Alcoa Misses Consensus In Q1 2019; Reaffirms Full Year Outlook

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Alcoa (NYSE: AA) released its Q1 2019 financial results on April 17, 2019, followed by a conference call with analysts. The company missed consensus estimates for revenue as well as earnings. Alcoa reported revenue of $2.72 billion in Q1 2019, which marked a decline of close to 12% on a y-o-y basis. Lower revenue was mainly a reflection of a decrease in aluminum and alumina shipments, along with a drop in global aluminum prices. Revenues declined by 18.7% sequentially, primarily due to a sharp drop in alumina prices due to higher global supply in Q1, along with lower aluminum volume sold due to operational disruptions. The company reported adjusted net loss of $0.23 per share in Q1 2019, compared to adjusted net profit of $1.01 per share in Q1 2018 and $0.70 in Q4 2018. Net loss for the quarter was mainly driven by high restructuring and other related costs of $120 million, associated with two aluminum plants in Spain with combined operating capacity of 124,000 metric tons per year, that have been maintained in restart condition.

We have summarized the key announcements in our interactive dashboard – How did Alcoa fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Materials data.

Key Takeaways

Alumina Revenue

  • Revenue from third-party alumina sales decreased by 2% (y-o-y) to $897 million, driven by a drop in shipments.
  • However, on a sequential basis, third-party alumina sales declined by 20.8% due to a much lower price realization compared to the previous quarter.
  • Alumina shipments decreased from 2.38 million tons in Q1 2018 to 2.33 million tons in Q1 2019. Lower volume was driven by lower demand for alumina with many aluminum companies cutting down on capacity, mainly in China (alumina is a raw material for aluminum companies).
  • After a year of being in deficit, which led to alumina prices increasing significantly post Q1 2018, alumina has been in surplus (excess supply) from December 2018, which has, in turn, led to a sharp drop in global price levels. This led to a significant reduction in price realized to $385/ton in Q1 2019 from $479/ton in Q4 2018.

Aluminum Revenue

  • Revenue from third-party primary aluminum sales decreased by 20.2% (y-o-y) to $1.57 billion in Q1 2019, compared to $1.97 billion in the year-ago period. Lower revenue was driven by a decrease in volume sold and price realization.
  • Volume decreased by 10.7% in Q1 2019, due to outages at Wagerup and Pinjarra.
  • The decrease in price realization is in line with a sharp drop in global aluminum prices since December 2018.
  • With aluminum exports from China being at record highs (exports exceeded 500kmt in seven of the last eight months) due to very low domestic demand, the price realized per ton has witnessed a sharp drop in Q1 2019.

Profitability

  • In spite of a lower effective tax rate, net income margin in Q1 2019 was -7.3%, significantly lower than 6.3% in Q1 2018.
  • This was mainly due to restructuring charges of $113 million, as against a reversal of 19 million in Q1 2018.
  • Higher restructuring charges were associated with two aluminum plants in Spain with combined operating capacity of 124,000 metric tons per year, that have been maintained in restart condition, as a part of Collective Dismissal Process with the workers.

Outlook for FY 2019

  • For the full year, we expect total revenue to decline by close to 14% to $11.5 billion in 2019, mainly due to lower revenue from the alumina and aluminum segments, driven by a decrease in shipments and global price levels for both the metals. Revenue from Bauxite is also expected to decline with the commodity being is excess supply, which would, in turn, lead to a further drop in prices.
  • Decrease in shipments is expected to adversely affect the company’s profitability as the total cost would be attributed to lower volume. Also, an additional restructuring charge related to Spanish operations, which is expected to be incurred in Q2 2019, is also likely to affect margins for the year.
  • We expect net income margin to decline to 1% in 2019 from 1.7% in 2018.

Trefis has a price estimate of $33 per share for Alcoa’s stock, which is higher than its current market price. We believe that the company’s focus on improving its asset base and reducing cost, along with the recently announced $200 million share repurchase program, would continue to support the growth in its stock price.

 

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