Shares of US aluminum giant Alcoa Inc. (AA) dropped 6% in after-hours trade and closed at $17.45 following the fourth quarter and full year 2009 earnings announcement on Monday.
In the fourth quarter of 2009, Alcoa posted a modest profit of 1 cent, missing the Zacks Consensus Estimate of 5 cents and market expectations of 6 cents. Accounting for charges on restructuring and special items of $275 million, or 28 cents per share, Alcoa reported a loss of 27 cents, down from a net loss of $1.16 per share in the same quarter of 2008.
Higher aluminum prices drove an 18% sequential increase in the top-line to $5.4 billion in the fourth quarter. The quarter saw Alcoa post a 9% increase in the realized price of alumina partially offset by higher energy prices and a weak dollar. However, weak demand from end-markets including aerospace, commercial building and construction and industrial gas turbines led to a 5% decline in revenues, year on year. Total aluminum shipments improved by a modest 2% year over year to 1.4 million tons.
For full year 2009, revenues fell 32% year over year to $18.4 billion. Net loss of $1.15 billion, or $1.23 per share, was higher than the net loss of $74 million, or $0.10 per share in 2008. Total aluminum shipments declined 7% year over year to 5 million tons.
In the Alumina segment, production in the fourth quarter declined 3% year over year to 3.9 million tons. Production of primary aluminum decreased 7.6% to 897,000 tons. In the Primary metal segment, higher energy bills affected Alcoa’s Italian smelters.
However, prices have improved in the last six months. Alcoa realized 97.8 cents per pound of aluminum in the fourth quarter, up about 9% from the previous quarter. The company commissioned its Juruti mine in Brazil and combined it with the Sao Luis refining expansion, which makes it the lowest-cost producer of alumina, globally.
In the Flat-Rolled Products segment, shipments decreased 7% year over year. Continued improvement in pricing in North American and European facilities combined with the cash sustainability savings has more than offset weak end-market conditions that lowered shipments by 2%.
During the year, Alcoa commissioned its Borhai flat-rolled products facility in China, which serves the printing, transportation, electronics and packaging industries. In the Engineered Products and Solution segment, shipments declined 18% year over year. Low demand from the aerospace and building and construction market coupled with further declines in industrial gas turbines sales has more than offset the benefit of marginally improved commercial transportation markets and the benefits from cash sustainability efforts.
Alcoa’s cost-cutting efforts helped overhead cost savings of $412 million and raw material procurement savings of $2 billion in 2009, $500 million above the target for the year. The company sources raw materials externally, including coke, used in the smelting process, and caustic soda, which is used to refine bauxite into alumina. Reduction in working capital generated more than $1.3 billion in cash or more than $500 million above the 2009 target of $800 million.
Alcoa’s free cash flow turned positive for the first time since the second quarter of 2008, a sign the company was able to generate money from operations and not solely through cost cutting. Alcoa generated free cash flow of $761 million in the fourth quarter, a $947 million improvement from the last quarter driven by strong cash from operations of $1.1 billion, a $940 million increase from the third quarter of 2009. Alcoa ended the fourth quarter with $1.5 billion of cash in hand. Alcoa’s debt-to-capital ratio of 38.6% at the end of the quarter reflected an improvement of 3.9% from the year ago quarter.
Going forward, Alcoa sees end-markets stabilizing and demand improving 10%. Most of the demand is expected to come from global truck and trailer and automotive segments. Rising aluminum prices could benefit Alcoa and help the aluminum producer increase its profit in the upcoming quarters.
To boost savings, Alcoa proposes to cut 24,600 jobs to save an annualized $600 million. In 2009, the company shed 21,500 positions and saved $325 million. Alcoa’s headcount is down to 59,000 and it plans to cut 3,100 jobs by the end of the first quarter of 2010. We believe the cost cuts will make the company more competitive when markets recover. We maintain our Neutral recommendation on Alcoa.
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