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Alcoa 3Q16 Preview: Could Productivity Offset Pricing Pressure?

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Pricing pressure

Previously, we looked at the different factors that could impact Alcoa’s (AA) 3Q16 upstream revenues. In this article, we’ll analyze how the company’s downstream revenues could play out in the quarter. Note that Alcoa’s downstream business consists of three segments: Engineered Products and Solutions (or EPS), Transportation and Construction Solutions (or TCS), and Global Rolled Products (or GRP). The business will be split to form a new company, Arconic, which will compete with companies such as Constellium (CSTM), Woodward (WWD), and Precision Castparts (BRK-B) in the aerospace component space (ITA).

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Productivity gains

The aerospace component market has been witnessing pricing pressure, which was acknowledged by Alcoa in its 2Q16 earnings call. However, the company has been working on improving productivity to offset the impact of pricing issues. 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.

3Q16 guidance

Although Alcoa has not provided any specific guidance for the downstream business’s 3Q16 revenues, it expects a further ramp-up of auto sheet shipments in 3Q16. Also, the company expects pricing pressure in the packaging grade sheets market. The GRP segment produces sheet products.

For the EPS segment, Alcoa expects pricing pressure and supply chain destocking in airframes to impact its 3Q16 performance. While the TCS segment is expected to benefit from rising nonresidential construction activity, lower heavy-duty truck building activity in North America could drag down revenues. In the next part, we’ll discuss how Alcoa could do profitability-wise in 3Q16.

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