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Text: I'm joined today by Roy Harvey, Alcoa Corporation's President and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer.
Any reference in our discussion today to EBITDA means adjusted EBITDA.
With that, here's Roy.
We had another strong quarter, bolstered by aluminum prices that are higher than we've seen in more than a decade.
Before we get underway, however, in particularly at a time where we are experiencing a rapidly changing market dynamic, I would like to reinforce once again that our values, which we established when we launched as an independent company in 2016 continue to guide us.
It's not just about the results, but also how we achieve them.
Our values continue to be foundational for our company and our embedded in all of our decisions.
Now, as Alcoa Corporation approaches its five-year anniversary, we've been reflecting on the achievements Alcoans across the globe that helped us to accomplish.
It is clear that our strategic priorities are creating value.
Today, Alcoa is much stronger than when we launched.
We've significantly improved our processes, we've strengthened our balance sheet, we've reshaped our portfolio, we responded to societies need for responsible production launching the industry's most comprehensive portfolio of low-carbon products, and we've also certified many of our assets to the stringent standards of the Aluminum Stewardship Initiative.
In addition, our strategic priorities have helped us to do exactly what we said we wanted to do, strengthen our company to prepare for an even brighter future.
And today, we've reached an important milestone.
Additionally, we've authorized a new share repurchase program that will complement our existing program that was authorized in 2018.
These decisions concerning capital returns align with our existing capital allocation framework and reflect two important points.
First, we have confidence in the strength of our company and our ability to generate cash to sustain these programs through the commodity cycle.
Today, both our balance sheet and operating portfolio are in a much stronger position, with no substantial debt maturities until 2027.
Second, we believe the markets we participate in will be stronger, that this cycle will last longer and then Alcoa is well positioned to deliver in a low-carbon ESG focused world.
But our work is never complete.
These achievements simply serve as a strong foundation.
Despite the positive financial news, I am disappointed that we had a serious injury in the quarter.
An electrical contractor in Brazil sustained a life-threatening electrical shock.
Our focus must always be on the safety of everyone who visits or works at our facilities.
As our comments progress today, I'd like to highlight some recent initiatives that align with our strategic priorities and that use this strong foundation as a starting point.
The Alumar restart that will be powered by renewable energy, the joint development project for high purity alumina and our net-zero ambition.
The green evolution is happening fast and as evidenced by these projects, we are positioning ourselves for the future.
Also, we'll talk more today about the strength in aluminum pricing and an improved pricing trend in Alumina.
But first, let's review the financials with our CFO, Bill Oplinger.
This quarter was even better than the previous one.
Revenues at $3.1 billion were up $276 million or 10% sequentially.
Revenues were up $744 million or 31% from the same period last year on higher aluminum and alumina prices.
Realized aluminum prices were up 13% sequentially and 64% year-over-year.
Third quarter earnings per share was $1.76 per share, $0.13 per share higher than the prior quarter and $2.02 per share higher than the year ago quarter.
Adjusted earnings per share for the third quarter increased 38% sequentially, to a record $2.05 per share.
Adjusted EBITDA, excluding special items also increased, up 18% sequentially to $728 million, much higher than last year's $284 million.
These charts, which debuted last quarter show that the Aluminum segment with modest income taxes and virtually no minority interest continues to outperform and drive record net income.
In the first nine months of 2021, the Aluminum segment has had its best year so far, with nearly $1.4 billion or 73% of Alcoa's total adjusted EBITDA, excluding special items of $1.9 billion.
That segment EBITDA generated record adjusted net income.
Before this year our best full year adjusted net income was in 2018 at $698 million.
In 2021, our adjusted net income for the first nine months is already $822 million or $124 million higher.
Now with Aluminum prices remaining at post global financial crisis highs and Alumina prices recovering nicely, earnings should be even better in the fourth quarter.
Now let's review adjusted EBITDA in more detail.
The $110 million increase in adjusted EBITDA excluding special items was driven by higher metal prices as well as favorable currencies, slightly higher Alumina prices and better product pricing in Alumina and Aluminum.
However, as you know, a Bauxite unloader at Alumar sustained structural damage in mid-July and we ramped down refinery production by roughly one-third with corresponding impacts to Bauxite production assurity [Phonetic].
This outage had a $27 million impact in the quarter, mostly affecting shipment volume and production costs.
In addition, we experienced a few other impacts in the quarter, higher raw material costs, mostly caustic in the Alumina segment and carbon products in smelting, higher energy costs in Europe and to a lesser extent in Brazil were unfavorable by $71 million.
Spain costs increased by $53 million, while we also experienced higher costs in Norway and Brazil.
These increases were favorably offset by strong earnings in the Brazil hydros, the highest earnings in a decade for a net unfavorable energy impact of $17 million.
Lastly in the Aluminum segment, railcar delays in Canada and seasonal shipping patterns in Europe negatively impacted the results in the quarter.
The other column primarily reflects the non-recurrence of the Portland smelter government support, which ended in the second quarter after we repowered the facility through July 2026, and increased accruals for residue storage area improvements in Brazil.
Now let's look at impacts in our cash flows.
The cash flows continue to highlight major corporate actions as well as the benefits from very strong adjusted EBITDA.
To illustrate the strong cash generation in the last quarter, we have bridged from the second quarter ending cash balance to the third quarter cash balance.
Cash declined $200 million to $1.45 billion, our largest single outlay was $518 million in September when we redeemed the 2026 bonds, followed by working capital use of $206 million, $83 million of capital expenditures and a modest $19 million of pension and OPEB funding which is mostly OPEB.
EBITDA and other factors provided net inflows of $626 million.
On a year-to-date basis, you can see the benefit of the strong nine months of EBITDA and the additional major sources of cash inflows, including non-core asset sales and the $500 million bond issue.
Those cash flows and EBITDAs also impact key financial metrics.
Return on equity increased to 30.2% for the first nine months of 2021, nine month 2021 free cash flow less non-controlling interest distributions was negative $51 million due to the second quarter's $500 million pension funding, but was positive $320 million in the third quarter due to the strong EBITDA, partially offset by a three-day increase in days working capital.
Most importantly, our key leverage metric proportional adjusted net debt is now below our $2 billion to $2.5 billion target range at $1.7 billion.
Working capital has increased in line with expectations, as metal prices continue to rise and now are being joined by Alumina price increases.
Moving to our outlook for the remainder of the year.
The full year 2021 outlook is expected to see modest changes.
For Bauxite shipments, the expected ranges are decreasing 1 million tons to 49 million tons to 50 million tons due to the Alumar unloader outage in the third quarter.
We are expecting improvements on the income statement below the EBITDA line.
Depreciation, depletion and amortization is expected to improve $10 million to $665 million, while interest expense is also expected to improve $10 million due to our redemption of the 2026 notes.
In the cash flow section, there are three expected changes.
Return seeking capital expenditures are expected to be $10 million lower.
Payment of prior year taxes has been adjusted $5 million to $30 million and environmental and ARO spending is expected to be $20 million better, down to $120 million for the year.
For the fourth quarter, overall with Alumar refinery production returning close to normal operating levels and if current Aluminum and Alumina index pricing levels persist, we expect another record-setting quarter.
However, at the San Ciprian refinery and smelter, the current high energy costs in the country and the strike if both persists through the quarter end are expected to be primary factors decreasing adjusted EBITDA approximately $100 million sequentially and increasing working capital sequentially $120 million.
Included in the San Ciprian impacts are in refining, we expect sequentially lower shipments of 86,000 metric ton and an unfavorable EBITDA impact of approximately $15 million.
In smelting, we expect sequentially lower shipments of 52,000 metric tons and an unfavorable EBITDA impact of approximately $85 million.
For the rest of the portfolio, adjusted EBITDA in the Bauxite segment is expected to improve $10 million sequentially, primarily due to recovery from the Alumar unloader outage in 3Q 2021.
Aside from Index pricing, currency and the San Ciprian impacts that I mentioned, the Alumina segment adjusted EBITDA is expected to be flat sequentially, higher shipments, cost improvements and the partial recovery from the Alumar unloader outage are expected to offset higher raw materials and energy costs.
In the Aluminum segment, again excluding the San Ciprian impact Index pricing and currency impacts and assuming today's spot alumina prices persist, while we expect substantial benefit in the Alumina segment, Alumina costs in the Aluminum segment are estimated to increase by $100 million.
Higher shipments are expected to offset increased raw materials and production costs, energy related impacts are expected to be comprised of two factors.
$30 million as Brazil hydro sales seasonally decline and higher smelter energy costs of $20 million primarily in Norway.
As Bill noted, the Aluminum segment has a significant role in our profitability.
The LME Aluminum price was the highest that has been in 13 years and has doubled relative to the low point in the second quarter of 2020.
In addition, regional premiums are being influenced by higher transportation costs into deficit markets such as North America and Europe.
The continued economic recovery and the tightness of supply have continued to support this LME rally and high regional premiums.
We continue to see positive GDP in industrial production across the world's leading economies, which supports Aluminum demand across all major end-use sectors.
This year, we expect annual global demand for primary Aluminum to increase approximately 10% relative to 2020 and to surpass the pre-pandemic levels of 2019.
Strong demand is also being supported by China's continued status as a net importer of primary Aluminum.
In 2021, China has curtailed more than 2 million tons of annualized capacity due to power shortages and its enforcement of policies related to energy and the environment.
These curtailments represent one of the largest supply cuts the Aluminum industry has ever experienced, particularly given that they are occurring during a year in which we have seen strong demand growth.
These supply dynamics are not only occurring in China.
There have been recent reports in Europe regarding energy shortages and high power costs that may lead to smelting cuts there as well.
For Alcoa's commercial impacts, we are also seeing significant year-over-year growth for our value-add Aluminum products.
In the third quarter, the premiums we earn for value-add products were up relative to the second quarter.
Strong demand supported high spot premiums for open volumes.
Much of our volume for value-add products is sold in annual contracts.
So, only a portion benefits from high spot pricing.
However, current market dynamics provide a positive environment for 2022 contract negotiations.
Next, I'd like to comment on what we're seeing in the Aluminum market, which is also on the rise.
As we've noted previously, we are the world's largest third-party producer of Alumina and market fundamentals there have also become more favorable over this last month.
In the first two months of the quarter, ex-China Alumina prices remained more muted than in Aluminum, high freight costs made shipments to China unattractive and the market outside China had sufficient supply.
However, in the last month or so, we have seen a substantial rally in ex-China Alumina pricing.
Some unplanned production disruptions outside of China reduced the amount of Alumina available for spot purchases.
At the same time, some refineries in China have restricted production to be the same dynamics I discussed earlier in regards to the smelting cuts.
Power shortages and policies related to the environment in energy.
These dynamics have driven current global supply tightness in Alumina.
While China remains short in Alumina as a net importer, it is now competing with smelters outside of China for available Alumina.
As a result, prices for Alumina outside of China are at the highest levels they've been since 2018.
Now, let's move to a slide that recap some of the items that Alcoa has been doing to support our business for the future.
Our strategic actions over the past two years and our ongoing activities are positioning Alcoa for the future.
Two years ago, we announced three key strategic programs.
The new operating model, non-core asset sales amd the portfolio review.
We've already met the goals on two of these.
First, we fully implemented the new operating model and captured the annual savings.
Second, we also met the top end of our target for non-core asset sales.
The portfolio review, meanwhile, has three years remaining and was designed to improve both the cost structure and sustainability position of our global production assets, focusing primarily on smelting and refining.
It considers options for significant improvement, curtailment, closure or divestiture.
At this two year mark, we've already addressed nearly half the 1.5 million tons of smelting capacity with a repowering at Portland, the curtailment of Intalco and restarting Alumar.
The announced restart of 268,000 metric tons of smelting capacity in Brazil equates to our share of Alumar's nameplate capacity.
It will supply the short Brazilian market and the smelter will be fully powered with renewable energy by 2024.
We've earlier reported that 78% of our global smelters are powered by renewables, and we expect that percentage to reach 85% by the conclusion of the portfolio review in 2024.
In refining, we've also addressed half of our global goal of 4 million tons of refining capacity with the 2019 closure of the Point Comfort refinery in Texas.
Now, let's move to the right hand side of this slide.
In September, we took another step to strengthen our balance sheet and redeemed in full $500 million in senior notes issued at a 7% interest rate that were due in 2026.
We used cash on hand to repurchase this debt.
A stronger financial position is an outcome of our focus on aligning decisions with our strategic priorities, including our imperative to advance sustainably.
Last month, we added even more production facilities to our list of locations certified to the Aluminum Stewardship Initiative, the industry's most comprehensive third-party system to verify responsible production.
Today we have 15 global sites certified to ASIs Performance Standard, the latest were two Canadian smelters, ABI and Deschambault.
Congratulations to those teams in Quebec for earning these certifications.
Importantly, we also have ASIs Chain of Custody Certification, which allows us to sell ASI certified Bauxite, Alumina and Aluminum.
And we've earned a premium on ASI certified products, which we can sell globally.
Earlier this month, we also announced the beginning of a joint development project related to the market for high purity alumina or HPA.
Industry analysis shows that demand for HPA will be strong with increasing year-over-year demand due to the need for low carbon solutions in transportation and other sectors.
Our non-metallurgical alumina, HPA, is used to create a variety of products for a sustainable economy.
This includes lithium-ion batteries that are the backbone of clean emissions free electric vehicles and energy efficient LED lighting applications.
While we are still at an early stage of development, we believe our process knowledge of Alumina refining can help ensure the operational and financial success of this joint development project.
And more generally, across our alumina refineries, it is important to note that Alcoa has the world's lowest carbon intensity in its global refining system.
This too was an advantage now and in the future for our smelter grade and non-metallurgical businesses, both of which are the largest outside of China.
Finally, I am proud of our ambition to reach net-zero by 2050 for Scope 1 and Scope 2 greenhouse gas emissions across our global operations.
Announced earlier this month, this ambition complements our Climate Change policy and existing GHG targets, which we discussed more fully in our Annual Sustainability Report.
To work toward this ambition, we are focused on increasing the share of our operations powered by renewable energy and commercializing some of the breakthrough innovations we've discussed previously, such as the ELYSIS technology which eliminates all direct greenhouse gases from the traditional aluminum smelting process and adapting Mechanical Vapor recompression to Alumina refining to further reduce our already low-carbon intensity.
Next, I wanted to quickly highlight the news we announced earlier today.
We are proud to initiate this quarterly dividend and authorized a new buyback program.
Since Alcoa Corporation's launch nearly five years ago, we've talked about strengthening our company.
This announcement is clear evidence of the work that Alcoans across the globe have completed to position the company to succeed not only in the favorable market environment we're seeing now, but through the commodity cycle.
Today, Alcoa is stronger than it has been since our inception, and with our current view of the markets and expected cash flows, we believe these programs can be sustained.
The decision regarding capital returns aligns with our current capital allocation framework.
To review the framework prioritizes maintaining liquidity and investing capital to sustain and improve our operations.
Next, we aim to maximize value creation opportunities across four categories listed in no specific order.
One of those, of course, is returning cash to stockholders, which we've demonstrated today.
Now, let me briefly highlight the other three value creation opportunities.
First, we've made great progress in reducing our debt.
As mentioned, our adjusted proportional net debt is now below our target range of $2.0 billion to $2.5 billion.
Today, our company has no substantial debt maturities until 2027 and our expected cash pension funding requirements are at their lowest levels.
As we've said previously, our net debt may fluctuate, but we intend to maintain a strong balance sheet through this cycle.
Second, another focus is the transformation of our portfolio, building on the progress we have already made in this five-year program.
Finally, we continue to evaluate value creating growth projects and pursue opportunities that will generate an adequate rate of return.
First, it's a very good time to be in the upstream aluminum business.
We have a long position in all three of our segments and the work that we've accomplished while continuing has made us more competitive, enabling us to succeed through the commodity cycle, because of this work we are well positioned to capture benefits from improved markets, including the very healthy aluminum prices that we're currently seeing.
Next, I'm proud to say that Alcoa Corporation is stronger today than any other time.
Our strategies are working and our balance sheet is in its best shape ever.
This improved financial strength has allowed more flexibility to execute on our capital allocation framework, including the authorization of further returns to our investors.
Finally, we are ready for a sustainable future.
As we approach our five-year anniversary next month, I'm excited about what's ahead as we move forward as a stronger company that can deliver value to our people, our processes and our products.
Operator, who do we have our first question?

user
compname reports q3 adj earnings per share of $2.05 excluding items.
alcoa sets another record for quarterly net income and earnings per share.
q3 adjusted earnings per share $2.05 excluding items.
q3 earnings per share $1.76.
q3 revenue $3.1 billion versus refinitiv ibes estimate of $2.91 billion.
2021 shipment outlook for alumina and aluminum segments remains unchanged.
anticipates continued positive financial results in q4 of 2021.
working capital increase in q4 related to san ciprián could approximate $120 million.
continues to expect a strong 2021 based on continued economic recovery and increased demand for aluminum in all end markets.
expects annual global demand for primary aluminum to increase about 10% relative to 2020 and to surpass pre-pandemic levels in 2019.
alcoa corporation initiates quarterly cash dividend and new share repurchase program.
initiation of a quarterly cash dividend on its common stock and a new $500 million share repurchase program.
have no substantial debt maturities until 2027.

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