By Carole Vaporean
NEW YORK, April 27 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
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
"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.
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.
Aluminum price: link.reuters.com/bur87s
Alcoa's results: link.reuters.com/zus57s
Estimated profit growth (sector):
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.
(Reporting By Carole Vaporean; Editing by Josephine Mason and
Keywords: ALUMINUM ALCOA/INTERVIEW
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