Alcoa Earnings Call Insights: Raw Material Costs and Efficiencies

Alcoa Inc (NYSE:AA) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Raw Material Costs

Curt Woodworth – Nomura: If you look at the other cost increases in the raw material headwind this year, if you add that up, it’s almost a $0.45 EPS delta, so it offset some deferred activity, which is a pretty big number. So, can you just outline kind of the key moving pieces of those numbers, and do you think any of that $559 million will reverse this year?

Charles D. McLane Jr. – EVP and CFO: Let me give you some of the main components of it. I pulled four big categories. Look pension cost you may be aware as a result of declining discount rates, even when you are making contributions to the plans it tends to continue to increase your pension expense on an annual basis and based on discount rates this year that will be another headwind for us in 2013. Another item is labor inflation. We’ve experienced a bit of labor inflation, especially in the emerging markets and you can understand that whether it’s in Latin America or whether it’s in Australia there has been really tight employment levels that has led to labor inflation. We’ve got some fuel costs and transportation and then MRO services, maintenance and repair parts.

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So, do we think that they would be at the same level right now? I guess, I ask pensions would probably be about the same level, but these other categories we don’t think the headwinds are going to be as strong in 2013 as they were in ’12, but yet we do feel that we are going to continue to generate the productivity and that’s the important piece here. So, we had those headwinds and as you can see, raw materials they’ve actually been coming down a little bit and leveling-off and/or coming down. So, right now they look in better shape than they were on a year-over-year basis. Yet, here again I go back to the productivity. We’ve got a goal of $750 million, but we came into this year we had a goal of $800 million and we actually ended up with $1.3 billion.

Efficiencies

Michael Gambardella – JP Morgan: I have a question for you in the U.S. market on the primary side. How quickly will you see cost reductions on power given weakness in natural gas prices? I know you have contracts that have some scale off, but can you give us any sensitivity on that?

Klaus Kleinfeld – Chairman and CEO: Yes, I can. For the U.S., it has two impacts; it has a direct impact that affects our Point Comfort refinery because on the refinery side, I mean, there we are using gas and it impacts that directly and we are benefiting from it. As you may recall, Point Comfort used to be a swing plant for us and we are now ramping it up and basically using – driving it as a base plan. The second thing is it influences already today the willingness of the utilities to sign long-term power contract. Remember, probably three years ago, four years ago the utilities were all kind of thinking that to be in the spot market is the best position. Today, I think that they are a little bit concerned that they might end up in a situation where they have to curtail the capacity because they don’t find anybody to buy any more and that has helped us tremendously in the U.S. to sign again long-term power contracts at a pretty decent and attractive competitive rate. The last ones that we had here was from Mt. Holly as well as for Intalco that we did in the fourth quarter. So, that’s the second impact and there the rates are obviously dependent also on where the general energy costs are going. The utilities understand that they are competing there. So, they have been pretty attractive

Michael Gambardella – JP Morgan: Can you quantify the improvement in the cost and what you could see in the future?

Klaus Kleinfeld – Chairman and CEO: I don’t think that where we could, but I don’t think that we would do that.

A Closer Look: Alcoa Earnings Cheat Sheet>>