Alcoa Disappoints, Outlook Bright

| About: Alcoa, Inc. (AA)

Alcoa Inc. (NYSE:AA), the largest U.S. aluminum producer, reported loss in its fourth-quarter 2011 results. Alcoa posted a loss from continuing operations of $193 million, or 18 cents per share compared with a profit of $172 million, or 15 cents per share in the same quarter of 2010.

Excluding restructuring charge of $159 million and other items, Alcoa's loss came in at 3 cents per share, below the Zacks Consensus estimate profit of 1 cent. It is the company's first loss in the last nine quarters.

For the full-year 2011, Alcoa reported income from continuing operations of $614 million, or $0.55 per share, which is more than double of 2010 results. The disappointing results were driven by higher costs of energy and transportation.

Though revenues for the quarter rose 6% year over year to $6 billion, business was down in most areas including construction, industrial products, packaging and commercial transportation. Besides, sales to automobile manufacturers fell 2%.

For 2011, revenue rose to $25 billion from $21 billion in the fiscal year 2010.

Segment Details

Alumina -The shipments in the reported quarter were 2.4 million metric tons on production of 4.2 million metric tons. The After Tax Operating Income (ATOI) increased 92% year over year to $125 million. Adjusted EBITDA fell $82 million to $229 million, representing a sequential decrease of 26%. The fourth-quarter results were negatively impacted by lower pricing. Increased raw materials costs were offset by improved productivity, lower energy costs, and positive currency impact. The sale of land in Australia contributed $30 million to segment ATOI. Alumina production in the fourth quarter was a record 4.18 million metric tons.

Aluminum demand grew 10% in 2011 on top of 13% growth seen in 2010.

Primary Metals- Shipments in the fourth quarter of 2011 amounted to 0.8 million metric tons versus 0.7 million metric tons in the previous-year quarter. ATOI was a negative $32 million, a decrease of $210 million year over year. Adjusted EBITDA fell $201 million to $71 million. Third-party realized metal prices decreased 12% sequentially driven by declining London Metal Exchange (LME) cash prices. Lower LME and cost increases offset positive currency impacts and productivity gains compared with the third quarter of 2011.

Flat-Rolled Products - Shipments in the quarter were 0.4 million metric tons, almost flat versus the prior-year quarter. Third-party revenue in the fourth quarter was $1.7 billion, up 4% year over year. ATOI was $26 million, down 51% year over year and down 57% sequentially. The sequential decrease was driven by seasonal volume declines in North America and Russia with continued weakness in the European market. Performance was also unfavorably impacted by credit losses for several customers.

Engineered Products and Solutions - Shipments in the quarter were 0.53 million metric tons versus 0.50 million metric tons in the prior-year quarter. ATOI in the fourth quarter was $122 million, up 8% year over year, but down 12% sequentially, mainly driven by cost increases and unfavorable product mix, partially offset by productivity improvements.

Financial Position

Despite deteriorating prices and market conditions in the fourth quarter of 2011, Alcoa turned in an outstanding performance overpowering the company’s financial targets. Alcoa generated $656 million in free cash flow in the quarter, four times better than the sequential quarter, while cash from operations was $1.14 billion.

Alcoa improved liquidity in fourth-quarter 2011, with cash on hand rising 46% sequentially to $1.9 billion. The company ended the fourth quarter with days working capital dropping to 27, which is a record low and 3 days lower than 2010.

For 2011, capital expenditure was $1.3 billion (86% of the target). Alcoa invested $249 million in its joint venture in Saudi Arabia (62% of the target). The Saudi project continues on-time and on-budget, with first production in the smelter and rolling mill scheduled for 2013.

Alcoa finished 2011 with a debt-to-capital ratio of 35%, consistent with the targeted range of 30% to 35%. Debt-to-capital was negatively impacted by the annual measurement of the company’s pension plan liability driven by a significantly lower discount rate.

Further, Alcoa generated $906 million in free cash flow for the year and $2.2 billion in cash from operations while ending the year with $1.9 billion cash on hand.

Alcoa To Close Smelting Capacity

Alcoa plans to close or curtail 531,000 metric tons, or 12% of its system smelting capacity to improve its competitive position.

Curtailments at Alcoa’s smelters in Portovesme, Italy, and La Coruña and Avilés, Spain, represent 240,000 metric tons, or 5% of Alcoa’s global capacity. The previously announced closing of Alcoa’s smelter in Alcoa, Tennessee, and two lines at the company’s Rockdale, Texas, smelter, account for another 291,000 metric tons of capacity reduction.

In addition to the closures and curtailments, Alcoa will aggressively accelerate actions to reduce the cost of raw materials used by its Primary Products business. Further, the company will adjust the capacity across its global refining system to reflect internal demand as well as prevailing market conditions.


For 2012, Alcoa expects global aluminum demand to grow 7% due to the global deficit in primary aluminum supply.

Alcoa’s growth projection is ahead of the 6.5% rate, which is required to meet its forecast of doubling the global aluminum demand between 2010 and 2020.

In addition, Alcoa believes that growing demand for aluminum, combined with market-related production cutbacks, will result in a global aluminum industry deficit of 600,000 metric tons in 2012.

Further, Alcoa projects global growth in the aerospace (10-11%), automotive (3-8%), commercial transportation (2-5%), packaging (2-3%), and building and construction (4-5%) markets.

Our Take

Pennsylvania based Alcoa Inc. is among the world’s leading producers of primary and fabricated aluminum and alumina. It involves the technology of mining, refining, smelting, fabricating and recycling of aluminum. We believe that Alcoa’s cost reduction efforts are, to some extent, offsetting the negative impact of higher energy and raw material costs on profitability.

The company is divesting underperforming assets through its restructuring program. The annual global consumption of aluminum products, both upstream and downstream, is expected to double by 2020. This consumption boom will be driven primarily by growth in China, India, Russia and Brazil, whose demographics are accelerating development.

Zacks Recommendation

Currently, Alcoa has a short-term (1 to 3 months) Zacks #4 Sell rating and a long-term (6 months) Underperform recommendation.


Alcoa faces stiff competition from Aluminum Corporation Of China Limited (NYSE:ACH), Rio Tinto plc. (NYSE:RIO) and BHP Billiton Ltd. (NYSE:BHP).

ALCOA INC: Free Stock Analysis Report

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