Alcoa Inc. (AA)

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Alcoa (AA)

Q1 2011 Earnings Call

April 11, 2011 5:00 pm ET

Executives

Roy Harvey - Director of Investor Relations

Klaus Kleinfeld - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Chairman of International Committee

Charles McLane - Chief Financial Officer and Executive Vice President

Analysts

Anthony Rizzuto - Dahlman Rose & Company, LLC

Paretosh Misra - Morgan Stanley

John Redstone - Desjardins Securities Inc.

David Gagliano - Crédit Suisse AG

Brian Yu - Citigroup Inc

Sal Tharani - Goldman Sachs Group Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Alcoa, Inc. Earnings Conference Call. My name is Melanie, and I'll be your coordinator today. [Operator Instructions] I would now like to turn the call over to Mr. Roy Harvey, Director of Investor Relations. Please proceed, sir.

Roy Harvey

Thank you, Melanie. Good afternoon, and welcome to Alcoa's First Quarter 2011 Earnings Conference Call. I'm joined Klaus Kleinfeld, Chairman and CEO; and Chuck McLane, Executive Vice President and CFO. After comments by Chuck and Klaus, we will take your questions.

Before we begin, I would like to remind you that today's discussion will contain forward-looking statements relating 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 presentation and in our most recent SEC filings. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, in the appendix to today's presentation and on our website at www.alcoa.com under the Invest section. Any reference in our discussion today to EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix.

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

Charles McLane

Thanks, Roy. I'd like to welcome everyone for joining us today on the call. Just a few months ago, we closed out an important year for Alcoa and celebrated the success of our 2009 and 2010 cash sustainability program. All our targets were met for those two years, and the company's financial position was considerably strengthened. We then outlined to you our financial goals for 2011 and our strategic targets for the next several years.

I'm pleased to announce that we have achieved a number of important milestones this quarter in each of our segments. While the first quarter is only a first step, we're clearly on the path to achieving our goals. We've been able to capitalize on improving end markets and the strength in aluminum pricing. But more importantly, we've demonstrated that we can achieve profitable growth in each of our businesses. Now let's go on to the first quarter overview.

Income from continuing operations in the quarter was $309 million or $0.27 per share. Restructuring and other special items totaled a negative $0.01 per share in the quarter, which brings us to an EPS, excluding special items, of $0.28 per share. This represents an increase of 33% versus last quarter and an increase of 180% versus the first quarter of 2010.

Our revenues grew 22% year-over-year and 5% sequentially. This increase is not the entire story. Our end markets actually showed significant strength. In fact, when looking at the year-over-year improvement, only 1/3 came from price changes in the LME, whereas approximately 50% came from increased volume and the remainder came from pricing and product mix actions that we undertook. EBITDA of $955 million rose 22% from last quarter and 60% from the first quarter of last year. Revenue, income from continuing ops [operations] and EBITDA were our best results since the third quarter of 2008.

All of our segments showed sequential improvements and profitability. Both our Alumina and Primary Metals businesses are now performing at an EBITDA per ton greater than the 10-year average. Our Flat-Rolled Products segment had a record first quarter at $81 million in ATOI and $173 million in EBITDA, and our Engineered Products and Solutions segment delivered its best-ever quarter with an EBITDA margin of over 18%.

An investment in working capital to support continued growth in our end markets, coupled with higher realized pricing, resulted in cash use from operations of $236 million and negative free cash flow of $440 million. Still, we achieved a two-day improvement in days working capital, once again proving that we are sustaining our operations at lower levels of working capital. Given this strong start, we expect to continue on our goal to be free cash flow positive for the year.

We continue to strengthen our balance sheet and perform within our 2011 targets as our debt-to-cap [capital] ratio stood at 33.6%, or 130 basis points lower than the fourth quarter, and comfortably within our 30% to 35% target range. And lastly, during the quarter, we completed the acquisition of the aerospace fastener business of TransDigm, acquired the full ownership of the technology associated with carbothermic aluminum reduction and invested in Electronic Recyclers International, the largest recycler of electronics in the U.S. These are all strategic growth projects that will strengthen our company for the future.

Now let's move on to the income statement. The sequential increase in revenue was primarily due to a 7% increase in Alumina and a 17% increase in Flat-Rolled Products. Cost of goods sold as a percent of revenue was 79.1%, an improvement of 120 basis points from the fourth quarter and a 300 basis point improvement from the year-ago quarter. The improvements were due to higher pricing and volume, somewhat offset by higher energy and raw material costs.

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