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Alcoa misses on Q3'16 earnings, outlines unexpected aerospace headwinds

Alcoa Inc. reported third-quarter results Oct. 11, just missing analyst forecasts of revenue and earnings, and revised down revenue expectations for its Arconic business segment.

Analysts had expected revenue of US$5.3 billion, according to SNL Metals & Mining data, but Alcoa reported US$5.2 billion in revenue during the quarter, down 6% from the third quarter of 2015.

Meantime, Alcoa said it had 32 cents in earnings per share, or 3 cents below analyst consensus.

Alcoa said net income was US$166 million, up fourfold from US$44 million in the third quarter of 2015.

Addressing the revenue decline, Alcoa blamed changes to operations, such as shuttered operations, and lower alumina prices, among other things.

But Klaus Kleinfeld, Alcoa chairman and CEO, pointed to profit growth and improving operating costs.

"The aluminum business now sits at the 38th percentile — from the 51st percentile in 2010, 43rd in 2013 — and the alumina business has moved down to the 17th percentile — from the 30th percentile in 2010, 27th in 2013," Kleinfeld said in a prepared statement.

In a conference call on Oct. 11, Kleinfeld expanded on the improvements, saying, "I mean this gives you an idea of the competitiveness. Basically, it means 83% of all industry players are under water before these businesses will be."

The earnings report comes as Alcoa marches toward a business split and sells off assets.

In all, Alcoa said it expects US$1.2 billion in gross proceeds from assets sales in 2016.

Alcoa will also split into two separate, publicly listed companies, Arconic Inc. and Alcoa Corp., starting Nov. 1. Arconic will focus on value-added products such as advanced materials mainly for the automotive and aerospace industries, while Alcoa will hold the more traditional aluminum and bauxite assets.

Kleinfeld said the split was on track.

"We are ready and set to go to separate on November first," he said during the conference call.

In the third quarter, Alcoa also completed a reverse stock split of its common stock on a 1-for-3 basis and raised US$1.25 billion in debt.

Headwinds in outlook

Facing unexpected headwinds, Alcoa revised the Arconic segment's year-end targets.

Kleinfeld said the market for Arconic products and services was "more dynamic" than expected this year.

This included a decline in the market for North American heavy-duty trucks, plateauing North American auto build rates and lower recent demand for airframes. Notably, it was affected by "an unprecedented industry ramp-up to new platforms, destocking and supply chain optimization in airframes," Alcoa said in a statement.

For global rolled products, Alcoa revised targeted 2016 revenue to between US$4.8 billion and US$5.0 billion, down from between US$5.0 billion and US$5.2 billion.

For engineered products and solutions, the group dropped revenue expectations to between US$5.6 billion and US$5.8 billion from between US$5.9 billion and US$6.1 billion, and adjusted the segment's EBITDA margin to approximately 21%, revised from 21% to 22%.

As for its transportation and construction solutions unit, the company dropped revenue forecasts to between US$1.7 billion and US$1.8 billion from US$2.1 billion.

That said, Kleinfeld maintained a bright outlook for Arconic given strong, long-term demand for lighter materials in the automotive and aerospace industries.