Alcoa Corp's (NYSE: AA) fourth-quarter GAAP earnings came in at a loss of $0.68 a share. It was the aluminum giant's first quarter as a stand-alone company, so it was a rather inauspicious performance. But don't get caught up in the headline number; a little analysis is needed to understand the big picture that's behind the loss and why it was good to get the pain out of the way.
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Two Alcoa employees at its Australian alumina refining facilities. Image source: Alcoa Corp.
Alcoa had revenue of little more than $2.5 billion in the fourth quarter, with full-year revenue coming in at roughly $9.3 billion. Since this was the company's first full quarter of reporting since it broke off from its former specialty parts business Arconic (NYSE: ARNC), there's no real quarterly comparable from a year ago. For at least the next year, earnings are likely to be a little messy. That said, analysts had been forecasting fourth-quarter revenue of $2.4 billion.
So, in some ways, Alcoa put up a solid top-line number. Part of that was driven by increasing commodity prices and part by higher volumes in the company's rolled products division. That said, on the bottom line, the company reported a GAAP loss of $0.68 a share. At first blush, that's a somewhat troubling way to start life as a separate company. But it includes a couple of one-time items worth looking at a little more deeply.
Shutting one door to open another
Alcoa's closed and curtailed capacity. Image source: Alcoa Corp.
The aluminum company's fourth-quarter net loss of $125 million included "special items" worth $151 million. Those costs were "primarily related to the permanent closure of Suralco's refinery and mines in Suriname and the impairment of Alcoa of Australia Limited's (AofA) interests in a Western Australia (WA) gas field." Pull those one-time expenses out, and Alcoa would have earned $0.14 a share.
That adjusted number was still below analyst expectations of $0.20 a share. But you have to look at what the one-time items mean for the future. Writing down the value of the gas assets was not good news, but at least it's out of the way. The permanent closure of the Suriname assets, however, helps set the stage for a brighter future. For around a decade Alcoa has been closing older and less desirable facilities, effectively updating its business to better compete in today's market.
The impact has been pretty huge. The company's streamlining efforts since 2010 improved its position on the alumina cost curve from the 30th percentile to the 17th percentile. In aluminum, closures and curtailments helped push it from the 51st percentile to the 38th. The company has made a lot of progress to get where it is today as a stand-alone company, and the fourth-quarter closures were just a continuation of the longer-term moves to improve the business.
There's a cost associated with these efforts, however, and the fourth quarter clearly demonstrated that. But, over the longer term, such moves are setting the company up for a brighter future. In fact, you should watch for more efforts along these lines in the years ahead -- they're a sign that Alcoa is focused on getting into fighting shape.
Alcoa's goals for 2017 include $50 million in additional net productivity savings. Image source: Alcoa Corp.
To put a different spin on the same idea, Alcoa's moves to improve its business in 2016 helped it generate $290 million in net productivity cost savings. The company's net productivity number pulls out factors beyond its control, like commodity prices and currency fluctuations. There's a lot that goes into that number, of course, but closing under-performing and less efficient assets is a key part of the puzzle over the long term. Watch the net productivity metric for continued improvement.
A positive outlook
Change is never easy, but Alcoa has made a huge amount of progress in its modernization efforts. Although the expenses related to closing assets that no longer make sense can be painful in the short term, they really are the right moves to help brighten the aluminum giant's long-term outlook. These changes started years ago, and the fruit of those efforts is showing up clearly in the company's improving cost structure. If you invest in Alcoa, look past this quarter's red ink to see the bigger picture.
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