Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Alcoa Earnings Conference Call. My name is Whitley and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Kelly Pasterick, Vice President of Investor Relations. Please proceed.

Thank you, Whitley. Good afternoon and welcome to Alcoa's second quarter 2014 earnings conference call. I'm joined by Klaus Kleinfeld, Chairman and Chief Executive Officer; and William Oplinger, Executive Vice President and Chief Financial Officer. After comments by Klaus and Bill, we will take your questions. Before we begin, I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the Company's actual results to differ materially from these projections listed in today's press release and presentation and in our most recent SEC filings. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, in the appendix of today's presentation and on our Web-site at www.alcoa.com under the Invest section. Any reference in our discussion today to EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix. And with that, I'd like to hand the call over to Klaus Kleinfeld.

Hello everybody. Let me describe this quarter first and summarize it. I mean the transformation accelerates. All groups improved on a quarter-to-quarter as well as on a year-to-year basis. We really do see two themes, two major themes. One is strong operational performance, and the second one is our transformation is continuing and we are changing the portfolio. So let's start with the operational performance and Bill will go into this in detail. The downstream has the highest ever profit as well as margin, the midstream profit is up 34%, and on the upstream side we have also show an improved performance. This is now a story that goes on for the 11th consecutive quarter. We see productivity in this quarter $302 million coming from all segments year-over-year. So the net debt and the balance sheet is much, much more healthy at [6.9%] (ph), lowest debt level since September 2007 and a positive free cash flow of $260 million. So let's talk also about the second theme, the portfolio transformation. About two weeks ago, exactly two weeks ago when we were on the call here and I guess most of you listened in, and announced that we will be acquiring Firth Rixson, this is a great fit to us, it strengthens our already pretty robust aerospace portfolio. But inorganic growth is not the only name of the game. We also have been very, very strong on the organic growth side. Just to pick out a few things that happened in the quarter, a $100 million investment that we announced to expand our structural engine component offering in La Porte, Indiana and a $25 million investment to further enhance our jet engine blade performance and this one was in Hampton, Virginia. At the same time, we also continued to work on the upstream side, on the commodity side. We safely executed the curtailments in Brazil, and on top of it we signed a letter of intent to pursue the sale of our Jamalco interest. This is the refinery where we have a 51% ownership in Jamaica. So with this, Bill, why don't you give us a little more color on the numbers?

Thanks Klaus. Let's quickly walk through the income statement. Revenue increased roughly $380 million on a sequential quarter basis to $5.8 billion, primarily driven by higher realized aluminum prices and higher volumes in our mid and downstream businesses. We saw revenue growth across all of our major end markets. Compared to a year ago, revenue was essentially flat. Cost of goods sold percent decreased sequentially by 80 basis points due to better price and mix for the quarter and productivity gains partially offset by cost increases. Cost of goods sold is favorable 270 basis points compared to year ago basis. Overhead costs are essentially flat as a percentage of sales on both a sequential and year ago quarter basis. In absolute terms, SG&A was up slightly this quarter due to the Firth Rixson acquisition costs of $13 million pre-tax. Our effective tax rate for the quarter is 38% which is consistent with our expected operational rate for the year as the impact of discrete and special tax items in the quarter was not significant. However, we'll continue to experience swings in the rate given the volatility for our profits within each taxing jurisdiction. Overall, results for the quarter are a net gain of $0.12 per share. Excluding special items, we have net income of $0.18 per share which is twice the adjusted earnings from 1Q. Let's take a closer look at the special items. Included in the net income of $138 million is an after-tax charge of $78 million or $0.06 per share primarily for restructuring. During the quarter, we began the initial closure activities of the Point Henry smelter and rolling mills in Australia. This accounted for $49 million out of the $54 million in restructuring charges. 83% of the charges are non-cash, related primarily to accelerated depreciation. Since…

Thank you, Bill. So let's go through the end markets and let's start in the usual fashion with aerospace. We expect an 8% to 9% growth. This is pretty much unchanged through the number that we upped in the first quarter and this is supported by a lot of data. By the way, I want to mention that you see a new format here today to make it easier for you to take these things back home, so we included a lot of the things that I typically give you in color on those charts, and you let us know whether you like this format or you like the old one better. So back to this, so this is supported, the growth is supported by lots of data. I mean we see a large commercial aircraft, the segment is growing with 12.1%, there's a very strong commercial jet order book, it's now nine years of production, the fundamentals according to IATA are very, very good, they are expecting a 5.9% increase of passenger demand, 3.1% increase of cargo demand, and also expect the airline profits to be up, they expect around $18 billion for the industry. It's also reflected on the jet engine side. I mean there the order book is also full and roughly also have kind of the same backlog, I mean with 23,000 engines on firm order. A nice additional thing is the regional and jet markets continue to rebound. We see a growth of 13.2%. This is the highest order book in five years. Let's move on to the next segment, automotive. In North America, we are seeing, we are believing that we would see a growth of 2% to 5%. This is pretty much unchanged to what we had believed before in the first quarter,…

(Operator Instructions) Our first question comes from the line of Paretosh Misra with Morgan Stanley. Please proceed.

My question is about your GRP segment. Can you give us a sense as to what capacity utilization rate you're running for your aerospace plates and sheets parts and for the beverage can sheet product?

Say that again. I didn't fully get what are you asking for.

The utilization rate for your Rolled Products segment, something that you used to provide for the aerospace products and for the can sheet products if you could?

It's Bill. We typically don't provide the capacity utilization by particular product lines but what we can tell you is that that segment in total is running at around 75% utilization rate currently.

Your next question comes from the line of Sal Tharani with Goldman Sachs. Please proceed.

Klaus, if I look at your aerospace portfolio with this acquisition, $4.8 billion in 2013, looks like it's going to about based on the projections for the acquisition, acquired company, the company acquiring and the ones you have, it's going to be about $6 billion by 2016, very close to what PCP is right now about $6.5 billion, so you're going to be a very major player. I'm just wondering what do we expect in terms of growth in this business beyond that? You mentioned 19% for the Firth Rixson but in your organic business, do we see similar growth rates beyond 2016? And also are there any CapEx opportunities in the Firth Rixson area like you're doing in the organic portfolio right now?

It's a lot of questions, so let me try to answer them one after the other. I think the growth projection on Firth Rixson is very much driven by them just starting up their Savannah operations. So the growth that you see there and the reason for the enormous growth that you see there is that they are just bringing that online, and the good news is as I think I said last time, is that 70% of that growth is backed by contract. You will see good growth driven by the positions that we have and we disclosed the positions now on the planes as well as on the engine. So all you really have to do is look at the value that we have in there and look at the projections from the aircraft makers what we are seeing in there. We believe that in general, I mean the engine segment is going to grow at 7.2% and the commercial aerospace segment long-term is going to grow with 7%. So then the other question that you had – and we have all intention and all good belief that we will grow with it and if not above it with the way we are positioned, but you can actually see that also in this stuff that we provided in the last time. So the second thing that you asked is further organic growth opportunities. The answer to this is, yes, and you already see – I showed you two examples of this quarter and one was in La Porte and the other one is in Hamilton and both of those show clearly that we have great opportunities with additional technology there, and frankly we're just putting this and this will come online by the end of next year. And so, I'm really optimistic on that and I think the other thing that you have to keep in mind is that – I very much believe that when you've got the value proposition of what you're offering right, you will do well and when you think about what is the biggest value proposition of new planes, the biggest value proposition of new planes is 20% fuel efficiency, 50 percentage – 30 percentage points of this comes from the new jet engines, right, and the sweet spot in the jet engine is the combustion chamber and the sweet spot of the combustion chamber are the blades, the vanes and the disks and the shafts, because the higher you can go in regards to temperature, the better you are in regards to combustion efficiency. That's the part that we are in and we now with Firth Rixson will have a totally complete offering. So I mean I couldn't be more optimistic on that. As long as the market stays as it is and with a nine-year order backlog, I mean there are very few markets where you have characteristics like this, Sal. Okay, should we go to the next question?

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

I have two questions if I can sneak them in just really straightforward I hope, but on the outlook for the Global Rolled Products segment you talked about being down sequentially 15% talking about seasonal impacts but that's even lower than last year’s seasonal Q3 and this is the area where we're supposed to be seeing I would think some benefits of F-150, so can you correct me and help me understand what's going on there? The other question hopefully straightforward as well on Primary, just trying to understand that $40 million in energy sales and how to think about that not just in the third quarter but going forward, is that sustainable as that part of the segment going forward?

Okay, the straightforward question, so you can't just look – if you want to judge the 15% change for the next quarter, you can't just look at the last year, we have to look at it more over a longer period of time because this is really the seasonality that we have in there. And by the way I think we said approximately 15%. So you can never tell 100%. Part of it depends also on the packaging side. I mean if you have a hot summer particularly here in the U.S., you know still even though the market is not growing overall but it's still almost 100 billion cans a year. So this is one impact. The second thing on the automotive is, you're right, this is the area where the automotive growth falls in, but keep in mind the real big volumes come up – this is currently – we have gone through the qualification phase, we have started the production in Davenport, the auto production end of last year. We are then starting to ramp it up, we are going through the qualification there and the preproduction and then once the cars get into production, come into the shop floor, this is when you would see the real volume coming in there. In fact, you actually today – and I think Bill pointed that out in the working capital charge, today you actually see a negative impact from some of these things and it's basically reflected in the inventory going up because when you go through this ramp-up phase, this qualification phase, you have to have a little bit more inventory because you are trying out some stuff, I mean Ford is trying out some stuff and others are trying out some stuff. So, I would say the moment the aluminum cars, particularly the F-150, come into the shop floors, you will see this volume is going up, and that's how I would look at it. Energy Brazil, the other question, Timna, I mean Bill, you said 40 million?

If you don't mind, let me add, let me put some color around that. The Brazilian energy sales benefited us in the second quarter by about $40 million, but offsetting part of that was lower volumes and lower prices that we had in the U.S., Timna. So the net impact between that and the U.S. hydro systems was about $28 million. The Brazilian energy is a sustainable situation because in part we've sold some of that energy forward, we've reserved part of it for capturing spot market opportunities, and it's important to keep in mind that that opportunity is really generated based on the optionality that we created a while back by having both smelting and energy in Brazil. And so we've been able to gain those profits via curtailing the capacity in Brazil to be able to free up that energy to sell in the market.

And it's not the first time, Timna, that we are doing that. I mean part of it is also because operationally we have the capability to even on a short-term basis, which here in Brazil we have not done, we have curtailed a major chunk because our forecast here is that this is a situation that's going to continue for a while, but when you look at places where we have progressed like here in the U.S. Warwick, that are connected to a smelter, we are very, very good operationally in ramping it up and ramping it down and sending the energy into the market whenever this gives us a better profitability. This is one of the things where I would say our primary team has been very, very good in using those types of structural advances coming along also with the operational capabilities. So, this is not – I mean the impact of this is pretty substantial this quarter but this is not a new phenomenon, we've just gotten better with it I would say. Okay, next question please?

Your next question comes from the line of Josh Sullivan with Sterne Agee. Please proceed.

So on the Engineered Products business, the margin profile continues to improve impressively almost 100 basis points sequentially and year-over-year. Can you expand on how you're expanding this leverage, is it the end of aerospace destocking, is it fasteners, and then where can it go as these trucking opportunities in non-residential markets layer in as also next-generation of aircrafts like the A350?

What a loaded question. I'll give you a couple of data points. It sounds to me as though there is really two big chunks. The one is what's happening in this quarter and the second one is what's going to go on for longer term, and I think in Bill's presentation you, maybe we can bring that on the screen for those that are in front of their computer, Page 6 in Bill's presentation, you see – okay we're going back here. There it is. This is Page 9 strangely enough here, Page 9 in your deck, so you see on the left-hand side, up lower left-hand side you see the bridge for this quarter and you actually see what has been happening there. It's on the one hand driven by productivity, on the other hand driven by volumes and basically share gains across all factories, right. So that's one thing. And the second thing, outlook here for the next quarter as you see on the lower right-hand box, we believe this is going to continue. Also on the profitability side we expect an increase between 5% and 10% for the next quarter. And then when you go to the larger question, are they in growth markets? My answer to this is, yes, absolutely, and I talked already about aerospace, I talked about jet engines in aerospace, I talked a little bit about commercial transportation, I talked about wheels, but wheels is only one part of the commercial transportation offering. Also think about large [forge] (ph) parts that fall into this segment here. Then we can talk about building and construction. We are very strong in the U.S. as well as in the European markets. The good news is the U.S. market is coming back, and the other good news is, with the European market and our product offering, European customers are much, much more interested in higher energy efficiency. So therefore, we have very strong knowledge there. We are bringing some of the knowledge over here to the U.S. because we see the demand is shifting in energy efficiency much like what we've seen with fuel efficiency in automotive is becoming more and more decision criterion also here in the U.S. and this gives us an additional advantage. So there's a lot going on there and the markets are growing. So I'm very optimistic that we – and the innovation, the foundation for – the foundation really is the market growth, that’s winning out the share, but the foundation of it is the innovation capabilities because the stuff that we are coming up with is really unmatched and I mean it can go from the lightest wheel on this planet to the blade that can stand the most heat in a jet engine or in an industrial gas turbine. That's really what's driving it, Josh.

Great, appreciate it.

Your next question comes from the line of Brian MacArthur with UBS. Please proceed.

Just two quick things following up on Timna's question, Point Henry going down, I thought it had coal deposits that [indiscernible], was there an energy benefit from that as we go forward that's sustainable too? And second question totally unrelated, just on Firth Rixson, are there pension obligations I need to worry about?

So let me address the first one second, Brian. The Firth Rixson deal includes t we're going to pick up some pension obligations and so that is factored into the acquisition price. So we clearly have that, not big obligations especially in comparison to what obligations we currently have but they are pension obligations in the U.K. So that's the answer to that one. As far as the first question was, Point Henry does have, it has a coal-fired plant that supplies energy and we're evaluating what the options are to do with that. We have not seen, just to be clear, there's not any benefit built in to this quarter's earnings from the result of selling power at Anglesea because Point Henry was still operating through the second quarter but we are looking at what options we have at Anglesea in the future.

So there should be an offset as you shut that down and benefit to you?

There is the potential. We need to go through some regulatory approvals and we're in that process. So we're looking at what the options are once it's curtailed.

Your next question comes from the line of Michael Gambardella with JPMorgan. Please proceed.

I had a question on the body and weight technology that you have with your providing Novelis with the F-150. How do you protect that technology going forward beyond the F-150 into other model line?

Mike, that's very simple. You're talking about the A-951, so bonding capabilities, and this is very simple. It's fully patented, nobody else has that and others thought they had something like this which showed up and they feared as not the comparable. So if we wouldn't have – we were in a situation where when the customer started to realize that they came back to us and said, look I mean we do not want to single source but at the same time we need these bonding capabilities and so we decided to license it out and make it available to the industry but we also benefit through the profits that we get through the license royalties.

Okay, so you do get license royalties from Novelis?

Yes, we do, yes.

Okay, second question if I may, just on aluminum lithium, is the bottleneck there the capacity or the product acceptance?

I would say both at different points. I mean the first one is – I mean you've probably seen that we have invested $100 million over the last year I would say to expand our aluminum lithium capabilities and we now have three facilities that can make aluminum lithium. We originally started with only one and this was outside of Pittsburgh at our tech center where this was developed and where we have this unbelievably great gang of metallurgical experts that came up with that stuff, and we can do that now here also at another facility here in the U.S. and in the U.K. So that's the first thing that had to happen and this was a response to the demand, right. So we were supply constrained but we are digging ourselves out of that with the expansion. So the second thing is this is an industry, the aerospace industry is an industry where they go through a very rigorous process of qualification and therefore you are absolutely right, and usually you need to wait for a new platform to come online, right. So my expectation here is that the $100 million that we saw, that I mentioned on aluminum lithium, that's really just the start because when you see today what is going on in the aerospace industry and the discussion around the next levels of renovations of planes, you see that in a lot of discussions aluminum lithium plays an enormously important role and the reason for it are the reasons that I just mentioned, I mean the corrosion resistance is an unbelievably strong argument particularly when you talk about the floor panels, all the stuff where things drip on a plane and how difficult it is to rip this out in their maintenance interval if you can, if you can increase the maintenance interval, this is a big, big winner. So I really think that on this end you will see much, much more.

Your next question comes from the line of Aldo Mazzaferro with Macquarie. Please proceed.

I had a question on the Rixson acquisition as well, on the forecast you made of $1.6 billion in revenues, that's up from about $1 billion now. I think you said there is a major facility that would come online. I wonder if you could just tell us about that. And then as a second part of that question, the $350 million of EBITDA forecast, I don't know if you could help us get that EBITDA down to ATOI or how much is the DA and how much is the interest on that EBITDA?

That was a two-part question, the first part is the growth and the growth, the big part of the growth is Savannah. So I don't know if you want to…

That's very simple, sorry I was distracted for a second here. So the growth is basically the Savannah growth and that's all around disks and it has two components on the disk side. [Indiscernible] we have – the one disk is the normal, I would say normally forged disk, and the other one is the isothermal forged disk and these things are critical parts for the engine makers to get their fuel efficiency up. And on top of it, I mean as I think I said last time, 70% of the growth of this 1 billion, a lot of that comes from the Savannah operation, is backed up by contracts.

And the second question, Aldo, that you asked is the $350 million EBITDA, how do we convert that to earnings? A lot of that is going to be tied up in the purchase accounting, so it's very, very difficult to say. Just trying to think if there's any other guidance that I can give you on that. I don't think there is. I mean…

I'm sorry, I was just wondering, what kind of a depreciation or amortization schedule might you use on the purchase price, it's purchase accounting you said, right?

It will be purchase accounting, it's all going to be based on how much goodwill is associated with the acquisition. So all of that will be determined as we get closer to actually getting the deal closed and when we get there we'll tell you how much DD&A to expect on the deal.

Okay, and just one second question if I could. Did you have any power sales other than the Brazil?

That's what we are saying. When you look at the power sales in Alcoa, we have had power sales for years in Alcoa, we have had power sales associated in Tennessee, we've had power sales in North Carolina, we have power sales occasionally in Indiana, we now have some power sales in Brazil, Brian MacArthur brought up that we've got a power asset in Australia. So the net impact in the second quarter was $28 million. That's because we had some in Brazil and we had lower power sales in the U.S. So the idea of selling power is really not new and I think Klaus alluded to it well, we have had a best practice within the system of being able to modulate the smelters to be able to sell power for quite a while now.

Great, I appreciate that. You're saying $28 million is the after-tax number, correct?

Yes.

You see it actually on the bridge, on the primary bridge also that Bill has in his part of the presentation.

Your next question comes from the line of Tony Rizzuto of Cowen and Company. Please proceed.

Could you give us an update of your transformation in your rolling mill system, specifically as you're trying to shift I think some of the mix from Tennessee and I understand maybe you're doing something at Texarkana as well, and also what level of CapEx might require as you shift more to an auto sheet mix?

Let me start with the last part. We are doing nothing in Texarkana. So that is still idle. And in regards to the shift, I mean you're referring to what we are doing in Tennessee or what we're intending to do in Tennessee. I mean as you know, Tennessee is coming online by mid next year and this basically is the backend of whatever we want to start. I mean the cold mill part and the heat treat, that's what we are adding. So the front-end, the hot mill will be used by the packaging part as well as by the automotive part and the investments are around $300 million, and for the time being I mean we are very happy with this and we will continue to monitor the market but we are also very happy with the product mix that we have. I mean what different industries we cater to and how much we are depending on a certain industry, that all plays into it. So, there is no intention at this point in time to do something, but as I said, we are monitoring the situation but at the same time we have to ramp it up and the good news is our Tennessee expansion is on time, on budget and hopefully ready to go online by mid next year where it is really desperately needed because it's full, I mean even though it doesn't exist yet, and then we'll see from there but we first want to convert what we are putting into the ground there into profits.

Your final question comes from the line of Andrew Lane with Morningstar. Please proceed.

Congratulations on a solid quarter. I have a couple of questions. First I know some of your competitors are exploring viability of using 3D printers to manufacture jet engine components from superalloy dust. So supposedly this will allow for the production of components that are both lighter and stronger. Is 3D printing something Alcoa or Firth Rixson has been exploring or are we a long way off of this becoming a reality?

No, no, no, no, we are not a long way off of 3D printing becoming a reality. I would say in the manufacturing space, we're probably absolutely cutting edge when it comes to using 3D printing in multiple ways, and you saw that I mentioned it in my presentation, I mean that the La Porte facility will also have 3D printing capacity. The main use for it today is prototype, rapid prototyping and this is where it allows us to cut down the prototyping times from what used to be 18 months because you had some time in there for having to make tooling down to weeks. So this is very fascinating. At the same time, for what you just said in regards to dust that we place [indiscernible] some of the key components that we have, I would say that at this point in time I do not see that because the reason for it is the lightness is not the issue there, it's more the temperature capabilities and the strength, and nothing of that nature currently comes close to what can be achieved through investment casting, but we are monitoring the space, we're not just monitoring, we are in this space. I mean when you come to places like Whitehall, we probably have some of the most sophisticated advanced manufacturing capabilities there and all customers already today benefit from it and they very much enjoy it.

Okay great. And then to change gears quickly, I wanted to ask about the impact of the Indonesian export ban on bauxite. Because of the ban, Chinese bauxite imports have decreased pretty significantly and although they had a pretty sizable inventory before the ban took hold, we've seen some refining and smelting closures within the country. So in your view, will China be able to replace its lost imports from Indonesia with supply from other countries or do you think the ban will really have a longer-term impact on the global supply and demand dynamics for bauxite?

On a long term it's always hard to tell with Indonesia and the election day is today if I recall that correct.

Tomorrow. It might be today…

But everybody says that even the person who is most likely to get elected also has made comments already on whether he's going to withdraw or loosen the ban, and he said, no, he's not going to do that, he thinks that that's the right thing to do. So at least for the time being, I am positively surprised about how strict Indonesia is and this is changing the supply dynamics in China and I mean we are seeing that the Chinese are looking for other opportunities. You have seen that at this point in time you are right, they still have a pretty substantial supply for alumina and also the demand there has gone down a little bit with the smelter closures that we saw in China and what Bill showed in his last slide there is there is still a little bit of an overhang in the Chinese alumina market but it's shrinking. So we'll see where that goes but you're spot on with that idiom. Very good, Andrew. I think this leaves me with thanking you all to having listened in, I mean as you hopefully come to the same conclusion, the transformation of Alcoa truly is in high gear and the results show this. Our strategy is working, the downstream business has reached new profitability highs and the midstream business is capturing demand from many areas including the auto light-weighting that is accelerating. On the upstream side we see, we are relentless in improving our performance and becoming very highly competitive commodities business. So with that, I would say excellent progress and let's stay tuned. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.