Alcoa Endures First-Quarter 2012 Drop in Prices, Sees Strong Productivity Gains

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Researched by Industrial Info Resources (Sugar Land, Texas)--Aluminum producer Alcoa Incorporated (NYSE:AA) (Pittsburgh, Pennsylvania) weathered stormy market conditions in the first quarter of 2012, as steep declines in realized aluminum and alumina prices offset the benefits of improved productivity and volumes, as well as record results in the Flat-Rolled Products and Engineered Products segments. Net income for the quarter was reported to be $94 million, compared with $308 million in first-quarter 2011.

Alcoa executives stressed that the results were different when excluding net income attributable to non-controlling interests; losses from discontinued operations; provisions and benefits on income taxes; interest expenses; restructuring and similar charges; depreciation; depletion; and amortization. Using this measurement, called "adjusted EBITDA," income stood at $624 million, a 34.66% decrease from the same period last year.

Total sales for the quarter were reported to be about $6 billion, a 0.81% increase from first-quarter 2011. The industry witnessed a 9% decline in the realized price of aluminum and a 13% drop in the realized price of alumina from the same period last year, although the midstream and downstream businesses saw improved volumes. Input costs also were notably higher. Still, the results were an improvement when compared with fourth-quarter 2011, based on solid productivity gains in all of the segments and improved aluminum prices, as well as higher volumes in most segments.

Industrial Info is tracking about $4.2 billion in active Alcoa projects, including the $150 million expansion and modernization of a Brazilian aluminum smelter in Pocos De Caldas, Minas Gerais. The project involves modernizing 288 electrolytic pots with the new Soderberg technology, expanding capacity from 95,000 to 105,000 tons per year, and is expected to be completed in January 2016.

"We had prevailing cost headwinds--pensions, cost increases in raw materials and energy--that were strongly offset by the productivity improvements," said Chuck McLane, the executive vice president and chief financial officer of Alcoa, in a conference call. "Just to give you a glimpse of the types of productivity improvements that we saw this quarter, they ranged from higher utilization rates, process innovations and efficiency, scrap recovery and usage reductions."

The after-tax operating income was substantially lower in the Alumina and Primary Metals segments when compared to first-quarter 2011, but the Flat-Rolled Products and Engineered Products segments reported record results:

• The Alumina segment reported $35 million in after-tax operating income, compared with $142 million in the same period last year.
• The Primary Metals segment reported $10 million in after-tax operating income, compared with $202 million first-quarter 2011.
• The Flat-Rolled Products segment reported $96 million in after-tax operating income, an 18.52% increase from the same period last year.
• The Engineered Products and Services segment reported $155 million in after-tax operating income, a 19.23% increase from first-quarter 2011.

Alcoa executives believe that global aluminum demand will grow about 7% in 2012, on top of a global supply deficit. The industry saw 10% growth in 2011. Among the markets it serves, the company is projecting growth of 13% to 14% in aerospace; 3% to 7% in automotive; 2.5% to 3.5% in building and construction; and 1% to 5% in commercial transportation.

"As we look forward to the second quarter, we see at the beginning of the quarter that the alumina surplus is continuing to be a drag on the average price index and spot prices," McLain said of the Alumina segment in the conference call. "Obviously, that has a lot to do with us recently announcing curtailments of 390,000 tons in the Atlantic region on alumina, and the production in the second quarter will be down as a result of that by 100,000 tons. We're going to incur maintenance expenses, some of which was just timing between the first and second quarter that will impact us by negative $2 million in the second quarter, yet we expect our productivity gains to continue."

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