and we wouldn't necessarily make a decision to restart capacity simply
based on tariffs just because they can change.
Timna Tanners
Understood. Thanks again.
Operator
The next question is from Bill Peterson with JPMorgan. Please go ahead.
Bill Peterson
Yeah, hi. Good afternoon and thanks for taking the questions. Maybe
following up on the tariffs a bit, so you talk about engaging with
governments, policymakers, U.S. and abroad, but can you provide, I guess,
additional color on the level of engagement, who in the Trump and maybe
Canadian administrations are doing with, and I guess are you going at it
alone as Alcoa or in partnership with other aluminum companies or maybe
potentially customers of your products? I'm asking the second part in the
context of some competitors, either with larger portion of domestic
production or even like Middle Eastern competitors that are evidently
announcing intentions to build U.S. capacity and basically wondering, are
there some in the administration that are sympathetic to your arguments
that the U.S. really isn't going to be able to close the gap anytime soon?
William Oplinger
So, it's a wide-ranging question. I'll give you a wide-ranging answer. We
are engaging with both the U.S. government and the Canadian
government, we're doing that as Alcoa. We're also doing that through the
U.S. Aluminum Association. We have met either through ourselves or
through the association with a number of President Trump's direct reports,
and that the message is fairly simple. The message is that the U.S. imports
a lot of its primary aluminum and that in order to support the downstream
processing jobs, we need to have economic upstream aluminum
production that can come in preferably through Canada, but through other
countries.
We've met with the Canadian government, both the outgoing prime
minister, Mr. Trudeau, also the current prime minister, Mr. Carney, and
have had very good discussions there. So, a lot of engagement both
through us and the Aluminum Association. And the way I would
characterize it is that and I should say it's been with the administration, it's
been with the House members, it's also been with the senators. I would
characterize it that people are listening to us.
Alcoa Corporation April 16, 2025, 5:00 PM EST
Disclaimer
Alcoa Corporation published this content on April 17, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on April 17, 2025 at 21:11 UTC.