Edited Transcript of Alcoa Q3 2014 Earnings Conference Call..
Company: Alcoa (AA)
Event Name: Q3 2014 Results Earnings Conference Call
Date: October 8, 2014 5 PM ET
Alcoa Q3 2014 Results Earnings Call – Webcast audio
Operator: Good day, ladies and gentlemen, and welcome to the third quarter 2014 Alcoa earnings conference call. My name is Sarah and I will be your operator for today. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Ms. Kelly Pasterick, Vice President of Investor Relations. Please proceed.
Kelly Pasterick – VP, IR
Thank you, Sarah. Good afternoon and welcome to Alcoa’s third quarter 2014 earnings conference call. I’m joined by Klaus Kleinfeld, Chairman and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer. After comments by Klaus and Bill, we will take your questions.
Before we begin, I would like to remind you that today’s discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company’s actual results to differ materially from these projections listed in today’s press release and presentation and in our most recent SEC filings.
In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s press release, in the appendix of today’s presentation and on our website at www.alcoa.com under the Invest section. Any reference in our discussion today to EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix.
And with that, I’d like to hand it over to Klaus Kleinfeld.
Klaus Kleinfeld – CEO
Well, thank you Kelly. Look, I mean, most, I think, have seen the press release. So here is the summary. As you probably all can see, the transformation is delivering results. All segments have improved sequentially. Very strong operational performance, earnings increase in every one of our group’s downstream, highest-ever quarterly profits, as well as margins.
In the midstream, the profits are up 45% year over year. On the upstream side, the improved performance now 12 consecutive quarters. We have $612 primary second metal EBITDA per metric ton. And also good news for activity. I mean $862 million across all segments year over year. As this is the third quarter, obviously we expect that we will not stop with productivity. So you will see more also coming through in the whole year. That’s very, very good, and if you look at it, that really comes from not only all across segments, all across the company, everybody is basically contributing.
So that’s one thing. The operations are really in good shape, really working well. The second thing is the portfolio transformation. And you’ve all followed it, Firth Rixson acquisition, $2.5 billion. The financing is done. We expect the close of the transaction by year-end. I’ll give a little bit more color a little bit later. Obviously happy if anybody has any questions.
The other thing in this quarter, which I’m very, very happy is that we had two multiyear contracts, both really very, very important contracts, one with Boeing and one with Pratt & Whitney. In total every one of those more than a billion, so over $2 billion combined. And both demonstrate clearly the margin materials aerospace dealership, because Pratt & Whitney is more around the engine. So it’s more around also nickel as well as titanium, as well as some aluminum-lithium, Al-Li aluminum.
And then we have Boeing on the structure side. We opened the world’s largest aluminum lithium facility in Indiana. Very, very good. And we had Saudi Arabia, our smelter, being fully operational, and generated profits already in the third quarter.
And then on top of it, we announced our permanent closure of Portovesme and safely executed our Australia smelter closures. With this, and a little coughing on the side, I hand it over to Bill.
William Oplinger – EVP and CFO
Thanks, Klaus. Let’s quickly walk through the income statement.
Revenue increased over $400 million on a sequential quarter basis versus third quarter last year. Revenue increased nearly $475 million on higher sales in our mid and downstream businesses, higher realized metal prices, and favorable energy sales. Versus last year, revenue grew in all of our segments. Approximately half of the revenue growth is organically driven.
Cost of goods sold percent decreased by 300 basis points sequentially, and was down 460 basis points compared to a year ago quarter basis, both driven primarily by productivity gains, better prices, and the stronger dollar, somewhat offset by cost increases.
Overhead costs are down versus both periods. You’ll note that the effective tax rate of 60% includes a non-cash charge related to a tax holiday initiated in Brazil, where we received approval for a 10-year reduction in one of our subsidiaries’ tax rates. This should result in significant cash tax savings over this period.
As a result, we re-measured the deferred tax assets to reflect this reduced rate. Excluding the impact of this discrete item, our tax rate for the quarter was 43%. Overall, results for the quarter are a net gain of $0.12 per share. Excluding special items, we have net income of $0.31 per share, $0.13 higher than the second quarter and nearly triple adjusted earnings from third quarter last year.
Let’s take a closer look at the special items. Included in net income is an after-tax charge of $221 million or $0.19 per share, primarily for restructuring. During the quarter, we permanently closed the Portovesme smelter, which accounts for $167 million of the restructuring related charges. We also continued closure activities at the Point Henry smelter, and rolling mills in Australia. In total, 60% of the charges are non-cash related to the write-down of assets.
Other special items for the quarter were $14 million of fees incurred for the Firth Rixson acquisition, a loss of $14 million for certain mark-to-market energy contracts, and a gain of $9 million on the sale of a rolling mill equity interest in China. So in aggregate, this results in net income, excluding special items, of $370 million or $0.31 per share.
Let’s look at the results sequentially. Effects from the market were a tailwind this quarter as LME prices on a 15-day lag were up by $200 per metric ton and the U.S. dollar strengthened against most major currencies.
Overall performance for the quarter was $36 million positive, driven by strong productivity across all businesses and rising regional and value-add product premiums in our primary business. The energy impact was flat in the quarter as higher energy sales in Latin America offset higher energy costs in Australia, refining, and seasonally higher energy costs in the primary segment. Other costs for the quarter were up slightly on higher labor costs and interest expense.
Turning to the year over year look. Versus the third quarter of last year, profits have tripled. On a year-over-year basis, favorable LME prices and a stronger U.S. dollar contributed $92 million. We delivered $183 million of after-tax productivity gains, or $306 million pretax, and you can see this more than fully offsets year-over-year cost increases.
Higher premiums, both regional and value-add, contributed to the favorable price mix impact. This performance was somewhat offset by continued pricing pressures in can sheet. Year over year cost headwinds were driven by inflationary increases, higher maintenance and transportation costs, and loss of carbon tax credits in Australia.
Turning to the segments. EPS, once again, delivered its 18th consecutive quarter of year-over-year ATOI improvement with the best ever quarterly ATOI of $209 million. The segment reported a record adjusted EBITDA margin of 23.5%, compared to 23.1% in the second quarter and 22.5% in the third quarter last year.
Third-party revenue was $1.5 billion, essentially flat sequentially, but up 4% versus the third quarter 2013, driven by innovation and share gains. EPS continues to demonstrate significant productivity improvements from every area of the business, and you see it again in this quarter.
As we look towards the fourth quarter, we expect the aerospace market to remain strong. Regarding our nonresidential construction business, we’ll continue to see strength in North America but continued weakness in Europe. Heavy duty truck will remain strong in North America, but will be flat in Europe, and we continue to expect to see share gains across the portfolio, driven by innovation.
As we look to the fourth quarter, we expect another year-over-year improvement in this segment, 8% to 12% increase, driven by continued productivity and growth versus the fourth quarter of last year.
Turning to global rolled products. The rolled products segment increased profits by 30% sequentially and 45% year over year. Sequentially, the improvement in ATOI was driven by higher metal prices, seasonal demand for can sheet in North America, and productivity partially offset by the impact of European summer vacation shutdowns. However, pricing pressures continued, particularly in the packaging and industrial businesses.
The segment continues to ramp up production for automotive demand and had record auto production during the quarter. As we look out into the fourth quarter, we expect global rolled products to be impacted by the strong auto demand for both auto sheet and brazing sheet, the further ramp up of the Davenport auto line, seasonal decline in the packaging business, which is typical third quarter to fourth quarter.
It’s important to note that the favorable metal price impact in the segment in the third quarter was due to the sharp run up in prices during the quarter and won’t repeat at this level unless we see a similar move in prices. In total, ATOI for the segment is expected to be up an additional 150% over last year’s fourth quarter results.
Let’s move to the Alumina segment. The Alumina segment generated substantially higher sequential earnings, up $24 million from the second quarter to $62 million in Q3. Three major factors drove the earnings gains: higher volume due to higher third-party sales and better production; positive currency impact from the strengthening of the U.S. dollar; and higher pricing on LME-based Alumina sales contracts more than offsetting lower API pricing. Higher productivity only partially offset higher energy costs in Australia while maintenance input costs and the preoperational costs of the Saudi Arabia refinery sequentially were virtually flat.