INTERVIEW-Alcoa finds gold in its engineering segment

Fri Apr 27, 2012 11:12pm BST

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By Carole Vaporean

NEW YORK, April 27 (Reuters) - Alcoa Inc. (AA.N) aims to offset the impact of low aluminum prices on its earnings by growing its downstream and engineering businesses, with a focus on the booming aerospace industry, said global primary aluminum business president Chris Ayers.

Ayers, who manages the company's upstream businesses, said Alcoa plans to offset the sluggish-at-best aluminum and alumina prices by finding more efficient means of output and moving down the cost curve. Its recent decisions to cut capacity at some high-cost aluminum smelters and alumina refineries was directly related to this goal, he said.

With aluminum prices down 12 percent so far this year, a big source of Alcoa's future growth will be its engineered products and solutions (EPS) division, which engineers and makes aerospace components and other finished aluminum products.

The engineered products division reported record profit margins in the first quarter and is expected to generate revenue of $6.2 billion by next year, up $1 billion, or 17 percent, from 2011.

Most of that additional revenue will come from new products and market share gains. Broader industry growth will generate the rest, particularly aerospace, which already accounts for almost half of the division's revenue.

"Boeing Co's (BA.N) order book is fantastic," he said. "It's at an all-time high for both companies (including EADS EAD.PA unit Airbus).

"We feel very comfortable that we're well positioned in the platforms where they see growth, whether (Boeing) 737s, (Airbus) A320 - the workhorses of the airline industry," said Ayers.

Because aluminum is a huge component in those airplanes, he added, Alcoa plans near and medium-term to accommodate the plane makers' build rates.

As the airline industry evolves over the next eight to 10 years with more advanced designs, he said, Alcoa plans to deploy new components and alloys such as its aluminum lithium which makes airframes lighter, stronger and less corrosive.

"In the aerospace market, we're going to have a presence in virtually every frame that's out there,” Ayers said.

Engineered products revenues are growing much faster than targeted, with 11 percent revenue growth year-on-year in the first quarter, and 44 percent of the its three-year revenue growth target in the first year, due largely to productivity gains but also from growing demand in the aerospace industry.

Besides the revenue growth, its business is profitable, Engineered products group contributed 52 percent to total after-tax operating income. It turned in record margin of 19.2 percent in the first quarter.

In its first-quarter earnings, Alcoa raised its 2012 aerospace demand growth forecast by 3 percentage points to 13 to 14 percent. That rate of growth is double the company's 7-percent estimate for global aluminum demand growth this year. [ID:nL2E8FB0R3]

Potential growth for engineered products is great because the aerospace industry's order backlog is as high as seven to eight years, Ayers said, noting that order books at Boeing Co. (BA.N) and EADS EAD.PA unit Airbus are at all-time highs.

The Pittsburgh-based company's investment in its downstream operations paid off in the first quarter when its surprise profit was largely attributed to the strong performance of its downstream business. [ID:nL2E8FADF8]

"Not only has that business got strong topline growth (...), whether it's in the casting business or forgings or wheels business, these are very strong investments made in past years that we really start to see coming into the market right now in a very strong way," Ayers told Reuters in an interview.

And the division's profit margins will improve further this year, analysts said.

"(Alcoa's) earnings beat was driven by record margins in the downstream segments, part of which came from unusually strong productivity improvements. We don’t expect the company to achieve this pace every quarter. However, we do expect record margins to get better in 2012," said Lloyd O'Carroll equity and aluminum market analyst at Davenport & Co.

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Aluminum price: link.reuters.com/bur87s

Alcoa's results: link.reuters.com/zus57s

Estimated profit growth (sector):

r.reuters.com/qes57s

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For 2012, Alcoa sees healthy demand growth for aluminum wheels and fasteners in North America and for airfoils in industrial turbines, but expects declines in European wheel and fastener markets, and commercial construction in both regions.

Because of the low aluminum prices, Alcoa implemented an efficiency program, with output cuts at high-cost aluminum and alumina operations already this year, to lower costs. [ID:nL2E8F581T] [ID:nL3E8C98TB]

(Reporting By Carole Vaporean; Editing by Josephine Mason and David Gregorio)

((carole.vaporean@thomsonreuters.com)(1-646-223-6044)(Reuters Messaging: carole.vaporean.thomsonreuters.com@thomsonreuters.net)) Keywords: ALUMINUM ALCOA/INTERVIEW

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