Earnings Call Transcript - AA Q1 2022

Operator, Operator

Good afternoon, and welcome to the Alcoa Corporation First Quarter 2022 Earnings Presentation and Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.

James Dwyer, Vice President of Investor Relations

Thank you, and good day, everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Roy and Bill. 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 EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website. With that, here's Roy.

Roy Harvey, CEO

Thank you, Jim, and welcome to everyone who is joining our first quarter earnings call. As you saw in today's press release, we had record quarterly results for profitability across three key measures: net income, adjusted net income, and adjusted EBITDA, excluding special items. Bill will give more detail, but I'm pleased to report that it was a very solid quarter. We had net income of $469 million. Adjusted net income was $577 million. This is a 21% sequential improvement and more than three times what we posted in the first quarter of last year. Adjusted EBITDA, excluding special items, was $1.07 billion. That's 20% higher than the prior quarter and more than double the same period in 2021. And with a focus on our capital allocation framework, we have also repurchased 1 million shares of common stock in the quarter. Looking back at our more than five-year history as a stand-alone company, it's great to see the efforts of our Alcoa teams and the strengthening market mirrored in these record-setting results. In this period of global volatility, we remain strong and steady, guided by our values and focusing on our strategic priorities. We're continuing to eliminate unnecessary complexity and focus on being low-cost, driving returns with strong margins and operating sustainably across our global operations. We also remain focused on maintaining a safe workplace for our employees, contractors, and anyone who visits an Alcoa location. In the quarter, we had no serious injuries, and we remain resolute in the use of proactive tools to prevent incidents. When accidents do occur, we investigate to the root cause to continuously improve our safety systems and outcomes. Again, this quarter, we continued to make important progress on several fronts. In January, we completed the curtailment of the San Ciprián smelter in Spain, according to the terms of an agreement reached previously with the workforce. Even with improved metal prices, the smelter continued to lose money due to exorbitant energy prices. The agreements to idle the top lines while continuing to operate the casthouse will allow us to control our losses during a two-year curtailment period. We'll use that time to find an energy solution and deliver on improvements to the plant for its future. Meanwhile, we are continuing our work to restart aluminum smelting capacity in Brazil and Australia. This additional capacity, once online, will continue to position us well to capture the benefits of stronger markets. In our bauxite business in Brazil, we've signed a deal to divest our full interest in Mineracao Rio Do Norte or MRN. The transaction is expected to close in the second quarter of this year. Following this divestiture, we believe we will remain well positioned in the bauxite business with high-quality reserves across our global system and particularly in our Juruti mine in Brazil. The transaction avoids potential capital costs in the future and allows us to focus future bauxite investments into two Brazilian mines we own and operate. Next, we recorded $77 million in restructuring charges in the first quarter related to the 2019 divestiture of two Spanish smelters, Avilés and La Coruña. We offered to resolve various legal claims related to the sale of those assets, and former employees unanimously agreed this week to accept our proposal. Upon satisfaction of all agreed-upon conditions, this settlement is expected to avoid the potential for costly and lengthy litigation. We are continuing to pursue legal actions against the entity that purchased these assets and failed to meet its promises to our former employees. Finally, the fundamentals of the aluminum business remain strong, and the work we've done over these past several years has enabled us to operate efficiently and capture benefits from positive markets. In the quarter, we saw the average realized price for aluminum increase sequentially 14% to more than $3,800 per metric ton. And that's a good pivot point for Bill to detail the full results, including the positive impact that these strong metal prices had on our adjusted EBITDA. Bill, please go ahead.

William Oplinger, CFO

Thanks, Roy. The first quarter of 2022 marked Alcoa Corporation's highest net income and adjusted net income in its history, as well as the first time recording over $1 billion of adjusted EBITDA, excluding special items. Revenues of $3.3 billion were up $423 million or 15% year-over-year, but slightly lower sequentially due to logistics-related shipment delays. All earnings measures increased both year-over-year and sequentially. GAAP net income of $469 million was $294 million higher than the prior year quarter's $175 million and was $861 million higher sequentially. Special items in the quarter included $77 million related to a settlement offer made to the workers of the divested Avilés and La Coruña smelters in Spain, which would be paid upon their collective acceptance, and $58 million for asset impairment relating to the company's planned sale of its interest in the MRN bauxite mine. Adjusted net income was $577 million, which was up $427 million year-over-year and was up $102 million or 21% sequentially. Adjusted EBITDA of $1.07 billion improved $551 million year-over-year and was $176 million better sequentially. Let's look at the drivers for adjusted EBITDA. In the first quarter, the majority of the benefit of higher realized aluminum prices, up $479 per ton sequentially, translated into higher adjusted EBITDA. Other positive contributors were stronger product premiums and customer mix in both the Alumina and Aluminum segments, as well as lower costs related to intersegment profit eliminations of approximately $64 million and improvements related to the San Ciprián smelter curtailment, contributing $62 million. As expected, those improvements were partially offset higher raw material costs in both the Alumina and Aluminum segments, as well as higher energy costs at refineries, primarily in Spain, and lower hydropower sales prices in Brazil. Volume was unfavorable in all three segments, partly due to fewer days in the quarter, but also due to lower production in Australia and shipment delays in Canada due to railcar availability. Despite the challenges, production costs were up very little sequentially and demonstrated overall strong cost focus. For more perspective on our strong margins, let's look at the relationship of realized sales prices compared to cash costs in the Alumina and Aluminum segments. These charts show a simplified view of our cash cost structures for the Alumina and Aluminum segments over the last year compared to third-party realized prices. The focus is on raw materials and energy costs, the areas where we receive the most questions from our investors. Looking at Alumina over time, you see that both energy and raw material costs have increased somewhat, while the remainder of the cost, including bauxite, has been mostly flat. The relatively muted rise of these costs reflects the benefits of our integrated system and colocated mines and refineries, low caustic soda use, global procurement strategies, and long-term energy contracts. Our main spot energy exposure is at our San Ciprián refinery in Spain, reflecting broader market conditions and industry cost pressures, while the realized alumina price has increased substantially, more than offsetting our cost increases. And spot index prices are currently similar to the first-quarter average. An even more pronounced effect is seen in Aluminum. Alumina costs in the Aluminum segment are up, and while energy and other raw materials are also higher, their impact is outpaced by the significant increase in the realized aluminum price. Again, we see the benefits of our integrated system, global procurement capabilities, and minimal exposure to spot energy prices. Approximately 60% of our smelter energy costs are linked to aluminum prices. Roughly 30% is fixed price or self-generated power, and our spot exposure is less than 10% and limited to a portion of our Norway smelter load. And remember too that, given our long position in alumina, higher alumina prices may impact Aluminum segment earnings but are a net positive for the company. The key message here is that most elements of our cost structure have seen only modest increases compared to our revenues. Let's move to other financial metrics. When looking at the quarter, the 50% return on equity was our strongest quarter yet and reflects the excellent profitability levels discussed earlier. Our cash balance declined, however, increasing net debt. Major cash uses for working capital, income taxes, dividends, and capital returns. Working capital days expanded to 49 days and was our largest use of cash in the quarter at $680 million. Cash income taxes were $220 million, including $162 million related to the prior year. Net dividends to non-controlling interest and capital returns to stockholders totaled $209 million. Let's take a deeper look at what happened with working capital and what we expect in the future. There were multiple factors increasing working capital this quarter. The 20 days change consisted of 14 more days of inventory, five more days of receivables, and one day less of payables. In inventory, higher raw material prices primarily for caustic and carbon products accounted for seven days and two days of the increase related to higher values of finished goods. Logistics challenges added two days of inventory with missed shipments in alumina in both Australia and Brazil and limited availability of outbound transportation for finished goods, primarily in North America. Finally, we purchased metal in Brazil to serve annual customer contracts that will be met with Alumar supply after the restart, which added two more days of inventory. Receivables are up mostly due to higher sales prices, especially late in the quarter and account for five days. To the extent prices remain elevated we will maintain higher levels of working capital. We do anticipate some reduction through the year, assuming shipping schedules improve, the IMR restart progresses as expected, and we realize lower inventories on hand. Our full-year shipments outlook has only one change. We expect our 2022 bauxite shipments to be down approximately two million tons to a range of 46 million to 47 million tons, the result of our decision to not sell to Russian customers as well as Russia, Ukraine-related changes in the Atlantic bauxite market. The 2022 shipments outlook for alumina remains 14.2 million to 14.4 million tons. For aluminum, we have paused the Alumar restart process for about one month due to unavailability of suitable path material, but we still expect the restart to be complete by year-end, and the aluminum shipments outlook is unchanged. All other full-year outlook estimates are unchanged. For the second quarter based on today's prices, we expect both alumina and aluminum realized third-party prices to be higher than the first quarter, with part of that benefit offset by approximately $115 million of higher energy and raw material costs. Higher shipments are expected to more than offset additional maintenance costs and other factors. Looking at the segments, excluding index sales prices or currency impacts for the second quarter, in bauxite we expect EBITDA to be approximately $10 million as one-time benefits in the first quarter do not recur, and we slowed production rates in Juruti in response to ceasing supply to Russian businesses. In Alumina, we expect approximately $85 million in higher energy and raw material costs, with two-thirds being related to San Ciprián refinery energy costs. We also expect higher shipments to fully offset higher maintenance and other costs. In the Aluminum segment, we expect alumina costs to increase approximately $35 million and expect improved shipment volumes to provide a $50 million benefit, more than offsetting $30 million of high raw material prices and energy impacts, as well as maintenance costs of $10 million. Let me turn it back over to Roy.

Roy Harvey, CEO

Thanks, Bill. Next, I'd like to give an overview of what we're seeing in our markets. Last year, we saw a general price recovery after the impact from the 2020 pandemic. Now, today's markets are experiencing increased volatility, most notably from Russia's invasion of Ukraine, but prices remain at higher levels than both the 2020 and 2021 averages. In the alumina market, demand is reduced due to global aluminum smelter cuts. We saw some tightness in the market last month when a competitor suspended shipments from the Nikolaev refinery in Ukraine. Since then, we have seen supply outside of China reemerge. Australia's decision to ban exports to Russia disrupted the market with a separation between suppliers willing to sell to Russia and those who are not. This has pressured Western Australian alumina pricing, and it has prompted some atypical Chinese exports to Russia. Turning now to metal, the Aluminum segment continues to play a large and positive role in our overall results. On the demand side, we expect annual global demand for primary aluminum to increase this year approximately 2% relative to 2021. Growth remains positive despite a somewhat slower pace due to interruptions to supply chains, particularly in automotive, and lower growth expectations in Russia and Eastern Europe. With slightly lower but positive demand growth, aluminum pricing remains supported globally by supply disruptions, low inventory levels, and high transportation costs. High energy prices in Europe are driving some smelter cuts in this region. In China, the central government also continues to limit output growth in primary aluminum through the government's capacity permitting system. From Alcoa's commercial perspective, much of our value-add aluminum products are sold in annual contracts, and negotiations with customers resulted in favorable pricing quarter-on-quarter, which we recognized in Q1. Regional premiums also remain high in markets where we produce, reflecting underlying physical tightness and logistics costs. Additionally, we are seeing year-on-year growth for our line of sustainable products in our Sustana family. We expect threefold increases this year in the total volume of sales for EcoLum, which is our low-carbon aluminum brand, and EcoDura, which is our aluminum product made with at least 50% recycled content. Notwithstanding the current volatility in the markets, we continue to expect positive fundamentals in alumina and aluminum due to favorable structural changes, including a drive towards more sustainable solutions. These shifts should provide advantages for a low-carbon operator like Alcoa. As I said at the top of this call, Alcoa is strong and steady, an outcome of the work that we've been doing over these last several years to build an even stronger foundation, including a healthy balance sheet. This work has been vital to ensure success through all market cycles. Importantly, we've worked to ensure that we have a lean and efficient operating structure. Our Alcoans, as usual, have been working with diligence. As an example, the teamwork in our procurement group has been vital in helping us manage our raw material costs and work through various logistics challenges, especially important in this current environment. In our operations, we're also working to use our raw materials very efficiently. Our global refineries, as an example, are well positioned in this context. They use on average less caustic soda than most of our competitors. This is important as caustic soda is a key ingredient in the refining process. We use less caustic due to a variety of factors, primarily the high-quality bauxite from our integrated mines and the fact that we keep our refineries fine-tuned for our raw materials. Regardless of the situation, we have the processes and procedures to react efficiently. And when something new arises, we quickly adjust while maintaining overall stability. A good example of this is when we decided last month to cease buying raw materials from or selling products to Russian businesses. While we do not have operations in Russia, a multi-disciplined team helped us act decisively, and we've worked to mitigate the financial impact. As I explained to our employees in a letter following our decision on Russian businesses, we acted in alignment with our values, and we continue to hope for an end to this crisis. Now let me discuss some of the items on the right-hand side of this slide. As we continue to manage through what have been turbulent times, first from a pandemic and now the unease from the situation in Ukraine, it's important to emphasize that we remain well positioned for the future. We closed 2021 in our best financial shape ever, and we remain lean and cost-focused. We have low debt, well-funded pension obligations, and a cash balance that stood at $1.6 billion at the end of the first quarter. We have top-tier assets that are strategically located to supply the world with the materials it needs now, including developing breakthrough technologies for tomorrow. We are building an operating portfolio that is cost-efficient, restarting capacity where it makes economic sense to do so, such as Alumar and some modest capacity at Portland Aluminum in Australia. We have a clear vision to reinvent the aluminum industry for a sustainable future supported by a technology roadmap that has the potential to decarbonize production processes, differentiate Alcoa, and create value for our stockholders. Our work on the ELYSIS joint venture continues to progress. Last month, we were excited to see Apple announced that they'll use metal produced at R&D scale for the iPhone SE. It's very exciting to see a technology that we first developed at the Alcoa Technical Center outside of Pittsburgh come to fruition via the ELYSIS technology. This is truly revolutionary, producing metal without any direct greenhouse gases and instead producing oxygen as a byproduct. Once ELYSIS technology licenses are available from 2024, the first full-scale commercial application of this breakthrough process could be running within two years. In addition to reinventing aluminum smelting, we're also working to unlock a new recycling technology that will use low-value scrap, removing impurities through a proprietary process that will produce high-purity aluminum. The output from this process will surpass the quality of what's produced at a conventional smelter. In refining, we were proud to announce last week that both the national and regional governments in Australia have agreed to provide funding for development of electric calcination, a process that would use renewable power to fuel the last stage of alumina refining. When combined with another technology known as mechanical vapor recompression, which also has funding in Australia, there is the potential to decarbonize alumina refining. These two technologies are built into what we're calling our refinery of the future initiative, which has the goal to lower the cost of constructing a refinery, eliminate fossil fuels, reduce freshwater usage, and minimize and eventually eliminate deposits of new bauxite residue. Finally, summing it all up, I want to leave you with a few key points from the results we issued today. First, despite volatile markets, we delivered. We continue to execute on our strategies to deliver solid results, including providing a 50% return on equity in the quarter. Second, our strategies are working. We've strengthened our company and our operating portfolio, including restarting capacity when it makes economic sense, and when necessary, executing on curtailments or divestitures according to our portfolio review process. Third, we are rewarding our investors. In the first quarter, we paid our second consecutive cash dividend. Also, we executed another tranche of our share repurchase authorization in accordance with our capital allocation framework. These actions again reflect our strength and our positive view of the future. And finally, we are excited about our future. Looking back at our history, it is clear that we have delivered on our purpose to turn raw potential into real progress. And as we look toward the future, we will continue to drive value and redefine what aluminum consumers should expect when it comes to sustainable production and products across the aluminum value chain. Now Bill and I are ready for your questions. Operator, please go ahead.

Operator, Operator

We will now begin the question-and-answer session. And our first question will come from Alex Hacking with Citi. Please go ahead.

Alex Hacking, Analyst

Yes. Thanks Roy and Bill. So, just on the first question on the cost side. Obviously, you've done a pretty good job, caustic soda, pet coke, all that stuff. As prices increase, it tends to be on several quarters' lag. So should we be expecting cost pressure to be building up through the year or you're comfortable with the position? Thanks.

William Oplinger, CFO

Hi Alex, it's Bill. I'll address that. We have indicated that in the second quarter, we expect higher raw materials and energy costs. The raw materials will be around $45 million higher, and energy costs will increase by about $70 million, primarily due to our operations in Spain. However, I want to ensure everyone understands the guidance we've shared in the prepared remarks. We're projecting a strong second quarter. This is based on a couple of factors. First, at current prices on a delayed basis, second-quarter prices for both alumina and aluminum are actually higher than those in the first quarter. This increase will more than counterbalance the higher raw materials and energy costs I've mentioned. Secondly, we anticipate significantly improved shipment volume in the second quarter, which will also offset some increased maintenance costs and the absence of a few minor one-time expenses from the first quarter. Overall, while we are facing some increased raw material and energy costs, we're still guiding toward a strong second quarter.

Alex Hacking, Analyst

Okay. Thanks, Bill. And then just a follow up with, I guess, kind of a general question regarding Russia, Ukraine. What have been the impacts on Alcoa from that? And how are you seeing that? I mean you stopped the small amount of transactions with Russia that you have. Metals prices have moved around. But have you been getting a lot of inbound from customers looking for additional offtake? Any concerns with supply chains? Like I guess what's changed directly for Alcoa? Thanks.

William Oplinger, CFO

Alex, let me address the financial side, and then I'm going to turn it over to Roy for a more broad answer. The impact of our stopping shipments to Russia was minimal in the first quarter. We're projecting for the full year, it's about a $30 million impact. A piece of that is obviously built into the guide that I just gave you for the second quarter, but overall, not a massive impact from stopping shipments into Russia. Roy, do you want to address this from a broader perspective?

Roy Harvey, CEO

Yes. The situation in Ukraine exacerbates what was already a complicated supply chain. From an Alcoa perspective, we have a team dedicated to working on supply chains, procuring materials across the world and leveraging our ability to buy materials in different parts of the world, to have the best cost structure possible. Before the war in Ukraine, it took a lot of creativity to ensure we got what we needed. What we're seeing now is that it's becoming even more complex. This complexity doesn't mean that we can't find the materials that we need. I would argue that we have a talented team that is getting very good at managing these issues. When we made our decision to neither buy from nor sell to Russia, it took some effort to ensure that the few materials we do buy from Russia were replaced, which we did without any kind of issue, but it created the drag on financials Bill talked about, particularly because of bauxite sales that we were making into Russia. On the cost side, we're doing a very good job in ensuring that it doesn't impact us. On the supply chain, just because of the uncertainty and the volatility, we continue to need to manage this. Our job is to ensure that we have the materials that drive stable operations and keep our people focused on safety and operations.

Alex Hacking, Analyst

Thanks and good luck navigating everything.

Roy Harvey, CEO

Thanks, Alex.

Operator, Operator

Our next question will come from David Gagliano with BMO Capital Markets. Please go ahead.

David Gagliano, Analyst

Hi. Thanks for taking my questions. My first question, I want to ask about the pace of the buybacks. So you repurchased 1 million shares. I think that's about 1/2 of 1% of the total shares outstanding in the first quarter. Obviously, you've got a large cash balance, still plenty of free cash flow generation potential once those working capital headwinds go away. So should we expect the pace of these buybacks to accelerate in the coming quarters? That's my first question.

William Oplinger, CFO

Thank you for the question, Dave. To clarify, we repurchased approximately $75 million worth of stock, which equates to 1.04 million shares at an average price of about $72 per share. We also distributed the dividend during the quarter. Considering the increase in working capital we experienced and the slight decline in our cash balance in the first quarter, we believe that $75 million was the appropriate amount for buybacks this quarter. Future capital returns will depend on various factors, including our assessments of the current and future markets. We will provide more updates as the year progresses.

David Gagliano, Analyst

Okay. Just to clarify, I understand that there was a significant working capital draw. Are you suggesting that this large working capital draw affected the extent of the buybacks, or do you think it influenced the size of the buybacks in the first quarter?

William Oplinger, CFO

Yes. So, we're being conservative on the buybacks in the first quarter as we saw the working capital build during the first quarter. Just to be clear, the working capital build was not a surprise to us. We typically see a working capital build in the first quarter. In this particular case, it was accentuated by the fact that pricing was as high as it was. As we build working capital in the first quarter, we were tempering the returns to shareholders in the first quarter.

David Gagliano, Analyst

Okay, understood. And then, just my second question on the bauxite business. I thought I would ask this once I try before. The guide for 2Q is $10 million. $38 million was the EBITDA in the first quarter. Obviously, the press release called out a one-timer and also the elimination of sales to Russia for the expected decline. Is that $10 million now the right new kind of run rate for quarterly bauxite EBITDA moving forward?

William Oplinger, CFO

Yes. We don't provide a run rate for the segment earnings. Let me tell you what's going on there in the first quarter and then what's expected to happen in the second quarter. In the first quarter, we had a true-up for some of the royalties from bauxite that we sell to a third party. That was a little bit higher than it normally is, which occurred in the first quarter. When I refer to a one-time item, that was the real one-time item in the first quarter, and I believe that was around $7 million in the bauxite business. Secondly, we're projecting that the MRN sale closes in the second quarter. So we won't have the MRN earnings pickup. Finally, with our decision to not sell to Russia, we are seeing a decline in the bauxite business because of the lack of sales there and the long market of bauxite in the Atlantic region. That is negatively impacting earnings out of Brazil.

David Gagliano, Analyst

All right. That’s helpful. Thanks.

Roy Harvey, CEO

Thanks, Dave.

William Oplinger, CFO

Thank you, Dave.

Operator, Operator

Our next question will come from Michael Dudas with Vertical Research. Please go ahead.

Michael Dudas, Analyst

Good evening, Jim, Bill, Roy.

William Oplinger, CFO

Hey, Michael.

Roy Harvey, CEO

Hi, Mike.

Michael Dudas, Analyst

Looking ahead, regarding the situation in Russia, it seems you are progressing through the challenges caused by the disruptions over the past six weeks due to the invasion. How is the industry perceiving this in terms of premium scarcity? How does it compare to other procurement options? Will buyers avoid Russian materials? If the situation settles soon, will there be time for the market to understand how it will adjust, or are there structural issues that might affect the market due to the impact Russia has had on Ukraine?

Roy Harvey, CEO

Yeah. Mike, I'll take that one. As you can imagine in a situation like this, there's always some unpredictability about when the situation comes to an end. Even if it were to end, whether some of the sanctions and other things would actually be lifted is uncertain. From an aluminum standpoint, the questions are whether Russia can get sufficient alumina to continue to operate. We really don't have a lot of visibility about whether they’re maintaining their rates of operation. We do know there are significant logistical challenges to get materials from China or alumina from China or elsewhere into Russia, certainly on a cost-competitive basis. The other side is whether the metal that they produce inside of Russia is able to actually leave Russia and who would buy it. To answer you one very specific question, most players in the market are shying away from purchasing any Russian material. Even Russian materials produced before might be stored in LME warehouses, etc. There is a very real expectation in this market that that material is not going to come into the Western world markets. However, it complicates whether some of that material can go into China. I would never question the ingenuity of the Chinese to find solutions for some of those problems. The market is still trying to digest the immediate impacts. The immediate situation leads to volatility, but stepping back, the fundamentals for aluminum remain strong in the medium to long term. The importance of decarbonization and the fact that there isn't a lot of new capacity coming to market while demand continues to grow helps that.

Michael Dudas, Analyst

Well, that’s very helpful. Thank you very much.

Roy Harvey, CEO

Thanks, Mike.

Operator, Operator

Our next question will come from Chris LaFemina with Jefferies. Please go ahead.

Chris LaFemina, Analyst

Hi, everyone. Thank you for taking my questions. I have a question regarding the working capital build and another about margins or costs. Firstly, regarding the working capital build, Bill, you mentioned that two major factors contributed to this. Clearly, there was a significant increase in prices during the first quarter, along with a seasonal impact that you anticipated. So, my first question is, if we assume that prices remain stable moving forward, how much of the working capital build we observed in the first quarter do you think will reverse throughout the year? If it's driven primarily by price changes and seasonal factors, I would think it would all reverse. Does that sound reasonable?

William Oplinger, CFO

A large portion of it will reverse over the year, Chris. It will really depend on what pricing does both on finished goods products and raw materials. It's difficult to give you a number of how much that will come down over time. Just to put it in perspective, we were up around 20 days, 14 days of that was inventory, five days of that was receivables, and one day less was payables. The inventory levels were up nine days. Out of the inventory, out of the 14 days, nine of that is due to price, two of it is due to the Alumar restart, and two related to logistics issues. It will depend on how the logistics issues get worked through, but there’s a piece that will naturally come down as you've seen every year over the last five years. We typically bring working capital down during the year.

Chris LaFemina, Analyst

Got it. So there’s no reason to believe that working capital is structurally higher. Do you have something going on in Russia or anywhere else in the world?

William Oplinger, CFO

Not at this point. It's structurally higher because prices are higher. If prices stay high, that's a good thing for us.

Chris LaFemina, Analyst

The second question is about how costs impact the income statement over time. If we assume prices remain steady throughout the year, will we see margins decrease in the second half of the year? Will the cost inflation we are currently observing affect margins later in the year?

William Oplinger, CFO

Yes, we. As you know, you can take a look in the backup of the deck, and it walks you through the cost timing for each of the major cost drivers, the big one being caustic soda. So caustic that we're buying today will typically flow through toward the end of the third quarter at this point. All of those lags are there. The critical thing that I'm hoping people understand is that given where we sit today with alumina and aluminum pricing, it's actually stronger than what we've seen on average. Again, lagged. It's actually stronger than what we saw in the first quarter. Even though we are seeing some higher raw materials and energy prices in the second quarter, there should be margin expansion, assuming that pricing stays where it's today.

Chris LaFemina, Analyst

That’s very helpful. Thank you very much.

William Oplinger, CFO

Thank you.

Roy Harvey, CEO

Thanks, Chris.

Operator, Operator

Our next question will come from Lawson Winder with Bank of America Securities. Please go ahead.

Lawson Winder, Analyst

Thank you, operator. Good evening, Roy and Bill. Very nice to hear from you, Bill. Thank you for today's update. Maybe just asking on cash costs and your goal to become first quartile. What still remains to be done to achieve first quartile cash costs by 2024? And does it involve any closures? How does the energy cost linkage to LME factor in there?

Roy Harvey, CEO

Yeah. Let me start on that one and Bill might want to chime in as well. What we're working on are several different things. There's always the ongoing improvements in creep projects, which ensure that our plants are competitive and can be even more competitive in the future. There are return-seeking capital projects that we put in place in order to lower our total capital or operating costs. We have our ongoing operations review, focusing on how we can get step changes of our facilities that are at the upper part of the cost curve. For example, the San Ciprián smelter that was just recently curtailed had an unsustainable spot-based power price. When we bring that back on, we expect that we can get a set of power contracts to slide down the cost curve, which helps reduce overall energy costs. Portland Aluminum is another great example where we're bringing on some additional parts and examining energy contracts as we get towards the end of that period. That will be key. This is a mix of blocking and tackling, along with underlying changes in energy costs. When it comes to the linkage to LME, while it may increase our cost, it means that we're getting significantly improved margins because the aluminum price we're getting translates into better margins. So I become a little less worried about getting to the first quartile if the LME is high.

William Oplinger, CFO

The only thing I would add to that, Roy, is that about 60% of our energy has an LME linkage to it. To be clear, as the LME goes up, we don't pass all that benefit on to the power suppliers. We only pass a portion of that benefit. While that linkage presents a challenge, it also signifies that having elevated prices could enhance our margins overall.

Lawson Winder, Analyst

Okay. Understood. That's excellent perspective. Maybe could you provide a little bit more of an update on ELYSIS? Just at this point, how is performance versus your expectations and the next milestones over the next year and nine months?

Roy Harvey, CEO

Absolutely, Lawson. We're careful to continue to talk about the fact that this is in active research and development, probably more development now than research. We continue to work on this project. That said, I think you should read into the fact that we are continuing to say that we won't do brownfields or greenfields of conventional technology because we believe ELYSIS will succeed and be the technology for the future. We're in the midst of scaling it up. We expect that we have our next size of industrial pop, which is up to 450-kilo amperes, is under construction right now. That's the next step that demonstrates not only does this technology work, but it works at an attractive operating cost point and can operate at a necessary scale. The programs are ongoing, are on track, and we have confidence in the technology.

Lawson Winder, Analyst

Thanks very much.

Roy Harvey, CEO

Thank you, Lawson.

Operator, Operator

Our next question will come from Lucas Pipes with B. Riley Securities. Please go ahead.

Lucas Pipes, Analyst

Thank you very much, and good afternoon everyone. I wanted to touch on the demand side. And obviously, prices are very strong. Are you seeing signs of demand destruction? If so, what end markets are you most concerned about? Thank you very much.

Roy Harvey, CEO

Yes. So let me get started. I'll break it into a few different pieces. We talked a little bit about supply chain disruptions. They existed before the war in Ukraine, but that war has exacerbated them. This situation has made the chip shortage in automotive a bit more complicated, causing some disruptions around whether the economy continues to grow as it did. The IMF has recently brought down their growth expectations. This can start to erode some of the demand we see because aluminum is so tied to the general economic cycle. Automotive is one area where we are seeing some supply chain disruptions. Moreover, the inflationary environment has an impact. As the U.S. Fed reacts to inflation, it tends to make demand feel a bit more uncertain. We're seeing demand grow for aluminum, but we adjusted our expectations from a 2% to 3% growth to about 2%. This reflects the beginning of demand impacts, but it's not deep, and we continue to see growth in the aluminum market. I would note that our order book remains strong, and we haven't seen our order book suffer.

Lucas Pipes, Analyst

That's very helpful. I really appreciate it. I love to ask more questions, but I do want to touch on the R&D programs as well. In the prior quarter, you showed conditional spend on various programs in 2023, 2024. Can you remind us when you will make a final decision on that spend? Specifically to ELYSIS, what's the monetization path for that technology? Thank you very much.

William Oplinger, CFO

So Lucas, let me address the spend. We had multiple R&D projects that back in November, we listed out projected spend for '22, '23, and '24. We've not deviated off of that as public guidance at this point. Each one of those individual projects has stage gates, and we make decisions around spending based on the business case at each stage. ELYSIS is progressing well. We're constructing pots in Alma in Quebec, expected to be operational in 2023. We continue to make progress in Australia, but Australia is very early in stage development. High-purity alumina will have a stage gate in mid-year, where we will reevaluate whether we build a pilot plant for high-purity alumina. The refinery of the future projects are in the development stage. We've gotten funding from the Australian governments for electric calcination, which is a huge step forward.

Roy Harvey, CEO

On the monetization pathway for ELYSIS, we're keeping options open. We could license that if we see it as a lucrative venture or can choose to keep it between the partners and grow our facilities if we believe a green premium makes it more sensible to keep it in-house. That decision can wait for us to allow the markets to develop for what is truly green aluminum. I look at our pipeline, and each project is in different stages, but we see strong potential for financial success and decarbonization solutions.

Lucas Pipes, Analyst

Really appreciate it and continue best of luck. Thank you.

William Oplinger, CFO

Thanks, Lucas.

Roy Harvey, CEO

Thank you.

Operator, Operator

Our next question will come from Carlos De Alba with Morgan Stanley. Please go ahead.

Carlos De Alba, Analyst

Yes. Thank you very much. Hello, Roy and Bill.

William Oplinger, CFO

Hi, Carlos.

Carlos De Alba, Analyst

Hey. My first question has to do with the return to cash to shareholders. Working capital was an issue this quarter, respected and for good reasons, as you elaborated. As we go forward and we see continued high prices, cash flow should improve. Is there a possibility that you step up your dividend, or would you focus more on share buybacks rather than bumping up the dividend potentially through a special dividend?

William Oplinger, CFO

Carlos, just a reminder on the capital allocation framework. We typically want to maintain about $1 billion of cash on the balance sheet, as you saw, we maintained more than that this quarter. We aim to maintain a strong balance sheet. While our proportional net debt grew a little, I'm pleased with where the balance sheet sits today. That leaves three uses of cash going forward: returns to shareholders, spending on repositioning the portfolio, and positioning for growth. We'll evaluate dividends versus buybacks over the year. It was a huge step forward to launch a dividend, signaling that we think the balance sheet is strong to weather downturns.

Carlos De Alba, Analyst

Yes. Thanks, Bill for the details. And maybe, Roy, this might be too early, but could you shed some light about how you are thinking about ELYSIS in terms of future investments? Are you thinking about retrofitting most of your smelters if the technology works out, or just build a few or one big smelter with ELYSIS if that plays out as expected?

Roy Harvey, CEO

Yes, Carlos. The answer is all of the above. When ELYSIS is successful and we meet our commitments regarding operating costs, cell size, and lower capital costs, it becomes a question of retrofitting existing plants versus building a new greenfield. By 2050, we need zero carbon production of aluminum, which is why we're doing these projects. Once ELYSIS proves itself, we will make decisions based on financial comparisons, and whether governments will support retrofitting or not. That will provide us with options moving forward.

Carlos De Alba, Analyst

Alright. Excellent. Well, good luck with everything. Thank you guys.

Roy Harvey, CEO

Thank you, Carlos.

Operator, Operator

Our next question will come from Timna Tanners with Wolfe Research. Please go ahead.

Timna Tanners, Analyst

Hey, guys. Thanks for squeezing me in.

Roy Harvey, CEO

Hi, Timna.

William Oplinger, CFO

Hi, Timna.

Timna Tanners, Analyst

I don't think either of my questions are conducive to a really quick response, so I apologize. But I wanted to ask given what we've talked about on Russia and Ukraine, but China has been restarting some smelters I've seen, and there are concerns over demand. I'd like to hear if you have any updated thoughts on the risks of greater exports from China or if they're indeed being disciplined? My second question is about updated thoughts on your portfolio.

Roy Harvey, CEO

So, looking at China first, we agree that there have been some restarts from some of the idle curtailments. We're starting to see some of those facilities come back online. There’s a bit more friendliness to operations using coal as an energy source due to recent COVID issues, which is speeding up rates. In the short term, there is some pressure on supply. However, in the medium to long term, the Chinese seem serious about maintaining decarbonization and controlling new capacity. They keep saying they will maintain a 45 million ton per year capacity limit. So, while we see slight production increases, we don't expect major deviations from this decarbonization plan.

Timna Tanners, Analyst

Okay, great. I leave it there. Thanks guys.

William Oplinger, CFO

Thank you, Timna.

Operator, Operator

Our last question will come from Emily Chieng with Goldman Sachs. Please go ahead.

Emily Chieng, Analyst

Good afternoon, Roy and Bill. Thanks for taking my question. I've got one today, around the Alumar restart. I think you mentioned that it was progressing perhaps a little slower than we'd previously expected. I would be interested to hear some of the challenges with restarting assets and why we haven't seen more from you and your peers?

William Oplinger, CFO

Yes. We announced that we are energizing the pots probably about a week ago, 1.5 weeks ago. We've encountered some technical issues where the bath that we purchased isn't up to standard and we're not able to restart as quickly as we wanted. Importantly, we're still projecting the plant will be operational by year-end. We have about a month setback, but we will catch that up during the year. So, we are confident we will be able to get it started. This is just a temporary pause on the restart. Do you want to address the broader issue?

Roy Harvey, CEO

One quick comment on Alumar before moving on. I know the team there well because I worked directly with them in Brazil, and they're one of the most innovative teams we have. I'm confident they’ll catch up quickly. More generally, restarting a facility takes time. We made the decision to restart Alumar over two years, ensuring its readiness by maintaining it next to the refinery. It’s difficult to secure energy, find the right workforce, and restore and restart those pots. This situation explains why you don’t see a lot of announcements about restarts. It's indeed hard, especially to ensure they work not just during peak cycles but through regular cycles. We’ve put effort into ensuring Alumar was restartable, and our technical teams have maintained it well.

Emily Chieng, Analyst

Right. That's very helpful. Thank you.

Roy Harvey, CEO

Thanks, Emily.

William Oplinger, CFO

Thanks, Emily.

Roy Harvey, CEO

Thanks, Matt. And thank you once again to everybody for joining our call today and for your questions and, of course, continued interest in Alcoa. We will continue to execute on our strategies as we progress throughout the year. Both Bill and I look forward to talking to everyone again in July for our second-quarter results. In the meantime, please be safe, take care of yourselves and each other. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.