Alcoa Cuts Global Demand Forecast, Blames China

Alcoa aluminium

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Alcoa beat analysts’ profit estimates in the third quarter, reporting earnings Tuesday of $0.03 per share versus expectations of $0.00 per share.Alcoa also posted higher revenue than expected at $5.8 billion versus estimates of $5.56 billion.

Alcoa cut its 2012 global aluminium demand forecast to 6 per cent from 7 per cent.

Alcoa’s CEO spoke on CNBC after the bell. He said that the China slowdown affected its outlook for global aluminium demand.

Here is the full press release:

3Q 2012 Highlights

  • Loss from continuing operations of $143 million, or $0.13 per share; excluding special items, income from continuing operations of $32 million, or $0.03 per share
  • Solid revenue of $5.8 billion, despite 17 per cent decline in realised metal price year-on-year
  • Record third quarter results in Global Rolled Products and Engineered Products and Solutions; significant sequential performance improvement in Alumina and Primary Metals
  • Days working capital a record low for third quarter
  • Cash on hand of $1.4 billion
  • Company sees global aluminium demand of 6 per cent in 2012; reaffirms long-term outlook that aluminium demand will double 2010 to 2020

NEW YORK–(BUSINESS WIRE)–Alcoa (NYSE:AA) today reported a loss from continuing operations of $143 million, or $0.13 per share, which includes special items of $175 million, primarily related to environmental remediation of the Grasse River in New York State, and the settlement of a civil lawsuit brought by Aluminium Bahrain (Alba) that had been pending in the U.S. District Court in Pittsburgh. Excluding the negative impact of special items, income from continuing operations was $32 million, or $0.03 per share.

The Company reported performance improvements across all segments and solid revenue of $5.8 billion despite a 5 per cent decline in realised aluminium prices sequentially and 17 per cent year-on-year.

“Markets seem to be driven more by headlines than fundamentals right now, but Alcoa remains focused on the things within our control”, said Klaus Kleinfeld, Chairman and CEO.

“We’re capitalising on pockets of strong growth and achieving record profitability in our mid and downstream businesses. We’re improving performance in the upstream while optimising our assets, and across the board we’re driving productivity gains.”

Third quarter 2012 net loss of $143 million, or $0.13 per share, compared to a net loss of $2 million, or $0.00 per share, in second quarter 2012, and net income of $172 million, or $0.15 per share, in third quarter 2011. Adjusted EBITDA for the third quarter was $282 million, down 45 per cent from second quarter 2012 mainly due to lower realised prices and special items.

Special items in third quarter 2012 included reserves for environmental remediation, a net discrete tax charge, uninsured losses related to a fire at the Massena, New York site, the negative impact of mark-to-market changes on certain energy contracts, and restructuring and other charges.

Additionally, Alcoa confirmed it has entered into a settlement agreement with Aluminium Bahrain B.S.C. (“Alba”) resolving a civil lawsuit that had been pending in the U.S. District Court for the Western District of Pennsylvania since 2008. Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two installments. One half was made at settlement and the other half will be made one year later. The settlement amount is within the range Alcoa previously estimated as its reasonably possible losses, which it disclosed in its second quarter 2012 earnings announcement. Alcoa said the settlement with Alba represents the best possible outcome and avoids the time and expense of complex litigation.

Based on the settlement agreement with Alba, Alcoa recorded a $40 million charge ($15 million after-tax and non-controlling interest) in the third quarter in addition to the $45 million charge ($18 million after-tax and non-controlling interest) it recorded in the second quarter. Alcoa estimates an additional possible after-tax charge of approximately $25 to 30 million to reflect an agreement between the shareholders of Alcoa World Alumina LLC regarding the cash costs of the settlement of the Alba civil lawsuit; such charge would be recognised in the event that a settlement is reached with the Department of Justice and the Securities and Exchange Commission regarding their investigations.

Alcoa and Alba have also resumed a commercial relationship and have entered into an Alumina Price Index-based, long-term alumina supply agreement, demonstrating a mutual desire to work together going forward and the significant value that Alcoa brings to customers in the region through superior quality and optimal logistics of its alumina.

Third quarter 2012 revenue was $5.8 billion, down 9 per cent compared with third quarter 2011, primarily due to a 17 and 20 per cent year-on-year respective decline in the realised metal price and realised alumina price.

Alcoa continued to turn in strong performance in the third quarter, despite market turbulence.

Amidst challenging market conditions, Alcoa’s upstream businesses achieved significant performance improvement in the third quarter, delivering $98 million of combined sequential operational improvements across the Alumina and Primary Metals segments as higher volume, improved price and mix, and productivity gains more than offset cost headwinds.

In what is traditionally a weaker quarter, Alcoa’s midstream and downstream businesses continued to turn in record performance. Global Rolled Products continued to deliver strong profitability despite European weakness, achieving record third quarter ATOI of $98 million, up 3 per cent sequentially, and 63 per cent year-on-year. Adjusted EBITDA per metric ton for Global Rolled Products was a third quarter record at $395, and year-to-date record at $405, 72 per cent higher than the 10-year average. Engineered Products and Solutions achieved a record adjusted EBITDA margin of 20 per cent, a third consecutive quarterly record.

Alcoa is on track to deliver against its financial and operational targets in 2012. The Company continued strong productivity growth across the upstream and downstream segments this quarter, driven by higher utilization rates, process innovations, lower scrap rates, and usage reductions.

Following the record low in days working capital achieved for both the first quarter and second quarter of 2012, Alcoa also achieved a record low in days working capital for the third quarter at 33 days, five days lower than the previous third quarter record set in 2011. This is the 12th successive quarter the Company has demonstrated year-over-year improvement.

In third quarter 2012, the debt-to-capital ratio stood at 36.1 per cent, with net debt-to-capital at 32.4 per cent, and liquidity remained strong with $1.4 billion cash on hand. Following on the improved working capital performance, the Company generated cash from operations of $263 million in the quarter. Capital spending was $302 million in the quarter, compared to $291 million in second quarter 2012. Free cash flow in the third quarter was a negative $39 million. Expenditures on the Saudi Arabia joint venture project were also on track at $16 million.

Alcoa continues to execute on previously announced curtailments in the upstream business, improving competitiveness and driving toward the Company’s stated goal of moving down the cost curve 10 percentage points in smelting and 7 percentage points in refining by 2015. In line with plans announced in January 2012, Alcoa has completed partial curtailments at La Coruña and Avilés, Spain, and the Portovesme, Italy curtailment is underway and will be complete by November 30, 2012. Additionally, Alcoa permanently closed its smelter at Alcoa, Tennessee, and two lines at Rockdale, Texas. When the Portovesme smelter is fully curtailed, Alcoa will have 14 per cent of its highest-cost system smelting capacity offline.

Alcoa has moderated its 2012 global aluminium demand forecast to 6 per cent, down from 7 per cent, as a slowdown in China slightly impacts the second half outlook. The aluminium market grew 13 per cent in 2010, and 10 per cent in 2011, and is well ahead of the 6.5 per cent compound annual growth rate needed to meet Alcoa’s projection of a doubling of aluminium demand 2010 to 2020.

In Alcoa’s global end markets, positive growth continues, particularly in the aerospace market where we see 13 to 14 per cent year-on-year growth, and in the automotive market, where we have raised our 2012 North American forecast by 1 per cent. Alcoa’s 2012 global growth outlook for packaging (2 to 3 per cent), commercial building and construction (2.5 to 3.5 per cent), and industrial gas turbine (3 to 5 per cent) markets remains positive and unchanged. In the heavy truck and trailer market, Alcoa is lowering 2012 growth expectations (7 to 9 per cent decline) in anticipation of a slowdown across all major regions.

Segment Information

Alumina

After-tax operating income (ATOI) in the third quarter was negative $9 million, down $32 million compared with second quarter 2012 and down $163 million compared with third quarter 2011. The sequential quarter decrease was driven by lower London Metal Exchange (LME)-based pricing and unfavorable currency impact, partially offset by stable Alumina Price Index-pricing, productivity gains, and higher volumes.

Primary Metals

ATOI in the third quarter was negative $14 million, down $11 million sequentially, and down $124 million year-on-year. LME-based pricing negatively impacted results by $36 million sequentially, in addition to higher alumina costs. Productivity gains, cost decreases, and improved regional premiums partially offset these negative impacts. Third-party realised price in the third quarter was $2,222 per metric ton, down 5 per cent sequentially and down 17 per cent year-on-year.

Global Rolled Products

ATOI for the third quarter was $98 million, up $3 million, or 3 per cent, sequentially and up $38 million, or 63 per cent, year-on-year. The sequential increase was mainly driven by improved price and mix, mostly offset by lower volume and increased costs. The year-on-year improvement was driven by better price and mix, higher volume, and strong productivity gains.

Engineered Products and Solutions

ATOI in the third quarter was $160 million, flat sequentially and up $22 million, or 16 per cent, year-on-year. Sequentially, continued productivity improvements and favourable Massena impacts were offset by cost increases and unfavorable volume. The year-on-year improvement was driven primarily by productivity gains, partially offset by cost increases.

Alcoa will hold its quarterly conference call at 5:00 PM Eastern Time on October 9, 2012 to present quarterly results. The meeting will be webcast via alcoa.com. Call information and related details are available at www.alcoa.com under “Invest.”

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ORIGINAL: Global aluminium giant Alcoa unofficially kicks off the Q3 earnings reporting season today after the closing bell.

The company is expected to report breakeven profits of $0.00 per share, according to a survey of analysts polled by Bloomberg.

On the top line, analysts expect Alcoa to report $5.56 billion in sales.

Alcoa has beat consensus estimates on earnings in 5 of the past 8 quarters and has beat estimates on sales in 6 of the past 8 quarters.

BofA Merrill Lynch analyst Timna Tanners writes in a recent note to clients:

We forecast Alcoa posting an EPS loss of $0.06, below the latest consensus estimate of breakeven, as weaker LME prices and a weaker U.S. dollar likely more than offset continued productivity gains and improved regional premiums.

And SocGen strategist Ciarán O’Hagan had this to say in a recent note:

Alcoa and commodities generally are an ambiguous bellwether. Aluminium has been hitting its best levels since March on the LME, but AA has been lagging. Fears over the build-up in stocks – taken out of the market on the back of cheap financing – are hitting long-term profit estimates. This is another sign of how low rates are leading to persistent factor price distortions.

We will have the numbers here LIVE on Money Game after the closing bell >

Don’t miss our full Q3 earnings preview: Now Comes The Worst Earnings Season Since The Financial Crisis >

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