Alcoa Management: "Global Supply and Demand Is Essentially Balanced"

Alcoa Inc. (AA) reported earnings Tuesday night for the second quarter of 2008 (ending 6/30/08), and held a conference call to discuss the results. The results beat estimates and the stock was up 4.5% in pre market trading Wednesday to $33.80.

Financial Highlights

Revenues - $7.6 billion
Net income - $546 million
EPS - $0.66

Cash - $815 million
Debt to capital - 30.6%
Year to date AA has repurchased 18.3 million shares
Capital expenditures - $1.5 billion year to date - $3.6 billion expected for the year

Shipments of aluminum products (metric tons) - 1,407,000

Management Comments

Industry Fundamentals

"Aluminum prices have continued to show strength and those higher prices are supported by a host of factors....global supply and demand is essentially balanced; even though North America and Europe are experiencing significant weakness in specific end markets, global consumption remains robust. Secondly, energy costs and input prices have continued to escalate for the industry as a whole...And lastly, global mega-trends will continue to increase the per capita consumption of aluminum, as well as provide a catalyst for material substitution."

Raw Material/Energy Costs

"Higher raw material and energy costs reduced profits by $107 million. Caustic, carbon, natural gas, fuel oil and transportation costs continue to climb."

"...energy supply constraints have caused smelter curtailments as well as postponements to greenfield expansions."

"caustic energy and bauxite account for approximately 65% of our refining costs, while alumina energy and carbon account for approximately 70% of our smelting costs...From the first half of last year to the first of this year, these costs have increased between 35% to over 80%."

"The energy situation, along with the inflationary pressures on many materials, has increased the cost of alumina refining and aluminum smelting by about 20% to 35% between 2005 and 2007, and we would expect a similar rate increase this year."

Relative Cost Positioning

"Our own research indicates that the industry cost curves for both refining and smelting have seen double-digit increases in both 2007 and 2006. Through brownfield expansions and operational improvements, we see our position on the refining cost curves improving by approximately [eight points] from 38 to 30 over the last two years while we maintained our midpoint status on the smelting cost curve."

Rockdale

"In June, we announced the curtailment of 120,000 tons of annual production in Rockdale. This was driven by an increasingly unreliable power supply that created financial and operational hardships to a point where we could not justify continuing full operation." (Rockdale is a smelter located in Texas - Luminant supplies power and prices spiked to as much as $2,000 to $4,000 per megawatt hour during peak hours.)

Outlook

"Aluminum consumption will increase by approximately 8% and given the supply interruptions in China, South Africa and the U.S. to name a few, we see the global demand/supply picture to be generally in balance."

North America - "Automotive production is projected to be at its lowest level in two decades. Similarly, heavy truck and trailer production are anticipated to remain below already weak 2007 levels. Commercial building and construction activity is showing signs of the decline that we have been anticipating due to the slowing business cycle and also to the tighter credit conditions."

Europe - "The end markets in Europe have held up, although signs of softness, especially in building and construction and truck and trailer, are becoming evident. Automotive production has held up and is expected to show some increase for the year."

Asia - "End markets in China continue to be showing strength. We expect consumption in China to increase approximately 20% this year."

Comments

[BSCLossMan]

And AA was down by the time of market close...