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

Thank you, Connor [ph]. Good afternoon and welcome to Alcoa's fourth 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 the future events and expectations. You can find factors that 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 historical EBITDA means adjusted EBITDA, for which we have provided reconciliations and calculations in the appendix. And with that, I'd like to turn the call over to Klaus.

Thank you, Nahla. So let me start the session by characterizing the quarter. As you've seen, over the last year, that we have grown our portfolio aggressively and we have managed to deliver value. So what are we seeing in the fourth quarter? We see $5.2 billion of revenues. This actually is a composition of two opposing factors. One is a 7% growth year over year mainly to aero, as well as acquisitions, and that gets offset by price declines as well as divestitures and closures of 25%. So then we've seen a $65 million of adjusted net income, $590 million of EBITDA, and that includes $71 million of special items, right? So, and then if you go one level deeper and look into the value-add side, value-add $3.3 billion revenues, $448 million of adjusted EBITDA. When you look at our midstream business, the GRP business, auto sheet shipments are up 18%. We continue to shift the mix to higher-value, higher-margin products, and this has been driving a 90% year-over-year increase in regards to higher adjusted EBITDA per metric ton. And if you look into our EPS business, record revenues in the fourth quarter of $1.4 billion and aerospace revenues have been up by 34%. And then last but not least, our TCS value-add segment, record fourth quarter, margins of 14.6%. So let's move over to the upstream business. Upstream business in total $2.4 billion of revenues and $239 million of adjusted EBITDA. It's been profitable despite of lower alumina. Alumina has actually decreased in the quarter by 24% and over the course of the whole year 43%. Alumina prices continue to go further down, even 1% further down in the quarter, and over the [full year] [ph] have declined 28%. Alumina is profitable and primary metals have actually, in…

Thanks, Klaus. Let's review the income statement. Fourth quarter 2015 revenue totaled $5.2 billion, down approximately 18% year over year. Growth from the recent acquisitions and aerospace volume was offset by lower alumina and metal pricing, unfavorable currency, and the impact of divested and closed businesses. Cost of goods sold percentage increased by 220 basis points sequentially due to lower pricing, somewhat offset by productivity gains. Overhead spending held flat sequentially. Other expenses of $29 million, primarily related to the currency impact from the stronger U.S. dollar on our balance sheet. As Klaus mentioned, EBITDA of $519 million includes the impact of $71 million of special items. So, excluding specials, EBITDA is $590 million in the quarter. Also the fourth quarter effective tax rate of negative 8.5% was due to the net unfavorable discrete tax and special items in the quarter. I'll discuss these further in the next slide. Excluding these impacts, our operational rate for the quarter was 25% and 31% for the year. Overall, net loss for the quarter was $500 million or $0.39 a share. Excluding special items, net income was $65 million or $0.04 a share. It's important to remember that preferred dividends were $16.8 million in the quarter, which reduced EPS by $0.01 per share. So let's take a closer look at the special items in the quarter. In the quarter we recorded after-tax charges of $565 million or $0.43 per share, primarily related to restructuring and tax items. We announced curtailment of several U.S. smelters in the Point Comfort Refinery, resulted in a $220 million after-tax charge. Other restructuring across the business included the curtailment of Suriname, capturing synergies in our acquisitions, and a significant effort to improve efficiencies through an overhead reduction program. Note that roughly half of the restructuring-related charges are non-cash.…

Thank you, Bill. And let's go to the end-markets, those end-markets obviously that are most relevant to our core. Let's start with aerospace. We believe that aerospace in 2016 is going to grow 8% to 9%. The large commercial aircraft segment we believe shows a growth -- will show a growth of 15%. The ramp-up increases off these large-volume platforms like the 320 and the -- the 320, the A350 and the 787. So then the reflection of this is the jet engine order book now stands at 23,400 engines on firm order. The strong demand continues. If you look at the book-to-bill ratio of last year, it's at 1.25. So, the already high order book, which is over nine years of production in 2015 delivery rates, continues to increase. The good news also is the fundamentals are solid, 6.9% passenger growth and 2.8% cargo demand. And the profitability of airlines is substantially increased with what's expected of $36 billion in 2016. So, good outlook for aerospace. Automotive. Let's start with North America. Detroit Auto Show, I mean some of you have certainly followed today, I mean an equally very, very positive picture. We believe the growth is going to continue 1% to 5%. We project for this year the record sales in the last year of 5.8% year to date. Light trucks are leading it. It's been the highest number of penetration in the mix with 61.2%. And in this segment, the F150 is the bestselling pickup. That's obviously very, very good. We also think that this demand is going to have some sustainability also. Vehicles of 12 years and older have increased and will continue to increase to 15% by 2020. That kind of spells also that there's probably some pent-up demand still sitting there. Production is up…

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

Great. Thank you for taking my questions. I wanted to focus in on the targets, specifically in the EPS segment, and I wanted to compare it to the Investor Day a few months ago. If we look back two months ago, I think the target for the EPS business was $7.2 billion in revenues, EBITDA margin of 23%. That would imply EBITDA of $1.7 billion. But when I back into the EBITDA based on the Q1 guidance for ATOI, it looks to me like Q1 EBITDA for the segment will be at best $300 million. So, obviously that means quarterly EBITDA needs to increase quite a bit in Q2 through Q4, probably over 50%. So my questions are, number one, do you stand by the $1.7 billion EBITDA target for 2016? That's my first question.

Well, Dave, look, I mean, I said it already with my first slide, I mean when you look at the larger and larger picture here, right, we have built out our aerospace offering through innovation as well as through acquisitions, right? And this has helped us, for instance, to win those $9 billion of contracts and substantially strengthened our position that we have in the aerospace market, and that we will have also when we go into the separation. That said, Firth Rixson is operationally behind and RTI is ahead of plan, right? So we are expecting to address these issues. We are addressing them. We are on the course of bringing Firth Rixson up to the standards of the Alcoa operation system and also ramping up the new and emerging technologies and realizing all the benefits that are there. On RTI, as I said, we are ahead of our plan, and you will also see this coming through in the numbers once we are done with the purchasing accounting here, which is pretty much now, right? So that's where we are.

Okay. But just to clarify, that's a pretty big delta between what was communicated in November specifically for that segment and the run rate in Q1. So what I'm trying to figure out, and I think a lot of us are assuming that, you know, that that EBITDA number is achieved in the EPS segments, so really what I'm trying to figure out is, should we be rethinking that full-year target or should we expect meaningful EBITDA growth in Q2 through Q4 for this business, sufficient enough to hit the $1.7 billion EBITDA target?

Well, I mean we've shown you also in the Investor Day, I mean, what the team is working on. And so there's a whole host of things that the team is working on, from putting more productivity in place to capturing the synergies. We are actually on a very, very good course capturing the synergies, right, from gaining more market share there, from getting the operational availability of the equipment up to the level that we are used to. And that's all happening. That's all happening.

Dave?

Okay. All right. I will just leave it at that then. Thank you for the --

Thank you, Dave.

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

Yes, hey, good afternoon.

Hi, Timna.

Hey, Timna.

So, Dave asked I think a really important question. I wanted to follow up with the other one I keep hearing people ask me, which is about the alumina segment. And fully appreciate that Alcoa is way ahead of everyone with cutting production and that taking that very seriously, and that the Chinese should cut more production. I hear, and I'm hoping if you can just elaborate a little bit, if we plug in the 200-ish alumina price into the first quarter and beyond, a lot of downside to results. And until, you know, you're cutting back volume, that helps lessen your exposure. But what else can you do if the Chinese don't cut production? Can you talk to us about other cost cutting, other levers that you can pull? And any confidence you have that the Chinese might this time rationalize like they're suggesting?

Yes. So let me just -- I'll start by addressing it, and I'm sure Klaus will jump in, Timna. Clearly, you know, we're going to take capacity off at Point Comfort. We're -- we've already curtailed the capacity at Suriname. Those were the two that were the biggest drags on profitability. We are going to go heavily after raw materials to take costs out there, go after significant productivity improvements year over year, and also to drive our spend down on MRO and services. So on the remaining facilities, a very aggressive cost-cutting program. And Klaus also alluded to an overhead program that the upstream company will be going after along with value-add. But the upstream, given the market conditions that we're in, will be going after the overhead restructuring very heavily also.

Okay. If Klaus want to jump in, that's cool. But just one other follow-up I would have is, also getting a lot of questions about how the debt will be allocated. I know you've said that most of all would be put on the downstream. But do you have any further insights on what you might do with the pension under funded healthcare liabilities?

Nothing, Timna. Nothing has changed in our intentions compared to what we said before.

And recall what we said on Investor Day, if there's a clear connection with the business, for instance, active pensions, they go along with the business, so, active employees go along with the business that they're going to, environmental liabilities, things like that, clearly anything that's tied directly to the business, we will allocate it to the business. And then from there, we haven't determined the capital structures yet.

Okay. Thanks for the help.

Thanks, Timna.

Your next question comes from the line of Brian Yu with Citi. Your line is open.

Yes. Thanks, and good afternoon.

Hello, Brian.

Hey. So the first question is, this goes with Dave's earlier bit, is, Firth Rixson, you said it's behind plan. Could you give us a little bit more detail? And then also, what does this mean in the context of the $350 million EBITDA target originally set for 2016?

Well, I mean, yes, happy to elaborate a little bit. I mean, so, first, you have to always put this in the larger context of what has this achieved for us, right? And not just Firth Rixson but the total buildout through innovation as well as through acquisitions. It has strengthened our aerospace portfolio, it has created an aerospace portfolio. It has given us -- it has doubled -- I mean Firth Rixson alone has doubled the content on jet engines, and has given us a full range basically of global aero-engine forgings, critical rotating, light-limiting discs, shafts [ph], isothermal processes, all of this we didn't have before. RTI has given us access to titanium, to the mid and downstream titanium. And as I said, RTI is ahead of plan, performing better than what we have expected. Right? So I mean, if I look at the first year of full ownership of Firth Rixson, I have to be very clear, I mean it's not meeting our expectation, and this is mainly due to the operational issues and some technological issues. Now the good news of this is we know how to do these things, right? We know how to manage this. We know how to make sure that critical assets are run in a way that the operational availability is on par with what we are used to at Alcoa. So this is partially an issue of lack of maintenance and bring maintenance to the right levels and an understanding on how to run it. At the same time, you know, when it comes to technology, frankly, I mean as you know, the isothermal technology is a challenging one. We -- the starting point was not where we expected it. At the same time, we are leveraging our own resources,…

Okay. And second one, on just the aerospace revenue. So in the slide deck you said the industry is currently at 8% to 9%. You guys have also added about $9 billion of long-term contracts. At the same time, the deck also mentioned there are some inventory management at OEMs. So I'm trying to put all these pieces together, and what is a -- what do you think is your EPS revenue growth going to be on a like-for-like basis in 2016? Could you give us a range?

Well, look, I mean you have I mean two slides in there basically -- one for the engines and one for the structures -- that have the content of us for every one of those. So the only thing that you basically need is now the build rates, you know, and that gives you that number. So -- and by the way, on the inventory thing, this is very particular, I think Bill said it right, it's particularly on -- with one of the customers who prepared themselves for it, being well-equipped for the startup of their new platforms. And this typically goes in line with buying a little bit too much, and they're currently going through this. So this is nothing sad at least for us of longer term or even of midterm concern.

All right. Thanks.

Yes, Brian.

Thank you.

Your next question comes from the line of Justin Bergner with Gabelli & Co. Your line is open.

Good morning -- sorry, good afternoon, Klaus. Good afternoon, Bill.

Hey, Justin.

My question relates to the business improvement plan, about $1-1/4 billion. How much of that should I think is similar to sort of productivity gains that you've generated in 2015, how much of that relates to sort of activities beyond productivity gains?

Well, the interesting thing is that when -- I have it in one of my slides here. We have three categories that we track in our DI [ph] system, and we also have, not just cost productivity in there, we also have had growth actions and we have asset management actions. And obviously the asset management action only have an impact on the cash side, but that's one of the reasons why you see such strong cash performance, right? And so that we manage that in the same way. We just don't talk about it that much, you know. But the growth actions and the productivity actions have been the part of the structure all the time. So you should assume that this is pretty much the same logic that we are following, also the same logic in terms of how we are tracking these things. We have what I call the degrees of implementation logic. So basically we currently have for value-add 12,000. I don't know, Bill, whether you know the numbers. Probably also in the same magnitude --

Yes --

-- 40,000.

Forty thousand, yes.

In the system. So, roughly 12,000 also in the system for the upstream, which is giving us the comfort of understanding that this 600 or 650, respectively, are doable. And we have, as I mentioned and as the last point, I mean we have also done a very substantial program in terms of overhead reduction, which we manage separately, right, but it's part of the numbers that I gave you. We manage it centrally.

Yes. To be clear [inaudible] so I do have the numbers in front of me. The value-add co. has around 12,000, the upstream co. has around 6,000. So that's --

Oh, 6,000. Okay.

Yes.

This is the new year. Okay, good. So we have work to do.

Okay, thank you. But how much of that would be incremental to sort of the gains that you've called as productivity into the team?

All incremental.

Okay.

All incremental.

It's non -- it's beyond productivity?

It is on the -- in both cases, it's largely productivity, year-over-year savings, on top of the productivity that was accomplished in 2015.

Okay. Thank you. My second question, if I may, is -- have -- are you going to articulate cash flow goals for 2016? And if cash flow is challenging given the challenging macroeconomic backdrop, you know, what are your plans for, I guess, generating additional liquidity as needed into the separation?

Right. So we have historically provided a cash flow goal. Given the fact that -- two things that are going on this year that prevented us from providing a cash flow goal. First is, going into the separation, there will be separation costs associated, and so we're looking at that. And then secondly, the volatility in the markets, it makes it very, very difficult to provide a firm cash flow goal in 2016. So we will continue to work through that. You saw that we generated over $400 million of cash this year. Just to be clear on that, that included a negative impact of $300 million that we made on the prepayment in Australia. That was also at a significant lower metal price than when we had set the target. And we'll continue in 2016 to do all the same things that we did in 2015, and that is productivity increases, driving down working capital, and limit capital expenditures to critically important capital for both sustaining and growth.

Okay, thanks. And any comments on the question of liquidity into the separation needed?

Yes. We, you know, I guess it's -- as we go into the separation, we'll continue to do all the things that we talked about, and are confident that, as Klaus had alluded to earlier, that the separation is on track. So, no real concerns there.

Thank you.

Your next question comes from the line of Paul Massoud with Stifel. Your line is open.

Hi everyone. Good afternoon. Thanks for taking the questions. I guess --

Hello, Paul.

I had a question on just the smelting portfolio review. Obviously you've done a lot of work, you're aiming towards having 2.1 million tons I guess smelting capacity by the middle of 2016. And this quarter we saw an increase in EBITDA in that business. And so, you know, I guess, you know, once you're all set and done, I mean are you happy with where the portfolio is at given the current commodity price environment? Put another way, I mean, are there still operations out there today that are in negative EBITDA territory?

The answer is yes. And we are working, as always have done these, to make sure that also the restructuring is done with an eye on the value creation for the shareholders. Right?

And if I could add just a little bit to that, recall that we have a smelting portfolio that sits on average in the second quartile of the cost curve. So that would tell you that we have some very, very strong assets globally in places like Canada, Norway, Iceland, the world's lowest-cost smelter, 25% ownership, in Saudi Arabia. And so there is a core set of assets that are very, very strong in the smelting portfolio.

It's more than half of the -- 1.7 million tons.

Yes.

Right? So --

Given the fact that we're running around 2.1 million metric tons. So it has really gotten to the point where the operating capacity is a fairly strong set of assets.

But that also gives you the answer of how much capacity is still kind of on the radar, I would say.

I appreciate that. Thanks for the color. I guess, the second question I have was on GRP. I mean you're talking about flat year-over-year ATOI in the business despite this step-up that we're seeing in revenues coming in from the auto side, and, you know, I can appreciate that you've got costs elevated as a result of the Tennessee ramp-up. I mean, at what point do we start to see, you know, and we've seen EBITDA step up, but at what point we start to see ATOI really move up?

Yes. No, you have to also keep in mind that we actually restructured the portfolio. We closed two mills in Australia, we sold the mill in Russia, and we sold the two mills in Spain, one mill in France. And that's -- I mean that all goes out as volume. That all goes out as volume. So you have to adjust to volume. What I -- and also you have to look at -- I mean, you can't just look at the revenues there because they get massively impacted by the pass-through of metal. So the real good indicator to give you a feeling for what's going on in our midstream business is to look at the conversion margin. So this is the EBITDA per metric ton. And when you look at the EBITDA per metric ton, you actually see that there's a substantial uptick that we've seen over the last quarters. And this shows you that our move with multiple actions, I mean auto is just one, I know that auto is always on the mind, but I mean those portfolio actions that we have taken also were much in light of doing the same thing. Shifting to higher value, shifting to higher margin products, that's what we will continue to do there.

Okay.

And if you don't mind, one last comment on GRP. The guidance that we provided is flat year over year. Remember that that includes a negative impact from the cold metal strategy that we are putting in place in Warrick. That's part of the -- in part that's part of the separation of the Company because we are putting the Warrick rolling mill in a position to be able to run without the smelter. So, exclusive of that impact, we would see ATOI growth year over year, and as Klaus alluded to, the really two things going on within GRP: aerospace and auto continuing to be strong, if not stronger, and the packaging business continuing to see pricing pressure.

Yes, exactly.

Thank you. Maybe one last question, it's a longer-term sort of thought. You had, you know, you're qualifying the material on the micro-mill -- at the micro-mill, or I guess eight companies, eight or nine companies as of the last conference call, that are looking at it, in addition to --

Twelve. Twelve now. Twelve now.

Twelve companies. Yes. Does the micro-mill, you know, imply that we're no longer going to see any more Tennessee type conversions where you take an old packaging facility and convert? Is that, you know, what you're hoping will ultimately be the case? Or is there room for growth in both?

Well, there's room, I would say, there's room for a Tennessee scenario with the micro-mill, right? You can see some combinations of this, you know, where you put a micro-mill in front of something, right, and use this, and -- or you could put a micro-mill behind the smelter. Because the capabilities of the micro-mill -- don't just think of micro-mill for automotive applications. Think of it for other applications. You know, what the micro-mill really needs is a high-volume application. That's what -- other than that, it's highly, highly flexible, right? And I mean, this time I actually decided not to talk so much about micro-mill. But the cool thing -- that's the cool thing about micro-mill, it will clearly change the way the rolling world works, you know. At the same time, it also allows, and that's probably the more interesting thing, it allows to attack steel in a more dramatic way. And we believe now that the market size there is 8-point, I don't know, 8.3 --

$8.3 billion of addressable market --

-- addressable that currently is not addressable with the aluminum materials that one can make. But with micro-mill, this is addressable.

All right. Thanks for the taking the questions, I appreciate it.

Pleasure, Paul.

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

Good afternoon.

Hey, Josh. Afternoon.

Can you just expand on the inventory overhang in aerospace with the one customer? You know, is it any specific area such as fasteners, air structures or engines? And then how -- what do you think the duration of that overhang is?

I think the duration is a relatively short duration. You know, we are really, I mean, seeing varying degrees of inventory adjustment. So one is basically because, and that's mainly buoying the efforts of consolidating major OEMs in the airfreight market and then one other is basically the decreasing build rates of selected aircraft platforms, this will impact basically specific product lines there, right? So as I said, nothing is at -- we see as a mid or longer-term worry. This is really something more for the next quarter to know will sort itself out.

Yes. Just keep in mind to put it in perspective of the strength of the long-term growth of large commercial aircrafts. So it's a short-term phenomenon.

And I would say, I mean asking for which products are more affected, it's probably fastener and extrusions that are most affected by it.

Okay. And that's what we're typically seeing on the buildup.

Clearly, Josh. Yes, thank you.

Just one follow-up on GRP. You know, at the Analyst Day you had mentioned the potential for can sheet imports to pressure the business. Have you seen any new import pressure in that market?

Not really. I mean the -- I would say the -- one should not overestimate the import pressure. I mean the general situation is an oversupply in the marketplace, right? And therefore, a price pressure, right? And the import, the import part, particularly when you think about China, is small add-on to it, right? So -- but Europe obviously also has an overhang and we've seen some of that coming over, right? But the general problem is the oversupply in the market, putting price pressure on. And the second issue I see there is the lack of differentiation potential, right? Because in a way it has become a very commoditized product, right? A lot of people can make it, which is clearly the indication that is commoditized, right?

Okay.

Yes. I mean, Josh, that's the reason why -- that's the reason why we're trying to move further into differentiated products also on GRP, and that's the reason why we converted Tennessee successfully over from a one-trick packaging pony into this double-trick pony. And it's currently tricking more on the automotive side, and that's the good thing, we're ramping up, and sold out by the -- I mean you will see it coming through already in the next quarters. By the end of the year we will see a very, very strong Tennessee impact also much as we see the impact on them for the automotive, reflected in the earnings increase in the midstream.

Okay. Thank you for that.

Thank you, Josh. Next question?

Your next question comes from the line of Michael Gambardella with JPMorgan. Your line is open.

Yes. Good evening.

Mike. Hey, Mike --

Yes. Just have a question with the separation. Have you been in talks with the PBGC, the Pension Benefit Guarantee Corporation? Because I would assume they guarantee all the define benefit pension plans that you have in the United States, and do we have something to say about the capital structure of the companies when they're separated?

Absolutely, Mike. And so I'll address that one. You hit on it exactly. And that's one of the reasons why we can't necessarily give you definitive answers on the capital structures at this point, because we are in discussion with the PBGC. You understand, as you well alluded to, that that is a requirement in this type of a transaction. And so, yes, we have initiated that discussion with the PBGC.

So the PBGC at the end of the day, will they dictate what the capital structure will be of the split in the company?

They won't dictate it, Mike. It will be a dialogue. But ultimately we want to do the right thing for our pensioners and our employees, and so we will be working with the PBGC to ensure that we do that.

Is it a fair statement to say that the majority of the U.S. pension plans go with the upstream business?

Yes, I think it's fair to say at this point that we're in discussions with the PBGC and it's early in the process. So why don't you let us work through that, and in the Form 10, we will make it clear.

Okay. Thanks, Bill.

Sure.

All right. Okay. I think this is really all the time we have today, and obviously we have more time in the next weeks and in several discussions here. So let me just characterize the quarter again. I think it's a solid quarter, reflects all the actions that we've taken. We really have two different things here on the value-add, good things happening on the aerospace, record sales, major new contracts, midstream, higher margin, profitability up, automotive delivery is up. And then at the same time, on the upstream side, massive headwinds. We've reshaped the portfolio. The upstream is standing firm and remain profitable. We have and continue to have strong productivity, seen $1.2 billion last year, cash generation was excellent. One thing I can absolutely assure you, we are laser-beam-focused on controlling what we can control and we are fully on track with the completion of our separation in the second half of 2016. So, thank you very much for calling in, and have a great day.