Alcoa Inc. AA topped earnings estimates in the first quarter of 2015 on healthy demand from aerospace and automotive markets, backed by its ongoing portfolio transformation initiatives. However, the company’s revenues lagged expectations.
The New York-based company logged a profit, as reported, of $195 million or 14 cents per share in the first quarter as against a loss of $178 million or 16 cents per share in the year-ago quarter. The results represent an increase from an income of $159 million or 11 cents per share in the fourth quarter of 2014.
Alcoa recorded $158 million in restructuring charges in the reported quarter, primarily related to portfolio optimization.
Excluding one-time special items, earnings came in at $363 million or 28 cents per share in the reported quarter, much ahead of the year-ago earnings of $98 million or 9 cents per share. Earnings per share also surpassed the Zacks Consensus Estimate of 26 cents.
Revenues rose 7% to $5,819 million in the first quarter from $5,454 million in the year-ago quarter. The increase can be mainly be attributed to organic growth, backed by strong automotive and aerospace volume. Revenues, however, missed the Zacks Consensus Estimate of $5,852 million.
Alcoa expects global aluminum demand growth of roughly 3.5 million metric tons in 2015, equaling 6.5% growth and achieving a new record high of 57.5 million metric tons.
The company’s shares were down as much as 3.7% in extended trading yesterday, reflecting the revenue miss.
Segment Review
Alumina – Shipments in the reported quarter were 2.5 million metric tons on production of 3.9 million metric tons. After Tax Operating Income (ATOI) was $221 million, up from $92 million in the year-ago quarter as well as $178 million in the sequentially preceding quarter. The sequential rise was mainly due to favorable currency exchange rates and energy costs. However, this was partly offset by lower volumes and unfavorable London Metal Exchange (LME)-linked pricing.
Primary Metals – Shipments in the quarter were 0.6 million metric tons, down 4.5% from the year-ago quarter. Production in the quarter was 0.7 million metric tons, down 15.3% from the prior-year quarter. ATOI was $187 million compared with negative $15 million in the year-ago quarter and an income of $267 million in the prior quarter. The sequential decline in earnings was due to lower LME aluminum price and energy sales, mostly because of new rate caps in Brazil, and increased alumina costs.
Global Rolled Products – Shipments in the quarter were roughly 0.4 million metric tons, down 7.5% year over year. Third-party revenues were $1.6 billion, down 3.3% year over year. The segment posted ATOI of $34 million, which decreased 42.4% year over year and 52.1% sequentially. The decline reflects market pressures in packaging and metal price lag that more than offset strong automotive shipments. Productivity gains, increased volumes in the North American packaging market and record automotive shipments from the Davenport expansion were offset by lack of metal premium pass-through in the Russia packaging market and pricing pressure in global packaging. The segment also incurred increased R&D costs for the Micromill and ramp-up costs for the rolling mill in Saudi Arabia.
Engineered Products and Solutions – The segment posted ATOI of $191 million, up 1.1% year over year and 15.8% sequentially. The year-over-year increase was driven by productivity gains and volume improvements across aerospace, commercial transportation and North American non-residential construction markets.
Financial Position
Alcoa’s cash and cash equivalents stood at $1,191 million as of Mar 31, 2015, up from $665 million as of Mar 31, 2014. Long-term debt stood at $8,711 million as of Mar 31, 2015 compared with $7,609 million as of Mar 31, 2014.
Portfolio Transformation
Alcoa has acquired TITAL – a leading provider of titanium and aluminum structural castings for aircraft engines and airframes. The acquisition has enabled the company to expand its titanium casting capabilities into Europe, with strong customer relationships. TITAL’s titanium revenues are expected to increase by 70% over the next five years.
Moreover, the company’s integration of Firth Rixson acquisition is on track. The buyout is likely to increase Alcoa’s revenues by $1.6 billion with additional $350 million earnings before interest, tax, depreciation and amortization (EBITDA) in 2016.
Alcoa also recently agreed to buy titanium and specialty metal products supplier – RTI International Metals, Inc. RTI – in a stock-for-stock deal worth $1.5 billion. The buyout is expected to broaden Alcoa’s titanium offerings and add advanced technologies and materials to its portfolio.
In addition, the company launched an expanded wheels manufacturing plant in Hungary to meet the growing demand for its proprietary lightweight wheels in Europe.
In the midstream, Alcoa is taking steps to further optimize and improve the competitiveness and profitability of its rolling mill business. The company sold Belaya Kalitva, a Russia facility to optimize its rolling mill portfolio.
Further, the company announced a strategic review of 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity. Alcoa stated its intentions to curtail 74,000 metric tons of smelting capacity in Brazil by Apr 15, 2015 and 443,000 metric tons of refining capacity in Suriname by Apr 30, 2015.
The company also converted San Ciprian alumina refinery in Spain to natural gas from fuel oil to increase its competitiveness.
Further, Alcoa of Australia Limited clinched a new 12-year gas supply deal to power its alumina refineries in Western Australia (WA).
Alcoa’s remains on track for lowering its position on the global aluminum cost curve to the 38th percentile and the global alumina cost curve to the 21st percentile by 2016.
Outlook
Alcoa has reaffirmed its 2015 forecasts for major markets.
Alcoa expects global aerospace sales to increase 9% to 10% year over year in 2015 on the back of strong demand for large commercial aircraft, regional jets and jet engines. The company anticipates global automotive production in the range of 2% to 4%, with a 1% to 4% rise in North America.
Further, it expects 5% to 7% global sales growth in the commercial building and construction market, 1% to 3% global airfoil market growth in the industrial gas turbine market, and a 2% to 3% worldwide sales gain in the packaging market.
Alcoa expects 6% to 8% percent growth for 2015 in North American heavy duty truck and trailer market, up from the previous forecast of 3% to 7% due to increasing orders. However, with weakness in China, Europe and Brazil, the global heavy duty truck and trailer market is expected to decline 2% to 4% in 2015.
Alcoa also revised its view for global aluminum demand growth for 2014 to 9%, an increase from the previous expectation of 7% based on 2014 worldwide aluminum demand.
Alcoa currently carries a Zacks Rank #3 (Hold).
Other companies in the mining space worth considering include Energy Fuels Inc. UUUU and NovaCopper Inc. NCQ. Both of these stocks hold a Zacks Rank #1 (Strong Buy).
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