Alcoa 3Q15 Earnings Call Notes

Klaus Kleinfeld – Chief Executive Officer

Managing through the headwinds

” let me characterize the quarter. We have had a very strong value creation focus and we’re managing through the headwinds. On the business side, 5.6 billion revenues and this is really two factors, this is a 21% decline done on purpose a lot coming from divestitures and closures and some also from headwinds”

Strong demand continues in aerospace

“Aerospace we continue to see an 8% to 9% growth rate for this year and that of commercial aircraft growth of 8.3%, strong demand continues.”

Automotive growing 2-4%

“Automotive, North America we believe it’s going to grow 2% to 4%, actually we are narrowing our projection here. In the last quarter we said 1% to 4%, so as we see the year go by we think that’s going to be 2% to 4%. ”

Taking numbers down on Chinese automotive

“China looks little different, there we actually take it down a bit, we actually believe already over that, it could grow 5% to 8%, we’re now seeing it more in the 1% to 2% range. Production slowing down, year-to-date plus 1.3% and if you look at year-over-year, you see a minus 7.8%. Sales are up 1.5% year to date and minus 2.1%, if you do a year-over-year and obviously also see a little bit on softening on the consumer confidence. ”

Breaking up the company into two

” last week, we announced that we are completing our transformation by creating two industry leaders. We create what we called the value-add company, provider of high performance margin material solutions and an upstream company leading and build for success. Throughout the cycle both as we believe are top tier investment choices.”

Higher multiple could be unlocked for the value add side of the business

“The value-add business, the value-add business side you get a feel for the value that is in there when you look at what have been the trading multiples for instance of those type of businesses. So, you just seen the acquisition for PCP that’s underway by Warren Buffett’s Berkshire Hathaway and he paid for a business that is having $10 billion of revenue whereas six of those 10 are having a full overlap with us, $37 billion, right. So you get a feel for the value that’s possible there”

Aerospace cycle should be strong for a while

” you have a nine year order backlog and you have a more diversified customer base today with many, many different airlines. So — and we have shown and we continue to believe that this market is basically going to grow pretty substantially until 2019 and on average we provided an outlook until 2024 growth between 3% to 5% on average.”

William Oplinger – Chief Financial Officer

Expecting a balanced alumina market for 2016

“Switching to the aluminum market, we’ve also tightened our forecast by about 180,000 metric tons to a global surplus of 2.2 million metric tons. Our expectation for the rest of the world surplus is down 840,000 metrics tons from our second quarter view largely due to an increase in Chinese imports of 700,000 metric tons as well as delayed expansions in the rest of the world. Chinese swing refining capacity is under pressure to curtail as alumina prices have fallen below $300. We expect to see more Chinese refining curtailments as we move into the fourth quarter. And as you can see, every quarter this year we’ve tightened our view of the surplus and we expect a balanced alumina market for 2016.”

Global inventories stand near long term average

“Global inventories stand at 62 days of consumption, two days lower than a year ago and unchanged since last quarter. This level is almost at the 35 year average of 61 days. Keep in mind that financiers are holding roughly 20 of the 62 days in this supply and it hedged with LME sales ranging from three to 12 months into the future. These forward sales guarantee a future yield and the only reason the financier would release that metal early to the market is if the physical market was willing to pay a higher premium than the yield on the forward sale. Therefore this metal is most likely not available to consumers in the short-term.”