Alcoa’s second-quarter profit off 24 percent

Rising cost of raw materials, energy offsets charging higher prices

updated 10:45 a.m. ET July 9, 2008

PITTSBURGH - Alcoa Inc., the world’s third-largest aluminum producer, ushered in the second-quarter earnings season by posting a 24 percent earnings decline as rising production costs eroded profits, but the results still exceeded analysts’ expectations.

Alcoa, the first of the Dow Jones industrials to report earnings this quarter, said after the markets closed on Tuesday that it earned $546 million, or 66 cents per share, for the three months ended June 30, compared with $715 million, or 81 cents per share, in the year-ago period.

Quarterly revenue dropped about 6 percent to $7.62 billion.

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Wall Street analysts surveyed by Thomson Financial, on average, were expecting profits of 64 cents per share on revenue of $7.36 billion.

Facility disruptions reduced earnings by a total of $39 million, Alcoa said. They included a natural gas pipeline explosion in western Australia that curtailed supplies to an Australian affiliate, Alcoa World Alumina and Chemicals, and the temporary idling of half the production at its Rockdale, Texas, smelter due to power supply interruptions.

The explosion in western Australia cut profitability by $17 million, while the power troubles in Rockdale forced Alcoa to step up electricity purchases at market rates, bringing down income by some $22 million.

In a conference call with analysts and reporters, Alcoa Chief Executive Klaus Kleinfeld said the company expects the global aluminum industry’s supply to remain in line with demand for the year, despite sluggish markets in the U.S. and Europe.

Growth in China will likely remain strong, he said, with consumption projected to rise nearly 20 percent this year.

The company forecasts growth of 6 percent annually in the global industry over the next decade, fueled by gains in Asia, said Kleinfeld, who took the helm as CEO in May.

Serving that demand will not be easy, he said; securing access to affordable supplies of power — a crucial factor in aluminum production — and raw materials such as bauxite, used to make the metal, remains an ongoing challenge.

Tony Robson, an analyst with BMO Capital Markets-Canada, said he was pleased to see continued gains in Alcoa’s two downstream divisions — flat-rolled and engineered products.

“However, the company was making higher profits a year ago on lower aluminum prices,” indicating greater industrywide production costs, he said. “There’s further work that needs to be done there.”

Alcoa said its primary metals business hit record smelting production levels of more than 1 million metric tons during the quarter as a recently built smelter in Iceland reached full capacity.

Sales volumes for engineered products increased in the aerospace, industrial gas turbine, commercial building and construction, and commercial transportation markets, the company said.

Also during the quarter, Alcoa continued a share repurchase program, bringing the number of shares bought back for the year to date to 18.3 million, or 10 percent of shares outstanding.