Alcoa Inc. (AA)

AA 
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Alcoa (AA)

Q1 2013 Results Earnings Call

April 8, 2013 5:00 p.m. ET

Executives

Klaus Kleinfeld - Chairman and Chief Executive Officer

William Oplinger - Executive Vice President and Chief Financial Officer

Analysts

Brian Yu - Citigroup

Michael Gambardella - JPMorgan

Sal Tharani - Goldman Sachs

Timna Tanners - Bank of America Merrill Lynch

David Gagliano - Barclays Capital

Tony Rizzuto - Cowen Securities

Aldo Mazzaferro - Macquarie

Paretosh Misra - Morgan Stanley

Charles Bradford - Bradford Research

Harry Mateer - Barclays

Presentation

Operator

Good day ladies and gentlemen, and welcome to the first quarter 2013 Alcoa earnings conference call. [Operator instructions.] At this time, now, I’d like to turn the call over to Kelly Pasterick, director of investor relations. Please proceed.

Kelly Pasterick

Thank you, operator. Good afternoon and welcome to Alcoa's first quarter 2013 earnings conference call. I'm joined by Klaus Kleinfeld, Chairman and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer. After comments by Klaus and William, 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 of 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.

And with that, I'd like to hand it over to Mr. Klaus Kleinfeld.

Klaus Kleinfeld

Thank you very much, Kelly. Good afternoon to everybody and before we go through all the details, let me give you a summary on how I see this quarter. I think it’s been a great start into the year.

We are delivering a strong number of results here. All segments are profitable. Net income is the best net income since the third quarter of ’11. EBITDA, 16%, up sequentially, 11% year over year. Record profitability on the downstream, 20% EBIT margin, 20.9% EBIT margin to be precise.

We have improved performance also on the upstream side, despite year on year lower metal prices. Strong liquidity, $1.6 billion cash on hand, and a solid global end market growth, and we are reaffirming our aluminum demand growth of 7% for 2013.

So with that, let me hand over to Bill Oplinger, our new CFO. Bill, welcome.

William Oplinger

Thanks, Klaus. As Klaus just highlighted, we had a very strong first quarter. I’ll start the financial review with a quick summary of the income statement. As you can see, revenue of $5.8 billion was down slightly on a sequential quarter basis, based on two fewer production days in Q1 versus Q4.

Compared to last year, revenues were down 3% on lower LME prices, which were down 8%, and the impact of primary production curtailments in Europe. However, due to strong productivity, which you will see more details on later, COGS percentage actually improved sequentially by 110 basis points. And overhead costs were also down sequentially from the highs we saw in Q4 2012.

Looking at other income, recall that we had a large gain of $320 million in the fourth quarter associated with the sale of [Tapoco] power assets. From a tax perspective, our tax rate for the quarter was 27.4%, which was favorably impacted by a $19 million discrete tax item which will be discussed on the following slide. So overall, results for the quarter are net income of $0.13 per share.

Now let’s move to the special items for the quarter. Included in the net income of $149 million was a net benefit of $28 million, or $0.02 per share, associated with special items. Stripping that benefit out, we made $0.11 per share, which is $0.05 higher than last quarter.

There were four noteworthy special items in the quarter: restructuring costs of $5 million related to the exit of the [litho] business in China, which was announced in the fourth quarter, and additional severance related costs of $2 million from a prior layoff program.

In addition, we booked a $19 million positive impact in discrete tax credits primarily due to the American Taxpayer Relief Act. Lastly, there’s a $9 million favorable noncash mark-to-market adjustment on energy contracts and a small gain associated with external insurance proceeds from the Messena fire.

So in aggregate, this results in net income, excluding special items, of $122 million, or $0.11 per share, a nearly 90% sequential improvement in net income excluding special items and $0.05 higher on an earnings per share basis.

Let’s move on to the sequential bridge. As I’ve said, net income excluding special items nearly doubled on a sequential quarter basis, increasing $57 million. This is especially noteworthy given the fact that metal prices were flat during that period.

I’ll address a couple of the drivers of the overall performance. Volumes were up in aerospace, automotive, and packaging markets, in our mid and downstream businesses, resulting in a $15 million benefit. Price and mix was positive by $21 million, driven by favorable regional premiums, primarily in the U.S., and favorable mix in Europe and Latin America.

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