Alcoa Earnings Review: Higher Aluminum Prices And Productivity Improvements Boost Q1 Results

April 9th, 2015 by Trefis Team
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Alcoa (NYSE:AA) released its Q1 earnings results and conducted a conference call with analysts on Wednesday, April 8. The company reported strong year-over-year growth in quarterly profits. Excluding one-time costs, net income stood at $363 million in Q1 2015, as compared to $98 million in the corresponding period last year. [1] One-time charges, totaling $168 million in Q1 2015, primarily consist of non-cash charges pertaining to  restructuring activities undertaken by the company during the quarter. [1] These include the sale of a rolling mill in Russia and the completion of the closure of the company’s Sao Luis smelter. [2] Quarterly revenues stood at $5.82 billion in Q1 2015, around 7% higher compared to the corresponding period a year ago. [1]

The increase in the company’s profit figures in Q1, as compared to the corresponding period a year ago, are mainly due to company-wide productivity improvements and improvements in realized prices, which boosted the results of the company’s upstream Alumina and Primary Metals business segments.

Alcoa is focused on its portfolio transformation towards value-added products. At the same time, the company has emphasized cost reductions in order to make its upstream businesses more competitive.

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Better Pricing and Productivity Improvements

Alcoa’s average realized price per ton ton of aluminum sold stood at $2,420 in Q1 2015. This is almost 10% higher compared to the corresponding period in 2014. [1] This was partly due to higher London Metal Exchange (LME) aluminum prices. The company uses LME prices as a reference for the prices of its own primary metal sales. LME aluminum prices averaged roughly $1,800 per ton over the course of Q1 2015, as compared to $1,700 per ton in the corresponding period of 2014. [3]

Aluminum has diverse applications in industry. The demand for aluminum is broadly correlated with industrial growth. Economic weakness in Europe and slowing Chinese growth contributed to the weakness in aluminum demand, and consequently prices, over the last few quarters. Global smelting capacity cuts, in response to low prices, have led to a tightening of supply. This has positively impacted aluminum prices lately. LME warehouse stocks of aluminum were down around 21% in December, since the start of 2014. [4] In view of the global smelting capacity cuts, according to a poll conducted by Reuters in July, the market for aluminum is expected to move from an oversupply of 235,500 tons in 2014 to a deficit of 4,444 tons in 2015. [5] However, global smelting capacity restarts in response to higher aluminum prices are expected to lower or eliminate the extent of the deficit next year. In any case, the tightening of the physical supply of aluminum led to the increase in aluminum prices. [3]

In addition, the  results of the company’s Alumina and Primary Metals business segments benefited from the company’s ongoing efforts to reduce operating costs and enhance the productivity of its operations. The closure of some of the company’s high-cost smelting and refining capacity in previous quarters has contributed to this. Company-wide productivity improvements boosted the company’s year-over-year quarterly profits to the tune of $238 million, on a pre-tax basis. [1] As for the company’s upstream businesses, a combination of higher prices and productivity improvements boosted the after-tax operating income of the Primary Metals business segment to $187 million in Q1 2015, from a loss of $15 million in Q1 2014. [1] The after-tax operating income of the Alumina business segment rose to $221 million in Q1 2015, from $92 million in the corresponding period of 2014. [1]

Portfolio Transformation and Performance of Value-Added Segments

The Global Rolled Products (GRP) and the Engineered Products and Solutions (EPS) divisions constitute Alcoa’s value-added business segments. The GRP segment is mainly involved in the production and sale of aluminum plate, sheet, and specialty foil. This segment’s products are sold to customers in packaging and consumer goods, aerospace, automotive, brazing, building, and the construction industries. The EPS segment’s products include titanium, aluminum, and superalloy castings, fasteners, aluminum wheels, integrated aluminum structural systems, architectural extrusions, forgings, and hard alloy extrusions. These products are sold to customers in the aerospace, automotive, building and construction, commercial transportation, and power generation industries. The fortunes of the upstream segment are to a large extent dependent on aluminum prices. To lessen its dependence on aluminum prices, the company has shifted its focus towards value-added products. The company is focusing on the aerospace and automotive segments and has made several investments and acquisitions over the past year to cater to customers in these segments.

Alcoa’s shift towards value-added products is reflected in its revenue figures. The percentage contribution of the GRP and the EPS segments sales to the total revenues has steadily increased. This figure stood at 54.4%, 55.7%, 56.4%, and 57.4% in 2012, 2013, 2014, and Q1 2015 respectively. [6] [7] In calculating these figures, we have only considered third-party sales.

The results of the GRP segment in Q4 2014 were boosted by robust demand for aluminum sheet from the automotive sector, which boosted volumes. In addition, higher aluminum prices provided a better pricing environment for the segment. Lastly, Alcoa’s company-wide efforts to boost productivity also helped boost the segment’s results. After-tax operating income for the GRP segment rose marginally to $191 million in Q1 2015, as compared to $189 million in Q1 2014. [7] The after-tax operating income for the EPS segment fell from $59 million in Q1 2014 to $34 million in Q1 2015, driven by higher costs associated with the ramp-up of a rolling mill in Saudi Arabia. [7]

The Road Ahead

The company expects to continue its ongoing strategic shift towards value-added products in 2015. The investments made by the company in boosting its production capacity and enhancing the breadth of its product offerings, should result in an increased share of value-added products in the company’s overall revenues. In addition, the company expects to continue improving the productivity of its operations. Alcoa expects to realize benefits totaling $900 million from productivity improvements. [8] A combination of an increasing share of value-added products, and productivity improvements, bodes well for Alcoa’s results in Q2 2015 and beyond.

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Notes:
  1. Alcoa’s Q1 2015 Earnings Presentation, Alcoa Website [↩] [↩] [↩] [↩] [↩] [↩] [↩]
  2. Alcoa’s Q1 2015 Earnings Call Transcript, Seeking Alpha [↩]
  3. LME Aluminum Prices, LME [↩] [↩]
  4. Dominant holder highlights problems in aluminium market, Financial Times [↩]
  5. Aluminium smelter restarts seen undermining global deficit outlook, Reuters [↩]
  6. Alcoa’s 2014 10-K, SEC [↩]
  7. Alcoa’s Q1 2015 Earnings Release, Alcoa Website [↩] [↩] [↩]
  8. Alcoa’s Q4 2014 Earnings Call Transcript, Seeking Alpha [↩]