Alcoa Inc. (AA)

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ALCOA, Inc. (AA)

Q4 2009 Earnings Call

January 11, 2010 5:00 pm ET

Executives

Matthew Garth – Director Investor Relations

Charles D. McLane Jr. – Chief Financial Officer

Klaus Kleinfeld – Executive Vice President, Chief Executive Officer

Analysts

Jorge Beristain – Deutsche Bank

Michael Gambardella – J.P. Morgan

David Gagliano – Credit Suisse

Mark Liinamaa – Morgan Stanley

Sal Tharani – Goldman Sachs

Charles Bradford – Affiliated Research Group

Brian Yu – Citi

Brian McArthur – UBS Securities

Anthony Rizzuto – Dahlman Rose

John Redstone – Desjardins Securities

David Stephens – Goldman Sachs

Kuni Chen – Bank of America

Presentation

Operator

Welcome to the fourth quarter 2009 ALCOA earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Matthew Garth, Director of Investor Relations.

Matthew Garth

Good afternoon and welcome to ALCOA’s fourth quarter earnings conference call. I’m joined by Chuck McLean, Executive Vice President and CFO who will review fourth quarter financial results, and Klaus Kleinfeld, President and CEO who will discuss current market conditions and our progress in strengthening ALCOA’s cost structure and balance sheet. After comments by Chuck and Klaus, we’ll take your questions.

Before we begin, I would like to remind you that today’s discussion 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 those expectations listed in today’s press release and ALCOA’s most recent Form 10-K 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 and in the appendix of today’s presentation and on our website at www.ALCOA.com under the invest section.

Now I’d like to turn it over to Chuck.

Charles D. McLane Jr.

I’d like to thank everyone for joining us today. Let me start off by summarizing our fourth quarter performance. We significantly exceeded our target to be free cash flow neutral by year end. We achieved all of our 2010 cash sustainability targets a year early, dramatically improved liquidity and strengthened our balance sheet.

As to earnings, we’ve overcome significant currency and energy headwinds, weakened markets, project start up costs and unallocated fixed costs at our facilities to report our second consecutive quarter of profitability.

If you noticed, I just drew a comparison between cash and earnings and if you bear with me, I’d like to take a few minutes and elaborate on that. If you’ve been following us during 2009, you know we’ve been singularly focused on cash as a financial measure of performance.

In early 2009 we were in the middle of a financial and economic crisis. Price and demand destruction was rampant. We set aggressive cash targets and communicated these both internally and externally.

The only way these targets were going to be achieved is by very aggressive and decisive actions, particularly in the manner in which we pulled back capacity and eliminated cash costs, and I’m sure everybody is aware that we did this in our stream operations but during the course of the year we did in it in mid stream operations. We did it in down stream operations.

We had investment casting facilities taken down by 50%. We had Davenport, our largest mill in North America, running at less than 70%, shut down Texarkana. My point is that we had to pull back capacity at many locations to meet the decreased demand and the way we were going to manage our cash is to take all of the variable cash costs out as quick as possible.

When you do that, you’ve got all your fixed costs and it’s going to be over lower volume and it’s going to hurt profitability. But the other alternative is we could have continued to run this volume that had no demand. We would have assumed all of this cost and put it in inventory and we would have had much better earnings and been on a road to disaster.

So let me finish by saying that we’re extremely proud of the efforts in maintaining our cash and liquidity position and think as we go through this presentation that you’ll see it speaks for itself that we were able to achieve all of these targets.

Now let’s move to the fourth quarter presentation. As I noted, we achieved all of our 2010 cash sustainability targets in the fourth quarter, helping to produce cash from operations of $1.1 billion and free cash flow of $761 million.

Disciplined capital management yielded a decline in debt of $759 million from the fourth quarter 2008 which when we add it to the increase in cash of $719 million, it resulted in a decrease in net debt of $1.5 billion.

Loss from continuing operations was $266 million or $0.27 per share and included restructuring of special items of $275 million or $0.28 per share. In a few minutes, I’ll review these items in more detail.

The quarter benefited from a 9% uptick in the realized price of aluminum, record production of third party shipments in the Alumina segment and continued productivity gains related to our cash sustainability program. A weak U.S. dollar and higher energy costs negatively impacted sequential performance.

On the revenue side, higher aluminum prices and margin neutral buy/resell activity helped drive an 18% sequential improvement in every end market with the exception of Aerospace, commercial building and construction and the IGT market showed a sequential increase.

Let’s move to the next slide and I’ll talk about market activity. Markets continue to be very weak relative to last year and the sequential improvements we are experiencing are well below historic norms. Sequential declines in the Aerospace and IGT markets were driven by continued destocking activity which we expect to last into the first half of 2010.

Now let’s move to the financials. I’ll highlight key items. You have the detailed income statement in the press release. Higher realized aluminum prices and buy/resell activity helped to drive an 18% increase in revenues sequentially. The buy/resell activity accounted for roughly a third of the sequential increase in revenues.

Cost of goods sold as a percent of sales increased in the quarter due to the charges related to our Italian operations and the MRN tax settlement. Excluding those charges and the impact of the buy/resell activity, cost of goods sold as a percent of sales was 83.6%.

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