Howmet Aerospace Inc (HWM) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2016 Alcoa earnings conference call. My name is Shawntelle, 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 and Analysis and Investor Relations. Please proceed.

Thank you, Shawntelle. 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 may 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, and 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, from which we have provided reconciliations and calculations in the appendix. With that, I'd like to turn the call over to Klaus.

Yes. Thank you, Matt. So let's get started by characterizing the quarter in the usual fashion. We continue to improve our businesses, and we have provided you with a lot of information that show already the two companies that are soon to come, Arconic, our value-add business, and Alcoa Corporation, our current upstream.

So let me start with Arconic. The Arconic segments have revenues in the second quarter of $3.5 billion, up 1% year-over-year. And this is a composition of 5% revenue increase, mainly related to acquisitions, offset by 4% predominantly coming from metal price impact. EPS has revenues of $1.5 billion in that, that's up 15%. All of these are year-over-year numbers.

After-tax operating income came out at $294 million, that's up 3%. Global Rolled Products in the $68 million after-tax, record quarter for automotive sheet shipment, up 17%. Engineered Products and Solutions record after-tax operating income of $180 million, up 9%. Transportation and Construction Solutions, $46 million, up 5%.

We also signed in this quarter, a multi-year contract with Embraer, valued at approximately $470 million, and proudly shown today at the Farnborough Air Show. And we also opened the state-of-the-art 3D printing metals powder production facility geared towards making metals for 3D-printing, mainly for titanium, nickel and aluminum alloys powders in the aerospace world. And on top of it, we achieved $176 million productivity savings in the second quarter. For the first half, this adds up for Arconic to $360 million. So we are on target to deliver the target of $650 million in 2016.

So Alcoa Corporation, the total revenues of $2.3 billion, up 7% here. It's all sequentially, this is the way the market looks at that in the commodity space. Predominantly, this is driven by 22% higher alumina prices. It's 2% higher aluminum pricing organic growth, and slightly offset by curtailed, divested and closed operations. The third-party revenues are at $1.8 billion, up 9%. After-tax operating income stands at $150 million, up sequentially as pricing improved. Productivity savings also clearly playing into this.

We secured a $60 million of a new third-party bauxite sales contract that stretches over the next two years, and we reached a power agreement for the Intalco smelter in Washington state which improves the competitiveness, and we fully curtailed Point Comfort, our Texas refinery. And lastly, great productivity, $199 million productivity in the second quarter adds up to $379 million for the first half, and going well against the target of $550 million in 2016.

And last but not least, the separation is on track. Ten days ago roughly, we filed our initial Form 10 on June 29, and the separation will happen in the second half 2016. Bill, with this, over to you.

Thanks, Klaus. Let's begin by reviewing the income statement. Second quarter revenue totaled $5.3 billion, down approximately 10% year-over-year. Growth from recent acquisitions and organic growth was offset by lower alumina and metal pricing, and the impact of divested and closed businesses.

Cost of goods sold as a percentage of sales decreased by 210 basis points sequentially, largely due to the impact of higher metal and alumina prices on revenue, as well as productivity gains. Overhead spending increased year-over-year, primarily as a result of costs related to the planned separation of the Company, and the acquisition of RTI. Other income of $37 million relates primarily to the previously announced sale of the Australian natural gas pipeline, as well as a supplier arbitration recovery related to a fire in our Iceland facility in 2010.

The second quarter effective tax rate of 46.1% was driven by nondeductible separation costs, tax associated with the sale of corporate owned life insurance, and discrete tax items in the quarter. Excluding these impacts, our operational rate was 31%.

Overall, net income for the quarter was $135 million or $0.09 per share. Preferred dividends were $17 million in the quarter. Excluding special items, net income was $213 million or $0.15 a share.

Let's take a closer look at the special items. In the quarter, we recorded after-tax charges of $78 million or $0.06 per share, primarily related to portfolio transaction costs, and the aforementioned tax items. All of our portfolio transaction costs this quarter stem from work being done to separate the Company.

Restructuring across the business included charges related to previously announced curtailments in our upstream business, plus headcount reductions associated with lower market demand, largely in the aerospace businesses, and in our extrusions business in Latin America. Note that roughly 20% of the restructuring-related charges are non-cash. In addition, included in the special items are the gains from the sale of the Australian pipeline, and the recovery related to the Iceland transformer fire in 2010.

Now let's look at our performance versus a year ago. Second quarter adjusted earnings of $213 million were down $37 million from the prior year quarter, driven largely by the drop in alumina and metal prices. Lower price mix was predominantly related to contract renewals and OEM supply chain efforts in the aerospace businesses.

Strong productivity gains in all segments contributed $237 million in savings, which are much more than offset by the $52 million of cost increases. The largest drivers of these cost increases include maintenance, labor, and benefits, as well as the cost to secure metal as a result of the Warrick smelter curtailment. Lower energy prices in Brazil and the US drove a decline in energy sales year-over-year.

Now let's move to the segment results, starting with GRP. GRP turned in another strong quarter, as solid productivity gains and reduced growth project spending were partially offset by cost increases, and the use of cold metal at Warrick after the smelter shutdown. EBITDA per metric ton was $326 per metric ton, or $380 per metric ton excluding the Warrick impact. This is well above our 2016 target of $344 a ton, a target which we expect to meet or exceed.

As we look to the third quarter of 2016, we expect GRP performance to reflect the following factors. Strong automotive sheet shipments, up 50% from a year ago, lower aero demand from continued inventory destocking and model transitions, lower commercial transportation build rates, and $15 million of after-tax costs as a result of the Warrick smelter curtailment. Overall, ATOI for the segment is expected to be up 5% to 10% excluding the Warrick impact.

EPS, the Engineered Products and Solutions business posted record revenues for the second quarter, up 15% year-over-year, primarily driven by the inclusion of RTI, now known as ATEP. This increase was partially offset by pricing pressure, supply chain inventory destocking, and weaker demand for legacy platforms and widebody aircraft. ATOI was $180 million for the quarter, up 9% versus the prior year. ATEP contributed ATOI of $21 million in the quarter.

Productivity gains in the segment more than offset cost increases, and growth project spend like the LaPorte expansion and the relocation of production to low cost locations. Unfavorable price mix year-over-year is largely related to new contract renewals in 2016, and higher use of standard products by our customers. As we look to the third quarter, we believe production of jet engines and new aircraft models will increase. We also expect continued price pressure and accelerated airframe supply chain destocking for legacy model components. In addition, we expect strong North America IGT growth, while oil and gas, European IGT and North American commercial transportation markets will continue to be soft. Overall, for the third quarter, we anticipate ATOI to be up 5% to 10% year-over-year at current exchange rates.

Now let's go to the TCS segment. TCS, the second quarter revenue declined 5% year-over-year driven by weakness in the North American heavy duty truck and Brazilian markets, partially offset by strong performance in our building and construction business. ATOI for the second quarter was $46 million, up slightly versus the prior year quarter as productivity gains more than offset market headwinds and cost increases.

TCS achieved record margin levels with an EBITDA margin of 16.3% in the second quarter. As we look to the third quarter, we expect continued weakness in the North American heavy duty truck market, offset by growth in our building and construction business, and productivity gains. Overall, third quarter ATOI is expected to be up 1% to 3% year-over-year.

Now let's move to Alumina. Alumina second quarter ATOI improved by $101 million due to higher API pricing, which increased 22% from the first quarter. Lower energy and raw material costs, combined with strong productivity at our operating locations more than offset unfavorable currency. In the quarter, we benefited from increased third-party bauxite sales and better margins from our partnership mines.

As of the end of the second quarter, we have fully curtailed our Point Comfort refinery. Including the reduction from this curtailment, production for the third quarter is expected to be up 20,000 metric tons. In the third quarter, we expect API pricing to follow a 30 day lag, and LME pricing to follow a 60 day lag. 85% of our third-party shipments will be on API or spot during the course of the year, and ATOI is expected to be up $5 million excluding the impacts of pricing and currency.

Let's turn to Primary Metals. Primary Metal's second quarter ATOI improved by $27 million sequentially due to higher metal prices and lower input costs. We also benefited from the closure of the Warrick smelter in this segment. These favorable impacts were only partially offset by lower energy sales in Brazil and the US.

Looking forward to the third quarter, we expect production to be up due to the additional day in the quarter. Pricing will follow a 15 day lag to the LME, higher alumina costs of $35 to $40 per ton of aluminum as prior quarter prices flow through our inventory, and productivity will offset seasonal higher energy prices. ATOI in this segment is expected to be flat, excluding the impacts of pricing and currency.

Before moving to the cash flow statement, let me summarize the third quarter guidance. GRP ATOI is expected to be up 5% to 10% excluding the Warrick impact. EPS ATOI up 5% to 10%. TCS up 1% to 3%, and the upstream, up $5 million excluding price and currency impacts.

Now let's look at the cash flow statement. In the second quarter, cash from operations was $332 million, contributing to free cash flow for the quarter of $55 million. This result included the investment of $200 million in the Western Australia gas supply contract.

Pension expense in the quarter of $85 million was slightly greater than cash contributions of $77 million. The contributions year-to-date of $147 million represent nearly 50% of our anticipated full year total of $300 million. Lastly, capital expenditures of $277 million for the quarter included $146 million for return-seeking projects, and $131 million for maintenance and other sustaining projects. Two-thirds of the capital expenditures were in support of the Arconic businesses.

Let's now take a look at actions we've taken to strengthen the balance sheet. Going into this year, we saw weakness in the commodity markets, and volatility in the debt markets. With that, we've taken swift action to strengthen our balance sheet, including the initiation of a program to sell nonessential assets. The program has been very successful, and I would like to you update you on our progress.

We sold our stake in the Western Australia pipeline and ATEP's medical device business, generating nearly $250 million in proceeds in the second quarter. We also redeemed the corporate-owned life insurance program which was set up a number of decades ago. Those sales generated $457 million in the first half. Lastly, we sold assets held by our captive insurance company in the second quarter generating an additional $111 million in proceeds.

In the second half of the year, we expect to complete additional asset sales with proceeds of approximately $400 million. These include the Yadkin hydroelectric project in North Carolina, property at the former Eastalco smelter site, and the Intalco smelter wharf. The Intalco property sale will not affect our ability to use the wharf or run the smelter. In total, we're expecting proceeds of $1.2 billion from these actions.

Now let's take a look at how these items benefited the balance sheet. We have very strong liquidity, and we ended the quarter with $1.9 billion of cash on hand, $600 million higher than the same time last year. Net debt at $7.2 billion compares favorably with the net debt of second quarter 2015 at $7.4 billion, and the prior quarter at $7.7 billion.

And now, I'll move to a review of the aluminum market fundamentals. We've updated our view of the market slightly since last quarter. Global demand growth remains at a robust 5%, while supply growth of 2.5% is up 50 basis points from our Q1 estimate, resulting in an aluminum deficit of 775,000 metric tons.

Let me discuss China briefly. 2016 Chinese demand growth at 6.5% is driven largely by Chinese government stimulus in the property market. However, we've also seen improved electrical end use, and strong demand in the transport and packaging sectors. On the supply side, China is increasing by roughly 3%. But it's important to note that China's net supply growth rate is the lowest it has been since the global financial crisis. Even outside of China, we see the majority of growth coming from Asia, while North America has curtailed significant production, putting rest of the world on track for approximately 2% supply growth in 2016.

Now let's take a more detailed look at the aluminum environment. As I said on the prior chart, projection is currently 775,000 metric ton deficit in the market for 2016. It's important to note that China is not exporting significant primary metal currently. Inventories continue to decline, with a 7% decline versus a year ago, and 8% decline sequentially. LME and China stock reductions are the big drivers behind this reduction. The continued global deficit has resulted in all-in prices recovering globally.

If I turn to the alumina market for 2016, alumina demand growth is projected to outpace supply growth globally. Consistent with our first quarter forecast, the alumina market remains in a 1.5 million metric ton deficit, with China importing 3.5 million metric tons of alumina, and the rest of the world in deficit, post exports to China. However, this level of China imports are down slightly from our last projection, as approximately 40% of curtailed capacity has been confirmed to have restarted as of the second quarter in response to stronger domestic Chinese alumina prices.

The price has maintained its recovery due to the improving fundamentals, rising $45 per ton since the lows we experienced at the beginning of the year, and remaining consistent with the prices we saw at the end of the first quarter. So let me turn it back to you, Klaus.

Yes. Thank you very much. And as customary, let me start with a view on the end markets, and let's start with the aerospace market. As we have discussed already, quite well in the last quarter this 2016, in the aerospace market is clearly a transition year, and we have been seeing some of this actually today in the announcements from Farnborough, so it's really a world of two different halves.

In the first half, if you look at large commercial aircraft deliveries, they have been down by 1%. At the same time, if you calculate the full year, we believe that it's going to be flat to plus 1%. But we do see that there is now a very careful ramp-up of the new models, the teething problems that we have particularly seen on some of the new technology are more on the jet engine side have been solved and the orders are coming in.

However, the lower orders are there for legacy models. But we do, we have seen, particularly on the jet engine side, strong June deliveries, second best month on record. And we do believe that the second half is going to show a growth of 6% versus the first half. We do also believe, that given this transition, that demand is going to move over or has moved over into 2017. That's why we projected double-digit growth for 2017 over 10%.

We do see a very robust commercial jet order book, over nine years of production, solid airline fundamentals here. IATA projects the airline profitability at all-time high, with $39 billion of net profits expected. And when you look also at the cancellation rate, the cancellation rate in the first half for instance, it stands at 0.6%. That is lower than what we've seen even in the last year, so fundamentals are strong.

I added a part here, that's important for what is the implication of all of this for us. Because there is a difference, when you distinguish between airframe components and jet engine components. Airframe components like fasteners, extrusions, forgings, casting, sheet and plate. And number one, we do see reduced rate of legacy widebody aircraft. So that's an immediate effect.

The second effect is, when you look at what has happened, particularly on the large volume platforms, the move over from the A320 to the A320neo, or 737 to the 737 MAX, the OEMs have done a very, very good job in standardization, and the supply chain optimization. So that's the second thing that we see there. And we will, therefore, see that near-term demand will be filled basically through destocking.

The situation on the jet engine components is very, very different. And here I'm talking about fan and turbine blades, rings, discs, shafts, structural casting. The new engines have launched.

They have multiple technology. And it's now all about the execution, in terms of ramping up the supply chain challenges, after the coolish first half, starting already in the end of last year. So this is all going into a very, very different phase now. At the same time, the legacy engine spares and replacements will remain strong. So here demand is clearly leading to new orders, and we do see that already in our order book.

So second market, end market, let's go to automotive. North America, we expect 1% to 4% growth. Production is up by 2.6% year-to-date. The sales are healthy, at a plus 1.3% year-to-date.

And if you look at the numbers, you're talking about 17.4 million cars. This is a peak since basically 2000, where it was, the last record was 17.3 million cars. And the light truck share now has reached 60%. That's obviously also very important for us, in regards to aluminum intensity.

We do also see going forward, when you look at vehicles that are over 12 years old, they are adding up to 104 million vehicles, out of 258 million that are in operation. So there's probably some pent-up demand in there. We also do see the inventories are stable at 66 days. That's kind of in the target range. Incentives are up, but so are prices.

In Europe, we believe growth of 2% to 4%, production is up 4.1%. In the west, 6.1%, offset by minus 8.5% in the east, and registrations are also up 9.9%, and exports are up too, with 4.8%. China also, we see up 3% to 5%, strong production, with plus 5.2%. Sales are up 6.5%, or 9.3% year-over-year. And also very interesting, driven by strong similarity here to the US, driven by a surge in SUVs and CUVs, basically crossover utility vehicles, basically smaller SUVs. And the demand has increased there by 34.7% year-over-year.

Heavy trucks and trailer, the next segment, North America, we do continue to see a decline, minus 26% to minus 28%. Production is down 22%. Year-to-date stands at 107,000 trucks, was 137,000 last year. Weak orders, down 35%, and year-to-date down -- basically 40%.

Inventory is high, with 64,500 trucks, 27% higher than the historic 10 year average that stands basically at 47,400 trucks. The order book is falling, and it stands at 108,900, down 35%. However, it's still above the historic average of 101,000 cars. Let's not forget in this, that the order intake last year was at a near record, near record high.

In Europe, we actually believe it's going to point up, 3% to 5% strength. In Western Europe production is up by 2.4%. Registration in Western Europe, up 18.4%. Orders up 5%. We do see a decline, however, in Eastern Europe of 16.6%.

China, we also see it pointing up, 2% to 4%, strong sales up 25% here, and production up also 25%. If you look at the year-to-date, then 10%. So there's probably even some upside possible here.

Packaging, really no change, North America minus 1% to 0%, Europe, 1% to 2%, China, 5% to 8%, with no change to the past. Building and Construction, we do believe that North America is going to go up 4% to 5%, nonresidential contracts awarded up 1.3%.

Architectural Billings Index is positive, with 53.1, and has been positive for 24 out of the last 26 months. Housing starts up 10.6%. That's all good.

In Europe, we actually see, obviously Europe is not one thing, but overall we see minus 1% to plus 1%. And in China we do believe is plus 3% to plus 5%. Lastly, industrial gas turbines, we continue to see this market coming back, with plus 4% to -- plus 2% to 4%. Very strongly, through the new heavy duty gas turbines, the orders are up by 4.3% in the first quarter. 60 Hertz is growing, 6.9% April year-to-date. And all of this is also driving demand for spares and component upgrades on existing turbines.

So let's also talk about the business, and I have also structured my presentation along the future. So let's start with the Arconic businesses. So let me summarize the highlights that you just heard also from Bill.

GRP. GRP in the second quarter, EBITDA per metric ton is $380, up 11%. This excludes the Warrick special impact. Strong productivity, record quarter for auto sheet shipments, up 17%. The outlook, we continue to see a positive trend here, and we believe it's going to be up 5% to 10%. Also that is excluding the alternative metal supply at Warrick.

TCS, revenues are down, the North American truck and the Brazilian market pressures have basically done that in the second quarter, but record EBITDA, profitability and strong productivity. We believe that we will continue to see the segment in spite of the headwinds grow. We believe the after-tax operating income to be up 1% to 3% going forward into the third quarter.

EPS, record revenues, 15% growth year-over-year primarily driven by the acquisition. And I also talked about the aero market dynamics here. We believe we will continue to see this positive trend in the third quarter. We believe ATOI is going to be up 5% to 10%. So all groups on track to meet their 2016 goals.

So let me highlight a few businesses, and start with Firth Rixson. Firth Rixson, we talked about quite a bit in the last quarter. So Firth Rixson is on track to achieve the 2016 target. We have seen in the first half revenues of $468 million, at a profit margin of 15.4%, and profits of $72 million.

We have been able to improve, as well as sustain our operational performance. Synergies have added up to $47 million. This is well ahead of our year-end target which stands at $51 million. And we have been able to debottleneck some of the production processes, which is particularly important for the second half.

I talked about the dynamics in the aerospace market. As we are ramping up the production for the next generation engine platforms, always keep in mind, Firth Rixson is in the main around jet engines. So this is in a nice, sweet spot.

Savannah, we also talked about our isothermal operation qualifications is doing okay. 60% of the parts are forged and to qualifications under way, so basically 12 out of the 19 parts that we have in there. And we're targeting that the revenues will be ramping up in 2017 then, once they are all qualified. So let me also -- so this is all I have today on Firth Rixson.

Let me also give you similar update on what was formerly RTI, and is now called ATEP. And here you see it on the slide. So ATEP is ahead of the integration plan. When we acquired the business, the pro forma numbers were at a margin of 14.5%.

If you look at the profitability in the first half of 2016, we're now standing at a 20% EBITDA margin with $400 million revenues and $80 million profits. And when you look at the synergies, we have currently synergies of about -- achieved synergies of $55 million. So we are more than one year ahead of our year-end 2017 target, that was $47 million.

We have quite a full list of steps that we are undertaking here, I'm not going to go through them all. We have a clear path how to hit the target, and you can see them here on the right-hand side. And so, we are on a good path, they're actually on a very, very good path there. We are ahead of our own plan.

I didn't prepare a chart, but I want to also fill you in on our titanium investment casting acquisition in Europe, Tital. Tital is showing a strong top and bottom line performance, well ahead of our business case. So all of these actions, and many more have allowed us to be very, very well-positioned on the next generation structures as well as engines.

This slide, you have seen some versions of this before. This is an update, also reflecting the latest wins. And you see on the left-hand side, you see the revenues per aircraft. And this, what you see are the light blue reflects the revenues that we have per aircraft, indexed to the 737NG. And then on the right-hand side, you basically see the new generation platform, and what the revenues basically per ship set are on this. And as you see here very well, we've been really very well able to build out our position on the structures, and at the same time, also on the jet engine. So we've gained share, substantially improved our position. And obviously, as the market is taking off and working through the backlog, we are well-situated for the years to come here.

Let me also remind you, that Alcoa has always been a leader in aerospace innovation. More than 90% of all aerospace alloys that are in service were invented by Alcoa, and we are always charging ahead on the next frontier. And in that light, we have shown that we are today leading in additive manufacturing in aerospace. We opened in July, our metal powder plant. The metal powder plant is geared towards titanium, nickel, and aluminum alloys, powder alloys optimized for the 3D-printing and for aerospace components.

We are advancing the feedstock as well as the processes as well as the product design as well as the qualification. That's the beauty of being in this industry for such a long time, and understanding what is required to make things successful. At the same time, we are developing exclusive advanced processes, processes like Ampliforge. Ampliforge basically allows us to finish a 3D-printed metals component using a traditional process, and by this enhancing the properties, and reducing also the material input.

And what we are very happy about is, that this is recognized also by very important customers. We are already seeing that customers are drawn towards this, and find this very attractive. So this allowed us to win a supply agreement with Airbus for 3D-printed titanium fuselage and engine pylon components. The first delivery of this is going to happen, basically as we speak in the third quarter of this year.

So let's also take a quick look onto the automotive market. And with this, let me be very clear. The aluminization as I call it, of North American auto platform content use. And this, the data of the market experts here, and it is not just -- which is very often understood -- it is not just about the fully aluminum intense vehicles. You also have to look at the closures components.

I mean, look at hoods here. Hoods are predicted to go up from a penetration of 6% to 28%, doors 43% to 73%, liftgates and trunks, 7% in 2015 to 26% in 2020. Fenders 6%, up to 19%. And this is -- now go to the right-hand side of the slide. This is why people believe that we will continue to see the pounds of aluminum per vehicle to grow.

We are going into really nice new growth phase. 77 pounds growth between 2015 to 2020, this is a 20% growth. And this is all, taking into account today's conventionally available aluminum alloys for automotive.

Now add into it, fast forward what we have in store, the micromill. And the micromill, the first micromill applications, we target clearly at the automotive market. And when you look at what capabilities the micromill material has, the micromill material has the capability to add to this incremental 250 pounds per vehicle, by attacking what today is squarely reserved for steel.

Why? Because micromill material is 2 times more formable, 30% lighter, and absorbs 40% more energy. So this is a good picture, and another market where the market looks interesting in North America, I filled you in on this. On top of it, the penetration is going to go, and Arconic will benefit from that. So much about Arconic.

Let's now talk about Alcoa Corporation, previously our Alcoa upstream businesses, right? And let me highlight one of the businesses, a very, very fine business, the bauxite business. We are number one bauxite miner in the world. We mine 45.3 million tons, right? The market, just to give you an idea for, is 290 million tons.

And when you look at the tons here, our tons are next to major markets, and we have growth opportunities. Plus, we have a very good knowledge about refining, as well as multi-product solution for customers. What that means is, we know how to fine-tune the bauxite to the refinery that it goes to, like nobody else does, because we run a lot of refineries. And that's a big, big plus when you enter the third-party bauxite market as we have done it.

We believe the third-party bauxite market -- you see it here, up on the upper right hand side, it's going to double in the next 10 years, an annual growth rate of roughly 7%. And we have been really successful since we started this business, a really strong start, and increasing our third-party bauxite business. With $60 million contracts signed in the second quarter, in total our third-party bauxite sales stand at around $410 million, and those contracts stretch over 2016 and 2017.

We have shipped the first Western Australian bauxite as a trial cargo to China, and they are going through the evaluation. But one thing that I'm particularly happy about, our Juruti mine, our Brazilian Juruti mine is it will be exporting 1 million tons to China in 2016. And that's roughly out of the 5 million that will get produced there, right?

And you see it reflected also in the higher profitability. So this team has done an unbelievably good job. I mean, really fantastic, fantastic, and, again, also here, like in many of the other segments, more to come.

So this is true by the way for many Alcoans. When you look at the productivity that we have been able to generate in the first half, $739 million in productivity. And when you then look at us, you know we have the degrees of implementation, action sheet system, we have 18,000 ideas in the system which lead to future improvement. So this is why we feel so comfortable in continuing to have productivity increases also going forward.

It's broken down in productivity, where we have roughly 16,000 action sheet growth. 1,800 in asset management, roughly 600. So the productivity is well on track and ahead of our targets.

When you look at future Arconic, $360 million. When you look at future Alcoa Corporation, $379 million. Very, very good job here.

So with this, let me also talk a second about the separation. Lastly, the separation is going as planned. We have just filed, it seems like yesterday, but it's 10 days ago roughly, our initial Form 10. We are on course to separate the Company in the second half of this year.

So let me summarize. We are increasing, continuing to improve our results. Arconic is gearing for profitable growth in aero, auto, and other interesting businesses. Alcoa Corporation benefits greatly from a more competitive portfolio. We brought the cost position down, and has a leading bauxite position. Both companies are strengthened with $1.9 billion on-hand, and the separation is on track for the second half of this year. So with this, let's open the line.

(Operator Instructions)

Your first question comes from Andrew Quail with Goldman Sachs. Your line is open.

Yes, good afternoon, Klaus and Bill. Thanks very much for the update, and congratulations on a very strong quarter. Just a couple of questions. One is on your aero guidance. Just want to know if it's all volume related, or does it reflect some change in pricing? And two, would your combined 2016, 2017 expectations at the start of the year be the same as they were, or has all the growth been pushed into 2017?

Let me start with the second one. The growth has not been pushed into the second year. It is, as I explained it, I mean, and you hear it not just from us, I mean from everybody, and you will hear more in the next days in Farnborough. I mean, there were some well-known early technical issues, and they are kind of normal when you do these type of enormous innovations, particularly on the jet engine side. And that's why the producers went very, very slow, with a very slow ramp-up. But these problems are solved, and now really it's about executing to fill the orders.

And so, the whole supply chain is really ramping up now on the jet engine side. On the structured side, that's why I differentiated, on the structured side, structured side is a bit different because there is a near-term destocking going on, right? So that's why we have the guidance as it is. And on the pricing side, you can actually see it that, yes, there will continue to be pricing pressures in the market because people really have to make sure that they are more competitive. We assume that and, therefore, we continue to have productivity in this, and come out with solutions that are more innovative, so that our customers are more competitive.

Thanks very much, Klaus. One more. Just on the pension, just wondering if with the split in the second half, do you guys have to mark-to-market the pension at all?

We will when we perform the split. So the underfunded status will be updated at the date of the separation.

And do you guys give any guidance on the assets? I know in the K, you've obviously given some good guidance on the liabilities. Do you give any guidance on the asset sensitivity?

We do. And it's in the K, and it's -- if I quote it without looking at it in the K, I'll probably get it wrong, but it was something like a 0.25 point, on both pension and OPEB was around $450 million is my recollection.

For the assets?

Yes. Go look in the K.

Okay, I will. Thanks, Bill. All right. Thanks, guys.

Thank you, Andrew.

Your next question comes from Evan Kurtz with Morgan Stanley. Your line is open.

Hi. Good afternoon, Klaus and Bill.

Hello, Evan.

Hey, Evan.

I have another question on EPS business. If I take your full year guidance kind of triangulate with the 5% to 10% for the third quarter, it implies -- it depends how you run the math -- but I'd say kind of a minimum of 30% ATOI growth in the fourth quarter. And I realize the comps are pretty easy, given the low numbers from last year. But I was wondering that, given the magnitude of that growth, how much of that is just aluminum price behavior versus what it was last year, versus a recovery in the structural inventory issue?

On the EPS side, you will see very, very little aluminum price aspects, I mean, so that's really not in there. And I mean, as I said before, there is a ramp-up curve that we are seeing in the second half. We saw actually a very difficult first half, already starting with December last year, right? This seems to be over. This is ramping up, and we are on track to meet our targets, and you've seen that, the second half. We believe that particularly on the jet engine side, we are seeing already -- we are seeing already, a very strong demand coming in. We saw it already in the June days.

And is there seasonally anything that happens in the fourth quarter, because it was pretty weak in 2015 and 2014 as well? Or is that just coincidence?

I think that this year is going to be different. This year is going to be different because you, as I commented, you have this transition year. And we had, for instance, I mean, the Airbus saying, that they have I think 25 A320s that they have fully manufactured, but they are without the engines. So they are waiting for the engines to be delivered, so they can then also ship them over to their customers. So this is what's going on there.

So I think that you could not -- you cannot draw conclusions from the past. This is a very, very different, and a bit of an off year because of the enormous amount of innovation that's going on. And the innovation actually is the foundation why there is such a strong demand. I mean, when you see the new jet engines getting 15% on average, 15% of efficiency improvement, that's something.

Great. Thanks. That's helpful. And then, just maybe one follow-up, if I may.

Boeing had an announcement out a couple weeks ago that they're changing a lot of their payment terms and inventory management. And we did see, a working capital injection, a pretty large magnitude in the first quarter. I was wondering if that is actually tied to Boeing's new stance on, I guess, basically forcing their customers to manage working capital for them? Is that already in your numbers, or is that something that we may see in the future?

We've seen that already in the second quarter. If we look at working capital, biggest driver on working capital year-over-year is the acquisition of RTI, now known as ATEP. But we've also seen some creep up in working capital, and one of the reasons is because of some of the moves that our customers are making.

Got it. Okay. Thanks, guys.

Thank you, Evan.

Your next question comes from David Gagliano with BMO Capital Markets. Your line is open.

Hi, great. Thank you for taking my questions.

Hi, David.

Hi. I just have a couple of number questions on slides 13 and 14. It looks like there's in the ATOI bridges for the alumina, and primary aluminum segment, there's about $20 million of portfolio actions included in the bridge. I'm wondering what is that? And secondly, is that included in sort of that 3Q outlook commentary that you mentioned?

Yes, the 3Q -- whenever we give 3Q commentary, it's always in the upstream business, it's always on a sequential quarter basis. And it uses a base, as everything excluding price and currency impacts. So the positive that we got out of portfolio actions in the second quarter, in the alumina business, in part was the curtailment of Point Comfort. And then on the smelting business, the portfolio action that the -- the biggest portfolio action there, is the curtailment of Warrick. So both of those are curtailed. And so, yes, it would build upon the favorability that we see in those segments.

All right, makes sense. And then, just one other clarification question. On slide 26, the EPS third-party revenue targets for 2016, the bottom right corner, looks like the EPS one went down about $100 million. It says it's from the medical sale, although the revenue in that business is only $70 million, at least it was for the year pro forma. So that would imply like $30 million of that $100 million. Is there anything else going on in that haircut to the -- or in that reduction, I guess, better way to say it?

No. No, the actual numbers, and I think Klaus had it on his presentation, the reduction associated with Remmele was $55 million in revenue. And you may say, well, why is that $55 million different than the $70 million? But that $55 million was accounting for the fact that it was a year-over-year versus when we had owned them part of the year. So that $55 million has been backed out of the target.

Okay. So then, I still am trying to understand one of the questions Evan asked a minute ago. It's not quite as onerous, in terms of the growth rates in the fourth quarter versus the third quarter when you adjust for that, but it still implies growth. And yet, versus last quarter, it looks to me like the only thing that's really changed in the outlook commentary was a pretty steep reduction in the global aerospace growth rate expectations from 68% to kind of flattish. So essentially, what I'm wondering is, why haven't you cut the guidance for the EPS segment for the year, given the change in the outlook?

Because we are seeing that this is ramping up. This is ramping up, and because we have taken pretty severe actions also on the productivity side in the first part of the year, when we weren't quite sure what was going on there. And you've seen that in the restructuring that we've done on the EPS side. I mean, I would say, roughly about 1,000 people that we have taken out, or taken out, or moved to low cost, a pretty big move to low cost countries, right? So all of this is what we have done.

Okay.

And we're working hard to get the ramp-up done so. But that's a better problem to have.

Okay. All right. Great. That's helpful. Thank you. I don't mean to pick on numbers when -- No, no, it's fine. It's actually a very good quarter. I should have said that in the beginning.

Thank you, David.

Exactly, David. Thank you.

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

Hey, guys, it's Jorge with DB. Just again, congrats on a solid quarter, especially in the upstream. I did want to talk a bit more about ATOI, specifically in engineered products. So again, on page 11 of your PowerPoint, where you are giving us kind of that sequential bridge as to what happened year-on-year in the quarter. It would seem that again you're facing pretty big headwinds on what you're calling price/mix, and it's down $40 million year-on-year, and it was down $30 million year-on-year in the first quarter.

So what I'm trying to understand is, this what you're alluding to when you're talking about the structure being weak? And is this where you're seeing some kind of price concessions that had to be given to the OEMs on your legacy business? That's my first question.

No, that's not on the legacy business. It's basically related to the business that is coming, the new business that's coming, right? And frankly, I mean, it's better to be on a platform than not to be on a platform. And you've seen also in the slides that I had in my deck, I mean, how successful we have been to expand our base on the structures, as well as on the jet engine side. And we, I think we addressed that also in the last quarter. And so, that's what's happening there.

And part of it I would say, is a normal, it's a normalcy in the market, everybody has to come down, right? And we have to make sure that we will continue to deliver productivity. Or have innovation and innovative solutions as we do, right, that customers are willing to pay a premium for. And so, these are the two levers that we have in our hands, and I think we continue to use them.

Okay. And then, the second question I had was on cost increases, and I'm trying to understand how your pricing works in this division? I would assume it would more or less be on a cost plus type of formula, but can you kind of quantify what type of cost increases you're facing there, that you're not able to pass on to clients?

It does not work on a cost plus basis. I mean, so simple labor cost increases, you can not, you can absolutely not count on. And it, I mean, it's not a cost plus environment at all.

So in that category, just to be clear, we bifurcated two sets of cost increases in the EPS business. The first is associated with the growth projects. I talked a little bit about that in my prepared remarks, a tremendous ramp-up in the large structural castings business in LaPorte that we're spending some money there. We're also spending money to reposition the portfolio down into lower cost countries like Mexico, especially in our fasteners business. The additional cost increases that you see there, $18 million, some higher maintenance spend. And as Klaus said, as Klaus alluded to, labor and benefit spend but very, very, well offset. I have to give credit to the business, that they've taken tremendous amount of productivity actions, and $53 million of after-tax impact year-over-year on strong productivity.

Okay. And given that you said that these are concessions, going back to the price/mix category, these should be well-known. Could you give us any kind of guidance into the second half as to how -- when this category kind of lapses, or is this going to be a continual cost pressure that you're under, given even existing contracts where it sounds like you're having to give up some price?

Look, I mean, we give you guidance on where we come out, and there's a lot of elements that go into it, right so?

That's a very good answer. I mean, ultimately, Jorge, if you go back and look at the third quarter of last year, the guidance that we're providing is 5% to 10%. That's baked in everything we know about the markets and pricing, and so that's the guidance that we provide.

Okay. Thanks, guys.

Okay. Thank you, Jorge.

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

Hi, good afternoon.

Hello, Timna.

Hi, Timna.

Hello, it was nice to see the jet engine details, so thanks for that. We wanted to ask two questions, one on the benefit from bauxite sales? So trying to understand, is this just some temporary opportunistic move to increase bauxite sales, given China's greater alumina needs and consumption there, or is this something you think would be more permanent? And then, if it is, are you going to help us model it going forward?

Okay, Timna --

I'll take the second one.

The first one, the answer is very simple, yes, this is permanent.

Yes.

I mean, permanent is a big word, Timna. But I think it's certainly something -- and certainly when used in conjunction with China, and then you suddenly get into a different time frame. But this -- China does not have enough bauxite, and China has been -- as long as I know importing bauxite. They are now these days importing 40% of the bauxite. They have been pretty substantially surprised by some of their major bauxite resources being shut. I mean, the Indonesians that had become a very strong supplier of bauxite, the Indonesian government decided to have a ban on bauxite, bauxite exports, and the ban continues to hold.

Then the Chinese moved over to Malaysia, and suddenly you saw in the last one and-a-half years, Malaysia playing a larger part in their imports. And here we go, the Malaysian government for good reasons also decided we're not going to let anybody just export our bauxite, and leave behind very often kind of structurals -- that illegal mines leave behind landscapes that can never been vegetated again. I mean, so they put out a mining bauxite mining ban, and the ban continues. So it was just recently renewed.

So what China Inc. has done basically, as they need the bauxite, they have very strongly reached out to those that can provide a more stable supply of quality bauxite. So we've seen that now Guinea has started to fill in a strong role here. So there's quite a bit of bauxite to China coming from Guinea. But it's also interesting that we have been able to secure contracts from Brazil. And Brazil, last time we looked on the map is not the closest to China. So this is all good signs, and this will continue for a long time. And as I also said, I mean, we shipped the first Western Australian bauxite as a trial cargo to China. They will trial it in their refinery, and then we'll see what we can make out of this.

And recall, we have about a year and-a-half ago, when we changed our organizational structure of what was called GPP into different businesses, that's when we formed the bauxite business, and very actively put a team in there to explore also third-party bauxite sales. This is there to stay, and this is there to be more enjoyed going forward. That's my view.

And Timna, we, in the Form 10, we had the bauxite segment broken out. As Klaus said, going forward, Alcoa Corp currently has six segments, and the bauxite and mining segment will be one of them. So you get good detail in that. And you may be wondering when will you see that again? When we have the amended version of the Form 10, after we get the initial round of SEC comments, we will provide an amended version, and we will have the second quarter segment results for Alcoa Corporation in there.

Got you. That would be great. And on the flip side where, an area that still continues to be a challenge, on Global Rolled Products. I'm just fascinated about that growth in auto, 50% year-over-year, and yet the ATOI guidance being where it is, and I know that packaging has been a drag.

So I guess, I just want to take a step back, and ask what's the outlook for packaging? When can we see your next results not -- what time frame would we not see that negative comment on packaging? When can that stabilize, do you think, or what is the outlook for that industry longer term?

That's a very good point, Timna. You may remember that we decided for North American packaging, that North American packaging will be part of future Alcoa Corporation, and will not be in Arconic. And there is a host of reasons for it. But one reason is that this business has turned into a more commodity like characteristic. So unfortunately, the pressures on packaging will continue, it will continue. There is a bit of an oversupply in the market, so we will continue to see it.

At the same time, we have taken strong actions also, because part of this move is that Tennessee is going basically leaving the segment, and is entirely -- as you may also remember, we refocused Tennessee which used to be just a packaging mill, and expanded it into becoming an automotive mill. The automotive mill is ramping up, and it's one of the big reasons why you are seeing these increases, also in automotive. And Tennessee will eventually not manufacture for packaging.

And we will also use the mill in Saudi Arabia, the mill that we built there, which is very, very good and very modern mill, but currently has too few contracts, and is very well able to do packaging material. We will use that to supply to the US market. And that's basically the setup that Alcoa Corporation has, a much more competitive set-up to play strong and good, and less costly structure in the packaging market in North America.

Couldn't agree more. We're excited to have it in Alcoa Corporation, and looking forward to making it a successful business.

Okay. Great. I'll follow up offline. Thanks.

Okay, Timna, thank you.

Your next question comes from David Lipschitz with CLSA. Your line is open.

Good evening, guys.

Hey, Dave.

Hi, Dave.

Quick question. In terms of the Primary Metals, you said $35 to $40 impact from the alumina, is that included in the guidance, or is that part of the pricing impacts?

That's part of the pricing impacts, Dave. All the LME, API, both input costs and output pricing are excluded from the guidance.

Okay, just wanted to make sure. And then, secondly, I don't know if you're going to be able to answer this. Can you tell me -- because I know you broke it out in the Form 10, and I know we'll get it in the new Form 10, what the actual alumina realization price was in the quarter, excluding the bauxite stuff?

The bauxite -- I don't have the alumina realization price, but the bauxite sales were roughly $87 million in the quarter. So that should help you, be able to model out what the alumina realizations were.

Okay. And then, in terms of how you do it -- when you do it internal versus external, is it the same market price, or do you -- are you able to sell the external stuff at a higher price than you would sell it to yourself?

There occasionally may be somewhat of a timing difference, but in the end, we try to make sure that internal and external pricing is done at arm's length and match very, very closely. So they should be very similar, Dave.

Okay. Thank you.

Thank you, Dave.

Your next question comes from Justin Bergner with Gabelli & Company. Your line is open.

Good afternoon.

Good afternoon, Justin.

Most of my questions have been taken, but I did have one or two still.

Go ahead.

On the asset sale proceeds, are those pre-tax or post tax numbers? And does any of the increased asset sales change or change on the margin any of the proposed capital structure comments that were made recently on the separation call?

Yes. So the proceeds that we've given you are cash proceeds. So they're our best estimate of cash, and that would be post tax proceeds. And clearly, the reason why we're doing the nonessential asset sale program is to improve the overall balance sheet of Alcoa Inc., and that will improve the, ultimately the balance sheet of Arconic, once Alcoa Corporation is spun out.

So the capital structure comments that we made to you 10 days ago still stand. And that is, we would be looking to raise approximately $1 billion of debt in Alcoa Corporation, and we would be picking up roughly $2.6 billion of pension and OPEB liabilities in Alcoa Corporation.

Great. Thanks for the clarity. My other quick question was in regards to the Engineered Products and Solutions segment and the $40 million price mix headwind, I mean, should we expect a similar price mix headwind in the second half of the year on a quarter by quarter basis? Or will that price mix headwind be coming down from the second quarter levels?

Yes, Jorge asked the same question already, so, and let me answer it again. I mean, so the thing is, as I said before, the pricing pressures will continue to be there, and we have to compensate this with productivity as we will, as we have, and you've seen how much more is in store there. Or with innovation that the customer is willing to pay more for it, and we've also done that, right?

So at the same time, we are not providing particular guidance on pricing. We have a guidance on the third quarter, and we have a guidance on the full year. And as I said, we confirm to that.

Great. Thanks for the extra clarity.

Thank you, Justin.

Okay. Next question, please.

Your last question comes from the line of Tony Rizzuto with Cowen and Company. Your line is open.

Well, at least I got on here. Hey, Klaus.

Hey, Tony.

Hey, Tony.

I've got a couple questions. With all the discussion about the competitive pressures on the structure side, I'm just wondering how has the competitive dynamic changed with Precision Cast Parts now a private Company?

That's a good question, and that's a really good question. I mean, the -- unfortunately, Berkshire Hathaway has decided to not show the separate numbers for PCC. So it was always a good benchmark for some of the EPS businesses, but unfortunately, we are not getting that anymore. And the rest, pretty much is there to come.

You've seen how successful we have been in gaining more share. We have strengthened our position substantially, and we will continue to strengthen it. And also through innovations that are further out, like what we are currently doing on the 3D-printing metals powder, as well as the Ampliforge and other things that we have in store. So competition, I believe is a good thing. So we forge ahead.

All right. That's helpful. It's a tough one for us to understand, obviously (multiple speakers).

And my other question is on the asset sales. You guys refer to the $1.2 billion during 2016. You've already received $815 million year-to-date, and you've already announced another $400 million in the second quarter. So that target, it sounds to me to be somewhat conservative. Are there other nonessential assets that you may be targeting?

Well, look, I mean, I think we are all here in it together because we want to increase the value for the shareholder, right? I have always believed -- I mean, talking about things in theory going forward is not helpful on this. And so, I think Bill has described it very, very well, in saying this is what we have been able to execute up to now, right? And all of these assets, as you clearly can see, are nonessential assets, right? So, and they help us tremendously in strengthening our balance sheet.

Understand. You'd rather talk about these when you've got them in your pocket type of thing. Certainly, understand that. Thank you very much.

Thanks, Tony.

Good talking to you. Okay, I think that gets us to the end here. So let me just summarize. We will continue to improve the performance of our businesses as you see, and we have been making Alcoa more agile. We saw the profits in this quarter up at Arconic. We saw upstream performing, even though it is a low pricing environment.

We will continue to be laser-beam focused on all these things that we can control, like productivity, like monetizing nonessential assets, focus on cash, strengthening our balance sheet, drive profitable growth, using also as using innovation for it. And the good news is, separation is on track. And I will be rushing now to the airport to make it over to Farnborough to meet with a lot of our customers, and to get another good dose of what is going on in the market.

And what I'm most excited about, I will also see a lot of Alcoa/Arconic material in the air. I mean, just to mention, first will be the Joint Strike Fighters will be there. They will be flying, and I'm very much looking forward to it. The A320neo, the 737 MAX, the Bombardier C Series CS100, and another first, the Embraer Air E2, also first time there. So that is exciting, and we will keep you in the loop with all the good things that are happening. Thank you very much, and talk to you soon.

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