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Alcoa’s last earnings call before split to tout parts prospects

10th October 2016

By: Bloomberg

  

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NEW YORK – Alcoa's chief has one more chance to show investors why he’s unchaining the company’s parts businesses from its legacy metal-making operations, even as a slowdown in the aerospace industry threatens to undercut the move.

On Tuesday, Chief Executive Officer Klaus Kleinfeld delivers the last earnings call to investors before 128-year-old Alcoa splits. From November 1, the iconic name will be used by a new company, Alcoa Corp., that will hold its legacy metal-processing business. The value-added parts operations will go by the name Arconic Inc., to be headed by Kleinfeld.

Investors have cheered the move after a flood of cheaper imports put a strain on the metal-making unit. In the past decade, Alcoa has been dethroned as the largest aluminium producer and seen its more than 50-year status as a blue-chip stock come to an end. Now Kleinfeld, who holds a PhD in strategic management, has to show that Arconic can live up to expectations at a time when aerospace demand is in question.

“For the most part, investors understand this is a valuable asset,” Anthony Young, an analyst at Macquarie Group, said by telephone. At the same time, “we’re in the midst of a down cycle in aerospace," he said. “To match that supply with the demand is difficult.”

In the past two years, the Russell 3000 Diversified Manufacturing Operations Index has gained 26%. In the same span, the Bloomberg World Mining Index fell 22% and Alcoa lost 34%.

Setting the tone for next month’s separation will be the company’s third-quarter results, which will give investors a breakdown of how each of the segments performed, as well as more detail on the outlook for the new companies. Alcoa spokeswoman Monica Orbe declined to comment on the company’s performance before the earnings announcement.

In the third quarter, net income was expected to rise to 33 c a share, from 6 c a year earlier, according to the average of six analysts’ estimates compiled by Bloomberg. Excluding one-time items, earnings were forecast at 34 c. The earnings statement, scheduled for release Tuesday before the start of regular trading in New York, will be followed by a conference call with analysts at 8:30 a.m.

AEROSPACE CONCERNS
Honeywell International shares tumbled Friday after the company reported preliminary third-quarter profit below its forecast and cut the top end of the 2016 earnings target as sales slump for aircraft parts. Honeywell’s prediction that the business-jet market will remain weak next year fuelled drops at other aerospace manufacturers such as Textron, which produces helicopters and Cessna jets.

“Aerospace estimates have more downside than upside risk,” Morgan Stanley said in a research note on October 3. “If Alcoa delivers an in-line third-quarter downstream performance, it would have to deliver a very strong fourth quarter to meet 2016 guidance, which seems unlikely, based on recent customer commentary.”

Morgan Stanley analysts said they project 2016 revenue for the engineered products and solutions business, at $5.9-billion, compared with management’s expectation for $5.9-billion to $6.1-billion.

AUTO DEMAND
Arconic – made up of some but not all of the global rolled products, engineered products and solutions, and transportation and construction solutions businesses – will still have automotive demand to help counter any slowdown in aerospace sales. The split will also free Arconic from many of the uncertainties of the commodities businesses.

Alcoa has been focusing on cost control and streamlining operations ahead of the split, Ken Hoffman and Sean Gilmartin, analysts at Bloomberg Intelligence, said in a note.

The new Alcoa Corp. will begin its corporate life with reduced debt and may benefit from more than nine years of production cuts, curtailments and investments at its global operations.

Cost cutting has helped buffer it from the impact of lower aluminium prices. In the earnings report released in July, the so-called upstream units outperformed some analysts’ estimates, even after prices for aluminium and its precursors fell from a year earlier.

The metals-processing unit is also getting assistance from rising aluminium demand and production cuts at Chinese smelters, which have helped spur a rebound in aluminium this year. While the metal is still down about 50% from a 2008 high, prices in London have climbed 12% in 2016.

Alcoa shares have climbed 5.9% in 2016. The stock fell 1.3% to $31.37 in New York on Friday.

Edited by Bloomberg

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