Good day, ladies and gentlemen, and welcome to the third quarter 2014 Alcoa earnings conference call. [Operator instructions.] I would now like to turn the conference over to your host for today, Ms. Kelly Pasterick, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good afternoon, and welcome to Alcoa's third quarter 2014 earnings conference call. I'm joined by Klaus Kleinfeld, Chairman and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer. After comments by Klaus and Bill, we will take your questions. Before we begin, I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's press release and presentation and in our most recent SEC filings. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, in the appendix of today's presentation and on our website at www.alcoa.com under the Invest section. Any reference in our discussion today to EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix. And with that, I'd like to hand it over to Klaus Kleinfeld.

Well, thank you Kelly. Look, I mean, most, I think, have seen the press release, so here’s the summary. As you probably all can see, the transformation is delivering results. All segments have improved sequentially. Very strong operational performance, earnings increased in every one of our groups downstream, highest-ever quarterly profits, as well as margins. In the midstream, the profits are up 45% year over year. On the upstream side, the improved performance now 12 consecutive quarters. We have $612 primary second metal EBITDA per metric ton. And also good news for activity. $862 million across all segments year over year. As this is the third quarter, obviously we expect that we will not stop with productivity, so you will see more also coming through in the whole year. That’s very, very good, and if you look at it, that really comes from not only all across segments, all across the company, everybody is basically contributing. So that’s one thing. The operations are really in good shape, really working well. The second thing is the portfolio transformation. And you’ve all followed the Firth Rixson acquisition, $2.5 billion. The financing is done. We expect to close of the transaction by year-end. I’ll give a little bit more color a little later. Obviously happy if anybody has any questions. The other thing in this quarter, of which I’m very, very happy, is that we had two multi-year contracts, both really very, very important contracts, one with Boeing and one with Pratt & Whitney. In total, every one of those more than a billion, so over $2 billion combined. And both demonstrate clearly the [margin] materials aerospace dealership, because Pratt & Whitney is more around the engine, so it’s more around also nickel as well as titanium, as well as some aluminum-lithium, Al-Li aluminum. And then we have Boeing on the structure side. We opened the world’s largest aluminum lithium facility in Indiana. Very, very good. And we had Saudi Arabia, our smelter, being fully operational, and generated profits already in the third quarter. And then on top of it, we announced our permanent closure of Portovesme and safely executed our Australia smelter closures. With this, I hand it over to Bill.

Thanks, Klaus. Let’s quickly walk through the income statement. Revenue increased over $400 million on a sequential quarter basis versus third quarter last year. Revenue increased nearly $475 million on higher sales in our mid and downstream businesses, higher realized metal prices, and favorable energy sales. Versus last year, revenue grew in all of our segments. Approximately half of the revenue growth is organically driven. Cost of goods sold percent decreased by 300 basis points sequentially, and was down 460 basis points compared to a year ago quarter basis, both driven primarily by productivity gains, better prices, and the stronger dollar, somewhat offset by cost increases. Overhead costs are down versus both periods. You’ll note that the effective tax rate of 60% includes a noncash charge related to a tax holiday initiated in Brazil, where we received approval for a 10-year reduction in one of our subsidiaries’ tax rates. This should result in significant cash tax savings over this period. As a result, we remeasured the deferred tax assets to reflect this reduced rate. Excluding the impact of this discrete item, our tax rate for the quarter was 43%. Overall, results for the quarter are a net gain of $0.12 per share. Excluding special items, we have net income of $0.31 per share, $0.13 higher than the second quarter and nearly triple adjusted earnings from third quarter last year. Let’s take a closer look at the special items. Included in net income is an after net tax charge of $221 million or $0.19 per share, primarily for restructuring. During the quarter, we permanently closed the Portovesme smelter, which accounts for $167 million of the restructuring related charges. We also continued closure activities at the Point Henry smelter, and rolling mills in Australia. In total, 60% of the charges are noncash,…

Yes, thank you very much, Bill. Let’s start with aerospace. We continue to see a very strong aerospace market and believe a growth between 8% and 9% for this year. And if you go to the large commercial aircraft, we see this even stronger, with 12.1% growth. The order books on the commercial jet side are full, nine years of production. We also see that the airline fundamentals are good, plus 5.9% on the passenger demand side, plus 3.1% on the cargo side. Airline profits are up. That’s all very, very nice. And we see a rebounding regional jet market, plus 13.2%, and the highest order book in five years. So that’s very good. On automotive, if we go through the different regions, North America, we take our projection for this year up to 3% to 5%. We had it before at a little bit wider range, between 2% to 5%. We can see the sales are up 1.2 million in September, and if you look at the year to date numbers, up 5.4% from the prior year. And in addition to that, if you look at the average fleet age of 11.4 these days, compared to the historic 9.7, there is still some pent-up demand sitting in there. Inventories are up to 64 days, but that’s kind of in line with where the industry targets are. Incentives are up, but we believe that this is more an indication in advance to clearing the inventories for the 2015 models, the changes that are coming. And production is up 5.1% year to date, compared to the prior year. In Europe, we also take our projection up to 2% to 4%. The range before that we had was zero to 4%, so we narrowed the range. And registrations are up in Europe,…

[Operator instructions.] Our first question comes from Sal Tharani from Goldman Sachs.

I wanted to ask something on GRP segment. You are starting to ship the BIW from your first facility, and wondering when do you think it’s going to be profitable? And there’s been quite a bit of new capacity announcement. I know you have been sold out. Is there any more opportunity you think, or you think there’s been too many announcements? And also, on GRP aerospace side, I wanted to understand, in your presentation at investor day, you had indicated that the new planes which are being built are more non-aluminum heavy planes. So the actual aluminum consumption in planes is going to decline over the next three years. However, you, of course, are a multimaterial company now, so your contribution or your revenue is growing. But I was just wondering, that statement of aluminum declining in aerospace is not what we hear from other peers of you who are in the aluminum plate and sheet business for aerospace. I was wondering if you could shed more light on that.

On the automotive front, you’re right, Davenport is producing, we’re ramping up the production. Tennessee is on track to go online by mid-2015, as you correctly said, all booked out. You see, actually, and Bill had it in his description, GRP produced record auto sheet in the third quarter, and that’s obviously a factor of increasing demand. One comment on Ford, but Ford has publicly said, you know, that they are bringing the F150 into the showrooms in the fourth quarter. So then that’s when you will see the volumes, as well as the profitability coming through. In general, you asked also the question on added capacity, I think that the announcements that we’ve seen, I would first see it as a positive, because I think it’s a reflection of how attractive the market is. And as you know, we’ve been the first ones indicating that we see a sea change there in the market. Now, finally, everybody gets it and people are putting their money behind it. So I see it as a positive. We also said that outside of the announced investments for us - our capacity is booked out - we will focus on smart investments, and we will focus on winning through innovation and technical capabilities. So interpret this in whatever way you want, and I know you will continue to follow us wisely. So did that answer the first part, Sal?

Yes, to some degree.

So the second part on the aerospace side, on the aerospace side, if you compare where the market was… When I came into the operational role at Alcoa, [it was] end of 2007. And when I started to do my first round in talking to people in Alcoa as well as in the industry, there was pretty much the rhetoric that metallic planes are going to be a sign of the past, and there’s no metallic planes anymore, right? Then we started to look into it, and we also started to look into what innovation potential we have. And as you saw, again, coming through this quarter, Boeing, the very Boeing that was very strong on the 787, has just given us a $1 billion plus contract, and it’s all metallic. And for their big planes, when they had to make a decision for the 737, are they going to renew it with the [max] as a nonmetallic or a metallic one, they decided they gotta go for a metallic version and just do a re-engining. So we’ve done two things. We’ve basically innovated, and that’s what you see in aluminum lithium, as well as going after the solution instead of going after the piece. So that’s also why we have been building out our offerings in the jet engine, which is non-aluminum, it’s basically nickel, and we have expanded also capabilities on the titanium side, including the forging side, and we have been building out the fastener side. Because you remember, I’m sure you remember this, I think I showed in the first Rixon overview, in the capital rate, there is a chart in there that shows the value of Alcoa per plane. And you see that the highest value is the 787. So in regards to aluminum go down, I think that it’s substantially up compared to where people were believing it would have been compared to 2007 and 2008, and I remember, [Kai] had a chart in there that showed it being constant, but I wouldn’t interpret too much into it, other than saying that obviously our focus is more around being innovative and going after… For us, it’s not so much the revenue dollar than rather the profitable revenue dollar. That’s what really counts for us. So we believe very strongly that our strength, in all of the value-add businesses, is innovation power. And we are reducing our footprint, as you see also in the GRP side, in the commodity space. And there is a bit of a commodity space pretty much in every industry, also in the aerospace industry.

Our next question comes from Timna Tanners from Bank of America Merrill Lynch.

I was also curious on the global real products segment, but I know Bill went through some of the detail kind of quickly, so I just really wanted to clarify what caused the outperformance relative to your initial guidance in the quarter? I know you mentioned that there were some not reoccurring items. I was wondering if that was maybe inventory gain. Didn’t sound like it was that much power sales. And then when we look into the fourth quarter, we get so many questions on this, I was hoping you could clarify, how much of the fourth quarter outlook had to do with F150 in particular, and how much might have other contributing factors?

In the GRP segment, we made $103 million this quarter. We did see a sizable gain due to the run up in metal price, and that contributed around $25 million in after-tax profit. And just to reiterate, that’s based on the fact that the segment is on an average costing basis. So when metal prices move up or down, you will see a big impact there. But aside from that, the business did a great job driving cost improvements and productivity improvement. So we continue to see some can sheet pricing decline. And in addition, in this sector, we saw a little bit of a volume decline related to seasonal shutdowns in Europe, largely, but great cost control on their part. As we transition to the fourth quarter, that $25 million metal we would not anticipate to return, assuming metal prices don’t run up again. And also in the fourth quarter, you typically see seasonality from third quarter to fourth quarter in the rolled products business, because can sheet goes down. Aside from that, we continue to see strength in automotive, and we’ll continue to ramp up the Ford sheet capacity in Davenport, so that’s where we come up with that projection of improvement over last year’s numbers.

And maybe I can add, and not just on the GRP side, but in general, if you look at the growth that we saw in this quarter, this 8% year over year growth, almost half of it comes from organic growth. And if you look at what we see going forward, in the fourth quarter, we basically see that this organic growth looks pretty stable and looks as though it’s there to stay and might even increase a little bit. And when you look under the hood, you see it’s coming from aerospace, from commercial transportation, as well as building and construction. And you said a couple of things. On automotive, the F150 is hitting the showroom, so with this we’ll see some of it flowing through. Aerospace continues to be strong.

So it’s a combination of factors. And if I could, a follow up on that one. The concern out there in the market, that’s evident by the way the stocks have been behaving across the space, is just that there’s a global slowdown, and again, not so much U.S., but maybe some of the markets that you serve. How much conservatism do you think you’ve baked into your guidance on the potential for that slowdown to be showing up in the next couple of months or quarters?

You’ve seen in detail our projections on what we think is going to happen in the end markets. And on Europe, there is already, I think, a slowdown scenario for Europe in the second half of the year built into it. But at the same time, keep in mind that IMF just came out yesterday with the new projections for this year and next year. And interestingly, they’ve upped the U.S., and the U.S. is a very important market for us, and very important for the strong end markets. And so they upped the U.S. for this year, and actually also for next year. And when you look at what the projection the IMF had for this year world market growth, and then look at next year world market growth, it’s actually a higher projection even for next year. And frankly, in China, Asian, they might be a little slower, but still going very, very strong. So I think you know that we try to not be overly conservative, but I don’t think that we are overly optimistic, and I think that if you look at our projections in the last years, also coming through the downturn, that we got it right more often than we had it wrong.

And just to add on to that, when you look at where we’re spending our money this year, we’re spending 90% of our growth capital in the mid and the downstream. And a lot of that is going into North America. You look at Tennessee, Davenport, Lafayette, La Porte], a lot of that is going into the U.S. to capture that 2015 growth.

Very true.

The next question comes from Josh Sullivan from Sterne Agee.

If I look at your aerospace end market, you’ve had two nice contracts here, one on the structural side, one with an engine manufacturer to support these build rates coming. However, in the near term cycle, destocking has been a headwind for the engine supply chain and the structural plate market has had an inventory overhang. And you guys are looking for what, 8% to 9% growth for aerospace? Have you seen an acceleration in the second half? Or maybe if you could break that down between what you saw in the first half and maybe what you’re seeing in the second half?

No. The no was more in reference to have we seen an acceleration or a deceleration. Not at all. And I think it was just around the start of this quarter that we had the big annual event. In this case, it was in Farnborough in the U.K., and whoever had the pleasure to be there and observe firsthand what you always feel at the annual air shows. The amount of optimism that still is there, and the amount of contracts that have been signed. I personally believe, and our experts do so too, it’s a very solid industry. In fact, it used to be a cyclical industry. But I think that through the wisdom of the two major players, Airbus as well as Boeing, in terms of being moderate in their production expansion, they have accumulated this nine years of auto backlog. And we actually had built into our models before a little cyclicality, but we corrected it, I would say, probably half a year ago or so, probably less than half a year ago. And we said look, we don’t see that cyclicality in there at this point in time. And it’s driven really by two factors. The one is the middle class growth and people having money now. You see it in every large city. Certainly, you see it here in New York, I mean, with more people coming here, more tourists, you know? You see it in pretty much every large city. More people traveling. And then the second factor is the re-engining through the efficiency drive. And that’s why I’m so excited about our portfolio, because we have a portfolio that’s very strong on the structural side. Don’t get me wrong, because this time I talked about metallic. I could have equally well, and I did so previously, talk about the composite side, because there we are excited about the stuff that this means on the titanium side of things, as well as on the aluminum lithium side, titanium side, as well as on the fastener side. So we have a portfolio that caters to both ends, and then obviously it’s fantastic to see that we are right in the sweet spot of the jet engines, and there the efficiency is primarily driven by new materials and new technologies to get the temperature in the combustion chamber up. And really, we’re right at the sweet spot with our blades, and with the addition of Firth Rixon on the [unintelligible] ring side.

And just a follow up on global rolled products. As we think about the F150, what are the typical lead times as far as provisioning. If it’s going to be coming out in the first quarter of 2015, how should we think about that? And then if you could help us frame pricing or the margin contribution for body [and white] compared to [unintelligible].

The volumes of the F150 how quickly they show up with us? I think Bill showed in his slide of the days working capital, you have seen an uptick. And the reason why you’ve seen an uptick is because we have been delivering material, so actually there’s more material there that will go through. And Bill correctly said this is a midterm impact, because I think for everybody this is a new situation. We have to learn how to perform well with the automotive supply chain here and usually this is a relatively short lead time that the automotive folks expect there. And then in terms of profitability, we have no intention to disclose the profitability for the benefit of our shareholders. But I think you would see it.

Our next question comes from Michael Gambardella from JPMorgan.

On the cost front, particularly on the upstream on the primary business, you’ve had good results in terms of lowering in the cost, in the past, by curtailing some of the higher cost smelters and base loading them in the lower cost operations, and also bringing on new very low cost, as you said, capacity. So going forward, how much more cost cutting is left on the primary business, just excluding any more curtailments or new capacity impact?

In regards to the productivity, just to clarify this, the closures of plants will not be reflected in productivity. When we close something, we don’t see that as productivity. So what you see reflected in the productivity is really what we get out of those plants that are operating. And frankly, I think if you were to ask our primary team, I’m pretty sure that they would say that they have a lot of additional ideas, and that at this point in time, they see no end. You know that we have established this system which we call degrees of implementation, where we basically document every idea from the start of the idea to basically having the cash coming into our bank account. And this is the Alcoa overall number. The total number of ideas currently in the system that will eventually turn into productivity is 15,500. And bill, I don’t know whether you have a breakdown of how much of that is in the GPP?

Yes, 5,600 ideas currently in GPP on the productivity side. So as Klaus said, 15,500 total productivity ideas, coupled with a couple of thousand growth ideas, and then we have an asset management class that has about 700 ideas also.

First of all, it’s a very robust system, because it goes down into the plant, everybody is involved. And you would not have seen these productivity moves all across the board, hitting every single plant, and constantly, since we introduced that. And on top of it, it gives people a capability to be more a part of increasing the profits and benefitting from a strengthened Alcoa. So I don’t think that we are seeing any end of this at this point in time, frankly.

Our next question comes from Brian MacArthur of UBS.

I just have one odd thing that I wanted to ask. Can you explain why we’re getting negative minority interest three quarters in a row? I thought a lot of that related to Alumina, so as it ramped up it would be proportional. Because it’s three quarters in a row now. I know it can happen one-off, like it did last year in the second quarter, but I’m just trying to understand what that’s actually representing now. Is that Point Henry restructuring? Or what actually is it?

Yes, it absolutely is. When you have a big loss associated with Point Henry, the loss contributes negative minority interest on our set of books. So that’s what’s driving it. In the quarter, we had some restructuring costs associated with Point Henry, so that’s the driver.

:

First of all, just to make sure that you understand, on Point Henry, that’s a smelter, so that’s reflected in the smelting category. But also, on the Alumina side, the real keys to the fourth quarter are projecting significant cost decreases in the fourth quarter. I think in my comments, we said something to the effect of about $20 million of cost improvements. And then recently, the API prices picked up. And as you know, about 65% of our contracts currently are API based. In the third quarter, the real big movers in the Alumina segment were the fact that API was low while metal price ran up. And we’re now starting to see API price running up also.

Okay, but there’s nothing else really in that minority interest, other than the minority of Alumina limited. Mostly, right?

Yes, that’s it. There’s nothing else.

Our next question comes from Jorge Beristain from Deutsche Bank.

My question is I guess really more for Bill, because I think he did a great job just articulating the sequential changes that were happening in the global rolled products. I just wondered if we could get a similar talk through on the Alumina segment and the primary segment, which are also significant sources of the beat, versus the expectations on the Street. And I’m just trying to understand, you had a very strong sequential gain in primary metals, so is there some borrowing forward that may be happening there? And is there any kind of accounting tailwind, like you said with the average cost accounting, that may be benefitting you in Alumina? And then lastly, on the primary side, could you quantify how much of the sequential ATOI is driven by higher premia, and if we’re kind of flattening out there, or is there a lag effect where we’re going to see some more catching up in the fourth?

Let me address the Alumina side. Alumina went from $38 million to $62 million. They do get a positive… And just to be clear, we’ve got pricing impacts in two columns in this bridge. We’ve got an LME pricing impact and a price mix impact. So what this says is that LME prices, and LME-based contracts help the segment, but API pricing, which was fairly flat, actually was a detractor. And I guess the other big mover in this segment is good productivity and then you see energy as a negative. So we actually lost carbon credits due to the change of carbon legislation in Australia. So when I look at the Alumina segment, I don’t think it should be too much of a surprise versus external guidance. The primary metal segment really, I just can’t reiterate it enough, extremely strong performance out of this group. We did see a benefit due to sequential quarter positive premiums. We got about a $24 million after-tax benefit on premiums in sequential quarters. That’s in that price mix column. We got very good strong cost control. And then the big one, and I hope this didn’t fly under the radar screen, is that Saudi Arabia made money for this segment. And extremely exciting. I know it’s exciting for the people at the plant. It’s exciting for me and Klaus to see that investment start to pay off. And that happened in this quarter. And then lastly, if I transition to viewing the fourth quarter, is that the segment, even with the $245 million of profitability, had $31 million of negativity associated with the shutdown of Portovesme and Port Henry running through the segment. So we would anticipate that not to recur. So just a really strong overall performance in the smelting segment, to not only capture the higher prices, but to continue to keep costs low.