5 Things Alcoa's Management Wants You to Know

Alcoa has a long-term strategy up its sleeve, and things look good so far. Find out more about the aluminum giant's future course.

Aug 23, 2014 at 3:09PM

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Second-quarter earnings season has just about come to a close, and it seems like long ago when aluminum giant Alcoa (NYSE:AA) led off the successful season with a strong report that helped the stock continue its impressive advance. Even though Alcoa earnings have shown some impressive results lately, the company's long-term strategy also plays a big role in the recent rise in investor confidence. Let's take a look at five choice comments from last month's conference call.

Firth Rixson [is] a nice addition to our already strong suite in aerospace, particularly in the jet engine side. ... The technology that we will be adding there is absolutely leading-edge, particularly the specialized isothermal process. -- CEO Klaus Kleinfeld

The aerospace industry has been an essential part of Alcoa's long-term success story, and the nearly $3 billion acquisition of Firth Rixson will help drive segment growth for the aluminum giant going forward. In order to make engines and other components as light as possible, lighter-weight materials have become more popular, and Firth Rixson has specialized in rings, forgings, and other specialty materials to improve efficiency.

Yet Firth Rixson also has exposure outside aerospace. With the need for such materials in the energy generation and exploration field, the acquisition should give Alcoa entry into what could become an increasingly important sector for its long-term growth.

Turning to the aluminum market, we've not changed our view that market fundamentals are positive. -- CFO Bill Oplinger

For years, Alcoa has had to deal with weak aluminum prices, hurting its commodity business. But after that long period of weakness, aluminum has finally started to bounce back, with prices recently hitting their best levels in nearly a year and a half. A combination of low inventories and reductions in production capacity has driven the price increases.

Moreover, Alcoa expects deficits between supply and demand to widen further this year, supporting prices even more. If demand starts to pick up, then that would only increase the trend toward higher aluminum prices.

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Ford's 2015 F-150 relies on aluminum. Source: Ford.

[Aluminum-intensive vehicles] go for better fuel efficiency and superior performance ... [and] they allow the automotive makers to meet the CAFÉ regulations with the 54 mile per gallon target by 2025, because they reduce weight. -- Kleinfeld

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Ultra ONE wheel. Source: Alcoa.

The new 2015 Ford (NYSE:F) F-150 pickup truck has inspired high hopes for Alcoa and the aluminum industry, as automakers have embraced the need to become more fuel-efficient and have turned to lightweight materials to meet their needs. Although the F-150 will break ground in the move toward aluminum, industry experts expect Ford's competitors to follow suit, especially if consumers respond favorably to the new vehicles. Moreover, products like the Ultra ONE aluminum wheel will also become more important in transportation, even in the heavy-truck segment. With Kleinfeld having noted that average fleet ages in North America are still about two years above the historical average, there's plenty of pent-up demand for vehicles, and Alcoa could benefit from that demand in the future.

We are building a lightweight multi-material innovation powerhouse. -- Kleinfeld

In the past, Alcoa faced concerns about its ability to compete against carbon fiber and other lightweight materials. To meet that challenge, Alcoa has expanded its production capacity to go beyond aluminum, incorporating titanium and other materials in order to look at potential innovations using composite materials. Firth Rixson also brings titanium expertise to the table, and in time, gaining experience and proficiency in using multiple materials could bring a flood of new products for Alcoa to sell.

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Source: Alcoa.

We are building a highly competitive commodity business. ... [It] is not essential what your total volume is, but what is essential is that the assets that you have are low on the cost curve, and that's what we're doing. -- Kleinfeld

Even with all the attention to value-added materials, Alcoa still intends to sell more basic aluminum products for industrial use. Along those lines, the company has aimed at getting rid of higher-cost operations in order to boost its margins as much as possible while still giving Alcoa the flexibility to challenge rivals on price. The value-add segment might drive profits, but Alcoa nevertheless intends not to let its commodity business become a loss-leader for the company.

Since its earnings announcement last month, Alcoa stock has continued to climb as investors become more comfortable with its progress. At least for now, Alcoa seems poised to pull off one of the greatest turnarounds in recent years, and that's good news for the aluminum giant and its investors.

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