The investment castings, forgings and fasteners business delivered ATOI of $102 million, a 19% increase over prior year quarter, even with the North American heavy truck decline. Improvement was driven by productivity and market share gains.
Detracting from these results was the decline in AFL, auto castings and auto structures.
ATOI decreased from a negative $8 million in the second quarter to a negative $35 million in the third quarter. This $27 million sequential decline was driven by the AFL business and can be broken down as follows:
- $7 million for the one-time German statutory tax rate change;
- $7 million for write-offs associated with the restructuring action; and $11 million due to the stronger seasonal decline in the automotive market.
Looking forward, the Class 8 truck downturn will be a bit more pronounced in the fourth quarter; yet you will begin to see the positive impact of the restructuring activity in the AFL business.
In the extruded and end products segment revenue was down significantly due to the fact that the soft-alloy business is now accounted for on an equity basis.
ATOI decreased from $46 million to $13 million and was essentially driven by two items. Once the JV was completed, the business began recording its depreciation which had been out of earnings while it was held for sale.
Secondly, seasonality impacted the soft-alloy business. Looking forward, the company anticipates seeing volume recovery across all these businesses.
The packaging and consumer segment continues to perform very well with productivity improvements overcoming most of the expected seasonal decline.
- As a result, ATOI was down only $1 million versus last quarter.
- ATOI was up 50% from a year ago, with productivity improvements in all businesses.
- EBITDA margins increased from 7.6% in 2006 to 9.2% in 2007.
- Looking forward to the fourth quarter, the company expects continued productivity improvements and the normal seasonal upturn in the consumer products business.
Cash from operations was $592 million after the $206 million pension contribution.
Capital expenditures for the quarter were $941 million, with roughly one-half devoted to the four major growth projects - Iceland, Mojin, Sao Luis and Juruti. The depreciation of the U.S. dollar continues to inflate capital expenditures on the company’s overseas growth portfolio.
Currently, the company has $1.3 billion on its balance sheet in cash.
In January, the board of directors approved a repurchase plan for up to 10% of the company’s outstanding shares over a three-year time horizon. Through the third quarter of the first year, Alcoa has repurchased approximately 5% of its outstanding shares. After reviewing the company''s prospects for continued strong cash generation and divestiture proceeds, the board has just approved an increase in the authorization for up to 25% of the outstanding shares through 2010.
The share repurchases were modest in the first half of the year, due to the pending Alcan offer. Share repurchases were also limited in the third quarter as the ongoing Alcan offer and pending Chalco transaction left a relatively small window to actually repurchase shares.
Key questions and answers from the third quarter fiscal 2007 earnings call conducted by Alcoa Inc. (AA: chart) on October 9th, 2007.
John Hill (Citigroup):
Backing up to the market a little, any opinions on what $360 spot alumina means for us out there?
Alain Belda: It means that the Chinese are not moving as fast with their alumina production as they are with their smelter; and that bauxite costs, if you look at transportation costs, it is really going through the roof. Plus there is some difficulty exporting out of Indonesia at the moment. I think it says good things about alumina, the spot price anyway.
Kuni Chen (Banc of America Securities):
A question on global acquisition, as far as the upstream businesses go. Nothing out there is for sale, so do you think this really restricts your future growth to just organic opportunities?
Charles McLane: The best way to look at that is that we''re looking for obviously a host of organic growth opportunities but we are also taking very seriously a long alumna position and think of that as a strategic asset. We look for joint venture opportunities as well, so there are opportunities for us to grow organically as well as through joint ventures, not only on the organic side, but also through existing assets.
Kuni Chen (Banc of America Securities):
Do you think at some point in the future that you would consider a more diversified kind of metals portfolio approach, or is it always going to be as a pure play alumina producer?
