Alcoa Reports Unexpected Profit on Cost Reductions

Alcoa Reports Unexpected Profit on Cost Reductions

Oct. 7 (Bloomberg) -- Alcoa Inc., the largest U.S. aluminum producer, reported an unexpected third-quarter profit as it benefited from improving metal prices and saved money by cutting jobs and raw-material costs.

The profit excluding certain items was 4 cents a share, exceeding analysts’ average estimate for a 9-cent loss. Net income fell to $77 million, or 8 cents a share, from $268 million, or 33 cents, a year earlier, Alcoa said today in a statement. Sales dropped 34 percent to $4.62 billion.

Alcoa, which posted losses in the past three quarters, cut 19,000 jobs since June 2008 as the global recession depressed demand and prices for aluminum. Chief Executive Officer Klaus Kleinfeld, who took over in May 2008, also announced plans in March to cut $2.4 billion in costs for items including raw materials and transportation by 2010.

“It looks stellar, and it’s hard to see how they can improve on this act,” John Stephenson, who helps manage C$1.5 billion ($1.4 billion) at First Asset Investment Management in Toronto, including Alcoa shares, said in an interview after the results were announced. “Cost-cutting has been the order of day. That continued with a vengeance so that’s been very positive.”

Alcoa, the first company in the Dow Jones Industrial Average to announce results for the three months through Sept. 30, rose 78 cents, or 5.5 percent, to $14.98 at 6:10 p.m. in trading after the official close of the New York Stock Exchange. The shares rose 26 percent through today’s close.

‘Firing on All Cylinders’

“This is an exceptional performance,” Kleinfeld said on a call with investors and analysts about the earnings report. “We are firing on all cylinders. We are hitting our targets despite significant headwinds.”

Alcoa posted adjusted losses of 26 cents a share in the second quarter, 54 cents in the first quarter and 28 cents in the fourth quarter of 2008. The company is projected to report per-share profit of 6 cents in the fourth quarter, according to the Bloomberg survey.

The average price of the metal used in cars, planes and cans was 83 cents a pound in the third quarter, up 24 percent from 67 cents in the second quarter, according to Deutsche Bank AG estimates. That was still 35 percent below the average price of $1.27 a pound in the third quarter of 2008.

Alcoa has curtailed 20 percent of its smelting capacity, and Kleinfeld said on the call that prices are not yet high enough to warrant restarts.

Ahead of Targets

The company said it achieved $1.61 billion in procurement savings in the first nine months of the year, ahead of its target for all of 2009. The company said in July it was getting lower costs for raw materials including coke, an ingredient used in the smelting process, and caustic soda, which is used to refine bauxite into alumina.

Combined with $375 million in savings on services, repairs, transportation and energy, the $1.99 billion total is 83 percent of the $2.4 billion in reductions Kleinfeld was seeking by next year.

In September, Kleinfeld raised his forecast for 2009 global aluminum consumption because of demand triggered by China’s stimulus spending. He projected China’s consumption of the lightweight metal would rise 4 percent this year, compared with a previous prediction of zero growth. That trimmed the company’s outlook for global demand to a decline of 5.5 percent from a previously forecast 7 percent drop, Kleinfeld said at the time.

The Chinese government is spending 4 trillion yuan ($590 billion) to stimulate its economy, the world’s third-largest after the U.S. and Japan.

bloomberg