Alcoa Q1 Profit Comes In Above Expectations Despite Continued Drag From Primary Metals Unit

Apr 8 2014, 4:20pm CDT | by

The unit that once prompted one Deutsche Bank analyst to write an ode to the value of its spinoff, primary metals, has proven to be a continued thorn in Alcoa's side. This is one of the conclusions from the aluminum producer’s first quarter fiscal 2014 earnings results, which it released Tuesday afternoon to officially kick off spring’s earnings season.

Alcoa reported $5.5 billion in first quarter revenue, a figure that beat Street expectations of $5.4 billion but marks a 2% decline over the prior quarter and a 6% decline from the first quarter of 2013, a decline that’s largely due to an 8% drop in year-over-year aluminum prices as well as capacity reductions in the company’s struggling primary metals unit, which reported negative $15 million in first quarter after-tax operating income, an improvement over negative $35 million in the prior quarter but down from a (positive) $39 million in the same period in 2013.

Alcoa’s first quarter profit, meanwhile, came in on the negative side: net revenue, including special items, was actually a loss of $178 million, or a loss of 16 cents per share compared to a gain of 14 cents per share during the same time in 2013. Excluding special items, like $276 million spent on smelting capacity reductions (smelting is the process by which aluminum is procured from ore), net income came in at a $98 million gain, resulting in earnings of 9 cents per share. This, too, beat the analyst consensus, which was calling for a gain of 5 cents per share.

“We hit record downstream profitability, nearly tripled results in the midstream, and strengthened our upstream business for the 10th quarter in a row,” Klaus Kleinfeld, Alcoa chairman and CEO, said in a statement Tuesday afternoon, referring to the production of aluminum, the transportation of the metal and the exploration/procurement of aluminum, respectively. “Our transformation is accelerating – we’re powering growth in our value-add businesses and aggressively reshaping our commodity business.”

Among the initiatives included in Kleinfeld’s reference to “reshaping” is Alcoa’s late March announcement that revealed it was curtailing 147 tons of smelting capacity in Brazil due to due to challenging global market conditions in primary aluminum and increased costs that have made the smelters uncompetitive. This change will take place by May of this year, and the company plans to close an additional 274 tons of smelting — aluminum procurement– capacity throughout the year. Once all these curtailments and closings are completed, Alcoa says it will have reduced its smelting capacity by 1.2 million metric tons, or 28 percent, since 2007.

Looking ahead to 2014, Alcoa did not provide specific earnings and revenue guidance, though it did say that it expects an increase in demand from the aerospace industry thanks to demand for commercial aircraft and business jets, as well as increased demand from the automotive industry, packing industry and construction industry. Alcoa reiterated its expectation that global aluminum demand will grow 7% in 2014.

Following the release of the earnings report, shares of Alcoa increased 2% in after-hours trading after finishing Tuesday’s regular trading session with an 0.48% gain. Year-over-year, the stock is up 48.6%.


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