Business | Investment

Alcoa earnings beat estimates

Orders from auto and aerospace industries boost revenues

  • Bloomberg
  • Published: 00:00 July 11, 2012
  • Gulf News

New York: Alcoa Inc, the largest US aluminium producer, reported second-quarter earnings and revenue that beat analysts’ estimates after an increase in orders from the auto and aerospace industries.

Profit was 6 cents a share, exceeding the 5-cent average of 19 estimates compiled by Bloomberg, Alcoa said yesterday in a statement.

That excludes charges related to a proposed settlement of a lawsuit brought by Aluminium Bahrain BSC and other items.

Sales fell 9.4 per cent to $5.96 billion (Dh21.9 billion), beating the $5.81 billion average of 11 estimates.

Chief executive officer Klaus Kleinfeld reiterated Alcoa’s forecast for global aluminium demand to rise 7 per cent this year and exceed supply.

The company’s units that make the metal for customers such as Boeing and Ford Motor Co have seen higher profitability, helping to counter the weaker performance of its aluminium-smelting business.

The primary metals unit posted an after-tax operating loss of $3 million after prices declined.

“Alcoa is still holding the line and keeping their head above water,” Jorge Beristain, a Greenwich, Connecticut-based analyst with Deutsche Bank AG who has a hold rating on the stock, said yesterday by telephone.

“The pilot light has kind of gone out on aluminium prices.”

German stock

Alcoa traded at 7.067 euros (Dh31.89) in Frankfurt as of 9.50am local time. That’s equivalent to $8.687, a 0.8 per cent decline from Monday’s closing price in New York.

The company, typically the first in the Dow Jones Industrial Average to report results, has fallen 47 per cent in the past year, the worst performance on the index after Hewlett-Packard Co.

Car and truck manufacturers are building lighter vehicles and planemakers face record backlogs as airlines refurbish aging fleets. Global aluminium demand in the auto industry will increase 4 per cent to 8 per cent this year, with US consumption rising as much as 14 per cent, Kleinfeld said yesterday on a conference call with analysts and investors. That’s higher than growth of 3 per cent to 7 per cent projected three months earlier.

Alcoa also said it will gain from demand growth of 3 per cent to 5 per cent for blades used in gas turbines and jet engines this year.

That compares with an estimate made in the first-quarter for expansion of as much as 2 per cent.

Downstream growth

Downstream operations are a focus for Alcoa. The company is spending $300 million to expand auto-parts output in Iowa.

In May it reported the start of a $90 million expansion of a plant in Indiana to produce aluminium-lithium alloys used in aircraft.

“In their downstream business and midstream business, those two pieces we are seeing margin expansion,” Brian Yu, a San Francisco-based analyst at Citigroup who recommends holding Alcoa’s shares, said in a July 6 interview.

“It’s a sign that, yes, the company is doing some things right.”

Aluminium prices have declined over the past year amid a supply surplus. Aluminium for delivery in three months on the London Metal Exchange averaged $2,019 a metric tonne in the quarter, 23 per cent less than a year earlier.

Global output rose 4.1 per cent to 14.9 million tonnes in the first four months of 2012, beating usage by 623,703 tonnes, according to data compiled by Bloomberg.

Still, for the whole year, there will be a deficit of 515,000 tonnes, Kleinfeld said, wider than Alcoa’s April forecast for a 435,000-tonne shortfall. Deutsche Bank’s Beristain and Lloyd O’Carroll, an analyst at Davenport & Co. in Richmond, Virginia, estimate there will be a surplus this year.

Output cuts

Alcoa said in January that it would cut production capacity by 12 per cent. Rio Tinto Group, the second-largest producer, said yesterday it reduced output by 15 per cent at a plant in New Zealand after prices fell. Norway’s Norsk Hydro ASA, the fifth-biggest producer, said last month it would shut 120,000 tonnes of capacity in Australia because of weaker demand and oversupply.

“The market is working and we do see that the people are moving forward with curtailing or responding by slower build- out” of new smelting capacity, Kleinfeld said on the call.

Alcoa has faced claims from Aluminium Bahrain, the producer known as Alba, that it bribed officials in the kingdom and caused Alba to pay almost $500 million more than it should have for alumina, the main raw material in aluminium. Alcoa said it proposed to settle the suit, brought in the US, by offering a $45 million cash payment, and also offered Alba a contract for alumina supply.

Alcoa took a $45 million charge for the quarter in relation to the settlement and said it may take a further charge of $75 million. Potential settlements with the Securities and Exchange Commission and the US Department of Justice may also result in future charges, the company said.

US prosecutors — who have been investigating the allegations since 2008 to determine whether Alcoa or anyone else violated the US Foreign Corrupt Practices Act — last month dropped objections to the pretrial gathering of evidence in the lawsuit by state-owned Alba.

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