Alcoa beats expectations
Stronger demand for aluminium products from airplane and car producers helped Alcoa's third-quarter profit beat Wall Street's expectations despite weak aluminium prices and worries about China's slumping economy.
But, even with its strong downstream business, chairman and chief executive Klaus Kleinfeld said the company had noticed a "slight slowdown" in some regions and end markets.
As a result, Alcoa lowered its global aluminium consumption outlook to 6 per cent growth from 7 per cent previously for 2012. "The main driver for this is China," Mr Kleinfeld told Wall Street analysts on a conference call yesterday.
China's aluminium demand growth was 11 per cent in the first half of the year, he said, but "we believe this is going to come down in the second half to 7 per cent.
"I'm pretty confident given the already announced China stimulus package which is going into the ground ... (it) will be picking up speed but this is probably going to take until the end of the fourth quarter," he said.
Mr Kleinfeld was bullish about Alcoa's downstream businesses, noting that the aerospace and car markets were coming back strongly from the recession.
"Global aerospace remains solid," with a backlog of 8,500 planes, or eight years work, he said. "In autos, we are seeing an increase of 11 to 15 per cent (annual) growth in North America."
Airplane maker Boeing, truck builder Navistar International and other manufacturers have been using more engineered aluminium parts from Alcoa to lighten the weight of planes and vehicles.
Making aluminium bolts, wheels, aircraft fuselages and other components for these customers is proving more lucrative for Alcoa than just supplying basic aluminium of which the price has dropped to near two-year lows.
Alcoa's core metal-making business is struggling to make a profit.
"It looks like the tone of the quarter was slightly better-than-expected, particularly in the downstream business," Kuni Chen, an analyst at CRT Capital Group, said of the company's units that sell to manufacturers.
Alcoa's stock was unchanged from its $9.13 close in after-hours trading on the New York Stock Exchange.
The Pittsburgh-based company posted a net loss of $143 million, or 13 cents per share, compared with a profit of $172 million, or 15 cents per share, in the same quarter last year.
Excluding charges for settlements with the Environmental Protection Agency and a joint venture partner in Bahrain, the company reported a profit of 3 cents per share. On that basis, it exceeded analyst estimates for a break-even quarter, according to
Thomson Reuters I/B/E/S.
Revenue fell 9 per cent to $5.8 billion, as a result of a 17 per cent drop in aluminium prices year-over-year, said Alcoa, traditionally the first S&P500 company to report quarterly earnings.
Despite the beat, some on Wall Street remain cautious.
"It's nice that revenues are up and that Alcoa is suggesting aluminium demand could double in the next decade, but that's a decade out," said Bryant Evans, an investment adviser and portfolio manager at Cozad Asset Management.
Mr Kleinfeld reaffirmed Alcoa's long-term outlook global aluminium demand to double between 2010 and 2020. He acknowledged there is still a lot of uncertainty, but said markets are showing signs of some positive growth.
"Markets seem to be driven more by headlines than fundamentals right now, but Alcoa remains focused on the things within our control", Mr Kleinfeld said.
"We're capitalizing on pockets of strong growth and achieving record profitability in our mid and downstream businesses."
Aluminium prices ended the third quarter at $2,112 per tonne, about 14 per cent lower than in the third quarter of 2011, according to Thomson Reuters data.
Prices have fallen further since the end of the third quarter and yesterday the metal was selling on the spot market for $2,055 per tonne.
While its downstream businesses have performed well, Alcoa faces big challenges in its core businesses of mining bauxite and producing aluminium.
Alcoa recently closed its aluminium smelter on the Italian island of Sardinia and put it up for sale, citing high power prices that made the operation uncompetitive.
Earlier yesterday, the company announced it had settled a civil suit brought by Aluminum Bahrain. Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two instalments. It will also supply Alba with raw materials under long-term contracts.
Alcoa took a $40 million charge against its earnings for the settlement. Alba had accused Alcoa of conspiring with a businessman to orchestrate bribes in Bahrain and overcharging it for alumina, a raw material for aluminium.
Alcoa warned there could be an additional charge of $25-$30 million related to the cash costs if there is a settlement with the US Department of Justice and the Securities and Exchange Commission, which are both investigating the case.