Alcoa Inc. (AA)

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Alcoa, Inc. (AA)

Q2 2009 Earnings Call

July 8, 2009 5:00 pm ET

Executives

Matthew Garth - Director of Investor Relations

Charles D. McLane, Jr. - Chief Financial Officer, Executive Vice President

Klaus Kleinfeld - President, Chief Executive Officer, Director

Analysts

Mark Liinamaa - Morgan Stanley

Charles Bradford – Bradford Research

Sal Tharani – Goldman Sachs

Brian Yu - Citi

Anthony Rizzuto - Dahlman Rose & Co.

Luther Lu – FBR Capital Markets

Kuni Chen - Banc of America/Merrill Lynch

John Tumazos – John Tumazos Independent

Presentation

Operator

Welcome to the second quarter 2009 Alcoa, Inc. earnings conference call. (Operator Instructions) I would now like to turn your presentation over to your host, Mr. Matthew Garth, Director of Investor Relations. Please proceed.

Matthew Garth

Thank you. Good afternoon and thank you for attending Alcoa’s 2009 second quarter analyst conference. I am joined by Chuck McLane, Executive Vice President and Chief Financial Officer, who will review second quarter financial results and Klaus Kleinfeld, President and Chief Executive Officer, will discuss current market conditions and our progress in improving Alcoa’s cost structure and balance sheet.

Before we begin I would like to remind you that today’s discuss will contain forward-looking statements related to future events and expectations. You can find factors that could cause the company’s actual results to differ materially from these projections listed in today’s press release and Alcoa’s most recent form 10K and other SEC filings.

In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most comparable GAAP financial measures can be found in today’s press release, in the appendix of today’s presentation and on our website at www.alcoa.com under the Invest section.

Now I would like to turn it over to Chuck.

Charles McLane, Jr.

Thanks Matt. We really appreciate everyone joining us today. Before I begin the financial review, I would like to draw your attention to three conclusions that we hope you would take away from our second quarter performance.

First, we are exceeding expectations in each of our cash sustainability projects. Secondly, those improvements are being realized in our financial statements. Lastly, our liquidity position is showing marked improvement.

With those as a backdrop let’s move to the overview. For the quarter our loss from continuing operations was $312 million or $0.32 per share, a 45% improvement sequentially. Excluding restructuring, loss from continuing operations was $256 million or $0.26 per share. The second quarter showed marked improvement over the first quarter as we realized substantial benefits from our cost reduction efforts and an up tick of 6% in the realized price of aluminum. Unfavorable currency impact and reduced volumes related to continued end-market weakness somewhat offset these positives.

As Klaus will demonstrate, we are exceeding expectations on each of our cash sustainability targets. As a result, cash from operations of $328 million was a $599 million improvement. Free cash flow improved $652 million and EBITDA improved $281 million. Our debt to cap declined 80 basis points from 40.6 to 39.8 and we ended the quarter with $851 million of cash on hand.

Let’s now review the income statement. You have the detailed income statement in the press release but let me highlight a few items before moving onto the sequential profitability bridge. Income from continuing operations improved on a sequential basis by $168 million or 35%. COGS as a percent of sales improved 650 basis points during the quarter driven largely by cost reductions realized from our procurement overhead initiatives. Restructuring charges for the quarter represent the company’s continued focus on streamlining operations and overhead through headcount reductions. After tax, these items negatively impacted results by $0.06 per share. In a few slides we will provide a recap of these reductions for the last three quarters.

Let’s move to the effective tax rate. Excluding the discreet tax items in the first quarter the income statement ETR declined 9.1 points sequentially. That is a negative impact of $0.03 a share from the first quarter. You may remember as I stated last quarter with the profit and loss drivers being volatile in the businesses, by that I mean currency, energy, etc., and applying the rules around when you can and cannot benefit losses this rate could continue to be volatile during the year. For now we should look forward at 31.5% for the year.

Lastly, the loss from discontinued operations is comprised of AEES, the wire harness business which we divested in June. This loss is reflective of weak operating performance in the quarter and the cash consideration in the sale. As a result of this divestiture our automotive exposure now stands at 2% of revenue.

Let’s now move on to the bridges which will quantify the operational impact sequentially and then year-over-year. This slide bridges the sequential improvement of $221 million and our loss from continuing operations excluding restructuring and other special items. It is a fairly straight forward bridge in that our procurement and overhead initiatives combined with the higher LME price represented more than the entire sequential improvement. Partial offsets were the lower tax rate and the unfavorable currency impact. For a more comprehensive view of the impact that our procurement and overhead initiatives are having our results, let’s take a look at the year-to-date, year-over-year bridge.

As we are all painfully aware, LME pricing was the single largest contributor to reduced profitability on a year-over-year basis. Realized pricing of $16.20 per ton was 45% lower than the first six months of 2008. In addition, with the exception of industrial gas turbines, lower revenues were experienced across every segment and end-market. A few major markets worth noting; Aerospace was down 20%, commercial transportation was down 49%, automotive down 51% and industrial products and distribution down 59%.

Another negative that I draw your attention to is the category that we name curtailments. To avoid confusion, this $90 million cost primarily represents the non-cash, fixed costs that continue to be incurred once the facility is partially or fully curtailed. Even though we made the right decision in curtailing production as those decisions were made on a cash basis, these costs will continue to hit P&L. These significant negative impacts, pricing, curtailments and volume, were partially reduced by $874 million of favorable productivity and currency, a testament that our procurement overhead initiatives are having a significant and positive impact to earnings.

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