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Alcoa, Inc. (NYSE:AA)

Q3 2013 Earnings Conference Call

October 8, 2013 05:00 PM ET

Executives

Klaus Kleinfeld - Chairman and CEO

William Oplinger - EVP and CFO

Kelly Pasterick - Director, Investor Relations

Analysts

David Gagliano - Barclays Capital

Brian Yu - Citigroup Inc.

Luke McFarlane - Macquarie Capital

Tony Rizzuto - Cowen and Company

Paul Massoud - Stifel

Charles Bradford - Bradford Research, Inc.

Paretosh Misra - Morgan Stanley

Carly Mattson - Goldman Sachs

Curt Woodworth - Nomura Securities International, Inc.

David Gagliano - Barclays

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 Alcoa Incorporated Earnings Conference Call. My name is Jason and I’ll be your operator for today. At this time, all participants will be in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Ms. Kelly Pasterick, Director of Investor Relations. Please proceed.

Kelly Pasterick

Thank you, Jason. Good afternoon and welcome to Alcoa's third quarter 2013 earnings conference call. I am 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’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 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 measure can be found in today’s press release in the appendix of today’s presentation and on our website 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.

Klaus Kleinfeld

Well, thank you, Kelly. So let me quickly characterize the quarter for you. This is a strong third quarter driven by performance, our repositioning. As working, we increased the earnings sequentially and year-over-year strongly driven by the downstream profitability ATOI is up 22% year-on-year. Upstream improved performance now for eighth consecutive quarters, productivity stands at $825 million across all segments year-on-year, very good performance there.

Days working capital, record third quarter low, five days lower than the prior year thus gave us $300 million in cash. Cash from operations stand at $214 million, negative free cash flow at $36 million. We executed all curtailments swiftly and safely and I will refer to that a little later. So with this, let me hand it over to Bill to go through the numbers more in detail though.

William Oplinger

Thanks, Klaus. As Klaus just highlighted, we had very strong operating performance in the third quarter. I will start the financial review with a quick summary of the income statement. Revenue held steady on a sequential quarter basis at $5.8 billion, despite a $57 per metric ton drop, or 3% decline in realized aluminum prices.

Compared to last year, revenues are also relatively stable with approximately a 1% decrease on a 2% drop in realized aluminum prices. Cost of goods sold percentage decreased sequentially by 110 basis points due to better productivity across the businesses and favorable currency impacts. The sequential change in other income and expense is largely due to favorable mark-to-market impacts on energy contracts.

Note that this benefit is backed out of our calculation of net income excluding special items. As we said last quarter, we took additional restructuring charges in the primary business associated with the closure of the Soderberg lines at Baie-Comeau and one line at Massena. Restructuring charges totaled $151 million pre-tax which I'll detail in the following slides.

Our effective tax rate for the quarter was 41.3%, and at 32% without discrete tax items. The ongoing operational rate should be assumed to be 33%. So overall the results for the quarter are net profit of $0.02 per share. But excluding special items, we have net income of $0.11 per share and improved metal sequentially and from prior year despite lower realized aluminum prices.

Let’s take a closer look at the restructuring charges. Included in net income of $24 million is an after-tax charge of $96 million or $0.09 per share associated with special items primarily for restructuring. Restructuring costs of $109 million after-tax relate to actions taken to improve competitiveness in the upstream. $103 million is due to the announced closure of two Soderberg lines at Baie-Comeau, and includes $25 million of accelerated depreciation and $78 million of employee and other costs. The remaining $6 million is associated with the closure of one potline at Massena.

In addition, discrete tax items for the quarter totaled negative $7 million, primarily related to the interim treatment of losses in jurisdictions where we are not able to record a tax benefit. It’s also $8 million of favorable non-cash mark-to-market adjustments on energy contracts.

Lastly we backed out the positive impact of $12 million of insurance recovery associated with last year’s Massena cast house fire. So in aggregate this results in net income excluding special items of a $120 million or $0.11 per share.

Let's move to the sequential bridge. As usual, we categorize the changes in the quarter in the three areas, market related, performance and cost headwinds. Taking each one in isolation the combination of LME and currency impacts provided a benefit of $17 million as lower LME cash prices were more than offset by the strength of the U.S dollar versus two key currencies, the Aussie dollar and the Brazilian real.

Overall performance was a positive $27 million for the quarter, as a decline in volumes in the Aero Industrial Products and Industrial Gas Turbine markets were offset by better productivity across all three business groups. As you'll see later we have already achieved our annual full year productivity target in the first nine months of the year.

Lastly the overall impact of cost headwinds was negligible this quarter and higher energy costs mainly in the primary metals group were offset by cost decreases primarily related to the non-recurring nature of the power plant shut down from the second quarter. So in summary, our focus on operating performance has allowed us to improve sequential earnings by 58%.

Turning to the year-over-year view, the currency and LME effects completely net out against each other. So you can clearly see that the operating performance of the business more than offset the cost increases experience. Some key points. The volume improvement is in the mid and downstream businesses across the Aero and auto markets. The productivity improvements across all three business groups more than offsets the cost increases associated with labor costs and a ramp up in the Saudi joint venture.

Let's turn to the segments. Engineered Products and Solutions continues their string of strong quarters with a record Q3 quarterly ATOI of $192 million, up 22% compared to the third quarter of 2012 and relatively flat sequentially. This segment reported a record quarterly adjusted EBITDA margin of 22.5% compared to 22.2% and 20% respectively for the second quarter 2013 and same quarter last year. Third party revenue was $1.4 billion, up 5% versus last year driven by innovation and share gains and down 2% sequentially due to summer shutdowns. In this quarter we benefited from the insurance recovery from the Massena fire which won't recur in the fourth quarter.

EPS continues to demonstrate significant productivity improvements quarter-over-quarter from every area in the business. Looking forward to the fourth quarter, we expect the aerospace market to remain strong but see a temporary unfavorable impact in the engine market due to an inventory realignment and lower U.S. defense spare parts demand. Regarding our nonresidential construction business, we'll continue to see a decline in Europe but expect a gradual recovery in North America.

We anticipate weaker industrial gas turbine demand but we continue to see share gains across the portfolio driven by innovation. So in aggregate, EPS had another strong quarter. For the fourth quarter we estimate an approximately 25% earnings improvement versus last year driven by continued productivity and roughly 10% sequential decline due to seasonality and market conditions.

Now let's turn to global rolled products. ATOI of $71 million was an $8 million sequential decline as lower volumes and pricing pressure were only partially offset by productivity gains and the lessening impact of unfavorable metal prices. Declining metal prices continued to unfavorably impact the results but at a lower level than last quarter. This segment had negative volume and price impacts due to seasonal decline and high OEM inventories in aerospace play.

Softening industrial markets in many regions of the world and pricing pressures in can sheet. These were partially offset by continued strong demand in the automotive and packaging markets. Productivity gains were offset by cost increases due to location shutdown tied with customers, plans, outages. In the bridge above the other categories largely associated with start-up expenses in Saudi and Tennessee. GRP remains focused on cash generation and set a 3Q record days working capital improving by one day year-over-year.

Transitioning to the fourth quarter, we expect auto demand to stay strong, higher airspace inventories are expected to have continued negative impact on volume. We expect seasonal volume declines in packaging. And lastly we expect continued negative price trends in Europe and China along with the demand decline in the brazing market. The overall view of this segment is for earnings to be down approximately 25% sequentially assuming no change in currency and metal prices.

Now I'll address the upstream segments. In alumina there are a couple key takeaways. While LME prices were down in the quarter the continued shift to API pricing, the stronger U.S. dollar and better productivity led to increased segment profitability. We saw continued positive trend in index and spot pricing versus percent of LME contracts which is driving a slight improvement in pricing and mix.

Essentially alumina prices were relatively flat to down slightly while the LME declined at a higher rate in the quarter. The segment continues to focus on productivity generating $13 million of savings primarily driven by efficiency improvements in Australia as well as overall energy efficiency initiatives and better raw material usage.

The cost increases are predominately associated with higher bauxite costs due to running two crusher sites in Western Australia after the Myara crusher move last quarter and higher Suriname mining costs which we noted in July. From a cash perspective our alumina business has continued an excellent job of reducing days working capital, a Q3 record of approximately 20 days was achieved this quarter which is 11 days lower than the same time last year, generating $162 million in cash year-over-year.

Looking out to the fourth quarter, 53% of third-party shipments will be either spot or API for the full year 2013, which typically follows a 30-day lag and the remainder of pricing follows the 60-day lag. Energy prices are expected to increase in Western Australia and higher mining costs are expected to continue through the fourth quarter.

In summary we anticipate our alumina business will strengthen on the back of stable alumina prices despite weak metal prices. Our productivity programs will continue to deliver into the next quarter permitting us to realize positive performance improvement versus Q3.

Let's go to primary metal. Profitability in the primary metal segment improved sequentially driven largely by productivity improvements and the completion of power plant maintenance outages which occurred in Q2. Overall performance was up $42 million despite higher energy costs due to seasonality in Europe and the Pacific Northwest.

LME price was down 4% sequentially on a 15-day lag basis with realized prices down 3% sequentially. Production is flat as indicated in our last call as curtailments began late in the third quarter. As stated earlier this segment also benefited from an insurance recovery from the Massena fire last year which won't recur in the fourth quarter.

Before I move off on the third quarter earnings commentary on the upstream businesses, it's important to note that the alumina and primary metal operations were able to offset higher mining costs and increased energy costs end up with $45 million of positive performance, significantly better than we expected at the beginning of the quarter. This is the eight consecutive quarter of overall performance improvements in the upstream business.

Looking out to the fourth quarter for primary metals, pricing is expected to follow the typical 15-day lag LME prices, curtailments will start to show full impact with our production decreases in Q4 are expected to result in 30,000 metric tons less than Q3 and we expect productivity gains to continue.

In summary we continue to manage what we can control in this segment unlike the alumina segment steady API-based pricing during a declining LME environment makes alumina relatively more expensive in this segment. Outside of the uncontrollable factors, LME, currencies and regional premiums, we expect performance in this segment to be slightly down. Summarizing the two segments, the two upstream segments, the overall performance is expected to be flat over the third quarter.

Now let's turn to the balance sheet. Regarding working capital, we continue to achieve significant improvement in our days working capital. In the third quarter we obtained a third quarter low of 28 days and this is the 16th successive quarter of year-over-year improvement. We've been able to reduce days working capital by 20 days since the third quarter of 2009 with $1.3 billion and the five-day improvement from last year's level equates to approximately $300 million in cash.

Moving on to the cash flow statement and liquidity, cash from operations totaled $214 million for the quarter. Overall free cash flow before the Saudi investment was negative $36 million; after the investment, negative $107 million. The use of cash in the third quarter is driven by cash funding of the pension plan, normal cash outflows from semiannual interest payments and slightly higher working capital in the quarter. These cash outflows were primarily supported by our reduction in cash on hand.

Our cash contribution to the pension plan totaled $354 million year-to-date which represents 77% of our estimated total contribution, or $460 million. Compared to last year free cash flow through September of 2013 is roughly $190 million better than 2012 and keep in mind this is at much lower metal prices. From a liquidity perspective we're ending the quarter with $1 billion in cash and debt of $8.3 billion. Debt to cap was maintained at 34.5%.

Now I'll address our 2013 targets. At the end of the third quarter, we are on target to meet our 2013 goals which I should note were set at much higher metal prices. As I said last quarter, our businesses our focused on deploying aggressive operational targets and they met this so called action, generating $825 million in pre-tax productivity improvements year-to-date, surpassing our full year target for 2013 with three months remaining in the year.

We continue to take a disciplined approach to capital spending. Our target for 2013 was to maintain total capital spend of $1.5 billion. On a year-to-date basis we're well below those targets having spent $771 million. Our spend on the Saudi Arabia joint venture is well within budget, however, the year-to-date number is not reflecting on the run rate spend, the budget is more backend loaded in 2013. And debt to cap is within our target range of 30% to 35%. We're operating in a challenging environment but our tract record shows that through continued operational discipline our overarching goal to generate positive free cash flow is within reach.

Now I'll turn to alumina and aluminum market fundaments. We have not substantially changed our view that market fundamentals are stable. We reaffirm aluminum demand will grow globally at 7% this year, 4% excluding China. However, we've made a few changes that I'll highlight. First, we've increased Chinese demand from 11% to 12% due to stronger manufacturing growth numbers and strong aluminum semi-product production which is up 30% year-over-year through August.

In total this adds 125,000 metric tons of demand. However, additional Chinese growth is partially offset by slightly lower growth in the rest of the world driven primarily by reduced demand in the Middle East and Southeast Asia. We continue to view supply and demand for both the alumina and aluminum markets as essentially balanced, however, driven by stronger demand and additional curtailments that have been executed we’re now projecting a deficit for aluminum of 400,000 metric tons versus our 2Q projection of 315,000 metric tons of aluminum deficit.

In alumina we’re predicting a greater surplus for 2013 versus our 2Q forecast. As stronger than expected Chinese refinery production and lower demand in the rest of the world were not completely offset by stronger demand in China and reduced production in the rest of the world. However in total our forecast surplus equates to less than 1% or three days of global demand, essentially in balance.

Inventories have declined 2.5 days versus our 2Q forecast to 74.5 days of consumption, driven primarily by Chinese inventories which have fallen 400,000 metric tons since 2Q. In the rest of the world inventories are essentially unchanged from our previous forecast although we continue to see movement from visible LME inventories and to lower cost non-LME storage as financiers seek to reduce storage costs.

Along this line there has been increased demand from metal from financiers due to continued low interest rates and strong contangos, which have actually widened in the past few months. For example, cash to three months aluminum on the LME is now trading at $45 per metric ton contango versus a $30 contango at the end of 2Q, ’13. In December 2013 to December 2014 is now trading at around $125 contango versus a $90 contango at the end of the second quarter.

This demand for physical metical from risk reversed financiers continues to be supportive of premiums. However as you can see from the lower right hand side, premiums have fallen year-over-year in each of the regions; 17% in Europe, 4% for Japan and 11% for Midwest premiums? We believe the decline in premiums is largely a result of the confusion caused by the LME’s major market intervention from their July 1st announcement of proposed warehouse rule changes.

Now I’ll turn it over to Klaus.

Klaus Kleinfeld

Well, thank you Bill, well said. I’ll start with the overview on the end market. Lets go on to the composite slide up. Let’s start with Aerospace. We continue to see aerospace growing at 9% to 10% this year. The major segment here making up for the major part aerospace large commercial aircraft. We actually see a higher growth of roughly 10%. The backlog for Boeing and Airbus that play in the segment basically has increased further. We now believe which is at 10,000 aircrafts, so this is a good eight year production backlog.

We’ve also seen that it's supported by passenger as well as cargo demand up and also supported by the desire from customers to have more fuel efficient newer planes that drives the demand as we -- basically we’ve been seeing every month. This also translates nicely into orders for new jet engines, that’s obviously important for us too because of our engine blade business, year-to-date the orders -- front order stand at 1280 new jet engines and the backlog stands at 19,100 units, so this is very, very nice.

The very pretty picture gets a little clouded because we see a slight excess in inventory on the supply chain particularly on the structural plate and a little bit of a temporary inventory alignment in the third and the fourth quarter in some of the jet engines, so we think that, that part is recovering in the first quarter in 2014. Regional jets, business jets those segments, smaller ones segments here but both rebounding. We sense business is obviously impacted by the sequestration. We’re well positioned on future platforms, but we will see impact from potentially reduced operations because it has an impact on the spare parts.

Next segment Automotive U.S.A. We confirm our forecast of 2% to 5% production growth for this year. Very interesting to see because the September sales actually were down 4.2% versus last year, but it's basically in our effect driven by two factors, one is two fewer selling days and the second even bigger one is that the Labor Say weekend this year was included in the August results.

If you take another indicator for where the real sales stand and you look at the daily sales rate this is up by 4% compared to last years level, this is probably giving you a better idea how positively this market is developing. Therefore it was no surprise that we saw that pretty much all of the U.S. OEMs reduced. They have somewhat plant shutdowns to keep an adequate supply level. We also see that the inventory levels are continuously decreasing in April it stood at 60 days, today it stands at 55 days.

Good news also the incentives have come down further to lowest levels since February, and the other good news also here is the average age of the fleet it stands today at 11.4 years. The average -- now the current grade stands at 11.4, the average stands at 9.4. So you actually see that the cars today on the streets in the U.S. are substantially older than they have been on average, two years older than on average and it's clearly indicating that all of these factors show this is not the end as further demand sitting in there.

Europe, we’re not changing our forecast. We predict the decline of 2% to 5%. It looks like in July, it looked like there was a short [relief] of registrations were up, but then it was all dampened again in August because it came down by the same magnitude and August was the worst August in 10 years, so this is looking a little stressed there. China a different situation, we’re actually taking our forecast up to 9% to 11% growth from what we had 7% to 10% as we anticipated a slower growth of the economy in general before end-to-end we’ve modified this.

Trucks and Trailer, the next segment here North America our production forecast is unchanged. It stands at minus 9% to minus 13%. But that’s an interesting phenomenon there which I think is worthwhile to note to get a feel also where the U.S. economy stands because orders have been up in September by 15.4% for trucks. If you look at the year-on-year number for the third quarter it’s actually even higher, it's up by 27.4%. But the inventory level is still higher than historically. They stand today at 50,800 trucks end of August basically and historically this has been at 42,000 trucks. So the OEMs have been slowing down their production.

If you really look at the fundamentals you actually do see that the fundamentals look good. Freight demand is up, prices are up and the average age of the fleet is higher than -- average age of the fleet today is higher than the 20 year average. It stands today at 6.7 years and the 20 year average is at 5.8, so good news to come and I think we hit the orders are showing in the right direction here.

Europe we’re raising our projection but it's still negative. We now expect to less negative 1%, it's minus 2% to minus 5%, we had minus 3% to minus 8% before. The main driver here is the change in legislation. There is this implementation of the new Euro-6 Norm which is basically more expensive and what is now allowed is that trucks with the older Euro-5 Norm can be registered in 2014 as long as they have been invoiced in 2013. We see a little bit of similar situation in China. In China we’re up but we’re revising our forecast to a growth between 17% and 20% before we had 12% to 16% and there it is that you layoff the Euro-4 Emission Standard as well as the stronger economy that is leading to this change.

Beverage can packaging, we hold our global forecast of the growth of 1% to 2% steady. North America continues to struggle a little bit at 2% to 3% decline. Europe is a little reduced; we now believe 1% to 2% before we had it at 2% to 3%. China stays at a growth rate of 8% to 12%. Commercial building and construction, North America we believe been a growth of 1% of 2% this year and good news there when you look at the fundamentals of nonresidential contracts awarded stand at plus 10.4%.

Case-Shiller Home Price Index rose in the last five quarters. So from 7% in the second quarter in 2012 now it stands at 10% in the second quarter ’13. And the new housing starts stands year-on-year and the August numbers at plus 19%. So it looks that there is a recovery on the way. Europe our expectation continued to see a decline of 4% to 6% then in China we predict the growth of 8% to 10%.

Industrial gas turbines, we keep our forecast at 3% to 5% growth in spite of the weakening market conditions, but our confidence is supported basically by very strong first half run rates as a growing install base lead also to a robust spare part demand which obviously -- which we believe will more than offset a decline in new bills and that obviously is very important for us as in engine blade manufacture and we’ll talk a little bit more about it.

So this concludes the end market overview, so let’s now focus on Alcoa. Those of you who follow us more closely know that we are undergoing what I would call a strategic repositioning and it has two aspects here. The first aspect is to build out our value at business and the second one is to restructure our commodity business. So, I would like to give you an overview on where this stands. What we want to achieve with that, become less dependent on the external factors like the LME and put more things into our own control and make this happen.

So, what you see on this slide here is our value-add business and you see here that the contribution from the value-add business continues to grow. We have put here a 10-year comparison on three indicators; top line revenues, absolute profits and margins. And as you can see here, I mean we have been growing the top as well as the bottom line at the same time. So we are on the right path.

So today I want to focus – this is the breakdown on the left-hand side which you see here in the circle of our value-add businesses, which markets are we playing in. Today I would like to focus on three segments there; aerospace, I just talked about it. Obviously it's a strong base that we have in there. This wouldn't exist if it hadn't been for the invention of aluminum and strong growth also there, right?

The second thing I want to focus on is automotive. It looks like it's small today which it is but there's a historic opportunity because we see that the high volume cars are now aluminizing and I want to fill you in a little bit more on that and show you some of the most recent data.

And the third example which we haven't really talked about that much in the past is commercial building and construction. This market here in the U.S. which is an important market for us, we are the leader here in the U.S. is recovering which is good but it's also transforming. It has new requirements and I think we are extremely well positioned to really profit from what's going on in that market. So let's start with the aerospace market.

As all customers announce new or revamped planes, new opportunities arise for us as it happened again in the last week, Airbus announced that they will have a new plane here or new variant is probably a better way to describe with the A330-300. It's an all metallic aircraft. And the target for this plane is to go for short high density routes in those markets which is mainly in Asia.

So what is Airbus wanting to achieve with this? They want to reduce the weight, they want to increase the passenger capacity and they want to optimize the engine thrust and lifespan to cater to this particular market niche. And that immediately translates into opportunities for us, opportunities to position advanced alloys, advanced alloys that allow the weight to further go down and to increase the corrosion resistance. It gives opportunities for bringing in new value-add products, new value-add products that increase the passenger capacity. It allows us to come with new engine technology to cater to the new thrust requirements that this new segment has.

And also when I talk about aerospace, you have to see that we are not providing just the structure of the plane. I've talked about this in the last two earnings calls quite a bit, but we also have the most critical component for jet engines, the high temperature blades. What the customers want here is pretty clear. The customers are putting together what we call the next generation jet engine and what they want is they want engine fuel burn reduction, they want reduced emissions and they want lower maintenance and operating costs. So they want this all in the new jet and next generation engines.

All of this can only be achieved if you physically increase the burn temperature in the jet engine. And this is where technology comes in. This is where Alcoa shines. Alcoa shines because we bring technology that today enables the operation inside of the burn chamber of the jet engine at highest temperatures well above 3000 degrees Fahrenheit. 3000 degrees Fahrenheit – those that have, we watched out in the physics test [ph] is well above the melting point of the metal, right? And so you have to ask yourself the question, how is that possible?

It is possible through those things that I mentioned here; advanced single crystal technology, basically nickel-based superalloys that increase the melting point by 12 percentage points. 3D multi-wall airfoils and what this is, is hollow structures that allow the cooling to go to the critical areas so it doesn't melt while it's rotating at a very high speed. Specialized coolings that increase the lift time and also decrease the hot corrosion. So all of this leads to the next generation jet engine to allow customers to have 15% reduced fuel burn and 50% reduced NOx emissions and that's why you see the demand for new aircraft going up. It's the structural thing plus the new engines, right, and we play a very, very important role in that.

So let's go to another segment, the automotive segment. It's become pretty clear and I hope that we will not have anybody questioning that anymore if we ever had anybody there that aluminum intensive vehicles have a clear competitive edge. And when you go through it, it's on the safety and durability, it's on the CO2 emissions and it's on the fuel efficiencies. Let me tell you the latest that we see there.

On the safety side, it is clear that aluminum intensive vehicles because of the weight reduction reduce stopping distance and very often as you know this can mean the difference between a serious collision and a near miss. They are by definition more durable because they are naturally corrosion resistant and they have been proven in some of the most harsh environments that you can imagine, like in the military missions with a picture in here as well as in space missions.

On the CO2 side in the middle box here, Oak Ridge Laboratory, one of the best brains in the U.S. have done a study that compares – in automotive that compares car solutions made with baseline steel versus aluminum in cars and they have done a calculation over lifetime which is the right way to look at it and they've seen that aluminum is 32 times lower energy than cars that are steel intensive and produce 29% less CO2 than cars that are steel based. So that's a great, great thing to see here and clearly speaks to the advantage of aluminum intensive cars.

They've also done something. They've taken an example of a car and remodeled it. The Toyota Venza has 3% aluminum content. Then they've turned into an aluminum intense vehicle so that it then had 37% aluminum content. And they saw what that meant in terms of fuel efficiency. Fuel efficiency increased by 18% and the weight decreased by 8%. So this all together is why you see now aluminum moving rapidly also into high volume vehicles.

And it's creating this once in a lifetime opportunity that you see here on this chat. On the left-hand side you see the aluminum content per vehicle quadrupling already by 2015 tenfold increase by 2025. And on the right-hand side you see what does that mean in terms of auto sheet demand in total, in tons? And you see that quadrupling that I talked about per vehicle also is quadrupling that you see here happening by 2015 from 2012. And the good news all of this was locked into the designs of the cars. So this is happening. This is happening and there's no doubt.

If you then project it forward and I would say that this is a rather conservative view that we put out there to 2025, you actually see that aluminum sheet in auto alone is becoming an application that consumes more than 1 million tons of aluminum and that is why we are putting our money where our mouth is and we have to make sure that as 2015 nears that we are ready and that's why you see what we call a triple play here, basically three expansions; Davenport was our first auto expansion. It's full, secured by contracts even though it's not operating yet it will start to operate by December 2013.

And the second expansion here in the U.S. is in Tennessee. That's a pretty interesting one because in Tennessee we already do have a rolling mill and utilize the mill in a way that it is more flexible and that we can get a higher capacity utilization out of it and it will actually be complete by 2015 this expansion. And then we have Saudi Arabia where the first automotive coil will run there by December 2014.

The last example that I brought here on the value-add product side is the building and construction market. Worldwide it's a gigantic growth market. In the U.S. we are #1 here and the market is starting to come back. But interesting thing the market is coming back but it's not the same market. The requirements have drastically changed and they are catering to all strengths. So what is going on there? This little depiction that you see here on the upper left-hand side I think tell you the story.

What you see here is the statistics on how much of the electricity is consumed by buildings, inside of buildings? And the interesting statistic is that 73% of all electricity consumed in the U.S. is consumed inside of buildings. The respective comparable number in Europe for this is 58%. So if you assume that the structures are not that different, there's a 15 percentage point advantage that Europe has in this regard and that means in total $58 billion difference there that can be achieved through strong our energy efficiency requirements. And this is the change that that's happening here.

You see that the target of the net zero buildings legislation in Europe is coming in by 2020, in the U.S by 2030. The reason for is the advantages that you already get by the Green building compared to average commercial building, 25% reduction in energy consumption, 35% reduction in emission and 27% occupant satisfaction, so just a better feel inside of the building. So how do we do that? How is that done? We play a major role in that.

We have cutting edge solutions there, so let me show you three examples. Our OptiQ Ultra Thermal Window, it has a 40% improved thermal performance for the industry standard in this application. As air and water resistant, so what it basically means it won’t rot, warp, buckle or due to moisture or weather conditions or since hurricane Irene and Sandy came all through the U.S, the hurricane resistance has become a big issue, not just in the South, but also in many northern parts of the U.S. So that’s where our 1630SS IR Curtain Wall comes in. It withstands impact of objects over 50 miles per hour. Its got a 20% dynamic wind resistance and also 15% thermal performance improvement comparable to the industry standard in this application.

As we see new threats coming in, many institutions are rethinking their building safety and that’s where our blast resistance offering, the IR 501UT Framing comes in, which has the structural performance and glass retention, improved by 60% and also here we’re not compromising on the thermal performance, 54% improved thermal performance.

So, I just get a feel for the unique offering and our innovation skills. They have allowed us to use the downturn here in the U.S to grow 11 percentage points market share, while we’ve been improving profitability at the same time. As the market recover we have a great position to continue to grow very profitably in that segment.

So this was a little bit of a deeper view on some of the value add businesses. Let me also talk about what’s happening on the upstream side. And let me also be clear because sometimes I feel that people only associate smelting with the upstream side, but on reality our portfolio on the upstream side is much broader than that. It stretches from mining to refining to smelting to power assets and in each single one we have a different position. So that's important to note and we have taken a lot of actions that increase our competitiveness.

Let's start with the left hand side here on the mining and refining side. We have the largest low-cost global bauxite system and we are the leader in refining. We have been able to get gross productivity gains this year again of $175 million, were $71 million in this our net ATOI performance, we’ve just seen $159 million on a year-on-year basis. We’ve introduced, we change the market pricing from it used to be entirely linked to the LME pricing. We’ve changed that to an alumina pricing index and I think you see today how important that is, because otherwise we would be suffering from odd things that are happening in the aluminum pricing situation there, 53% of all contracts to date has been switched over to aluminum pricing or spot. We have also been put on the cash side, 11 day reduction on working capital results $160 million cash.

Move over to the right hand side, our smelting and energy assets. So smelting we have optimized our portfolio, 651,000 tons which is 16% of all capacity happened closed or curtailed. And you remember earlier this year we announced that we put 460,000 tons under review, 16% of that we have already announced that we will be curtailing our closing and we're doing this as we speak. 228 million of rough productivity gains here already this year in this segment and ATOI performance of $167 million.

We’ve also used something that is a little valued add here. The maximum value that we can get here is shapes in the cast house and we’ve gotten better on this and this has generally $200 million in profits in this year already and we’ve been good on the cash flow side increased our working -- decreased our working capital in just $50 million of cash on there.

So eight executive quarter of ATOI performance improvements if you strip the effect of LME pricing and currency out. So last but not least, also in regards to our upstream let’s focus on adding to the low cost capacity and this is what Saudi Arabia is about. I just talked about the curtailments on the upstream side, on the alumina and the mining side, we are pretty well off because we have a very, very competitive offering, we’re reducing our footprint on the smelting side and we're adding low cost capacity and this is a project that we have with the partner here in Saudi Arabia.

Phase 1 is all going fantastically well. It's on budget, actuality a little bit below budget and ahead of schedule. As I told you we started to sponsor up end of last year. We will produce about 250,000 tons of aluminum this year. It will be at full capacity in 2014, rolling mill is coming out of the ground first hot coil end of this year, we finally 67% complete and the mine, which is the last one here 38% complete, so all progressing very, very nicely.

So let me conclude with this, I mean, we're creating value by executing our strategy, we’re leveraging our Alcoa advance to deliver value add products and we’re investing to capture growth and improve our cost position. We’re focusing on those items that are controllable and increasing our upstream profitability.

With that, I’d like to open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Dave Gagliano with Barclays. Please proceed.

David Gagliano - Barclays Capital

Great. Thanks for taking my question. It looks like Alcoa’s overall average premiums over the LME were up about a penny sequentially. Obviously, regional premiums declined during the course of the quarter and I’m wondering is that difference a timing issue and should we expect directionally premiums for Alcoa to decline in Q4 versus Q3?

William Oplinger

Yes, its largely a timing issue Dave. We are not going to project out what we think premiums are going to do for the fourth quarter at this point, because quite honestly with the new rule changes proposed by the LME, I don't know that anybody knows what the premiums are going to be doing over the near-term. So it’s largely a timing issue.

Klaus Kleinfeld

And also don’t forget Dave, I mean, this is a -- the realized price that you see there is a composite not just of the regional premiums, but also of the shape premiums. And keep in mind what I mentioned before; we’ve been very active in working better with the cast house and using our capabilities to optimizing the cast house and also getting the shape premiums there that's also reflected in there.

David Gagliano - Barclays Capital

Yes and that actually is my follow-up question. Can you break out the kind of position of regional premiums versus shape premiums, and how those have changed in the last two quarters?

William Oplinger

We certainly can Dave. It’s a fairly detailed calculation that I think -- I don't know that we want to go into on the call here, but we did see a little bit of a premium decline in the third quarter as …

Klaus Kleinfeld

He is talking about the regional premium.

William Oplinger

I’m sorry, regional premium decline in the third quarter, and as you saw in the chart that we showed as far as overall premiums we saw that also.

David Gagliano - Barclays Capital

Okay. Got it.

Klaus Kleinfeld

Okay. Who is next? Who is next -- next online?

Operator

The next question comes from the line of Brian Yu with Citi. Please proceed.

Klaus Kleinfeld

Okay.

Brian Yu - Citigroup Inc.

Great. Thanks. My first question is just with the metal, I mean, I noticed in the primary metals the equity loss grew a little bit, and I know that it’s still starting, is there a way Klaus for you to or Bill help us think about where that projects profitability or where the breakeven point is, once it fully ramps up to capacity?

Klaus Kleinfeld

Yes, I mean, it will be Brian -- it will be the lowest cost facility in the world. So you can easily look at the crew data and pick out at the bottom -- to the very bottom and look at the bottom and slot this project in lower than that. So that should give you an indication of where the projects going to come in once it’s fully operational. We will be – we’ll have all [parts] operating at the end of this year and so we’ll expect to do much better next year given the fact that we’ll be through the start up phase.

Operator

Your next question comes from the line of Luke McFarlane with Macquarie.

Luke McFarlane - Macquarie Capital

Hi, guys. Thanks for taking my question. What I was interested in is, what percentage of your orders have been shipped to financial buys during 2013 and how that's changed recently as the contangos have widened?

Klaus Kleinfeld

I'm glad you're asking about the value-add business, Luke. So I don't think that we are breaking that out frankly.

Luke McFarlane - Macquarie Capital

Okay. Then in terms of your Ma'aden JV too; in terms of the power of constraints that you see through the Middle East, I mean are you seeing any of that or has that sort of just sorted itself out?

Klaus Kleinfeld

No. The Ma'aden project is particularly attractive, because by Royal Decree we have been given the rights to a gas field and there is a pipeline that comes directly to the facilities, the gas pipeline that will then split and part of it goes into the utilities there, which is getting built and there the electricity is produced. We pay a small conversion fee for this and the rest of the gas goes straight then into the refinery and the rolling mill to produce the heat. So there is no risk at all on that end.

Luke McFarlane - Macquarie Capital

All right, thank you.

Klaus Kleinfeld

Pleasure.

Operator

(Operator Instructions). The next question comes from the line of Tony Rizzuto with Cowen & Company. Please proceed.

Tony Rizzuto - Cowen and Company

Yes. Thanks gentlemen for taking my question. I've got two here. First is, you talked about the OEM inventory overhang in aero plate, and I think I heard you say, Klaus or Bill, I forget which, maybe you both mentioned it, that you expect it to continue. Did I hear you say you expect it to continue into 2014 and could you just reiterate what you said there? Then also, I think in the text you indicated price pressures in packaging. Is that customers fighting you over the premium over LME and the pricing mechanism? Where is that price pressure coming from?

Klaus Kleinfeld

All right, I'd be happy to address that. On the aerospace side, you have to distinguish between the structural materials and there it's basically – what happens all the time and Tony you know the market. When new airframes get made, I mean the OEMs typically load up the inventory to just make sure that in the startup phase that they are not running into any issues. So when the startup phase is done, you typically hit a little bit of too high inventories on the structural material side. So this is basically structural plate that I'm talking about. But we believe that the destocking will go on for quite a while, probably reaching – certainly reaching into the next year and probably reaching even into the year after that. But the impact of that is going to be approximately 10% and it will not affect wing skins and it will also not affect the regional and jets or our other airframe segments. So that's that on the structural plate. And then on the engine side, that's what I specified there. We see very temporary inventory alignment, which is affecting – which has been affecting the third quarter and we believe it's going to continue to go into the fourth quarter but the demand will recover in the first quarter of next year because we see that then there is a ramp up of the production rates and we believe it will then stabilize and go to normal levels again, Tony. And the second thing of packaging, no. This is not the discussion on pricing – these types of pricing discussions that we've had around the LME discussion. No, this is purely a question of the supply and demand and little bit probably of additional supply overhangs and the question of competitiveness on that end. That's a function of the industry not of these discussions there. Thank you.

Tony Rizzuto - Cowen and Company

Just a follow-up, if I may, just going back to that structural plate. Is any of this a result of plate coming in from South African sources and are you seeing any signs at this point of any material coming in from China in regards to those products?

Klaus Kleinfeld

No.

Tony Rizzuto - Cowen and Company

In a specific area?

Klaus Kleinfeld

No, it's purely a function of what I said the ramp up of new airframes and it's not uncommon at all in this industry, not uncommon at all.

Tony Rizzuto - Cowen and Company

All right. It's kind of the supplier readiness programs and going back to that.

Klaus Kleinfeld

Yes, exactly. I mean it's basically everybody – I mean nobody wants to be late on getting the plane out and having to tell the CEO I couldn't get it done because I ran out of material. And as they continue to make last minute changes, they rather load up on that and that happens all the time when you have new airframes coming on that's purely a function of that.

Tony Rizzuto - Cowen and Company

Very good. Thanks very much…

Klaus Kleinfeld

And the impact of that – let's be realistic on the impact. As I said, I mean probably next year and the year after that a little bit affected by that but not more than the 10% impact on that.

William F. Oplinger

Tony, thank you.

Operator

The next question is a follow-up question from Brian Yu. Please proceed.

Brian Yu - Citigroup Inc.

Great. Thanks. So, Klaus, this is actually a follow-up on Tony's question. Just with the flat-rolled products where you're seeing some pricing pressure because of the supply/demand imbalance. Did you answer when maybe that might be worked through or when the demand would accelerate to help balance that part out?

Klaus Kleinfeld

In regards to what?

Brian Yu - Citigroup Inc.

In the flat-rolled products business and the pricing pressures because of the supply/demand imbalance?

Klaus Kleinfeld

I think my answer was specifically towards the packaging because Tony asked around the pricing pressure on that whether there were some issues around the discussion with the LME pricing, but it's not related to that all. It's purely around the normal negotiations between the customer and the supplier and we felt that we had to make a more competitive offering. That's all it is. I mean I would not interpret anything else into it because there is nothing else there. And in regards to the demand that we see there, I mean the big demand drivers continue to be – I mean very stable demand on the aerospace side, from skins to – on the GRP side from skins to structural plate continues on. You heard me talk about the strength of the aerospace market and then you see that the automotive market is coming in now. I mean I wish we had more capacity at this point in time. We could certainly fill it all in and then all our new capacity comes on line starting basically end of this year and you would see the impact of that already in the next year. So that's what's driving our excitement there.

William Oplinger

And one last thing, Brian, around the Tennessee expansion is that it does gives us flexibility between packaging and automotive.

Klaus Kleinfeld

Yes, that's a good point.

Brian Yu - Citigroup Inc.

Okay, great.

William Oplinger

Thank you, Brian. Next question?

Operator

The next question comes from the line of Paul Massoud with Stifel. Please proceed.

Paul Massoud - Stifel

Hi. Thanks for taking my questions. I actually just have two. On the auto expansions, I mean you've given us the investments associated with the three projects. But could you give us a sense of what the volume is; the capacity that might be associated with that in total?

Klaus Kleinfeld

We don't give out volume numbers, sorry Paul. I think that you can get a good idea. We have given you investment numbers. So I think you can triangulate a little bit from that.

Paul Massoud - Stifel

Okay. And then I guess just as a – a question on the productivity gains. I mean obviously you've had a pretty good year. You've already surpassed your annual target. Is there potential for these productivity gains to continue into 2014? And if so, I mean can we expect the magnitude might be similar to what we saw this year? Has really all the low hanging fruit already been picked?

Klaus Kleinfeld

I think, Paul, that's a very good question. I really appreciate you asking this. If you look at the performance we've shown in productivity, basically since the downturn, since 2008, you actually see that we have in total I think $5.5 billion. I would say this is last year basically not including the more than $800 million this year and continuously every year somewhere between $700 million to $1 billion productivity. I think that all of our businesses have found a way that they don't accept the headwinds and that they are continuing to push back and they've made it part of their operating process. This is basically an ongoing and never-ending process and almost only limited by the creativity of our own folks. But it's a lot of hard work and I don't want to minimize this at all because this is a – we are very proud of this frankly. And to achieve this ongoing, I mean there's literally thousands of people working on these things everywhere and picking up. I mean sometimes an action that has a 1 million and sometimes something that is a couple of $100, you know nothing of that nature we leave unturned.

William Oplinger

Just as an example, we currently have 14,000 ideas in the system that are being captured, monitored and hit the bottom line ultimately, there’s 14,000 across the enterprise.

Klaus Kleinfeld

Yeah, and what Bill is referring to; we have an operating system that includes that we know pretty much all of these action up to a certain size worldwide and can monitor them, not ask for the fact but once they go into from idea basically to execution. So we monitor them from the first idea basically until the cash comes and this gives us also a good idea on where is the next year going to go. Paul, thank you.

Paul Massoud - Stifel

Thanks.

Klaus Kleinfeld

Next question?

Operator

And your next question comes from the line of Charles Bradford with Bradford Research. Please proceed.

Charles Bradford - Bradford Research, Inc.

Good afternoon.

Klaus Kleinfeld

Yes, Charles, hi.

William Oplinger

Hi.

Charles Bradford - Bradford Research, Inc.

In the past you haven't been willing to crow too much about inroads into the automobile industry expect in sort of generalities. But now that the new models are out, do you have any updates on the success of capturing market share versus non-materials?

Klaus Kleinfeld

Let me put it this way. We cannot speak for our customers -- but I think that you can get a good feel for where we -- what we are doing in terms of investment. We would not have started our Phase 2 investment in Tennessee if the Phase 1 investment Davenport would not have been sold out, and if we look at the Phase 2 which we really just broke out a couple of weeks ago and I look at how is the capacity situation there, I would say that most of it is already also committed. So we have been very successful there in this market, and I think a lot of customers appreciate also our technical support as they are moving into changing from more steel intensity to aluminum intensity. You may have, Chuck you follow us very closely I know. You might have seen the press release that came out a couple of weeks ago where we talked about a coding technology that we have developed and it's this coding technology we are now offering up to all of our competitors because our OEMs have asked us to, because they realized in the manufacturing process that this is the only coding that really allows the conjoining of materials, and we obviously get royalties for this. So yeah, we do well and we will continue to do well there.

Charles Bradford - Bradford Research, Inc.

And what I was getting at, there had been rumors about the Ford F-150 becoming much more aluminum intensive in 2014, and I’ve not seen anything from Ford. I was wondering if you knew if those kind of thing’s came through or not.

Klaus Kleinfeld

Look, I mean 1994 Alcoa anticipated where the world was going and helped Audi to build the first aluminum intense vehicle. And without our help I mean the Audi folks would all admit that, I mean that would have never happened. They’re now seeing the same historic thing happening here in the U.S. We anticipated it, we’re right on it. We have the technology, we don’t just only deliver materials and we will drive it also to the next level because we already think about things that are behind the corner and we can look around the corner much like we do in the aerospace industry and this is what all customers appreciate and we’re pretty excited, really, really excited about this. I mean really, really excited about this.

Charles Bradford - Bradford Research, Inc.

Well, thank you very much.

Klaus Kleinfeld

(Indiscernible).

Charles Bradford - Bradford Research, Inc.

I agree.

Klaus Kleinfeld

Thank you, thank you. I knew you would. Who’s next?

Operator

Your next question comes from the line of Paretosh Misra with Morgan Stanley.

Paretosh Misra - Morgan Stanley

Hi everyone, two questions. One, on your -- basically on Tennessee facility. As you allocate more rolling capacity from packaging to automotive, you think that can also improve margins in packaging business or you think there’s lot of spare capacity there already?

Klaus Kleinfeld

The flexibility -- we didn’t have flexibility before. So before you basically have a rolling mill that can only do one thing, and basically Paretosh you answered the question yourself, you’re on the right track here. Now in future we will have the flexibility the front end as I call it or the front end of the mill. The backend of the mill is specialized, obviously they’re the part that can only make can sheet and there will be a part that can only make automotive. But the whole front end can be used for multi-purposes now, so that gives us flexibility and it doesn’t force us to fall into this sort that the midstream industry has built up so nicely off build capacity that only has one purpose, right. That’s why I think the Tennessee, the way we do the Tennessee investment is not only great in regards to automotive but it's great also in regards to all flexibility and what that allows us to do in other segments, that’s exactly right Paretosh. What's your second question?

Paretosh Misra - Morgan Stanley

Just going back to the cast house value added that $200 million number, that’s after tax right? And can you give us what this number was last year, just to compare?

William Oplinger

Paretosh, that’s a pre-tax margin number and the basis for that is versus how much value the cast house adds over making basic P1020 metal and so that’s the reason for that $200 million. I do not have the 2013 number off the top of my head, but I recall that it was something fairly sizeable.

Klaus Kleinfeld

Yes, I would say (indiscernible). Yes, well don’t -- let’s not speculate. We can get you the number. I mean Kelly can get you the number.

Paretosh Misra - Morgan Stanley

Got it. Okay, great. Thank you.

Klaus Kleinfeld

Pleasure Paretosh. Who’s next?

Operator

The next question comes from the line of Carly Mattson with Goldman Sachs.

Carly Mattson - Goldman Sachs

Hi, good afternoon. Could you give us an update on any discussions you’ve had with S&P and Fitch regarding your ratings; and in particular has the Company done any preliminary analysis as to how much changes in rates this year could help produce the pension liabilities?

William Oplinger

Yeah, Carly the way the rating agencies work is we’re in constant dialogue with them, and there are essentially insiders, so we give them a lot of information and keep them up to date on what's going on. So that’s the interaction that we have with the rating agencies. Clearly I’m not going to speculate, I’d be a fool to speculate where interest rates are going to end this year with everything going on in the world. But interest rates going up will help us close that under funded status fairly substantially and we’ll have a much better view of that as we get closer to the year when we see where the interest rates will be.

Carly Mattson - Goldman Sachs

Great. Thank you.

Klaus Kleinfeld

Thank you, Carly. Next question?

Operator

And your next question comes from the line of Curt Woodworth with Nomura. Please proceed.

Curt Woodworth - Nomura Securities International, Inc.

Yeah. Hi, good afternoon.

Klaus Kleinfeld

Hello Curt.

William Oplinger

Hey, Curt.

Curt Woodworth - Nomura Securities International, Inc.

Klaus, I was wondering if you could talk about sort of portfolio optimization as you look out to next year when balance fully ramped and you know you already curtailed the term loan of your higher cost smelting capacity. Do you see any opportunity either for potential asset divestitures or areas within the portfolio you could look to monetize you’re not getting value, do you see that maybe a potential to further reduce your footprint in high cost areas just to probably get a sense for any other changes that you could be looking out for next year?

Klaus Kleinfeld

Curt, absolutely and the way we do it, we will basically look at the whole portfolio. We look at how does that add value to us and how can we add value to this. Can we be a good parent to this, and you have to look at the results and how we do it relative to our competitors. And as we have done in the past also we’ve used good opportunities if we saw them to monetize that. I think part of this is that you really don’t talk about that publicly because otherwise I mean you’re destroying shareholder value but I can tell you I mean we constantly are looking into this and there are constantly opportunities. Some turn out to not make sense because they just are too low and you were saying this is not worthwhile doing it. And others like, when we sold the last one that we did is, is the (indiscernible) it turned out to be a very good deal for us. So this is how we look at it.

Curt Woodworth - Nomura Securities International, Inc.

Okay.

Klaus Kleinfeld

Thank you.

Curt Woodworth - Nomura Securities International, Inc.

And then I believe Alcoa put a letter out to the LME last month regarding some of their proposed changes that we’re looking at on the warehouse side and I think that your position was that it wouldn’t really help the customer base in terms of increasing metal availability, but it seems like it would increase the availability and premiums are already coming down, so I was just wondering if you just could kind of elaborate on your position and if you don’t -- if you haven't …

Klaus Kleinfeld

Yeah, I’d be happy to do that and it's probably timely because these folks are sitting at a little bit before midnight at metal – at LME Week in London and debating over things. I mean the way we see that and I think Bill said that before, the reason for the premiums having come down a little bit is because of this market confusion that really was caused by this very irresponsible way how the LME has steered the process. I mean to announce rules outside and as a proposal to be discussed publicly without hearing the market participants before or hearing some market participants before was pretty irresponsible. We commented on it, made that public. I mean it's a major market intervention. By the discussion alone leads to a major market intervention. We are very clear. We believe that if this is not done in the right way, it can actually lead to a reduction of transparency. And the reason for it, you see part of it by the way are happening in the chart that Bill showed and as what I always call the mountain chart, which shows how much is already outside of the LME and how much is off Warren and the amount is getting bigger and bigger. So it takes off the radar screen. So we have made – and on top of it, the transparency in the LME pricing, that's the big issue here. This makes 90% of the total price and that has substantial flaws in it. So we've made some very, very specific recommendations. We've said, improve transparency. There is no reason why you can't do it tomorrow. Commit to a timeline, do it immediately along the line of the CFTC traders report. And then if you want to do improvements, fine, but commit to a timeline, commit to when you want to do it. That hasn't happened yet to my strong disappointment and I hope that the Board is wise enough – the LME Board is wise enough to decide that. The second thing is establish the regional premium contract because the big complain was from consumers we can't hedge for those regional premiums. I mean this is what an exchange is there for. Invent an instrument and put that out and I think what we call it in our report, we call it the red herring, this discussion about primary aluminum not readily available. Those that were on the second quarter call have heard me say loud and clear, whoever had issues not getting aluminum, give me a hallo, I can solve that, right. The interesting thing – I mean I have received some calls from customers but not from customers that had problems with getting metals, but rather customers that were saying, hey, you know what, our market is growing stronger and you are the only ones that have the technology that can help me. And on top of it this whole discussion about pricing being too high at a time when the prices are at a four-year low as really [indiscernible]. So I mean I just hope that the LME will find the right solution there. We believe we have a clear pathway forward and more transparency in a premium contract.

Curt Woodworth - Nomura Securities International, Inc.

Thanks.

William Oplinger

Okay. Next question?

Operator

Next question is a follow-up question from David Gagliano with Barclays. Please proceed.

William Oplinger

Okay, Dave, go ahead.

David Gagliano - Barclays

Hi. Just a quick one on CapEx. I might have missed this. It looks year-to-date, your CapEx is running about $900 million and I think your target for the year is $1.9 billion. Are those numbers…?

William Oplinger

Our target for the year is $1.55 billion and so that's the combination of growth and sustaining; $1 billion in sustaining, $550 million in growth and we're currently under spending on a run rate basis both of them.

David Gagliano - Barclays

I just don't think you're going to hit the $1.55 billion number?

William Oplinger

We will not hit the $1.55 billion at this point. We're under-spending on a run rate basis, but we haven't given out a lower range at this point.

David Gagliano - Barclays

Okay, fair enough. Thanks.

Klaus Kleinfeld

Okay. That's concludes – and let me also make another comment as a recommendation, because I think we have a strong interest also for you to understand to what is going on inside of the company. When I look at reports that I've seen, my impression was – obviously I've been seeing where we were going throughout the quarter. So how can we bring these things closer together? And I think that I would recommend that the questions today that came around productivity, I mean we have made that a constant, so built that in. We will continue to show strong productivity. The other thing is what we call the strategic repositioning, which is basically you have to build in the different on the value-add business side. You are a more strong contributor and much more meaningful on the top line as well as on the bottom line. I mean just look at the number. We tripled ATOI in the value-add businesses in the last 10 years and now they make up for 79% of the profit and 57% of the profitability. And also don't underestimate two things on the upstream side, which is the second part which is basically the decoupling that we are well underway from the LME on the alumina side, the alumina and mining segment, we are really well positioned. The one that needs restructuring and we've always said that is the smelting segment. That's why you see 60% of the capacity curtailed, but it's a smaller part of our business. So I think I would highly recommend you look at these things because then I think you'll get a better feel where the company is going. And I hope that you agree with me that you've seen a quarter where we've really been firing on all cylinders. I mean nothing has stopped us, not even the headwinds, the strong headwinds that we seen, record downstream margins and the commodity business gets better, repositioning is on the right path. You see the results there. And I believe we're focusing on the right things, those that we can control and we are delivering.

That said, thank you very much for listening. I hope that I will see or have many of you listening in at the investors meeting which is on the 5th and 6th of November, I believe. Kelly is that – 6th and 7th, I got it wrong – 6th and 7th of November. Okay. Thank you very much. That concludes this call.

Operator

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

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