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Alcoa’s Downstream Business Posts a Mixed Performance in 1Q16

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Alcoa’s downstream business

Previously, we saw that Alcoa’s (AA) upstream revenues fell on lower metal prices and capacity curtailments. Markets were expecting Alcoa’s downstream business to more than compensate for the weakness in its upstream business, as has been the case for the past few quarters. Alcoa’s downstream business consists of three segments: Engineered Products and Solutions (or EPS), Transportation & Construction Solutions (or TCS), and Global Rolled Products (or GRP).

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EPS segment

Alcoa’s EPS segment supplies products to aerospace companies (ITA) including Boeing (BA) and Airbus, and it competes with companies like Precision Castparts (BRK-B), Barnes Group (B), and Woodward (WWD) to capture the aerospace component market.

The EPS segment posted revenues of $1,449 million in 1Q16, a year-over-year increase of 15%. The growth was largely led by acquisitions made by Alcoa in the aerospace component space over the last few quarters. The segment’s after-tax operating income (or ATOI) was up marginally as compared to the corresponding quarter last year, which was in line with Alcoa’s guidance.

GRP segment

However, the GRP segment’s 1Q16 revenues fell 16% YoY. Alcoa attributed lower revenues to lower volumes and pricing pressure from the packaging sector, alongside lower aerospace demand. The slowdown in the North America heavy truck market also impacted the GRP segment’s 1Q16 performance. Despite these headwinds, the GRP segment managed to post higher ATOI and per-ton EBITDA (earnings before interest, taxes, depreciation, and amortization) in 1Q16 as compared to the corresponding quarter last year.

The slowdown in the heavy truck market took a toll on the TCS segment’s financial performance with revenues falling 9% YoY. However, the ATOI was flat over this period and the EBITDA margin improved to 14.9%, which is a 1Q record for the segment.

While the downstream segment’s 1Q16 performance was decent, the outlook is a bit grim, as we’ll explore in the next part of this series.

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