Alcoa Inc (NYSE:AA) Inc is one of the largest producers of manufactured aluminum in the US and is considered the bellwether for earnings season, as Alcoa always officially kicks off each earnings season.  Unfortunately, Alcoa has been in rebuild-mode for quite some time now, as aluminum spot prices continue to bring considerable headaches for the company.  Now, Alcoa has announced that they will be splitting up the company into two separate corporate entities, as the rebuilding period for the company progresses forward.  Planned to be completed during second half of 2016, Alcoa says the “Upstream Company” will retain the global primary products and “Value-Added Companies” will feature rolled products, engineering solutions, and transportation and construction solutions. At this point, we know that the “Upstream Company” will still hold the Alcoa name, while the “Value-Added Companies” entity has yet to be named.

Finviz.com

Alcoa CEO Kleinfeld to take reigns on Value-Added Companies

Alcoa is down over -42% year to date, as aluminum spot prices hit their lowest levels in five years of $0.71 per pound, after hitting a high of around $1.25 per pound back in early 2011.  Unfortunately, with aluminum prices continuing to stall, drastic measures had to be taken in order to save the 126 year old company.  “In the last few years, we have successfully transformed Alcoa to own distinctive strategic directions,” detailed Alcoa CEO Klaus Kleinfeld.  “The upstream business is now built to win throughout the cycle. Our multi-material value-added business is a leader in attractive growth markets,” (Street Insider). Kleinfeld is detailing that the upstream company will be built around a “strong non-investment grade rating”, while the value-added companies will have focusing on investment grade ratings.

infomine.com

Upstream gears up for bullish aluminum demand outlook; Value-added companies look to retain solid share of downstream market

As it stands right now, the Upstream company will retain 64 facilities around the world with roughly 17,000 employees at work.  The upstream business generated $13.2 billion in revenues for Alcoa’s fiscal year ending June 30, 2015.  The upstream company will also have the world’s largest bauxite mining operation under helm; which produced a massive 46 million tons of bauxite in 2014. Additionally, the upstream entity will retain Alcoa’s flagship aluminum operations as well.  Being that aluminum demand is forecasted to grow 6.5% this year and double by 2020, the upstream entity certainly is preparing itself to meet the newfound demand as the fourth largest aluminum producer in the world.

The value-added entity will feature 157 facilities around the world and around 43,000 employees.  For the fiscal year ended June 30, 2015, the value-added company had pro-forma revenues of $14.5 billion.  The value-added entity is really what has been driving growth at Alcoa the past several years.  As aluminum and commodity prices stay low, value-added business has gone from making up 25% of Alcoa’s after-tax operating income in 2008 to 51% as of 2014.  Growth in the automotive and aerospace industries are the main reasoning for the value portfolio’s impressive gains.

Overall, Alcoa is breaking up into two separate entities that will be able to independently focus on growth and improving their businesses. It seems since 2008, Alcoa really has had a hard time bouncing back from recession levels.  Most of the dragging was due to commodity prices remaining low over most of that time period.  However, Alcoa’s upstream business feels that demand for these important industrial metals is set to soar through the end of the decade, while the value-added entity focuses on “business as usual”, as the value portfolio of Alcoa continues to be the main source of revenues.  Overall, this is a great for shareholders, who will benefit from the value being unlocked with this break up.