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Alcoa Inc. (NYSE:AA)

Q1 2014 Earnings Conference Call

April 8, 2014 17:00 ET

Executives

Kelly Pasterick - Director of Investor Relations

Klaus Kleinfeld - Chairman, CEO

Bill Oplinger - CFO

Analysts

Sal Tharani - Goldman Sachs

Paul Massoud - Stifel

Michael Gambardella - JPMorgan

Brian Yu - Citi

Timna Tanners - Bank of America Merrill Lynch

Josh Sullivan - Sterne Agee

Paretosh Misra - Morgan Stanley

Andrew Lane - Morningstar

Harry Mateer - Barclays

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 Alcoa Incorporation Earnings Conference Call. My name is Whitley, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

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

Kelly Pasterick

Thanks Whitley. Good afternoon, and welcome to Alcoa's first quarter 2014 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 would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's press release and presentation and in our most recent SEC filings.

In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release, in the appendix of today's presentation and on our Web site at www.alcoa.com under the Investor 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 would like to turn the call over to Klaus Kleinfeld.

Klaus Kleinfeld

Hello, good afternoon. Let me characterize our first quarter as we have seen solid results in the first quarter as the transformation of Alcoa accelerates. So let’s talk about the operational performance. We have seen strong earnings throughout – increased sequentially downstream record performance up 9% year-on-year. Midstream earnings rebound almost tripled quarter-over-quarter record auto revenues and this is just the start as we will see later.

In upstream, we have an improved performance, it’s a 10th consecutive quarter that we have seen that and we have seen the highest alumina first quarter profit since 2011. Another point on the operational performance, productivity stands at $250 million and the good news that really comes from all segments so everybody is performing well. So second big point in the quarter is the portfolio transformation and we have seen two big elements, the growth elements we commissioned our $300 million Davenport, Iowa automotive expansion, it’s operating now.

We are investing $40 million in our value-add especially packaging facility in Brazil. We are expanding our proprietary wheel facility in Hungary to cater to the European market. And the second element restructuring, the major part of the restructuring comes from smelting capacity. We have taken out in this quarter roughly 420,000 tons of smelting capacity in Australia, U.S. as well as in Brazil. And on top of it, we are changing our portfolio and announced that we are taking down our can sheet rolling capacity by 200,000 tons through closing our rolling mills in Australia and this will happen at the end of the year.

So with that said, let me hand over to Bill.

Bill Oplinger

Thanks, Klaus.

Let’s quickly walk through the income statement. Revenue declined on a sequential quarter basis to $5.5 billion driven primarily by the shift from third party to internal sales as the primary segment typically restocks the pipeline for our midstream business in the first quarter.

Versus a year ago, capacity reductions in primary metals combined with an 8% decline in year-over-year realized aluminum prices caused revenues to fall 6% from the first quarter last year. Cost of goods sold percentage decreased sequentially by 190 basis points due to better price and mix for the quarter and productivity gains partially offset by lower metal prices.

Note that overhead costs are down both on a sequential and year ago quarter basis. In the other income and expense line, we realized that $28 million gain from the sale of our ownership interest in the Suriname gold company, Surgold offset by start up cost in Saudi Arabia recognized an equity income and unfavorable currency adjustments.

Our effective tax rate for the quarter is 28%; however, if you exclude the impacts of discrete and special items, our effective tax rate is 46% which is consistent with our expected operational rate for the year. However, we will continue experience swings in the rate given the volatility of our profit drivers with each taxing jurisdiction.

So overall results for the quarter are net loss of $0.16 per share excluding special items we have net income of $0.09 per share more than double adjusted earnings from the prior quarter. Let’s take a closer look at the special items.

Included in the net loss of $178 million is an aftertax charge of $276 million or $0.25 per share associated with special items primarily for restructuring. During the course of the quarter, we announced curtailments and closures in Massena, Brazil and Australia. Combined these actions resulted in $255 million of restructuring charges.

In addition, we took $28 million charge related to a write-off of a cost associated with the cancelled Baie-Comeau modernization project. An additional restructuring charges in the downstream and corporate segments. Roughly, 45% of these charges are non-cash related to the write-down of inventory and assets. Since the Australian plants will be closed during the course of 2014, further restructuring charges are expected to be between $100 million to $125 million after-tax for the remainder of 2014 approximately 85% of these charges are expected to be non-cash.

In addition, we experienced unfavorable impacts related to the restart of one pot line at the Saudi JV smelter amounting to $13 million in the quarter. Discrete and special tax items in the first quarter were a benefit of $22 million which we have backed out of the operating earnings.

Lastly, we back out the favorable impact of the after-tax after non-controlling interest gain of $11 million on the sale of Surgold. So in aggregate, this resulted in net income excluding special items of $98 million or $0.09 per share. Let’s move to the sequential bridge.

This bridge looks at the impacts on sequential quarter basis both LME and ForEx went against us this quarter as LME prices on a 15-day lag were down by $54 per metric ton and the dollar weakened toward the end of the quarter which resulted in unfavorable remeasurement impacts.

Performance for the quarter of $99 million more than offset both market impacts and cost headwinds. Volumes were down slightly from last quarter particularly from two fewer days of production in the upstream business and impacts from smelter curtailments offset by strong auto sheet volumes and improvement in the industrial markets.

The quarter benefited from both stronger alumina prices relative to the declining LME and strong premiums. The regional premium impact was $63 million after-tax. This was somewhat offset by continued pricing pressures in the industrial and packaging market in GRP.

All of the businesses continued to deliver strong productivity gains, in addition we saw significantly better energy cost in our primary metals business. Cost headwinds for the quarter were predominantly driven by unfavorable sequential LIFO impacts partially offset by favorable cost absorption in the rolled product segment. This quarter, we have included a year-over-year look to see the progress we have made across the business.

On a year-over-year basis LME was a significant headwind as prices on a 15-day lag were down $310 per metric ton. And partially offset by a stronger Australian dollar and Brazilian real. We delivered $160 million of after-tax productivity gains, $250 million pre-tax as Klaus alluded to putting us ahead of our 2014 targets.

Volumes are higher driven by aerospace growth for both EPS and GRP, higher aluminum wheel demand and an increase in alumina shipments. Higher premiums both regional and cast house value-add and stronger alumina index pricing year-over-year were a positive contributor to the favorable price mix impact. This performance was partially offset by pricing pressures in the packaging market.

Cost headwinds year-over-year were predominantly driven by inflationary increases to labor and transportation costs, weather-related cost increases and Saudi Arabia start-up costs. These costs were partially offset by lower pension expense and better cost absorptions.

Turning to the segments. Value of the EPS business shows through again this quarter. EPS generated record ATOI of $189 million up 13% sequentially and up 9% compared to the first quarter of 2013. This segment reported it’s best ever Q1 adjusted quarterly EBITDA margin of 22.2%. Third party revenue was $1.4 billion up 3% sequentially and up 1% versus Q1 2013.

Revenues would have been higher had it not been for the extreme weather we experienced in North America. Excellent productivity achievement to offset the weather impacts in the quarter.

Looking toward Q2, we expect the aerospace market to remain strong but see lower U.S. defense spare parts demand, regarding our non-residential construction business, we will continue to see a decline in Europe but we expect continued gradual recovery in North America.

Heavy duty truck will remain strong in North America that will be partially offset by declines in Europe. So in aggregate, we expect a 4% to 6% year-over-year increase in ATOI and for the first time ever, the downstream EPS segment is targeting after-tax earnings of $200 million or more in the second quarter.

Turning to GRP. In January, we said that the rolled product segment would rebound from its fourth quarter results and it just did that nearly tripling earnings in the quarter. There are a few drivers impacting the results this quarter. Higher Midwest premiums drove a favorable impact to earnings since this segment is on an average inventory method higher metal prices hit the bottom line in the near term resulting in $15 million improvements over the fourth quarter.

Overall, volume is slightly higher versus the previous quarter; improved industrial volumes in Europe were offset by weaker demand in North America. We continue to be impacted by the continued market pressure and unfavorable pricing impacts in packaging. Auto sheet volumes are strong resulting in record automotive revenues. Improved productivity and cost containment combined with the favorable fixed cost absorptions significantly benefited the result.

Lastly, included in the segment result is $11 million of after-tax charges associated with the announced closures of the Australian rolling mills. As we look into the second quarter, we expect this segment to be impacted by a strong auto demand, industrial volumes are expected to strengthen in the U.S., however, pricing is still under significant pressure. We expect continued pressure on packaging prices.

In summary, ATOI is expected to be up 20% versus the first quarter results excluding changes to the currency and metal prices.

Let’s move to alumina where performance remained strong. Earnings increased for the sixth straight quarter to $92 million even excluding the benefit of the sale of our Surgold interest, it’s the highest Q1 earnings since 2011. Earnings were bolstered by the highest third party shipments since 2009 driven by a shift from inter-company to third party, and smelter curtailments have taken place, while our Australian refineries set a quarterly production record for average tons per day.

Our spot and alumina price index sales were 61% of third party sales and those revenues are consistently higher than prices in our legacy portfolio of LME-based alumina contracts. Sequentially this had a favorable $37 million impact.

Overall performance was $19 million higher than in Q4 in spite of the $15 million impact of lower volume due primarily to two fewer days of production. Productivity actions partially offset higher energy costs and cost increases with $2 million of this cost increase is due to the ramp-up of Saudi refinery. The sale of Surgold part of our portfolio realignment strategy generated $18 million after-tax preminority earnings for the quarter.

For 2014, our third party pricing mix will reach 65% tied to spot or ATOI prices. In the second quarter, we expect our production levels to decline due to lower production from the Poços refinery in connection with the Poços smelter curtailment. In addition, we continued to ramp up our pre-operational activities in Saudi Arabia refinery and expect to spend an additional $5 million in the second quarter over first quarter spending.

In summary, we expect productivity gains to offset energy and cost increases excluding the additional pre-operational costs in Saudi.

Moving to primary metals. In this segment, sequential performance improved $62 million which combined with the alumina segment marks our 10th straight quarter of performance improvement in the upstream businesses. This quarter favorable regional premiums are $63 million and product premiums are $7 million from major contributors with lower volume due to the two fewer days of production and weather having an negative impact of $8 million.

Energy costs improved $24 million due to lower power prices at our Spanish smelters but that benefit was partially offset by higher energy cost in the U.S. and Latin America. Cost increases of $26 million were driven by alumina cost increases of $15 million as we transfer alumina to our smelters at market prices and taxes increased $11 million in the segment.

Portfolio actions including inventory write-off associated with the curtailments reduced sequential earnings by $14 million. So for 2Q, our pricing will continue to lag by 15 days to the LME prices. Our volumes will decrease due to closure at Massena East that was completed on March 31st and the Brazilian smelter curtailments that will be complete by the end of May. In addition, the restart of the Saudi Arabia JV smelter continues and we expect it to be completed by the end of the second quarter.

In summary, we expect productivity gains to offset spending increases in the second quarter excluding the impact of regional premium price changes. Regarding regional premiums, since many of you have asked about the timing impact of our – on our results, we have included a schedule in the appendix showing the approximate exposure to the various premiums and the timing for a second profitability.

Moving on to working capital, we have made a change in 2014 to how we measure and incent working capital improvements. Historically, we have showed an ending day’s working capital which is reflective of the working capital on the balance sheet at the end of the period. However, this measure really didn’t reflect how much capital was being tied up during the course of the quarter. So we have begun to use an average working capital measure reflecting the average of each month ending working capital.

This is important because a reduction of working capital during the quarter saved the company financing costs since each day of working capital is worth roughly $60 million, the cost of capital savings equates to $5 million annually for each day reduction. So an annual average reduction of 5 days saves the company $25 million in financing cost during the course of the year. Using this new measure, we have reduced working capital by two days versus 1Q 2013 and 25 days since the beginning of 2009 contributing roughly $1.6 billion in cash. 1Q 2014 marks the 18th successive year-over-year improvement in days working capital.

Moving on to the cash statement and liquidity, many of you have heard us talk about the normal cash outflow for the first quarter, this year followed that same pattern with a free cash outflow of $760 million since its based on a number of factors. In the first quarter, we make annual incentive compensation payments and semi-annual interest payments in addition, this year we made the first of five payments to the U.S. government for the DoJ as the fee settlement.

Also in the quarter, working capital built-based on a number of factors, higher receivables due to stronger sales in the mid and downstream in March, seasonal increases on the inventory side preparing for the typical stronger second quarter. And we increased inventory due to the ramp up of automotive production.

Moving on to the pension, the global pension contribution requirement for 2014 is expected to be $625 million. In the first quarter we contributed $91 million of cash. And lastly capital expenditures for the quarter were $209 million with $92 million on growth projects. Nearly 90% of that growth spend within the mid and the downstream.

Turning to debt and cash. Debt declined during the course of the quarter by roughly $575 million to $7.7 billion. That’s the lowest level since the third quarter of 2007. The decline was driven by maturing of the convertible notes on March 15, 2014. As a result of the conversion, Alcoa issued a total of 89 million shares of common stock, 26 million of which impact the share count for the quarter due to the conversion occurring late in the quarter.

The full 89 million shares will be outstanding common stock in the second quarter EPS calculation. Debt-to-cap return to our target range of 30% to 35% declining by over 300 basis points from the fourth quarter due to the debt conversion. Cash on hand stood at $665 million at the end of the quarter with zero commercial paper or borrowings on short-term loans outstanding at the end of the quarter.

I'll conclude the review of the quarter with the discussion of the 2014 targets. Year-to-date productivity is ahead of schedule with $250 million of productivity actions achieved in the first quarter. Growth capital spend was $92 million and then as anticipated to ramp up during the year to meet the $500 million target, Saudi spending of $35 million is essentially right on target.

Sustaining capital was $117 million significantly lower than the run rate of $750 million would suggest, we anticipate that this will also ramp up during the year. Debt-to-cap is already back into our target range. And lastly, while we did have a cash outflow in the quarter, we still anticipate generating positive free cash flow for the year.

Let me turn to the alumina and alumina markets. We reaffirmed our expectations that aluminum demand will growth globally at 7% this year, 4% excluding China. Supply and demand for both the alumina and alumina markets are essentially balanced. The 2014 alumina supply demand situation is that the market will be in a surplus of roughly 2.3 million metric tons or 2%. However, there are number of variables that could swing this market. Included in these are the Indonesian bauxite ban, which is an evolving situation and if it persists could limit refining capacity in China. Secondly, we assume Indian production increases in 2014, but most of this is coming from refineries that have not been able to secure local bauxite. And third, we assume that China will need to import around 3.4 million metric tons of alumina as the balance of domestic deficit.

On the aluminum side, we tightened our forecast by nearly 430,000 metric tons driven by curtailments in the rest of the world including our own announced curtailments. The result is a deficit of roughly 730,000 metric tons. Inventories remain stable at about 76 days and premium stayed stronger in the quarter leveling out an $18.25 per pound for the Midwest spot but the other premiums steady.

Now, let me turn it back over to Klaus.

Klaus Kleinfeld

Very good. Thank you, very much Bill.

So let’s start with the end markets and the usual fashion that we start with aerospace. In aerospace we ramped up our forecast here by 1 percentage point and we are now at 8% to 9% growth that we forecast for this year. Why do we see that? We see a continued strong performance from the large commercial aircraft segment. We believe it’s up by 12.1%. If you look at Boeing and Airbus, the backlog stands now at 10,675 aircraft units, this is well over eight years of backlog.

We’ve just seen recently strong demand coming from Asia and the Gulf region, if you just look at the last three months, the Singapore Air Show 90 orders and options for Airbus and just recently Japan $26 billion of orders coming from JAL as well as ANA both to Airbus and Boeing and all of that has been happening in the last month that’s pretty exciting.

At the same time, the Airline Monitor has also reported the aircraft prices and the reported prices, average prices to be up 2.1% for Boeing and 5.7% for Airbus. And IATA, very strong indications for good fundamental passenger demand up by 5.8%, the cargo demand up 4% and airline profitability now projected to stand at $18.7 billion. Also nice here in the other segment, the smaller segment, regional jets that has nicely rebounded plus 13.2% and now has a backlog of roughly five years with over 1,200 aircraft.

The second segment is automotive. So in automotive, we have a regional markets, so let’s first look at USA. We continue to believe in a 2% to 5% growth for this year. Why do we believe in that? I mean the March numbers has just come in orders are up 1.5 million units, which means an increase of 29% month-over-month, 6% year-over-year. And on top of it, if you look we kind of get an indicator of what – how much demand is still sitting there, how much pent-up demand is still sitting there; take a look at the average age of the fleet, the average age of the fleet stands at 11.4 years here in the U.S.

Historically, the number is 9.4 years so quite a bit of pent-up demand, so orders are up, inventory is down, down by 13 days, it now sits at 62 days compared to 75 days in February. And the average – the historic average it’s around 60 to 65 days, so pretty much in the range of the historic average. Good news. However, incentives helped, incentives are up 8.6%, that’s a February number ahead of last year and it now sits at $2,718 on average that is on average. Production is also up and that’s obviously an important number for us. The February number is 1.39 million units and that’s up 4% year-on-year and 7% month-on-month.

In Europe, automotive the picture also have slightly improved, we now believe zero to 4% growth range up from what we predicted before the range between minus 1 and plus 3%, right? Why do we see that? Registrations are up 6.6%, year-to-date February number. Exports grow, they are forecasted to grow by 3.4% that alone is $4.48 million cost projected, production is up 9% month-on-month and 4% year-on-year, that’s all good.

And let’s go to automotive China. We continue to believe in our forecast of the growth that ranges between 6% to 10% for this year.

Another good story comes from the heavy trucks and trailer market in North America. We are seeing substantially – we are substantially increasing our production forecast to 5% to 9% growth range. We used to have in the last quarter our projection at plus 1 to 5, so you see that there is a lot of good stuff happening there and what is happening there? We’ve seen orders increased plus 15.3% in the first quarter versus the fourth quarter. And if you add into this plus 40.6% growth from the third quarter to the fourth quarter so you get the picture.

The orders in the first quarter stood at 90,100 trucks and that’s 35.2% up from the first quarter in 2013, this is the highest first quarter since the – since 2006 so pre-crisis led to pretty good situation. Also this has led to an increased backlog; the backlog that’s a February number now stands at 114,100 trucks at 36% about the year-on-year number here.

We are also seeing decreased inventories, very important indicator, February number stands at 47,300 trucks. This is pretty much closer to the historic level which is at 43,000 trucks. Strong production also, we are seeing 65,200 in the first quarter truck that’s up 19% year-on-year and 8.3% quarter-on-quarter.

Now, on top it, looking at the fundamentals what we expect going forward, strong freight demand plus 3.2% increased freight prices plus 1.6% and a better fleet profitability, fleet profitability on average is up to 4.7% versus in the – this is the fourth quarter number versus the third quarter of 4.5%.

And Europe commercial transportation also an improved situation and we are taking our forecast up. The range still is negative range minus 1 to minus 5, but we used to have a minus 6 to minus 9, so this is a pretty much improved picture that we’re seeing there. If you look at the orders, you’re actually seeing the orders payment at 6.4% improvement plus 6.4% in Western Europe. However, we believe that some of this is really caused through the supply chain issues coming from the change over in the norms from the Euro-V to Euro-VI and we believe that these orders will basically level-off, that’s why we are not more optimistic on the market there then what we reflect our changed forecast here.

We also see an increased production 16.3% up. China commercial transportation our forecast is unchanged. We basically believe a range from minus 1 to plus 3. And before you get too negative on that, I want to remind you that last year we saw a record growth of 30% and a market that already basically is bigger than all the rest of the world, so that’s still a pretty decent number and a very attractive market so to be in.

So the next market segment beverage can and packaging, we continue to believe in a growth between 2% to 3%. North America, we think is declining between minus 1 and minus 2. And Europe, we expect an increase between 2% to 3% and China we see 8% to 12% increase and what we see they are driving very much the increases not just the increased consumption but also the increased conversion from steel to aluminum.

Next segment, building and construction. North America, good story there, we expect to see a gradual growth. Finally, we think that the range is going to be 3% to 4% and the early indicators look really encouraging, let me start with architectural building index. That remains positive, 50.7 in February up from 50.4 in January. Usually there is a lag time between this of 12 to 15 months until those architectural buildings really become construction spending. So it’s a really good early indicator.

Another early indicator are non-residential contracts award up 12.5%, this is the rolling 12-month average and usually there is a 9 to 12-month lag time to construction spending. And then there is the Case-Shiller Home Price Index and that now rolls for seven quarters up 11% in the fourth quarter.

Let me also address one other thing that has been discussed quite a bit and we also saw it in our order intake in the first quarter here in the U.S. where it slowed down, it slowed down, the order intake there slowed down. This has pretty much single handedly been driven by the extremely cold weather so what do we see now? We are seeing on those sides now as this sites got delayed with concrete couldn’t get poured people are now trying to catch up and trying to make the days that they had projected for their project, so we continue to be optimistic in the recovery of that market and don’t believe that there is any substantial change in this, it was really weather that hit there.

And Europe, building and construction, we continue to see a declining growth. We think that this is going to be between minus 2 to minus 3. And then China, we believe the market will grow here between 7% to 9%. Industrial gas turbines, we expect the industrial gas turbine F1 market to decline between minus 8 and minus 12, the orders are flat levels to 2012 levels and down from the 2011 levels. And the spare demand is down given the shifts in the energy mix as well as the usage in key markets.

So if you look for instances, at Europe, you see gas-fired power is getting clobbered by low price coal and subsidized renewable and utilities are even mothballing state-of-the-art gas-fired power plant. And if you look at the U.S. you’ve actually seen the natural gas price has come up and that allows coal to win some market share back.

So this basically concludes our end market overview. Let’s now talk about some exciting things that are happening at Alcoa. And let’s start with our exciting value-add business. So here you see a breakdown on the left-hand side of our value-add revenues. At the last year, the value-add revenues made up $13.1 billion revenues, this was 757% of our revenues and they made up 80% of our segment profits, that’s how important this segment already is today.

Today, I want to focus really only on four of those segments and that doesn’t mean that there is not much exciting stuff going on in the other segments, last time I talked about building and construction, I will do that again probably in the next quarter.

So let’s focus on these markets, aerospace, automotive, commercial transportation and packaging. Let me give you a little color on what’s going on there. One thing that all of these markets have in common, they all grow and they all grow substantially. And on top of it, we offer something that it goes into that growth and grows on top of it, aerospace 7.5% market growth projected for the next three years, eight year order backlog. Automotive, in automotive sheet we expect a 50% average growth in the next year. So North America, we believe the auto sheet market by 2025 will cover a million metric tons; I will talk more about it. Commercial transportation, 3.4% average growth rate in the truck market and the wheels market the shift over from steel to aluminum is going on in a very excitingly.

Packaging, 2% to 3% global market growth again penetration by the steel, substitution of steel very, very exciting. So let’s start with aerospace.

On the aerospace side, we have a very exciting portfolio and the portfolio comprises of three major components. It already today is – it accounts for $4 billion revenue and it’s made of multi-material innovative solution. So let’s go clockwise, advanced aerospace structures, what does that mean, a sheet plate and extrusion. Aluminum, aluminum and titanium forging and structural casting, 50% of that is titanium, 30% aluminum, 20% nickel alloys.

Second component, high performance engine and engine investment castings. We are global leader in the jet engine air force business, 100% is nickel superalloys. And the third component here is innovative fastening systems. We are global leader in aerospace and we are in the airframe and in the engine application, 40% titanium, 25% steel, 35% nickel alloy. This is a unique portfolio that gives us excellent growth opportunities in this growing market.

So next market that I want to talk about is the commercial transportation market and I want to focus here on wheels. We are literally reinventing the wheel. We are making it lighter and brighter. And no pun intended and I hope you will agree with me after you see what we are doing in here.

What does the consumer need? The consumer wants fuel efficiency, some consumer wants lower emissions, the consumer wants lower operating costs and all they want higher payload and we give it to them. We give it to them through our newest innovations, the Ultra ONE wheel, it’s a wheel for heavy-duty usage and we call it heavy-duty without the heavy and why do we say that?

We invented a new alloy for it, the alloy allows us to be 17% stronger and that allows us to come out with a lightest wheel 40 pounds only. This wheel is 47 times lighter than steel and it’s even 18% lighter than an average aluminum wheel. In total, it helps save 1,400 pounds per rig and that’s a big number, you can – as an operator you can use it to increase your payload or you use it to bring your operating cost down.

The second big innovation that we brought out before that was EVO, Dura-Bright EVO which really never losses its shine, it’s 10 times more corrosion resistance. It really doesn’t need any clean, it looks new all the time. And we’re putting our money behind that. We are doubling the EVO capacity in Europe at our Hungary facility. And important to know, 67% of our Alcoa, we would say are driven by proprietary technology and this number will go up. These are great product that are designed for an exciting growth market and let’s talk about the market and take a little deeper look into the market.

Here on the left hand side, you see the wheels market and you see the wheels markets steel as well as aluminum, commercial vehicles – wheels and you see two things. You see, on the one hand, this market has been growing and will continue to grow, it will actually accelerate in the growth as you can see here go up from 1.5 to 2 to 2.7, very, very exciting but what’s equally exciting is, you see the darker blue color in there, which shows the project – the actual order projected in aluminum penetration and not only does this market grow, also we grow our penetration of the aluminum wheels in a growing market from 30% to 40% this year and we believe a 50% will potentially higher in 2018.

The good news is, we have a deep understanding of our customers and you see it reflect here on the right-hand side. I mean we just literally just launched our Ultra ONE wheel and 150 fleet owners already specify the Ultra ONE wheel that equals 67,000 wheels. One of those fleet owners TMC Transportation already are starting to convert over. And frankly, if you look at that picture there of this wonderful truck with our wheels on it, I believe I mean a picture says more than many, many words and I certainly understand why many truckers and fleet owners for a whole host of reasons very, very proud to have Alcoa wheels on their vehicle, that’s very good.

Let’s go to another segment, the automotive segment. I’m talking about a picture says more than a thousand words. This picture was taken in 1985 and this is the frame of the Audi A8 which was the precursor of the Audi A – this was the Audi A100, this was the precursor of the Audi A8 and these two ladies from the beautiful town in Bavaria of Ingolstadt which is the headquarters of Audi as you can see are holding it and they don’t look as though they just came straight out of the Ingolstadt bodybuilding shop, right? So this tells the story of lightweighting and it really kicked off I mean we work together here with Audi to develop the space frame this really kicked off the commercial demand for aluminum in automotive.

And then we give you another fact that I want you to keep in mind at least until the next chart. From 1994 to today 700,000 space frames were sold and the reason why we only have the 94 because that’s when the Audi A8 was launched. So from 1994 to over the last 20 years 700,000 aluminum space frames were sold by Audi. So this year we have been opening a new chapter, I would say that this is nothing short than historic. In January at the Detroit Auto Show, this vehicle was launched by Ford, the F-150 and what is different here, it’s military-grade aluminum alloy in the body and the back, 700 pounds lighter, accelerates, brakes, tows and resist corrosion like never before.

And the New York Times even came out with a pretty raving review saying a stamped aluminum body can equal or outperform steel in overall strength, dent resistance and crash protection, I need not say more. The most important piece of information is here in the yellow bubble at the right at the upper right that gives you a real understanding of what’s going on.

As I told you on that slide 700,000 Audi space frames have been sold in the last 20 years. The volume, the production volume for the F-150 in 2030 was roughly 700,000 vehicles that get the historic dimension. And that also gets you understand why we are believing that we are only seeing the start here as you can see here on this slide here, we want to capitalize on our leading position as auto goes lightweighting.

We believe that the aluminum content in cars is going to quadruple very, very soon basically until the next year and then going to grow 10-fold as you see here on the left-hand side. That’s why we are building out our capacities here. Davenport is online, our investment is operating and it was completed on time and on budget. Alcoa, Tennessee was will go online mid-2015, will allow to a flexible production, which is also great. And Saudi Arabia would start the first auto coil at the end of this year. So what does that mean for Alcoa’s revenue and you see that here on the right-hand side.

Last year we stood at $229 million revenues for auto sheet. For this year, we are expecting $330 million, for next year, $580 million. But you really get the picture when the volume ramps up to $1.3 billion in 2018. So I hope you understand looking at those slides why we are very, very excited about the opportunities that we are seeing here. But it doesn’t stop there. So my last segment that I want to talk about today, my last value-add segment is a packaging segment, right? And the packaging segment, we are really changing, we are repackaging this packaging segment by shifting the mix to grow the value-add. You see here on the left-hand side, the new Bud Light bottle and those of you who watched the Super Bowl, I’m sure have seen the ad for the Bud Light cool twist bottle.

This is Alcoa patented bottle technology, its Alcoa aluminum sheet, Anheuser-Busch has licensed this, it’s a highly differentiated product. It’s re-closable, 84% lighter than glass bottle and it infinitely recyclable. And we believe with our – we believe that there is going to be growth in this, we have more than doubled by 2015 and we believe also this – with our suite of proprietary Alcoa technology, we can offer a lot of packaging options for brand and this is an outstanding opportunity for branding as many of the brand companies see it.

At the same time, if you go to the upper right-hand corner, another change here in the packaging comes from our specialty packaging unit and we just put $40 million into our specialty packaging aseptic foil business in Brazil.

The capacity and that’s what I like even though it only comes on light in 2016, it’s totally committed, that’s great, it’s highly differentiated and there is a lot of growth in the Latin America, Latin American market as we can see. At the same time and that’s last point here on the slide, we are reducing the commodity capacity in the midstream portfolio and this is behind the announced closure of our two Australian can sheet rolling mills 200,000 tons and we will execute this by the end of this year.

At the end, let’s also talk about our upstream commodity business. Our strategy here is crystal clear. We are improving our cost competitiveness to gain a higher independence from pretty wild market swings that we have been seeing in the last year. And let me remind you of something before I lead you through the slide. Those that were with us at the Investor Meeting has have seen this.

In 2010, the alumina business where at the 30s percentile on the cost curve and really in the commodity business, it’s all about where you are in the cost curve. In 2013, we knock that down to 27th percentile and we announced that we will knock it down another 6 percentage points until 2016 to the 21st percentile. This is fantastic, this is a very, very good business and I said earlier today on CNBC it’s a real gem in our portfolio and you actually saw it in the numbers that Bill just showed.

And on top of it also we are changing the pricing structure here and moving it away from the bundling to LME was exactly the right strategy here. Aluminum, it was a more difficult journey because we started out on the 51st percentile right in the middle of the cost curve, which is highly vulnerable, but we moved it down already to the 43rd percentile in last year. And we also said, we have actions in-stock to move it further down to the 38th percentile by 2018. So part of the journey and the upstream on the smelting side is what’s depicted here on this slide. This shows that the pre-crisis volume – operating volume of $4.1 million in the smelting and what do we have today after we announced – after also we announced curtailments will be executed.

A reduction of capacity – of operating capacity of 28% and in total this is almost 1.2 million tons we have acted very, very fast and very drastic, this was painful but it was necessary and we will continue to monitor the environment and act accordingly. And obviously our toolbox to improve our cost competitiveness is bigger than just closing facilities. Let me remind you also of what we were just able to do in Canada, renegotiating our power contract. And let me also remind you of the very, very good continued productivity improvement that we see quarter over quarter over quarter, again, also on our upstream business.

Last but not least, let’s also talk about Saudi Arabia. This is the single most important action to reduce us on the cost curve. Because it’s the lowest cost facility on this planet for smelting as well as for alumina refining this alone will bring us down and each one of the segments by 2 percentage point on the cost curve. Good news is smelter is operating and we will ramp it up to full capacity the total volume that we think we will produce for this year is 550,000 tons. Rolling mill, we rolled the first hot coil end of last year the first auto will come at the end of the fourth quarter here. Refinery, we’ve started up at the end of this year and on the mine, we will produce bauxite this year, in fact the good news that just came through today is 56 wagon have been loaded at the mining site and are already to leave the mind site tomorrow and make their way – all the way from the mine to the refinery that’s right on the Arabic sea.

So let’s summarize. We are accelerating by launching more innovative products. We are applying the Alcoa advantage and I assume I gave you quite a number of good meat around that. We are building out of our Alcoa value-add businesses and capturing the growing demand and at the same time, we are lowering the upstream cost base.

So with this, we are ready to address questions. Let’s open the line.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sal Tharani with Goldman Sachs. Please proceed.

Sal Tharani - Goldman Sachs

Hello.

Klaus Kleinfeld

Hello, Sal.

Sal Tharani - Goldman Sachs

Hi, Klaus. Just a quick question on how to get our hands around the benefit on the cost side or the EBITDA margin on these capacity closures? You on your slide 28, you are 400 – more than 400,000 tons announced, which will be I think which will be taken care of by the end of this year. And if I look at your EBITDA a ton on the aluminum side, as you might had some adjustments but you made up $122 a ton last year and $144 the year before that. I’m just wondering were these capacities well below these levels, where you had been making for the last couple of years, while any of these negative EBITDA margin businesses. And also what’s going to happen to alumina associated with these facilities?

Klaus Kleinfeld

Yes. Well, to your first question, you are spot on. Those have been negative on an EBITDA basis and therefore you should expect our cost also to come down reflected in the average cost per aluminum produced. On the alumina side, the good news is, as we have gotten out of this pretty good (indiscernible) of pricing alumina as a percentage of aluminum and we’ve established the alumina pricing index. We have to monitor this market as a separate market. And Bill had in his presentation an overview on what we see in this market and in the alumina market on top of it. And I just refer to it. We didn’t put a slide in there as we have also a different cost structure, we are a cost wise our facilities are more competitive which is reflected in the lower position on the cost curve.

So those are really two independent decisions, right? And we have adjusted some capacity, but not much but we see this sale and you should also see this as two independent business decisions because they cater to two different markets.

Sal Tharani - Goldman Sachs

Great. Thank you very much.

Klaus Kleinfeld

Pleasure. Next question please.

Operator

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

Paul Massoud - Stifel

Hi. Thanks for taking my questions.

Klaus Kleinfeld

Hi, Paul.

Paul Massoud - Stifel

I guess I wanted to just dive into the switch from packaging to auto sheet on GRP. I guess first I know you probably don’t want to give specific numbers, but is it possible to give us a sense of the magnitude difference in margin between packaging and auto sheet. And then just more generally speaking, you’re doing in Tennessee where you’re taking auto sheet – packaging facilities and converting them to auto sheet. At some point in the future, over the next few years, North America are you expecting to see the North American market have to rely more on imports for packaging and that result in price increases in that side of the business as well?

Klaus Kleinfeld

Well, this is two questions really. So on the first one and you – we provide a couple of additional information – I think for to get a better handle around it. You would have the slide in my deck there that gives you an indication of how we see the growth – the revenue growth in automotive sheet. So you can directly reflect that in your projections and we broke it down basically by years, right? And it correlates, obviously, it correlates highly with ramp-ups of aluminum intent vehicles in the marketplace so I guess that’s the way I would model that.

And the second thing, I think that I would give as recommending, we are not going to give segment below sub-segment profitability. We’re not going to do that for a whole host of reasons. But you should assume and actually you see it reflected also in the GRP numbers already in this quarter that there are substantial difference in the profitability and that’s also one reason why we early on when we didn’t even see automotive did not go for larger packaging contracts because we have been suffering from some large packaging contracts for a long, long time, right? So coming to your second question, I want to speculate where this goal is frankly, right?

A lot depends also my view on how much the packaging industry values innovation, I mean I’m always been a big, big believer, the can by itself to me is a mystery honestly because today you have 200 billion cans manufactured every year, right? And when you look at the packaging you would say wow! Is this the most appealing thing, it has a lot going for it, right, from recyclability to transportability to feasibility and those types of things. But there are innovations in there. And what we have seen from studies that we conducted there pretty much market share increases for consumer firms very often have been driven by packaging innovations.

That’s why we invested in shaping technology. So what you – what I showed today this Bud Light bottle, re-sealable Bud Light bottle as a great example. It’s a great example of that, but it’s only one example because the technologies that we are using to make this bottle, you can equally well use to make other types of forms and packaging, it doesn’t have to be re-sealable all the time. You can also have a shaped can, right? And there is a huge degree of flexibility.

So I very much hope and we put some efforts into this as the packaging industry will understand that and then we would see also growth coming from that and a more differentiated way how to handle – how to handle this. And instead of being more a commodity type of approach that the packaging firms apply today, which obviously is not effective for us. Paul, I hope that answers your question.

Paul Massoud - Stifel

Appreciate it. Thanks.

Klaus Kleinfeld

Thank you, Paul. Next question please.

Operator

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

Michael Gambardella - JPMorgan

Yes. Good afternoon, Klaus and Bill.

Klaus Kleinfeld

Hey, Mike.

Bill Oplinger

Hey, Mike.

Michael Gambardella - JPMorgan

Hi. I have a couple of…

Klaus Kleinfeld

Can you go a little bit closer to the microphone, Mike?

Bill Oplinger

Here we’re having a hard time hearing you.

Michael Gambardella - JPMorgan

Yes. I have a couple of questions on the premiums. Some of your costs are associated with index to the LME price of aluminum, but are any of your costs indexed to premium price movements?

Bill Oplinger

The energy cost there is a variety of different types of contracts and some of the – and just one comes to mind, but some of the energy contracts also have a premium component to the metal price index that they use.

Michael Gambardella - JPMorgan

So as a percent of your total business, how much would not be referenced to a cost increase – decrease premium movements?

Bill Oplinger

I don’t have a percent Mike, on top of my head. But it’s not – it is not overly significant. When you think about our overall cost structure, if you are thinking specifically about smelting roughly a quarter of the cost is energy cost, only a small portion of those have LME linkages to them and then within that only a portion of that has an LME – has a premium linkage also. So it’s not all that material.

Michael Gambardella - JPMorgan

All right. And I think the premium price was about $0.21 per pound in the quarter. How much of that is product versus price premiums?

Bill Oplinger

And when you say the premium, the premium peaked out at $0.21 in the Midwest. And…

Michael Gambardella - JPMorgan

So your – in your pricing, in your realized prices, I think the premium over LME in your total realized pricing, we’d estimate it was around $0.21 in the quarter between product in the Midwest and other premiums right in the world.

Bill Oplinger

Right. And you need to be careful to go back and look at the – and we’ve provided a new level of transparency around the premiums. So we’ve given you in the appendix, the lag effect on premiums. And so to be clear on that, roughly 55% of our product is – 55% is based on Midwest and that’s on a 15-day lag, 30% is in Europe and that’s on a 45-day lag and then the rest is really either in Japan, which we know is negotiated in the prior quarter or negotiated. So it’s not a simplest thing, the premiums in the quarter are what we see because of these lags.

Michael Gambardella - JPMorgan

One last question. Do you have any other smelters around the world that are currently operating and have not been yet announced that they’re going to be closing, ever losing money?

Klaus Kleinfeld

Well, look I mean the curtailing – I’m very happy with how well our team has been able to handle those pretty massive curtailments and this is a very delicate process involving valued employees that really cannot do anything against this because it’s not their fault. They have been doing a great job very often and the energy cost in that business. And then there is a political process involved. So it’s not helpful to talk about this but what you publicly before we talk about the constituents that are involved in it. But what I think, you’ve seen from us and that’s also what I meant to depict in the slide that I showed to you in the bridge.

We will continue to monitor where the market is moving and you’ve seen that we acted swiftly. We acted drastically. So it all depends on where the market is going and we are committed to make money and that’s the route that we are following here, Mike.

Michael Gambardella - JPMorgan

But I mean currently are there any smelters that are operating that are still losing money?

Klaus Kleinfeld

That’s really all I have to say on this. When you look at the primary metal segment, you see where the primary metal segment is. It’s connected to this, all right. So you know the answer to this. All right?

Michael Gambardella - JPMorgan

I’m just trying to get an idea how much low hanging fruit is still there?

Klaus Kleinfeld

Low hanging fruits, I would not call anything one of this low hanging fruits to be honest. I think we all did extremely hard work and happy to advise anybody who wants to see this, right? And really great, great job for everybody involved. Great job. Of course, very often these things have long, long history and we want to make sure that they are done in the right way and that they are done in the way that we are not going to see additional restructuring, it’s falling into overlap. Okay?

Operator

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

Brian Yu - Citi

Thanks. Afternoon Klaus and team. On Page 26, where you got the slides, we got a couple of questions, one is that you guys are obviously switching or adding capacity and some of your competitors are doing the same thing. And your discussions with the OEMs and do you see enough whether ramp has steepened up for the next several years for the market to accept all this capacity.

And then two, there seem to be a difference between body sheet and body and white, can you discuss by your level of participation those two and if there is any appreciable margin differentials in those two types of products?

Klaus Kleinfeld

Yes. Let’s address it one by one. In regards to additional capacity what have we seen? You have on the slide 26 that we referred to, we have our structure there. Davenport is fully committed and Tennessee is pretty much also fully committed. That’s the level of what’s going on here. And the same pretty much holds true for Saudi Arabia, right? So that’s the first thing.

Second thing, as when you look at other companies we have seen Novelis obviously is a player in this. They have announced in December that they would be further expanding the automotive sheet capacity in Oswego. And then comes Constellium has had talked about North America in January that they want to have a corporation with UACJ through their subsidiary Tri-Arrows to plan to form a JV and that sounds like from the planning stage and Wise has inspected there. They are considering a JV with Toyota and might add that to their Muscle Shoals, Alabama.

So that’s what has been going on in the marketplace, but look at what we are seeing here in terms on the left-hand side of the Slide 26. When you will see what we believe we will be envisioning here in terms of aluminum substituting other materials mainly steel in cars. You will see a very substantial shift, I’m convinced to lightweighting across the board. At this point in time, I’m not concerned about the capacity situation in North America in the way that you described in terms of overcapacity. I think most folks are rather concerned about not enough capacity to cater to this growing demand.

Brian Yu - Citi

Okay. That’s helpful.

Klaus Kleinfeld

Thank you, Brian.

Brian Yu - Citi

The body sheet versus body and white, can you describe the level of participation in those two markets and will that require different equipment?

Klaus Kleinfeld

No. In reality you have different, you can use different types of automotive products and you can use them at different places in the car. It’s a question of the strength and formability requirements, the big thing and we will be happy to run you through this. This might actually be a good session. I think we should do that. We should do it session after a session with our automotive experts to run them through technically what this is and because of this, technically there are two large groups, there is 5000 series products and 6000 series products than they are mainly differentiated on the production side through the heat treatment. So heat treatment which changes the characteristics of the aluminum and the characteristics of aluminum go inline with the formability and the strength, right?

So let’s go through this and there are different profitability’s depending on this but there are also different production steps depending on this, right and different levels of innovation, right? And also don’t forget when you want to get a handle around what our role in this market is. This whole market in the U.S. would not be able to exist if it hadn’t been for our exclusive bonding technology that we made available to the industry without that it would have been impossible to move this around. And there we also get decent royalties the moment the market takes of even more.

I think we should do this, I mean so we have noted down Brian, I think this is a good idea. I know that this is not just a question that comes from you and so it would be helpful maybe as a conference call so that we offer this. Yes. Okay. Thank you.

Brian Yu - Citi

Thank you.

Klaus Kleinfeld

Thanks again. Thank you. Next question please.

Operator

Your next question comes from the line of Timna Tanners, Bank of America Merrill Lynch. Please proceed.

Timna Tanners - Bank of America Merrill Lynch

Hey, good afternoon.

Bill Oplinger

Hey Timna.

Klaus Kleinfeld

Hey, Timna.

Timna Tanners - Bank of America Merrill Lynch

I was hoping you could provide us an update on the situation in the aerospace market. So you talked a little bit about the underlying demand which remain strong. But at your Investor Day, I think on your last call you talked a little bit about destocking, timeframe for different portions of the end markets whether it be engines and airframes. So I was just wondering, if you could give us an update on where that stands and how you are seeing that evolve? Thanks.

Klaus Kleinfeld

Yes. Well, that’s a very good Timna. And I think you heard in general, our joint optimism on the aerospace market. Compared to for instances, I think when we last time that when we board last time talk about this in-depth was at the Investor conference. And already there I was optimistic but at that time I think we also had a discussion on, isn’t this in the end of potentially a cyclical market. Frankly, what has been going on in the last, almost half year now, I would say that at least for the next six to ten years, I mean this cyclicality is probably not going to happen partially driven by a very, very strong, or mainly driven by a very, very strong demand coming from those regions where the middle class is growing and has enough money now to travel, which is mainly the Gulf and Asia.

And you saw that reflected whenever there is an Air Show going on in that region, the big ones are raking in fantastic order volume. So that’s the first thing. That’s the first thing. And that’s in the short-term as well as in the mid-term.

The second thing to your point and the inventory, destocking there were two items there that we address I think in the third and the fourth quarter. The one-item was a very temporary one and that has gone away. This was around the jet engine products that’s gone away that was really just a small, synchronization issue.

The second one that is still there, but as to reduce the impact is purely around what we call aero structural plate. And that does not affect fasteners, wing skins, engine, engine parts, forging and all of these things. This is a very, very tiny segment. And the reason why this happened is because there have been quite a number of new models that were ramped up. And all of the aerospace companies were worried given the shortage that existed before an aero structural plate and the long lead times in this production. They were worried that they could not ramp up their production.

So therefore, they filled the inventories. Now that the production is ramping up and they have gained experience they obviously are sitting on which is kind of good news for them sitting on a larger pile of inventory that they really need and so they are going through this. This is an absolutely normal situation that we have seen again and again and again in the ramp up phases of new models in aerospace.

And what you also saw in this quarter is, even though the plate destocking is happening, right? And we have seen in this quarter also – this affects only our GRP business by the way. You have to look only at the GRP. It’s a small segment in the GRP and what you have seen in this quarter is basically been offset by other commercial action in this business. So this is a – so this is really not a big deal anymore and you don’t even see it in the numbers anymore. Yes?

Timna Tanners - Bank of America Merrill Lynch

Okay. Got it. If I could ask a question about the cash position, switching gears is because it’s relatively low and obviously a seasonal working capital build. I just wondered if you could provide a little bit more color about how seasonal that might be or if there is any change in the way you look at your cash position? Thanks.

Bill Oplinger

Yes. We haven’t really changed the way we are looking at our cash position. Couple of key things to keep in mind Timna is that unlike other quarters we have no CP outstanding at the end of the quarter. We have not drawn on any of our short-term debt facilities. We did have a working capital build in the quarter that was largely related to the seasonality that we see in the second quarter where we see seasonally strong volumes in the GRP business. We had built a little bit of inventory related to the automotive production ramp up.

And then we had very strong sales in March which result in a higher receivable level in March versus December. So you build working capital through all of those. So not to be concerned on either of these issues, I don’t believe.

Timna Tanners - Bank of America Merrill Lynch

Great. Thank you.

Klaus Kleinfeld

Thank you, Timna. Next question please?

Operator

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

Josh Sullivan - Sterne Agee

Good afternoon.

Klaus Kleinfeld

Hello, Josh.

Josh Sullivan - Sterne Agee

So on your new automotive sheet targets out 2018 I think were $1.3 billion. Does that I mean how many customers does that include, is that just for Ford, is that just F150, are you assuming greater customer set in other units?

Klaus Kleinfeld

Well, first of all, Josh welcome to Alcoa. And really appreciate you starting the coverage on us and I think everybody will benefit from it because you know the automotive and the aerospace industry very, very well. So and I really enjoyed your comments on the first coverage in those industries, right?

So on the $1.3 billion, no, it doesn’t reflect that and neither does our volume today reflect only Ford or the F150. We are – and this is by the way only North America, right for those numbers. We are catering today already to everybody here in the U.S. basically, right, the big thing is obviously those gigantic change of the highest volumes sell-off over the last 30 years which is the F150 in the U.S., right? That’s a big one but we are seeing that others are ramping up the shift over to lightweighting and that’s reflected on the slides which I think is 26 and your stack that was referred to earlier, on the left-hand side where you see the aluminum intensity for the vehicle. And I think you can pretty much multiply that than with the numbers that you see coming out there.

Josh Sullivan - Sterne Agee

Okay. And then –

Klaus Kleinfeld

And by the way let me be clear on this. I believe that’s a conservative number.

Josh Sullivan - Sterne Agee

Okay. Okay. And then just on the aerospace outlook, I know you talked a bit about the plate overhang, one of your primary competitors in the titanium fastener market has pointed to kind of a similar change over from the supply, demand balance becoming more attractive. Are you guys seeing that same sort of dynamics?

Klaus Kleinfeld

In the fastener side?

Josh Sullivan - Sterne Agee

Yes. On the titanium fastener side in particular?

Klaus Kleinfeld

That’s in the fastener side. Well, our folks have been very optimistic in regards to also the fastener business in aerospace. And the good news is, we have a leading position in the aerospace market and pretty much everything that is there now really been excellently positioned also in the composite planes. So we are optimistic in this segment in general.

Josh Sullivan - Sterne Agee

Oh, great. Thank you for the welcome. I will jump back in queue.

Klaus Kleinfeld

Well, thank you. Next question please.

Operator

Your next question comes from the line of Paretosh Misra, Morgan Stanley. Please proceed.

Paretosh Misra - Morgan Stanley

Hi, everyone. I had a question about this $1.3 billion auto sheet revenue guidance you gave for 2018. What’s aluminum price and premium assumptions are you using for that forecast?

Bill Oplinger

Josh, we are essentially assuming similar prices to what we have today. So no major upside on LME prices. We try to normalize the future projections for similar prices as we have now.

Paretosh Misra - Morgan Stanley

Got it. And if I could add just a follow-up, on the scrap side, hearing a lot about tightness in the scrap market. Did that have any impact on your rolled product segment in the first quarter?

Bill Oplinger

Scrap, yes. No, significant impact on – negative impact on GRP in the first quarter.

Klaus Kleinfeld

And scrap prices are high. Other than that not much you can do about it.

Paretosh Misra - Morgan Stanley

Got it. Thanks guys.

Klaus Kleinfeld

Thank you, Paretosh. Next question.

Operator

Your next question comes from the line of Andrew Lane, Morningstar. Please proceed.

Andrew Lane - Morningstar

Good afternoon.

Klaus Kleinfeld

Good afternoon, Andrew.

Andrew Lane - Morningstar

I’m thinking about your EPS business, which has generated improved margins in each of the last four years, aluminum of course serves as the major input costs. And declining aluminum prices have supported margin expansion for this business. If aluminum prices increase materially from here, have margins already peaked for the EPS segment. And then additionally to what degree would you expect the productivity gains and a continued mix shift towards the value added high margin products to offset the impact for the higher input prices?

Klaus Kleinfeld

That’s a very good question Andrew. Thank you asking this. In the EPS, first of all, I love the EPS business. While I love every business as long as we improve our performance. But EPS as you correctly pointed out as a long streak of doing this. And we are nowhere close to ending this. One thing what I would like to refocus, the EPS business is much less depend on aluminum, its our least dependent business on aluminum, right?

I would say 60% of the total volume in the EPS business is non-aluminum. And it’s basically titanium, its nickel alloys, and it’s even steel. And you see that pretty nicely in this. I have the slide and I never know what the page numbers are because on my stuff they are different than on yours.

This is what page, which one, its 21. On 21, when you look at our aerospace portfolio, a major share of this is the EPS business. And you see the nice material mix in there. So 60% is basically non-aluminum in EPS. So is this impact of falling aluminum prices has not been a big impact story for the improvement in EPS. It has rather been the second point you mentioned, what drive, we accelerated the drive in every single one of the business for more value add, higher innovative products that gave value to our customers. And I can go pretty much through every segment.

When you are in aerospace look at the structural casting, what we have done in structural casting what we have done on the engine – on the engine parts, we just talked about the fastener business. Our lighting strikes fast, absolutely innovation, right?

So when you go to commercial transportation wheels I talked about today. When you go to building infrastructure and one of the last quarters I talked about the innovative products the round insulation as well as blast protection on building and construction. What else, commercial transportation we can also talk about some of the structural elements that we have done there.

And also pretty much in everyone of those businesses we innovated and we will continue to innovate, right?

Andrew Lane - Morningstar

Okay. Thanks Klaus and congratulations on another constructive quarter.

Klaus Kleinfeld

Well, thank you very much. Thank you, Andrew. Okay. We are coming close to the last question here. So who – do we have any more questions on the line?

Operator

Your next question comes from the line of Harry Mateer from Barclays. Please proceed.

Klaus Kleinfeld

Good afternoon, Harry.

Harry Mateer - Barclays

Hi, good afternoon guys.

Bill Oplinger

Good afternoon.

Harry Mateer - Barclays

Bill, so just following up on the prior question about cash, I guess can you just remind us what the minimum cash level is that Alcoa want to keep on the balance sheet. Should we expect any gross debt reduction for the balance of the year or will it be more of a net debt reduction this cash rebuilds?

And then last, can you just update us on any discussions with S&P and Fitch regarding getting this negative outlook on your ratings results?

Bill Oplinger

All right. So we typically like to keep anywhere from between $0.5 billion and $1 billion of cash on hand in the quarter. As far as debt maturities we don’t have significant debt maturities coming due, right? So we don’t have any significant maturities till 2017. And the latest one was the convert which converted into equity.

So any build – any build in cash really at this point will be a net debt reduction not an overall debt reduction. And your question about Moody’s and Fitch, clearly and we have said this number of times. We keep them up to-date on where we stand; we meet with them in the beginning of the year and run them through our plans. And so they have all the information they need at this point to make an informed decision.

Harry Mateer - Barclays

Thank you very much.

Klaus Kleinfeld

Very good. So who was the lucky winner of the last question? Have to be a good one?

Operator

Our last question comes from the line of Sal Tharani with Goldman Sachs.

Klaus Kleinfeld

Okay, Sal. You stand for good questions. So take it home.

Sal Tharani - Goldman Sachs

Thank you. Wanted to ask you, you haven’t mentioned aluminum lithium for a while, what’s going on there and what kind of opportunity we looking at and when should we start to see some benefits of that in your numbers?

Klaus Kleinfeld

This is a good question. I’m glad you asked it. So basically, we have as you know invested pretty heavily into getting all aluminum capacity up. And we now have two facilities here in the U.S. that can produce and one facility in Europe. So this is very, very nice. We have a very nice complete aluminum lithium portfolio consisting of sheet, plate, small press extrusions, large press extrusions, hallow extrusions, forging and multiple alloys and in multiple tempers.

So and we are on a quite number of key platforms from twin-aisle to the A380, A350, 787, single-aisle with Bombardier CSeries we are on there. And on the regional jets we got new 650 and the Bombardier 7000, Global 7000 and 8000. So this is very, very nice. And we project aluminum lithium revenues to more than quadruple over the next years from nearly roughly $200 million I think we said that, we said that before. And we are going to cater to this market from Lafayette as well as from our 83 locations outside of Pittsburgh and from [Sweden] (ph).

Sal Tharani - Goldman Sachs

Thank you, Klaus.

Klaus Kleinfeld

Okay. Hope that answers your question. And we are excited. I hope that came across you. Okay. Very good. So this concludes the conference call for this quarter. I hope you agree with me this was a very strong quarter. You have seen record downstream profitability nearly tripling results in the midstream and we strengthened our upstream business growth is powering through our value add businesses, good investments, smart investments we capture. Strong end market demand we are aggressively reshaping our commodity business and we were not stuck with this and we are already I believe seeing the proof of our strategy which is basically in the profits and the results.

The transformation is accelerating and the repositioning in my view is working, so you will see more of this. And thank you very much for listening and stay close. And you will see more of this. Thank you very much. Talk to you online.

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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