Alcoa Corporation (AA) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Alcoa Corporation Third Quarter 2025 Earnings Presentation and Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Louis Langlois, Senior Vice President of Treasury and Capital Markets. Please go ahead, sir.

Thank you, and good day, everyone. I'm joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer; and Molly Beerman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill and Molly. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. For historical non-GAAP financial measures, reconciliation to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. We have not presented quantitative reconciliation of certain forward-looking non-GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings press release and slide presentation are available on our website. Now I'd like to turn over the call to Bill.

Thank you, Louis, and welcome to our third quarter 2025 earnings conference call. Let me begin with safety. In late July, we experienced a tragic loss with the passing of a colleague due to a fatal incident at the carbon plant of our Alumar smelter, our first workplace fatality since 2020. This event has deeply affected the entire Alcoa family and our thoughts remain with his loved ones, friends and colleagues. Following the incident, safety leaders from across Alcoa, supported by independent external experts, conducted a comprehensive investigation. We held a town hall with employees to share findings, address concerns and reinforce our safety protocols. Already, the implementation of the associated actions are well advanced at Alumar and a series of global measures have been introduced to prevent such incidents in the future. This loss is a solid reminder of the critical importance of safety in everything we do. We remain steadfast in our commitment to provide a safe working environment. In the third quarter, we delivered strong operational performance and stability, achieving year-to-date aluminum production records at 5 of our smelters. These additional tons are particularly valuable as they carry higher margins and contribute meaningfully to our bottom line. With increases in the Midwest premium this quarter, related revenue on our U.S. produced tons more than offset the net unfavorable tariff impacts on imports of aluminum to the U.S. from our Canadian smelters. We had 3 onetime items impacting the quarter, which Molly will cover. The permanent closure of the Kwinana refinery, the closing of the sale of our 25.1% interest in the Ma'aden joint venture and a sizable increase asset retirement obligations, primarily related to our Brazil operations. Looking ahead to the fourth quarter, we anticipate higher shipments and a sequential release of working capital. The recent rise in Midwest premium is now sufficient to cover the full cost of logistics for importing aluminum into the U.S. including the 50% Section 232 tariff. While we continue to evaluate the most profitable placement of our spot volumes and direct those shipments accordingly, the Midwest premium now covers costs on the shipments to our U.S. customers on contracts supplied by our Canadian smelters. Earlier this week, we announced that the United States and Australian governments will provide funding to develop a gallium plant, which will be co-located at our Wagerup alumina refinery in Australia. This follows the support by the Japanese government, which we announced in August. The partners will receive a gallium offtake in proportion to their interest. This project has strategic benefits for Alcoa and the government supporting it. The support from all 3 governments underscores Alcoa's role in the development of the critical mineral supply chain, and enables us to provide maximum value from the bauxite resources we already extract in Australia. The continuity and competitiveness of Alcoa's Australian mining and refining operations not only support the aluminum industry but also support manufacturing, technology and defense industries. Additionally, earlier today, we announced a new long-term energy contract for our Massena operations as well as a $60 million investment in the anode bake furnace. Securing long-term competitively priced energy is essential to supporting investments like the rebuild and modernization of the furnace, an initiative that will enhance operational efficiency. This energy contract and major investment commitment are a big deal. Alcoa is taking steps to further strengthen the United States primary aluminum production capabilities. I made a commitment to the Massena employees to secure power and to invest in their operation. Now I will ask them to respond with their commitment to continuously improve the operations profitability. We look forward to celebrating the step and certainly welcome President Trump, Governor Hochul, Senator Schumer and the entire New York congressional delegation as well as members of the New York Power Authority and Empire State Development to visit our Massena operation to see what great U.S. manufacturing looks like and to thank them for their support. The Australia mine approvals process is moving forward with completion of the public comment period in August. We're preparing our responses and expect to submit to the Western Australia EPA by year-end. The Western Australia EPA has indicated that it will publish its assessment and recommendations by the end of the second quarter of 2026, and we anticipate ministerial approvals by year-end 2026. In summary, this quarter brought both sorrow and progress. The tragic event at the Alumar smelter underscores the importance of our unwavering commitment to safety. Despite challenges, we achieved record aluminum production and took strategic steps to strengthen our future. Looking ahead, we're focused on increasing profitability through higher shipments, improved operations, and key investments such as the Massena Energy contract and anode bake furnace. Now I'll turn it over to Molly to take us through the financial results.

Thank you, Bill. Revenue decreased 1% sequentially to $3 billion. In the Alumina segment, third-party revenue decreased 9% on lower volumes and price of bauxite offtake and supply agreements. In the Aluminum segment, third-party revenue increased 4% on an increase in average realized third-party price, partially offset by lower shipments and unfavorable currency impacts. However, this was lower than our revenue expectation for the segment primarily due to certain aluminum shipments from Canada to U.S. customers, which were in transit at quarter end. This also explains why our tariff costs sequentially was lower than expected. Third quarter net income attributable to Alcoa was $232 million, versus the prior quarter of $164 million, with earnings per common share increasing to $0.88 per share. The results reflect a $786 million gain on the sale of our interest in the Ma'aden joint venture and a subsequent favorable mark-to-market change of $267 million on the Ma'aden shares, partially offset by restructuring and related charges of $895 million for the permanent closure of the Kwinana refinery in Australia. On an adjusted basis, net loss attributable to Alcoa was $6 million or $0.02 per share. Adjusted EBITDA was $270 million. Let's look at the key drivers of EBITDA. The sequential decrease in adjusted EBITDA of $43 million is primarily due to increased U.S. Section 232 tariff costs on aluminum imported into the U.S. from our Canadian smelters. Adjustments to asset retirement obligations, unfavorable currency impacts and lower alumina prices, partially offset by higher aluminum prices. The Alumina segment adjusted EBITDA decreased $72 million, primarily due to adjustments to asset retirement obligations, primarily in Brazil. Also, lower volumes and price of bauxite offtake and supply agreements and lower alumina prices were only partially offset by lower production costs related to the timing of maintenance activities. The Aluminum segment adjusted EBITDA increased $210 million. Higher metal prices and lower alumina costs were partially offset by tariff costs which reflect a full quarter at the 50% tariff rate after its increase from 25% on June 4. In addition, production costs improved due to the timing of maintenance activities. Outside the segments, other corporate costs increased, while intersegment eliminations changed unfavorably, primarily due to the absence of a benefit in the prior quarter, resulting from a lower average alumina price requiring less inventory profit elimination. Moving on to cash flow activities for the third quarter. We ended the third quarter with cash of $1.5 billion. Cash used for operations was $85 million, including a slight working capital use of $25 million. We also received a tax refund of $69 million from the Australian tax office for the deposit held during the 5-year transfer price dispute that was resolved in our favor in April. Cash from investing included $150 million from the sale of the Ma'aden joint venture, shown here net of transaction costs. Cash used for financing activities included a $74 million full repayment on a term loan, which was the last borrowing associated with the AWAC joint venture structure. Let's look at other key financial metrics. The year-to-date return on equity was 14.5%. Days working capital increased sequentially by 3 days due to an increase in accounts receivable days primarily due to higher aluminum pricing. Our third quarter dividend added $26 million to stockholder capital returns. We closed the quarter with $1.635 billion in adjusted net debt, making progress towards the top end of our target of $1 billion to $1.5 billion. Cash flow for the quarter includes an increase in capital expenditures to $151 million. Turning to the outlook. We have a few adjustments to our full year outlook. First, we are decreasing our annual outlook for interest expense to $175 million. Second, we have adjusted our total CapEx for 2025 to $625 million, down from $675 million, primarily due to less spending on mine moves in Australia. Third, we have adjusted our payment of prior year income taxes for 2025 to 0, previously $50 million to reflect the tax refund from the ATO matter mentioned earlier. And last, the outlook for total ARO and environmental spend in 2025 is expected to increase by $20 million to approximately $260 million, consistent with the guidance update we provided in the Kwinana closure press release. For the fourth quarter of 2025, in the Alumina segment, we expect performance to improve by approximately $80 million due to the absence of charges recorded in the third quarter to increase asset retirement obligations as well as higher shipments and lower maintenance costs. In the Aluminum segment, we expect sequential unfavorable impacts of approximately $20 million due to restart inefficiencies at the San Ciprián smelter and lower third-party energy sales partially offset by higher shipments. While current Midwest premium pricing and higher shipments of our Canadian metal into the U.S. are expected to have a favorable impact on the fourth quarter, we expect tariff costs to increase by approximately $50 million due to increased shipments. Further tariff impacts from changes in LME pricing during the quarter can be calculated from our tariff sensitivity. Alumina cost in the Aluminum segment is expected to be favorable by $45 million. Below EBITDA, Other expenses in the third quarter included favorable foreign currency gains of approximately $10 million, which may not recur. Based on last week's pricing, we expect fourth quarter operational tax expense of $40 million to $50 million. Now I'll turn it back to Bill.

Thanks, Molly. Let's discuss our markets, starting with alumina. Alumina prices have declined significantly over the past month with recent prices around $315 per metric ton as the market remains under pressure due to ample spot availability and refinery expansions in Indonesia and China. Outside China, the timing mismatch between new refining capacity coming online in Indonesia in 2025 in additional smelting capacity expected only in late 2025 or into 2026 is creating a short-term imbalance. In China, most previously curtailed capacity has been restarted since May, adding further supply pressure. Many Chinese refineries operate at the top of the cost curve. Continued downward pressure on domestic prices may prompt further supply side response, resulting in curtailments. Looking ahead, alumina demand will be supported by new smelting capacity in Indonesia to anticipate it to come online in 2026. However, uncertainty around the Mosjøen smelter could weigh on demand and pricing. Meanwhile, bauxite prices remained firm, supported by seasonal supply disruptions in Guinea and the market working through stockpiles accumulated earlier in 2025. Alcoa continues to deliver on strong fundamentals, consistent quality in our smelter-grade alumina products and preferred supplier status due to our reliability. We remain on track for a record year in third-party bauxite sales volumes. Let's now move on to aluminum. LME prices rose approximately 7% sequentially and have continued to increase, recently reaching $2,775 per metric ton, reflecting a combination of factors, a weaker U.S. dollar, expectations of monetary easing and persistent supply tightness amid resilient global demand. In the U.S., the Midwest premium continued to increase during the third quarter and recently reached import parity. This reflects declining inventories and reduced aluminum imports following the Section 232 tariff increase earlier this year. European premiums also rebounded from earlier lows, signaling improving market fundamentals. Demand remained steady across Europe and North America. Packaging and electrical sectors continued to show healthy demand growth in both regions, while construction and transportation remain soft. The automotive sector is weak based on tariff uncertainty. On the supply side, growth remains constrained. Outside China, restarts and ramp-ups have been moderate, while China is approaching its smelter capacity ceiling. Additionally, potential disruptions at the Mosjøen smelter could further tighten the market. Looking ahead to 2026, the impact of increasing supply from Indonesia is expected to be limited given constrained growth elsewhere, including in China and the expectation of continued demand resilience. Importantly, our core markets in Europe and North America are expected to remain in regional deficit. Specific to Alcoa, we had an overall stable order book of value-add products in the third quarter with the exception of foundry. In North America, demand for slab and wire rod remains strong, while billet demand is steady, but spot activity is subdued. In Europe, while rod demand is robust, slab performance is mixed, with strength in packaging but weakness in automotive and billet demand remains cautious with customers maintaining short order visibility. I'm very excited to host you on October 30 for our Investor Day 2025. It's been almost 4 years since Alcoa has had its last Investor Day. It's a great opportunity to discuss why Alcoa is the investment choice in aluminum. We'll discuss our strategic vision and market position, operational excellence and innovation, talent, the long-term market and our financial outlook. We also provide additional details on our Spanish operations and our Australia mine approval process. Please visit our website for additional details. To conclude, in the third quarter, Alcoa maintained strong operational stability, took strategic actions to strengthen the company and continued our engagement with trade policymakers. Looking ahead, we will focus on safety, stability and operational excellence, deliver fourth quarter financial improvement and progress our Australia mine approvals. I look forward to welcoming you to our Investor Day event on October 30. With that, let's open the floor for questions. Operator, please begin the Q&A session.

[Operator Instructions] Our first question will come from Chris LaFemina with Jefferies.

Just wanted to ask about, I guess, capital allocation. I mean you're approaching your net debt target range, you could be in a position where you're able to start returning capital a bit more aggressively in 2026. You're obviously focused on further operational upside. I know you're going to give us a lot more detail around this at the upcoming Investor Day. But just wondering about how you think about potential M&A opportunities in the market? And to the extent that you think about that at all, is it any particular spot in the supply chain that you'd be focused? Would you be interested in bauxite, alumina? Is it more in the downstream? Or is that really not even in front of your mind right now because of all the stuff you have going on internally?

So Chris, let me let Molly address the capital allocation, and then we'll come back to the M&A question.

Chris, we are $135 million away from the top of our adjusted net debt target at $1.6 billion and the top target is $1.5 billion. We do have a priority to continue to pay down debt. We have notes -- the 2027 notes, $141 million remaining. And on the 2028 notes, $219 million remaining. So that will be our first priority. But as we stay within the net debt target, we will certainly be evaluating additional returns to stockholders in parallel with pursuing some growth options.

And Chris, to address the M&A question, we did the Alumina Limited transaction last year, and that showed that we have the ability to successfully do M&A work. That transaction, if you look back upon it allowed us to do the Ma'aden transaction where we're swapping out the Ma'aden equity interest for shares. As I look forward, we will look at opportunities for M&A across the spectrum of the product line. I would not say at this point that we have any particular part of the product line that we need to add to, but we will look at opportunities as they come up, and we'll do the evaluation. And what we'll do is where we have opportunities to create significant synergies that aren't available to our shareholders, otherwise, we would look at those opportunities from the acquisition perspective.

Your next question today will come from Lawson Winder with Bank of America.

Great. Bill, Molly, nice to hear from you both. Could I ask about the U.S. Australia Alcoa partnership? Would you be able to provide some background on how this came together. Was that an initiative driven by Alcoa?

It was an initiative that really began between Alcoa and the Japanese. The Japanese were looking for potential offtake of gallium. We got that joint development agreement put together a little while back. And we've been talking to both the U.S. and the Australian government for a number of months now. The real strategic advantage of this deal is that it provides a supply chain outside of China for gallium that is around 10% of the world's gallium market. It will be at our Wagerup facility in Western Australia. That solidifies the importance of that facility in Australia. And it really strengthens the relationship between -- and you saw this in the press conference yesterday, and in the joint signing ceremony between President Trump and Prime Minister Albanese, strengthens the relationship between the U.S., Australia, Japan, and really shows the importance of Alcoa in Australia.

And then as a follow-up, could you give us an idea of what sort of approvals or permits might be needed and the time line to first production on that facility?

So the -- that's one of the reasons why Wagerup was chosen. The approvals -- we have line of sight to get the approvals done fairly quickly. We are pushing to have first metal by the end of 2026. We think we will be first to market outside of China, and it's an aggressive schedule. We -- the next step is that we need to get final documents signed, but we're pushing to be able to create -- to extract gallium by the end of 2026.

And your next question today will come from Timna Tanners with Wells Fargo.

I'm looking forward to hearing more about Australia and Spain as you teased for next week's Investor Day. But didn't hear mention of Canada or U.S., I thought I would probe those topics. Didn't hear mention in particular on the negotiations with Canada regarding any carve-out of aluminum. So I would like to hear that export opportunity the latest there. And then given that the U.S. now has arguably the lowest aluminum smelter production costs in the world, just if there's any rethinking of expanding capacity domestically, like at Warrick with that idle potline.

There was a lot of questions there, Timna. So as far as the Canadian U.S. negotiations that are going on, we are providing information to both sets of governments so that they have the right information, the right data to make the right decisions. And we're working with both administrations to ensure that they understand the trade flows because we're probably the world's expert on the trade flows between Canada and the U.S. when it comes to aluminum. I'm a little bit surprised by your comment around the lowest cost in the world for aluminum production. We have not yet seen with the exception, and I'll cover the Massena project. We have not yet seen significantly competitive energy prices available for the long term in the United States. You know that globally, we would be shooting for energy prices between $30 and $40 a megawatt hour. We've not seen those available yet for long-term packages in the U.S. In fact, the opposite of that is occurring because some of the data centers and the AI centers are able to pay $100 a megawatt hour, whereas we're looking for 30 to 40. And then lastly, around your question around Warrick. The Warrick restart is a complex restart for that fourth line. It will cost us probably about $100 million, and it will take anywhere between 1 to 2 years to get that fourth line up. We will continue to evaluate it, but we won't make an investment decision simply on a tariff. Tariffs can and do change over time. So we won't be plowing $100 million into the ground at this point based on a tariff cost. Did I answer all of them?

I think you did, and I should clarify that, that comment on the lowest production cost is adjusted for tariff and actually came from CRU, but that's helpful detail. I appreciate it.

And I should have highlighted Massena, and let me just take a second to highlight Massena, really big deal. And I said this in our -- in my prepared remarks, but maybe it didn't come out as exciting as I wanted it to. Really big deal in Massena. We have a 10-year contract that has 2 potential extensions of 5 years each, that allows us now to make long-term decisions associated with Massena, and we've decided to invest in the bake furnace and Massena. So really excited for the people of Massena. And as I said in my prepared remarks, I committed to them. We're going to get them globally competitive long-term power contract. They've committed to me that they're going to work on the profitability of that plant, the safety of that plant and the production of that plant. And I'm looking forward to get up to upstate New York and celebrate here soon.

Your next question today will come from Carlos De Alba with Morgan Stanley.

Bill, Molly, a question on gallium. Do you have any color that you can share on the economics of that project? And if it is too early, maybe when do you expect technical report feasibility study that you can share, given that it seems that it could come up rather quickly? And maybe related to that, does this project changes in any way, the ongoing mining process that you have going on in Western Australia?

I missed the second half of that.

That's an impact on approvals.

Approvals -- approvals process.

If you change the ongoing mining permit process that -- permitting process that you have in Western Australia.

Right. So let me go there fairly quickly. The approvals process that we're going through currently is related to Huntley and Pinjara. Huntley the mine; Pinjara, the refinery. So this would have no impact on that approvals process. In Wagerup, we will be going through an approval process there at a later date and this should have no impact on that approval process either. When it comes to the economics, Carlos, this is not a large plant. It is not a large investment. It is going to be financed via a couple of Japanese entities, the U.S. government and the Australian government. Alcoa will have a small part of the financing. The really critically important thing here is to have a supply chain of gallium outside of China. And this is what the governments want and they will be taking an offtake of that gallium. So Japan, Australia and the U.S. will all have an offtake of the gallium.

I'll just add that the structure for that offtake is a cost-plus margin, which is still in the process of negotiation.

All right. Great. And then one more, if I may. Maybe related to the last question Timna asked. Any intention to maybe look at getting back into the rolling business, unfortunate situations from some of the current producers there, maybe highlighted the need of having more robust supply chain?

Carlos, my attorneys always tell me not to make unequivocal statements. But I will make an unequivocal statement. No, there's no interest in getting back in the rolling business.

And your next question today will come from Daniel Major with UBS.

Bill, Molly, I think most have been answered because I discussed most of the strategic elements next week. But just one follow-up just on the comment you made on gallium. Would you -- you said that the pricing would be an offtake agreement at a cost plus or a fixed margin. Is that the all of -- would that be for all of the volumes associated with the project? Is that the right way to think about it?

All of the volume, Alcoa, and we still have to get through a definitive agreements. So we're making these comments based on the MOU that was signed. Alcoa will have a very small offtake, very small offtake, but the rest will be cost plus.

Okay. And just one follow-up on the gallium dynamic. Can you give any insight on the ownership structure of the JV and your equity participation in the 100 tonnes?

So the ownership structure is 2 entities will own the plant. The Japanese will own 50%. The combination of the U.S., Australia and Alcoa will own the other 50%. We have not publicly said the ownership of that second 50% and the offtake will be similar in line with the ownership percentages.