Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Alcoa Earnings Conference Call. My name is Shannon, and I will 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 for today, Matthew Garth, Vice President of Financial Planning & Analysis, and Investor Relations. Please proceed

Thank you, Shannon. Good afternoon, and welcome to Alcoa's first quarter 2016 earnings conference call. Let me begin by apologizing for the late distribution of the press release. Our newswire provider network went down, so we distributed the release as quickly as we could. I'm joined today 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'd like to remind you that today's discussion will contain forward-looking statements relating to 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 to 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. With that, I'd like to turn the call over to Klaus.

Very good, Matt. Thank you very much. So, in the usual fashion, let me characterize the quarter solid performance, strong productivity separation on track. We have for your digestion actually separated out the Arconic as the new value-add company will be called, and new Alcoa gives you a better taste for the future two firms. Let's start with the Arconic segments. Revenue, $3.3 billion, down 2.2% overall. Now this is really a combination of the growth of 6.7% predominately acquisition related and a decline of 8.3% from metals and FX changes and also minus 0.6% from divestitures or closing of operations. Profits are up 8%. Record adjusted EBITDA margin of 16.4%. If we then go down into the segments: Global Rolled Products, profit up 26%, the EBITDA margin per metric ton probably the best measure of how they are doing, $374. And if you include the Warrick, cold metal plan, it would have been even at $390 per metric ton. Engineered Products and Solutions, record first-quarter revenues, record first-quarter profits, up 4%. Transportation and Construction Solutions up 3% profitability, and record first-quarter adjusted EBITDA margin of 14.9%. Good news also, we've been able to secure supply agreement with Airbus for 3D-printed titanium parts for Airbus on the plane. So, this is obviously also indicating important future business opportunity. We've been able to secure multi-year $1 billion industrial gas turbine contract, the largest IGT contract to-date. We have been able to sell Remmele Medical proceeds of $102 million. $179 million of productivity plan of $650 million in 2016. Global Rolled Products, Transportation and Construction Solutions are on track to meet their three-year targets. And we have set a new goal for EPS that will better reflect the aerospace market and the Firth Rixson performance. And obviously, we'll go into it and I'll talk to this in detail in my presentation. So, then, when you go to the new Alcoa segments, third-party revenues of $1.7 billion, down 32%. This also is a combination of growth of 4.5%, offset by 26% to lower prices and FX and another 10.6% to the curtailment and closures of operations. Both segments are profitable. We've been able to sign a $350 million third-party bauxite contract. Ma'aden, the refinery, is now at 80% nameplate capacity. We've been able to curtail, fully curtail, we are able to fully curtail Point Comfort by the second quarter. Warrick smelter is closed. $175 million of productivity, plan is $550 million in 2016. We've sold the natural gas pipeline, our stake in it, in Western Australia for $154 million. And we are on track to meet our three-year targets, which is a cost-curve target to get down to 38% of aluminum and the 21st percentile for Alumina. And as a third point, separation is on track. So, with this, let me hand over, Bill, to you.

Thanks, Klaus. As we usually do, let's review the income statement. First quarter 2016 revenue totaled $4.9 billion, down approximately 15% year-over-year. Organic growth and growth from the recent acquisitions was offset by lower Alumina and metal pricing and the impact of divested and closed businesses. Cost of goods sold percentage decreased by 230 basis points sequentially, largely due to productivity gains. Overhead spending increased year-over-year, primarily as a result of costs related to plan separation of the company and the acquisition of RTI. Other expenses of $34 million were related to the results of our Ma'aden joint venture and unfavorable currency translation. First quarter effective tax rate of 73.2% was primarily due to non-deductible separation costs and tax associated with an asset sale and discrete tax items in the quarter. Excluding these impacts, our operational rate was 32%. Overall, net income for the quarter was $16 million or $0.00 per share. Preferred dividends were $18 million in the quarter, which reduced EPS by $0.01 per share. Excluding special items, net income was $108 million or $0.07 a share. Let's take a closer look at the special items. In the quarter, we recorded after-tax charges of $92 million or $0.07 per share primarily related to restructuring and separation costs. Restructuring across the business included accelerated depreciation of the Warrick smelter, costs from the Wenatchee and Point Comfort curtailments, and headcount reductions associated with lower market demand largely in the aerospace businesses. In the EPS segment, we've reduced 600 positions in the first quarter and have a plan to reduce an additional 400 positions this year. Also, given the current market environment, we're evaluating a further reduction of up to 1,000 positions. Portfolio transaction costs stem from work being done separate the company. Note that roughly 75% of the restructuring-related charges…

Well, thank you very much, Bill. So, why don't we start with a look into the end markets that are most relevant for Arconic and also for a new future Alcoa. I'll start with aerospace. Aerospace, we project 6% to 8% growth this year. This is a little lower than our 8% to 9% that we saw for this year earlier in the year. We see that the market is going through a transition given an unprecedented level of new model introductions. And we are seeing lower orders due to that for legacy models and a careful ramp up of the new models. Large commercial aircraft deliveries stand at 9%, plus 9%. The jet order book is bigger than nine years of production, and we actually see solid airline fundamentals from passenger miles demand to the cargo demand. Airline profitability is expected to hit a record this year. The global trend is also fully intact with the middle class as well as urbanization and the cancellations are below the five-year average and below 2% of the gross order book. Let's go to automotive and let's start with North America. We believe a 1% to 5% growth. This confirms our earlier view. Production is up 7.4%; strong sales 3.1%; sustained demand, also, we see the average age of the vehicles of 12 years and older is increasing. So, kind of pent-up demand showing in there. Stable inventories were 65 days. The average transaction price is up 2%. So all of that are pretty good news in that market in North America. In EU, automotive in EU rising production of 1.9%, in the west, 4.3%, offset by minus 14% in Eastern Europe. Strong registrations, over 10% and exports expected to increase by 6.9%. China production is recovering, plus 3.9%. We expect for…

[Operator Instructions] Your first question comes from the line of Evan Kurtz from Morgan Stanley. Your line is open. Please go ahead.

Hi. Thanks, everyone. Thanks for taking my questions. Just a quick one on the aerospace. It seems like the market might be weakening a little bit. I was wondering how you protect yourself from that. Do you have any sort of minimum requirements contracts where you get some sort of take-or-pay penalties, if they dip below a certain amount in a given year?

The contracts vary substantially, but typically, I mean, the way this works is, you get certain components on a jet engine or on a plane platform and then it all depends on how much this sells. And typically, I mean, if it doesn't sell, you don't get it. If it sells more, you get more. That's really how this works.

Okay. So, if they were to cut production schedules more that would be kind of a one-for-one relative to kind of your revenue in aerospace? Is that how to think about it?

That's exactly how you have to think about it, but what you are seeing here is, is a little bit of a different phenomenon. I mean, they are very carefully ramping up the new platforms. And that's, I think, a very responsible behavior on their side because there's a lot of new technology in the jet engines as well as in the structures. So, they are carefully ramping it up so that they are not spreading the goods all over the planet and then if there are maintenance issues, they have an issue. So, I see it rather than a stretching out because the demand, as you can see by what I just talked about on the end market, demand continues to be strong, right, and you have a nine-year auto book and there's almost no cancellations and the fundamentals are strong, right? So that's what's happening in the market.

Great. Thanks for that. And then my follow-up is just on the bauxite opportunity. Nice to see the $300 million third-party sale. I was hoping you can seize the opportunity there. How much spare bauxite capacity do you have? I assume with some of the refineries down that you can go above and beyond that, but any sort of quantifying, that would be helpful.

Yeah. We have curtailed Point Comfort. We've curtailed Suriname. And so, any additional bauxite that we're getting out of the system, we're selling into the third-party market. And so, the size of that deal that we just recently announced is $350 million over a couple of years. And we're looking to grow our third-party bauxite business.

Well, the nice thing is with the mining, it's much easier to increase your capacity as well as to slow down your capacity. This is not like, I mean, in a refinery or in a smelter where you have, I mean, certain increments. I mean, in a smelter, you basically can typically only do half a line and in a refinery, it's one, it's a digester that's a unit that you can bring up or down. In a bauxite mine, it's much, much easier. And you can ramp it up and ramp it down much faster. You leave it in the ground, we're still on aerospace. You leave it in the ground if there's no demand and you bring it out. And frankly, I think we did not limit it by our own capabilities. We have one of the largest bauxite reserves.

We have one of the largest bauxite reserves, and we're the largest bauxite miner. So, we mine around 45 million metric tons a year and looking to get bigger in the third-party market.

Yeah, exactly.

Great. Thanks, everyone.

Well, thank you, Evan.

Your next question comes from the line of Curt Woodworth from Credit Suisse. Your line is open. Please go ahead.

Hey. Good afternoon, guys.

Hello, Curt.

My first question is just on the guidance at Firth Rixson. When you look at it relative to your initial guidance say 18 months ago, you're off almost $190 million of EBITDA. And you commented that you think that you're two years behind your initial plan. So, I guess, the question is, how much of the miss is on the isothermal piece? And then, when you say you're two years out, does that mean you still think you can hit that initial target you outlined for the $1.6 billion of revenue and the $350 million of EBITDA?

Well, the good news on the isothermal, I mean, we have structured the contract in such a way that we have a performance clause in there. This is not directly for the isothermal alone, it's for Savannah, and that was more for practical purposes how to calculate that. And that's $130 million if I recall that correctly. So that's a performance part in the purchasing agreement with the seller, right? So, in case that doesn't happen, I mean, we would not have to pay that.

Yeah. It's $150 million earn out that we...

Exactly, exactly. So that's the good news there. The other thing is on isothermal, as I mentioned before, it is coming up. The qualification is underway. And we have had additional requests from customers, which we're currently working on securing, right, which obviously allow us to improve the utilization of the isothermal press. But we knew from the start on that isothermal it's a very, very complicated technology and that's why we did the earn out because we knew that there was a risk in it from the start on. But again, to be clear the earn out is on Savannah in total not just on isothermal. And then the question you mentioned here, the second part of your question, will we get it in two years? Frankly, I mean, after our recent experiences I would re-leave it as I described it. I mean, we're two years behind and I would say we'll work on it. And the other plan which is something that I shared with some of you already but let me share it here, we are planning the moment we are separating the two companies, we will be coming out with new three-year or multiyear, let me put it this way, multiyear target. So, by that time, so in the second half of the year, you will also get much more clarity on the longer term for both companies, and we will also come out with the measurements that are more in tune with the two types of businesses that you will be seeing, a commodity business as well as the high-performance technology business. We've been talking to quite a number of investors, and we're currently in the process of getting kind of the investor matrix lined up.

Okay. And then as a follow up, just on the packaging business you said that profitability is down about 55%. It's not clear what the timetable is on that chart, but it looks like [indiscernible].

Timetable is very simple. It starts basically with the year...

2011.

2011. We put the 2011 at 100% and then you see how it is going from there, right?

So, following 55% roughly in, say, two years, do you think that's a structural change and how much of that – and, A, do you see a bottoming? And is it a combination of, say, scrap spreads narrowing and pricing pressure or mix and do you think you can turn that around at all since [indiscernible]?

Yeah, it looks on the chart as those two years, but in reality it's four because we only showed 2011 through basically early 2016.

That's been pretty flat the first year.

Yeah. Well, yeah, on the first two years, but the answer is very simple, yes, there is a structural change in the business. And that's also why we have been doing things like, for instance, changing Tennessee that used to be a packaging mill only into an automotive and packaging mill, right? And that's why we have been restructuring some other parts, closing some down. Our Australian mills for instance, the two Australian mills, we sold the three mills in Europe, I mean, two in Spain, one in France. This all goes into it. We clearly believe that there is a structural change in the market and we're very happy that we have been building up to the higher value businesses in there and that's really what you can see here also. But the unfortunate thing is the market, the packaging market has really substantially deteriorated, right.

And I would also point out, Curt, that you look at the strength of the productivity that GRP has done year-over-year and that's really an attempt to offset some of these declines in the market in packaging.

Okay. Got it. Thank you.

Thank you, Curt.

Your next question comes from the line of David Gagliano with BMO Capital Markets. At this time, I would also remind our participants to please remember to ask one question at a time and hold their other questions. Thank you very much. Your line is open.

Hey, Dave.

Please go ahead.

Hi. Great. Thank you for taking my questions. And also, thank you for the increased visibility on the targets on the downstream. Actually I have a question though that's related to the other two segments. I don't know if I'm reading this correctly, but it looks to me like you say that GRP and the TCS segments are on track to meet the three-year targets for 2016, and you gave revenue numbers for each of those segments in the press release. But if I look back at the November 2015 Investor Day, the revenue numbers in the press release for those two segments are about $1 billion below what they were as of November 2015. So, I'm wondering if you can give us a similar bridge that you gave for the EPS segment to explain the difference?

To be honest, I'm looking at it right now, and I'm happy to put this out in the deck. I'm not sure whether we probably have to run this through our legal process here, but I tell you it's very simple and it ties back to what I just explained. Remember how much we have divested and closed also in the GRP side. So, what we've basically done, if you take the original target was nominal $7.1 billion, right, and we've divested and closed about $1.1 billion. So the target for 2013 where we put this out, was roughly – the starting point was roughly $6 billion. And then if you look at what we have been able to add through all the other things here, so automotive and stuff, and look at the LME and the FX, it brings the basic down to $6.1 billion line.

And on the TCS side, Dave, there's around a $200 million negative impact from currency also. So, the numbers that you see on page six from – it's probably not page six on your deck, but from Klaus' presentation, have been adjusted for forex impacts.

Okay. And so just, but just to clarify on the GRP business, the $7 billion number that was provided in November 2015 was...

$7.1 billion.

$7.1 billion was pre any divestitures, right?

Right.

Yes, it was pre any divestitures and closures. And they have eliminated on that chart the LME and FX, I mean, you also have to see the LME pass-through part here, right, in GRP.

Okay. Great. Thanks very much.

Yeah, good.

Your next question comes from the line of Justin Bergner from Gabelli & Company. Your line is open. Please go ahead.

Good afternoon, Klaus. Good afternoon, Bill.

Hey, Justin.

Hey, Justin.

Question on the separation. Is there any update you can give us on when we can expect the first Form 10 filing or any update you can give us on sort of how matters are progressing vis-à-vis pension and the PBGC?

Yeah. Two things, really. On the Form 10, and we've always said first half of 2016 is when we will put out the Form 10. So, right, and we will...

And regarding the PBGC, we've had initial conversations, initial discussions with the PBGC. It's gone well and we'll update you as we can. But the initial discussions have gone well.

Yeah, good conversations.

Great. That's good to hear. As you divest some of these non-core assets, is it possible to provide us the net proceeds number relative to that $750 million? And should we expect, sort of, Alcoa to continue to work through divesting non-core assets opportunistically in the quarters ahead?

Well, we are always looking at opportunities how to monetize and generate value, right? So, I think, this has always been, then the case if you look also in the previous years, right? And on the...

On the net proceeds side, you almost have to go one-by-one, but on the pipeline, you realize that we will have a tax impact and also it's an AWAC asset. So, we get our 60% share there. On Remmele, there will be a small tax impact. And then on the corporate owned life insurance, that will largely show up as cash this year, and we're likely to consume a tax attribute in future years. So, largely that one will be without tax impact this year in 2016, so the total proceeds slightly less than the $750 million we have before the gross.

Great. Thanks for taking my questions.

Sure.

Justin.

Your next question comes from the line of Tony Rizzuto from Cowen & Co. Your line is open. Please go ahead.

Thank you very much. Hi, Klaus and Bill.

Hey, Tony.

Hi, Tony.

Thanks for taking my questions. My first question is, what percentage of your aero business is spares or aftermarket versus OEM business?

That's a good one. You know it offhand?

I don't know it offhand, Klaus, and I hate to put a number out there without the actual numbers.

Yeah. Neither would I.

So, I'll follow up with you guys in offline.

Yeah. Exactly, Tony.

Okay. And then the second question if I may and maybe if I could possibly ask a third question too. That's all right.

Let's start with second before the third [indiscernible].

All right. With regard to GRP, it sounded like you guys are seeing increased pressures on margins in the packaging market. Is that fair? Is that a fair statement?

Well, I mean, just look at the slide that we just discussed here. I mean, there's no way to deny that. At the same time, I would say, we have seen the level to come down to this level as we have it. So, I think you're talking about GRP right on packaging?

Yes. And I'm talking about the level of acceleration in those pressures because I'm hearing...

Yeah, I would say, at this point in time we're not seeing that increasing but we're also seeing a trend upward.

And I would reference you back, Tony, at least to our short-term guidance. Right? And so, we're trying to be very clear in all of our short-term guidance that all of our segments are trending upward with the exception of TCS. And so, on the GRP side, we said, I think, 5% to 7% year-over-year. So, even if we see additional pricing pressures, we're able to mitigate it through good cost control.

So, and in regards to the spares, I mean, our good team is just providing it. And I don't want to go into each one of the segments, but I would say it varies. But I would say, it varies substantially depending on which one of the aerospace segments you're looking at. And I think it also varies if you look at by year, and I only have here in front of me one year. So, it varies if you look at – this is 2015. If you look at 2015, it varies from 50% in that year some businesses to 2016. Actually 10%, 10% in some other businesses, right? But I would be very careful with this number, right, because the segment that has the 50%, I think that's a very unique situation that we had in 2015.

Okay. That's helpful. May I ask a quick third question if I may?

Sure. Go ahead, Tony.

Of the Upstream adjusted EBITDA that you guys reported, $185 million in Q1, approximately what percentage would be from power sales?

Let us come back to you on that one, Tony. I don't have the numbers in front of me. But I think that just to give you some color, power sales have been down on a sequential quarter basis and on a year-over-year basis as we've seen the Brazilian power prices come off fairly substantially. So, I can get you that number in a minute.

All right. Got it. Thank you so much, gentlemen.

Okay.

Your next question comes from the line of Josh Sullivan with Sterne Capital. Your line is open. Please go ahead.

Hey. Good afternoon.

Hey, Josh.

Just regarding the revised EPS guidance, you talked about pricing pressure from the OEMs. Do you think we've seen the bottom of that pressure, or just how do you see that playing out over the next 24 months? And if you could dissect that between maybe the legacy aircraft and next-generation aircraft.

Look, I think that there's enormous pressure from the OEMs. They are under pressure through their customers. This pressure will continue. We are assuming this pressure will continue, and we will have to continue to build productivity in and we will also have to continue to win through innovation. And basically we put out new cars, come up with new ideas. So that it's not just giving a certain reduction on price but coming up with a technical solution that's superior so that we can jointly win. And that, I think, where our technical skills come in and we're pretty good at that. I mean, but the pricing pressure will continue. That's what we are assuming. And we are in the business also to help our customers to win, right? So that will be going on. And you also see – I mean, we're pretty proud of having won the Airbus contract for 3D metals printing. And in this case, it's titanium. I don't know whether you guys noticed that. And as you may be aware of, also we brought our new powder metals plan online beginning of the year. And that allows us to do powder very, very high quality metals powder for three different types of metal alloys. And in the main titanium, nickel alloy as well as aluminum alloy so this is a big, big enabler for the future growth.

Okay. Thank you.

Thank you, Josh.

Your next question comes from the line of Charles Bradford from Bradford Research. Your line is open. Please go ahead.

Hi. Good afternoon.

Hey, Chuck.

Hi. Just a simple question on the insurance sales. Was there a profit? And do you expect to book a profit in the second quarter when you finish up those sales? It may have been in your deck. I might have missed it.

There was no accounting gain on those sales, Chuck. There is a lower tax basis. So, we'll have some tax expense associated with it, but no book gain.

Well, thank you.

Okay. And to answer to Tony Rizzuto, I was able to grab the numbers fairly quickly. Around 25% of that $185 million of Upstream EBITDA is associated with energy sales. Now that's our energy business unit. So that would be inclusive of energy that we're selling externally and internally. So, it'd be inclusive of energy we sell at the Warrick facility up in Canada and our ownership there and then also in Brazil.

Okay. Next question, please. [Operator Instructions]

Your next question comes from the line of Justine Fisher from Goldman Sachs. Your line is open. Please go ahead.

Good evening. How are you doing?

Hi, Justine.

The first question I have is related to the pension liabilities. You guys had mentioned earlier in the presentation that there are liabilities associated with operating businesses and then anything that's curtailed can be left at the corporate level, I guess, as opposed to the segment level. Does that mean that those liabilities would potentially be offloaded to the PBGC? So, if we're looking at potential standalone for the Upstream business, we can exclude – well, I won't quantify, but exclude some of the legacy liabilities that are on current Alcoa's balance sheet?

No, we would not be looking at offloading any of the legacy liabilities to the PBGC. The legacy liabilities will be split between the two companies. That's part of the activity that we're going through now. And clearly when we sit down with PBGC, they have an interest in how those gets split and the credit worthiness of the two companies. So that's part of the exercise, but none get offloaded per se.

Okay. Could you reduce or reschedule any of the cash payments related to those liabilities that might sell to Upstream Company?

We are making the minimum ERISA payments today on those liabilities. And so, we're currently, on a GAAP basis, around 74% funded. On an ERISA basis, I believe it's in the lower 90%s. But there would not be any further reduction of payments that we could make that we're making – less than we're making currently.

Okay. And then just one last question, in this timetable on steps to completion in the presentation, it mentions complete financing in the second half of 2016. What financing is that? I mean, if the deck can move downstream and you guys haven't announced anything, but if hypothetically it did, it seems to me that there wouldn't necessarily need to be any new financing. So can you talk about what that refers to?

Sure. We would be looking that the debt ultimately will be attributed to the upstream and the downstream. In order to do that, we will go out, and without getting into too much detail around the orientation of the separation, we will go out into the market, raise debt on one of the two entities and then pay off debt at the other entity. And so that's what the financing would be.

Okay. Thanks very much.

Okay.

Thank you, Justine. Okay. More questions?

At this time, it's all the time we have, and I'd like to turn the call back to Mr. Klaus Kleinfeld.

Very good. So, you've seen this quarter our profits were up in every Arconic segment, Alumina, aluminum segment, both profitable in a very low pricing environment. We are laser-beam focused on the things we can control: productivity, high productivity, showed you the winning major contracts, monetizing non-essential assets, you should expect our focus continue there. Looking ahead, I mean, we are on track to meet our three-year targets in all businesses except EPS. And I hope I gave you also the clear adjusted expectations to better reflect what is going on in aerospace, as well as the lower Firth Rixson performance and the better RTI performance that shows you our new expectations for EPS. And the other thing here is the separation is on track. So, stay tuned. We will obviously have many more opportunities coming up here to talk. Thank you very much for joining us for this call. Thank you.

This concludes today's conference call. You may now disconnect.