Stronger demand for aluminum products from airplane and automobile producers helped Alcoa Inc's (AA.N) third-quarter profit beat Wall Street's expectations despite weak aluminum prices and worries about China's slumping economy.
But, even with its strong downstream business, Chairman and Chief Executive Officer Klaus Kleinfeld said the company had noticed a "slight slowdown" in some regions and end markets.
As a result, Alcoa lowered its global aluminum consumption outlook to 6 percent growth from 7 percent previously for 2012. "The main driver for this is China," Kleinfeld told Wall Street analysts on a conference call on Tuesday.
China's aluminum demand growth was 11 percent in the first half of the year, he said, but "we believe this is going to come down in the second half to 7 percent.
"I'm pretty confident given the already announced China stimulus package which is going into the ground ... (it) will be picking up speed but this is probably going to take until the end of the fourth quarter," he said.
Kleinfeld was bullish about Alcoa's downstream businesses, noting that the aerospace and automobile markets were coming back strongly from the recession.
"Global aerospace remains solid," with a backlog of 8,500 planes, or eight years work, he said. "In autos, we are seeing an increase of 11 to 15 percent (annual) growth in North America."
Airplane maker Boeing Co (BA.N), truck builder Navistar International Corp (NAV.N) and other manufacturers have been using more engineered aluminum parts from Alcoa to lighten the weight of planes and vehicles.
Making aluminum bolts, wheels, aircraft fuselages and other components for these customers is proving more lucrative for Alcoa than just supplying basic aluminum of which the price has dropped to near two-year lows.
Alcoa's core metal-making business is struggling to make a profit.
"It looks like the tone of the quarter was slightly better-than-expected, particularly in the downstream business," Kuni Chen, an analyst at CRT Capital Group, said of the company's units that sell to manufacturers.
Alcoa's stock was unchanged from its $9.13 close in after-hours trading on the New York Stock Exchange.
LOWER ALUMINUM PRICES
The Pittsburgh-based company posted a net loss of $143 million, or 13 cents per share, compared with a profit of $172 million, or 15 cents per share, in the same quarter last year.
Excluding charges for settlements with the Environmental Protection Agency and a joint venture partner in Bahrain, the company reported a profit of 3 cents per share. On that basis, it exceeded analyst estimates for a break-even quarter, according to Thomson Reuters I/B/E/S.
Revenue fell 9 percent to $5.8 billion, as a result of a 17 percent drop in aluminum prices year-over-year, said Alcoa, traditionally the first S&P500 company to report quarterly earnings.
Despite the beat, some on Wall Street remain cautious.
"It's nice that revenues are up and that Alcoa is suggesting aluminum demand could double in the next decade, but that's a decade out," said Bryant Evans, an investment adviser and portfolio manager at Cozad Asset Management.
Kleinfeld reaffirmed Alcoa's long-term outlook global aluminum demand to double between 2010 and 2020. He acknowledged there is still a lot of uncertainty, but said markets are showing signs of some positive growth.
"Markets seem to be driven more by headlines than fundamentals right now, but Alcoa remains focused on the things within our control", Kleinfeld said.
"We're capitalizing on pockets of strong growth and achieving record profitability in our mid and downstream businesses."
Aluminum prices ended the third quarter at $2,112 per tonne, about 14 percent lower than in the third quarter of 2011, according to Thomson Reuters data.
Prices have fallen further since the end of the third quarter and on Tuesday the metal was selling on the spot market for $2,055 per tonne.
While its downstream businesses have performed well, Alcoa faces big challenges in its core businesses of mining bauxite and producing aluminum.
Alcoa recently closed its aluminum smelter on the Italian island of Sardinia and put it up for sale, citing high power prices that made the operation uncompetitive.
Earlier on Tuesday, the company announced it had settled a civil suit brought by Aluminum Bahrain ALBH.BH. Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two installments. It will also supply Alba with raw materials under long-term contracts.
Alcoa took a $40 million charge against its earnings for the settlement. Alba had accused Alcoa of conspiring with a businessman to orchestrate bribes in Bahrain and overcharging it for alumina, a raw material for aluminum.
Alcoa warned there could be an additional charge of $25-$30 million related to the cash costs if there is a settlement with the U.S. Department of Justice and the Securities and Exchange Commission, which are both investigating the case.
(Reporting By Steve James and Ernest Scheyder; Editing by Bernard Orr and Patricia Kranz)