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How Productivity Gains Helped Alcoa in 2Q16

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Pricing pressure

Alcoa (AA) released the ATOI (after-tax operating income) for its different business segments. In this part of the series, we’ll look at the 2Q16 ATOI generated by Alcoa’s business segments.

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Productivity gains

On a consolidated basis, Alcoa generated an ATOI of $444 million in 2Q16. In comparison, the company had generated an ATOI of $291 million in 1Q16 and $567 million in 2Q15. The sequential increase in ATOI was mainly due to the Alumina segment, whose ATOI increased from $8 million to $109 million as alumina price rose sharply during the quarter. Plus, higher aluminum prices helped Alcoa’s Primary Metals Segment improve its ATOI from $14 million to $41 million. The downstream ATOI also rose 9% from 1Q16.

According to Alcoa, it realized productivity gains of $237 million in 2Q16. Productivity gains helped Alcoa offset the impact of lower metal prices in the upstream business and pricing pressure in the downstream business.

Outlook

Alcoa also provided ATOI guidance for the third quarter. In the downstream business, Alcoa expects its GRP (Global Rolled Products) segment’s ATOI to increase 5%–10% year-over-year (or YoY) in 3Q16, excluding the impact from its Warrick smelter.

The EPS (Engineered Products & Solutions) segment’s ATOI is also expected to increase 5%–10% YoY in 3Q16 while the TCS (Transportation & Construction Solutions) segment’s 3Q16 ATOI is expected to increase 1%–3%.

In the upstream business, Alumina segment’s 3Q16 ATOI is expected to increase $5 million from 2Q16 while the Primary Metals segment’s ATOI is expected to be flat. This assumption excludes any impact from metal prices (DBB) and currency movements. However, metal prices tend to be volatile. Earnings of commodity producers like Century Aluminum (CENX), Rio Tinto (RIO), and Norsk Hydro (NHYDY) have varying sensitivities to aluminum prices.

In the next part of this series, we’ll look at the business outlook Alcoa’s management shared.

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