Alcoa’s Q2 Earnings Report and Conference Call

• Alcoa released its second-quarter earnings after the markets closed on Wednesday. The company missed the revenue estimates.
• The company slashed its aluminum demand forecast.

On Wednesday, Alcoa (AA) released its second-quarter earnings after the markets closed. The company reported revenues of $2.71 billion in the second quarter. Alcoa reported revenues of $2.72 billion in the first quarter. In contrast, the company reported revenues of $3.58 billion in the second quarter of 2018. Alcoa’s second-quarter revenues missed analysts’ expectations. However, the results weren’t surprising. Alcoa’s second-quarter revenue estimates looked aggressive, which we noted in the pre-earnings analysis. The company posted an adjusted EBITDA of $455 million in the second quarter. Alcoa posted an adjusted EBITDA of $467 million in the first quarter and $783 million in the second quarter of 2018. Overall, the metric was broadly in line with analysts’ estimates. Alcoa was free cash flow negative in the second quarter. A payment of $306 million towards last year’s income taxes could have impacted the negative free cash flow.

Alcoa also lowered its 2019 aluminum demand forecast. The company said, “Global aluminum demand growth for 2019 is estimated to range between 1.25 percent and 2.25 percent, down from 2 percent to 3 percent in the previous quarter.” However, the forecast isn’t surprising. The aluminum demand fell due to lower automotive sales globally.

During the second-quarter earnings call, Alcoa said that the “swing factors” for aluminum demand are progress in US-China trade talks, central bank dovishness, and Chinese stimulus. Alcoa saw a cash burn in the second quarter. However, CFO William Oplinger said that it wasn’t “a bad outcome” considering the headwinds. The company expects annualized savings of $200 million. Canada is exempt from the Section 232 tariffs. The amount is higher compared to Alcoa’s previous guidance. The company’s ABI facility in Canada was operating at reduced rates due to a labor lockout. The company’s aluminum shipments are expected to increase as it ramps up the smelter’s production.

Alcoa commented on its decision to exit MRC (Ma’aden Rolling Company). The company paid $100 million to exit the project. According to Alcoa, it recorded $35 million in losses on its income statement last year due to MRC. Oplinger said, “So we essentially, we’re exiting an EBITDA breakeven mill that was looking at significant cash associated with debt repayment in the future.”

During the second-quarter earnings call, Alcoa also commented on the percentage of global capacity below breakeven. According to the company, 5% of Chinese alumina capacity is below breakeven. In contrast, 7% of the alumina capacity is below breakeven for the rest of the world. Alcoa expects 2% of the Chinese smelting capacity in aluminum to be below breakeven. Notably, these numbers are much lower. Several smelters were cash negative due to rising alumina prices. Alcoa also discussed aluminum inventories. According to the company’s estimates, the global aluminum inventory is 10.7 million metric tons. Half of the global aluminum inventory consists of unreported stocks. Alcoa expects unreported stocks to be distributed evenly between China and the rest of the world.

Global aluminum inventories have fallen. Although falling inventories are usually positive for prices, we’re still in a weak demand environment. Metal prices have been weak amid macro headwinds and concerns about Chinese demand. Read Alcoa’s Mid-Year Review: Will the June Rally Continue? to learn more.