What Could Drive A Drop In Alcoa’s Q2 2019 Earnings?

by Trefis Team
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Alcoa (NYSE: AA) is expected to release its Q2 2019 results on July 17, 2019, followed by a conference call with analysts. Alcoa’s revenue base has been shrinking over the last four quarters, with Trefis estimating the trend to continue in Q2 2019. The market expects the company to report total revenue of $2.8 billion in Q2 2019, marking a y-o-y drop of 21.6% over Q2 2018. Lower revenue is likely to be driven by a decrease in alumina and aluminum shipments, exacerbated by a drop in global price levels of both these commodities on the back of excess supply. The consensus earnings expectation of $0.62 per share in Q2 2019 is significantly lower than $3.58/share in the year-ago period. Lower earnings could primarily be driven by lower production, decreased price realization, and restructuring charges related to aluminum plants in Spain.

You can view the key expectations from the announcement in our interactive dashboard – Alcoa: Q2 2019 Earnings Preview And Outlook For FY-2020. In addition, here is more Materials data.

A Quick Look At Alcoa’s Revenue Sources

Alcoa reported $13.4 billion in revenue in FY 2018. The company’s primary revenue segments are as follows:

  • Alumina: $5.17 billion revenue in FY 2018 (39% of total revenue). This segment consists of the Company’s worldwide refining system, which processes bauxite into alumina, which is sold to its aluminum segment and third-party customers who process it into industrial chemical products.
  • Aluminum: $7.24 billion revenue in FY 2018 (54% of total revenue). This segment consists of Alcoa’s worldwide smelter system. Results from the sale of aluminum powder, scrap, and excess power are also included in this segment, as well as the results of aluminum derivative contracts.
  • Bauxite: $0.99 billion revenue in FY 2018 (7% of total revenue). This segment consists of the Company’s global bauxite mining operations located in Australia, Brazil, Guinea, and the company also has an equity stake in a mine in Saudi Arabia.

A] Revenue Trend

Alumina Revenue

  • Revenue from third-party alumina sales decreased by 2% (y-o-y) to $897 million, driven by a drop in shipments, whereas on a sequential basis the drop was sharp due to much lower price realization.
  • Shipments are expected to remain sluggish in the near term due to lower demand for alumina with many global aluminum companies cutting down on capacity.
  • Additionally, the global price level is also expected to remain subdued with the commodity being in excess supply since December 2018.

Aluminum Revenue

  • Aluminum revenue has continuously decreased since Q2 2018, led by lower volume.
  • Shipments are expected to remain under pressure due to outages at Wagerup and Pinjarra.
  • 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 is expected to remain low, which could, in turn, lead to lower segment revenue in the near term.

Bauxite Revenue

  • Over recent quarters, bauxite revenue has seen a lot of volatility due to production variation and fluctuation in demand for alumina production and other industrial applications.
  • Segment revenue is expected to remain under pressure through 2019, driven by lower price realization and volume sales.

B] Expense and Profitability Trend

Total expenses have trended lower on a sequential basis since Q2 2018 due to the drop in production volume. We expect total expenses to increase in Q2 2019, led by higher cost of sales and restructuring charges.

  • Cost of Goods Sold (COGS): Cost of sales as a % of revenue has been continuously increasing over the last four quarters due to lower sales of aluminum products along with higher costs for carbon materials, energy, and maintenance related expenses. With aluminum sales expected to remain low, COGS is likely to remain elevated in the near term.
  • Restructuring Cost: Over the next two quarters, Alcoa is expected to incur significant restructuring charges related to 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 a Collective Dismissal Process with the workers.
  • Effective Tax Rate: Tax rate shot up in Q1 2019 due to an unfavorable tax impact related to the treatment of operational losses in certain jurisdictions for which no tax benefit was recognized. Effective tax rate is expected to be much lower in Q2 2019 on a sequential basis, and closer to historical levels.

Net income margin has largely trended lower in most of the recent quarters. We expect margins to drop on a y-o-y basis in Q2 2019, driven by lower revenue and increase in restructuring expense and cost of sales, partially offset by a lower effective tax rate.

Full Year Outlook

  • For the full year, the company is expected to report revenue of $11.2 billion in 2019, marking a decrease of 16.3% over 2018, driven by lower alumina and aluminum volume sales and price realization. This is expected to be followed by a 2.5% increase in revenue to $11.5 billion in 2020, driven by moderate turnaround in global commodity price levels and increase in production volume.
  • 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 and Q3 2019, is also likely to affect margins, which are expected to drop to 0.5% in 2019, from 1.7% in 2018.
  • However, with the increase in revenue and major restructuring cost already incurred, margins are expected to improve to 2.2% in 2020.

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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