U.S. News

Alcoa Profit Rises; Sees Aluminum Demand Growth


Alcoa, the world's largest aluminum company, said on Tuesday first-quarter profit rose 9%, driven by higher metal prices and strong demand from aerospace and industrial customers.

And Chief Executive Officer Alain Belda said the company expects more of the same as world demand for aluminum, much of it driven by China, continues to grow. "Our markets remain robust, with Europe stronger than the U.S. and China continuing at a torrid pace," he told Wall Street analysts on a conference call.

The results, which beat Wall Street estimates by 2 cents, sent Alcoa stock up 1.7% to $35.50 in after-hours trading. Alcoa is traditionally the first major U.S. company to report its results, kicking off the earnings season.

"At first glance, it looks like a strong report, actually a little stronger than I had expected given the consensus that we're having an economic slowdown," said Brian Hicks, co-manager of U.S. Global Investors' global resources fund.

"Costs were contained, that was one of the concerns coming in to the quarter and the company seemed to have been successful in doing that," he said.

Analyst Charles Bradford, of Bradford Research/Soleil said the results were decent. "The metal price was clearly up in the quarter. Nearly everyone has had cost overruns and these guys appear to have done better than others."

Alcoa said net earnings were $662 million, or 75 cents per diluted share, compared with $608 million, or 69 cents per share in the same quarter last year.

Income from continuing operations was 77 cents per share. Excluding restructuring charges, the company said it earned 79 cents per share, which was 2 cents higher than the analysts' average estimate of 77 cents, according to Reuters Estimates.

Revenue for the quarter rose 11 percent to $7.9 billion from $7.1 billion, Pittsburgh-based Alcoa said, boosted by higher metal prices and sales to the aerospace, building and construction and industrial product markets.

But production of alumina -- the raw material for aluminum -- declined 4% as a result of lower shipments, a strike in Guinea and a stronger Australian dollar, it said.

Chief Financial Officer Chuck McLane told analysts the company benefited from an 8% increase in the LME aluminum price to $2818 per ton.

He said costs of the restructuring, which was announced in the fourth quarter, were about $26 million and the Guinea strike cost around $12 million. Also there were $16 million in start-up costs for Alcoa's new Fjardaal, Iceland smelter.

In the second quarter, he said Alcoa anticipated a further $25 million in costs for starting up Fjardaal, which will be geo-thermally powered.

And although the 4% alumina shortfall represented 135,000 tons, Alcoa expected a 4% production boost in the second quarter from improvements in its western Australian operations, McLane said.

Discussing the aluminum markets, Belda said Alcoa had underestimated China's production and consumption growth rates and now expects both to increase by 23% in 2007.

Although North American consumption had leveled off as a result of inventory corrections and reduced production of commercial trucks, Alcoa sees growth of 10% in India and Russia and the rest of Europe and overall world growth of 7.7% this year, the Alcoa chief said.

Such growth would present a challenge to smelters to keep up with demand, he said, noting Alcoa's new "environmentally friendly" Fjardaal smelter in Iceland, which started up on Tuesday, is expected to be at full capacity by the fourth quarter. But its cost was 30% over budget.

Also, the company's Intalco smelter in Ferndale, Washington, expanded its production this quarter, said Belda.

The strong results came after Bear Stearns analyst Anthony Rizzuto on Monday increased his earnings estimate and share price target for Alcoa in an upbeat research note on the aluminum industry.