Alcoa offsets lower aluminum prices with stronger sales, productivity

US-based aluminum giant Alcoa  (NYSE: AA) maintained 2Q13 revenue levels from the previous quarter thanks to strong sales in the aerospace, packaging, building and construction, and automotive markets, CFO William Oplinger said in a conference call to discuss the company's quarterly financial results.

Alcoa posted Q2 revenues of US$5.8bn despite a drop of US$161/t in realized aluminum prices and an 8% decline in LME cash prices.

"Compared to last year, revenues were slightly lower by 2% on a 4% drop in realized aluminum prices. Cost of goods sold percentage increased slightly by 120 basis points due to the lower LME impacts in revenue, largely offset by better productivity across the businesses," Oplinger said. "The change in other income and expense is largely due to unfavorable mark-to-market impacts on energy contracts."

Excluding special items, the US$45mn net income decline in the quarter was mainly due to lower LME prices offset by better operating performance. Aluminum prices skidded about 8% during the second quarter, further hurting the company's aluminum mining and smelting units, according to the CFO.

"The US$150mn LME impact caused by an 8% decline in LME cash prices was somewhat offset by the strength of the US dollar versus our key currencies, the Aussie, the Canadian and the [Brazilian] real," he said.

Alcoa is well on its way towards achieving the company's 2013 productivity target, according to the executive. "Cost headwinds were driven primarily by mining and power plant outage costs which we noted in our last earnings call. So in summary, our focus on cost control and volume gains has allowed us to offset much of the decline in the metal price."

" The majority of the cost increases are associated with relatively flat alumina API prices in the wake of lower LME prices. As you can see, this is a positive in alumina, but a negative in the primary metals segment."

"It is very clear. We have got high cost capacity in Australia. We got high cost capacity in Southern Europe. We have got some higher cost capacity in parts in Brazil, depending on what power prices are," Oplinger said.

Alcoa posted a net loss of US$119mn for the second quarter of 2013, compared to a US$2mn loss in 2Q12 and a net profit of US$149mn in 1Q13.

Adjusted Ebitda for Q2 was US$616mn, up from US$517mn in the year-ago quarter, but down from US$690mn in 1Q13.

In Latin America and the Caribbean, Alcoa has assets in Chile, Peru, Argentina, Colombia, Jamaica, Suriname, Trinidad & Tobago and Brazil, the last of which represents the bulk of its earnings from the region.