Alcoa Corporation Q2 FY2025 earnings call

Safety

• Strong safety performance in Q2 with no fatal or serious injuries, injury rates below 2024 benchmarks, supported by leader time in field initiative.

Strategic Priorities

• Closed sale of 25.1% stake in Ma'aden joint ventures for $1.35 billion.
• Successfully concluded 5-year tax dispute in Australia with favorable ruling.
• Steered through tariff updates, redirected Canadian production to non-U.S. customers, engaged with policymakers.
• Extended supply agreement with Prysmian and completed first North American sale of EcoLum.

Financials

• Ended Q2 with cash $1.5 billion, cash from operations $488 million, working capital release $251 million.
• Year-to-date return on equity 22.5%, days working capital 47 days, second quarter dividend $27 million, free cash flow $357 million.

Revenue was down 10% sequentially to $3 billion. In the Alumina segment, third-party revenue decreased 28% due to lower average realized third-party price, partially offset by increased shipments. Adjusted EBITDA decreased $525 million primarily due to lower alumina prices, with higher production costs, energy costs, and raw material costs only partially offset by higher volumes. In the Aluminum segment, third-party revenue increased 3% due to increased shipments and favorable currency impacts, partially offset by a decrease in average realized third-party price. Adjusted EBITDA decreased $37 million, impacted by $95 million in U.S. Section 232 tariffs, partially offset by price/mix improvements and higher volumes. Second quarter net income attributable to Alcoa was $164 million, with adjusted net income at $103 million or $0.39 per share. Adjusted EBITDA was $313 million.

Aluminum Shipments

• Adjusted annual outlook for aluminum shipments to 2.5-2.6 million metric tons, down from 2.6-2.8 million due to San Ciprián smelter restart disruption.

Other Corporate Costs

• Lowered other corporate costs to $160 million from $170 million.

Interest Expense

• Increased interest expense outlook to $180 million from $165 million.

CapEx

• Adjusted return-seeking CapEx outlook for 2025 to $50 million from $75 million.

Third Quarter Outlook

• Alumina segment expected to improve by ~$20 million with lower maintenance costs and higher production.
• Aluminum segment expects higher Midwest premium revenue but offset by ~$90 million in sequential tariff cost increase, alumina cost favorable by $100 million.

• Tariff impacts on aluminum pricing and shipments, including Section 232 tariffs affecting Canadian production redirected to non-U.S. customers.
• Uncertainty in Western Australia mine approvals process causing delays in new mine regions, potentially impacting bauxite supply.
• Volatility in alumina and aluminum prices, bauxite supply disruptions due to Guinea mining license issues.

Q: Maybe starting on the tariff side. Molly, I think you mentioned that the current outlook doesn't include anything for potential, I guess, 50% tariffs on Brazil. How would -- if that does happen, is there any way you get impacted from that potentially?

A: Katja, it depends on if alumina is indeed excluded. Our read of it now is that it's covered under the annex. But until we see the executive order that would be related to Brazil, we can't assure that. If that were the case, we are sourcing our U.S. smelters with Brazilian alumina. Now we could redirect supply and provide them from Western Australia, but obviously, that will take time and cost more in terms of shipping. But we have that option. And depending on how that executive order is written, we can adapt.

Q: Just following up on Katja's question there on WA. If the delays to the new mine areas are extended, can you keep mining the lower grade areas for a period of additional years? Or it would be more urgent than that?

A: So we'll continue to mine the areas that we're in today. And as I said to Katja, the -- no impact on '25, '26. As we said, we expect it to be in the new mines in late '27. That slips out till 2028 at this point, but we do have contingency plans in place that can go up to -- all the way up to a 15-month delay if needed.

Q: Just very quick first one. Just to clarify the maths on the tariff costs, you had $115 million cost in the second quarter, and you said it's going to be a negative $90 million delta. So it's $205 million the run rate of cost in the second quarter. Is that correct?

A: That will be the third quarter cost, yes, $205 million. And then we're saying again at latest pricing. So if you dialed forward, that would be the $215 million that we guided to in tariff cost.

Q: On the mid-2026 restart of San Ciprián, it still implies 75% utilization. Can you remind us of, I guess, when the term of the agreement with the workforce comes to [ an end ] and whether the delayed restart has any impact on that?

A: So after -- Bill, thanks for the question. After the power outage occurred in Spain, we declared force majeure with -- on that contract because it limited our ability to be able to meet the deadlines that are included in the contract. Recall that we had anticipated a full restart by October 1 of 2020 -- sorry, 2025. And then from there, we had some flexibility on how we run the plant after that full restart. Because of the power outage, we have said that we were not going to meet that October 1 deadline, and we've moved it back to the middle part of 2026.

Q: On the last point you made, Molly, that 70% of your Canadian smelting output is under contract to be sold to U.S. customers. When does -- when can you start renegotiating potentially those contracts so that, that 70% decreases?

A: So those are annual contracts, but also understand we have firm customer relationships that we're not going to jeopardize. So Carlos, you could see some flexibility, but it's going to be a careful balance of respecting our strong customer relations as well as moving the metal to get the best margin.

Q: I'm curious as to the confidence you have in Spain restarting this week that the utility will deliver electricity. Presumably, the population grows something like 10% July, August with tourism. And then there's air conditioning, electricity demand in the heat of the summer. So are there any guarantees of power delivery or something that's different than August 28 when the wind didn't blow?

A: So John, it's a question that we've been wrestling with since the wind didn't blow on the date earlier in the year. We've been working with the national and regional representatives of the country, and they have developed, and this is obviously not just our prompting, but prompting from other industry. In Spain, they've approved a list of 65 actions in the energy sector that are designed to make the electricity grid more resilient. They are incorporating additional tools in the networks like voltage control, working on stability in the face of oscillations. So they are working to strengthen the electrical systems. There's no guarantees in life, and -- but they are taking, we believe, the right measures to ensure that the power stays on.

Q: Firstly, Bill, just wondering if you could share any thoughts on how discussions with the government are going regarding the tariff. I had heard that maybe Canada could be in line for a reduction relative to the rest of the world. And then secondly, I don't want to put the cart before the horse, but net debt came down, you're almost within sight of that $1 billion to $1.5 billion range. Just your thoughts on timing for when we may hear some words on capital management and what you're potentially thinking if it's not too early?

A: Glyn, on the tariff discussion, I want to emphasize exactly how much advocacy and engagement we've been doing over the last 3 or 4 months. I've spent time in Ottawa. I've spent a lot of time in D.C. I have met with Mr. Hassett, Mr. Lutnick, Mr. Greer. I even had a very, very brief discussion with President Trump while I was in Saudi Arabia, and we're talking like a 15-second discussion with President Trump while I was in Saudi Arabia. And we're doing really 2 things. One is an underlying education of how short the U.S. market is for aluminum and how long it would take to replenish that via building plants in the U.S. And recall, and I know you know this, but building a smelter in the U.S. would probably take us at least 5 years in order to replace the 4 million metric tons of aluminum that comes outside of -- from outside of the U.S. We need 6 gigawatts of energy, that's not gigawatt hours, that's 6 gigawatts of energy. And it would probably cost $30 billion to put 4 million metric tons here. So we're educating the government on those facts. And then secondly, we're educating them on how tight the supply chains are between the U.S. and Canada and the fact that we think it makes a lot of sense to have metal coming out of Canada to support our downstream customers. And then there's one last data point. There's something like 12 or 13 jobs in the downstream that are supported by every Canadian primary upstream job. So the relationship between how much jobs can be created in the upstream is really outweighed by how many jobs there already are in the downstream processing business in the U.S. Do you want to address the capital flows? Molly S. Beerman: So Glyn, thanks for the question on the cap allocation. We made good progress this quarter on our adjusted net debt target. At the end of the second quarter, we were at $1.7 billion. That's an improvement from the $2.1 billion from the first quarter. We are about $200 million away from the high end of our target at $1.5 billion. While we reach the top end of the range, we will look across our capital allocation priorities, so returns to shareholders, portfolio actions as well as any growth opportunities. We do recognize that we have a bit more work to do inside the target. The adjusted debt, which we define as including the gross debt plus the pension is at $3.2 billion and that's above the high end of that range that we've targeted at $2.1 billion. So we will work on some delevering. We do have our 2027 notes, a portion of those remain about $141 million, those are now callable at par. We also have a portion of our 2028 notes that are now callable with a small premium. That's about $219 million. So we'll look at keeping in mind that our cash target is $1 billion to $1.5 billion. We'll work on some delevering.