Alcoa Inc. (AA)

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Alcoa (AA)

Q2 2011 Earnings Call

July 11, 2011 5:00 pm ET

Executives

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

Roy Harvey - Director of Investor Relations

Charles McLane - Chief Financial Officer and Executive Vice President

Analysts

Jorge Beristain - Deutsche Bank AG

Timothy Hayes - Davenport & Company, LLC

Anthony Rizzuto - Dahlman Rose & Company, LLC

Paretosh Misra - Morgan Stanley

John Redstone - Desjardins Securities Inc.

Brian Yu - Citigroup Inc

Sal Tharani - Goldman Sachs Group Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Alcoa Inc. Earnings Conference Call. My name is Jonathan and I'm your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I'd now like to hand the call off to Mr. Roy Harvey, Director of Investor Relations. You may proceed, sir.

Roy Harvey

Thank you. Good afternoon, and welcome to Alcoa's Second Quarter 2011 Earnings Conference Call. I'm joined by 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. Reconciliation 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. Chuck?

Charles McLane

Okay, thanks Roy. We really appreciate everyone joining us today. Before we start our normal presentation, I'd like to take a couple of minutes and go through what we think is the real success story this quarter. There are 4 main themes: First, we've grown in every segment. We know and you know that growth for the sake of growth is irrelevant. What I'd like to point out is that we're going both margins and profitability faster than revenue. In fact, we've set records in 3 of our segments. Our businesses are stronger, and we're on track to deliver our long-term profitable growth targets.

Second, I would like to stress that we're taking firm actions to combat energy and raw material inflation. I'll spend some time illustrating these activities. Third, I would like to highlight that our Flat-Rolled Products and Engineered Products and Solutions segments had set margin records for the second time this year. And finally, our liquidity position has improved substantially. It was strong at the beginning of this year but it's been improving steadily as the year progresses.

Now let's take a second quarter overview. Income from continuing operations in the quarter was $326 million or $0.28 per share. Restructuring and other special items totaled in negative $38 million, which brings us to an EPS, excluding special items of $0.32 per share. This represents an increase of 146% versus the second quarter of 2010 and a 14% sequential improvement.

Revenues grew 27% year-over-year and 11% sequentially. All end markets demonstrated significant revenue growth on a year-over-year and sequential basis. Adjusted EBITDA of $1 billion rose 44% year-over-year and 9% sequentially and was our best result since the second quarter of 2008.

Both our Alumina and Primary Metals businesses are performing at EBITDA per metric ton greater than the 10-year average. Flat-Rolled Products generated a record EBITDA per metric ton, and Engineered Products and Solutions segment achieved a record EBITDA margin.

Our days working capital was 6 days lower than the second quarter of 2010, equivalent to approximately $500 million of cash. We continue to operate our businesses at sustainably low levels of working capital. We also remain committed to a strong balance sheet. We continue to perform within our 2011 financial targets as our debt-to-cap-ratio stood at 32.6 or 100 basis points lower than the first quarter and in the middle of our 30% to 35% target range.

During the quarter, we reduced our net debt by $319 million and extended our maturity profile through a successful tender offer and new debt issue. Lastly, liquidity remains strong with cash on hand at $1.3 billion. Now let's move to the income statement.

Our revenue increased $627 million sequentially. While 33% of this increase was due to a higher LME, the remainder was due to actions we took to increase volume and improve pricing. This illustrates we're not just depending on commodity prices to fuel our top line growth. Cost of goods sold as a percent of revenue was 79.7%, driven by currency and higher input costs, somewhat offset by higher pricing and productivity improvements.

SG&A at 3.8% of sales represents the lowest ratio in more than a decade. Our effective tax rate for the quarter was 26.3%. Our operational year-to-date is 27%, and going forward, we'd expect our operational rate to remain at that level. Income from continuing operations was $326 million, 6% higher sequentially and 138% improvement from the second quarter of last year. Now let's take a quick look at the special items in the second quarter.

Special items totaled $38 million. This includes a $16 million restructuring costs, driven mainly by litigation charge related to Saint Croix, a nonoperating location. Our non-cash mark-to-market impacts on power contracts was a $10 million benefit in the quarter. Finally, in connection with the tender offer and redemption of our bonds completed during the second quarter, we recorded charges of $32 million, predominantly related to the premiums paid on the transaction.

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