美國鋁公司 (AA) 2016 Q4 法說會逐字稿

Good afternoon, and welcome to the Alcoa Corporation fourth-quarter 2016 earnings presentation and conference call.

(Operator Instructions)

I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations.

Please go ahead.

Thank you, Andy.

First, I would like to apologize if you are having trouble logging onto the webcast; please try again.

We are having significant interest in the webcast, and so the access is a little bit slower than normal.

But you can also try it using Google Chrome, that seems to be working a little bit better.

So I apologize if you had any difficulty getting in.

I am joined today by Roy Harvey, Alcoa Corporation Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer.

After comments by Roy and Bill, we will take your questions.

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.

Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation.

Any reference in our discussion today to historical EBITDA means adjusted EBITDA, for which we have provided reconciliations and calculations in the appendix.

Finally, a note on the financial statements methodology.

Because Alcoa Corporation commenced operation as a standalone public company on November 1, 2016, the financial statements are a combination of financials carved out from Alcoa Inc prior to November 1, and actual results of Alcoa Corporation thereafter.

Therefore, the fourth-quarter results include October on a carve-out basis, and November and December actual results.

Similarly, the full-year 2016 results include January through October, on a carve-out basis, and November and December actual results.

With that, here is Roy.

Thank you, Jim.

I would like to welcome everybody to our call to review Alcoa's fourth-quarter results.

Our first reporting period as a new publicly traded company, and as our results show, we are off to a good, solid start.

Let me get started with a quick overview of what we would like to cover this afternoon.

First, over the last month, we have continued to aggressively streamline our portfolio.

While these actions will strengthen our competitive position, the restructuring costs produced a net loss in the fourth quarter.

Excluding those special items, we generated net income of $26 million or $0.14 per share.

Second, I am also very pleased with the strength of our underlying adjusted EBITDA.

Excluding special items, this metric rose 18% sequentially reaching $335 million.

Third, since launching as a stand-alone company, we have increased our cash, and we have closed the quarter with a cash balance of $853 million.

Fourth, looking at our markets, we expect growing demand in bauxite, which bodes well for our third-party bauxite business, and strong demand growth for alumina and aluminum, particularly in China.

The fundamental outlook is stable across all three markets in 2017.

And finally, as we look beyond the quarter and focus on the future, we will continue to manage Alcoa Corporation with an aim to reduce complexity, generate cash, and invest for strong returns.

As you can see from these highlights, we have had a strong start, but we still have much to do to secure a stronger and brighter future.

With that, I would like to turn it over to Bill so we can have a closer look at fourth-quarter financials.

Thanks, Roy.

I am happy to present the financials for Alcoa Corporation's first quarterly earnings.

As Jim noted earlier, the fourth-quarter financials represent one month of carve-outs and two months of actual Alcoa Corp results.

Prior to November, all financials are presented on a carve-out basis.

Let us look first at our GAAP quarterly income statement, which includes all special items, revenue increased of $2.5 million due to higher alumina and aluminum prices, and the impact of tolling metal for our rolling business.

On a GAAP basis, earnings were a loss of $125 million or $0.68 per share, with restructuring and other charges of $209 million pretax.

Let us take a look at the restructuring charges.

As you know, earlier in the quarter, we announced the permanent closure of Suralco and the impairment of [Waro].

The after-tax amount of -- for 2016 special items is $151 million, of which the largest component is $123 million of restructuring or related charges.

The Suralco closure of $90 million in the write-down of our Waro natural gas investment in Western Australia account is for $31 million.

Other actor tax special items include separation costs of $27 million, which is SG&A interest expense and energy contracts mark-to-market partially offset by a favorable discrete tax item.

This is the last quarter we will be reporting separation related costs.

On a pre-tax basis, restructuring is $209 million, of which 35% is noncash.

Now, let us look at adjusted EBITDA after special items.

Adjusted EBITDA, excluding special items, was $335 million in the fourth quarter of 2016, up $51 million, sequentially, and $83 million year-on-year.

Net income attributable to Alcoa, excluding special items, was $26 million or $0.14 per share.

Some key points are that margins improved as cost of goods sold grew slower than revenues, which are up both sequentially and year on year on higher alumina and aluminum prices.

SG&A and R&D helped steady sequentially at 3.2% of sales, interest expense is down $38 million, and it also reflects $19 million of allocated interest in October due to carve-out accounting.

Clearly, interest expense will be lower in 2017 when there is no impact of carve-out interest.

Our effective tax rate depends heavily on market prices, and in which jurisdictions we have gains and losses, but in 4Q 2016, settled at 34%.

Let us take a deeper look at the factors driving our earnings.

Higher metal and alumina prices drove bottom line improvement with some offsets from unfavorable costs and lower volumes.

Buying in the quarter was largely in the alumina segment, as weather delays pushed shipments out of 2016 and into 2017.

Energy, as we had foreshadowed in the third quarter at $37 million, was the largest negative impact due to the higher seasonal power prices at our Spanish smelters, our Portland smelters recent power price increase, and to a lesser extent, lower power sales and higher natural gas prices.

Net productivity was $13 million lower in the fourth quarter than in the third quarter, primarily due to timing of maintenance.

As a point of reference, net productivity versus the fourth-quarter of last year was $92 million.

Now let us take a look at the segment.

On this page, we have provided production and shipment information for 4Q 2016 for the segment, as well as revenues in ATOI for each segment.

I do want to point out, however, that our segment profitability measure will be changing to EBITDA in 2017, so this will be the last quarter you see ATOI numbers.

Let us take a closer look at adjusted EBITDA in the segments.

Fourth-quarter 2016 adjusted EBITDA in the segments totaled $406 million, up $56 million sequentially with strong results in the bauxite and alumina segments.

Bauxite was up $5 million on better pricing and overall cost improvement, moving up its adjusted EBITDA margin to 35%.

Alumina was up $94 million on favorable API currency and LME with partial offset from volume delayed into 2017, and the mix of contract shifts.

Alumina margins doubled to 17%.

Our other segments posted lower sequential earnings, the largest decline for an aluminum, down $19 million, where the aforementioned energy prices and the higher maintenance spending overshadowed higher metal prices.

And rolled products, down $15 million, where we had a mill outage, seasonal products, mix changes, and some towing costs depressed earnings.

Energy's margin remains high at 34%, but is down 4%, sequentially, or lower volume at Yadkin and Warrick, and a Warrick maintenance outage.

More details, segment bridges with all of the key drivers are available in the appendix.

Let us take a quick look at items outside of EBITDA.

This representation of the earnings was the one that many of you saw on our previous presentations.

All non-segment earnings were favorable sequentially, except for LIFO and the metal price lags.

Transformation costs, which are the costs of closed in curtailed locations in our long-term RFDO energy contract, improved $4 million to $20 million.

Corporate pension and OPEB costs also improved sequentially, down $3 million to $5 million.

Total pension and OPEB costs, combining segments and corporate was $35 million.

LIFO and metal price lag was unfavorable at $24 million due to higher sequential quarter alumina and aluminum prices.

All other the costs totaled $22 million, improving $14 million, sequentially.

Finally, let us close out our look at the quarter with a review of the balance sheet metrics.

Cash has been a focal point of the quarter.

Our cash balance upon separation was $654 million, and two months later, at the close of the fourth-quarter of 2016, our cash balance had risen to $853 million.

Working capital management has been exceptional, ending the quarter at 13 days.

Typically, our working capital is lowest in the fourth quarter and highest in the first quarter.

A key lever to maintain assets and grow returns 2016 capital spending came in almost exactly at our $400 million target, or $404 million.

As we have emphasized repeatedly, we are very focused on return on capital.

Our 2016 return on capital is 5.3%; you can find the calculation of this return metric in the appendix.

Leverage remains low, with net debt of $600 million and net debt to adjusted EBITDA of 0.6.

Although the under-funded pension and OPEB liability grew to $3.1 billion as the pension assets had a negative return due to higher interest rates.

Now let me give you a view on 2017.

This page provides information on 2017 shipments by segment, as well as detailing key financial estimates, both income statement and cash.

As we get better insight into certain costs for 2017, we have updated our outlook and have provided more information on items you have asked about.

We now estimate pension and OPEB expense to be approximately $175 million for 2017, down from $200 million.

Total cash contributions for pension and OPEB to be less than $250 million.

Note that these two numbers are not additive.

Interest expense will reflect our low debt level at approximately $110 million, roughly half the FY16 amount, due to carve-out accounting.

Transformation costs are estimated to be approximately $150 million, plus an additional $150 million to $170 million cash from R&D expense remediation and ARO reserves.

Warrick smelter, Suriname refinery and Anglesea power station will now be included in the transformation reporting.

All other corporate costs are estimated to be approximately $175 million, favorable to the prior Outlook of $200 million.

Our effective tax rate and cash taxes will vary with profitability.

Our taxable income and tax rates vary by region, and are heavily influenced by market prices.

There are a few other cash items.

We continue to expect the same capital expenditures to be less than $300 million.

However, we should note that we have increased our return seeking capital expenditures to be approximately $150 million to execute on the growth projects that we had shown in many of our recent presentations.

Recall that we have 18 projects that total $385 million in growth spend.

In 2017, we will start 11 of those 18 projects.

So with that, I will turn it back to over to you, Roy.

Thank you, Bill.

I would like to take a few minutes to review the progress we made in 2016, both enabling separation and positioning us well for 2017.

Starting with productivity.

During the critical period leading up to the separation, which at this point feels long ago, we were faced with a significant downturn in alumina and aluminum pricing.

Faced with these conditions, Alcoans across the globe generated significant savings through productivity improvement, which we drove to the bottom line.

In 2016, we delivered gross productivity savings of $760 million, significantly beating our published goal and even more importantly, we delivered $290 million in net performance improvement.

We have locked in those savings, and will build upon them in 2017.

One important note on how we plan to report productivity and performance going forward.

As we simplify our internal and external reporting, we will focus on net performance figures.

This metric reflects the net improvement of our business outside of our three main market factors, alumina and aluminum pricing, and currencies.

We feel that this is the clearest and simplest indicator of the progress as a Company.

In bauxite, we are among the world's largest bauxite miners, and last year, we increased our third-party exports as we had planned.

We shipped 6 million bone dry metric tons to third-party customers in 2016.

In the fourth quarter, we secured our first major bauxite export contract out of Western Australia, with a third party agreement to supply approximately 400,000 bone dry metric tons of bauxite from our Huntly mine to China.

The Western Australian government also granted approval for Alcoa to export up to 2.5 million metric tons per year of bauxite for five years to third-party customers.

We continue to see great opportunities in the merchant bauxite market, and with modest capital expenditures, we can increase our third-party sales volumes dramatically.

During 2016, we started to build partnerships with key customers in China and elsewhere that can flourish and grow as we build out this highly profitable business.

On production, we demonstrated strong productivity in our operations, beating annual records at locations in our bauxite, alumina, and aluminum segments.

In bauxite, the Juruti mine worked to de-bottleneck its process and set an annual record for both production and shipments.

In refining, Pinjarra and Wagerup in Western Australia, and Sao Luis in Brazil reached new production records.

In aluminum, we had production records for molten aluminum at four of our smelters, Becancour and Deschambault in Canada, San Ciprian in Spain and Mosjoen in Norway.

As it pertains to our portfolio, last year, we continued to take actions to improve our collection of operating assets.

We permanently closed the smelter at Warwick operations in Indiana, and have also just announced the permanent closure of the Suralco refinery and bauxite mines in Suriname, which had been fully curtailed since November of 2015.

We also idled the remaining aluminum refining capacity at Point Comfort, Texas.

These decisions are never easy, but are necessary to strengthen the remaining portfolio.

We continue to be focused on generating both earnings and cash through the active management of our portfolio of assets.

In rolled products, last year, the Warrick rolling mill successfully transitioned to a cold metal plant after the closure of our smelter.

And we are now working on customer qualifications at the Ma'aden rolling company in Saudi Arabia.

Together, the two plants will supply our customers with flat rolled aluminum that is used primarily to produce food and beverage containers and lithographic printing plates.

From a total business standpoint, we plan to transition production volume to Warrick operations in Ma'aden, eventually replacing the tolling agreement with Arconic at Tennessee operations, as they exit the [canned sheet] segment.

Operating results for this quarter demonstrate the need for rapid action to drive profitability in this business.

Our strategic levers are clear: finish startup and qualifications at our Ma'aden joint venture, fill the mills and increase capacity, improve margins in a challenging but improving supply-demand environment, and lower our operating and metal input costs across both plants.

We have made progress this quarter, and the work is continuing.

Lastly, a note about our Portland joint venture, where we were also able to resolve some important challenges.

The Portland aluminum smelter in Victoria state and Eastern Australia, which already faced the waxing of a long-term contract in a difficult energy environment at the end of 2016, lost much of its operating capacity from a December power outage.

Last week, we announced four year agreements with state and federal Australian governments and energy provider, AGL that will help the facility to better manage market fluctuations as we seek a low-cost, long-term power solution.

We have focused on making the best out of a difficult situation.

And we are pleased that we will be able to deliver a significantly improved financial outcome for our shareholders versus curtailment, while constructing a longer-term energy solution for this modern and competitive plant.

Next, I would like to highlight how we are using our CapEx budget for both return seeking projects, and those that help to sustain our business.

These select projects are meant as examples of how we are using our capital dollars efficiently, and with a focus on returns for our shareholders.

Our leadership team has implemented a clear process to review and approve capital projects, eliminating unnecessary complexity so we can quickly identify the right projects and drive returns to the bottom line.

We are also focused on execution, and delivering on projected returns as we build out and implement each of these projects.

We see that as a clear lever for our future success.

Starting with two return-seeking projects.

The first one is in our bauxite segment, with a capital investment of $13 million, the team at the Juruti mine in Brazil increased production last year to 6 million tons per year, up 12% year over year to meet third-party bauxite sales goals.

Last year, Juruti exported bauxite to China, Europe, and the Americas.

In 2016, 21% of production in Juruti was for export, up from 6% the previous year.

The project is expected to have an estimated annual EBITDA impact of $5.2 million, and is in the first phase of what could be additional expansion projects as we build strong customer partnerships for additional sales.

The next project is in our alumina business, and demonstrates how we use advanced process knowledge to continually improve operating efficiency.

Our unrivaled technical experts at the Center of Excellence developed modeling techniques for Pinjarra in Western Australia, our lowest-cost refinery.

The models showed how we could boost daily production by reusing the filtrate created during calcining, which is the last stage of the refining process.

Based on our models, we installed new piping and related infrastructure so that the filtrate could be added back into the refining process, improving the overall yield while maintaining our critical quality parameters.

The project is estimated to produce an internal rate of return of more than 150%, with annual EBITDA savings of $5 million.

In sustaining capital, I have selected this final project to demonstrate the ingenuity that is the hallmark of being an Alcoan, always looking for methods to improve traditional processes.

In this case, one of the most capital intensive parts of our refining portfolio.

We have applied pressure filtration technology to bauxite residue, lowering operating costs while at the same time reducing water and land usage.

Traditional methods required drying bauxite residue in large storage areas, and then once dried, applying water to prevent dusting.

The new technology forces residue through large filters, removing water and creating a high density cake, which limits dust and makes for more efficient use of existing space.

With the new system in place, the refinery has the potential to extend the life of residue storage areas by 15 years.

For this project, completed last year, we spent a total of $115 million, and will avoid spending almost twice that amount over 10 years as we manage bauxite residue.

The technology is being evaluated for our other locations, and holds great promise to fundamentally shift the long-term capital fundament -- footprint of the alumina business.

As you can see, we have many opportunities to deploy capital to drive returns, both to grow our existing third-party sales, but also to sustainably lower our cost footprint.

Let us now turn to a view of our major markets, starting with an overview of China.

In China, both the alumina and aluminum fundamentals are being supported by a combination of factors.

Increasing demand, limited supply available to respond to this demand, and rising input costs.

Both markets are enjoying strong demand growth in China, with alumina and metal growing at a 7% compound annual growth rate since 2015.

Additionally, both markets have limited capacity still curtailed that can come online quickly to address increased demand.

In alumina, only about 1 million metric tons of the 14 million metric tons curtailed in the last cycle remains off-line.

In metal, about 2 million metric tons of 4 million metric tons remains curtailed.

What is more, Chinese producers of alumina and [mayeve] metal are facing significant cost pressures.

In refining, average costs have increased approximately $40 per ton since June.

This has largely been driven by increasing caustic and coal prices.

Caustic prices have been supported by the limited supply of its co-product, chlorine, and Chinese coal prices have been supported by government action, including restrictions on the number of days minors can operate.

On the smelting side, the sustained increase in the cost of coal is combining with increasing alumina prices to push costs up approximately $400 per ton since June.

Alumina, of course, has its price supported by the same factors highlighted here, demand growth, limits on supply response and cost increases.

As we enter a period of relative quiet demand for the Chinese New Year, these cost pressures have driven more than 38% of Chinese smelters to a position of negative cash generation.

Furthermore, if you consider market alumina prices for integrated operators, 65% of Chinese smelters would be underwater.

Now, turning to our market projections.

Our fundamental outlook is stable for 2017 across the three markets.

For bauxite, we expect the market to be in relative balance this year, as the Chinese continue to stockpile bauxite strategically while seeking new sources of high-quality, consistently delivered material.

Their desire to hold bauxite is driven by major sources of uncertainty in the markets, including potential changes to the Indonesian and Malaysian bauxite export policies and the speed with which Chinese investment in Guinea can begin production.

We continue to see this market as very constructive, and ongoing discussions with current and potential customers give us confidence that we can continue to grow this high-return business.

For alumina, we see the market with relative balance, as well.

In addition to the expectation of increasing Chinese imports, strong, continued global demand, and little competitive capacity available to restart points to a market that continues to be strong.

A supply deficit in 2016 has reduced inventories, and we enter 2017 with strong fundamentals.

For metal, we are forecasting a slight surplus in 2017, largely driven by increased Chinese production as 2016 concluded.

Demand growth in this market remains strong, with Chinese demand growth at 6% driven by end-use market growth into packaging, electrical and transportation sectors.

Ex China growth of 2% is led by the North American market, where we are forecasting a 3% demand growth this year.

One important point to keep in mind.

Given the cost dynamics mentioned previously, a stronger supply-side response from China in the next couple of months could skew toward the tighter market for 2017.

Alcoa Corporation stands ready to capitalize on improving markets, but is also resolutely prepared should pricing swing downwards.

We are focused on delivering strong results, both in 2017 and beyond.

Thus, in closing, I would like to reiterate what are our three key priorities.

We will strengthen the balance sheet, we will reduce complexity, and we will drive returns.

As it pertains to the balance sheet, we can preserve cash optionality, and whether we invest in small growth projects or use generated cash to deleverage, we will be wise stewards of that cash.

We also intend to actively manage our pension and OPEB obligations going forward.

On reducing complexity, we are examining and simplifying each of our processes.

We are looking at everything from our capital project reviews, to our financial systems, to how we manage our people.

With a very, very simple goal, to make Alcoa more nimble, and to reduce our costs.

To that end, we are also setting a net performance goal of $50 million, offsetting at least $125 million that we see in market cost pressures in 2017, and building on the significant gains that we saw in 2016.

We remain committed to making sure that performance improvements hit our bottom line.

And lastly, we are focused on driving returns.

Based on recent metal and alumina prices, we estimate 2017 adjusted EBITDA, excluding special items, to be between $2.1 billion and $2.3 billion.

Two important notes about this estimate.

First, we expect our productivity programs to show progressive improvements as the year advances.

And second, please keep in mind that our first half will include the impact of our Portland smelter restart, plus some seasonality driven by our decision to maximize energy earnings for the year by shifting some sales to the second half.

And as we look toward the future, we are also in the midst of planning three year targets for return on capital that we will introduce midyear.

To conclude, we are pleased with what we have accomplished over the past year to achieve a healthy separation.

We are excited about the value that we can add to our businesses and the opportunities in our markets, and we are focused on driving results this year and beyond.

With that, we would love to turn it over to you to ask a few questions so that we can explore the results more fully.

(Operator Instructions)

Evan Kurtz, Morgan Stanley.

Hey, good evening, Roy and Bill.

Hey, Evan.

Hey, Evan.

How are you?

Pretty good, thanks.

One question, it is tough.

Maybe I will stick with the Company-specific one, then.

I saw you that put out a $150 million number for transformation, and since I assume that you have pretty good visibility on the reclamation expenses that you are going to have to incur going forward.

I was hoping you could maybe talk us through what that might look out, say, over a three- to five-year period.

Do you expect that to gradually decline, or is that going to stick with us for a little while?

Over the next three years, I think it will stick with us.

Beyond that, we would have to look to see what goes into transformation; but at this point, the next three years, I think, that is a reasonable estimate.

Okay, great.

Thanks.

That was fast, can I get one more in?

Is that okay?

Sure, sure.

You ask a very binary question, I can give you a binary answer.

(laughter).

So maybe this one on the market.

Obviously, there was some big news out last week on the WTO pursuing some subsidy remedies against China on the aluminum front.

I was just wondering what you thought about that, what sort of timing could we see about that?

How do you see that playing out, are there any milestones out there that we should be looking for?

Yes, thank you, Evan.

We are still waiting to see the details of the case, to be quite honest.

I think there is a lot of questions still out there, exactly the approach that these discussions will take.

And so as we have always been, we are very supportive of a marketplace that is fair, and where we can all compete together.

So we are following that very closely, but to be quite honest, we are reserving ourselves so we that can actually evaluate the argument behind it, and make sure that we can adapt.

Andrew Clare, Goldman Sachs.

Hi, Roy and Bill, thanks very much for the update, and taking my questions.

The first one is on bauxite pricing and margins.

Obviously, I think you said you -- third-party sales were 6 million tons last year -- adds up to the 48ish.

Can you go and give some color on the breakdown of margins of both the inter-segment and third-party, given that the third party is a big growth area for you over the next few years?

Yes, let me start, and then I will let Bill give a more technical answer.

First and foremost, when we look at the way that we price internally, we always take into account market pricing.

We try to be very fair so that we do not advantage one business over the other, and that we are very clear what is the opportunity cost, if we were to choose to sell externally rather than internally.

That said, bauxite is a differentiated product, so each bauxite has its own characteristics of allumina content, as well as impurities, etcetera.

So the pricing mechanism is very dependent upon what you are selling and to whom.

So as we develop the external marketplace, it helps us to be much better at judging what our internal pricing should be.

And as I mentioned in my comments, we just have our first shipment of Western Australia bauxite going externally through China.

Yes, and Andrew, we don't really necessarily like to get into what margins are for external tons just because there is really not that many customers for the segment in total.

Margins are at 35%.

I think Roy alluded to the fact that we have some tremendous growth opportunities in the business.

We think that we can grow both Juruti and Western Australia significantly over the coming years.

The ramp-up that you see in return-seeking capital that we previously were guiding to $100 million of return-seeking capital.

We are now at $150 million because we are investing in our bauxite business, due to the margins and our view of the future in bauxite.

So I think that is about the extent of what we can share with you.

Would you say -- obviously, the [WA] stuff, it is a little bit lower quality than some of the Guinea stuff.

Would you say that margins -- they usually ramp up volumes -- margins might come down slightly, or is that not fair?

I do not know that that is fair.

I think we are very cognizant of maintaining margin levels in bauxite.

Jorge Beristain, Deutsche Bank.

Hey, good afternoon, guys.

Quickly, just maybe one for Bill.

Can you comment on what your net debt position was two months ago, or in the last quarter?

I just do not have the quarter-on-quarter changes.

Sure, yes.

I can -- it is a question I actually like, Jorge, and the reason why I like the question is because we generated a lot of cash the last two months of the year.

We started the Company with right around $655 million of cash on hand.

We had right around $1.45 billion of debt; that is $1.25 billion of funded debt, $200 million of BNDS debt.

We ended the quarter with the same level of debt, and we had generated nearly $200 million of cash.

So our net debt position came down to roughly $600 million in net debt.

So a good, strong cash generation as an independent company.

Okay, and then -- so I guess I was asking -- my second question was going to be for a cash flow statement, but you are telling us that the change in cash generation you had was roughly your change in cash flow.

Yes, you know because of the carve-out financials, and given that we had one month of Alcoa Inc and two months of Alcoa Corp, a quarterly cash flow is really, really difficult to get much out of.

I think that the better indicator, at least for me, is that the last two months of the year, we generated $200 million of cash.

And to be clear, a free cash flow number would be larger than that because that is after we paid minority dividends to our partners.

So good, strong cash generation the last couple months of the year.

And Jorge, if I can just jump in briefly, as well, and add on top of Bill's comment.

We are trying to be very clear internally, the importance of cash to us, and how much that strengthens the balance sheet.

Helps to protect us from downside, but also at the same time, as Bill mentioned in his presentation, it allows us the opportunity to grow.

It allows us to get in there, lower our costs and deploy $150 million of return-seeking capital already in 2017, so it is the lifeblood, we typically say.

And I will jump on one more -- one last comment.

And you may be wondering what the cash priorities are; we will restate the cash priorities.

Cash priorities after sustaining and paying towards the pension, as we have laid out, it is a combination of de-levering and investing in business.

So we increased return-seeking capital by $50 million, excess cash flow, we would be looking at the potential de-levering at this point.

Justin Bergner, Gabelli & Company.

Good afternoon, Roy.

Good afternoon, Bill.

First, just a clarifying question.

On the net productivity, if I was to decompose the net productivity for the year just completed, that $760 million, what were the different factors that brought the net down from the $760 million to $290 million, just to compare it to the 2017 framework?

Yes, so let me -- again, let me hit the qualitative side, and I will let Bill hit some of the quantitative pieces.

So we had run a pretty complex system of trying to divide between gross and net productivity before.

And the fundamental idea was that we would essentially count all of those good ideas toward gross productivity, and they would be destined for two things.

Number one, to make the business better, and number two, to offset problems or headwinds or to unexpected circumstances.

So we will continue to look internally at how do we make sure that we have got a robust set of initiatives and ideas and ways to drive forward our business.

That can do, again, both of those things, offset headwinds and drive real gains on the ground.

So when you think about the difference between the delivered $750 million, and the $290 million that hit the bottom line, essentially, the difference is the cost headwind, and it is things that went against us over the course of 2016 that either we expected or did not expect.

The reason we have gone to the idea behind either net productivity, which is a little more narrowly defined, or net performance, which is broader and includes things like volume creep and pretty much everything outside market factors, is quite simply, because it shows what we are delivering to the bottom line on a year-over-year basis, so it holds us accountable.

Not just the delivering the prices that are prevailing in the market, it holds us accountable to delivering real value for our shareholders.

Whether it is through return-seeking projects, or whether it is by driving down costs faster than our competitors are holding back raw material costs.

Great, thank you.

And just to add on that a little bit, probably some of the biggest factors on a year-over-year were some of the headwinds that we saw around price and mix, especially in some of the value-add business.

We did see some higher energy costs over the course of that year and some higher raw material costs, so that was some of the things that took that down to the net number.

Kendra Tanner, Bank of America Meryl Lynch.

Hey, good afternoon, guys.

I know you were asked about WTO and it is tough to speculate, but I guess I would just ask you to speculate on something else because that seems to be part of our job lately.

In the Trump administration, there is a lot of talk about tax reform.

Have you put any thought as how that would affect Alcoa in broad terms, given that you are US-based company, but with the bulk of your income from overseas?

And in light of that, as well, with some of the initiatives that he is talking about, can you talk to us a little bit about what it might take, or if you are considering what it would take to restart any of your US operations?

Yes, so let me address -- I will take a crack at both of those, quite honestly.

First one, again, we think it is way too early to speculate, what type of implications changed tax policy would have on us.

I think you hit on it very, very well.

We have earnings that are generated overseas.

We have got losses, largely in the US, due to some of the overhead costs and things like that.

Which we do not get a tax advantage on, and you can see that sometimes in our ETR, depending on how the profitability flows.

So at this point, I think it is too early for us to determine.

Once we get an idea from the government on where they are going to land, we will have a better indication of how that will impact us.

Secondly, as far as restarting facilities, and Roy, you can jump in, but essentially, we are constantly evaluating the marginal facilities to see if there is an opportunity for either restarting them.

In the case of San Luis down in Brazil, Wenatchee -- so those are the opportunities we are looking at, potentially.

Does it make sense to restart them?

The other one is that typically, we are in the position of having to talk about curtailments.

And we always evaluate whether it makes sense to continue to operate the facilities, too.

So at this point, no clear guidance on when we would restart.

And just to add on that, I think Bill hit it pretty completely, but you think about the range of factors that we have when we think about a curtailment.

A curtailment or a restart, whichever side of that bubble you happen to be on, is really focused on how we drive additional value for our shareholders.

We look at the cash impacts, we look at the earnings impacts, and then we also think about what the market means for us today, and what the market could mean for us down the road.

As you probably would not be surprised, there often are very large numbers that have to do with power contracts and with the costs of curtailment or the costs of restart.

And so we take a pretty detailed view to really be able to determine what the right thing to do on a case-by-case basis.

And like Bill said, that can change pretty quickly.

It can change quickly depending on what policies are implemented, whether it is in the United States or elsewhere; it can change if markets shift, fundamentally.

That is one of the fun parts of the business, Kendra.

Well, with the volatility in the aluminum prices, too, I can totally understand that.

The only other thing I wanted to ask you was, the point you made about how you are going to actively manage OPEB and under-funded pension, what do you mean by that?

I am sorry if I am being dense, but I was just curious.

What we mean, Kendra, is that we have around $3.1 billion OPEB retention under-funded liability.

There are two ways to really solve that.

The first way is to try to actively manage the liability, so we would be looking at, are there ways to reduce the liability through actions?

And at this point, we are evaluating whether we would take any action on that side.

The other way is clearly, generally higher interest rates will close that liability over time, so those are the two things that would impact it.

Okay, thank you.

Tony Rizzuto, Cowen and Company.

Thank you very much.

Hi, gentlemen.

My first question is on the impact of the Indonesian relaxation on bauxite exports.

How do you see that playing out, and then I have another quick question, if I may.

Sure, Tony.

Let me talk a little bit about Indonesia, and then you can have your second question.

Unfortunately, you will be not too surprised when I say it really depends on the details that they layout as to exactly what kind of export they are going to permit.

Up until this point, we really have not seen a policy statement about how they would implement that new announcement.

And we also do not see any understanding on the part of any of the players that happen to be on the customer side or on the supplier side.

So right now, I think both sides of the equation are waiting to see exactly how that policy plays out.

If you think about what could happen, the fact is, Indonesia sits very close to China, and they have been an important supplier in the past.

We think that they will likely be part of the future supply equation going into China.

But at the same time, we also get back to the fact that that third-party bauxite market, which is primarily China, is going to grow significantly on the order of 8% cumulative average growth rate over the decade starting in 2016.

So they will have an important impact, but I do not think it pushes us away from our evaluation of the market, that there are real opportunities sitting in bauxite.

In 2016 and 2017, Tony, it has been about forging partnerships and looking for good customers that can value the bauxite and the consistent quality and the consistent delivery that we can provide.

Tony, your next question.

All right.

Thanks, Roy, for that.

We have seen the Midwest premium gaining a little bit of momentum of late, and likely due to the metal shortage that is in the United States.

So one is, where do you see this moving?

And then secondly, does this essentially work against the trade case against China from a standpoint of fabricators and just tightness in metal that is taking shape?

I think it is an interesting situation that we have today.

And you think about the moves in the Midwest premium, and they seem to be pretty closely tied with what is happening on the typical side.

And I think we have talked before about the fact that Midwest premiums and global premiums are much more closely related with the physical flows of metal.

So we have seen that premium start to come up a little bit.

We -- as is always our policy, we do not necessarily comment on where we think prices are going to go, whether it is on the aluminum or alumina side or on the premium side.

However, we continue to see that the smelting capacity that is operating in the US has fallen pretty dramatically.

We continue to have robust smelters, both

-- and strong demand.

-- and strong demand.

We continue to produce in Canada.

Rio Tinto obviously produces in Canada, as well.

It connects back with some of the other questions we have had before about how that all connects to policy, and what happens over these next few critical months.

We see a lot of strength in underlying the fundamental demand of the products that we sell and that first on a value-added basis, and we also see a lot of interest in growing that business.

And the other thing I would point out, Roy, is it is a lot about optionality.

We do not know which way the government regulations will go, or the view of which way the government will go.

We have the optionality in the US.

We have some facilities that could be restarted in the case of higher metal prices, but clearly, we have to see what comes out.

Yes, and I think just to add one more piece on one of my favorite topics too, the -- our Iceland Fjardaal plant cass houses, which is back from my times way back when I first got started with Alcoa.

Part of the attractiveness of Fjardaal was that you could sell both to the North American and to the European markets.

It gives us the flexibility, as do other of our plants, to sell into the market that is most attractive.

So we will determine that as it becomes more clear going forward, Tony.

Thank you.

That is very helpful, guys.

Thank you very much.

Jorge Beristain, Deutsche Bank.

Hi, I just wanted to circle back.

Your implied guidance for EBITDA for this year, could you tell us what aluminum price that is predicated on?

Yes, it says it down in the footnotes, $17.95 on aluminum and $3.35 on alumina.

And your -- probably your next question will be currencies.

Currencies have not changed that much over the last few days, so roughly at about the rate that we are at today, Jorge.

And the spot premiums, too -- I do not think they have moved a lot since we put this presentation together.

Sorry, and that is in the footnotes of your PowerPoint presentation, or your press release?

Yes, it is.

It is Footnote 2, I am sorry of our PowerPoint presentation, Jorge.

You see based on $17.95 LME, $3.35 API and spot regional premiums and foreign currency.

Great, thank you.

Thanks, Jorge.

Justin Bergner, Gabelli & Company.

Thank you for taking a quick follow-up.

I wanted to ask you, I mean -- some of us have the view that Alcoa is trading at a moderate to meaningful discount to the value of the various businesses you have.

Are you planning in the better environment that you are seeing to consider any action that might narrow that discount by use of your cash or otherwise?

I would not say anything is off the table, Justin, but our -- we do have a revolving credit facility that is somewhat restrictive.

We are currently at a double B- credit rating.

Clearly, I think, if we are generating $2.1 million to $2.3 million EBITDA, there is no way we should be a double B- credit, but that is for a different discussion.

The priority for cash that I said before -- the priorities for cash is grow the business with these high return projects, and to de-lever at this point, and then beyond that, we would determine what to do.

Justin, if I can just add on top of that, as well, one of -- we are trying to do two things when it comes to reporting.

Number one, we are trying to reduce complexity.

It saves us work, it helps us reduce our costs, and at the end of the day, makes our lives easier.

But number two, we are also trying to be very clear and help our analysts and our shareholders really understand the nuts and bolts of what is going on inside the Company.

We think as -- outside of corporate actions that Bill talked about, the more we can talk about how our business works and prove to our shareholders what we are doing to make the business better, I think that helps to get the story out there, and helps to show what we can leverage on top of what is just the metal cycle, so we will be working on that.

Thank you.

Yuriy Vlasov, Berenberg.

Good evening, gentlemen.

This is Yuriy Vlasov from Berenberg in London.

Congratulations on good [solid] results.

It is a bit of a theoretical question, but given your very impressive cash generation, in the long-term, let us say in the next 12 months to 24 months, what will be given the priority?

Would you be looking to reducing your debts -- well, more of a pension liability or returning cash to shareholders?

And one to follow-up, I have not seen anything on your dividend policy.

Is that something that I missed, or something you have yet to convey to the market?

Thank you.

Yes, Yuriy, thanks for the question.

The dividend policy is that we have no dividends, currently, and so that is where we stand.

Beyond further de-levering, we would be considering, you know, in an excess cash flow situation, how to return cash to shareholders.

And so when we get to that point, it will be a discussion around specifically, how we return cash to shareholders, whether that is a special dividend or a share buyback program.

An easy problem to handle, yes.

Thank you.

It would be a great problem.

Thank you.

Matthew Fields, Bank of America Merrill Lynch.

Hey, guys.

Just wanted to -- wondering if you could talk about the trends you saw in the rolled products side in the quarter.

And I am a little bit confused about, you know how it looks like shipments more than doubled in the quarter, but EBITDA swung negative.

Just wondering if you could talk a little bit about that.

Sure.

On rolled products, the reason why shipments have increased so much is because those sales that were coming out of Tennessee to body stock customers are now coming through Alcoa Corporation.

So we are pulling metal through Tennessee, and supplying our customers on the body stock side, so that is why you see that volumes are up.

In the quarter, on the rolled products business, we had a number of things going on.

We did have a mill outage that affected us toward the end of the quarter; we actually had a break down of a reversing mill, so that was a negative impact.

We typically see seasonal declines in the fourth quarter, and we saw some small amount of cost increases in the quarter, also.

As we move forward to the first quarter, we will start to see some better seasonality.

I think we have been very clear, this strategy for Warrick is to increase the volume coming out of Warrick, and we are very focused on doing that.

So we are optimistic that the first quarter will be better than the fourth.

Let me just talk briefly about the future of our rolling business, too.

It comes down to some pretty simple phrases.

Number one, fill the mill and drive capacity.

It is about getting that mill filled, as Bill commented, and making sure that once it is filled, we are constantly increasing capacity so we can continue to fill it.

Number two, to drive margins.

Look at who we are selling to, the products that we are selling, look to find opportunities in the market that can help us to better partner with our customers and drive an improved margin environment.

And then number three, in thinking about how we then drive this business, is to reduce our costs.

Not just the benefits of volume, but to really find ways to run that business smarter and better and more efficiently.

And those are the three tenants that we have been talking over again and again with our rolling division, and really, across the entire portfolio.

Okay, thanks.

So just to be clear about the arrangement from Tennessee, you guys are taking -- Warrick is taking tonnage that was previously going to the Tennessee Mills, and its body stock, and you are tolling it for your can sheet customers.

Exactly.

We are running metal through Tennessee, we are tolling it with Arconic, and we are shipping it to our customers.

Okay, all right.

Thanks very much.

Thank you.

John Tumazos, Tumazos Very Independent Research.

Hi John.

John.

Hi, congratulations on everything getting going.

Thank you.

Could you explain the power generation as a portion of either aluminum metal production or capacity self-sufficiency, and which -- presumably, it is in the aluminum metal segment, and roughly, what the profit contribution is from your electricity generation.

You made reference that there would be more in the second half of the year.

Could you explain that to some of us who do not routinely study power plants?

Do you produce the same number of megawatts every day, or could you vary it, or would you vary your metal production to sell more power?

Yes, so let me just explain the reporting, and I think Roy can jump in and explain what he meant by the second half comment.

You know, John, now we have broken out the segments so that we have the power segment separate.

So in that power segment, we have the Warrick generator and the Brazil hydros, are the preponderance of the assets in that segment.

We have seen significant fluctuation over the years, over the last couple of years, on the Brazil hydros, both in price and, to a lesser extent, volume.

But you know, we essentially -- anything that we do as far as work transferring into the rolling mill is transferred at a market rate, so there is not a lot of impact on the Warrick side.

Roy, do you want to comment on the second half question?

Yes, and I think it is critical to understand that we are very careful not to subsidize one business at the expense of another, so we separate out the benefits of generating power and electricity into the energy portfolio or the energy segment.

My comment, specifically, about seasonality is based mostly on what happens down in Brazil.

We took a look to see when we could sell different volumes of that hydro capacity, and our expectations, and our ability to look forward on pricing.

And we found that we could maximize and optimize our total profits in Brazilian energy generation by skewing it, essentially, and ending up selling additional volume in the second half than in the first half.

So it is just a matter of being smart about where we operate, where we generate electricity, and where we see opportunities in the market, and those happen to be in the second half rather than in the first half.

Thank you for the question, John.

Thank you.

This concludes our question-and-answer session.

I would like to turn the conference back over to Roy Harvey for any closing remarks.

Good, and thank you.

I appreciate everybody listening in; I appreciate the really good questions.

In closing, I just wanted to take a couple minutes just to go back over familiar territory.

And just start off by saying that we have had a good start, and it has been a good 2.5 months; although it seems some days, like it has been two weeks, and some days it feels like it has been two years.

We are enthusiastic about what we can accomplish and the additional value that we can bring to our businesses and the opportunities that lie ahead.

Whether -- in any of the businesses in which we operate, or are looking at the market in which we play.

And as I said earlier, we are focused.

We are trying to be very clear internally and externally about what we are trying to accomplish, and it is simple.

Reducing complexity, looking at every cost that we spend and finding ways to make it faster and easier and less costly.

It is about generating cash, strengthening the balance sheet, ensuring that we are ready, if times turned down or that we are ready if times get better.

And finally, driving a real returns mentality in every project and every one of our businesses.

And so that when we talk to each of our shareholders, we can talk about what we are doing to drive returns and to drive earnings and cash to the bottom line.

So that is what we are doing.

Thank you very much for your time today.

We look forward to additional opportunities to share our progress in the future, and I wish you all the best and have a great evening.

Thank you.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.