Is Alcoa Doing This Right?

Alcoa (AA) reported its first quarter 2016 results on 11th April. The company reported revenue of $ 4.9 billion, down 15 % year-over-year from $ 5.82 billion. The decrease in revenue was primarily due to continued low alumina and aluminium prices, foreign exchange impacts and divested, curtailed or closed operations. The metals and materials company reported adjusted first-quarter earnings of $ 108 million or 7 cents per share, down from 28 cents per share in the prior-year period.

The company is about to split into two, separating its value-add segments from its upstream segments later this year.
There will be 2 separate publicly traded companies after that. The value-add segments will be together called Arconic segments while the upstream segments will be called new Alcoa segments henceforth.

After the split, Arconic will contain higher-growth segments like car and airplane part production. The Arconic segments have earned an after-tax operating income of $ 269 million which is 8 % higher than the same quarter last year. However, the revenue from these segments declined 2.2 % to $ 3.3 billion. Alcoa acquired the Firth Rixson unit, the aerospace jet engine part maker in 2014. The company has now cut its forecast for 2016 revenue in this unit to between $ 1 billion and $ 1.1 billion, down from $ 1.6 billion previously.  It projects auto production growth of 1 % to 4 %.

"It's very clear we will not be making the number we had originally intended for Firth Rixson this year, but we are working on it," said CEO Kleinfeld in an interview Monday after the release.

On the other hand, the new Alcoa Company will include the company's traditional units including bauxite, aluminium and alumina. The third party revenue for these segments fell to $ 1.7 billion, down 32 % from the previous year. The total revenue from these segments was $ 2.1 billion, after-tax operating income was $ 22 million and adjusted EBITDA was $ 185 million.

A look at the end markets

Meanwhile, in the automotive segment, Alcoa has maintained a forecast of the global automotive production growth of 1 % to 4 %, including 1 % to 5 % growth in North America. Also, in Europe and China, the automotive sales are again increasing at good rates.

Other segments like packaging, building and construction and the aerofoil market are also expected to grow at low to mid-single-digit percentages. As the market moves towards higher value-add products for new, high-efficiency turbines with advanced technology, the growth in the aerofoil sales should easily equal the projected rate of 2 % to 4 %.

It’s only in the heavy duty truck and trailer end market, where Alcoa doesn’t see growth. The company has projected that this market will shrink by 4 % or remain flat this year. It’s a downward revision made after seeing the weakness in North America.
Published on May 13, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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