Howmet Aerospace Inc (HWM) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third-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 and Analysis and Investor Relations. Please proceed.

Thank you, Shannon. 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. Any reference in our discussion today to historical EBITDA means adjusted EBITDA, for which we have provided reconciliations and calculations in the appendix.

Lastly, the Company completed a 1-for-3 reverse stock split on October 5. The per share amounts in our discussion today reflect the reverse split.

Now I'd like to turn it over to Klaus.

Thank you, Matt. Let me characterize the quarter. Let's start with the Arconic segment. Revenues of $3.4 billion -- that's down 1% year over year. And this basically reflects the customer adjustments of the delivery schedules in the aerospace industry, softness in the North American commercial transportation market, pricing pressures, partially offset by the North American automotive volume.

The after-tax operating income at $267 million, up 4%. And if you go down to the segments of Arconic and Global Rolled Products, $58 million of after-tax operating income, up 23% year over year. This is without the impact of Warrick, changing Warrick over into a what we call a cold metal plant. Remember, we have closed the Warrick smelter before. And you also see in Global Rolled Products, a big driver of profitability is the automotive sheet shipment up 49%.

In the Engineering Products and Solutions segment, record third quarter profit of $162 million, up 7%. And the Transportation and Construction Solutions business, $47 million of profit, up 7%.

Overall, also strong productivity, $187 million this quarter. And if you look at the year-to-date number it stands at $547 million. So, that's really good and on track to deliver the $650 million target for 2016.

We also adjusted the targets for 2016 to reflect the near-term industry challenges. And I will talk about this in depth when we come to the presentation at a later point in time.

Then let's also talk about future Alcoa Corporation. Total revenues of $2.3 billion, flat sequentially. Continued lower alumina prices as well as the impact of curtailed and closed operations.

After-tax operating income of $128 million, down 15% sequentially. Improved metal prices offset by lower alumina prices and unfavorable currency impact.

New third-party bauxite contracts in this quarter alone, $53 million. And at the same time, if you look at year to date, $468 million of new third-party bauxite contracts. Very good value driver here.

And also very important to note, the Alcoa Corporation has met or exceeded the three-year cost curve target for alumina. The alumina segment is now on the 17th percentile of the cost curve. This is a 13 point improvement compared to 2010. This gives you an idea of the competitiveness of this. It basically means 83% of all industry players are under water before these businesses will be.

Alumina is now in the 38th percentile. This is an improvement of 13 points compared to 2010. Great job, very difficult job, and also a lot of curtailment changes of the original footprint here.

And also in Alcoa Corporation you see a strong productivity, $190 million productivity savings in the quarter. And overall, the year-to-date number sits at $569 million. And that is surpassing the $550 million target for 2016. But obviously, this does not mean that the productivity push is not going to continue.

Last but not least, but very important, the separation is scheduled for November 1. We got a lot of things out of the way.

PBGC approval, we have that in hand. The IRS private letter ruling we have in hand. The Alcoa Corp. team has successfully raised $1.25 billion of debt. And we have announced both Boards. So, we are set and ready to go to separate on November 1.

Okay, with this, I'll hand over, Bill, to you.

Thanks, Klaus. You've all seen by now adjusted earnings for the third quarter are $0.32 per share, up 48% from a year ago, on strong productivity across all segments and higher volumes, driven by the RTI acquisition. These gains were partially offset by unfavorable pricing mix, primarily in our downstream businesses and by some higher costs.

Third-quarter revenue totaled $5.2 billion, down 6% year over year. This is driven largely by lower alumina prices and curtailments and closures in the upstream businesses.

Cost of goods sold as a percentage of sales increased by 130 basis points sequentially largely due to the impact of lower alumina prices on revenue. Overhead spending increased year over year primarily as a result of costs related to the planned separation of the Company.

Other income of $117 million relates to the gain on the sale of the wharf at our Intalco smelter location. The third-quarter effective tax rate of 44% was driven by non-deductible separation costs and discrete tax items in the quarter. Excluding these impacts our operational rate was 30%.

Overall net income for the quarter was $166 million or $0.33 per share. Preferred dividends were $18 million in the quarter excluding special items. Net income was $161 million or $0.32 a share. Note that our earnings per share reflects, as Matt commented, the reduced number of shares following the 1 for 3 reverse stock split approved by our shareholders on October 5.

Let's take a closer look at the special items. In the quarter, we recorded after-tax income related to special items of $5 million or $0.01 per share, primarily related to the gain on sale of the Intalco Wharf and the settlement received on a prior acquisition. These gains were mostly offset by separation costs and the aforementioned tax items.

Restructuring included charges related to previously announced closures and curtailments, the majority of which are in our upstream business.

Now let's look at our performance versus a year ago. Third-quarter adjusted earnings of 161 million were up $52 million from the prior-year quarter driven by strong productivity across all segments. Lower alumina prices and a stronger Australian dollar, presented headwinds from a market standpoint, while metal prices were more or less stable versus this time a year ago.

Volume growth was driven by the RTI acquisition, now known as ATEP, while price combined with price headwinds in packaging, prices related to the contract renewals and supply chain destocking in the aerospace market, were combined with the packaging headwinds. Strong productivity gains in all segments contributed $246 million in savings, which more than offset $77 million in cost increases. The largest drivers of these cost increases included maintenance, labor and benefits, as well as costs to secure metal as a result of the Warrick smelter curtailment.

Now let's go to GRP. GRP turned in another strong quarter of solid productivity gains. And growth in automotive sheet shipments were partially offset by cost increases and the use of cold metal at Warrick, as Klaus mentioned.

EBITDA per ton was $295 per metric ton or $354 per metric ton excluding the Warrick cold metal impact. This is above our 2016 target of $344 a metric ton.

As we look to the fourth quarter of 2016, we expect GRP performance to reflect the following factors -- strong automotive sheet shipments up 45% to 50% from a year ago, lower demand in airframe, lower North American commercial transportation build rates. Overall, ATOI for the segment is expected to be flat year over year at $49 million.

Please note that in the fourth quarter of last year, we reported ATOI of $52 million, normalizing for the transfer of Warrick and the Saudi Arabian rolling mills which will be going to the Alcoa Corp. Fourth quarter ATOI would be $49 million.

Let's move to the EPS segment. ATOI was $162 million for the quarter, up 7% versus the prior year. The benefit of ATEP and productivity gains in the segment more than offset cost increases and growth project spend like the La Porte expansion and relocation of production to low-cost locations.

Unfavorable price and 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 fourth quarter we believe production of aero engines will increase. We also expect continued price pressure and 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 fourth quarter we anticipate ATOI to be up 6% to 14% year over year to $130 million to $140 million.

Now let's go to TCS. TCS third-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 third quarter was $47 million, up 7% versus the prior-year quarter, as productivity gains more than offset market headwinds and cost increases.

TCS achieved record margin levels of 16.9% this quarter. As we look to the fourth quarter we expect continued weakness in the North American heavy-duty truck market to be offset by growth in our building and construction business and productivity gains. Overall, fourth-quarter ATOI is expected to be up 8% to 10% year over year to $43 million to $44 million.

Let's move to alumina. Alumina third-quarter ATOI was $72 million, a decrease of $37 million sequentially. API pricing declined 6% from last quarter and unfavorable currency impacts due to the rising Aussie and Brazilian real drove the decline. However, higher shipments, favorable price mix and productivity more than offset seasonal raw material price increases and maintenance timing.

In the fourth quarter we expect production to be up 30,000 metric tons sequentially. API pricing will continue to follow a 30-day lag, and LME pricing to follow a 60-day lag. 85% of third-party shipments will be on API, or spot pricing, for the full year of 2016. And we expect continued productivity actions will offset higher energy and other cost increases.

If we turn to primary metals, primary metals third-quarter ATOI of $56 million was up $15 million sequentially due to improved productivity and cost control. Market factors of LME, API, and FX largely offset each other, while lower volume was due to production stability issues in our Iceland and Intalco smelters. Favorable energy sales in Brazil and the US offset unfavorable power prices in Spain and Intalco.

Let me forward to the fourth quarter we expect production to be up 10,000 metric tons as we regain stability in Iceland. And this volume offsets downward pressure and product premiums that we're seeing. Pricing will follow a 15-day lag to the LME, lower alumina costs of $15 to $20 per ton of alumina, as costs in this segment follow a 90-day lag on API pricing.

We also expect structural changes in the Portland, Australia energy contract and seasonal energy prices in Spain. These factors will drive energy prices up $15 million after tax. And continued productivity to offset all of these cost headwinds other than the energy headwinds that are listed there.

If we turn to the next slide, with our pending separation into Arconic and Alcoa Corp., I wanted to provide you with a view of what to expect in each Company's fourth-quarter earnings. Arconic's fourth-quarter report will include one month of GPP, or the upstream business, in the discontinued operations line.

There will also be charges related to the separation including two items highlighted on this slide. First, valuation allowances for certain deferred tax assets that is a result of the separation will not be realizable, will run through corporate and be treated as special items. Secondly, Arconic will evaluate if there's any impairment losses associated with the separation of Alcoa Corp. If there's an impairment loss we estimate the range to be $300 million to $700 million. Any identified loss would go through discontinued operations also.

Arconic segment reporting for EPS and TCS will be unchanged. GRP will be adjusted to reflect the separation of the Warrick and Saudi Arabian rolling mill.

For Alcoa Corp. the fourth quarter will consist of one month of carveout financials and two months of Alcoa Corp. results. The Company will report on all six segments. I've provided guidance on rolled products on this slide also to support your understanding of the transfer from Arconic.

Before moving to the cash flow statement let me summarize fourth-quarter guidance. GRP ATOI is expected to be flat, EPS ATOI up 6% to 14%, TCS ATOI up 8% to 10%, and alumina and primary metals segment combined performance flat excluding the energy pricing impacts and, in the case of Alcoa Corp., rolled products we expect that to decline $1 million to $2 million sequentially.

Let's go to the cash flow statement. For the third quarter, cash from operations was $306 million contributing to free cash flow for the quarter of $31 million. Pension expense in the quarter of $78 million was slightly lower than cash contributions of $80 million. Contributions year to date of $227 million reflects 76% of our anticipated full-year total of $300 million.

We are also announcing today that we've reached an agreement with the PBGC related to our separation. As part of the agreement Arconic will make contributions of three payments of $50 million each during a 30-month period following the separation.

Lastly, capital expenditures of $275 million for the quarter included $99 million for return-seeking projects and $176 million for maintenance separation and other sustaining projects. 58% 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. Our program to offset the weakness in the commodity markets and volatility in the debt markets exhibited earlier in the year has been successful, generating nearly $1.2 billion. This quarter we sold the Intalco smelter wharf and other excess property, earnings proceeds of $120 million.

The Intalco property sale will not affect our ability to use the wharf or run the smelter. We're working to complete additional asset sales in the fourth quarter which may raise an approximately $250 million in cash. In total, we're expecting proceeds nearly $1.2 billion from these actions.

Now let's take a look at the balance sheet. We have very strong liquidity and ended the quarter with $1.9 billion of cash on hand. Net debt is in line with where we started the year. We have an additional $1.25 billion in gross debt due to the Alcoa Corp. issuance, but that money is held in escrow until separation and therefore not included in our cash balances.

Now I'll move to a review of the aluminum market fundamentals. Global demand remains robust at 5%, while supply has increased slightly from last quarter, keeping the overall market balance for our 2016 aluminum balance in the deficit range of 615,000 metric tons.

Global consumption is projected to reach 59.7 million metric tons. Since the second quarter, the data continues to support our estimates for demand growth in China and has suggested a slight rebalancing between North America and Europe. Aluminum supply is projected to grow by 3% year over year to reach 59.1 million metric tons of production.

As I noted the 2016 aluminum deficit is down slightly from last quarter to 615,000 metric tons. In China the average SHFE price this quarter has increased 316 Renminbi, which has motivated slightly faster restarts and expansions than we had forecast. The average LME cash price in Q3 was $1,620 per metric ton, $48 higher than the Q2 average of $1,572.

When you go to the right side of the chart, global inventories have fallen, and we expect them to continue to fall due to the global deficit this year. And aluminum prices have recovered substantially since earlier in the year.

If we then turn to alumina, the alumina market is in deficit of approximately 1.6 million metric tons, representing a larger market deficit than what we had reported in the second quarter. The deficit increased due to the combined impact of three main factors -- higher alumina demand in both China and the rest of the world from increased smelter production; lower rest of world supply, as Sherwin curtailment and slowed expansion in India combined to lower the overall rest of world supply; and, in China, a few faster restarts and additional expansions have increased 2016 Chinese alumina supply.

If we transition to the right-hand side of the chart, alumina demand growth is projected to outpace supply growth, demand growing at 5%, supply growing at 1%. And prices have maintained recovery due to improving fundamentals, recovering $31 per ton since the lows we experienced at the beginning of the year, coming off higher prices we saw in the second quarter. Just in the last week, however, we've seen stronger Australia prices recovering to over $250 per ton.

Let me turn it back over to Klaus.

Yes, thank you very much, Bill. Let me customarily start with a view on the end markets and start with aerospace deliveries. We said in the second quarter that we see flat to plus 3% for this year. The airline fundamentals are solid and profitability of the airlines is at an all-time high, travel demand is up. Robust commercial jet orders, the order book is still over nine years.

There's very low level of cancellations, 1.9% of the order book, well below the historic numbers. But at the same time we do see 2016 as a transition year.

In the third quarter we've seen large commercial aircraft deliveries up 3%. The growth year to date is flat and so we believe that the year 2016 is more likely to come out at the lower end of the range, the range being 0 to plus 3%. We also see solid growth of narrowbodies and softening demand for the widebody segment.

And, as I already explained last time around, it is really important to understand what's going on there, also, inside of our business to distinguish between the airframe components and the air engine components. So, let me repeat that because the picture continues there as I described it already at the end of the second quarter.

Airframe, this is for us the spectrum of fasteners, extrusions, forgings, casting, sheet and plate. And what we see there is a reflection as the build rate reduction that has been announced by the OEMs for A380s, B777, and the C-Series and the part standardization and supply chain optimization.

All of this and the overbuy we saw as an expectation of the ramp up of the new platforms has led to an oversupply. Currently on the airframe component side we are going through a phase of destocking that absorbs the demand. And we actually do believe, from what we have line of sight, that this goes through all of 2016 and continues into 2017.

On the aero engine side, which for us also large spectrum, it means fan and turbine blades, rings, discs, shafts, structural castings, a lot of new engine launches with multiple new technologies, product introductions that are generating basically massive industry ramp up challenges. There is strong engine ramp up in the second half.

We've seen that this really does not slow down but, with the new engines ramping up and the high level of technical sophistication, there's a lot of increased product introduction costs for qualification of the component. And, at the same time, the legacy engine spares and replacements remain strong. So, here we have a different situation. We have very strong demand at the same time, the ramp up is accelerating and we're going through the near-term teething issues here of the aero engine industry.

So, let's move on to automotive, and let's go to North America. We believe it's going to grow 1% to 2%. In the second quarter we had a range that stood between 1% to 4%, but we are now seeing that as a rather a narrower range than the one that we had then.

What we do see is production is up 2.4%. But it's really a tale of two cities. For trucks the demand is up by 7.3%, operations up by 7.3%, and for cars it's down by 4.6%. And what we are currently seeing is the OEMs are lining their output according to the demand.

Sales are up by 0.4%. We see a growing US inventory. It now stands at 65 days, which is still in line with the industry target of between 60 to 65 days, but it's up three days month on month and six days year on year. The incentives are rising. They have increased by more than 17% year over year.

Also a different picture, as you would expect, between the cars and the trucks. On the car side, it now makes 14% of the average trading price and on the truck side it makes 9.3% of the average trading price. In general, the industry believes that everything below 10% is considered a healthy margin, a healthy incentive.

So, the demand, we believe, for longer term, we do see sustained demand picture in the US. If you just look at the vehicles in the US that are 12 years and older, the number is more than 100 million out of 258 million that are in operation. So, it's a big chunk that potentially is there, sitting there as the future demand.

In Europe automotive, we continue to believe it up. It's going to be up 2% to 4%. We see the production rising by 3.7%. This is different between the West and the East. West up by 5.2% compensated by the East. Strong registrations and also good exports.

In China, we actually believe that it's going to be better than what we saw in the last quarter. 6% to 8% we see here, up from the 3% to 5% that we saw before. Production is up almost 11%, sales up 11%, and some of the legislation is helping this to get boosted. So, that's the picture on automotive.

Let's move to the heavy duty truck and trailer market. Let's start with North America. Unfortunately, not a good picture. We actually have seen it continue to get worse in the second quarter. End of the second quarter we said it's going to go down, and we saw for the year minus 26% to minus 28%. We actually see now it's more in the minus 28% to minus 30% range.

We've seen the production coming down by 27% year to date. Freight growth is still there but it's smaller than what was forecasted. And obviously the psychological effect kicks in then in terms of investments for the trucking firms.

Weak orders down 28%. Higher inventories, now it's higher than the 10-year historical average with almost 58,000 trucks and the average is at 47,000 trucks. And the order book is falling, down year over year by 39%. So, not a pretty picture on that end.

In Europe, we continue to see it slowly coming up. 3% to 5% is the growth we are seeing. Production is up by 8.3%. Also registrations in the West are up by 16% almost, East is dropping by 5%.

And in China we also see that the stimulus programs are taking hold. We actually saw that it's going to go 2% to 4% after the second quarter. We now see it rather being in the 13% to 15% range. Strong sales, up 44%. Production is even up higher on a 56% level.

Packaging, actually we do see global growth rather a little bit higher than what we saw before. Before we said 1% to 3% and now we said 2% to 3%, very strongly driven by the US where we saw minus 1% to 0 as the picture before. We think now it's a little bit better, 0 to 1%.

The drivers are the same. Carbonated soft drinks down, beer segment up. And I think it's too early to tell whether this is a full trend or whether there are some weather-related impacts here. We will see what's going to happen going forward into the colder season in the northern hemisphere. Europe 1% to 2% up and China 5% to 8%, no change on that.

Building and construction North America, we believe 4% to 5%. Non-residential contract award is, however, down minus 1.8%. Architectural building index is positive for 2016 but in August the number turned to 49.7. This is the second time it's below the critical mark of 50, so we have to watch it.

Housing starts are up by 10.6%. And if you look at the annualized starts, they stand at 1.2 million. This is below the long-run average of 1.3 million. So, it has to be watched but we believe for this year we still see a good picture there. Europe is 0 to plus 1% and China up 3% to 5% growth.

And on the natural gas turbines we actually do see a 2% to 4% increase as the market moves to higher value-add product, higher efficiency turbines with advanced technology. The gas turbine capacity orders up 0.7%, strongly driven by the 60-hertz market up 7.7%. And the demand for spares and upgrades is also good. Electricity demand is down year on year by 0.6%, so that hasn't really changed that much yet.

Let's now talk about the businesses. Given that November 1 is almost around the corner, I decided to split it into a short part on Arconic, which, for those that haven't followed us or have followed us, is the old value-add businesses, so to say, and then the future Alcoa Corporation which is the upstream business.

Let's go to Arconic. I just described to you what we see in the end markets. And I'm happy to address this also more in depth in Q&A, if there's an interest. But given this, as you know, our mantra is we focus on those things that we can influence and do the best out of it. So, given this, we are adjusting the revenue targets for 2016 but we are holding the margin goals. So, let's go through this.

GRP -- what have we seen in the third quarter? We have seen the profit up 23%, the EBITDA per metric ton up 7%. These are the numbers excluding the cold metal plant aspects from Warrick.

What are we doing? We are changing the goals from what used to be $5 billion to $5.2 billion, revenues to $4.8 billion to $5 billion, and we are keeping the profitability target at the $344-plus per metric ton. For the fourth quarter, as Bill has said, we are expecting the profitability to be flat at $49 million.

So, what are the drivers for this goal change for 2016? There are a couple of those. One is that we actually did expect that the auto build rate would grow further, but what I just described to you is what we're seeing now. It is plateauing, granted, on a high level and the auto aluminization continues to be strong, so we will benefit massively from the auto aluminization. I think Bill has shown in his slide that we are expecting also, we had for this quarter 49% increase in auto shipments, and we are expecting a rate between 45% to 50%, also, in the fourth quarter.

But at the same time, our expectation for build rates were that it would continue to go up and compensate some of the other negative effects, the big negative effect obviously here the heavy-duty truck market decline. And then on the airframe side, the destocking of the model transition continues on longer than we had expected. And the lower build rates that have been announced, also, in this quarter. So that's the situation on GRP.

On TCS, we've seen in the third quarter profits have been up by 7% and the EBITDA has been a record EBITDA margin. What we see going forward in the fourth quarter, we actually see it will continue to go up by 8% to 10%, and that means year over year to $43 million to $44 million. At the same time, we can't ignore -- this includes obviously very strong our wheels business and that's heavily impacted by what's going on in the North American heavy truck markets, and you saw the massive decline that we are seeing there.

We obviously have taken a lot of counteractions and you see that reflected in the profitability target continuing to be at 15%, while the revenue target we're taking it down from what used to be at $2.1 billion to $1.7 billion to $1.8 billion. The other thing is also sales inflicted one on purpose, we are restructuring our Latin American extrusion business and therefore we are purposefully losing some or taking out some revenues that we don't think we want to continue to have going forward.

EPS -- the EPS business had a record third-quarter profit, up 7% year over year. And the fourth quarter we expect it to be up 6% to 14% to $130 million to $140 million. At the same time, we also have to see what is driving the full-year revenue.

Revenues, as I mentioned already, we have on the airframe side we have the destocking, we have the model transition, we have lower build rates. At the same time, on the positive, we have very strong aero engine demand. However, the industry is going through their ramp-up challenges on the aero engine side.

Let me also mention Firth Rixson, our acquisition there. We have been targeting the revenues of $1 billion to $1.1 billion for this year. Firth Rixson is very strongly oriented towards the aero engine side, though we see that realistic range as more between $900 million to $950 million revenues. At the same time the margin level we had originally said was going to be between 14% to 16% and we see it now more between 14% to 15%.

Also, our other acquisition, RTI, doing very well. We had targeted $755 million to $775 million of revenue for 2016, and we continue to hold that range. At the same time, the EBITDA margin, we originally said we were going to come in between 17% to 19%. We believe that we're now more on the upper range, rather on the 19%.

So, what does that mean for EPS in total? We are bringing the revenue down from $5.9 billion to $6.1 billion to $5.6 billion to $5.8 billion range, while we are holding the profitability at the 21% level.

Let's now also talk about Alcoa Corporation. We are really progressing in all of the business segments. And just to touch upon a few highlights here, on the bauxite business, Juruti is at a production record. I mentioned already $53 million of contracts for third-party bauxite in this quarter, almost $500 million of third-party bauxite phased over the course of the year. And that's a business that we will continue to build out as a core corporation.

Alumina -- Saudi refinery achieved 90% of the nameplate capacity. Good productivity there. On the energy side, Brazil third-party revenues up 26%. Very good progress on that end helped by the pricing situation there.

Alumina costs down by $349 per metric ton on the cast product side. EBITDA per metric ton, 40% higher than in the prior year. And on the rolled product side, the conversion to the cold metal plant is on track and we see in Warrick a record year to date recovery

I think the most important message here on Alcoa Corporation is the enormous success on coming down on the cost curve. Keep in mind, this is a commodity business and this is all about where you are on the cost curve so that what we've always said, that you can sustain and be profitable in whatever environment you have.

On the alumina side, we've come down from the 30th percentile to the 17th percentile, and on the aluminum side from the 51st percentile to the 38th percentile. This is fantastic and above what we originally had set here as targets.

Let's also talk about productivity, as you know, a major part of our DNA, and a major part of the profit drivers. Also good news on that. And we see that for future Arconic stands at this point in time at $547 million of productivity for the year, and future Alcoa Corporation stands at $569 million. This is above, already, the annual targets, so very good job. The team has committed to continue moving forward and keeping the pace at the rate ideally that they have been running along this year. You also see this is backed by more than 20,000 action sheets in the different categories for productivity growth, as well.

So, I thought I would end it, given again that November 1 is so close, and you from then on will be looking at two companies here and have the opportunity to hold two stocks, I thought I'll end with giving you an idea of what we are saying to the investors, why should you own Arconic and why should you own Alcoa Corporation. So, let me start with Arconic.

Arconic is very strongly positioned in attractive markets. And I would say they fall into two categories. One is secular growth with compelling margins, like aerospace and automotive. This makes up about 50% of the revenues.

And then the other big chunk, solid growth, attractive margin. And this is true for transportation, specialty industrial, and building and construction. Again, makes 50% also of the revenue.

We are clear market leader in major markets. If you just want an indication for that, and look at the revenues in the business, the number one or two position. Aerospace 85% of the revenues are in number one or number two, North American auto 96%, commercial transportation 93%.

We are a major supplier to industry because of all of the sectors that Arconic is in. Arconic is a differentiated driver via innovation and advanced technology solutions, has unparalleled capabilities of multi-material manufacturing processes, as well as application engineering.

Has a track record of breakthrough advances. I'm not going to mention all of those. Also, on the recent ones, Ampliforge, metal powders, lightning strike fasteners, Micromill, bonding. The list is long. And has a very strong culture of innovation-driven engineering and very good research and development base. Excellent people, and in the end it's all about people.

The margin profile is compelling, also driven by relentless pursuit of cost reductions and consistently delivering productivity, as I just read on the last slide. And a disciplined capital allocation.

Last, but not least, the people are everything. The management team, as well as the culture that exists at Arconic, is focused on performance, and is focused on creating value.

Alcoa Corp. -- what you see at Alcoa Corp. is really a reshaped aluminum leader. And you saw it very strongly in the position on the cost curve. What I would say, a compelling industry play here.

World-class low-cost assets, global partnerships to being in high-growth markets, opportunities like in bauxite to continue to grow substantially. Exciting industry outlook. Bill just went through this. Very often we don't remember that there are not that many markets that have a demand growth of 5%. And we have said demand is going to double in these 10 years. And we are seeing that demand is doubling in these 10 years, and every one of us sees it in their own environment.

I think the reshaped Alcoa Corp. is well-positioned, also, in whatever the future will bring here. The management team is very experienced, has been behind the drive to reshaping the firm. The culture and the company is extremely operator centered, so running the assets well. That's really a good discipline there. And also a disciplined approach to capital allocation, so focus on making high returns for shareholders.

I hope that this captures your attention. And I very much hope that you will continue to follow and invest in Alcoa Corporation as well as Arconic going forward.

So, with this, let me conclude the presentation, and let's go to the Q&A.

(Operator Instructions)

David Gagliano, BMO Capital Markets.

Great. Thank you for taking my question. I wanted to focus in on the Arconic businesses, specifically for 2017.

I noticed in the slide deck, the second quarter, the expectations were for more than 10% growth in 2017. And I notice that's not in the slide deck this quarter. I'm wondering, given the change that we've seen in aerospace, what do you expect for 2017 growth in aerospace?

Dave, you are very attentive. You noticed that. And there's obviously a reason why we didn't put it in there.

The range -- you've seen there's a lot going on, on the aero structure side, as well as on the aero engine side. The environment has been more dynamic than what we had expected, even in the first quarter, second quarter, and third quarter. And you've seen what we are projecting for the rest of the year.

If you talk to the experts and look at the 2017, the range that people put out there is huge, absolutely huge. And I would say it's basically, using the stick hunting gorillas in the fog. I don't know whether this picture works well, but it's very hard to predict.

What we are planning to do once 2017 hits, and actually once we go on to the road show, which will be coming up soon, we will provide for both companies, for Arconic as well as Alcoa Corporation, we will go more in depth into the 2017 view and give you also some numbers on what we see there. So that's our goal here. The same thing is going to hold true for Alcoa Corporation.

Sure. We'll give better view on supply/demand for 2017 as we go into the webcast towards the separation.

Okay, that's helpful. Just as a follow-up, just in terms of as you build out these expectations, obviously in the downstream businesses your order books, I'm assuming the visibility is very high there, at least for 2017. Again, we've seen these challenges in aerospace.

I'm just wondering directionally, given those challenges, you still delivered solid growth year over year in the EPS business. What do you think in terms of directionally growth potential in the EPS business for 2017? Do you still foresee, for example, an up 0% to 5% sort of year in the EPS business in terms of revenues?

The good news is the order book is full. And the other really good news is the demand for aero engines is gigantic. The new engines, which are technically highly advanced, you can expect that they cause some teething problems in a relatively complex supply chain situation, right? So, that's what we are going through. But the desire to ramp up fast is enormously high.

This all depends on how quickly can we get through this. We are doing all that we can with every one of our customers, as well as part of the supply chain, to get through this relatively quickly. But, frankly, Dave, we will give you 2017 outlook when we go on to the road and provide, which is in two weeks from now. So, you will get it very soon.

Okay, great. I look forward to it. Thanks.

Your next question comes from the line of Timna Tanners from Bank of America.

Yes, good morning, guys. I suspect you may answer my question similar as to the last one, but I'm going to go ahead and ask them anyway. I know that a lot has changed over the last year, 1.5 years, but I was just looking at the Firth Rixson forecast from 2014 and just wondering how do we think about the EBITDA guidance of $350 million that was initially for 2016? Is that still a good long-term number for what Firth Rixson is capable of, aside from some of the near-term headwinds that you've described in its own operational challenges? Or can you give us any color on how you're thinking about Firth Rixson's past and its going forward prospects?

Firth Rixson, as I already said earlier, the major reason why we acquired Firth Rixson is because they are a very important part of our aero engine component portfolio. The aero engine teething problems affect them squarely.

At the same time, we have really made very good progress on driving the synergies out. We are basically ahead of where we originally thought we would come out, and also in getting the operational productivity. And we're trying to take advantage of the aero engine ramp-ups. At the same time, these teething problems do affect them.

I think in the long run we will get there, but you saw that we are taking the revenue targets down for the year, as well as adjusting the profitability to the lower end. So, obviously we are not where we wished we had been. A good part of it is just the situation that we face in the market. In terms of our own control, I'm actually pretty happy with the progress that we're making. But it's work.

And let's not forget, everybody, Timna, focuses on Firth Rixson. I also talked a little bit about RTI. In RTI, we are ahead of our plan. We have confirmed the revenues are coming in, in the range that we always thought, but we are going to be at the upper range of the margin at 19% much earlier than we thought.

And, frankly, we have been able -- also, RTI is in the main aerospace, but what you see there, the team has been not so much focused on the aero engine side, more focused on the frame side with titanium. And the team has been very good in overcoming the headwinds. We are ahead there with the synergies. And, also, we've been able to get a lot of productivity out there, too. So, that's very good.

And on TITAL, the numbers on TITAL are even more stunning. Granted, it's smaller, but we've had over 100% growth of revenues compared to last year, and similarly the strong profit increase. So, we're happy with where that is going. And that's in titanium investment cast basically for Europe.

Okay, got that. Thank you. I just wanted to ask about Alcoa on the aluminum side. I feel like we had a flurry of announcements a couple quarters ago about curtailing capacity of high-cost US operations. And I just wondered if there's any progress in looking at some of the other operations that may be higher cost than any programs or plans that you can detail for us?

That's a good point, Timna. We have been part of that because we announced a couple of closures, as you know, in the US. We originally had planned to close Massena, and we also had planned to close Intalco. We did close Wenatchee.

We curtailed Wenatchee, not closed.

And in the discussions here in the north country in New York, we were able to achieve a power contract that got us into a profitable situation, so we didn't have to close it. And the same thing actually, to our surprise, happened on the Intalco side, and that's why we also kept Intalco running, and profitably running. So, that's been what has been going on there.

Okay, thank you.

Your next question comes from the line of Evan Kurtz from Morgan Stanley.

Hi, good morning, guys. Just a quick one on the new segments as we start to think about how to model these things going forward: When should we expect more updates as far as revised Form 10, just filling in some of the blanks that we got on the first Form 10 as far as segment ATOIs for the new groupings?

We've had four versions of the Form 10 at this point. If you recall, we were able to give you the first quarter and then the first half. We will have more information available to you in the early part of November. So, right after the close of the separation, you'll get more information on the segments then.

Okay, great. And then just a question on how you price third-party bauxite sales: We can for the first time look at what the revs are in that business and get a sense of what revenue per ton is. What's included in that revenue? Are there freight costs?

When you sell bauxite, what's the delivery point? Is it the mine? Is it the port? Is it delivered in China?

Just to be clear, on our revenues in bauxite, you've got a combination of internal and external. The internal revenues are internal transfer pricing where we try to approximate market as best as we can. It's very difficult to approximate a market where the mine is sitting right next to the refinery, but we make a best attempt to have a market and arms-length pricing there.

For the external revenues, they are largely including shipping costs over to China. So, they are on a delivered-into-China basis.

Great. And then just one last question on working capital: It's been a big use of cash this year and, actually, if you look at the first nine months of last year. Is there a seasonal pattern here? Should we expect some sort of release as we get into the year end?

Absolutely, and you've seen it year in and year out. We've tried to do a better job of smoothing out over time.

But we typically burn working capital. It's a consumption of cash, through the first nine months, and then we deliver cash back in the fourth quarter. And that's been consistent.

Historically you see it in both businesses, probably a little bit more on the Arconic side. Both businesses will typically generate cash in the fourth quarter.

Great, thanks. I'll hand it over.

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

Good morning, guys. Again, just trying to follow-up a bit on the downstream businesses, I'm just going to recap, but over the last three years roughly since 2014, you've added over $1.5 billion of revenue, particularly in the EPS business, but we've yet to see any real incremental pickup in EBITDA.

So, I'm trying to understand what is it that fixes this business going forward? What is going to be the turnaround inflection? Is it going to be revenue starting to flow through in 2017?

Are there internal cost cuts that you can keep doing? Because it just seems that those assets have just not been performing to snuff, or the stuff that was in downstream is just performing a lot weaker than it was also previously expected. So, I'm just trying to understand what is the inflection point and what should we be looking for, for this business to start to perform as to what the guidance was when you initially acquired them.

When you talk about downstream, I assume you're talking about all of the Arconic businesses?

Sorry, more focused just on engineered products and solutions.

I see. On engineered products and solutions, I actually think -- let me recap what is hitting here and why the revenue is trending below our expectations. The airframe structures, we see strong demand for narrowbodies, but softer demand for widebodies. It's public knowledge. We can't make the market. We would love to have it in a different way.

You look at the A380 announcement, the 777 announcement, the C-Series, plus the Boeing third-quarter deliveries of 5% lower than the third quarter last year. At the same time, we have the additional pressure from the destocking and the supply chain. So, that's one factor.

The second factor is the aero engine launches, and that's a major driver of our revenues here in EPS. We do see that there's a lot of demand there, but it's basically a multi-step supply chain. And we currently do see some supply chain challenges here on the aero engine side.

Supply chain is long. It goes from the material to the metal forming to machining to final assembly. And when you go through this, you actually have to invest in the qualification, and that's the phase that's currently going on.

But the interesting thing on both sides, the fundamentals of the businesses are very strong. The aerospace market, the number that I find most convincing is always to look at -- because it's all driven by the macros growth of middle class and urbanization -- the number that I find most interesting is, every year the aerospace industry adds about 100 million more passengers from Asia alone. So, that gives you an idea of the strong market that's out there.

At the same time, when you look at the margin level here, we are performing at a margin level of about 21% here. And we have, when you look at, Jorge -- and you have been one who has been following us for a long time -- when you look at where we were in 2008 with all of these businesses, and with the organic businesses, as well as what we added organically and inorganically, this was an 8% business and we've brought it to this level.

We will continue to work on that, and continue to improve and continue to grow. We are focusing on those things that we can influence, and there are certain things that we can't influence. But, as I said, the fundamentals are very strong. We have to get through these launch issues that exist.

Okay. Sorry, but just to recap, then, on the launch issues, is it that there's the qualification growing pains that are happening right now with the new engine launches and you would expect margins to improve, say, in 2017, once you're flowing the product better? I'm just trying to understand what the drivers could be next year.

Yes, you're absolutely right, because what is happening in the qualification period, you have a lower first pass yield, you have additional qualification costs, you have a lower utilization of your equipment. This is changing dramatically once you are going into steady state -- I mean, dramatically once you go into steady state.

Okay, that's what I was trying to get at. Thank you.

Because the other thing, keep in mind, this is the crazy thing here, demand is massive and everybody is working tirelessly on getting this done.

Got it. Thank you.

Your next question comes from the line of Justin Bergner from Gabelli & Company.

Good morning, Klaus. Good morning, Bill. A couple quick questions: In regards to the EPS segment, could you help us understand the breakout between engines and airframe? And if airframe is what's driving the weakness, how is it that RTI's guidance on a sales basis is unchanged within the segment?

Let me start with the last one. The RTI is really a big compliment to what the RTI folks have been achieving there. This is spectacular that they have been able to get to this level.

And largely, it's three factors, I would say. One is the synergies that we had planned for all the time. We got them implemented very fast.

Secondly, it's productivity that we have been getting out, partially also by doing some things there, taking best practices that we are moving over from other businesses over to RTI. And, thirdly, through a very good positioning in the market and a huge proximity to the customer. It's a great job by the team.

To your second point, when you look at EPS, out of EPS about 76% of the EPS revenues are -- and this is 2015 number, approximation -- 76% is the aero market. And then if you break that out into engine and structure, I would say it's roughly 50/50 between engine and structure.

Thank you for that detail. One other question, if I may? Have you clarified what the costs are to undergo the separation in total, and what the extra cost will be to have two stand-alone businesses versus one? And if not, when do you expect to provide those numbers?

I'll answer the second one, first. On a dissynergies basis we have identified fairly small levels of dissynergies that we think we can largely overcome with efficiencies. So, the dissynergies that we would be looking at, of course you've got two CFOs, for example. We're looking at ways that we can -- probably not a great example (laughter), but it is a dissynergy. So, you've got two different companies and we're looking for ways to streamline.

I would not recommend a company without a CFO.

No, you get the point. As far as the overall separation costs, at this point we haven't given much in the way of guidance. But I can tell you we have spent around $200 million in cash year to date on separation, but we still have some spend left to do in this last month.

And also, just as a little fun fact on the side, we have been very substantially benchmarking, as we always do, how the costs for separation typically are for others. And we are very proud of how efficient we have been in the separation and how low our separation costs have been relative to what we've seen at other places.

Great. Thank you. It does seem like the costs have come in lower, but we'll await final detail.

Yes, and you will get this. You will really get this when both teams go on to the road shows. As I said, both are planning to start this in two weeks from now, so you will also get a glimpse on to 2017.

We probably have time -- we might not have time -- but time for one more question. One more, is that possible?

Your final question comes from the line of Tony Rizzuto from Cowen and Company.

Thank you. Hi, gentlemen. My question is on the jet engine side. Klaus, you mentioned some of the supply chain challenges. I was wondering, how are those jet engine deliveries facing in the fourth quarter? Earlier you were expecting a fairly good ramp in 4Q.

And then, also, possibly associated with that, when you talk about teething pains I noticed that one of the Japanese airlines, ANA, has been talking about issues revolving around the turbine blade material, at least on the Rolls Royce engine for the 787. I don't know if GE is experiencing similar issues. But about the engine deliveries that you're seeing in 4Q, is Arconic currently sourcing any of the materials that go into that blade material? Whatever you could tell us on that would be great.

Look, obviously I cannot speak for our customers. One thing I can tell you, we are supplying, and you know this, we've gotten the charts out there where you see we are literally supplying every commercial jet engine that exists on this planet. And on many of those we have a lot of material on there. So, we are basically supporting all of them to manage what I would call an unprecedented ramp-up. It was really multiple, very challenging new technologies.

What we typically have is, in this phase, the supply chain, as I described, is relatively long, so we are supplying aluminum lithium, for instance, for fan blades. And then it goes to a machine shop, and then it goes to some coating, and then it goes to somebody who basically puts all these pieces together. So, the chain is long. And then it's final tested and built in.

The only way how you can get a hold of these issues is to get your arms around the whole supply chain under the guidance of the OEM. And that's how this industry is working this out. So, with pretty much everybody we have jointly committed action plans and we are fulfilling those.

Okay. All right, that's very helpful. I appreciate that. I was going to ask another, but I'll get that offline. Thank you.

Okay, we've got to move on, so let me conclude. I think you saw that with all that's going on we steered steady through this quarter, delivered profits growth at Arconic, and Alcoa Corporation performed well in a low pricing environment. Productivity was exceptional.

Alcoa Corporation has delivered on its 2016 cost curve growth, actually overachieved them. The three-year target adjustment at Arconic reflects basically the near-term industry realities.

The fundamentals, let's not forget the questions -- thank you very much for the questions -- the fundamentals in the key markets remain solid. Separation is on track and we are looking forward very much to launching two new companies on November 1. So, this will be the last time we will get together on this constellation, after 128 years -- not with everybody in the room.

So, thank you very much for listening to us and paying attention. I'm very much looking forward to also see you as investors and as interested parties going forward for Alcoa Corporation, as well as Arconic. Thank you very much.

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