First Quarter 2020 Results Aluminum Manufacturer Gives COVID-19 Updates
Alcoa Corporation, a specialist in bauxite, alumina, and aluminum products, reports first quarter 2020 results and talks about decisive actions to adress the corona ciris.
“While we reported a solid first quarter with a strong cash balance, the world has fundamentally shifted due to the COVID-19 global pandemic, and we are taking decisive actions to address this crisis," said Alcoa President and Chief Executive Officer Roy Harvey.
“Most importantly, we are focusing on the care and safety of our workforce, our operations, and our communities. We have implemented numerous steps for business continuity and are acting quickly to protect financial stability. We took action before this crisis to drive savings by deploying a new operating model and launching processes to sell non-core assets, review our portfolio, lower production costs and reduce working capital. Today, we are announcing new actions to effectively manage cash through the economic uncertainty from the pandemic. Taken together, these new and existing initiatives, including the sale earlier this year of our former Gum Springs plant, will total $900 million in cash actions for the year. We know how to manage through downcycles, and we’ve used our strategic priorities to strengthen our company, creating a stronger foundation to address these challenges.”
In the first quarter of 2020, Alcoa reported net income of $80 million, or $0.43 per share, compared with a net loss of $303 million, or $1.63 per share, in the fourth quarter of 2019. The 2020 first quarter results include the net positive impact of $122 million of special items, stemming primarily from the gain on the previously announced sale of the waste treatment facility in Gum Springs, Arkansas, partially offset by costs related to the restart of the Aluminerie de Bécancour Inc. (ABI) smelter in Quebec, Canada and interim period tax impacts.
Excluding the impact of special items, first quarter 2020 adjusted net loss was $42 million, or $0.23 per share, improved from fourth quarter 2019 adjusted net loss of $57 million, or $0.31 per share.
Adjusted EBITDA excluding special items for the first quarter of 2020 was $321 million, a 7 percent sequential decrease. Favorable currency and lower costs for raw materials and energy did not completely offset lower prices, product mix, and volume, or higher production costs.
Alcoa reported first quarter 2020 revenue of $2.4 billion, down 2 percent sequentially, primarily due to lower alumina and aluminum prices and lower volume, partially offset by favorable currency.
Cash used for operations in first quarter 2020 was $90 million. Cash used for financing activities was $44 million and cash provided from investing activities was $107 million. Free cash flow was negative $181 million.
Alcoa ended the quarter with cash on hand of $829 million and debt of $1.8 billion, for net debt of $973 million. The Company reported 31 days working capital, a 4-day decrease year-over-year, primarily due to less days sales outstanding and lower inventory days on hand.
Alcoa is taking strong measures to protect its workforce and its locations from the threat caused by COVID-19. All of Alcoa’s bauxite mines, alumina refineries, aluminum smelters, casthouses, energy assets and rolling operations remain operational. The Company continues to prioritize health and safety in accordance with public health and governmental regulations, including adjusting patterns to socially distance, increasing hygiene protocols, and encouraging remote work where practical. The Company is implementing new actions in 2020 to effectively manage cash during the economic downcycle caused by the pandemic: Those actions include:
- Reducing $100 million of non-critical capital expenditures
- Delaying non-regulated environmental and Asset Retirement Obligations (ARO) spending of $25 million
- Deferring $220 million in pension contributions in the United States under provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act. The Company also continues to evaluate other governmental support programs.
- Implementing hiring, travel and other spending restrictions targeted to save or defer approximately $35 million
In addition to these immediate cash improvement actions, Alcoa amended its Revolving Credit Facility agreement in April 2020 to temporarily increase borrowing base availability for the next four quarters and provide improved flexibility.
Strategic Actions and 2020 Programs Update
Alcoa has fully deployed its new operating model announced in September 2019 that will reduce annual overhead expense by $60 million beginning in the second quarter of 2020.
The Company is also continuing the review of its asset portfolio to drive lower costs and sustainable profitability. The asset review includes two components: Potential sales of non-core assets to generate between $500 million and $1 billion in cash by early 2021, and an evaluation of the competitiveness of existing production capacities, focusing on 1.5 million metric tons of global smelting capacity and 4 million metric tons of global alumina refining capacity.
Non-Core Asset Sales
As previously announced, on January 31, 2020, the Company closed the sale of its waste treatment facility in Gum Springs, Arkansas, in a transaction valued at $250 million. Alcoa received $200 million in cash upon closing. The remaining $50 million will be paid to Alcoa if certain post-closing conditions are satisfied. The Company recorded a gain in the first quarter of 2020 of $180 million (pre- and after-tax).
Alcoa today announced that it will curtail the remaining 230,000 metric tons of uncompetitive smelting capacity at its Intalco smelter in Ferndale, Washington amid declining market conditions. The full curtailment, which includes 49,000 metric tons of earlier-curtailed capacity, is expected to be complete by the end of July 2020. The smelter recorded a net loss of $24 million in the first quarter of 2020.
“While our employees have worked diligently to improve the facility, the smelter is uncompetitive, and current market conditions have exacerbated the facility’s challenges,” Harvey said. “This is difficult because of the impact on our employees, and we will ensure appropriate support as we work to safely curtail the facility.”
The action will bring Alcoa’s total curtailed smelting capacity to 880,000 metric tons, or approximately 30 percent of its total global smelting capacity.
The Company will record estimated restructuring charges of approximately $25 million (pre- and after-tax), or $0.13 per share, in the second quarter of 2020 associated with the curtailment, for employee-related costs and contract termination costs, which are all cash-based charges expected be paid primarily in the third quarter of 2020. Intalco employs approximately 700 people, and the workforce will be significantly reduced due to the curtailment.
In February 2020, Alcoa announced 2020 programs to drive leaner working capital and improved productivity. Alcoa intends to improve working capital by $75 to $100 million through reduced inventories and optimized contract terms. Greater productivity and lower costs are expected to result in approximately $100 million of improvements.
The Company has updated annual Aluminum segment shipments to between 2.9 and 3.0 million metric tons from its earlier outlook of between 3.0 and 3.1 million metric tons, due to the impact of the Intalco curtailment on the second half of 2020. The Company’s 2020 shipment outlook for Bauxite and Alumina remain unchanged from the prior full-year estimates. Total annual bauxite shipments are expected to range between 48.0 and 49.0 million dry metric tons. Total alumina shipments are projected between 13.6 and 13.7 million metric tons.
In the second quarter of 2020, Alcoa expects lower quarterly results in the Bauxite segment primarily due to the non-recurrence of an annual sales contract true up. In the Alumina segment, the Company expects benefits from lower costs for raw materials. In the Aluminum segment, the Company expects performance to be nearly flat, as improvements from lower alumina costs, smelter power costs and production costs are expected to be offset by lower Brazil Hydro sales prices and lower value add pricing and volumes.
The Company recognized significant currency benefits related to the strengthening of the U.S. dollar in the first quarter 2020, and it continues to be exposed to impacts of currency rate fluctuations in the second quarter.Alcoa expects its annual operational tax rate will vary with market conditions and jurisdictional profitability and is withdrawing its prior outlook of 70 to 80 percent. The extent and duration of the coronavirus COVID-19 pandemic is unknown. The uncertainty around the future impact on the Company’s business, financial condition, operating results, and cash flows could cause actual results to differ from this outlook.