Aerospace Is Arconic’s Aluminum, and Its Not Looking Good




Previously in this series, we discussed the importance of Alcoa’s EPS (Engineered Products and Solutions) segment. After the company’s split into two entities, Alcoa and Arconic, aerospace will be for Arconic what aluminum is for Alcoa (AA). Aerospace (ITA) demand will thus be a key driver of Arconic’s post-split performance.

But Alcoa has lowered the long-term guidance of its EPS segment. Previously, Alcoa had a three-year target of $7.2 billion in revenues, with an EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 23%. The company has now reduced its target revenues to $6 billion–$6.2 billion with an EBITDA margin of 21%–22%. Let’s see why Alcoa lowered its guidance.

Aerospace Is Arconic's Aluminum, and Its Not Looking Good

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Lower guidance

Speaking about the EPS segment’s 2Q16 outlook, William Oplinger, Alcoa’s Chief Financial Officer, said that he expects “the aerospace market to remain solid.” However, Oplinger added that aerospace demand would be “tempered by declines in legacy program deliveries, careful new program ramp-ups and inventory management at OEMs (original equipment manufacturer).”

Competitive pricing

According to Alcoa’s Chair, Klaus Kleinfeld, the aerospace market “is going through a transition given an unprecedented level of new model introductions.” He also added that Alcoa is “seeing lower orders due to that for legacy models and a careful ramp up of the new models.” Kleinfeld also hinted at competitive pricing in the aerospace industry.

Due to changes in the market scenario, Alcoa now expects aerospace demand to grow in the range of 6%–8% this year, as compared to the previous guidance of 8%–9%. Lower demand projections from Arconic’s key end market is now negative for the company.

Aerospace components

Other aerospace component suppliers like Precision Castparts (BRK-B), Woodward (WWD), and Constellium (CSTM) will also be impacted if aerospace demand cools off and OEMs push for competitive pricing.

We’ll hear from Alcoa’s management in the company’s next annual shareholder meeting, which is scheduled for May 6. You’ll want to check out Market Realist’s Aluminum page to get key updates from that event.

In the meantime, to learn more about Alcoa’s split, you might be interested in the series How Alcoa Plans to Create Value through its Upcoming Split.


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