Image source: Alcoa.
Aluminum and titanium company Alcoa (AA) plans to split itself into two separate companies in the second half of 2016, and Alcoa CEO Klaus Kleinfeld couldn't be more excited about the strategic move. The breakup will create two separate businesses, one focused on the production of alumina and primary metals, and the other specializing in the engineered and customized products for specific customer groups that have allowed Alcoa to add value beyond the worth of the commodity itself. Earlier this month, Alcoa gave investors more detail about its post-split future, with Kleinfeld talking about the implications for the company's future. Let's look more closely at five things the Alcoa CEO said and what they mean for the company's future.
1. Focus on repositioning
Kleinfeld began by running through all the legwork that has led Alcoa to its current position. On one hand, the company has worked hard to boost organic growth. Innovations like its Micromill allowing more efficient production of value-add products have helped Alcoa become a stronger player with its existing business. On the other hand, major acquisitions of Fifth Rixson, Tital, and RTI International have expanded Alcoa's reach in terms of both size and materials. The net result was a company that is prepared to go in two separate but equally exciting directions. As Kleinfeld said, "We've really substantially worked on repositioning Alcoa."
2. Controlling costs
Part of preparing Alcoa for its breakup involved streamlining current operations. Kleinfeld noted how the company divested itself of businesses that it believed didn't fit well with the overall company, including its structural automotive business. It also looked for cost efficiencies, closing nine of the rolling mills in its global-rolling business and also reducing its higher-cost aluminum smelting capacity by a third since 2007. Doing so put Alcoa in position for a brighter post-split future. Kleinfeld summed it up: "We always believe that on the one hand, you grow. On the other hand, you really control your cost."
3. Great potential in the value-add company
The value-add side of the business has exciting prospects, especially given the growth industries that it serves. The value-add company will include engineered products as well as global rolled products, incorporating Micromill products and global packaging. Kleinfeld highlighted the huge role that aerospace will play in the division's breakdown of revenues, making up nearly 40% of the company's overall sales:
Multi-materials is at the essence of this company. It's going to be an innovation leader, and we are continuously shifting further into higher value-add, more complicated, more competitive, more value-creating products.
At the same time, even though other businesses like automotive and commercial transportation will have smaller roles at its inception, Alcoa hopes that rapid growth from innovations like greater use of aluminum in vehicle body manufacturing will spur more of the value-add company's overall sales to come from automotive. The greater the diversification, the healthier the value-add business will be after the split.
4. Well-laid plans mean there's lots of potential in the upstream business
The key to the success of the upstream business comes from the preparation that Alcoa has done prior to the split, according to Kleinfeld: "[The upstream business] is a cost-competitive industry leader." With mining, refining, energy, smelting, and casting as part of its business structure, the upstream unit will rely on its track record of cost leadership to fend off rivals like Aluminum Corp. of China (NYSE: ACH). For a long time, the upstream business has languished in the shadow of value-add products, as many saw Alcoa has having no competitive advantage in terms of producing primary metals and materials against Aluminum Corp. of China or other global producers. Kleinfeld is proud to have defied that assessment, and he sees the upstream company as having more potential than many investors think.
5. Attracting new types of investors
Kleinfeld is also excited about the transaction from an investor's perspective, as he believes that depending on differing investment profiles among prospective investors, different people will find one or the other of Alcoa's two businesses to be the best for their particular investing needs. He said: "We thought through this a lot and came to the conclusion that this is the right thing for U.S. shareholders but also for other stakeholders because of the way it assures a brighter future for both sides." Some growth-oriented investors will have confidence in Alcoa's technology and be willing to take on the risks involved in innovative new products. Others will gravitate toward the cyclical upstream business, with its own set of risks and rewards that more closely resemble what investors in Aluminum Corp. of China and other primary-metals producers have. Either way, Kleinfeld sees everyone benefiting from having two choices on which to focus once the split is complete.
Investors might still have to wait nearly a year for Alcoa's split to happen. Nevertheless, understanding the implications now is essential to prepare yourself for which of Alcoa's businesses you might want in your portfolio going forward.
