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Alcoa recently reported a 27% sequential drop in revenue resulting in a loss of $480 million for the first quarter of 2009, reflecting the impact of the economic downturn on its core industrial and commercial markets as well as an historic decline in aluminum prices. The company launched a series of operational and financial actions in the quarter that successfully increased cash, strengthened liquidity and significantly improved the company’s cost structure.
Revenues for the 2009 first quarter were $4.1 billion, down from $5.7 billion in the fourth quarter of 2008 and down 36% from $6.5 billion in revenues in the first quarter of 2008, after excluding divested businesses. The sharp drop in revenue resulted from the impact of the economic downturn on Alcoa’s end markets (automotive, transportation, building and construction, and aerospace). As demand weakened during the quarter in those markets, realized metal prices fell an additional $558 a ton, a 26% price decline, resulting in prices that are now about 60% lower than last summer.
“Alcoa responded swiftly to the declines in our end markets and the historic drop in aluminum prices with a holistic program that dramatically repositions our balance sheet and operational cost structure,” said Klaus Kleinfeld, president and chief executive officer. “The result has been a rapid increase in liquidity during the quarter and significant operational cost savings. Besides putting us in a strong position to manage through this downturn, we now have the strategic and operational fundamentals in place for Alcoa to emerge even stronger when the economy recovers.”
During the quarter, the company launched wide-ranging operational initiatives to reduce costs, increase cash, and improve liquidity. Procurement efficiencies and reduced overhead will eliminate more than $2.4 billion in annual costs by 2010. For the quarter, Alcoa generated $293 million in procurement savings and $110 million from overhead reductions. By 2010, capital expenditures will be cut by 50%. Working capital initiatives generated $291 million in cash this quarter and will result in a total of $800 million in cash in 2009.
“Our operational measures are already beginning to bear fruit in all our businesses,” said Kleinfeld. “In our Primary Products segments, for example, since the third quarter of 2008 we have reduced the cost of producing alumina and aluminum by 33 and 30%, respectively. Pacing well ahead of our 25% reduction target, we expect our efforts to have a significant impact on Primary’s profitability and cash flow in 2009.”
Major initiatives were taken during the quarter to execute on the financial pillar of the company’s holistic program. Most are already completed and Alcoa finished the first quarter with $1.1 billion of cash on hand. The company reduced the quarterly dividend, resulting in cash savings of $430 million annually. Alcoa received $500 million of a $1.02 billion payment from Chinalco for exiting its stake in the Shining Prospect venture. The company recorded a non-cash after-tax loss of approximately $120 million on exiting the investment. Alcoa raised $1.4 billion in cash through successful common stock and convertible notes offerings to further improve its liquidity. As a result, Alcoa is in a stronger cash position, with availability of $5.2 billion of aggregate revolving credit facilities that support its commercial paper program, and has lowered its debt-to-capital ratio to 40.6%.
Income from continuing operations for the first quarter of 2009 showed a loss of $480 million, or $0.59 per share, compared with a loss from continuing operations in the fourth quarter of 2008 of $929 million, or $1.16 per share, and income from continuing operations in the first quarter of 2008 of $299 million, or $0.36 per share.
The first quarter of 2009 saw a net loss of $497 million, or $0.61 per share, compared with a net loss for the fourth quarter of 2008 of $1.2 billion, or $1.49 per share, and net income for the first quarter of 2008 of $303 million, or $0.37 per share.
During the quarter, the company completed temporary curtailments of approximately 18% of its global smelting output. In addition, a plan to curtail an incremental 100,000 mtpy in May was announced, bringing total curtailments to approximately 20% of output. Alcoa also completed an exchange with ORKLA ASA for the remaining stake in two smelters and an anode plant in Norway for Alcoa’s stake in the Sapa soft alloy extrusion joint venture. With the exchange, Alcoa once again became the largest producer of primary aluminum in the world. Alcoa recorded a non-cash after-tax gain on the transaction of approximately $130 million.
The quarter’s results reflect the gain on the exchange for the Norway operations and a discrete tax benefit that were essentially offset by the negative impact of restructuring and other charges and the exiting of the stake in Shining Prospect. Capital expenditures for the quarter were $471 million, with 70% dedicated to growth projects, primarily the Juruti bauxite mine and Sao Luis alumina refinery expansion in Brazil, which will help lower the company’s costs moving forward. Both projects are expected to be completed in the first half of 2009.
“While our financial performance in the quarter was adversely affected by the economy-driven drop in demand, we launched operational and financial measures that will significantly improve our profitability and cash flow in 2009 and beyond,” said Kleinfeld. “In fact, they have already begun to have an impact in the first quarter.
“We also see both near-term and long-term catalysts that should improve the prospects for the aluminum industry. Current stimulus programs that target infrastructure and energy efficiency will create a demand for the unique characteristics of aluminum. Longer term, the global megatrends of population growth, urbanization, and environmental stewardship will all drive demand for aluminum as the economy improves.”
First quarter 2009 after-tax operating income (ATOI) for the Alumina segment was $35 million, a decrease of $127 million, or 78% from the prior quarter. Production declined 331 kmt, or 9%, mainly due to the curtailments at Point Comfort. LME-based pricing declined 34% sequentially and was somewhat offset by lower energy costs, productivity gains, and favorable currency impacts.
Additional details are available at www.alcoa.com.