Alcoa (AA +0.00%) posted a net loss of $178 million in the first quarter, compared to a net income of $149 million a year prior. At first glance, the aluminum giant seems to be experiencing troubles, especially with aluminum prices falling 16.6% in 2013.
But, Alcoa is preparing for an upward ride.
Drying up fast
Alcoa has been under major pressure from lower aluminum prices, increased competition in the Asian market, and the potential use of other materials by customers like steel and composite plastics.
In the first quarter, Alcoa spent $461 million to restructure and slim its business and factories. It spent $7 million during the same period last year. This 65% expense increase seems counter-intuitive; however, it is key for growth.
Thankfully for investors, Alcoa's restructuring costs are primarily exiting costs. It spent $336 million in the first quarter to cut production at two unprofitable primary metal smelters and at two overproducing rolling mills and to suspend production at two additional smelters.
With low aluminum prices, Alcoa's biggest flop was in the primary metals segment, the after tax operating income difference falling 140%compared to the first quarter last year. It is streamlining its business to cut such programs and invest in more lucrative segments like engineered products and solutions, which serves the growing aerospace industry, and global rolled products in regions of automotive growth.
Expansion in the skies
Alcoa broke ground in the end of May to capture the growth in the air. The new Indiana facility will be producing by the end of 2015 and will allow production of aircraft components 60% larger than Alcoa can currently produce.
The ability to build larger components is key because it allows Alcoa to produce products for wide body aircrafts. Boeing (BA 3.01%) decided last year to continue to use the traditional aluminum fuselage for the upgrades of its market leading, wide-body 777. The new 777 is expected to take to the skies by the end of the decade.
Alcoa currently provides aluminum alloys for the wing panels of the 777. Its new facility will allow it to produce more components for Boeing's wide body aircrafts, like the fuselage, resulting in more sales per aircraft.
For example, an empty 777 weighs 150 tons and is composed of 50% aluminum. At 75 tons of aluminum per aircraft and a market rate of $0.84 per pound, each aircraft requires $126,000 of aluminum. This excludes the high costs of special alloys and engineering.
The jetliner market is expected to reach $4.8 trillion in the next 20 years. This growth will help Alcoa soar to new heights.
Boeing 777. Source: Boeing
Fuel economy rules
Alcoa is a supplier for numerous automotive companies and is preparing to meet an increase in demand.
Automotive companies producing in the U.S., like Ford (F 1.03%), are required to meet increasingly strict fuel economy regulations by the EPA or pay a penalty. Today, automotive companies' annual fleet of production must achieve an average fuel economy of 31mpg. That number will be ballooned to 50mpg by 2025.
To continue to meet EPA requirements and to satisfy consumer concerns about gas prices, Ford is shaving 700 lbs. off its market leading F-150 by shifting the 2015 model to an aluminum body. Former models have steel bodies.
The American Lightweight Materials Manufacturing Innovation Institute estimates that every 100lbs. saved per vehicle results in a 2% increase of fuel economy. Ford is increasing the pickup's fuel economy by 14% -- from about 20mpg, depending on the model, to 22.8mpg.
2015 aluminum body F-150. Source: Ford Motors
Ford is leading the automotive market toward an aluminum body, and the major automotive companies are following. Alcoa is working with these companies to cater to their specific needs and each forecasts fast growth in aluminum consumption.
This is great news for Alcoa's Global Rolled Products, which produces flat aluminum used in vehicle bodies. Although this segment took a hit last quarter because of low aluminum prices, the company can expect better revenues as demand increases in coming years. In fact, the segment is projected to grow four times by 2015 and 10 times by 2025.
An adapting company
At a quick glance of the first quarter results, Alcoa does not look healthy. However, Alcoa is proving its resilience to investors.
It is willing and is cutting unprofitable practices. Alcoa is investing for the future.
