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Alcan reports strong third-quarter results

Alcan Inc : 04 November, 2004  (Company News)
Alcan has posted strong results for its third quarter of fiscal 2004.
Alcan has posted strong results for its third quarter of fiscal 2004.

Alcan Inc today reported third-quarter income from continuing operations of US$176 million, or US$0.47 per common share, up from US$108 million, or US$0.32 per common share, a year earlier. Operating earnings, which exclude foreign currency balance sheet translation effects and ‘other specified items’, were US$276 million, or US$0.74 per common share, up from US$140 million, or US$0.42 per common share, reported for the equivalent period of 2003.

'Alcan delivered another strong earnings and cash-flow performance, despite rising external costs and normal seasonal slow-down,' stated Travis Engen, President and Chief Executive Officer. 'We executed well against our operating plans and made excellent progress on integration, synergy capture and the spin-off of Novelis.'

'Looking ahead, we expect aluminium fundamentals to remain strong. Raw material and energy costs will likely pose challenges in the near-term, but we are confident that our operating discipline will continue to serve us well.'

Operating earnings for the third quarter of 2004 were up US$136 million from the comparable quarter of last year. The improvement reflected the benefits of higher prices, improved volumes, mark-to-market adjustments on derivatives and contributions from acquisitions and synergies. These were partially offset by higher energy-related costs, higher operating and administrative costs and the negative impact of stronger local currencies versus the US dollar.

Compared with the second quarter of 2004, operating earnings increased by US$42 million, as the company benefited from higher prices, mark-to-market adjustments on derivatives, contributions from synergies and lower operating and interest costs. Partially offsetting these positive factors were lower shipments because of normal seasonal slowing, higher energy-related costs, higher administrative costs, reduced technology sales and the negative impact of stronger local currencies versus the US dollar.

Income from continuing operations for the third quarter of 2004 included a primarily non-cash, after-tax loss of US$123 million, or US$0.33 per share, for the effects of foreign currency balance sheet translation, compared with an after-tax loss of US$7 million, or US$0.02 per share, in the corresponding quarter of 2003. Also included in income from continuing operations for the third quarter was a net after-tax gain of US$23 million, or US$0.06 per share, for ‘other specified items’ compared with a net after-tax charge of US$25 million, or US$0.08 per share, in the corresponding period of 2003.

Sales and operating revenues were US$6.2 billion in the third quarter, up US$2.7 billion from a year earlier. Of the increase, approximately US$2.2 billion was the result of acquisitions, primarily Pechiney, with the remainder reflecting higher prices, improved volumes and the stronger euro. Revenues were essentially unchanged from the second quarter of 2004.

Total aluminium volume, at 1514 thousand tonnes (kt), was up 370 kt from a year earlier and down 21 kt from the preceding quarter. The year-over-year increase largely reflects the acquisition of Pechiney, while the quarter-over-quarter decline reflects the Arvida Soderberg capacity closure and the ongoing strike at the Becancour smelter in Quebec.

Ingot product realisations, at US$1899 per tonne, were US$322 per tonne higher than in the year-ago quarter and US$37 per tonne higher than in the second quarter, reflecting a tighter balance between supply and demand for primary aluminium. As a result of these conditions, LME prices as well as local market premia have improved.

Bauxite and Alumina: BGP for the third quarter was US$129 million, up US$73 million from the year-ago quarter. The increase reflected benefits of the acquisition of Pechiney and higher alumina prices. These favourable variances were partially offset by the impact of currency movements on operating costs and balance sheet translation and higher raw material, energy and freight costs.

Compared with the second quarter of 2004, BGP decreased by US$8 million mainly because of the impact of balance sheet translation and higher energy prices, partly offset by the benefit of higher margins on commercial activities. While spot alumina prices have risen in recent months, Alcan's sales price realisations are expected to be little changed in the fourth quarter as the bulk of the company's sales are made under longer-term arrangements which are linked to LME aluminium prices. Considering the strength of the Canadian and Australian dollars and the euro, operating costs in US dollar terms will continue to be negatively affected in the fourth quarter. During the third quarter, a US$1.3 billion investment to expand and improve the Gove alumina refinery was announced. This will increase the refinery's capacity by 1.7 million tonnes per year (mt/y) to 3.8 mt/y and enhance environmental performance.

Primary Metal: BGP for the third quarter was US$386 million, an increase of US$146 million from the year-ago quarter. Higher metal price realisations and contributions from Pechiney were partially offset by the adverse impact of the stronger Canadian dollar on operating costs and balance sheet translation and higher raw material costs.

Shipments were affected by the closure in the second quarter of 2004 of 90 thousand tonnes per year (kt/y) of Soderberg smelter capacity at the company's Arvida complex in Quebec. On a sequential basis, BGP decreased by US$90 million, which largely reflected the unfavourable impact of the stronger Canadian dollar, lower technology sales and the continuing strike at Aluminerie Becancour's (ABI) 400-kt/y smelter, in which the company has a 25% stake. The ABI smelter is currently operating at one third of its rated capacity.

Higher price realisations and lower operating costs offset increased costs for alumina and oil-based raw materials, such as coke and pitch. Results for the third quarter of 2004 were reduced by US$16 million because of a reclassification of derivative gains related to prior quarters, which does not affect total company BGP or earnings. Looking ahead to the fourth quarter of 2004, the group is expected to benefit from the higher year-over-year metal prices, as well as from the contribution from Pechiney operations, but these will likely be partially offset by higher raw material costs and the impact of stronger local currencies against the US dollar.

Rolled Products Americas and Asia: BGP for the third quarter was US$102 million, up US$16 million from the year-ago quarter, reflecting record shipments on strengthening market conditions in Asia and North America and market share improvements in South America. In addition, higher conversion prices in all regions as well as a favourable product mix in North America more than offset the impact of negative metal price lags and higher costs for hardeners, alloys and scrap.

Compared with the preceding quarter, BGP was largely unchanged as continued strong volumes and price improvements were offset by higher costs in North America and Asia, and metal price lags. The acquisition of Pechiney does not materially affect this group. For the fourth quarter, it is expected that the normal seasonal slowing in shipments in North America will be partially offset by volume increases in South America and Asia.

Rolled Products Europe: BGP for the third quarter was US$61 million, an increase of US$2 million over the year-ago quarter. The group's results benefited from some volume gains, contributions from former Pechiney operations, cost reductions, metal price lags, as well as from the translation of euro-denominated results into US dollars. Largely offsetting these positive factors was a weaker sales mix, softer margins and provision of US$10 million for the closure of the Falkirk facility in the UK.

While some end markets are showing modest improvement, the strong euro continues to keep margins and volumes under pressure. Faced with difficult market conditions, the group continues to focus on optimising its portfolio of products and reducing costs. BGP was US$9 million lower than in the second quarter because of the normal summer seasonal slowing.

Engineered Products: BGP for the third quarter was US$46 million, an increase of US$15 million over the year-ago quarter. The increase was driven by contributions from the Pechiney, Baltek and Gator-Cor acquisitions, higher volumes and cost reductions, partly offset by higher energy-related costs. BGP was US$27 million lower than in the second quarter reflecting the normal seasonal slowdown in Europe. Fourth quarter results are expected to reflect continued strong demand in aerospace offset by the seasonal slowing in demand normally seen towards year end.

Packaging: BGP for the third quarter was US$162 million, up US$73 million from the year-ago quarter. The increase reflected the acquisition of Pechiney, volume growth, the realisation of synergies from the Pechiney and FlexPac acquisitions and the positive impact of the stronger euro. These positive factors were partially offset by a significant increase in raw material costs, most notably resin.

Compared with the second quarter of 2004, BGP declined by US$5 million as seasonally softer demand was accompanied by higher raw material costs.
While business conditions are expected to remain mixed in the fourth quarter, the progressive realisation of merger synergies and operating cost improvements is expected to more than offset the continuing squeeze on margins due to higher raw material costs.

Segregated businesses: These include the BGP of operations identified for potential divestment under the terms of the Pechiney acquisition. These assets are being held separate and managed by independent trustees. Operations in this category include the Neuf-Brisach, Rugles and Annecy rolling mills and aluminium cartridges packaging operations. The Ravenswood rolling mill will continue to be included in discontinued operations as long as the US Department of Justice obligation to hold separate remains in place and until such time as Alcan reaches a decision on the status of the facility.

Alcan expects world demand for primary aluminium to grow by 9.5% in 2004. In terms of supply, it believes that higher primary aluminium production in China and Africa will contribute to an increase of 6.3% in world supply. With demand increasing faster than production, Alcan forecasts a market deficit of 640 kt for 2004, slightly greater than the deficit that was forecast at the end of the second quarter.
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