Alcoa’s Sales Plunges on Lower Alumina Pricing

Prices of aluminum for delivery dropped 11% on the London Metal Exchange

Source: Company's Website
Source: Company’s Website

Aluminum giant Alcoa Inc. (NYSE: AA) announced its Q2 FY16 financial results on July 11th, 2016. The New York-based Company engages in engineering and manufacturing lightweight metals worldwide. The Company operates through five segments: Alumina, Primary Metals, Global Rolled Products, Engineered Products and Solutions, and Transport and Construction Solutions. The Alumina segment mines and refines bauxite to produce alumina, and sells alumina directly to external smelter customers. The Primary Metals segment produces and sells primary aluminum to external customers. The Global Rolled Products segment produces and sells aluminum sheets and plates to the packaging end market, as well as to the aerospace, automotive, commercial transportation, and industrial products end markets. The Engineered Products and Solutions segment offers fastening systems, including titanium, steel, and nickel alloys; forged jet engine components; and various forging and extrusion metal products to the aerospace, commercial transportation, power generation, oil and gas, and automotive end markets. The Transport and Construction Solutions segment provides integrated aluminum structural systems, architectural extrusions, and forged aluminum commercial vehicle wheels, to the construction, commercial transportation, and industrial products end markets. Read more about Alcoa’s financial results below.

Q2 FY16 financial highlights

Source: Company's Presentation
Source: Company’s Presentation

Alcoa’s Q2 FY16 net sales plunged 10% to $5.3 billion from $5.9 billion in Q2 FY15 as aluminum futures declined. The price of aluminum for delivery during the quarter under review dropped 11% as compared to the year-ago quarter on the London Metal Exchange to average at $1,583 a metric ton. The price of aluminum has tumbled about 50% from a 2008 peak. That apart, Alcoa faces intense competition from Chinese companies that boosted output. Although Alcoa reported a 4% revenue growth from recent acquisitions and organic growth, the increase was more than offset by a 14% revenue decline due to lower aluminum and alumina pricing and the impact of curtailed, divested, and closed operations.

A3The Engineered Products and Solutions segment remained Alcoa’s cash cow, and it reported an after-tax operating income rise of 9.1% and sales gain of 15% for Q2 FY16. Alcoa has spent more than $4 billion in 2014 and 2015 to strengthen this unit, including the acquisition of U.K. jet-parts maker Firth Rixson Ltd. and Pittsburgh-based RTI International Metals Inc. Alcoa has targeted 1,000 job cuts and is looking to downsize a further 1,000 people in the division as part of its plans to integrate these acquisitions and boost profitability.

Source: Company's Presentation
Source: Company’s Presentation

Alcoa’s Q2 FY16 net income declined to $135 million, or $0.09 per share, including $78 million in special items primarily related to separation costs, restructuring-related charges, and associated tax impacts. The year-ago quarter had net income of $140 million, or $0.10 per share. Excluding the impact of special items, Q2 FY16 adjusted net income was at $213 million, or $0.15 per share, compared to $250 million, or $0.19 per share, in Q2 FY15.

During Q2 FY16, Alcoa’s five segments contributed to $375 million in productivity gains, which partially offset the negative impact of lower aluminum pricing and cost increases. The productivity gains for H1 FY16 are shown alongside. Alcoa ended Q2 FY16 with cash on hand of $1.9 billion. Cash from operations amounted to $332 million.

Other highlights

Source: Company's Website
Source: Company’s Website

During the quarter under review, the Company’s value-add units under Arconic signed a multi-year contract with Embraer valued at approximately $470 million. It also opened a state-of-the-art, 3D printing metal powder production facility to develop and produce proprietary titanium, nickel and aluminum powders. Units under Arconic achieved $176 million in productivity savings, on target to deliver $650 million of savings in FY16.

Also during the quarter, the upstream unit reached a power agreement to improve competitiveness of Intalco smelter in Washington State and achieved $199 million in productivity savings, on target to deliver $550 million in savings in FY16.

Separation update

On June 29, 2016, Alcoa filed an initial Registration Statement on Form 10 with the U.S. Securities and Exchange Commission to separate into two standalone, publicly-traded companies later in the second half of 2016. The Company plans to separate its value-add units (Global Rolled Products, Engineered Products and Solutions, and Transport and Construction Solutions) into a company called Arconic. Arconic will regroup higher-growth segments, like car and airplane part production, and will aim to be a global leader in precision engineering and advanced manufacturing. Its upstream segments (Alumina and Primary Metals) will remain under Alcoa Corp.

The separation is subject to the fulfillment of certain terms, including final approval from Alcoa’s Board of Directors, a favorable IRS ruling, a satisfactory opinion from Alcoa’s tax advisors on certain tax matters, and the effectiveness of the Form 10.

Asset sale

Alcoa is disposing various assets that are expected to generate total cash proceeds of $1.2 billion during FY16, of which $815 million has been received so far.

Forecast for FY16

Alcoa increased its forecast for global aluminum supply in FY16, while decreasing its market-deficit projection. Supply of aluminum is set to climb 2.5% in 2016, higher than Alcoa’s earlier projection of 2%. In April 2016, Alcoa had estimated a market deficit of about 1.1 million metric tons in 2016, which it lowered to a 775,000-ton deficit in Q2 FY16. Alcoa’s forecast for global aluminum demand was unchanged at 5% growth from the last quarter’s report.

Stock Performance

A6Alcoa’s stock stood at $10.69, jumping 5.42%, at the close on Tuesday, July 12th, 2016, having vacillated between an intraday high of $10.80 and a low of $10.43 during the session. The stock’s trading volume was at 53,332,618 for the day. The Company’s market cap was at $14.04 billion as of Tuesday’s close.

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