Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Kelly Pasterick - Director of Investor Relations

Klaus Kleinfeld - Chairman, Chief Executive Officer, Chairman of Executive Council, Chairman of International Committee and Chairman of Executive Committee

William F. Oplinger - Chief Financial Officer, Chief Operating Officer of Global Primary Products, Executive Vice President and Member of Executive Council

Analysts

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Brian MacArthur - UBS Investment Bank, Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Paretosh Misra - Morgan Stanley, Research Division

Brian Yu - Citigroup Inc, Research Division

Jorge M. Beristain - Deutsche Bank AG, Research Division

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

David Gagliano - Barclays Capital, Research Division

Anthony B. Rizzuto - Cowen and Company, LLC, Research Division

David A. Lipschitz - CLSA Limited, Research Division

Paul A. Massoud - Stifel, Nicolaus & Co., Inc., Research Division

Andrew Lane - Morningstar Inc., Research Division

Harry Mateer - Barclays Capital, Research Division

Alumina (AWC) Q4 2013 Earnings Call January 9, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Alcoa Inc. Earnings Conference Call. My name is Jackie, and I will be your coordinator today. [Operator Instructions] As a reminder, this conference is being recorded for training purposes.

I would now like to turn the presentation over to Ms. Kelly Pasterick, Director of Investor Relations.

Kelly Pasterick

Thank you, Jackie. Good afternoon, and welcome to Alcoa's Fourth Quarter 2013 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 the 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 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 it over to Mr. Klaus Kleinfeld.

Klaus Kleinfeld

Well, thank you, Kelly, and good afternoon to everybody and thank you for joining us in our fourth quarter as well as our full year's earnings announcement. I'm very conscious that we have been giving you a lot to digest today starting this morning with the announcement that we're resolving a legacy legal matter with the U.S. government. So before Bill gets into the details, let me give you a quick overview and you see it summarized here on the slide.

So we took decisive actions of putting legacy matters behind us, clearing the way and continuing our transformation. So when you look at the legacy matters, they really fall into 2 big buckets in the main, right? The one is the legacy legal matter and we welcome this resolution. We worked hard to minimize the liquidity impact. It's 5 installments over 4 years. Bill will talk more about that.

So the second big bucket is really around a new reality; unfortunately not a good reality in our smelting industry and the very fact that this has a consequence of us having to write down the goodwill for 2 legacy acquisitions in smelting and also discrete tax items. Both of those are noncash events and that's important -- it's important to note. So that's the legacy part.

Let's turn to the operational side. And the operational side continues to be what we've been saying all the time. We are repositioning the company. At the same time, we're facing some headwinds. How are we repositioning it? We're building out our value-add businesses and we're lowering our cost base off the commodity businesses, and this transformation is working out. You can see it by a couple of steps here. The value-add business today accounts for 57% of the revenues and 80% of the segment profits and if you look under the hood and go into the segments, you see record downstream results. You can look at the fourth quarter or you can look at the year-over-year comparisons; year-over-year profits are up 20%. And if you go to the upstream side, the upstream performance is also facing headwinds. In light of that, it continues to hold up well against its 9 consecutive quarters with improved performance.

We also see, on a broad scale, that in all segments, we have improved productivity: $1.1 billion over the course of the whole year. Plus, on the cash flow side, the -- improving the working capital has been a major driver of that. We've come down 4 days again from reducing it over every year now. It's another $240 million, and we will talk about that more. This can only be achieved by, really, every Alcoan rolling up their sleeves and working, working very, very hard. Today for 2014, we have 12,000 actions in our -- what we call our degrees of implementation system. We'll talk about this more. This gives us good confidence that we will continue on this good path.

All of this has led to a strength in balance sheet, $1.4 billion cash on hand, $6.9 billion net debt. This is the lowest year-end level since 2006, and all of this has happened while we have also focused to invest in our future. And let me just remind you of automotive, our Saudi Arabia joint venture, aluminum-lithium to just mention 3 things. And if you want to see overall how this has worked out, look at the annual earnings, up 36% if you include special items in spite of metal price decline of 4%.

So with this, let me hand over to Bill.

William F. Oplinger

Thanks, Klaus. I have a lot to cover, so I'll try to move relatively quickly. A quick review of the income statement.

Revenue declined on a sequential quarter basis to $5.6 billion, driven primarily by seasonally lower results in the value-add businesses, particularly the packaging markets; weakness in industrial markets, and the weather-related impacts to building and construction. Primary Metals revenue was steady despite a 1% decline in realized aluminum prices.

Compared to last year, revenue was 5% lower on a 7% drop in realized aluminum prices. These prices were the lowest realized prices in 4 years. Cost of goods sold percentage increased sequentially by 110 basis points due to lower metal prices and lower volumes. As you've seen by now, we took a series of restructuring and other charges that I'll detail on the following page.

Our effective tax rate for both the quarter and the full year was negative, resulting from the fact that some of the special items had little to no tax benefits associated with them, as well as the impact of the deferred tax valuation allowances. If you exclude discrete and special items, our operational rate for the full year was 34% and 43% for the quarter. So overall, results for the quarter are a net loss of $2.19 per share. Excluding special items, we have net income of $0.04 per share.

Let's now take a closer look at the special items. Well, the special items in the quarter totaled $2.4 billion, or $2.23 per share and can be categorized into 3 areas: resolution of the U.S. government investigations; charges, as Klaus alluded to, associated with the market conditions in the smelting business and other changes. As we've seen by now, we've resolved the investigations with the U.S. government and recorded a charge of $288 million, or $243 million after-tax in noncontrolling interest. Taking into account this fourth quarter charge, we have recognized all costs associated with the resolution of the Alba civil suit and related government investigations. It's good to put this legacy matter behind us. The resolution, excluding a one-time administrative forfeiture, will be paid in 5 equal installments over a 4-year period, beginning in the first quarter of 2014.

The second set of charges largely relate to the smelting business. We wrote off the goodwill associated with the Alumax and Reynolds acquisitions made in 1998 and 2000. Each year, we test the carrying value of our businesses against discounted future cash flows and took this noncash charge due to changes in the LME price, operating margins and discount rate. I want to note that no other segments are affected by this goodwill write-down.

Along those same lines, we booked a noncash valuation allowance against deferred tax assets in certain jurisdictions whose realization is no longer assured. Again, this is largely driven by the current market situation in the smelting business. You should note that the underlying tax losses and credits are still available should earnings and dividends improve in the future and this has no impact on cash taxes that will be paid. However, this change will increase our projected ETR to approximately 45% in 2014.

At the height of the financial crisis, Alcoa made the decision to delay investment in a number of ongoing capital projects as part of our Cash Sustainability Program. Due to the current market environment, certain capital projects, all in the upstream businesses, are no longer being pursued, resulting in a noncash charge of $13 million.

And lastly, the final category of charges includes a couple of items. We booked restructuring costs of $46 million after-tax related primarily to a corporate-wide overhead cost reduction program. This program is across all businesses and resource units and will pay back within 1 year of full implementation.

As we detailed earlier in the quarter, charges related to the restart of one potline at the Saudi joint venture smelter amounted to $9 million in the quarter and as we usually do, we've backed out the favorable impact of noncash mark-to-market adjustments on energy contracts of $7 million and the positive benefit of $5 million of insurance recovery associated with last year's Massena casthouse fire. I know that's a lot to digest, so excluding the impact of special items, the company reported net income of $40 million, or $0.04 per share.

Let's move to the sequential quarter bridge. As usual, we've categorized the changes in the quarter into 3 areas: market-related, performance and cost headwinds. As many of you know, we typically see a fourth quarter seasonal decline in our mid and downstream segments, and that drove much of the declines you see in the chart. Market forces negatively impacted the quarter by $26 million driven by slightly lower LME cash prices and losses recognized on a mark-to-market basis for the part of the future customer fixed-price sales commitments which can't be effectively hedged, specifically the regional premiums.

Productivity across all 3 business groups offset lower volumes, particularly seasonal declines in packaging, aero plate destocking and demand pressures in industrial markets. Cost headwinds for the quarter were driven by higher energy costs, mainly in the upstream businesses; fixed cost absorption in the midstream driven by lower packaging and aerospace volume; as well as expected seasonal payroll-related costs in the downstream.

Now let's turn to cash flow. Cash flow is a good story. We ended the fourth quarter with exceptional cash results. Cash from operations totaled $920 million, leading to positive free cash flow of $498 million. As I mentioned earlier, most of the special items for the quarter are noncash and, therefore, don't impact our liquidity position. The year-over-year reduction in days working capital that Klaus highlighted to a record low of 20 days also contributed to strong cash from operations.

Regarding pension, pension contributions totaled $108 million for the quarter for a total cash contribution of $462 million in 2013. And I do note, that was all made in cash. The global pension contribution requirement for 2014 is estimated to be $625 million, but that includes roughly $90 million of funding related to the shutdown of the Soderberg lines at Baie-Comeau facility, which was recorded in the prior period. Our liquidity position remains strong. We ended the year with $1.4 billion cash on hand.

Now let's turn to the segment results. EPS continues their string of strong quarters, reporting a record fourth quarter ATOI of $168 million, which was down 13% sequentially, but up 20% compared to the fourth quarter of 2012. This segment reported its best ever fourth quarter EBITDA margin of 20.3% compared to 22.5% and 18%, respectively, for the third quarter 2013 and same quarter last year. Declines in volume due to seasonality, as well as weather impacts to the Building & Construction business and price mix impacts in the aerospace and defense markets, were offset by significant quarter-over-quarter productivity improvements from every area of the business. There were some cost increases which were primarily driven by employee-related costs and operational -- overall operational cost increases.

As I look forward to the first quarter, we expect the aerospace market to remain strong but see lower U.S. defense spare parts demand. Regarding our nonresidential Building & Construction business, the market decline in Europe is slowing, and we expect continued gradual recovery in North America. Heavy-duty truck will remain strong in North America but will be offset by declines in Europe. In the IGT markets, the industrial gas turbine market, we anticipate weaker global demand. We continue to see share gains across the portfolio, driven by innovation.

So in aggregate, EPS had a very strong fourth quarter. For the first quarter of 2014, we expect an 8% to 10% sequential increase in ATOI due to share gains through innovation, market conditions and productivity. We also expect year-over-year ATOI to increase by 5% to 7%.

Let's turn to Global Rolled Products. There are a couple of key themes that drove the GRP results this quarter. While auto sheet demand is at record levels, it wasn't enough to offset some of the negative market conditions, specifically seasonal packaging volume declines and pricing pressures in packaging, aero plate destocking and demand and pricing pressures in the global industrial markets. The volume declines led to lower fixed cost absorption, which, combined with plant outages, contributed to the higher costs in the segment.

However, on the positive side, GRP continues to deliver on cash initiatives and hit an all-time low days working capital of 30, a reduction of 6 days. As we look out to the first quarter, we expect GRP to rebound, with profitability doubling in the first quarter.

Auto demand is expected to remain strong for both sheet and brazing sheet for heat exchangers. Industrial volumes are expected to strengthen together with the recovering economies in the U.S. and Europe. The continued high OEM inventories on aero plate will impact plate volumes and prices and we expect continued pressures on packaging volumes and prices. But as I've said, ATOI is expected to double sequentially, excluding any currency and metal price changes.

So if we move on to alumina, in alumina, there's a couple of key takeaways. Improved productivity and API pricing generated positive performance in the quarter, partially offset by lower LME-based pricing. We saw a continued positive trend in index and spot pricing versus percent of LME contracts, which is driving a slight improvement in price and mix. The segment continues to focus on productivity, generating $14 million of savings from lower maintenance costs, energy efficiency and better raw material usage. However, the energy cost increase of $9 million was primarily driven by higher natural gas prices in Australia, as we signaled in last quarter's announcement.

From a cash perspective, our alumina business has continued an excellent job of reducing days working capital. Another record quarter in Q4 of 22 days was achieved, which is 5 days lower than the same time last year. That generates approximately $77 million in cash year-over-year.

As we look out into the first quarter in the segment, 65% of third-party shipments will either be spot or API for the full year 2014 and that typically follows a 30-day lag while the remainder of pricing follows a 60-day lag.

For the first quarter production and shipments will be 95,000 metric tons lower due to 2 fewer days in the quarter. Seasonal maintenance activities across many of our refineries will increase cost by $10 million. And as preoperational activities ramp up at the Saudi Arabia refinery, we expect to see $5 million of additional costs in the segment. In total, this segment will see $30 million of cost increases in the first quarter, driven by lower volumes, increased maintenance and the Saudi JV ramp up.

So now let's turn to Primary Metals. Profitability in the Primary Metals segment deteriorated sequentially, driven largely by the market conditions, lower regional premiums of 4% sequentially and onetime items. Note that the fourth quarter 2012 ATOI includes the gain from the sale of the Tapoco facility. So excluding this transaction, ATOI in the fourth quarter of 2012 was $44 million.

Overall performance for the segment was down $4 million due to declining average premiums impacting the segment, along with higher energy costs due to seasonality in Europe and the Pacific Northwest.

A portion of the LME impact reflects losses recognized on a mark-to-market basis for the part of the future customer price sales which can't be effectively hedged, specifically the regional premiums. LME price is essentially flat sequentially on a 15-day lag basis, with realized prices down 1% sequentially. Production is lower sequentially, as indicated on our last call. The curtailments that began late in the third quarter are now realizing the full impact.

Productivity gains continued. Primary generated $11 million, with the majority of this coming from widespread improvement in maintenance and services as well as better energy efficiency in the quarter. There were 2 onetime items in the segment that impacted the segment by $13 million of ATOI this quarter. The segment benefited from Massena-related insurance proceeds in the third quarter which didn't repeat in the fourth quarter, and the Saudi JV also -- the line outage impact of this segment. From a cash perspective, our metal business has achieved record days working capital in the quarter of 15 days, which is 4 days lower than the same time last year, generating approximately $105 million in cash year-over-year.

Before I move off the fourth quarter earnings commentary in the upstream, it's important to note that alumina and Primary Metals' operations were able to offset unfavorable premiums and increased energy costs to end up with $8 million of positive performance, better than we expected at the beginning of the quarter. And to note, this is the ninth consecutive quarter of overall performance improvement in the upstream business.

So now as I move on to the outlook for the first quarter in Primary Metals, pricing is expected to follow a 15-day lag to LME prices. Production and shipments will also, in this segment, be 20,000 metric tons lower due to the 2 fewer days in the quarter. Lower energy sales in Latin America of $12 million and higher energy costs and Rockdale power plant outages combined to impact the segment by $19 million. And the incremental impact of the Saudi JV restart is expected to be between $15 million and $20 million. I want you to keep in mind that we're in the ramp up stage now in Saudi Arabia, so negative impacts will reverse over time as revenue is generated.

One final note on smelting. We're very focused on continuing to optimize our portfolio in this tough environment, and we still have roughly have 180,000 metric tons of capacity under review through the first half of 2014.

Now let me turn to the alumina and aluminum market fundamentals. Hopefully, you're very familiar with this set of charts. For 2014, we are projecting global aluminum demand growth to continue strong at 7%. China continues to lead global growth at a solid 10%, slightly lower than the 12% in 2013. In the rest of the world, North American demand will accelerate to 5%, driven by an increase in automotive consumption, and we're forecasting a return to growth in Europe. Stronger flat-rolled product and extrusion exclusion shipment in Germany will lead the region there. We do expect Brazil, Russia and India to perform reasonably well, with growth of 6%, 5% and 7%, respectively. Brazil should see particularly good prospects with the construction from the Olympics and the final preparations for the World Cup of 2014.

When we look at the alumina market, our initial outlook for the 2014 alumina supply/demand situation is that the market will be in surplus of just under 2 million metric tons, or roughly 2% of the global market. In the rest of the world, this is driven by new capacity coming online, namely, the full year run rate impacts of the Worsley and Yarwun refinery expansions, startup of our refinery in Saudi Arabia and Indian production coming online. Additionally, we continue to see Chinese production additions based both on domestic bauxite and imported bauxite.

I want to make a note though, that this forecast really has 3 large variables that can impact it. First, Indonesia, as you probably are aware, is scheduled to implement restrictions on bauxite exports on January 12, 2014. This is an ongoing story. However, it's creating uncertainty in the future supply chain of bauxite into China. We don't anticipate any near-term disruption to the alumina supply chain, but this continues to be an evolving situation.

Secondly, we assume Indian production increases of around 1.3 million metric tons in 2014. Most of this is coming from 2 refineries, Lanjigarh and Anrak that -- both of those have been unable to secure local bauxite and now must rely on higher-cost imported bauxite. The economic viability of these 2 facilities is a question.

Thirdly, we assume that China will need to import around 3.4 million metric tons of alumina in 2014 to balance their domestic deficit. We've seen Chinese buyers react to import price parity with domestic supply. The arbitrage between imports and domestic prices ultimately dictates the import volume. So while we're forecasting the market to move along in 2014, there are many variables that could swing this market into deficit fairly quickly.

Moving on to the aluminum market. China continues to add capacity in the Northwest at a measured pace. We're forecasting 3.75 million metric tons capacity addition, mostly coming from the Northwest. However, we expect curtailments of 1.1 million tons of higher cost, less efficient capacity in the east and central provinces of China. Recently announced increases in power prices for less efficient smelting underscores the likelihood of these cutbacks.

In the rest of the world, new expansions of 1.4 million metric tons are concentrated in the MENA region and India. However, there continues to be significant execution risk in India due to uncertain coal supplies for expansion.

Moving on to inventory, inventories remained stable at about 74 days. Producer-held inventories remained at all-time record lows of less than 8 days. LME-canceled warrants, which represent the backlog of metal poised to leave the exchange, sit at 2.4 million metric tons, or 43% of total LME stocks. These cancellations are largely held by financiers seeking new metal off-exchange for lower-cost medium or long-term financing.

And lastly, off-exchange stocks remain around 2.1 million metric tons but are expected to rise during 2014. Regarding premiums, as I'm sure many of you are aware, premiums began to rise toward the end of the fourth quarter. Coming off of a decline in the third quarter, the U.S. Midwest now sits at $0.16 per pound, with other premiums also increasing during the quarter.

So that closes out my comments around the fourth quarter. I will try to quickly transition to the full year.

When we look at the full year, Alcoa responded to the tough operating environment of 2013. Despite realized aluminum prices falling, earnings increased by 36% on a year-over-year basis. Disciplined execution across all the businesses generated $753 million of after-tax productivity. This improvement in operating performance more than offset unfavorable market impacts and cost headwinds. This further demonstrates that repositioning the company is working. We're generating profitable growth in our value add businesses and lowering the cost base in the commodity business to drive improved results.

As we turn to productivity, this is a very similar chart to what we have shown in the last Investor Day. A key driver to our strong underlying performance is our ability to capture productivity by turning ideas into cash. For the last 5 years, we've generated over $6.6 billion of savings and cash by pulling multiple levers through the organization. In 2013 alone, we captured $1.1 billion in productivity improvements, and we don't expect it to end there. All this is driven by a disciplined execution of the businesses, as well as the operating system we have in place to implement and capture our cash-generating ideas. We currently have 12,200 ideas in the system that will impact the future, of which the majority of those relate to productivity. We plan to move these ideas through our stringent process in order to capture additional growth, savings and enhanced cash flow in 2014.

We move on to working capital. Klaus already largely alluded to this. This is the 17th successive quarter of year-over-year improvement in days working capital. Since we implemented the Cash Sustainability Program in 2009, the company's days working capital has come down significantly to a record 20 days at the end of the fourth quarter. Our objective for 2013 was to sustain the days working capital that we had at the end of 2012. However, our businesses outperformed and achieved a 4-day improvement year-over-year. Over the 5-year period, we've achieved a 23-day reduction worth $1.4 billion, and the 4-day improvement that we see this year is roughly $240 million in cash.

Turning to the balance sheet and the debt levels. As I said, it was a strong cash year for the quarter. During the year, we paid debt maturities off of $422 million and we have no further maturities due until 2017 other than the convertible debt. We do expect the convertible debt of $575 million to convert in the first quarter of 2014. And as I've stated before, we made 100% of contributions in the pension plan in cash. We ended the year with $1.4 billion of cash on hand and debt levels of $8.3 billion. That puts net debt at $6.9 billion, which is the lowest year-end net debt level since 2006.

We transitioned to our annual targets for 2013. As you know, at the beginning of the year, we established a set of targets given the market environment at that time. As you can see from the chart, we met every target, delivered positive free cash flow in the year for the fourth consecutive year, all at much lower metal prices than what we started the year at. As you can see from the chart, we had $1.1 billion in productivity, we managed our sustaining capital and we continued to invest in our mid and downstream segments. Our spend in Saudi Arabia joint venture is well within budget. The reduction in the spend in 2013 was really driven by timing and spend and the ability to control cost. And the debt-to-cap ratio, excluding the fourth quarter goodwill impairment and deferred tax allowance, ended within our target range of 30% to 35%.

We now turn to the 2014 annual targets. Our annual financial targets have been set to continue to reposition the company, driving growth in operational improvements in 2014. We're targeting $850 million of additional year-over-year productivity. The spend for growth capital is $500 million and will focus -- will largely be focused on billeting the value-add businesses with continued spend to meet demand in auto and aerospace markets. We'll continue to invest in Saudi Arabia, projected to spend $125 million in 2014. From a maintenance perspective, we'll actively manage our asset base by targeting $750 million of sustaining spend, and that is much more heavily weighted on the upstream operations.

Last but certainly not least, we have a commitment to a strong balance sheet. Generating positive free cash flow will continue to be the target for 2014 and we do expect to manage our capital structure to a debt-to-capital ratio in the range of 30% to 35% by the end of 2014. At this point, I'll turn it back over to Klaus.

Klaus Kleinfeld

Thank you, Bill, and let's go through this and let's start in the usual fashion with the end markets. On aerospace, we forecast another strong year, 7% to 8% growth, driven by continued strong performance in the last commercial aircraft business. Boeing, as well as Airbus, now have a combined backlog of over 10,000 aircraft, and that is about 8 years of production. We have been seeing strong demand also recently, coming from Southeast Asia and the Gulf. The Dubai Airshow in November showed a lot of this. We saw Boeing receiving the single largest commercial order, $56 billion for 150 Boeing 777X by Emirates, and Airbus got an order of $20 billion for 50 A380 also by Emirates. Also backed by strong fundamentals, travel demand last year, up 5.3%, we expect for this year 6%. Cargo demand, plus 1% last year, we expect another 2.1% this year. Airline Profitability in 2012, it was $7.4 billion; last year, $12.9 billion; and for this year, the market expects $19.7 billion.

So at the same time, we see some inventory adjustments in one of our aerospace business. We talked about excess inventory in the aerospace structural plates, and that needs about 2 years to fully resolve and has an impact of about 10% lower aerospace plate revenues versus the 2013 level. In the other segments that we talked about last time, the jet engine side, we've seen an inventory adjustment in 2013 in the third and the fourth quarter, and we expect this to be finalized and normalcy returning back now with the first quarter starting.

The growth in aerospace is also supported by growth into other segments in aerospace. Regional jets, we've seen an increase of 19.5%, business jets, another 10% last year. And even on the defense side, the last weeks have brought some clarity with a 2-year budget agreement that has given some relief from the sequester and has been paired with giving flexibility here. This progress is particularly important to Alcoa because it avoided major reductions on those platforms that matter a lot to us like the Joint Strike Fighter or the F-35, the KC-46 Tanker or the V-22 Osprey. However, I mean, all of that does not compensate some of things that come with reduced operations on the defense side. Obviously, that has an impact on spare part demand, but the picture on total on aerospace is very positive.

Let's move on to automotive and let's start with the U.S. It looks like 2013 saw a growth somewhere between 4% and 5% and production lead. December numbers have not yet come in. We believe the 2014 growth is going to be at another 2% to 5% range. This is bringing the market close to prerecession production levels of roughly 60 million vehicles per annum, and 2007 was the highest with 16.1 million vehicles.

There's still some -- quite some pent-up demand in the market. Passenger cars today have an age of 11.4 years and the historic average is around 9.4 years. At the same time, we started to see inventories going up. They have now a level of 76 days. This is about 14% higher to where it was a year ago. And as a result of this, incentive has also gone up a little bit. They now stand an average at $2,687 per vehicle, this is roughly 8% up. This is not really concerning in light of the overall picture but we need to watch it as we go into the New Year and the overall picture for the U.S. automotive is very positive, and we see, I think, some of this also next week in the Detroit Auto Show.

In Europe Automotive, we expect production to stabilize in 2013 and the volume levels, most likely growth between minus 1% and plus 3%. So in China, we continue to see the growth of the middle-class driving, obviously, also auto demand, 6% to 10% we believe here. Even if we do see an intensified focus on air pollution, we might see stricter restriction actually, but there could be a positive impact from that driving older vehicles off the street and replacing them with more modern and more fuel-efficient cars.

Let's go on to the next segment, trucks and trailers -- heavy trucks and trailers, North America. After we have seen the production decline in 2013 by 12% roughly, we believe 2014, we will see an increase between 1% to 5%. Our view is based on a couple of things. Orders are up 17.1%, backlog has increased 29%, now stands at 95,000 trucks. Inventories have decreased by 4.1%, now stands at 49,000 trucks. Historic average is around 42,000 trucks. The age of the fleet is at 6.5 years versus a historic number of 5.8, so pent-up demand still there. Freight time miles are up 4.8%, prices are up 1.1%. However, the free profitability has been under pressure, mainly through change legislation. The so-called U.S. hours of operation provision that requires more rest time and increased fuel prices, so that has declined by around 4.6%, but overall, a positive picture also in North American trucks and trailer.

In Europe, due to the pull-forward effect in 2013, caused by the regular change from Euro 5 to Euro 6 norm, we expect the market this year to decline by 6% to 10% in 2014. China, after an enormous growth of 30% in 2013 were due to fiscal stimulus and the delay of the Euro 4 norm, we expect the market now to stay at the level of around minus 1% to plus 3% growth, that's what we expect there.

Beverage can packaging, we project an overall growth worldwide between 2% to 3%. North America is stabilizing, we see a decline between 1% and 2%. Pressure is on the carbonated soft drink side but there are new emerging market segments like energy drinks or vitamin drinks. Europe is expected to grow between 2% to 3% and the China growth remains at 8% to 12%. We see the conversion between steel cans to aluminum cans continuing in the major segments, which is herbal tea as well as beer.

Commercial building and construction. North America, we expect this segment to grow stronger than in 2013 where we saw plus 1% to 2%. Roughly, we think it's going to go up 3% to 4% in '14 and this view is backed by the housing starts, up 19%. Nonresidential contracts awarded, up 11.5% case [ph] to the home price index, up another 11% in the third quarter, so all of this is good.

In Europe, the decline is slowing. We expect a minus 2% to minus 3% in 2014 compared to the minus 4% to minus 6% in 2013. And in China, we expect the growth just a little below 2013 levels, where it was 8% to 10%, we now see 7% to 9%.

Last segment, industrial gas turbines. For 2014, we expect it to decline between 8% to 12% auto sale [ph] in 2013. In Europe, gas-fired power generation is squeezed between low-priced coal and subsidized renewals. In the U.S., gas prices have increased and this has allowed coal to claw back some of the share gains. Gas now stands in terms of energy production share here in the U.S. at 27.8% versus 30.4% in 2012. So much about the end markets, so let's now focus on the businesses.

In 2010, we announced our midterm targets for each of the businesses and we also described how we are going to reposition the company. So the first question is, how have we been performing against those 3-year targets, and you see this depicted here. On the left-hand side, you see our value-add businesses. On the downstream side, we've added $970 million in revenues through share gains alone. And if you look at the right-hand side there on the downstream business, we have massively increased the profitability. 2010, it was at 16.8% and now last year, ended at 21.5%, and we expect this trend to continue and I'll talk a little bit more about it later.

On the midstream side, we added $740 million to value-add innovation. And if you look at the profitability, the average profitability before we started this was at around $233 metric ton -- EBITDA per metric ton, and in 2013 it stood at $301 million.

Move over to the right-hand side, on the commodity businesses, alumina is all about where you are in the cost curve. We started on the 30th percentile and we've moved 3% down percentage points, down to the 27th percentile and we've moved 8 percentage points down from the 51st percentile to the 43rd percentile in smelting. This has been achieved through optimizing our portfolio, 481,000 tons of smelting are closed currently and 655,000 tons are curtailed. And in addition to that, we have really achieved massive amounts of productivity there.

The last quarters I talked about, pretty detailed about our aerospace business, about automotive, about building and construction, about innovations and new product offerings and our growth strategies. Today, I want to pick out some other examples here. I want to talk about wheels, automotive and our Saudi joint venture.

So let's start with the wheels business. So what does the trucking industry need today? The first thing is they are hit by new regulatory requirements that force them by 2018, to have 20% higher fuel efficiency and to generate 20% lower greenhouse gases. And on top of it, obviously, they want to improve their competitiveness, reducing operating cost and ideally, also increasing the payload. So that's where Alcoa wheels come into the game. And how do they come into the game? Because they have solved it here. If you look at the weight of aluminum wheels versus steel, it weighs 35% lighter, causing up to 5% lower fuel cost, lower maintenance costs through no rust, no stripping needed, no repair or repainting needed, and up to 3% -- allowing up to 3% higher payload.

If you look at what we have out there as offerings, our LvL ONE wheel, for instance, the lightest wheel in the industry, 45 pounds, 41% lighter than steel, 8% lighter than an average aluminum wheel, and on the top of it, it looks better. It's 6% brighter than even our aluminum competition and it's polished on both sides. You would say why would we polish it on both sides? Because you put it on differently, depending on whether you put it on the truck or the trailer, so you really only need to have 1 wheel in your spare part repository, it reduces the spare parts.

The other innovation that we brought to the market is what we call surface treatment, right? It's more intense than coating because it really changes the structure of the material. What this allows basically, no mechanical or chemical cleaning is needed, corrosion resistance much improved and it looks newer much longer.

In October last year, we came out with Dura-Bright EVO, so an even improved version of our original Dura-Bright, improving it by 10x in regards to the corrosion capabilities, I would really call that indestructible. And we don't stop there, we're going to continue to revolutionize this market and we are announcing that in March this year, we will come out with a new wheel. And for this new wheel, we have created a brand-new alloy and we have that in the making for quite a while. We call the alloy MagnaForce. The reason why we call it MagnaForce, to give you a little hint, 17% stronger than what we have out there today, right? It's coming into your market in March.

So look at the lower left-hand side. What has that all allowed us to do in this wheels business? We have grown, on average, since we've been having this strategy, 22% every year. The market has grown by 15%. And on top of it, we've changed the mix. 67% of the products that we sell today are highly differentiated products with proprietary technology. So you get a feel for that. And so we prepare for MagnaForce, it's already in Europe. Probably better way to say is it's already on the road, rolling over to all of us.

So let's move on from commercial transportation to automotive. Automotive, many of you know the story, this is the historic moment for us with the shift here in the U.S., particularly in the volume basis to lightweight vehicles. It's driven by 2 factors that you see on the left-hand side. One is consumers want it. The most recent survey shows 88% of the consumers, no matter whether they want big cars or small cars, say fuel economy is an important factor for my vehicle purchase, right? So that drives it. And on top of it is the legislation, the CAFE legislation which requires the OEMs to come up with more fuel-efficient cars. That's why we see here depicted in the middle, there's really -- I mean, this fourfold increase by 2015 of auto body sheet, aluminum auto body sheet content in vehicles, and then 10x by 2025.

Seeing that coming, a couple of years ago, we put our money where our mouth is. Davenport is our first expansion automotive in our automotive triple play expansion. We said it's going to be ready by 2014 and it is ready by 2014 on time, on budget. The first part has been produced and sold out and currently, the coil is with our customers for qualification. This is the first, as I said, out of our 3 auto expansions, the next -- the other one is Tennessee, coming online in mid-'15, 2015, and Saudi Arabia are coming online end of this year.

So talking about Saudi Arabia, why don't I give you an update also where our Saudi Arabia joint venture stands. Let's start with the Phase 1, which is the smelter and the rolling mill. Smelter has been producing 190,000 tons in 2013 and we are planning to produce 550,000 tons this year. It will reach full capacity, which is 740,000 tons this year. We have been accelerating the ramp-up of line 2 and we have been -- our restart of line 1 is progressing very, very well. Remind you, this is the lowest cost smelter on this planet and will reduce our footprint by 2 percentage points on the cost curve in our smelting business.

Rolling mill, also good news there. We said we're going to finish the rolling mill by the fourth quarter of 2013, and that's what we've done. And you see a picture here, it's 93% complete, talked about auto already. Second phase is the refinery and the mine. It's going to come to a conclusion by the end of this year. The refinery, 77% complete. You get an impression also by the picture. And the mine also will start to produce bauxite in 2014, and you'll see that everything there is in place.

So a lot of exciting things are going on. So the real question is, what does that mean in the short as well as in the medium-term? In the medium term, let me remind you, for those that were not at our investor conference in Cleveland in November, this is what we announced there. We announced new 3-year targets for each group. So to give you some additional guidance of what you should expect, we said in the downstream business, we're going to add $900 million from innovation and share gains. We're going to do that at profitability levels above historic highs, which has been set now with the 2013, 21.5% EBITDA margin.

On the midstream, we set again, also $900 million coming from innovation and share gains. And here we said, above [ph] average historic EBITDA per metric ton, which stands at $344.

On the commodity businesses, we're going to move down on alumina, 6 additional percentage points. So the new target is 21% -- 21st percentile. And on the alumina side, it's 5 additional percentage points and the target is 38th percentile. We're going to do that by continuing on the productivity side and by transforming our asset base. We still have 183,000 tons under review. We will conclude this in the first half of this year. And obviously, once our Saudi joint venture comes online, it's going to bring another 2 percentage points.

So the real question is what does that mean for this year? Bill already referred to it, let me reiterate this to you. We will continue to deliver operational performance with productivity gains of $850 million. We will also not forget to continue to invest in our future growth capital of $500 million. Saudi investment, $125 million sustaining capital and $750 million, and we will continue to strengthen our balance sheet, positive free cash flow and a debt to cap ratio around 30% to 35%.

So let me conclude. A lot to digest. Our repositioning is gaining traction. We've been able to put legacy matters behind us, which resolves the other matter. We've taken the necessary actions that for -- on the balance sheet, to reflect the new realities in our smelting business. We're building out our value-add businesses while we are lowering the cost base in our commodity business. You will continue to see the Alcoa advantages and disciplined execution, driving our profitable growth of 2014.

So what exactly does that mean for -- and what do we expect for our businesses in 2014? EPS will continue to grow profitably. GRP will rebound as all takes off and the industry segment comes back. GPP will continue to lower its cost base and restructure the footprint. Taking that all into account, I'm convinced that we will hit our 2014 annual target as we have done in all of the past 5 years. So with that, Bill and I are going to open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Sohail Tharani with Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

I just wanted to ask you on this -- your realized price appears to be, in the fourth quarter, much lower than what we had expected. Even if we adjust for the lower $0.02 or $0.015 lower premiums, it seems to be lower than what you had been gaining -- getting in the past. It was just wondering if any mix change happened in the quarter?

William F. Oplinger

No, Sohail, no significant mix change. It's really just a function of metal prices having come down and premiums having come down on average. And it was a little bit of a strange quarter in that premiums ran up towards the end of the quarter. But on average, premiums were down for the quarter. So no significant mix changes occurred.

Klaus Kleinfeld

And always keep in mind, you have a 15-day lag.

William F. Oplinger

Sure.

Operator

And your next question comes from the line of Brian MacArthur with UBS.

Brian MacArthur - UBS Investment Bank, Research Division

[indiscernible] on the aluminum price that you used for the write-down?

William F. Oplinger

Brian, we missed the first part of that question. Can you restate it?

Brian MacArthur - UBS Investment Bank, Research Division

Sorry, I just wanted to go back to -- you talked about writing the goodwill down on the Alumax and Reynolds acquisitions. Can you tell us what aluminum price you used for that, what assumptions?

William F. Oplinger

Sure. Let me just tell you about the methodology. The methodology is that we use a 15-year discounted cash flow with the terminal value. The first 3 years, we used what our planning assumptions are, which are very close to the market and the forward curve. Beyond the first 3 years, we simply use a forward curve, Brian, because that's probably the best estimate. If you look at the last couple of years, we disclosed how much headroom we have in each of the segments from the goodwill carrying value. That has been declining, and really, 3 factors drove the write-down. The 3 factors are metal prices; margins, which are essentially a function of currency and the discount rate. And as the discount rate went up, it also impacted the future profitabilities. That's what the drivers were.

Brian MacArthur - UBS Investment Bank, Research Division

And how do you deal with premiums?

William F. Oplinger

Premiums do get included, right? So you project out what your realized prices will be. So we use a forward curve on the LME and our best estimate of premiums.

Operator

And your next question comes from the line of Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners - BofA Merrill Lynch, Research Division

I just want to drill down a little bit to understand the Global Rolled Products segment, if I could. So just taking a step back, certainly all the end market demand commentary on auto and aerospace sounds really strong. But it is kind of surprising to us to see the sequential decline and even the doubling into fourth -- first quarter of ATOI would represent year-over-year declines by about half. So can you give us a little bit more color on what exactly is happening there and how much of that might be destocking, restocking or how much of that is other issues?

Klaus Kleinfeld

Well, Timna, what you do see, first of all, typically, in the fourth quarter in GRP on the packaging segment, you do see a seasonal decline in packaging. That's kind of in there. Then the second thing that -- we saw that, so that's one thing. The second thing that we saw is we saw price pressures coming on the packaging segments, which basically led to a reduction in prices, which have a direct impact on profitability and will probably stay there for quite a while, right? This is one of the reasons why we are flexible-izing capacity and changing the industry structure. This is one of the reasons behind our decision to go with the investment for the second auto expansion to Tennessee so that we have dual purposes for the hot mill part, right? So this has been the big ones and then you mentioned the third element, which is this adjustment of inventory on the aerospace structural plate, and that's basically in the main what you have been seeing there. We -- at the same time, we believe, and we said it, I think, it's in Bill's segment overview, we expect to rebound for the profitability -- base profitability going to double in the first quarter of next year. And once we see, which we believe you will see also, industry -- the general industry segment coming back, we also believe that the pricing level on that segment will improve.

Operator

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

Paretosh Misra - Morgan Stanley, Research Division

My question was on your Primary Metals guidance of $12 million lower energy sales in Latin America. Can you give us a sense as to how much this number typically is, this energy sales number, and if you had a similar sequential decline in the fourth quarter also?

William F. Oplinger

No, we actually -- that sequential decline that you're seeing is a sequential decline, 1Q to 4Q. The energy sales were actually fairly strong in Latin America in the fourth quarter and we're projecting them to fall off in the first quarter. The reason why that is such a large impact is really twofold. One is, we'll have less megawatts available to us; and secondly, pricing on energy has eased a little bit in Latin America. So that's the 2 key drivers there, Paretosh.

Operator

And your next question comes from the line of Brian Yu with Citi.

Brian Yu - Citigroup Inc, Research Division

And my question was to follow up on Timna's, just -- you have listed the various moving pieces, and those were identified when you originally gave the fourth quarter outlook. So along those lines, what incrementally happened to drive ATOI profits down? I think it's closer to 7% versus original guidance of down about 25%? What was different than what you guys were expecting?

Klaus Kleinfeld

Well, we -- I think the biggest difference is on the packaging side. We saw a stronger impact on the packaging side than what we expected, and it's hit on both fronts. It hit on the front of the volume and it hit also on the front of the profitability. I mean, for instance, in a place like Russia, which plays an important role there in the packaging business, we were surprised with the decline -- the stronger decline in volumes, and that also raised some more pressure in the whole industry, which led to a pricing decline there. That's in the main, what happened.

Operator

And your next question comes from the line of Jorge Beristain with Deutsche Bank.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Jorge with Deutsche Bank. My question is for Bill. There's been a lot of talk, especially on the papers recently, about some pension relief potentially for companies as interest rates start to move up. Could you talk a little bit about what your year-end unfunded pension balance was and if you expect any kind of tailwind to be reported into 2014 earnings because of higher discount rates or maybe the carryover effect of outperformance on your 2013 planned assets?

William F. Oplinger

Yes. It's a great question, Jorge. If you look at the balance sheet, and I know we just released the results, we actually picked up a little bit of closure around the underfunded pension liability. We started the year at $3.7 billion. We ended the year at $3.2 billion. We also saw a similar decrease in the liability on the OPEB side. That's largely driven by the fact that interest rates are up, and so right now, we're assuming a 4.8% discount rate. And so I gave you the cash contribution that we expect next year. From an earnings perspective, we would expense -- expect the expense to be somewhere between $450 million and $475 million. And the only reason I'm not nailing it down further from that is we have to settle on an expected return on assets, which we'll do sometime in the first quarter. So we are seeing a little bit of benefit on the expense side due to the higher discount rate and clearly closed a lot of the gap, which is also really good news on the underfunded liability side.

Operator

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

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

I had a question on -- just on the aerospace performance in the quarter. The third party revenue growth was 4%, which is the lowest you guys had all year and well below your market target of, I think, 9% to 10% this year. So I'm just wondering, is that a function of potentially lower metal pass-through volumes or some of the inventory adjustments you talked about on the plate of the jet engine side in the quarter?

Klaus Kleinfeld

Yes. That's in there, absolutely, yes.

Curtis Rogers Woodworth - Nomura Securities Co. Ltd., Research Division

And would that also affect your kind of outlook for your volume performance relative to your market view on '14 as well?

Klaus Kleinfeld

Well, I mean, we believe that on the aerospace plate side, this is going to continue probably another, let's say, 15 months or so, right? So we will continue to see some of that coming through, right? Whether it's hit at the extent that we've seen in the fourth quarter, difficult to judge, right?

William F. Oplinger

And recall we also had some OEM destocking on the jet engine side in the fourth quarter that we're not projecting to continue in 2014.

Klaus Kleinfeld

Yes, exactly. Yes, exactly. That goes into the EPS side.

Operator

And your next question comes from the line of David Gagliano with Barclays.

David Gagliano - Barclays Capital, Research Division

I just have a question regarding the auto opportunity. There's been a little bit of a talk with regards to the pace of the ramp-up for the Ford F-150, perhaps, being delayed. And I'm wondering if you could comment on that and if it's something we should be thinking about in the next sort of 6 to 12 months.

Klaus Kleinfeld

Well, I mean, what counts for us is that we have been basically hitting every milestone that we said we are going to hit. I mean, I shared that just with you. I mean, we're very happy that Davenport auto expense is done. It's producing auto material. The material is in the hands of the customers. Obviously, I can't comment on which customers but don't make the assumption it's just one. I mean, this is a broad-based change. This is a broad-based change happening in the industry. It's a really massive changeover to lightweighting going on here in high-volume segments. Davenport is sold out so I'm not concerned about any platforms there. Plus basically, also our Tennessee expansion is pretty much all committed, right? So this is what's going on in the industry. So this is a very, very exciting moment here for automotive.

David Gagliano - Barclays Capital, Research Division

Okay, and just to clarify, are there any -- are the customers flagging any issues to you with regards to the product that they're receiving?

Klaus Kleinfeld

From the side of the products that they are receiving from us, I'm not -- you have -- everything is going as we expected. I mean, this is a massive ramp-up with a lot of things happening there and we are fully on time, on budget and very happy with the developments there. And the rest, I really can't comment on that. You would have to ask our customers. Okay, it's all positive.

Operator

And your next question comes from the line of Tony Rizzuto with Cowen and Company.

Anthony B. Rizzuto - Cowen and Company, LLC, Research Division

Just a couple of questions. To follow up, Klaus, you sounded surprised by the declines that you saw in Russia in the packaging volumes and I'm just wondering if you could perhaps elaborate a little bit about that.

Klaus Kleinfeld

Well, it's really a function -- it was really mainly a function of the relatively fast decline of the economy in Russia, which actually nobody expected, including the Russians or probably -- I mean, they're -- nobody expected that. So we were hit by that and then there was some legislation impacts, the changes of fuel legislation in Russia that came through there. But the question before was, why did -- what happened unexpectedly? And that was my answer to it, right? So this other reality is there. And on top of it, I mean, there is -- there was a seasonality, so that's what's going on in the market.

Anthony B. Rizzuto - Cowen and Company, LLC, Research Division

Could you just remind me of what your total capital investment has been in Russia? I know you've made a lot of improvements there and [indiscernible] .

Klaus Kleinfeld

Yes, yes, a total -- yes, if you look at everything all in, I would say you're talking roughly about $800 million.

William F. Oplinger

Including the acquisition of the assets.

Klaus Kleinfeld

Including the acquisition of the assets and the investments, they are roughly $800 million, I would say.

Anthony B. Rizzuto - Cowen and Company, LLC, Research Division

Okay, and how we might read the announcement recently with regard to VSMPO-AVISMA?

Klaus Kleinfeld

Yes, very positive. I mean, we signed an agreement with VSMPO-AVISMA, and there's a memorandum of understanding that we are going to share our 75,000-ton press. There are only 2 of those presses around on this planet. One is in the hands of VSMPO and is used mainly -- only for titanium forgings and the other one we own. It physically sits in Samara. It's an amazing piece of industrial machinery, and we have, in the past, only used it for aluminum forging. So what we will do is we will also upgrade it and use it also for titanium forging and basically put our competency together here in regards to forging and in regards to the knowledge about the aerospace industry. So we will continue to be the controlling owner and operator of the joint venture, and there's a lot of details that still have to be hammered out. But this is a very positive development. VSMPO is a good partner, well -- has established itself well, gives us the opportunity to expand into titanium.

Operator

And your next question comes from the line of David Lipschitz with CLSA.

David A. Lipschitz - CLSA Limited, Research Division

Two quickies. On the pension expense, the $450 million to $475 million, that's for '14? And if that's so, what was '13?

William F. Oplinger

It is for '14 and I will have to look at what '13 was. So if you give me a second, I'll tell you.

David A. Lipschitz - CLSA Limited, Research Division

I'll ask the other question while -- so with -- Klaus, was premium spiking as much as they've been? Have you been getting a lot of calls, saying, "You have aluminum available?"

Klaus Kleinfeld

You referred to the last 2 quarters where I said, "Anybody, call me?" Funny enough, I mean, yes, we are receiving calls from our normal customers but not people that are saying, "I can't get my hands around aluminum." And so this has still not happened. But everything else that we diagnosed has happened. I mean, as you may remember, around the whole LME discussion, we always told them that we believe that their actions are not the right actions. We want more transparency. They thought that they can put pressure on the regional premiums. We told them that, that might not be the way to do it and you see the reality is our regional premiums continue to go up, as we have said. And the other thing which we also said, more metal is moving off-warrant. So 2 things, which we don't make -- I mean, make much sense in regards to improving the marketplace, and here is the LME, I mean, putting these massive market interventions in. The most important thing and the most -- the thing that we are most happy about is on the LME side is that they, at the same time, also committed to putting more transparency into the trading so that we can, like the commitment of traders' report, that the Chicago Mercantile Exchange puts out regularly that we can get a better handle on how the market is structured, what's the role of the physical demand playing and what's the role of more high-speed financial speculators in our marketplace. So I hope that they will eventually commit also to a timing on this, which, unfortunately, has not happened yet.

William F. Oplinger

So Dave, let me go back to your question around pension. Total pension expense in 2013, rough numbers, $610 million in 2013, of which $90 million was a special item associated with the Baie-Comeau/Soderberg curtailment. So underlying pension expense of around $520 million coming down, as I said, to $450 million to $475 million, depending on what expected return on assets we land on. And just a little bit more information, if you're filling in the model around OPEB, we would expect OPEB expenses to be fairly flat year-over-year, and they have come down over the last few years as we've managed health care costs.

Operator

And your next question comes from the line of Paul Massoud with Stifel.

Paul A. Massoud - Stifel, Nicolaus & Co., Inc., Research Division

I just had a couple of questions. In the past, you've given combined upstream ATOI guidance sequentially, and I apologize if I missed it, but could you give us a sense of what that is again?

William F. Oplinger

Sure. If you -- a couple of things to realize on the upstream, and I'll answer the question fairly fully. The alumina, I think, we were projecting around $30 million of incremental costs. And in the smelting side, we are projecting around $50 million of incremental costs. But there really are a couple of big drivers behind that. First of all, there's, and you'll laugh at this, there's 2 less production days. And for a refinery and a smelting system, that's a big deal, right? So you lose incremental volume just because of the nature of the calendar. And then secondly, we have the ramp-up costs in both refining and smelting on the Saudi JV. Those will -- as I said in my comments, those will reverse over time. And as Klaus said, that will be the best refining and smelting complex in the world. So those are 2 of the biggest drivers that are driving those results.

Paul A. Massoud - Stifel, Nicolaus & Co., Inc., Research Division

All right, and then just on the LME rule changes over the holiday or just before the holiday, we saw one of your competitors launched a legal action against the LME. And I was just curious, wonder if you had any thoughts about that, too, how you're continuing to approach the situation. Is legal action something that you're considering? Or are there other discussions that are going on behind the scenes?

Klaus Kleinfeld

Well, I think I referred to it a little bit, Paul. I don't know whether you heard my last comment. I mean, we were very happy that the LME picked up on a very strong point that we have made as we need more transparency on the trading side, right? So we need that and they committed to this. They said that they are going to put a committee together to put that out. Unfortunately, we have not yet seen a timeline or any commitment to a format. I much hope that, that's going to happen fast, right? The second thing that we have said, which we felt also, which was the original starting point that they said, well, the consumers cannot hedge the regional premium. So we suggested to have a regional premium contract. They kind of said that they will examine this and I hope that they will examine this fast because obviously, the regional premiums are not going away. In fact, they are increasing. In regards -- and in regards to the legal actions, yes, we've seen that. We feel that -- we understand where those folks are coming from. I have said numerous times that I'm -- I caution against such very direct and massive market interventions that the LME has done. I think there are better ways to do it. At this time, we don't have any plans to file a suit against the LME.

Operator

And your next question comes from the line of Andrew Lane with Morningstar.

Andrew Lane - Morningstar Inc., Research Division

In your prepared remarks, you mentioned the all-out ban on bauxite exporting, which is expected to be imposed on Sunday. Given the China imports 1/3 of its bauxite, and that the vast majority of that bauxite historically comes from Indonesia, do you anticipate that this will result in Chinese refining curtailments? And could this potentially have a positive impact on Chinese smelting overcapacity?

Klaus Kleinfeld

Yes, it could. At the same time, I would put a word of caution in there. We're talking about Indonesia, right? So you're right. I mean, the date that you have to keep in mind is January 12. It's the date where they are supposed to basically implement the ban on exports for unprocessed ore. You -- if you listen or see what communication has been out there from the government officials in Indonesia, I mean, the director general of mining has said quite a while ago that the [indiscernible] might grant some exceptions if people have some kind of plan to build a refinery there. So we would have to see what exactly happens there. I mean USACE has come out with a study last year, which looked at whether Indonesia is the -- how good Indonesia is in terms of having refining, and their conclusion was that the infrastructure is not adequate to support that industry nor could Indonesia be cost-competitive in refining versus other worldwide locations. So there are a lot of issues around this. We would have to watch it. We'd see it end of this week. At the same time, China is nervous, and you can see that by their actions. I mean, China currently imports 67% of all of their bauxite, and 65% of this comes from Indonesia, right? And what have they done? They have massively ramped up their bauxite imports. You've seen it in the numbers, right? And they currently have a stockpile that is around, basically, a year of consumption. I mean, our inflow is at 280 days but basically, a year of consumption. So they are preparing for something happening in their market, and we will have to watch it. At the same time, the thing that it underlines again, for everybody who is looking at our market, is that China is not the place where -- ideal for making aluminum. Because they don't have the necessary ingredients that make a competitive aluminum industry, starting with bauxite. And you can go next to energy. You can then ask yourself, I mean, in terms of cleanness and sustainability, and that's one of the encouraging things here. China, for us, and I've said it many, many times, is an opportunity, not a threat. And we see it, again, here on the bauxite side.

Operator

And your next question comes from the line of Harry Mateer with Barclays.

Harry Mateer - Barclays Capital, Research Division

Just 2 questions on the debt side. First, do you see any opportunities for debt reduction this year beyond the convert into equity? And then just to clarify, Bill, I think you said the OPEB unfunded balance declined by $500 million as well as the $500 million decline in the pension balance. Is that correct?

William F. Oplinger

No, no. I'm sorry. I said that the pension balance declined $500 million. Off the top of my head, I can't tell you what the OPEB balance declined. So I'll have to get back to you on that one, but it did also decline for similar reasons.

Harry Mateer - Barclays Capital, Research Division

Okay, and then in terms of additional opportunities for debt reduction this year beyond the [indiscernible] ?

William F. Oplinger

Yes, there are a couple of areas that we can pay down debt. There is, obviously, the convert. But also, we've got some Brazilian debt that we can pay back if there is excess cash flow and then we also have an account receivable securitization program that we can pay back also. So those are the areas that, if we have excess cash flow, we will continue to pay down debt.

Harry Mateer - Barclays Capital, Research Division

And what's the size on that Brazilian debt number, if you can do it?

William F. Oplinger

I believe it's around $500 million.

Operator

And your next question comes from the line of Sohail Tharani with Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

I'm looking at the Slide 25 of the automotive opportunity and from 2012 to 2015, increasing by 4x. And if I look at the 2 expansions you're doing, actually North America and the Ma'aden, which, my guess is, will also target the U.S. market. It looks like -- and if I back out, it looks like you have gotten a decent market share of this growth. I was just wondering, how prepared you are to go to the next level when you're going from 14 to 136 or from 55 pound to 136 pound? And how much CapEx would that require? Would you be participating of the same ratio in there? Or do you think that you have done with bulk of your investments in this field?

Klaus Kleinfeld

Sohail, to clarify that, the Saudi Arabia auto expansion will not go to the U.S. marketplace. That's more focused on the European as well as the Asian market, right? And quite a bit might actually stay there in country. I mean, you might have picked up that the Saudis are -- have been negotiating or continuing to negotiate with some automotive firms to also attract some automotive manufacturing there, or at least aluminum-intense basics there. So it's really the Tennessee is -- really the Tennessee expansion and then that's coming on as the next one after Davenport. That comes on mid-'15. For us, it is not the most important thing to have market share, right? Market share is not the primary one. For us, it's the quality of the growth, right? And that's why it's so important to put these pieces together. I mean, the 3-year targets, I mean, show you the new 3-year target as well as the old ones, but I mean, the new 3-year target gives you a good guidance of what we are intending to do. We -- and we are very conscious in regards to using our capital for expansion as well and also looking at how much we put into one basket, as much as we love the automotive industry, right; and at the same time, look forward to this growth. But at this point in time, we do not have any plans for another expansion here in the U.S.

Operator

And with that, ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts