Alcoa's Revenues Fall Marginally On Lower Prices But Profits Rise On Productivity Gains


Alcoa ( AA ) released its third quarter earnings on Tuesday, October 8. The company's reported revenues of $5.76 billion were slightly lower than Q3 2012 revenues of $5.83 billion, mostly due to a 7% year-over-year drop in realized aluminum prices. Including the impact of special items, it reported a net profit of $120 million. The after-tax special items, worth $151 million on a pre-tax basis include restructuring costs associated with the closure of the Soderberg lines at Baie-Comeau and one line at Massena. Excluding special items, the net income stood at $24 million, as compared to a loss of $143 million a year earlier. The rise in net income was largely due to productivity gains and favorable exchange rates.

The engineered products and solutions segments reported higher year-over-year after tax operating income (ATOI) figures due to higher productivity and volumes. The global rolled products division, however, reported lower ATOI figures due to low prices and adverse seasonal impact on volumes. The alumina segment showed a sequential and year-over-year rise in ATOI, primarily due to positive trends in the Alumina Price Index ( API ) prices, favorable foreign exchange rate movements and savings related to productivity. The primary metals segment reported lower revenues due to lower aluminum prices, but higher ATOI due to productivity gains and cost control.

The company's management made some adjustments to demand and growth projections for certain business segments.

We have a Trefis price estimate for Alcoa of $7 , which will shortly be revised in view of the latest earnings results.

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Performance Of Individual Business Segments

In the engineered products and solutions ( EPS ) division, ATOI rose year-over-year from $158 million to $192 million due to productivity gains and higher sales volumes. The division reported a record adjusted EBITDA margin of 22.5%. Alcoa is upbeat about the aerospace market and maintained its 9-10% growth projection for 2013. The company touts a large backlog of 9,900 orders for planes with Boeing and Airbus which might take up to 8 years to clear. It signed orders worth $135 billion with these companies at the Paris Air Show in the second quarter. Also, while Alcoa expects a decline in the non-residential construction market in Europe, it sees demand in North America picking up.

In the global rolled products (GRP) division, ATOI declined on a sequential basis to $71 million from $79 million due to pricing pressure, a seasonal decline in demand, and high inventory levels in the aerospace segment. In this segment, productivity gains were able to offset the negative impact of these factors only marginally. The fourth quarter outlook is bleak for this division due to an expected seasonal decline in demand in packaging, persistence of high inventories in the aerospace segment, and continued pricing pressure in Europe and China.

In the upstream part of the business, Alcoa's alumina division gained handsomely year-over-year due to higher Alumina Price Index ( API ) prices even in face of lower London Metal Exchange(LME) aluminum prices, a strong U.S. dollar and productivity related improvements. ATOI increased from $64 million to $67 million sequentially. The comparable figure in Q3 2012 was a negative $9 million. This also shows that the traditional correlation between alumina and aluminum prices is no longer valid. Earlier, alumina used to be priced as a percentage of market aluminum prices but now the API index is gradually becoming the benchmark. (( LME Aluminum Price Graph , LME))

The ATOI for the primary metals segment stood at $8 million compared to a negative $32 million in the previous quarter. The sequential growth was due to productivity related improvements, favorable exchange rates and lower costs. There was also a one-time gain of $23 million from the insurance amount received on account of fire at Massena that took place last year. The performance of this segment improved despite a 3% sequential drop in LME aluminum prices.


Alcoa has maintained its 2013 global aluminum demand growth figure at 7%.

In the U.S. automotive segment, the company maintained its growth projection of 2-5%. This has been done in view of continued strong passenger car sales due to which automakers are reducing planned shutdown of plants in summer. In Europe, however, Alcoa has maintained its forecast of a 2-5% decline. The growth forecast for China was raised to 9-11% from the previous forecast of a 7-10% due to strong economic growth witnessed in the third quarter.

In the heavy truck and trailer segment, Alcoa has maintained its forecast. It still expects negative growth of 9-13%. The growth rate in the industrial gas turbine segment has been maintained at 3-5% despite weakening market conditions because the company expects a robust demand for spare parts. ((Alcoa Q3 2013 Earnings Conference Call, Seeking Alpha))

Overall, Alcoa has been shifting its business mix focus to value-added products over the last few years. The company's value-added business in the first three quarters of the year constituted almost 57% of its revenues and accounted for nearly 80% of the segment after-tax operating income. If this trend continues in future, it will boost margins and reduce earnings volatility due to aluminum price fluctuations.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AA , API , EPS , MT , RIO



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