Alcoa Inc. (AA)

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Alcoa Inc. (AA)

Q2 2010 Earnings Call Transcript

July 12, 2010 5:00 pm ET

Executives

Matthew Garth – Director, IR

Chuck McLane – EVP and CFO

Klaus Kleinfeld – Chairman and CEO

Analysts

Kuni Chen – BofA/Merrill Lynch

Sal Tharani – Goldman Sachs

Curt Woodworth – JPMorgan

Tony Rizzuto – Dahlman Rose

Pertash Misra [ph]

Charles Bradford – Affiliated Research Group

Jorge Beristain – Deutsche Bank

Brian Yu – Citigroup

John Redstone – Desjardins Securities

David Gagliano – Credit Suisse

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2010 Alcoa earnings conference call. My name is Tony and I will be your coordinator for today. At this time, all participants are in listen-only more. (Operator instructions) I would now like to hand the call over to your host for today, Mr. Matthew Garth, Director of Investor Relations. Please proceed, sir.

Matthew Garth

Good afternoon. Thank you Tony, and welcome everyone to Alcoa’s second quarter earnings conference call. I am joined by Chuck McLane, Executive Vice President and CFO; and Klaus Kleinfeld, Chairman and CEO. 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 our most recent 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.

Chuck McLane

Okay. Thanks Matt, and we appreciate everyone taking the time to join us today. We got a fairly clean quarter, so let me run through it. Our increased performance this quarter reflects continuing improvement in our key end markets, as well as strong performance in our cash sustainability initiatives. We were able to generate positive free cash flow, and we maintained a strong liquidity position.

Now, let us move to the next slide and I will highlight the financial results for the quarter. Income from continuing operations in the quarter was $137 million or $0.13 per share compared with a first-quarter loss from continuing operations of $194 million or the loss of $0.19 per share. Remember first quarter 2010 results included restructuring and special charges of $295 million or $0.29 per share. We generated EBITDA of $724 million, a 14% EBITDA margin, which is the highest since the third quarter of 2008.

Higher volumes in most end markets and continued benefits from our cash sustainability initiatives drove this bottom-line performance. Free cash flow in the quarter was $87 million in debt to capital stood at 38.4%. Lastly, our liquidity remains strong with 1.34 billion of cash on hand.

Let us move to the next slide, which illustrates the revenue change by market. Revenues in most of our markets improved sequentially. Aerospace rose as destocking activity begins to slow and orders rise in the investment castings business. New customers and seasonal increases drove packaging sales higher, while commercial transportation benefited from increased global economic activity.

Higher third-party alumina shipments helped drive sales in that business up 10% sequentially. While many markets are up significantly year-over-year, let us remember that these improvements are relative to a very weak period in 2009.

Now, let us move on to the income statement. Third-party revenues rose 6% sequentially on higher third-party shipments in the upstream and improved demand in almost every end market. COGS as a percent of sales fell to 81.2% driven through continued progress on our cash sustainability initiatives. These activities also help to improve SG&A as a percent of sales by almost a full percentage point. We have a tight focus on spending as market activity increases, operating more effectively and minimizing rehires where possible. Let me remind you that we have reduced headcount by approximately 37,000 since the downturn began in late 2008.

Our cash sustainability initiatives drove a reduction of 17,000, while divestitures were responsible for the remainder. We’re not only holding headcount levels, but are also driving restructuring this quarter that will result in further reductions. Lastly, our operational tax rate for the quarter was 25%. 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 items totaling 16 million. Going forward we expect our operational ETR to be approximately 32%, however, we will continue to experience swings in the rate given the volatility in our profit drivers, and overall profitability in each tax jurisdiction.

Now, let us review the restructuring of special items in the quarter. This slide provides you with an overview of the restructuring and special items in the quarter and their location in the financial statements. As you can see, these items had no impact on our overall results. Yet, they do impact specific line items on the income statement. We have therefore included this detail to enable a clear analysis of our results.

First, restructuring was $20 million and relates primarily to further headcount reduction. Discrete tax items totaled a favorable $16 million. Non-cash mark-to-market benefits on derivatives in several power contracts totaled $22 million, and the negative decision in a lawsuit related to (inaudible) negative impacted results by $7 million.

Lastly, we reached a mutually beneficial agreement with United Steelworkers, which helped sustain our competitive position in the US. We are very pleased that our employees ratified the agreement in late June. Preparation cost for a potential strike and a one-time signing bonus for employee totaled $13 million this quarter.

Let us now move to the sequential bridge. This slide bridges our income from continuing operations, excluding restructuring and special items. Lower realized aluminum pricing and higher LME link cost, particularly energy, were more than offset by higher volumes in every business. Performance benefited from a rise in the US dollar and favorable non-LME linked energy rates. Productivity gains related to our cash sustainability initiatives continued to enhance bottom line performance and account for approximately 60% of the sequential improvement.

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