Alcoa Inc. (AA)

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Alcoa Inc. (AA)

Q2 2014 Earnings Conference Call

July 8, 2014 5:00 PM ET

Executives

Kelly Pasterick – VP of Investor Relations

Klaus Kleinfeld - Chairman and Chief Executive Officer

William F. Oplinger – EVP and Chief Financial Officer

Analysts

Paretosh Misra - Morgan Stanley

Sal Tharani - Goldman Sachs

Timna Tanners - Bank of America Merrill Lynch

Josh Sullivan - Sterne Agee

Brian MacArthur - UBS

Mike Gambardella - JPMorgan

Aldo Mazzaferro - Macquarie

Anthony Rizzuto - Cowen and Company

Andrew Lane - Morningstar

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Alcoa Earnings Conference Call. My name is Whitley and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Kelly Pasterick, Vice President of Investor Relations. Please proceed.

Kelly Pasterick

Thank you, Whitley. Good afternoon and welcome to Alcoa's second quarter 2014 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 Bill, 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 Web-site 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 the call over to Klaus Kleinfeld.

Klaus Kleinfeld

Hello everybody. Let me describe this quarter first and summarize it. I mean the transformation accelerates. All groups improved on a quarter-to-quarter as well as on a year-to-year basis. We really do see two themes, two major themes. One is strong operational performance, and the second one is our transformation is continuing and we are changing the portfolio. So let's start with the operational performance and Bill will go into this in detail.

The downstream has the highest ever profit as well as margin, the midstream profit is up 34%, and on the upstream side we have also show an improved performance. This is now a story that goes on for the 11th consecutive quarter. We see productivity in this quarter $302 million coming from all segments year-over-year. So the net debt and the balance sheet is much, much more healthy at [6.9%] (ph), lowest debt level since September 2007 and a positive free cash flow of $260 million.

So let's talk also about the second theme, the portfolio transformation. About two weeks ago, exactly two weeks ago when we were on the call here and I guess most of you listened in, and announced that we will be acquiring Firth Rixson, this is a great fit to us, it strengthens our already pretty robust aerospace portfolio.

But inorganic growth is not the only name of the game. We also have been very, very strong on the organic growth side. Just to pick out a few things that happened in the quarter, a $100 million investment that we announced to expand our structural engine component offering in La Porte, Indiana and a $25 million investment to further enhance our jet engine blade performance and this one was in Hampton, Virginia.

At the same time, we also continued to work on the upstream side, on the commodity side. We safely executed the curtailments in Brazil, and on top of it we signed a letter of intent to pursue the sale of our Jamalco interest. This is the refinery where we have a 51% ownership in Jamaica.

So with this, Bill, why don't you give us a little more color on the numbers?

William F. Oplinger

Thanks Klaus. Let's quickly walk through the income statement. Revenue increased roughly $380 million on a sequential quarter basis to $5.8 billion, primarily driven by higher realized aluminum prices and higher volumes in our mid and downstream businesses. We saw revenue growth across all of our major end markets. Compared to a year ago, revenue was essentially flat. Cost of goods sold percent decreased sequentially by 80 basis points due to better price and mix for the quarter and productivity gains partially offset by cost increases. Cost of goods sold is favorable 270 basis points compared to year ago basis.

Overhead costs are essentially flat as a percentage of sales on both a sequential and year ago quarter basis. In absolute terms, SG&A was up slightly this quarter due to the Firth Rixson acquisition costs of $13 million pre-tax. Our effective tax rate for the quarter is 38% which is consistent with our expected operational rate for the year as the impact of discrete and special tax items in the quarter was not significant. However, we'll continue to experience swings in the rate given the volatility for our profits within each taxing jurisdiction.

Overall, results for the quarter are a net gain of $0.12 per share. Excluding special items, we have net income of $0.18 per share which is twice the adjusted earnings from 1Q. Let's take a closer look at the special items.

Included in the net income of $138 million is an after-tax charge of $78 million or $0.06 per share primarily for restructuring. During the quarter, we began the initial closure activities of the Point Henry smelter and rolling mills in Australia. This accounted for $49 million out of the $54 million in restructuring charges. 83% of the charges are non-cash, related primarily to accelerated depreciation. Since closure of the Australian plants will continue during the second half of the year, further restructuring charges are expected to be $50 million to $60 million after-tax for the remainder of 2014. Approximately 90% of these charges are expected to be non-cash.

In addition, in the second quarter we recorded after-tax charges of $11 million related to the renewal of the U.S. master labor agreement and an additional $11 million associated with fees incurred for the recently announced acquisition of Firth Rixson. We've completed the restart of the potline at the Saudi joint venture smelter. We experienced unfavorable impacts related to the restart amounting to $6 million in the second quarter. Discrete and special tax items were an unfavorable $2 million in the second quarter. Lastly, mark-to-market energy contracts in the second quarter were a benefit of $6 million, which we've backed out of the operating earnings. So in aggregate, this resulted in net income excluding special items of $216 million or $0.18 per share.

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