Alcoa Inc. (AA)

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Alcoa, Inc. (AA)

Q1 2010 Earnings Call

April 9, 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

Mark Liinamaa – Morgan Stanley

Michael Gambardella – J.P. Morgan

Sal Tharani – Goldman Sachs

Curt Woodworth – Macquarie Capital

John Redstone – Desjardins Securities

Kuni Chen – Bank of America/Merrill Lynch

Charles Bradford – Affiliated Research Group

Anthony Rizzuto – Dahlman Rose

Presentation

Operator

Welcome to the first quarter 2010 Alcoa, Inc. earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Matthew Garth, Director of Investor Relations. Please proceed.

Matthew Garth

Thank you. Good afternoon and welcome to Alcoa’s first quarter earnings conference call. I am joined by Chuck McLane, Executive Vice President and CFO who will review financial results, and Klaus Kleinfeld, President and CEO who will discuss current market conditions and how the actions we have taken to strengthen Alcoa are driving value. 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 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 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, 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 D. McLane Jr.

Thanks Matt. I would like to thank everybody for joining us today. We have got some detail this quarter, I am going to take my time going through that; the bridges and the reconciliation sheet of the restructuring special items. I am also going to give you some additional disclosure around our sensitivities today.

Let me start off with by first saying our improved operating results reflects increased profitability that we gained through a strong performance in our cash sustainability initiatives. Higher realized aluminum pricing is hitting the bottom line and we are overcoming increased energy costs and reduced volumes.

Now let’s go to the first quarter overview. In the first quarter, higher realized LME pricing and the continued benefits from our cash sustainability initiatives drove significant improvements in the cost of goods sold and SG&A percentages of sales, the combination of which generated EBITDA of $596 million which is the highest level since the third quarter of 2008. Higher energy costs, lower volumes in predominately can sheet both negatively impacted results. A loss from continuing operations of $194 million or $0.19 per share included restructuring and special items totaling $295 million or $0.29 per share. I will review these items in more detail in just a bit. Lastly, debt to cap improved to 38.1% and liquidity remained strong with $1.3 billion of cash on hand.

Let’s move to the next slide which illustrates market activity in our businesses. Revenues in many of our markets have improved relative to last year while others, namely aerospace and IGT, continued to experience supply chain de-stocking and low levels of demand. The declines in packaging were expected due to our decision to curtail can sheet volumes to our North American supply base. This decision contributed to a reduction in flat roll product shipments of roughly 75,000 tons.

The sequential declines in our third-party alumina and primary metal sales reflect higher internal shipments to meet improved order rates and the anticipated reduction in buy/resell activity to more normal levels. Buy/resell totaled 49,000 tons this quarter, a reduction of 158,000 tons sequentially. On a sequential basis, aerospace was essentially flat as de-stocking activity begins to slow and supply levels stabilize. Weak demand in IGT and building and construction continues to drive revenue declines in these markets.

Now let’s review the financials. I will highlight some key items for you as you have a detailed income statement in the press release. Third party revenues declined 10% sequentially as increases in internal shipments in alumina and lower can sheet volumes more than offset the benefit of higher pricing. Note that the reduction in buy/resell activity contributed to half of the revenue decline.

COGS as a percent of sales fell to 82.1% driven through continued progress in our cash sustainability initiatives. As you will recall, COGS in the fourth quarter included charges related to our Italian operations, the MRN tax settlement and the impact of buy/resell activity, all of which accounted for 6.7 percentage points of the COGS’ percent of decline. On a percent of sales basis SG&A improved by 0.5 percentage points sequentially as we continued to aggressively reduce overhead spend. Lastly, our operational tax rate for the quarter was a negative 95.5%. For your reference we have attached an appendix to help guide you through the tax rate. Included in the tax rate this quarter are discrete tax items totaling $112 million which I will detail on the next slide.

Going forward we expect our operational EPR to be approximately 32%. However, we will continue to experience swings in rate given volatility in our profit drivers and overall profitability in each tax jurisdiction.

Let’s now review the restructuring and special items in the quarter. This slide provides you with an overview of the restructuring and special items in the quarter and their location on the financial statements. Restructuring related items of $119 million primarily relates to the permanent closure of certain curtailed U.S. locations including the Badin and Eastalco smelters. This decision was made after an assessment of the sustained competitiveness of each facility was completed based on factors including market fundamentals, other idle capacity, the cost structure and future capital investments.

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