Why Alcoa's Management Sees Better Times Ahead
Image source: Alcoa.
For decades, stock market investors have looked to Alcoa to provide insight not just on the aluminum specialist's own results but also on the health of the broader economy. Alcoa has faced a host of industry-specific challenges recently, however, and so its management has focused much of its attention on internal moves designed to cut costs and make Alcoa more competitive in a difficult environment. With the release of its second-quarter results recently, Alcoa's leaders gave investors a fresh look at where things stand right now. Let's look at five comments from CEO Klaus Kleinfeld duringAlcoa's conference call on July 8 that shed some light on how the company sees itself moving forward.
"If you add up the contracts that were signed in Paris [at the Paris Air Show] as well as the subsequent visit of [Chinese Premier Li], it adds up to $125 billion of orders and commitments."
Alcoa has taken full advantage of the aerospace boom lately, with its innovative materials playing an increasingly important role in aircraft manufacturing worldwide. Even with the drop in fuel prices, airlines continue to make huge orders from major producers for new aircraft, and that in turn supports all the efforts that Alcoa has made to dominate that niche. Between well-established customers in the developed world and newer players in emerging markets, Alcoa has put itself in a great position to take advantage of rising demand by supplying vital lightweight metals to all comers.
"The lightweighting trend will continue [in automotive], and we are super well-positioned there. Why will it continue? Because of the CAFE regulations, the OEMs need it. They need to lightweight. Alcoa has the solution."
Despite all the attention that the aerospace arena gets, one of Alcoa's biggest opportunities is in the automotive sector. The reason is simple: Aerospace applications have always needed the lightest-weight materials in order to be economically effective, but aluminum has only recently gotten the attention of automakers seeking to meet new fuel-efficiency standards while still providing the performance that vehicle-buyers demand.
The biggest win for Alcoa has been the emergence of the F-150 pickup truck, which has seen huge demand for its aluminum-heavy redesign. Despite some production issues that have kept sales numbers down, the appetite for the truck shows that drivers are ready to embrace aluminum and other lightweight metals as long as they don't compromise strength and durability. If more automakers seize on the trend, it could mean even better results for Alcoa.
"Upstream [had] a solid performance in spite of significant market headwinds. On the Alumina segment, it's been the best first-half profit result since 2007. On Primary Metals, very resilient even though the Midwest transaction price in this year has dropped by 22%."
Cost-cutting efforts have been an essential part of Alcoa's turnaround, with the company not just trying to build out its value-add business to earn premiums over commodity prices but also looking for higher margins on its alumina and primary metals sales. By closing higher-cost facilities in favor of lower-cost alternatives, Alcoa has managed to join some of the most efficient producers in the industry, and that has contributed substantially to the company's bottom-line success.
"Some people have said, 'Oh my God, I mean, they are now in acquisition mode.' But it's really been a bit coincidental that those three opportunities came so close after each other."
Kleinfeld poked fun at himself with respect to all the acquisitions that Alcoa has made lately, including components manufacturer Firth Rixson, titanium-casting specialist TITAL, and the pending deal with titanium supplier RTI International Metals. Yet he also notes that the stars seemed to align at the right time for Alcoa, rather than being part of any predetermined long-term strategy for the company. Regardless of the way in which the deals surfaced, Alcoa has started seeing signs of favorable results from its actions, and with RTI on track to close by the end of this month, the company's transformation from aluminum specialist to a more diversified lightweight-metals leader is almost complete.
"New supply from China in the form of fake semis has filled an increasing share of the [world aluminum] deficit, which has placed the rest-of-the-world total price under pressure."
Kleinfeld had many negative things to say about Alcoa's Chinese competitors, accusing suppliers of disguising what should be primary metal as semi-finished products in order to avoid export duties and receive rebates on value-added taxes. For its part, Alcoa wants a level playing field in the world aluminum market, because it believes it can win if the competition is fair. It's unclear whether efforts to get the Chinese government to stop the practice will succeed, but Alcoa is confident that in time, a viable solution will put a stop to the problem.
Alcoa hasn't solved all of its problems, as market conditions continue to be difficult. The company's efforts to recast itself as a broader-based metals supplier are starting to pay off, though, and in time, Alcoa could see its share price rise as a result.
The article Why Alcoa's Management Sees Better Times Ahead originally appeared on Fool.com.
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