Good afternoon and welcome to the Alcoa Corporation Second Quarter 2022 Earnings Presentation and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Thank you and good day everyone. I’m joined today by Roy Harvey, Alcoa Corporation’s 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.

Thank you, Jim, and welcome to everyone joining today’s call. Once again, we had a strong quarter with results that included a sequential increase in revenue, solid net income, strong cash flows and increased capital returns to our stockholders. We will dive deeper into our results soon, but here are a few of the most important highlights. Net income was $549 million. Our adjusted EBITDA, excluding special items, was $913 million, which brings us to nearly $2 billion through the first half of this year. Our free cash flow less non-controlling interest was $383 million. Strong cash flow in the quarter supported capital returns to our stockholders. Year-to-date we have provided $387 million in capital returns. This includes $275 million in stock buybacks during the second quarter and $19 million in cash dividends, which the company paid on June 3rd at the rate of $0.10 per share. Also today we announced an additional authorization of $500 million for future stock repurchases supplementing the $150 million that remains from the prior authorization. Importantly, in these volatile markets, we continue to have a very strong balance sheet and we are well positioned for all parts of the commodity cycle. Our proportional adjusted net debt has reached much lower levels. It stood at $1.2 billion at quarter’s end down from $3.4 billion for full year 2020 and we ended the quarter with a cash balance of $1.6 billion. We also recently amended and restated our revolving credit facility to provide more flexibility, which Bill will discuss in more detail during today’s presentation. Before we do that, however, I want to reinforce an important foundational item. Our Alcoa Values, you see them on the left of this slide and they continue to guide our company. We act with integrity, operate with excellence, care for…

Thanks, Roy. The second quarter of 2022 was our highest ever quarterly revenue at $3.64 billion. This quarter GAAP net income attributable to Alcoa of $549 million was higher than our adjusted net income of $496 million, mainly due to non-cash adjustments. These special items included mark-to-market gains on energy contracts, primarily at our Portland smelter of $106 million as well as a reversal of evaluation allowance of $83 million related to VAT credit in Brazil. Second quarter 2022 adjusted EBITDA was $913 million, up $295 million from the second quarter of 2021 and only $159 million short of last quarter’s record adjusted EBITDA. With another quarter’s excellent financial results our first half adjusted EBITDA, excluding special items, has totaled $1.99 billion. Let’s look at the key drivers of second quarter EBITDA. The largest sequential benefit in the second quarter came from improved shipment volumes. Other favorable factors included benefits from a stronger U.S. dollar and a higher alumina price index. Lower metal prices, which included approximately $40 million to set inventories to net realizable value combined with higher costs as well as lower aluminum and alumina premiums to more than offset those benefits. In the segments oxide EBITDA was $5 million a result of lower royalties’ income. Intercompany pricing, and the MRN divestiture, as well as higher maintenance and production costs. Alumina segment EBITDA increased $81 million sequentially on higher index pricing. The reversal of the valuation allowance in Brazil, favorable foreign currency and higher shipments with partial offsets from increased energy costs, higher raw material costs and production costs and an ARO charge for improvements to bauxite residue areas at Poços. In the Aluminum segment we saw benefits of higher shipment volumes, but earnings declined on lower LME prices, higher costs and lower by resale margins. Turning to…

Thanks Bill. Now moving from our strong second quarter financial results, let’s discuss what we’re currently seeing in our markets and the long-term trends that remain positive for the aluminum industry. Overall, the market is expected to remain in a deficit this year. Pricing and global supply demand forecast have been dynamic, and this is happening for a variety of reasons. First, on the supply side, China has ramped up some smelters that were idled in 2021 due to intentional curtailments for project delays. At the same time, European smelters, and more recently, one smelter in North America have cut capacity due to higher energy prices. On the demand side, while there is some global uncertainty in the near term, demand continues to grow. And finally, we continue to see inventories decrease globally as supply has failed to keep pace with continued demand. Given the price and cost pressures over the past quarter, we also see significant amounts of global Alumina and Aluminum capacities that are likely to be cash negative based on an analysis through June, which means global operating capacities will remain under pressure. Based on June’s average prices, we estimate that between 10% to 20% of worldwide smelting capacity was underwater last month. At some points in the first week of July, the SHFE spot price are likely to have pushed around half of Chinese smelting capacity underwater. In these conditions, however, suppliers like Alcoa that produce in markets with structural deficits like North America and Europe remain in an advantaged position as many consumers preferred domestic suppliers with integrated supply chains. Those consumers have also looked to move away from relying on riskier imported volumes. For Alcoa, much of our value-add aluminum products are sold on annual contracts and we expect similar volumes and higher average…

We’ll now begin the question-and-answer session. [Operator Instructions] And our first question will come from Timna Tanners with Wolfe Research. Please go ahead.

Yes. Hey, good afternoon.

Hey Timna.

Hey there, wanted to address kind of the energy concerns in Europe and I know you mentioned this as a headwind for some of your competitors. But if you could just give us an overview of your market conditions, I know you’ve mentioned in the past, Lista and the other one in Norway, I don’t think I can pronounce. And then if you could talk a little bit about a little more detail about San Ciprián, if it’s so easy to get wind power, why are your competitor is not doing it? So just a little more detail on Europe would be great. Thanks.

Yes, Timna, let me start on that one and then Bill can add in as well if I miss anything. So energy conditions in Europe, as I think everybody on the call knows, are seeing particular increases pretty much from where we were before. And there is, in fact, even more uncertainty when we think about how much of that – how much gas will actually be delivered into Europe, the need for potential restraints and what’s used, et cetera. So it is a very complicated situation that’s changing each and every day. And that is for gas, which is what we – natural gas, which is what we use inside of our San Ciprián refinery, but then also the knock-on impacts to the electricity market, which is what impacts our – the list of plant, which is our smaller plant up in Norway. So from our perspective, essentially, we have spot exposures in both of those, and we have been pursuing different paths for both and really have been trying to analyze the situation as it sits in front of us. So starting in Spain, and I’ll try to answer sort of your two questions there. Everybody will remember, we’ve curtailed the smelter. So thank goodness for that, because electricity prices in Spain have skyrocketed. And so we have an agreement there with the workforce until January 2024. As you said, we are in the midst of putting together long-term energy contracts there. It’s an agreement that we made with the workers. And there is also a lot of support from the regional government of Galicia and then the national government in Spain to try and offer incentives to the producers of renewable energies to also be able to supply us with energy. So we’re making good progress. We’ve…

I think you covered it really well. I guess the two minor points that I would add is that in Spain in the refinery, since we’re exposed to spot gas prices, we are seeing spot gas prices close to $30 per gigajoule, which results in a fairly large loss that we’re looking at in the third quarter, which is baked into the guidance that we provided, Timna. But the losses in the refinery in Spain are around $75 million a quarter currently. You addressed motions in a good situation given the fact that it’s up in Northern Norway. So it’s not exposed to the Southern European or Southern Norwegian energy prices. So that’s the only two things I’d add, Roy.

Okay. Thanks so much for the comprehensive answer and best of luck.

Thanks, Timna.

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

Yes. Thank you very much Roy and Bill. So just continuing with, I guess, the questions on costs. Any comments as to how do you see the cost pressures in alumina with the refineries there? And then also in that continent, how does Portland fits in your medium to long-term strategic view for the smelting business?

So I’ll take the cost question first. It’s important, Carlos, for you to go to the outlook page, which I think is Page 30 of our deck. In alumina, we’re expecting $30 million in higher energy and raw material costs and third of that is related to San Ciprián. So as I said to Timna, we are seeing high energy costs in Spain and projecting that they’re a little bit higher in the third quarter versus where we are in the second quarter. Continue to see some high raw material costs flowing through. However, we are projecting a stronger shipment view in the third quarter for the Alumina segment. And we think that that stronger shipment will offset all the other cost increases or any other issues that we have in the Alumina segment in the third quarter. By then step back and think about the cost structure of raw materials that are flowing through both the Alumina and the Aluminum segment. We are now finally starting to see on an as purchase basis caustic prices going down in the second quarter already, and going into the third quarter. Now you know, there’s a six month lag on our caustic purchases that it takes to flow through and to our costs of goods sold. But it’s good to actually see that we think we’ve peaked out on caustic prices, at least for now. And we’re starting to see those come off and that’s a positive. On the smelting side, seeing something similar, but probably in the third and fourth quarter as coke and pitch peak out in the third and fourth quarter, they will start to decline from there. So we’re finally starting to see some relief from higher raw material costs, but as we’ve said all along, it takes some time to flow through the P&L. So let me turn it over to you, Roy, to answer the Portland question.

Yes. Carlos, so for Portland very specifically, let me start off a bit more generally and then get to a very specific answer to your question. So generally what we’ve been driving to do and I think this was in a lot of the materials that we’ve provided in the Investor Day that we did not seems like a world ago, but it wasn’t that long ago. We’re focused on driving down the cost curve and making sure that we have long lived assets that we can invest in and drive to have a portfolio that makes us a very strong company. We’re also very determined to move towards renewable energy because we see that as the way for us to be able to adapt to a low carbon world to meet our net zero by 2050 targets. And because more and more customers are demanding, are requesting, are pushing towards low carbon aluminum as well. And so we always look at every single one of our facilities in those lights. For Portland specifically, right now we have a coal heavy power supply not exclusively, but obviously that has been important for the development of Victoria state in Eastern Australia in general. They’re working a lot in order to change that. So I think as you look a number of years out, they’re moving very quickly towards heavier renewables. Right now we have a contract that I think has four years left, approximately four years left. That gives us time to evaluate what we want to do and how Portland fits in our long-term portfolio. When we look at facilities, we always talk about and this is very simplistic terms, fix, close or sell. We look for ways to repower and if we repower, can we secure renewable sources in order to do that repowering? We have always have the opportunity to curtail or close, obviously that wouldn’t happen until that that power contract ends. And of course, there’s always the option to be able to the best, if we see that we can’t solve those issues in a way that then matches our portfolio. So for Portland, we’re actively looking to find what is the right solution and how that fits with our portfolio and we’ll keep you updated as we think through and make those decisions.

All right. Excellent. Thank you very much, Roy and Bill. Good luck.

Thank you, Carlos.

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

Good afternoon, Roy and Bill. And thank you for the update. My first question is just around the capital return strategy. So certainly great to see the additional buyback there, but was this step change in that program simply a function of the improvement in working cap and higher free cash flow this quarter or was it perhaps an increased confidence in the ability to weather through this period of macro uncertainty?

I’m going to agree with both about that, Emily. Thanks for the question. But we have a capital allocation program that’s focused on maintaining a strong balance sheet, sustaining the plants and sustaining the operations. And then you’ve heard us say there’s three prongs of that capital allocation after we’ve done that. And in no particular order transforming the portfolio, positioning for growth and returning cash to shareholders. Given the strength of the balance sheet and the balance sheet, as you’ve heard us say numerous times with the work we’ve done around funded debt, pension and OPEB is substantially stronger than where it was even two years ago, much less four or five years ago. We have confidence in the strength of the company. And so we provided returns to shareholders in the second quarter as our cash balance was strong. Our cash generation was strong and we have confidence in the future ability of the company to weather through cyclical storms. And so that’s why we provided it. Just we announced an additional $500 million buyback. We still have $150 million left on the prior buyback authorization. It’s very consistent with what we’ve done in the past, where when we see the authorization getting low, we go out with a new level of authorization. So that’s what we executed upon in the second quarter.

Great. And just one quick follow up, if I may. Roy, you mentioned there was a significant amount of capacity that’s currently underwater given where spot prices have trended to. Maybe turning the question to the Alcoa set of assets. Are you able to share what percentage of aluminum and alumina capacity is still generating positive cash margins maybe said another way, what’s the aluminum/alumina breakeven?

Yes. Emily, I appreciate the question. I’m not going to be able to give you a direct answer because that’s not information we typically share. More generally I would just say is that when as we see facilities that are going underwater, we take evasive action to try and figure whether it’s best to continue to operate or to curtail or to find other actions. And so, and I think Bill had mentioned San Ciprian refinery as a good example of a place where with exorbitant gas prices, it’s simply a loss making enterprise at this point. And so that’s a good example of a place that we do pretty much constant analysis to see how can we optimize the outcomes there. But otherwise in general, we really don’t talk specifically about each of the plants, but we do take very seriously trying to make sure that we can maximize and optimize the returns at each and every one of our facilities and look for ways to improve them.

I appreciate the color. Thank you.

Thanks, Emily.

Thanks, Emily.

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

Hi guys. Thanks for taking my questions. My question is actually related to some of the cost questions that have been asked previously, but it’s just a bit of a broader stab at it. So, if we consider what’s been going on in the aluminum market, things have changed quite a bit obviously the last few months. We’ve seen China production ramp, we’ve seen the demand outlook incrementally negative, I think that’s a fair comment versus what it was a few months ago. And obviously commodity prices come way down. Slide deck 10% to 20% of the global aluminum smelting is underwater based on Alcoa’s estimates. And so my question is in terms of how you think about your business, your smelting business specifically? If we look at the 2.5 million tons to 2.6 million tons of capacity now, if say for whatever reason prices continue to go down another 10% and another 20% for example, and costs all kind of stay where they are, about how much of that 2.5 million tons to 2.6 million tons of capacity would be at risk of closure in a sort of a six-month to one-year weak pricing environment?

Dave, let me take a stab at it first, and then Roy can follow up with some more information. We’ve done a lot on the portfolio over the last five and a half years, we announced a portfolio review going on three years ago, I believe it is. We curtailed Intalco. We repowered Portland. We are restarting São Luis almost at an restarting São Luis. We curtailed San Ciprián, which as Roy said earlier, boy, if we had not curtailed San Ciprián smelter, we’d be paying over $300 a megawatt hour on energy. So, we’ve done a lot to right size the portfolio and really get it in a position where it can get through some pretty tough economic situations. I’m not going to speculate on what gets done at a 10% or a 20% reduction. I hate to try to answer hypothetical questions. You’ve seen what we’ve done over five and a half years. If a facility needs to be curtailed, because it’s losing money, we don’t shy away from hard decisions. We do it in humane ways, but we don’t shy away from hard decisions. So Roy is anything you want to add to that?

Yes, I think you covered a lot of it, Bill. I would just call your attention, Dave, to three things. First of all, you talked about demand. We look out at demand and we continue to see growth this year. There is a lot of uncertainty. There’s a lot of questions, particularly in Europe, and of course, China with COVID. So there’s the potential that we continue to see customers stepping away. But realistically, what we’re seeing right now is that demand continues to grow for the year. And so we continue to have a good full order book. We have constant conversations with our customers. And of course, we have annual contracts, and we have – in the U.S. those tend to be priced annually, and in Europe they tend to be priced quarterly. We continue to see very strong premiums, very strong order books and value-added. And so while there is great uncertainty, I think, it continues to be a good story on demand. It’s just a question of where that takes us. The second thing is, is really around cycles. And Bill and I, and Jim have been around this business for a very, very, very long time decades at this point. And I think the one thing that is typically true is that as you see that revenue cycle turned down, you also tend to see that cost, that cost cycle turned down as well. Typically there is margin impression for the first few months, but then you start to see some of the relief on cost pressures, which Bill’s already talked about. And so we try to analyze our decisions based on that assumption. Now, every situation is very different, right? Russia, Ukraine is a very specific circumstance and what’s happening in the energy markets…

Okay. That’s helpful. I appreciate the historical references. And yes, and I do remember those days as well. And I remember going through these contingency planning conversations with Bill, and I think you actually in the IR role at one point. And I thought, there was typically an answer that said, yes, what, if prices go down another 20%, we have 20% of our capacity is. And really what I’m trying to get to is, is that the case now? Or is it such that the cost structure to your point is so much better that the existing assets are not impervious but are, at what point, I guess, really what I’m trying to get to is at what point does the commodity price impact start to actually have an impact on the existing smelting capacity? I think just was kind of curious some sort of framework. It doesn’t have to be specific to the smelter or anything like that? And also just while you try to address that rambling follow-up, the Alumar restart, how does that factor into the thought process with regards to, that’s a 10% increase in your capacity in this environment, how does that factor into your thought process in terms of the rest of the portfolio?

So, I think the one thing I’ll add to try and address your first question there, Dave is that, we tend to look at a number of different actions that you can take as the world shifts. And first and foremost, like we’ve talked about portfolio already, but most of our smelters at this point are with long-term, low priced energy contracts. And so when you think about the danger of them turning negative, it is much lower because they have long life contracts and the fact is, those were set at a time where alumina prices were significantly lower than what we’re experiencing right now. So we can always move to stop, not relining. We can step into partial curtailments, full curtailments, there’s a lot of actions that we can take. And I remember all those wonderful slides that we used to put together that talked about those programs. I think if we were to get to an area where those things were to start to occur, we would certainly communicate that to you and into the market because that would signify that we’re getting to a point where we’d have to start taking action. Like we said, it’s really the sense that we’re in refinery and it’s listed that right now, where the places where we had to take decisions and we’ve already talked through those. So I won’t belabor the point. When it comes to Alumar, the São Luis restart and this is the plant that I used to work at. So, it’s near and dear to my heart. The restart started off a bit later than we wanted it to, but it continues to ramp up now, according to the plan that we wanted it to be just offset by those couple of months. I think they’re doing a very good job of restarting. We’ve got a long-term renewable power contracts in place at very attractive power prices. And so, it’s coming in at the – on the very strong end of our portfolio, and that’s why we chose to restart it. And that’s even before you get to value add taxes and all the add-on benefits of having an integrated facility and having a strong position inside of Brazil and a good, strong domestic market as well for the metal that we’re making. And so what it does is make our portfolio even stronger. And it’s great to be able to bring that plant back up again.

And the only thing I would add to Roy as and I know we’re trying to address Dave’s question. One thing to keep in mind, Dave and this is a change from, if you looked back 10 or 15 years ago with the portfolio we had, today around 65% of our energy is LME linked. So that means when the LME is going up, we’re not getting all the benefit of the LME. And you’ve seen that, but when the LME goes down we’re – our energy costs are following that. So that’s a much higher percentage than it was, let’s say 10 years ago. And it positions the portfolio four times when the LME does go down, we’re not the ones that have to curtail.

No. And if I can just add one more piece onto it, also Dave, I know we keep adding on pieces and pieces. When you think about the smelters, big smelters very specifically at risk and who’s sitting at the very top end of that cost curve and what are they dependent on? I think it’s you look at it either in my prepared comments, but you look at sort of the average for Junes specifically in China and it was 10% to 20% that were underwater. That changed so significantly because of a change in SHFE prices that have reached at half of all smelters in China underwater, because those prices had come down over the course of a couple weeks. And so, when you think about how flat the cost curve is where our facilities sit on that cost curve, and then where some of the competitors sit on that cost curve, and then how beholden they might be to things like coal prices or specific alumina costs, et cetera. I think it helps you to understand that the decisions that we make are a bit more predictable and because of where we’re now located on the cost curve and the work on the portfolio, it’s just simply a different game than it was in a decade ago or five years ago.

Okay. That’s helpful. Thank you.

Thanks, Dave.

Our next question will come from Curt Woodworth with Credit Suisse. Please go ahead.

Yeah, good afternoon, Roy and Bill and congrats on the progression on the buyback, sort of the follow up to the power question and the LME linkage, we were somewhat surprised this quarter of the power cost is only 25% of the total for the smelting segment, whereas running 33%, 34%. And we sort of would’ve figured that, given the LME linkage and the fact that you have spot power Norway that would’ve gone up a lot. So is it – and also you have less buy resale. So could you address that? Is it simply a function of other things going up more or is there a lag – like a mechanism in place?

Curt, I think it’s a little bit of both that there is a little bit of a lag on pricing. So, it depends on which contract it is. It can be anywhere between 30 and 90 days. So, you do see a lag there. You also see some of the raw material costs have gone up and that would deflate the amount of percentage associated with energy. I don’t have a real, more precise answer for you than that Curt.

Okay. And then just on buy resale and tolling that is about 25% of your shipments in the smelter segment. And you mentioned in the prepared remarks that margins have come down for that. I know some of that is I think, Ma’aden tolling, but can you just talk to what you’re seeing in margins on that part of the business, and if you could give us a sense for profitability there in terms of our model, that’d be helpful? Thanks guys.

Profitability is generally very low. We’re doing buy resale activities to try to essentially meet customer demands in certain areas. We may do those also for just to swap from a time perspective of when we need to make deliveries. And so profitability is not large on the buy resale. In the case of the second quarter, we did see with the rapidly declining metal price. There was times where we were buying at one price and turning around and selling it a little bit lower price, given some of the supply chain disruptions that we saw in the quarter. So that’s what was meant by my remark in the prepared comments.

Okay. And then maybe just one quick one on the tax rate for the third quarter, I know that typically the Alumina segment has higher percentage tax base. Do you feel like the tax rate will move around much sequentially? Would it go up a little bit just given the fact that the LME maybe gone down a little bit more than alumina?

Tax rate could move around substantially depending on earnings levels and where the earnings come from? That’s why we, in my prepared remarks, I give you specifically the amount of tax expense that we’re anticipating for the company that gets you out of having to try to figure out what the actual tax rate will be. It’s our best given the current metal prices, current alumina prices, Forex, it’s our best estimate of the tax expense and it saves you from having to try to figure that out.

Okay. Thank you.

Thanks, Curt.

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

Good afternoon. Good job on the quarter. And I also wanted to ask a quick question on the cost side. So you mentioned the labor shortages at Warrick and 99% [ph] CPI, of course folks are feeling the pinch. What are you seeing on labor inflation? And if so, how quickly would that run through the cost structure? Thank you very much.

It depends by jurisdiction. And in certain jurisdictions, we have labor agreements that our combination of built in increases that are related to inflation. There are also places around the world, for instance, like Norway, where there’s a stipulation of how much increases get paid. So Lucas, there’s not one kind of monolithic answer that I can give you about wage inflation. And so it really depends on the jurisdiction. As we look out it’s getting harder and harder to determine how much wage inflation there will be just with the some of the volatility that we’re seeing in the marketplace. And just take the U.S. for instance we did have difficulty getting enough folks to work at in Indiana, which in large part led to the curtailment of the facility. But at the same time, we’re seeing some of our competitors curtail, so that may give us an opportunity to hire some people out of those facilities that may take some of that pressure off.

Okay, thank you for that. My second question is on ELYSIS. You mentioned that priority to scale up the supply chain. What does that entail?

Well, essentially Lucas, and I’m not going to get too deep into the technical details because it’s proprietary. Essentially it means that as we’ve solved the – essentially, the essential manufacturing technology inside of the cell. And so right now, we started off, we’ve been essentially ramping up the amperages and increasing the size of the cell, working up to the 450 kilo ampere cells that’ll be operating here by the end of next year. As we ramp up that we need to start thinking about how we make sure that the proprietary material and technology that is the anode, the replacement for the carbon anode, that we can manufacture that, manufacture the cathodes and essentially manufacture everything that goes into what will be the design and finally the installation of that first and then those sequent ELYSIS cells. And so essentially it means how do you solve the supply chain, because these are new materials, these are new technologies and thus ELYSIS as an entity, and then Alcoa and Rio Tinto as the partners that have ownership in that entity really need to solve how are we going to make sure that we have the materials necessary. And the knowhow to be able to allow that deployment to happen as quickly as it could happen because of increasing demand for low carbon aluminum, and the very unique product that will be ELYSIS metal.

That’s helpful. And then the commercial strategy would be to sell those packages by 2024. Did I hear that right?

The strategy that we have is that we’ll have a proven technology by the end of 2024. We’ll then go into a design phase for what would be the deployment of the essentially be putting into place that that first facility for first half metal coming in 2026. And so the decision about how we put together the commercial packages and then who is going to deploy at first and all those things are still decisions that will be made as well as the decision whether we choose to license or just keep it in house. And so that’s all – that all has option value for us as we solve technology problems and make sure that we have a – we have a great and cost efficient system that then we can choose to do what creates value for our shareholders.

Very helpful. Thank you very much and best of luck.

Thanks, Lucas.

Thank you, Lucas.

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

Good evening, gentlemen.

Hi, Michael.

Roy, I was intrigued by your comment that you made in your prepared remarks about customers looking to more advantage, more in in-market type of suppliers than maybe in the past. How quickly that changed and is that, and can you look at that relative to what’s going on in the global markets and with Russia and the dynamics that could be with us for quite a while and how that metal may or may not be part of what customers are thinking about as they go about their business?

Yes. Mike, I don’t think this is necessarily new. I started off my career in Alcoa in sort of the interface between operations and commercial and finance, trying to figure out how you fund the right products in the right places for the right customers, and I think it’s always been true that that customers want – the quality material that they want and they want to have it when they want it and thus there’s always been – there’s always been an advantage for the supplier, for the company that is close to the customer. I think what we’ve seen and if this was really brought into start contrast through the, the COVID pandemic, I think we’ve seen that people realize that supply chains are fickle. And I think that’s not just aluminum that’s across the board, and so what we’ve seen is more and more interest over these last two to three years of how can you guarantee not just the quality and the price, but also the fact that you’re going to have that material when you need it, because we don’t have the material you’re not going to be able to produce and therefore you’re losing demand or losing it to other competitors. That then add one more wrinkle which is Russia/Ukraine because Russia was importing into the U.S., it wasn’t importing into Europe. And all of a sudden you have a lot of companies that are choosing to no longer accept that metal, even if it’s going through traders. And so I think that, that’s even exacerbating the situation making people really think twice about how can they really drive towards – towards local suppliers. And so for us it’s an advantage for Alcoa because a lot of our capacity and a lot of our…

Well, that sounds quite encouraging. Thanks for those folks.

Thanks Mike.

[Operator Instructions] Our next question will come from John Tumazos with John Tumazos Independent Research. Please go ahead.

Thank you. The two smelter idling in the Midwest that were 30% of U.S. output didn’t benefit Midwest premiums it kept falling. There wasn’t much brouhaha in the press. I would’ve thought Tesla increasing output or Ball Corporation building two plants might have had some anxiety. Why are – why is there so much complexity with shrinking output? Is it just that autos and housing are particularly week this month as well?

Yes. John, let me take a stab at that because I think it’s a good question and we put some thought into it and as is always the case when it comes to pricing environments, there’s a lot of factors that go into it. So I’m going to give you some breadcrumbs. And I also know that, you’re good at putting together those breadcrumbs to have a view as well. So obviously there’s the supply side, which is pretty clear what’s happening. On the demand side, we continue to see an order book that is full. We continue to see a lot of demand for value-add products. And so, that to us really, we haven’t seen a lot of changes that have happened over the course of this year. And so that says those two things are more or less stable to where they were. And although you still continue to see a little bit of weakness in the automotive side, as we talked about last quarter as well. Add that then to the logistics of some of these imports coming into country. And so I think part of what you might be seeing is that when those imports in fact are able to get in, when those vessels can actually make it, and we understand there were a couple two, three vessels that were meant to come in Q1, but they actually came in Q2. And that tends to mean that it’s not just the – in the moment supply demand, but then there’s also this supply coming in from vessels that then makes a factor like Midwest that is so dependent on those deals that are happening in the moment that can have impacts that are a bit surprising. So on this one, everything that we see is that the Midwest premium is continued to reflect the strong demand that we see. It’s not yet reflecting the lack of that supply because it’s being substituted by some of these imports that came in a bit tardy, but have actually come in. I think the question will of course be, and I’ll leave that to you is, as you think through this, what happens in the future? And how does that change through time? But for us it’s – but for us we continue to see good demand and that supply obviously is having an impact.

Do you think a solution would be for Washington to increase the 10% tariff?

We’ll probably leave that to smarter people to work through. From our standpoint, we’re always looking to have a very efficient market. And so for us, we want to make sure that we’re incentivizing demand. We want to be sure that we can have the best possible outcome for our plans that are operating in the U.S. and Canada and Brazil around the world. You know, I think we want to make sure that we don’t have unintended impacts that happen in downstream. A tariff is, it’s been effective to a certain extent that increasing at driving the market as we see it today, but it’s an imperfect instrument. And we just want to make sure that it doesn’t have unintended consequences.

If I can ask one last one. The IAI at this morning had Eastern Europe, Russia, 5,000 times more output than April, another 30-day months. It would seem as though it’s four plus months now with the war in the sanctions, the plenty of alumina must be getting into Russia overland from China or even further from Vietnam or India overland or something in bauxite, alumina in Indonesia. There must be enough covered gondola cars and covered trucks given there aren’t that many hopper cars for overland transport from Asia. Does it appear that the Taishet 428,500-ton new greenfield smelter is, in fact, getting fired up? But they’re maintaining the old 3.75 million ton output plus firing up the new smelter despite the sanctions and most of their alumina getting cut off from the West? I hope President Biden’s, Jackass are listening.

Hey John, we’re looking at a lot of the same import data that you look at, I’m sure. We’re having a hard time determining how imports, sizable enough imports are getting into Russia to support all of the smelting capacity. We don’t really have any better insight into what smelters are actually producing in Russia than probably what you do. But like I said, that the import data of alumina certainly wouldn’t suggest that they can keep all of the smelters running plus ramp-up Taishet but we have not heard anything different. So that’s where we stand.

The aluminum price would suggest the output exists and that the sanctions or some kind of fantasy that the data the Russian submitted is truthful because the aluminum price goes down, unfortunately. Thank you. You guys are doing a great job in a tough time.

Thank you very much, John.

Thanks, John.

And our final question is a follow-up from David Gagliano with BMO Capital Markets. Please go ahead.

Hi Dave.

Hi, I promise it will be shorter. I just had a quick question on the cost, the costs that are tied to LME, 65% of cost side to LME. Is there any kind of lag in there?

Yes, so 65% of energy, it’s not all costs, it’s energy costs. And the lag is anywhere between 30 and 90 days. So there can be a little bit of a lag there.

Okay. That’s helpful. Thanks.

All right. Thanks Dave.

Thanks Dave.

This concludes our question-and-answer session. I would like to turn the conference back over to Roy Harvey for any closing remarks.

Thank you once again for joining our call today and for your questions and 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 October for our third quarter results. In the meantime, please be safe. Take care of yourselves and each other. Thanks.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.