Good day, ladies and gentlemen, and welcome to the First Quarter 2015 Alcoa Earnings Conference Call. My name is Kyle and I'll be your operator for today. As a reminder, today's conference is being recorded for replay purposes. I'd now like to turn the call over to your host for today, Nahla Azmy, Vice President of Investor Relations. Please proceed.

Thank you, Kyle. Good afternoon and welcome to Alcoa's first quarter 2015 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 those projections listed in today's press release and presentation and in our most recent SEC filings. In addition we've 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 to today's presentation, and on our website, www.alcoa.com under the Investor section. Any reference in our discussion today to historical EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix. With that I will turn the call over to Mr. Klaus.

Thank you very much, Nahla. So welcome, everybody. Let me in the usual fashion quickly summarize the quarter. So and I assume that you have had a little chance of looking at it and I hope you all conclude it's been a strong operational quarter and the transformation is fully on track. Just let's look at the operational performance, and let's start with revenue. Revenue has been growing year-over-year by 7%. And if you look under the hood, you actually see that this has been driven primarily by the organic growth coming from auto & aero. And obviously over a year, when you look at all the transformational portfolio moves that we have made, that we have had, I mean, capacity reductions, as well as some portfolio actions, as well as currency, if you put all of this together, that's pretty much a wash, and the only thing that stands out is the organic growth in the auto & aero. That's been the reason for the 7%, and I assume that we'll have more of a discussion around that. I'm happy to provide more color on that later in the Q&A. So when you then look at profits, you also see, on the downstream side, I mean, we have another first quarter record there with $191 million ATOI. On the midstream, we have $34 million ATOI. There's challenge on the can sheet on the one hand and at the same time, we have record auto shipments. And I'll explain the dynamics and what we are going to do on that end in detail when it comes to my presentation. On the upstream, good news, 14th consecutive quarter of improvement. Alumina segment stands at $22.1 [ph] million. Primary segment is at $187 million of ATOI. And then you again see in…

Thanks, Klaus. Let's review the income statement. First, the year ago revenue increased $365 million, or 7%. The 7%, as Klaus said, was principally organic growth, largely driven by auto and aerospace volumes, and positive market factors, which were offset by the impact of portfolio actions. Cost of goods sold percentage decreased by 160 basis points sequentially, primarily driven by the strong US dollar, and productivity partially offset by lower LME pricing. Compared to a year ago quarter basis, the 6 percentage point improvement came from productivity gains, improved prices and a stronger US dollar, somewhat offset by cost increases in energy. Overhead costs were down sequentially across the organization. The addition of Firth Rixson was more than offset by headcount reduction and favorable currency impacts. Other income was $12 million in the quarter, including a favorable balance sheet re-measurement impact of $17 million pretax. EBITDA was over $1 billion for the third consecutive quarter, over $400 million higher than the 2014 first quarter. First quarter effective tax rate of 47% was higher than our expected operational tax rate, primarily due to a non cash valuation allowance against certain deferred tax assets in our alumina business, the impact of which was entirely offset in non-controlling interests and the fact that a significant portion of our special items had no tax benefits associated with them. Excluding the impact of these items, our operational rate was 31% for the quarter, which is consistent with our expected operational rate for the year. Overall results for the quarter are net income of $0.14 per share. Excluding special items we have net income of $0.28 per share, $0.19 higher than first quarter last year. Let's take a closer look at the special items. Included in net income is an after-tax charge of $168 million or…

Thank you, Bill. That was very good. So let's look at the Alcoa end markets, and let's start with aerospace. We continue to project for this year growth between 9% to 10%. And the reason for that is because we see large commercial aircraft segment growing at 9.6%. The order book for that large segment stands now at 9 years of production. The airline fundamentals are very solid, 7% increase in passenger demand projected; 4.3% cargo demand, airline profits are up. Those are all the expectations basically from IATA [ph] up to $25 billion in 2015. And on top of it, the other segments, the regional jet segment, is also growing nicely, almost at 11%. That's 50% above the 2012 situation. So, that's really good. Automotive North America, we continue to believe we will see a growth for this year between 1% and 4%. Sales are strong, 5.6%, up year to date. I actually looked at the SAAR rate, the seasonally adjusted annual rate, and in January we project $16.4 million for the year, and the projection now is at $17.1 million. Very strongly driven by light trucks. We talked about that last time. I mean, this is a bit of the impact of lower gasoline prices. And we continue to see pent-up demand there. The average fleet age is at 11 years in the US and the historic number roughly is at 10. Production is flat, and this is mainly a factor of the new models ramping up. So, we see that basically following the sales situation. Inventories are down, which those two things you see go together at 58 days. In March the industry average was rather between 60 and 65 days. Incentives are flat, and on trucks are obviously down because there's a very strong demand there.…

[Operator Instructions] Your first question comes from the line of David Gagliano from BMO Capital Markets. Your line is open.

Great. Thank you. I thought we could focus in on the topic of the day for a minute, which from my seat is the premium, the Midwest premium, regional premiums, Europe, and America, North America. My first question, we're hearing many transactions are happening below the Platts or the Metal Bulletin prices. So my first question, where are premiums for you in terms of your physical transactions currently?

Dave, we basically stick to the quoted premiums. The way the premiums work is, as transactions get done, they get reported to Platts and Midwest, and it moves the premium. So, we're sitting currently at around $0.185 for the Midwest spot premium, and that's down from the highs of $0.24.

But, Dave, I would recommend, I mean, to – as you know, I mean, it's very hard to predict where prices or commodities will go. And therefore I think it is good to remind ourselves of what drives what. The LME price is driven, as we've been saying for now years, by sentiment. I mean, it moved up and down depending on what Mario Draghi or Janet Yellen were on a day, right, whereas the regional premium is really driven by the market fundamentals. And then let's go back and take a look at the chart that Bill showed at the end of his presentation and look at where this stands. We pretty much see that the market on aluminum is pretty much balanced, right. And I'll come to that. And on the alumina side, you see a bit of an overhang, but in reality I mean, we already are taking the overhang down from the first quarter because again we're seeing that some of this capacity announcement are not coming through. And when you put it in perspective, I mean, this is the – we are projecting roughly 2 million or so, and we are talking about 100 million market, 100 million tons market roughly, right. But let me come to what we've been hearing a lot also on the premium side. I mean, the reason why we've seen a little bit of additional pressure on the premiums is because we have seen that the high premiums have attracted some, what we call, Chinese fake semis, right. And the fake semis, I mean, really are completely – and they are re-melts. They got completely directed towards competing with primary. And now that the premium has adjusted, we are looking at the economics of this, and the economics actually has turned negative. So we believe that to come to an end. However, there's a component in it where they are misusing, where those people that are exporting semis, fake semis on China, are basically misusing or abusing the Chinese tax policies and acting against the declared Chinese policy. The declared Chinese policy clearly doesn't want primary to be exported. They have a 15% export duty on primaries, right. So, they are declaring this as semis, and therefore they get the 13% value at rebate, right, and in reality its re-melt. So that policy has not changed. And all what we are seeing and all that we are hearing from the Chinese is that they have no intention to allow this to further happen. So we believe the market is pretty much going to come back to – exactly to market fundamentals.

So, that's very helpful. Thank you. So as a follow-up, based on that commentary, is it Alcoa's view then that premiums will stabilize at $0.18 a pound?

Well, our view is that – that's why I had such a long answer. I mean, that in the end it all depends on the physical supply and demand. That is different, depending on regions. Because also don't forget, and what Bill showed, I mean, we always talk about the inventory overhang and how, I mean, I think most people have slept through the last years. We have been growing demand. I mean, when in 2008, the total market was roughly 40 million. Now it's almost 60 million. 9% growth, demand growth for last year. I mean, this is the compound interest. So – and you see it very nicely in the inventory. In the height of the crisis we were around 108 day’s inventory. Now we're back to roughly around 66 or something like this. The historic average, I think Bill said it, is around 61. So we're pretty much back to normal, right. So, you are seeing this little spot things, as I said, abusing Chinese tax policies. China doesn't want that, declared policy. So I think it's a very limited phenomenon. And I think we are going to see this thing falling back exactly where it belongs and showing what is the regional supply and what is the regional demand. And then also keep in mind, I mean, there are some regions where the supply chain has become very long. We saw that when part of Logan went down and how all of a sudden the packaging folks were scrambling for material because they were very, very worried, having to stop their facilities.

Okay, great. That's very helpful. Thank you.

Your next question comes from the line of Jorge Beristain from Deutsche Bank. Your line is open.

Good afternoon, everybody. I guess, two questions, more for Bill. But just if you could talk a little bit more about, on page 11 on the slide deck on GRP. You intoned of about a 30% year-on-year decline for ATOI as we head into 2Q for that business. I'm just trying to understand how much of that can ultimately be worked through. Because some of it seems to be the inability to do the pass through in Russia of premium, but that ultimately should be recoupable in the medium term. And then just some other timing issues. I'm just trying to understand, do you see GRP getting back to normalized margins by second half, or is this really just a reset of the basis for that business because of the Russian issue?

No, you have a couple of things going on. First of all, let me address the Russian issue right off the bat. The Russian issue is something that's hitting us this year. We would expect that that will persist probably through 2015, and potentially into 2016 as we work to pass through that to our customers. The other things that are going on, and remember that 30% is a year-over-year number, that's not a sequential number, it's 30% from the baseline from last year. A couple of things that we have going on. We've got the investment in the Saudi Arabia rolling mill. That's in the start-up phase, and that continues to cost us money. And we are spending money on the Micromill. Klaus alluded to the fact that we've got five partners signed up…

Six in total.

Six in total. And that is costing us a little bit of money also. So, ultimately that will pay a reward. So those are really the things that – and then I guess the other piece of it that I should allude to, we talked a little bit about the metal price lag. And when metal prices are going down, inventory costs stay high in the GRP segment. The opposite occurs when metal prices go up. And at this point we would say $15 million of that decline is purely the impact from the metal price lag.

Okay. And my second question was just related to working capital. I know that you mentioned there's some one-off issues due to acquisition integration. But do you think that working capital will actually be on a year-over-year basis, a net source of funds, or is that tapped out?

And let me just make sure that I'm very, very clear around the increase in working capital year-over-year. The EPS business, as you probably know, the EPS business, because it's not a very capital intensive business, and due to the structure of the marketplace, has traditionally had higher working capital than the rest of Alcoa, and Firth Rixson is even higher than that. So the simple fact of blending in the Firth Rixson acquisition raises the working capital level on a day's basis for Alcoa in total. And so we see that as - right now we have 3 additional days of working capital over the lows of 30 last year. We see it as an opportunity to bring it down. The working capital levels are pretty high in Firth Rixson, so our teams will be going after that. I do not see necessarily cash – working capital be a cash generator for the company in the year simply because working capital levels are pretty low to start the year.

Thank you.

Thank you, Jorge. Next one?

Your next question comes from the line of Timna Tanners from Bank of America Merrill Lynch. Your line is open.

Good afternoon.

Hello, Timna.

I wanted to also focus on China but on the finished aluminum side, because the day that you came out with your announcement that you were exiting smelting capacity in Brazil, my Chinese colleague counterpart told me that, he was saying that Hyomin Choi [ph] I think I pronounced it wrong, I don't know, but is adding 750,000 tons for the year. So, they're clearly adding, and I get that they're demanding more. But my question is, we're hearing that the Chinese are starting to talk about actually removing the tariffs on exports. It sounds like there's a lot of chatter on that. Are you concerned about it? What's your view? Is there any way that Alcoa can respond to that level of support, government support for the industry?

Well, I m mean, that's a very good question, Timna. I mean, the declared policy and the policy that's in place, and that economically makes sense, I have great admiration for what the Chinese government has done over the last four years. And the smartness of the economic team is unbelievably good. I had a chance to be exposed to them many, many times. And what they are doing here in regard to the policy is a very intelligent policy. On the one hand they are saying we don't want primary to be exported, and that's why they established this 50% export duty. The logic is very simple. Because what primary, in their view, is a lot of resources that are scarce, and the scarce resources are bauxite. You know that they have to import 50% to 60% of that bauxite. And it's energy which is non-clean energy, and they are running out of air, literally. And then they are running out of water. And you, unfortunately, need a lot of water when you have a coal-fired power plant. So, in reality you see all of this in the primary aluminum bar. And that's why they basically say we don't want I mean, this to be exported, right. So that's why they have the 50% export duty, right. I don't think that that's going to change. I rather think that they are going to enhance this because they are literally running out of air. The second logic is another logic. The logic is they are based – they want to upgrade the jobs. They want their people to earn more per hour. To do that they have to increase the value add of their businesses. So, they are basically saying if you now take a base metal and refine it…

Okay, great, Thank you.

Okay, Timna.

Your next question comes from the line of Paretosh Misra from Morgan Stanley.

All right. I have a question on slide 41, actually. Is that something changed in the way you do business? Because I'm seeing your distribution revenues grew 43%, and you have a very sharp decline in industrial products and housing. Just hoping you could comment on that.

To comment on that, the distribution jump that you see is, in large part, a portion of the Firth Rixson revenues, Paretosh. So, Firth Rixson does about 75% of their revenue in aerospace. At this point we're putting the rest into distribution, hence that big jump in year-over-year. The industrial products, I believe, is mostly related to the fact that we've exited some of the exits that Klaus talked about, especially in our rolled products business where lower margin products, and hence we got out of some of those industrial product segments in the rolling business. Those are the big drivers there.

Got it. And if I could ask one more. You have purchased RTI and Firth Rixson. So I was hoping if you could just remind us, where do you see your revenues for the engineered product segment next year or 2018 or 2019? And how much of that would be aerospace on a pro forma basis?

Well, I think we've put the – you can pretty much add those things. I mean, for Firth Rixson we have the $1.6 billion revenues with $350 million out there. And then you can add into it the organic growth target…

$1.2 billion the first year…

$900 million of that organic growth. And that you can pretty much add into it. We've also said that we will continue to bring up our profitability on the existing EPS portfolio.

So, those are the two big changes. $1.2 billion of organic growth, $1.6 billion the first year.

$1.2 billion of all growth. $900 million of organic growth.

Right. And $1.6 billion associated with Firth Rixson.

Exactly. And then you have the TITAL that I mean…

$100 million.

$100 million there, right.

Got it. Okay. Thank you.

Yes. Okay. Thank you, Paretosh.

Your next question comes from the line of Sal Tharani from Goldman Sachs. Your line is open.

Good morning, good afternoon, sorry. I wanted to ask you on the acquisition strategy, you have two major acquisitions, Firth Rixson and now going to RTI. I'm just wondering what your goal is on the end game. Is there something else you think or should we consider that you will realize that before going to some acquisition, particularly on the sourcing side, and you now have titanium source available. I'm just wondering as, you're also becoming very big in nickel side. Is that something you would be looking into?

Yes, good question. I mean, Sal, let me address the specific question at the end first, right. I mean, there was actually a question when we announced the RTI transaction and we have looked into this. I mean, we've looked for backward integration, and there's two steps of potential backward integration. One is sponge, and the other one is rutile and aluminite, exactly, hard to pronounce. We'll get used to it. So – and we've looked, and we've studied the market and we see that both markets, I mean, are – there's no needs in further upstream integration there. There's plenty of supply there. We have good long-term contracts, and I think we can even get better long-term contracts there. We are a customer of those suppliers, and I think I said last time that the supply source for RTI is mainly Japanese. We also looked one level further back on the ore side, alumunite, as well as rutile, and also on that end we see plenty of supply there. So, no need for that. And then on the bigger question, look, I mean, this is – I mean, that's why I put this one chart together there, which is, I know, very, very full. But I wanted to make sure that people have put a lot of attention on the acquisition. But in my mind, the best thing to create value always will be organic growth. And we have been very, very strong on the organic growth side. And we've been carrying this through and you see it in bringing the profitability up. EPS profitability and some of you might not even remember that because you didn't cover us, but in 2008 the EPS profitability was 8%, 8% profitability. And look where we are today. And, frankly, we continue…

I just want to ask one more thing is on the upstream side. Two announcements you've done, and one announcement including the 12 month capacity review. How much do you think you need to get to the targeted cost that you are talking about, 38% and 21% on the cost curve? And how much of this you think you can do by the end of this 12 months?

Well, we wouldn't have announced, and you know what, I mean, you know how we're doing these things. I mean, there's a reason why we now have what 33% of all primary capacity curtailed, right, and why we see the results, like the ones that we see today and the primary as well as the alumina segment. I think we are all basically reaping the benefits of our strategy there. We have been making the upstream business much less vulnerable to swings on the metal side, on the commodity side, right. We are looking at these in a relatively relaxed fashion. Now, we would love to have a higher metal price and we'll probably see it with the premiums. But I mean, it's not earth shaking. I've always said that. And you see also we announced it one week, the next week we were able to get to conclusion with our partner, in São Luís, BHP, or future or what maybe called São 32, right, and we came to the conclusion, okay let's close that remaining port line down there. And it frees up the self old energy which we can sell onto the open market, so we have a benefit to this, right. We've done the same thing on Suriname, curtailed further. Also, we will go to more of those reviews, and do what is right, always with an eye on cash, always with an eye on cash.

Great. Thank you very much.

Okay, Sal.

Your next question comes from the line of Josh Sullivan from Sterne Agee. Your line is open.

Good afternoon.

Hey, Josh.

Can you just talk a little bit about how you see the cadence of the Firth Rixson ramp? Clearly getting from, I think you said $27 million in this quarter to the 2016 target. It's a big jump. Can you just give us an idea on the outlook of how we should be thinking about that ramp? Is it any particular contract, share shift, or maybe when the isothermal press finally comes on line?

Well, the isothermal, I said already, I mean, the isothermal will start to generate revenues as of the second half of this year. And I think you actually do see – I think we provided so many numbers. I think the most important short-term number is the $1.6 billion revenues for next year with a $350 million EBITDA. And then I think we had an addition, if I recall that correctly, the $1 billion growth until 2019, right, where we basically said that the major part of it, 7%, is locked in. That's the beauty of aerospace contract, locked in with contracts. So I think there's quite a number of – I mean, quite a bit of numbers. I don't know…

But a big piece of the driver for 2016 will be the ramp-up of Savannah as that comes on line, produces revenue and produces profits.

Okay…

We will also have to be in a normal – I think I would not call the first quarter here, and I think you explained it very well, Bill, I would not call that a normal quarter. I mean…

In the first quarter, we had a number of things that were going on still. We still had the inventory turns issue that we had in the fourth quarter, so that was a partial impact. We have all the integration costs, right, and you probably noticed that we don't pull out the integration costs. We have the integration costs embedded in the operating results that I gave you, the $27 million EBITDA and $6 million of ATOI. So, that's some of the things that are impacting it in the first quarter.

Yes, I think people always – we're all moving so fast, we are all moving so fast. But keep in mind, I mean, we were only allowed to get our hands around this on November 19. That was the first day for us.

Right. Great. Okay, good. And then just a second one. In the global rolled product segment, can you just talk a little bit about the aerospace aluminum plate market and just what's going on there with pricing?

What do you mean specifically?

In your global rolled product business, the aerospace business.

Yes. And you might be referring, Josh to see on whether there's any overhang as far as…

Yes, just on that…

We've talked about overhang in the past about plate, and we have not really seen a significant impact from plate overhang over the last year or so.

Okay, great. Thank you.

We have time for one more question. Your next question comes from the line of Brian Yu from Citigroup. Your line is open.

Hey, Brian.

Great. Hi. The first question is just on the $500 million prepayment on the Western Australia gas deal. Can you talk about how – I presume that this is a prepayment, how that recovery works and what's the anticipated cost savings associated with the new gas deal?

I'm really glad you asked the question, Brian, because that deal has come together fairly quickly. We announced it today. Our partners announced it in Australia today. And the selling company that the partners are buying this asset from announced it after the market closed. So, let me give you just very briefly a couple of things about the structure of that deal. It's a $500 million prepayment, $300 million gets paid this year, $200 million gets paid next year. It's to secure energy in WA for combined with a couple of other smaller deals. We'll secure the natural gas for the refineries in WA for about 75% of our needs. And it starts in 2020, and so it'll run from 2020 to 2032. Just to be clear, if you look at the results of the alumina segment, you see that under normalized environment, those assets are great assets. So it secures those assets for the long-term. And one other point, the way we – two other points, I guess, the way we recapture that cash is that we get a tranche of free gas during that 2020 to 2032 time frame, and we get a discounted gas level from market rate. So, those are the two ways that we recover the money. And then my last point on this subject, we had a $500 million free cash flow target at the beginning of the year. We are saying that we're going to spend $300 million on this year – on this prepayment this year. We're still going to deliver $500 million of free cash flow even after having paid that $300 million. So, we're essential absorbing an additional $300 million that we will deliver this year. So, $500 million of free cash flow after that $300 million payment. So it's actually, I think, a pretty good story for us all around, both mid term and long-term.

Okay. And that $300 million, just so I'm clear, is that on a 100% basis, or is that Alcoa's 60% ownership?

That is 100% basis, Brian. So that $500 million is 100% basis. So clearly our partners will absorb 40% of that $500 million.

Got it. And then second one, just going back to your comments earlier on the inventory impact at Firth Rixson, can you quantify what did the purchase inventory mark-up, and what was that headwind in the quarter?

Yes, and that's a hold-over from last quarter. Just whenever you do purchase accounting you have to mark your inventory up to market levels. And so, when you turn that inventory the first time, that you make no profit on it because you've marked your inventory up to market. And so in this quarter, that was a couple of million dollar impact negative on the EPS segment.

Got it. Okay. Appreciate it. Thanks.

Thank you.

Okay. Thank you very much. Before we close, I mean, let me ask myself a question, right, because a question that has not been asked but I'm sure is on the mind of some of you, but we're kind of running out of time here, given some other commitments there. The question that I think I have seen before I came in after the release I mean, that's floating around in the space, is around revenue growth. I want to address that, right, and so to make sure that everybody understands that, because we've grown year-over-year, 7% on the revenue side. And I know that there's been some comparisons on what the expectations are out there. But in reality it's 7%. So let's lock that in. And I have also said the primary drivers of that 7% has been organic growth coming from auto and aero. Now, let me give you some more color on this and remind you, I mean, and please help me explain that to the outside world, because people are going to look at you to explain this, and I think you understand what's going on there, so that they understand why this is a really good growth quarter. And the reason why – so if you look at the exact number, the exact growth number year-over-year is 6.7% and then when you break it down to how much of that has come – has changed through portfolio moves, you have to really have two buckets. One bucket is reductions, right, and we have two large segments where we have reduced our portfolio over a year, and it's a lot that we've done. And those of you all that know us well, remember that. But we sometimes forget a year is 12 months, it's a long…

And with this, I close and stay tuned to this station. Thank you very much.

Thank you.