Alcoa 2Q16 Earnings Call Notes

Alcoa’s (AA) CEO Klaus Kleinfeld on Q2 2016 Results

Revenue down 1% y/y

‘Revenues of 3.4 billion, that’s down 1% year-over-year and this basically reflects the customer adjustments of the delivery schedules in the aerospace industry, softness in the North American commercial transportation market, pricing pressures partially offset by the North American automotive volumes.”

Demand for aircraft is pretty flat, softening demand in wide body segment

“In the third quarter, we’ve seen large commercial aircraft deliveries up 3%. The growth year-to-date is kind of flat and so we believe that the year 2016 is more likely to come out at the low end of the range and the range being 0 to plus 3%. We also see solid growth of narrow and softening demand for wide body segment.”

North American auto growing 1-2%

“So let’s move on to automotive and let’s go to North America. We believe it’s going to grow 1% to 2%. In the second quarter we had a range still between 1 to 4, but we are now seeing there’s rather a narrow range than the one that we had planned. What we do see is product is up 2.4%, but it’s really a tale of two cities.”

100m vehicles older than 12 years in the US

“The demand we believe for longer term, we do see a sustained demand picture in the US. If you just look at the vehicles that are 12 years and older the number is more than 100 million out of 258 million that are in operation. So it’s a big chunk that potentially is kind of sitting there as future demand.”

China could actually be better than what we saw in the last quarter

“On China, we actually believe that it’s going to be better than what we saw in the last quarter, 6% to 8% we see here up from the 3% to 5% that we saw before. Production is up almost 11%, sales up 11%, and some of the legislation is helping us to get boosted. So that’s the picture on automotive.”

Packaging actually a little higher than we saw before

“Packaging, actually we do see global growth rather a little bit higher than what we saw before. Before we said one to three, and we said 2 to 3 very strongly driven by the US where we saw minus 1 to 0 as a picture before and we think now it’s a little bit 0 to 1”

William Oplinger

Weakness in heavy duty truck offset by growth in construction

“As we look to the fourth quarter, we expect continued weakness in the North American heavy duty truck market to be offset by growth in our building and construction business, and productivity gains. Overall, fourth quarter ATOI is expected to be up 8% to 10% year-over-year to $43 million to $44 million.”

Global consumption expected to be 60m tonnes

“Now I’ll move to review the aluminum market fundamentals. Global demand remains robust at 5%, while supply has increased slightly from last quarter, keeping the overall market balance of our 2016 aluminum balance in depths at range of 615,000 metric tons. Global consumption is projected to reach 59.7 million metric tons.”

Alumina market is in deficit

“We then turn to alumina; the alumina market is in deficit of approximately 1.6 million metric tons, representing a larger market deficit than what we had reported in the second quarter. The deficit increased due to the combined impact of three main factors; higher alumina demand in both China and the rest of the world from increased smelter production, lower rest of the world supply, as (inaudible) curtailment and slowed expansion in India combined to lower the overall rest of the world supply. And in China a few faster restart in additional expansion have increased 2016 Chinese alumina supply. “

Alcoa 1Q16 Earnings Call Notes

Klaus Kleinfeld

Slightly lower growth in aerospace

“Aerospace, we project 6% to 8% growth this year. This is a little lower than our 8% to 9% that we saw for this year earlier in the year. We see that the market is going through a transition given an unprecedented level of new model introductions. And we are seeing lower orders due to that for legacy models and a careful ramp up of the new models.”

Auto segment outlook stable

“Let’s go to automotive and let’s start with North America. We believe a 1% to 5% growth. This confirms our earlier view. Production is up 7.4%; strong sales 3.1%; sustained demand, also, we see the average age of the vehicles of 12 years and older is increasing. So, kind of pent-up demand showing in there. Stable inventories were 65 days. The average transaction price is up 2%. So all of that are pretty good news in that market in North America.”

It’s easier to flux capacity at a mine than a refinery

“Well, the nice thing is with the mining, it’s much easier to increase your capacity as well as to slow down your capacity. This is not like, I mean, in a refinery or in a smelter where you have, I mean, certain increments. I mean, in a smelter, you basically can typically only do half a line and in a refinery, it’s one, it’s a digester that’s a unit that you can bring up or down. In a bauxite mine, it’s much, much easier. And you can ramp it up and ramp it down much faster. You leave it in the ground, we’re still on aerospace. You leave it in the ground if there’s no demand and you bring it out. And frankly, I think we did not limit it by our own capabilities. We have one of the largest bauxite reserves.”

William Oplinger

Revising global demand forecast lower

“We’re revising our 2016 global demand for aluminum from 6% to 5% with consumption on pace to reach 59.7 million metric tons. The slight decline in demand is from two key markets, China and North America. Chinese growth is being reduced to 6.5% versus our prior forecast of 8% due to slower growth in the construction and electrical segments. North American demand growth is being reduced to 4%.”

Alcoa 4Q15 Earnings Call Notes

Klaus Kleinfeld

Expecting 8-9% growth in aerospace in 2016

“We believe that aerospace in 2016 is going to grow 8% to 9%. The large commercial aircraft segment we believe shows a growth — will show a growth of 15%. The ramp-up increases off these large-volume platforms like the 320 and the — the 320, the A350 and the 787.”

Also continue to be positive on auto

“Let’s start with North America. Detroit Auto Show, I mean some of you have certainly followed today, I mean an equally very, very positive picture. We believe the growth is going to continue 1% to 5%. We project for this year the record sales in the last year of 5.8% year to date. Light trucks are leading it. It’s been the highest number of penetration in the mix with 61.2%. And in this segment, the F150 is the bestselling pickup. That’s obviously very, very good.”

William Oplinger

Chinese fundamentals are solid

“We see that fundamentals are solid. Klaus I believe mentioned that we continue to expect a 6% growth in aluminum. Demand is on track to double between 2010 and 2020. Chinese consumption continues to be strong at 8% and North America will surpass Europe as the largest region of demand outside of China, delivering growth of 5%.”

Alcoa 3Q15 Earnings Call Notes

Klaus Kleinfeld – Chief Executive Officer

Managing through the headwinds

” let me characterize the quarter. We have had a very strong value creation focus and we’re managing through the headwinds. On the business side, 5.6 billion revenues and this is really two factors, this is a 21% decline done on purpose a lot coming from divestitures and closures and some also from headwinds”

Strong demand continues in aerospace

“Aerospace we continue to see an 8% to 9% growth rate for this year and that of commercial aircraft growth of 8.3%, strong demand continues.”

Automotive growing 2-4%

“Automotive, North America we believe it’s going to grow 2% to 4%, actually we are narrowing our projection here. In the last quarter we said 1% to 4%, so as we see the year go by we think that’s going to be 2% to 4%. ”

Taking numbers down on Chinese automotive

“China looks little different, there we actually take it down a bit, we actually believe already over that, it could grow 5% to 8%, we’re now seeing it more in the 1% to 2% range. Production slowing down, year-to-date plus 1.3% and if you look at year-over-year, you see a minus 7.8%. Sales are up 1.5% year to date and minus 2.1%, if you do a year-over-year and obviously also see a little bit on softening on the consumer confidence. ”

Breaking up the company into two

” last week, we announced that we are completing our transformation by creating two industry leaders. We create what we called the value-add company, provider of high performance margin material solutions and an upstream company leading and build for success. Throughout the cycle both as we believe are top tier investment choices.”

Higher multiple could be unlocked for the value add side of the business

“The value-add business, the value-add business side you get a feel for the value that is in there when you look at what have been the trading multiples for instance of those type of businesses. So, you just seen the acquisition for PCP that’s underway by Warren Buffett’s Berkshire Hathaway and he paid for a business that is having $10 billion of revenue whereas six of those 10 are having a full overlap with us, $37 billion, right. So you get a feel for the value that’s possible there”

Aerospace cycle should be strong for a while

” you have a nine year order backlog and you have a more diversified customer base today with many, many different airlines. So — and we have shown and we continue to believe that this market is basically going to grow pretty substantially until 2019 and on average we provided an outlook until 2024 growth between 3% to 5% on average.”

William Oplinger – Chief Financial Officer

Expecting a balanced alumina market for 2016

“Switching to the aluminum market, we’ve also tightened our forecast by about 180,000 metric tons to a global surplus of 2.2 million metric tons. Our expectation for the rest of the world surplus is down 840,000 metrics tons from our second quarter view largely due to an increase in Chinese imports of 700,000 metric tons as well as delayed expansions in the rest of the world. Chinese swing refining capacity is under pressure to curtail as alumina prices have fallen below $300. We expect to see more Chinese refining curtailments as we move into the fourth quarter. And as you can see, every quarter this year we’ve tightened our view of the surplus and we expect a balanced alumina market for 2016.”

Global inventories stand near long term average

“Global inventories stand at 62 days of consumption, two days lower than a year ago and unchanged since last quarter. This level is almost at the 35 year average of 61 days. Keep in mind that financiers are holding roughly 20 of the 62 days in this supply and it hedged with LME sales ranging from three to 12 months into the future. These forward sales guarantee a future yield and the only reason the financier would release that metal early to the market is if the physical market was willing to pay a higher premium than the yield on the forward sale. Therefore this metal is most likely not available to consumers in the short-term.”

Alcoa 2Q15 Earnings Call Notes

Aerospace strong, and resi construction recovering but weakness in Europe continues

“The aerospace market is remaining strong. We see continued recovery in North American non-residential construction. Weakness in Europe continues. We anticipate the usual European summer slowdown across all sectors, and we have continued strength in North American heavy-duty truck build rates and gradual recovery in Europe.”

Raising north american truck forecast

“et’s go to the next end market, heavy-duty trucks and trailer. Let’s start with North America. And this is really a fascinating story. That score, we expected growth this year between 6% to 8%. And we’re ramping this up to 9% to 11%. And the reason for this is because we were originally assuming that the supply chain would not be able to support much higher [?] in the second quarter, and we are now seeing production peaking at +18.7% at 137,000 trucks. Their order book is largely has increased 42% year-over-year, stands at 169,000 trucks just compared to this 10-year average is 100,000 trucks cover orders or decreasing 8.6% after the record fourth quarter 2014 numbers. The fundamentals are very solid, 2.3% freight ton miles and a 54% fleet profitability in the first quarter this year.”

Taking European trucking up as well

“On the European heavy trucks and trailers, we actually also taken our number up. It used to be minus 5% to minus 7% for this year, and we believe it is more likely to be around minus 2% to zero. The reason for this is because we see production increasing by Western Europe, 5.2%, and improving conditions in Western Europe. Orders are up 12.2%. Registrations are up 17.8%.”

China trucking down a lot though

“In China, we actually bring the number down. We used to think minus 9% to minus 11%, and we now think minus 14% to minus 16%. The production is down by 34%, and this still suffers from the strong pull ahead that they had due to the Stage 4 regulations.”

North American construction still positive

“When you go to building and construction, actually we do believe in North America continue to believe in the 4% to 5% growth for this year. The early indicators are really positive.”

Lightweight trend will continue in automotive

“the lightweight trend will continue and we are super well-positioned there. Why will it continue? Because of the CAPE [ph] regulations, the OEMs needed, they need to lightweight who has the solution, the end customer’s benefit from it, they get fuel efficiency and money savings, they get more payload, they get faster acceleration and improved breaking.”

We are really optimistic about the aerospace market

“you can see that we are really optimistic, as most people are, in where this market is going, right? So, and the fundamentals are there. I mean, and they are very different from what we’ve seen before. We didn’t have an emerging Asia that adds 100 million new passengers every year in the next 20 years every year. We didn’t have a situation where the next-generation aircraft was so much more attractive in terms of fuel efficiency and maintenance costs and where we literally had 600 aircraft per annum retiring every year.”

The Rolls Royce thing is more a company specific thing

“we do see a robust demand also on the engine side, which is basically a derivative of the planes and of the new planes and the usage, and we do not see any dips in there or any risks. I think that is more, and I think if you talk to the experts there you would very soon see that this is more a company-specific thing rather than a market situation, right?”

Enormous headwinds on the packaging side

“when you see the decline in the enormous headwinds that we are facing on the packaging side, I mean, when I look at our rolling business, I must say, I mean, they are doing on both sides a really, really good job to bring the cost down in the packaging business.”

The Chinese don’t want primary metal leaving their country

“why have they put these procedures in place? Because they don’t want primary metal to leave the country, because primary metal is another way, it’s a liquefied way of energy. And that energy that they don’t have enough in their country, and that has a level of pollution, creates a level of pollution and eats up water in areas where there is water shortage.”

China’s government is very focused on how their people are feeling about government

“this government, as we could see today again and yesterday, I mean, it’s very much also focused on how their people are feeling about the government, right?”

Alcoa 1Q15 Earnings Call Notes

7% Revenue growth driven by auto and aero

“Revenue has been growing year-over-year by 7%. And if you look under the hood, you actually see that this has been driven primarily by the organic growth coming from auto & aero.”

Strong aircraft growth supporting growth

“We continue to project for this year growth between 9% to 10%. And the reason for that is because we see large commercial aircraft segment growing at 9.6%. The order book for that large segment stands now at 9 years of production.”

Auto growth this year between 1-4%

“Automotive North America, we continue to believe we will see a growth for this year between 1% and 4%. Sales are strong, 5.6%, up year to date. I actually looked at the SAAR rate, the seasonally adjusted annual rate, and in January we project 16.4 million for the year, and the projection now is at 17.1 million. Very strongly driven by light trucks.”

Production flat, inventories down

“Production is flat, and this is mainly a factor of the new models ramping up. So, we see that basically following the sales situation. Inventories are down, which those two things you see go together at 58 days. In March the industry average was rather between 60 and 65 days.”

Packaging shrinking

Packaging North America, unchanged. We see it continue to shrink a little bit, minus 1% to minus 2%. That’s mainly the demand decline of the carbonated soft drink side, and partially offset by moderate growth in the beer segment.”

Recall that there are two engines here

“we are building really two value engines. So one is lightweight multi-material innovation powerhouse. And the other one is we are creating the globally competitive commodity business”

Shifting to higher value add

“We are increasing the share in exciting growth markets. I will come to that. We have a full pipeline of innovative products. We are really using all growth levers. We are shifting to higher value add and we are expanding in multi-materials and we are increasing our expertise in multiple technology areas.”

Increasing competitiveness on commodity side

“And on the globally competitive commodity side, we are really increasing our competitiveness. And we do this to mitigate the downside, which I’ve said multiple times, we cannot influence the commodity prices, but what we can influence is where we are on the competitiveness side.”

The LME price is driven by sentiment

“The LME price is driven, as we’ve been saying for now years, by sentiment. I mean, it moved up and down depending on what Mario Draghi or Janet Yellen were on a day, right, whereas the regional premium is really driven by the market fundamentals.”

The Chinese economic team is very, very good

“I have great admiration for what the Chinese government has done over the last four years. And the smartness of the economic team is unbelievably good. I had a chance to be exposed to them many, many times.”

Alcoa 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Expect near double digit growth in aerospace

“On aerospace, we do believe that there is going to be a growth in this market in 2015 between 9% to 10%. ”

Airlines have good fundamental growth projected

“if you look at the airline fundamentals, we are taking here the IATA expectations. What they expect for this year is 7% increase of passenger, a 4.3% increase of cargo demand. Airline profits are supposed to go up to a level of $25 billion for the airlines. That’s pretty amazing.'”

Expect auto to be up 1-4% this year

“North America we believe we’re going to see a growth between 1% to 4%. That’s a pretty big range. Mary Bara, the CEO of GM last week came out with her estimate of roughly 3%. So that’s in that range. And this is obviously on top of the 2014 goals. In 2014 we’ve seen the USA is up 5.8%, 16.4 million vehicles. Production also strong than the 15.7 million vehicles. All of those numbers are year to date November numbers. This is up 4.4% compared to the prior year.’

China auto growth 6-8% expected

“China, a good story. We believe 5% to 8% growth on top of the 6.9% that we saw in the full year 2014 and the growth is driven very strongly by the middle class, increased middle class. And also by the Clean Air Act. The China Clean Air Act is supposed to scrap older less clean cars and they are trying to get 15 million vehicles off the roads and replaced obviously by 2017.”

Two businesses at Alcoa

“On the one hand we are building a lightweight multi-material innovation powerhouse, and at the same time we’re creating a globally competitive commodity business.”

Multi-material powerhouse means getting aluminum into more products

“We are increasing share in exciting growth markets; like aerospace, automotive, heavy duty trucks and trailer, building and construction, many of those that I just talked about. We have a full pipeline of innovative products and solutions. You just saw that again in the last quarter, what we came on with our breakthrough Micromill materials. We are using all those levers from organic to inorganic. We are shifting the mix to higher value add.”

expanding metals portfolio with investments

“we’re expanding our multi-materials portfolio with smart investments. Firth Rixson…making us a global leader in seamless rolled rings, giving us access to a full range of engine disk, give us access to a unique technology called Isothermal forging, and giving us increasingly multi-materials mix to having here in the Firth Rixson 60% nickel base, 25 titanium, 15 steel and aluminum. And TITAL falls kind of in the same logic. It establishes for our core titanium casting capability in Europe.”

Even with oil prices down, OEMs are going to lightweight because CAFE standards require them to

“one of the big questions that I’ve been getting and Bill has been getting here from you all in the last weeks is what about lightweighting in a potential environment where the gas price is coming down…Why do the OEMs need it? So let’s start here on the left hand side. Because there is such a thing called CAFE regulations”

Signs that consumer preference has shifted with lower gas prices

“while the gas price has been coming down, the consumer preference has been a shifting a bit. It’s probably too early to tell though that’s really a trend here, but it’s an interesting development. So lower gas prices I would say increase — lead to bigger vehicles.”

Boeing and Airbus’ more efficient planes are still here to stay

“The second big driver was the increase of efficiency on the planes, and you typically see that new planes on new re-engine models; if you look at on average the claim buy Boeing and Airbus is that they give you 25% increased efficiency and that’s also not going to go away.”

Lower oil prices lead to higher profitability

“the direct impact that Alcoa has outside of the industry impact here, for every $10 per barrel, up or down it means for us 40 million pre-tax profitability impact. That’s after minority interest. And that basically comes to two factors. One is the two oil based refineries that we still have in the portfolio. One is [indiscernible] and the second one is the transportation cost, simply the transportation cost. So that’s the direct impact.”

Alcoa 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Transformation is driving results

“As you probably all can see, the transformation is delivering results. All segments have improved sequentially. Very strong operational performance, earnings increase in every one of our groups downstream, highest-ever quarterly profits, as well as margins.’

Debt to cap could be impacted by strength of USD

“Year to date, we are on target to hit our full year goals, although our debt to cap could end up slightly above the target range, due largely to the strength of the U.S. dollar.”

aerospace is healthy

“We continue to see a very strong aerospace market and believe a growth between 8% and 9% for this year. And if you go to the large commercial aircraft, we see this even stronger, with 12.1% growth. The order books on the commercial jet side are full, nine years of production. ”

China auto activity is strong

“In China, we take the number also up. We had 6% to 10% before, and we narrow the range to 7% to 10%. It’s up year to date 7.7%, and obviously driven by two factors, the increase of the middle class. And the second one, which should not be underestimated, is this new clean air act, that for this year we believe is going to take roughly 6 million cars off the streets in China for lack of the appropriate emissions situation.”

Heavy truck and trailer market is back

“if there’s one fascinating thing, the heavy trucks and trailer is fortunately back, and we are clearly, for North America, taking up our projection.”

European heavy truck market not so strong though

“European side, we are not optimistic. In fact, we are more pessimistic. We had it at minus 1 to minus 5 in the last quarter. We now take it down to minus 7 to minus 10.”

Alumninum lithium alloys

“don’t walk away thinking, oh, you know what, this is all the old aluminum, but that’s not what it is, because we are not standing still, we are improving our metallurgical offerings, and aluminum lithium is really, I would call it, really a revolution, but if you are precise enough, the revolution started a while ago, so in reality it’s an evolution, right?”

In 2007 everyone was saying that metallic airplanes would be a thing of the past, but it’s clear that they are here to stay

“When I came into the operational role at Alcoa, [it was] end of 2007. And when I started to do my first round in talking to people in Alcoa as well as in the industry, there was pretty much the rhetoric that metallic planes are going to be a sign of the past, and there’s no metallic planes anymore, right?

Then we started to look into it, and we also started to look into what innovation potential we have. And as you saw, again, coming through this quarter, Boeing, the very Boeing that was very strong on the 787, has just given us a $1 billion plus contract, and it’s all metallic. And for their big planes, when they had to make a decision for the 737, are they going to renew it with the [max] as a nonmetallic or a metallic one, they decided they gotta go for a metallic version and just do a re-engining.”

We’ve built a slowdown assumption into our Europe projections

” on Europe, there is already, I think, a slowdown scenario for Europe in the second half of the year built into it.”

China may be slower but it’s still growing very strongly

“frankly, in China, Asian, they might be a little slower, but still going very, very strong.’

We think aerospace isn’t as cyclical of an industry as it used to be

“I personally believe, and our experts do so too, it’s a very solid industry. In fact, it used to be a cyclical industry. But I think that through the wisdom of the two major players, Airbus as well as Boeing, in terms of being moderate in their production expansion, they have accumulated this nine years of auto backlog…we said look, we don’t see that cyclicality in there at this point in time.”