Alcoa Reports Lower Revenues On Aluminum Prices, Net Loss On Restructuring Charges
Alcoa (NYSE:AA) released its first quarter earnings on Tuesday, April 8 and conducted its earnings conference call on April 9. The company’s reported quarterly revenues of $5.5 billion were lower than the $5.8 billion reported in Q1 2013 due to 8% lower year-over-year aluminum prices. As we mentioned in our earnings preview article, smelting capacity reductions also had a role to play in lowering of revenues. [1]
Net loss for the first quarter stood at $178 million compared to a net income of $149 million in the first quarter of 2013. The net loss was a result of an after-tax charge of $276 million associated with special items primarily related to restructuring. The company shut down many aluminum smelters in the first quarter and we had reported in our earnings preview article that Alcoa would have to incur restructuring charges against these.
Alcoa is very upbeat about its automotive and aerospace businesses and would like to strengthen them further in order to reduce the volatility in earnings due to the uncertain nature of aluminum prices.
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Performance Of Individual Business Segments In Q1
In the engineered products and solutions (EPS) division, ATOI rose sequentially from $168 million to $189 million due to productivity gains and higher sales volumes. The division reported an adjusted EBITDA margin of 22.2%.
In the global rolled products (GRP) division, ATOI improved sequentially to $59 million from $21 million due to higher Midwest premiums, cost decreases, higher productivity and higher volumes. In this segment, continued market pressure and unfavorable pricing impact in packaging were able to offset the positives only marginally.
In the upstream part of the business, Alcoa’s alumina division gained handsomely sequentially due to higher Alumina Price Index (API) prices even in the face of lower London Metal Exchange(LME) aluminum prices and productivity related improvements. ATOI increased from $70 million to $92 million sequentially. ((LME Aluminum Price Graph, LME))
The ATOI for the primary metals segment stood at a negative $15 million compared to a negative $35 million in Q4 2013. The sequential improvement was due to lower energy costs, productivity gains and higher premiums. [2]
Price Outlook
While prices have surged in the first week of April on the London Metal Exchange, this is largely due to the impact of a court ruling in the favor of Rusal. The ruling has blocked the implementation of new LME warehouse rules which would have otherwise depressed the spot premiums manufacturers like Alcoa depend on. The upsurge, however, is likely to be temporary as structural factors remain largely unchanged. LME has already decided to challenge the court ruling issued in favor of Rusal. We believe that unless structural anomalies in the aluminum market are resolved, prices on the LME will stay depressed and Alcoa will have to depend on regional premiums to run a profitable primary metals business. [3]
Demand Outlook
Alcoa gave its outlook for various business segments in the earnings conference call. [4]
In the aerospace business, the company increased its forecast by 1% and now expects 8-9% growth in 2014 compared to 7-8% earlier. The company touted the large backlog of orders with Boeing and Airbus to the tune of 10,675 planes which might take upto 8 years to clear. Alcoa also mentioned the orders coming from the Gulf region, the orders received at the Singapore Air Show and those received from airlines like JAL and ANA. All of these have gone to Boeing and Airbus to whom Alcoa will supply the relevant aluminum parts. Also, demand for regional jets is rising and the order backlog of 1,200 planes will take up to 5 years to clear. In addition, prices for aircraft have been increased by Boeing and Airbus which will translate to higher revenues for Alcoa.
The automotive segment in the U.S. saw growth of 4-5% in 2013 and Alcoa continues to expect further growth between 2-5% in 2014. The average age of passenger cars today is 11.4 years against a historic average of 9.4 years, which implies pent-up demand. In Europe, Alcoa now expects growth between 0% to 4%, as compared to -1% to 3% earlier as vehicle registrations are increasing and exports are growing. The company’s forecast for commercial transportation in China remains unchanged at -1% to 3%.
In the truck and trailers segment in North America, Alcoa has raised its growth forecast quite substantially from 1-5% to 5-9%. This is because of the robust order flow that Alcoa is witnessing in this segment. The demand for trucks increased by 35.2% in Q1, which is the highest growth witnessed since 2006. Demand in the commercial building and construction segment is expected to grow by 3-4% in 2014 in North America. In the industrial gas turbine segment, however, demand may decrease by 8-12% because in Europe gas-fired power generation is facing competition from low priced coal, and in the U.S., gas prices have increased, which has allowed coal to claw back some share in power generation.
We have a Trefis price estimate for Alcoa of $9 which will be updated shortly now that Q1 results are out.
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Notes:- Alcoa Reports Strong First Quarter 2014 Results Offset by Special Items as Portfolio Transformation Accelerates, Alcoa News Release [↩]
- Alcoa Q1 2014 Earnings Presentation, Alcoa Website [↩]
- Aluminum Price Premiums: Disconnect Between LME and Reality Continues, Metal Miner [↩]
- Alcoa Q1 2014 Earnings Conference Call, Seeking Alpha [↩]