Alcoa Reports Earnings Beat In Q2 But Downgrades Its 2018 EBITDA Guidance As Tariffs Hit Profits

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Alcoa (NYSE: AA) reported its second-quarter results on 18th July 2018 and conducted a conference call with analysts the same day. The company reported an earnings and revenue beat and posted an EPS (Non-GAAP) of $1.52 and a revenue of $3.58 billion, respectively. However, the company’s share price tumbled as a result of the company’s downgrade of its 2018 EBITDA guidance. Alcoa’s better than expected performance for the quarter was backed by higher aluminum and alumina prices and slightly higher aluminum shipment volume compared to the same period last year.

Alcoa reported a 25% year-on-year (y-o-y) increase in revenue in the second quarter, largely benefiting from a substantial increase in its average price realized for both aluminum and alumina sales. The company’s realized prices for aluminum was up by 19% y-o-y and that for alumina was up by almost 49% y-o-y. This significant increase in prices largely reflects third-party supply disruptions for these commodities which have distressed the global aluminum and alumina supply chain. Supply cuts at the world’s largest alumina refinery, Alunorte, and additional supply cuts expected by the world’s largest aluminum producer, China, during its winter months have driven aluminum and alumina prices higher during the quarter. Additional supply concerns were stirred during the quarter with respect to the U.S. trade sanctions against the world’s second-largest aluminum producer, Rusal. Alcoa expects both its aluminum and alumina market to remain in deficit throughout the year which should continue to support its higher prices.

However, despite such favorable market developments for the company, Alcoa has downgraded its full-year 2018 EBITDA guidance by almost 14% (assuming mid-points) to the range of $3.0 billion to $3.2 billion. This downgrade comes largely as a consequence of the recently imposed 10% trade tariffs on aluminum imports into the U.S and rising energy costs. The company’s management believes that aluminum imports would continue to remain necessary to sustain the U.S. demand for aluminum. Alcoa operates three smelters in Canada which are subject to the U.S. import tariffs and are thus expected to result in an additional monthly cost impact of $12 million to $14 million in the near term.

In the second-quarter itself, Alcoa faced cost headwinds of around $15 million as a result of the recently imposed tariffs. The company was still able to report better than expected earnings as a result of higher metal prices. We have updated our 2018 outlook for the company on the basis of these above developments. In case you disagree with our estimates, you can modify our assumptions by using our interactive dashboard Q2 2018: Alcoa’s Fair Price Estimate Revised to arrive at your own fair price estimate for the company.

 

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