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Alcoa Earnings Beat Estimates on Strength of Jet-Parts Profit

July 11, 2016
Investors are scrutinizing the profitability of the so-called downstream units that will be renamed Arconic when the company splits in two by the end of the year.

Alcoa Inc. CEO Klaus Kleinfeld has staked his company’s future on jet and car parts. Investors are cheering that decision after second-quarter earnings beat analysts’ expectations.

Alcoa, the 128-year-old aluminum producer that’s splitting into two companies, benefited as profit from its engineered-components businesses offset declines in the metal’s price. Excluding one-time items, the New York-based company earned 15 cents a share, exceeding the 9-cent average of 12 estimates compiled by Bloomberg. The shares rose in pre-open trading.

The engineered products and solutions segment — which will comprise the largest unit of the manufacturing company after it’s split from the legacy smelting and mining assets — saw second-quarter after-tax operating income rise 9.1% and sales gain 15%. The results buoyed shareholders who were awaiting signs that Kleinfeld can build the so-called downstream units while cutting costs in all of Alcoa’s businesses, said Anthony Young, an analyst at Macquarie Group Ltd.

“Over time, you’ll see that revenue bleed down” to the operating income as their synergies start to show results, Young said. “I think this is only going to accelerate after the split occurs, but it’s good to see them out there going after these cost savings.”

Kleinfeld said in September that he would split off the company’s smelters, mines and power assets into a stand-alone entity that will keep Alcoa’s name. Investors are now scrutinizing the profitability of the downstream units that will be renamed Arconic when the company splits in two by the end of the year. 

The quarterly report, released Monday, unofficially kicked off the U.S. earnings season. The shares rose 4.1% to $10.56 at 8:25 a.m. on Tuesday before the start of regular trading in New York.

Kleinfeld is targeting an earnings before interest, taxes, depreciation and amortization margin of 21-22% this year for the engineered products and services segment. This quarter, the company achieved 22.5% EBITDA margin in the unit, according to a presentation to investors.

The company spent more than $4 billion in 2014 and 2015 to bolster the business, including the purchase 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 evaluating a further 1,000 in the division as it works to integrate the acquisitions and boost profitability.

After the separation, Arconic may have about $7.8 billion of debt, imperiling the goal Kleinfeld set when the split was announced: to achieve an investment-grade credit rating. On June 29, Kleinfeld said the target is for Arconic to retain Alcoa’s ratings, which are split between one investment-grade and two junk levels.

Alcoa increased its forecast for global supply of the metal in 2016 and decreased its market-deficit projection. Supply of the metal used in everything from beer cans to aircraft is set to climb 2.5% in 2016, higher than a 2% projection in its previous earnings report, the company said in the statement. In April, Alcoa estimated a market deficit of about 1.1 million metric tons in 2016, which it lowered to a 775,000-ton deficit in the latest earnings report.

Alcoa left its forecast for global aluminum demand unchanged at 5% growth from last quarter’s report.

Alcoa’s sales in the second quarter dropped 10% to $5.3 billion as aluminum futures declined. The price of aluminum for delivery in three months on the London Metal Exchange dropped by 11% from a year earlier in the second quarter to average $1,583 a metric ton.

In the past decade, a protracted downturn in aluminum prices left Alcoa’s smelters struggling to compete as Chinese companies relentlessly boosted output. The price of aluminum has tumbled about 50% from a 2008 peak. Net income in the second quarter fell to 9 cents a share from 10 cents a year earlier, Alcoa said Monday.

By Sonja Elmquist

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Licensed content from Bloomberg, copyright 2016.

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