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Alcoa, Inc. (NYSE:AA)

November 09, 2011 9:00 am ET

Executives

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

Chris L. Ayers - Executive Vice President and President of Global Primary Products (GPP)

Helmut Wieser - Executive Vice President

Unknown Executive -

Roy Harvey - Chief Financial Officer of Global Primary Products

Olivier M. Jarrault - Executive Vice President and President of Alcoa Engineered Products & Solutions

Timothy D. Reyes - President of Alcoa Materials Management

Charles D. McLane - Chief Financial Officer and Executive Vice President

Analysts

Jorge M. Beristain - Deutsche Bank AG, Research Division

Paretosh Misra - Morgan Stanley, Research Division

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

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

Carly Mattson - Goldman Sachs Group Inc., Research Division

Unknown Analyst -

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Roy Harvey

Good morning, everybody, and welcome to Alcoa's 2011 Investor Day. I would like to thank everyone for many of you who came and participated in yesterday's tour in our Davenport plant. And I would like to thank you for coming today, as well as the many people that we've got out there on our webcast.

Before we get started, I would like to give the people in this room some very simple safety guidelines and what to do in the event of an emergency or fire or some other type of occurrence such as that. If anything happens, go straight out this door, down the stairs that we have just right down the hall, back out the lobby and out one of the doors. We'll assemble right outside and you will receive instructions immediately to make sure that we can get everybody mobilized and take care of the situation.

Also, 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 book of presentations or 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 the presentation booklet or on our website at www.alcoa.com under the Invest heading. Any reference in our discussion today to EBITDA means adjusted EBITDA for which we have provided the calculations and reconciliations in the presentation booklets and on our website.

Now without further ado, I would like to introduce and turn the podium over to Klaus Kleinfeld, Chairman and Chief Executive Officer.

[Presentation]

Klaus Kleinfeld

Okay, very good. I don't know how you feel about this. Whenever I see this video -- some of you have seen, the last year's version was pretty close to this year. I always get chills because you get a feel for, I mean, the history of Alcoa and the role Alcoa has played in so many industries and has allowed us to be in Iowa, Davenport today, right, because without that, I mean, without the great forefathers, there would be no aerospace industry, and certainly, would we not know how the planet moon looks like from having walked on it.

So I think it's great that you are here. It's great to be here in Davenport. And I understand from just speaking to a few of you over there in the breakfast room that the plans for yesterday was enjoyable. And we always believe that, that it's one thing to talk about the numbers and there's another thing to understand also what's going on really in the organization and also talking to the next level of people getting a feel for how motivated are they, what's on their mind and also getting a feel for what the innovative potential the company has.

We all talk a lot about that because, very often, we only talk about the upstream side, we only talk about the commodities market. And obviously, there are certain and very different principles in that market compared to the one where we have much more control over.

So let's spend the basically 1/2 of the day today to give a pretty detailed look and also lots of opportunities for you to engage and ask questions here. That's the way we set it up, I think you've seen that. And my role here this morning is basically to give the frame, to provide a frame of what you're going to see more of as we go through the day.

So starting with the guideposts. And again, I mean, these are not new guideposts. These are the guideposts that we have been talking about last year and I believe that we will continue to talk about because these are our 3 strategic priorities. And they are very simple as well as very profound. What are they?

It's only 3. Profitable growth, and what you see, what that means basically for every business, every business has a midterm outlook, has a very specific idea on how to make the next 3 years look like, how to profitably grow in the next years. What are the priority levers? What's the program that we put behind that, and who is responsible for that? And what do we want to achieve also quantitatively? So that's number one, profitable growth.

Number two is the Alcoa advantage. And I know I've had multiple conversations with many of you here in the room of asking: What holds the company together? What is it that brings these various businesses under the roof of Alcoa? And why do you have the right to have these businesses? And I think that's a fundamentally very, very good question, and that's a question that we internally ask all the time. And the answer to that can only be is, if Alcoa need to -- Alcoa needs to bring more value to the business, then the business could generate standing on their own feet. And that is the only plausible answer to that, and that's the answer that we have to basically have and provide every time for every business that we own. And how do we do that?

There's only a pretty finite set of levers that you use, but I believe we use them pretty well. Talent. You will see today, and probably you saw a little bit yesterday, obviously, it makes a hell of a difference whether you're an international company, has 60,000 people and you want to be in the recruiting market and bring people on. It makes a hell of a difference in an internal development of talent, whether you can look at a potential of 60,000 people and basically pick the best and brightest out of that and develop that and bring them into the leadership position.

Technology. On the technology side, I mean, you will have multiple, probably endless examples today where you see technology that has been developed in one place in Alcoa and then transferred to other places. We have, undoubtedly, and some of you had a chance to meet those folks, the best metallurgists that the world can offer, and a lot of these folks basically sit over in Pittsburgh out at our tech center. And they are the ones that make a lot of the things happen that you then see at the other plants.

I'm sure that you saw yesterday the impressive A380 wing. The A380 wing is a great example of a technology that would have never happened if there wouldn't have been a great combination of scientific discoveries, metallurgic knowledge and manufacturing knowledge and deep understanding of customer needs.

Talking about customer needs, customer intimacy. Some of the business that we have are kind of partially fragmented business, but with the association with Alcoa, what it allows us to do is it allows us to go to the highest level of the company. When we have a discussion with Boeing, we have a discussion not just about supply of plane, we have a discussion that broadly talks about what is the future in aerospace. And that means we actually can convince people of how the future should look different compared to what they have been seeing before. And I think that the recent decisions that we saw from Boeing as well as from Airbus on the A320 as well as the 737, it changes basically committing to having an aluminum plane. We're exactly driven through that, obviously also driven by very strong technology, and I'll come to that and we'll have more about that.

Procurement, a clear competitive advantage, clear parental advantage. There's a hell of a difference when you have 16 billion procured material under your wing or you just have 1 billion or even less so.

And last but not least, the way we run the place: the way we do the performance dialogue, the way we structure our regular reviews. These are the Alcoa advantages then. Again, we would see more of that.

And last but not least, our third advantage is the execution. I always say, I mean, as long as the plan is good, that's fine. But if it doesn't get executed and you're still struggling, you will fail eventually. So in the end, it all comes down to go from idea to cash. From idea to cash, and that's where it ends. Cash is the measure where it ends. It's not something like EBITDA or whatever, adjusted EBITDA. It's cash because, in the end, that's what we need to pay the employees, to give out dividends and so on and so on.

So 3 strategic priorities, and they build the frame of what we are doing.

Talking about strategy. Last year, we announced our midterm strategy. And we structured as such that we said, what are the goals in each one of the groups? So just to remind you of those goals.

On the primary side, we basically said this is a commodity business so the major thing is to go down on the cost curve. And the targets that we set are very, very ambitious targets, so basically saying we're going to do, on the refining side, we're going to come down from the 30s percentile to the 23rd percentile in the 5 years from last year to 2015. On the smelting side, we said we're currently in the midpoint, we're going to come down 10 percentage points on the cost curve. We have some additional things and I'll talk about that on the -- that also impact the profit side on the top line side, and I'll talk about that also on the upstream side.

On the midstream. What did we say on the midstream? On the midstream, we said we want to profitably grow $2.5 billion incremental growth without any acquisitions, incremental growth. And we want to do this in an environment where our profitability is above historic levels.

Downstream, $1.6 billion of added profit and, again, at a profitability level. That's not just above historic levels but that continues to go up and up and up.

On the financial targets side, we pretty much said we want to be self-funding for the next years when it comes to our sustaining capital as well as when it comes to the growth capital. So that's the midterm targets that we put out.

Let me go through each one of the businesses very, very quickly and give you a high-level summary, which then you'll see more depth while we go through the morning. So what do we see on the refining side, on the alumina side? We are already today a leader in the alumina side. We are a leader and we have a pretty good cost position on the 30s percentile, a pretty enviable position. But again, we said we're going to bring that down further 10 percentage points.

How are we doing on the operational excellence side? I mean, we're doing pretty fine. If you look at the productivity in 2011, more than $200 million productivity. If you see that, what we've done there, we formed centers of excellence, and the centers of excellence have really only one task: They have the task to capture and develop best practice and then to make sure that the best practice gets rolled out as quickly as possible and consistently across the board in all of our refineries. And we clearly also have to have focus on being faster in the feedback also on the profit and loss side. So we have established a daily profit and lost (sic) [loss] [ph] here.

On the growth side, we've talked about it. Brazil, we added Brazil where we've ramped up Juruti. We've ramped up São Luis and then, also we've talked more about it, Ma'aden. Ma'aden will come online actually not that far. We'll actually show you a video later today that gives you an impression of where we stand. You can actually physically see what has come out off the ground there. And we would see that those lowest-cost refineries will come online in 2014. And if you see how fast time runs, that's actually almost tomorrow.

Last but not least, a major, major point here in addition to coming down the cost curve of moving the needle was the introduction of the alumina pricing index, moving away from an LME linkage and changing the market and changing the market to saying, "Look, we are, in the future, only going to sign contracts that are either spot or alumina price index." And we said that last year and we've executed flawlessly on that. You've seen where we are today, and we believe, by the end of 2012, we'll have 40% of our total alumina volume transferred over to alumina price index or spot.

Let's move on to the smelting side. On the smelting side, our cost position is basically a cost position that you would expect from a company that invented the industry and has been around for such a long -- we are in the middle of the cost curve. Middle of the cost curve, obviously, is an average. And we have set ourselves a target to move further down 10 percentage points until 2015. That's an unbelievably ambitious target.

How are we doing operationally? We're recently hammering on all cylinders. You would see that the productivity in 2011 is around $300 million, and that is very good and, at the same time, much needed because headwinds that we've been seeing in this market are pretty strong. You've seen the LME price, talked about it more. You've seen currency swing in a way that we've not seen that before, right? You've seen energy moving. So there's a lot of moving elements in this segment of our business, we need the productivity but we also get it, and that's the good news. Same good news here how we get it. The role of the centers of excellence here also in smelting has been phenomenal, phenomenal and will continue to be phenomenal. Same thing also in terms of speeding it up. We have established daily profit and loss statements. And basically, it makes a big difference when people see where they stand on a daily basis and then respond to it much, much, much faster.

We've optimized our smelting portfolio with Iceland; with a swap in Norway, the cashless swap in Norway. And last but not least, once comes 2013, you will see Ma'aden going online. Ma'aden will establish a new low-cost point on the cost curve worldwide and it's going to add huge competitiveness to Alcoa. So that's a great thing.

Last but not the least, comparable here, maybe not quite in the size but in the logic to our alumina price index is the question of how we use the casthouses because you always -- and I think this has gotten kind of buried in the debate because people always think, well, it's a ton of aluminum and you buy a ton of aluminum, but that's not really what it is. It comes in various shapes and it comes at various places, but the shapes have various premiums. And therefore, to utilize the casthouse in a smart way to differentiate your product and, by this, capture market opportunities to gain value is exactly what we're doing here. I wouldn't say that at this point in time we are absolutely world class in this, but I think that we are moving to world class. And it's one of these levers that brings the top line up while you improve the cost positions, so improving the cost position, at the same time, looking for differentiation potential where you can charge the premium in the marketplace. Please keep that in mind, and we'll talk more about it and you will see more about it.

So let's move on to the midstream business, our rolled products business. Rolled products business said we're going to add, last year, we're going to add $2.5 billion of profitable growth to our top line. And we're going to do it at a profitability that's higher than what we've seen in the past, historically in the past. And I believe, at the time when launched it, we said something like, this year we're going to get 35% or so. And where are we this year? In spite of all the forces that you see in the market, we believe we will get 50% to 60% of this revenue growth this year. That's pretty phenomenal, that's pretty phenomenal.

On the operational excellence side, same good story: $136 million productivity; we've established in the same with global centers of excellence. I mean, I understand you didn't see the global centers of excellence yet. You did, you did. Some of you did. Some of you didn't notice, I take it from it, from the conversation this morning over breakfast. Well, some probably came later. Because it's here, it's here in Davenport, and I think it's really doing an outstanding job.

We've reorganized our rolling business in such a way that we've turned it from a regional organization to a market-facing organization. The whole idea behind that is to continue to increase our intimacy with our customer base. You will see, and you saw yesterday, that there is a lot happening in the business. And you saw here in Davenport, we are currently expanding into the automotive market. And the good news is, the expansion that we just announced that started this year, quite a bit of that capacity is already sold. The only way how we could do that is by linking up very, very closely with customers, understanding of where they are going and offering them pretty unique solutions. And we believe, with that strategy, with that organizational structure, we are better positioned for the future growth, future growth that also has a strong component of not just the same old, same old but a strong component of using our innovation potential to serve the customers better so that they have a higher profitability.

So last but not least, on the technology side, we've talked about innovation. I mean, you've just seen on the aerospace side, we've talked about it. I mean, the introduction on a large scale of aluminum-lithium together with very innovative structures has worked out very well and convinced our customers to make the decisions that they did against competing materials.

So last but not least, our fourth pillar to stand on: our Engineered Products and Solution business. I don't know where you are, but I'd like to get a feel for this over the course of the day. I'm pretty happy that now we are at a point where this business starts to get recognized as a business inside of Alcoa, whereas before, I had the impression that many people didn't even see that, that business is there. Now we've restructured it in the last 3 years pretty heavily. But I've always said to many of you separately that I've always seen the businesses that we have in there as a gem, as in pretty much undiscovered gem by those that are looking at Alcoa. And I think what we have seen is that not only is this a theoretical potential gem, but actually performs to show exactly what it's supposed to show: that we are a very, very good owner of that business and we can add quite a bit of value to that business.

You've seen that also on the targets, that EPS has set $1.6 billion on revenue growth. Same thing, I mean, higher profitability than in the past, but also the idea of operating continuously, as you see on the left-hand side, continuously growing that profitability quarter-over-quarter, year-over-year, and that's what we're doing. When we came out last year, I think we've said -- where's Olivier? Olivier, I think we've said something like 30%, 25% to 30% we're going to get in 2011. Where are we now? In 2011, we believe we can generate 40% to 45% of the growth that we announced here in 2011. That's actually a very, very, very, good achievement. So as you also see, a mix of different businesses in there. It's not all aerospace but a lot of aerospace.

So on the operational excellence side, good performance there, productivity coming in. We are in leading position to many of the businesses. And at the same time, as this market is ramping up, we don't have to be worry, at least for the short term, because there is still capacity that we can bring online.

Levers that we use are very strong in technology; customer solution, innovation-driven. And we can go through the different areas that we have in there. And I still get chills when I think about our Power and Propulsion business, the investment casting business. When you think that -- I mean, we have been able to develop materials as well as shapes which allow the turbine blades to be in the worst part of the turbine, the one that has the worst environment, to rotate that with a high speed and under temperature conditions, which are well above the melting point of the metal. And to do that and to do that consistently is a great, great, great achievement. And it brings a lot of value to the customers because, in the end, the temperature in the burn chamber of a turbine determines the efficiency as well as brings down the emissions.

Same thing on the fastener side. I mean, the latest thing and very strongly, obviously, of importance for those that were going into multiple materials and composites, so what do you do when lightning strike? What do you do when lightning strike? And I think that's one of the things that we all feel more comfortable about, to know that the lightning strike does not get in the plane but rather gets deflected. And when you have a nonconductive material, then that is a big, big issue. To come out with fastener solutions that literally condense the lightning strike and lead it through so that it goes in and out, I tell you -- I mean, when you hold the piece in your hand, it looks like nothing, but when you know what it does, I mean, I feel very comfortable. And that's also what the customers literally then pay for, and those solutions are very, very good.

Forgings and extrusion. When you go into structural solutions that we have for the aerospace market, I believe we are very, very unique. And there are a lot of customers that tell us that. Unfortunately, some of those customers that tell us that, we cannot quote so -- because they really don't want us to talk about those innovations, but this is fantastic, what we're doing there.

Commercial wheels. I mean, we have a few [ph] has a nice car, knows -- or has somebody, a next-door neighbor who's a trucker, that's even better, knows that once a trucker has Alcoa wheels on, they will never give them up for life, right? And that's not only because of the looks, but I think it is also because of the looks, but it's very optimal, so because of the economic aspects. It's the best in class on the weight savings side.

Building and Construction, you could say, well, what's the innovative part of Building and Construction? And it's very, very interesting. This is a market which is down in the West and up in the East, right? Our position is very strong in the West, basically here, as well as in Europe. And it's dead. It's a dead market. But when Olivier will go through this, you will see we continue to grow and we continue to have a decent profitability. How do we do that? We do it only by coming out with innovations at the worst time of the market and killing the competition because the innovation potential, the innovation power there is so strong. The last one that made the headlines was -- EcoClean, when we came out, was a solution for surfaces, for building surfaces that not only is self-cleaning but also is pollution-eating. I mean, it can't really get much cooler than that. And it comes in different shapes, forms and textures. You can almost generate all kinds of textures there. I honestly, I personally believe it can't get any cooler than that.

So that's the business side. Again, you'll hear more about it. How does the balance sheet side, the financial side look like? And again, many of you have seen how we've come through the very terrible time of 2008, 2009, and we've come through this. I mean, speaking about hindsight, very well, I think, but it was a lot of actions that we took. And when you look at, for instance, on the top side here, the maturity profile, you do see that we have also used the last 1/2 year or 2 to have a nice maturity profile. We extended the maturities through a midterm, mid-time [ph] financing. And if you look at the amounts that are coming up, the cash requirements that are coming up in the next years, this is a very, very manageable level, and we did it in a good way.

Cash on hand, a very nice profile. We continue to produce significant, have significant cash on hand. And then on the right lower side, if you look at the debt-to-cap ratio, we have strengthened our balance sheet and reduced basically our leverage. And that's again another one of those strong things we -- financially, we have very, very sound, a very sound balance sheet. And we will continue with that.

I can't predict the future. We're going to work as hard as we can to generate the best possible position for us, but one thing I want to make crystal clear. This is the charge that we used during the downturn. The 3 strategic priorities have provided us "True North," I went through that. But when you go through a downturn, you have to modify the way you're operating, undoubtedly. We have a very full toolbox that has shown us what to do, how to do and how to do it right. We can't predict the future but we stand ready in case conditions continue to deteriorate. There are things in the toolbox that I believe are very unique, and just, let me just select one.

Obviously, on the upstream side, this is all about the question, how quickly do you adjust capacity, right? When the market deteriorates, prices come down, demand comes down, as we saw end of 2008. We adjusted fairly quickly. And not only did we adjust very quickly but we did it in a way that we never let our sight off the cash because there's enormous cash implications of how you act on ramping it down and how you could act once you ramp it up again. And I think we have developed tools that allow us to prioritize how to do that, where to do it and exactly in which increment to do it because this is not just a digital decision, do we run the plant down, or do we run, have the plant operating? There is a whole set of different options in there. We know exactly how to do it. We have had a nice trial run, you could say, in 2008, 2009. I mean, it's not that we love to do it again, but in case we need to, we will do it faster and even more laser-beam focused than we did the last time. And the last time, I must say, was already pretty good.

Okay. I mean, I don't know what your habits are. My bad habits are, when I get up in the morning, I switch on the TV and look at CNBC, right. And when you look at CNBC, you cannot get a CNBC worldview. And that means there's a crisis every day, you just don't know where, because, I guess, that's the way TV works these days. And then probably, that's the way humans work these ways.

But in the end, with all the things that are happening on a day-to-day basis, whether Berlusconi is going to step down or not, whether Papandreou is going to hand over or not, whether the super committee is going to find another $1 trillion to save the world or not, there are some fundamental things, very fundamental things that, I think, we have to remind ourselves of to be not caught in the frenzy of the day trading or the hour trading. And these are the things that continue to happen on this planet and that, in the end, are the underlying current that gives us the opportunities to swing, right? The rest we see, in my view, is partial noise, noise around some fundamental shifts on this planet.

Already today, the planet is very, very different from how my parents have seen it, how your parents have seen it. And it will be different for our children. And if there was, in my view, the most fundamental thing in the last weeks that happened, for me, it was the birth, the birth of the seventh billion child on this planet. But I have no idea how they found the kid, right, but they say it was Manila in the Philippines, right? Talking about precision in this world these days. So the seventh billion inhabitant on this planet just 2 weeks ago, just think of that, think of what that means.

Now we've talked -- I've used exactly the same slide last time in New York. It's really these things that I call the megatrends which give us the underlying current. And it is population growth, population growth at above and beyond everything else, right, a lot of the things that we will see: good, bad or indifferent. And it is urbanization. And urbanization, I think it was the year 2006 when, for the first time on this planet, more people have been living in cities than ever, ever: More than 50% of people living in cities than living in rural environment. And that changes, it changes the demand structure. That changes the desire for infrastructure. It changes the way societies work. This are the undercurrents. And it also has an impact on our environment. I mean, it's driving all of these things.

So for us, when we look at these currents, for us, it spells opportunities. It spells opportunities basically on 2 sides, I mean, 2 big chunks. One chunk is what I call our miracle metal. The miracle metal, what you see here on the upper right side of that chart, the miracle metal has capabilities. If you look at the spider diagram of what it, what aluminum can do, lightweight and strong, you would actually say, if you -- I'm pretty sure I've never done that before, but if you bring a couple of kids in the room and say, "Is there something that is very, very strong and very light?" Is there something that, in addition to that, easy or malleable? Is there something that's infinitely recyclable? That's how it exists, right? I'm pretty sure most people would say, no, that's not possible, that's not possible. But it is possible.

I think it is the reason why Charles Martin Hall's professor, when he -- when this 20-year-old kid asked the professor in the height of the Industrial Revolution in Pittsburgh -- steel was coming up, right, and changing the world. Bridges were suddenly possible. Railways were built. When he was asking his professor and said, "What do I have to do to become the richest man on the planet?" And the professor, in split-second, at least that's what the story said, said, "Whoever invent an industrial process to make aluminum will be the richest man on this planet," right? And why did he say that? He said it, I am absolutely sure, because he saw these capabilities. He saw this, I would call, the spider diagram. He saw what you can do with this metal, and I think he was right. And we have, by no means, by no means, reached the potential of what's -- that's great -- the potential of -- I could tell a whole story about what just plugged up there. So would you be so kind to bring this wonderful slide back? Thank you, thank you.

Okay. I believe we have not seen the full potential of what aluminum can do. And I think the biggest limitation that we have is a limitation of thought there. I mean, you've seen in how many areas the material now comes in. And you see, the second big engine is the innovation engine. And that's not just aluminum based, but it has a lot of other foundations, and we will see more examples of that.

So as I've said, I mean, it's been in our blood. It's been in our DNA. Innovation has been at the foundation of what we did, whether it was in the poor invention process or whether it was when the first aluminum car came on, which was the Audi A8, right. And I've seen an ad, somebody sent me an ad recently where there were 2 women standing there and on high heels and basically holding the body of the A8 with their own hands, right. That's pretty impressive, and it tells you something about lightweighting. So on the right-hand side, you see how the innovation picture looks today. And I think one thing is to have it in the DNA, the other thing is to bring it out every day, to basically everyday continue to innovate, to continue to make also old solutions obsolete. And if you see Alcoa today, it's not the Alcoa of old. It's the Alcoa that continuously brings you our new stuff. I mean, some of those images might not say much to you that's why I give you a little color on this.

This thing here, right, it looks like we just flew it in from outer space. And in reality, that's as cool as you could have it in outer space because, you see this instrument, it's called STARprobe. It sits right next to an aluminum pot, and it measures a number of indicators, including temperature, in that pot. And it gives us statistics that allow us to better manage the pot. What it means is it allows us to bring the quality of the pot up to increase the pot life as well as to bring the energy consumption down. Very, very cool process innovation. Don't just always think about product innovation. Process innovation is another one of those great things. What you see here in the middle, I mean, this is not only a -- this is a great combination of a new material, aluminum-lithium, with new structural designs, which come in also from understanding how an airplane works, a holistic understanding of what you do, including how you can connect different materials in multiple ways, one of that being fasteners.

And the weird side -- I don't have to say much more. I mean, it swims in the water, that's how light it is. On the aluminum can sides, bottles, I mean, we have come up with shaping technologies that allow a hugely successful product, the aluminum can, to be even more successful because whoever would have thought that the can makes it as such a success story because it's probably not necessarily the most logical way how the shape would look like. And if you look of those shapes, the emotional qualities of this, at least that's what the consumers are telling. Our customers are just fundamental, and the environmental profile, obviously, is fantastic.

And what you see on the right-hand side, a totally new market, consumer electronic. We're not just entering the market but we're entering it with proprietary technology. What you see there is what we call PRC cast. I mean, it's a new way how we can die cast aluminum and have it in a very cool fashion for particularly for those markets.

How do we interact with the growth opportunities there are in the world? There are basically 2 big growth opportunities. One, our regional opportunities. I really don't need to talk much about it, but we will hear more today. Russia, China, Brazil, Saudi Arabia, those are the places where, undoubtedly, a lot of growth is happening. And guess what, we are there. We are expanding, and we are doing fine. That's on the regional side.

On the market segment side, there's really 2 big growth segments with a lot of innovation that continue to play a very, very important role and play a very important role here in Davenport. It's very clear: The aerospace segment is doomed to continue to grow 8 years of order backlog with Boeing and Airbus. And with the population growth and urbanization and the rising middle class -- what's the biggest desire after people basically have their refrigerator, their air condition, their washing machine, their dishwasher, their car? What do they want to do? They want to travel. They want to see the world because, before, they only saw it on TV. Now they want to see it in real life. So that's why you see some of the things that are unfolding there and why you see the growth in passenger miles as well as the growth in aircraft, aircraft orders. And in addition to that, the -- underlies by innovation drive through a higher efficiency, so it even pays off to invest in a new plane even in a downturn scenario.

Automotive. What do we do see? What's different in automotive today than what we saw before? What is different is that it's now moving into the high-volume segment. Before, we've talked about it and it was the Ferraris, the Audis, the Jaguars, the Range Rovers of this world, the luxury segment, right? It's now moving into the mainstream. It's moving in there, and it's happening as we speak for a whole host of reasons.

Let me come to a close here. I hope you will see when we come to the day today that we are doing the right things. But I hope you also do see we are not just doing the right things but we are doing the right things in the right way. And we are a very strong value space company, very strong. And safety. Our safety record probably speaks for itself. But I think it is worthwhile to remind all of us that, that also has a very hard-nosed business implication.

But before we go there, what is our safety record? When you look at these, the blue and the red line there, you say, okay, fine, they are improving, that's fantastic. While we are improving, we are improving even though our absolute level already is benchmarked well above our industry, I mean, across industries. And we continue to improve, and that's our target. In a way, the safety record shows what we can do in all processes, not just on the safety side. 82% of all of our locations worldwide, and you know that not all locations are those pretty places like Davenport, Iowa, and 82% of all those locations, until today, we haven't had one lost workday in this year.

To give you another statistic on that, I mean, to make it probably more visible, when you went to the facility yesterday, I'm pretty sure that you felt pretty safe. And you had the safety gear on, right? Well, that's not necessarily the norm if you look not only at the industry or if you look across industries. And we operate with a lot of heavy equipment. If you are an Alcoan and you work at an Alcoa workplace, no matter where you are on this planet, your safety is 4x safer, 4x safer than if you were an industrial employee in the U.S. in general in another firm, 4x. These are the statistics here.

And this is what's getting recognized outside. I mean, Dow Jones Sustainability Index, I don't want to go through all of those, but the Dow Jones is a phenomenal one and it makes us very proud. It's the 10th consecutive year that we have been listed in the Dow Jones Sustainability Index. That's pretty cool. That's pretty cool, and it's pretty amazing. But it as a hard-nosed business implication, as I've said before, because whenever we go and expand into other regions, obviously, in a lot of our businesses, we need the involvement of governmental bodies to issue licenses to allow us to do what we do in-country. And it's amazing how often the reason why we are sitting on the table, why we are getting a preferred treatment on the table is because people know that we have very, very high values and people know that we bring the values to the table and have procedures how to act on that and are acting very, very well on that.

So let me sum it up. Alcoa is committed to creating shareholder value. We have aggressive growth targets. We have 2 engines to grow in the future: miracle metal as well as the innovations that are going on in many areas. We have been investing in growth, being it regional as well as in the growth markets. And we are living our values. That all comes together, a pretty unique package, and we continue to accelerate to build up shareholder value creation.

With that, let me hand over to Tim. Why are you standing up there? Okay, very good. Thank you very much.

Timothy D. Reyes

All right. Good morning, everybody. My name is Tim Reyes. I'm the President of Alcoa Materials Management. I'll give you a little background. Alcoa Materials Management is the commercial arm of the Global Primary Products group. Amongst our responsibilities, we manage the buying and selling of bauxite, alumina -- aluminum, and we also do a lot of the market analysis that you see that comes out through across these presentations and what have you. So today, I'm going to spend a little bit more time diving into that with you and giving you our viewpoint of the overall market and how we see things evolving.

Let me start with kind of where we left off last year. Last year when I was with you at this event, we touched on some points that, just to recap, we looked at 2011, and we saw, last year at this time, a very good and robust demand growth across this year. The other thing we saw at the time was metal premiums, which had risen to higher levels despite the fact that there were inventories in the West that had been built up, and we explained at that time that we felt that the premium structure was fairly firm and that the impact of the inventories would not be significant. And the other thing that we talked about last year was the fact that we felt China would be at a deficit for primary aluminum this year. And those 3 things, we think, have all come through.

The other thing we talked about was that we thought alumina imports into China would be robust this year. That actually hasn't happened, and I'll touch on that a little bit later in the presentation.

As we take a look at 2012 and beyond, a couple of things we will highlight today. One is again reiterating our view of the strong demand growth that we see out on the horizon. And the second are the challenges that we see facing the industry to continue to build out capacity both on the smelting and on the refining side at the pace at which we've seen over the course of the last few years, specifically as related to China where we see China moving closer to becoming a net importer and where we see challenges overall for the general demand growth being driven by the emerging markets that we see the challenges of the capacity keeping up with that demand growth.

So let me step back a little bit and kind of pick up where Klaus talked about the megatrends that we see out in the world and to go a little bit more specific and talk about the middle-class population which drives so much of the demand for the aluminum products that we see today.

The middle-class population, by 2030, is expected to grow to 66% in Asia, specifically. So today, Asia is about to overtake Europe as the largest middle-class population. And by 2030, according to the OECD, 3.2 billion more people will be added to the middle class. These are the people that are driving the demand for aluminum. These are the people that want to travel, have consumer electronics, so these types of things. And so this begins to build the framework for how we look at the long-term prospects for aluminum demand going forward.

And then, we look at what's happening even in the near term. If you look at the past, the 2 decades prior to the start of the 2000s, aluminum growth, primary aluminum growth in terms of, compared to global GDP rates, grew at a slightly slower pace. But as we move into 2000 and out to 2020, we've seen that acceleration, which is being pushed by the emerging markets, which is being pushed by aluminum becoming the raw material of choice for the things that Klaus talked about, and that's driving aluminum to be consumed at a multiple roughly 1.6x the global GDP rate.

So this thing last year that I -- that we talked about was the doubling, the near doubling of demand over the course of this decade that we talked about, 6.5% average compounded annual growth rate between 2010 and 2020 driven largely by China and the emerging market growth that we saw going forward, and we still hold to that. In fact, it's a bit conservative because, one year out of the box, we're talking about 12% growth rate between 2010 and 2011, so the pace is already moving at quite a rapid pace. That raises the question now, what about the supply side of the equation? The demand side looks very robust, then what happens on the supply side of the equation?

When you look at where the capacity is expected to be added and where we're seeing the announcements of capacity over the course of the next few years, China just jumps off the page at you. And you see some very strong growth predictions on capacity additions in China.

On the smelting side, you see it also from the Middle East and from India. On the refining side, India, we're seeing growth on the capacity side coming in now in places like Australia.

So on the smelting side, let me just quickly touch on the Middle East. The Middle East, I think, there's a strong premise for why you see growth in the Middle East. You see the desire to diversify the economies in the Middle East. You're obviously sitting on a large area of excess power. And these are some of the fundamental reasons why we are in the Middle East today. However, when you look at India and China specifically, there are specific challenges that are presented there that I want to talk to you a little bit more about today.

So India specifically really has not executed at the pace at which they've announced. So continuously, India is overpromising on the pace at which they're going to add capacity to the market today. A couple of fundamental reasons: One is India is already tight on power. They're one of the world's largest importers of coal, and that's expected to continue over the course of the next few years. So we still see that challenges exist to increase smelting while you -- while the country is importing coal at larger, at a greater and greater pace.

The second thing is, you notice where the bauxite in India exists. The bauxite in India largely exists along the border between Orissa state and Andhra Pradesh. This is an area where you've seen a lot of terrorist activity, political unrest that's stalled the capacity additions for mining. And also in India, you see a lot of difficulties on the mining side around obtaining the environmental permits required to open up mines.

So over the course of the past few years, we see India executing only on about 50% of the planned capacity additions that they've announced, so the performance there is not great. And there's some very specific examples. For instance, you had a refinery built, the Lanjigarh refinery, next to a bauxite deposit mine. This is an inland refinery. The permits for the bauxite mine never came through. So the refinery is now running at a higher cost, at a lower rate, and they're importing bauxite in from the West.

Similar things on smelting where we've seen production disruptions take place over the course of the last few years where you've seen coal shortages pop up and producers have not been able to run smelters. Or even recently, we've heard Vedanta talk about taking new capacity and smelting that they've added into the system and actually not running it, instead, just simply selling the power into the market because of the high price of power that exists today.

China is not terribly different from a power situation with India. In regard to the aspect that power is a very precious commodity in China, China today already has some of the highest-cost power rates from the grid in the world, number one. The second thing, the contribution to GDP that the non-ferrous industry brings to the country is very low overall. So roughly, 7.5% of the energy consumed in China went to the non-ferrous industry, yet only 2.5% contribution to GDP from the industry. And when you look at the 12th 5-year plan recently announced by the Chinese. Inside of that, you have many aspects related to energy efficiency, energy conservation, upscaling of the labor force and a very heavy focus on adding value in the country, specifically GDP value. So between that and the high power prices, it creates a very difficult place for the aluminum smelting world, in terms of growth. And today, we think roughly 35% or so of the smelting is attached to that grid power specifically.

And of course, we all know that China today largely operates from coal-fired power, which is adding to the pollution in the country, which is also putting pressure, heavy pressure on the industry.

Okay. We told you we got one wrong this year. Let's look a little bit at the alumina imports into China. They declined this year. They declined sharply. So why did that happen? Well, China is a high-cost refiner, number one. However, they are able to respond with high cost capacity in the event that the price signals tell them to do that. Right? And this year, we saw that in the West, we had a number of supply disruptions in the first half of the year, drove the price up in the West. So at one point, imports into China for alumina were as much as $100 premium to domestically refined alumina.

But as you can see by the increase in the volume of bauxite imports that came into China over that period, the Chinese responded by turning on the high-cost capacity by importing bauxite into the country.

So I think it's one -- very interesting to note, back in the downturn, in the early first half of 2009 when a lot of capacity was coming out of the market in China, the first thing that they cut back was imported bauxite, right? And I think that leads you to the point where you see the numbers start to add up that say, "Yes, China is importing a lot of bauxite, but they're importing a lot of bauxite to support swing capacity in the market today." And when you look at where China sits on the cost curves, really, it brings you back to that same point.

On the smelting side, 85% of Chinese smelting capacity sits in the top 1/2 of the cost curve. 45% in the fourth quartile. Similar on refining, 78% in the top 1/2 of the global cost curve, 37% in the fourth quartile, refining. So again, it's capacity that's coming on at a relatively high cost.

So how about the impact to the markets this year and what we've seen as far as market trends in China and the drivers? China is an exporter of aluminum semis, we see that. China is an exporter of secondary alloys that go into automotive applications, importer of scrap. But when you look at the primary aluminum, it's a flat line. Net import, export, there's virtually nothing going on. And why is that? Even this year, we saw the Shanghai Metal Exchange price, the Shanghai Futures Exchange price traded a fairly large discount to the LME for the better part of the year. That didn't stimulate exports. And part of the reason for that is that they have a 15% export duty. They don't have a lot of interest in seeing energy, precious energy that's used for smelting to be exported from the country.

But over the course of the last few months, we started to see that difference between the price on the LME, the Western price and the domestic price in China really start to narrow back down. And if you go back again to 2009, where we got to the point where Shanghai was actually at a bit higher of a premium, that immediately drove imports into the country. So the price signals are telling us that China is becoming closer and closer to reaching the point where they're going to rely on imports to satisfy their demand, just as they did in 2009 when they imported 1.5 million tons of aluminum.

And the other thing, okay, we talked about China being short at a deficit this year for primary aluminum, but we didn't see the imports. We didn't see the price signals that drive the imports. So what happened? Well, this was the year of China destocking. From the peak in May of 2008, inventory in China has fallen by roughly 800,000 tons of primary aluminum. So really this year was a year of destocking. And you can see that as inventory starts to reach back toward the lower levels, toward the critical levels, that's one of the reasons we start to see the price signals start to tell us that we're inching closer and closer to a point where China is going to become a net importer.

And we know that in the West, there still sits a fairly large pile of inventory. We'd be remiss not to have a discussion about that, right? And you see that largely in the West, inventories have been relatively stable. We haven't seen huge inventory additions in the West. So we've seen the big ramp up of inventories take place, following the economic crisis, and we've held relatively stable from that point forward.

So why does this inventory not show itself up to the market? Not only that, why are premiums remaining as high as they are? It's a great question. And I think it comes down to 2 fundamental aspects. One is that demand is strong. We talked about that. We know that demand this year has been very robust. And the second thing is that financial demand has been very strong. The financial demand, the demand from the financial sector to hold hard assets, banks who are holding a lot of cash on their balance sheet that have a more risk-averse position in terms of how they want to deploy that capital, have found commodities like aluminum, where you have a structure today, very low financing cost matched up with a cost on the LME where in the future of tire to help offset the carrying cost of the metal. And that's taken a lot of metal off the market. It held metal away from the market and it's resulted in with the -- combined with the higher physical demand, the higher premiums. In fact, in North America this year, we actually saw premiums spike even higher, hitting close to a record of $1.85. And today they still sit at a very high $0.08 per pound.

So kind of recap our position on 2011, we've shown this before. But again, we've been talking about China at a net deficit, and I think the evidence is there that that deficit is very real. That they've drawn down stock to fill that deficit and they're now inching closer to the point where they need imports of primary aluminum in order to fill the future gaps that we see that they're going to have.

Second thing, rest of the world, a bit long this year. But we see that position continuing to move into a more balanced position on metal as we go forward.

On the alumina front, again, imports of alumina not to the level we thought this year, but we're already starting to see signs that the alumina imports into China are starting to ramp back up now that the difference in price between China and the West has closed. So next year, we expect to see China to resume imports of alumina at a much more robust level. And I think overall, we see that both the aluminum and the alumina markets continuing to further tighten over the course of the next few years.

So let me just summarize quickly for you. Again, the drivers, emerging market growth, as well as aluminum being the raw material of choice, taking share from steel, taking share from copper, being driven by the megatrends that we see today. And on the supply side, again, challenges especially in the traditional places where we've seen the most recent large capacity additions, specifically India and China. And in China, the competition for energy that we see happening today as well as the inventories that have largely been depleted. And lastly, now with inventories having been drawn down, moving towards becoming a net importer of primary aluminum systematically over the course of the next few years.

So you can see why we see and we remain very optimistic for Alcoa as we look into the future. Thank you.

Chris L. Ayers

Good morning. I want to start off by thanking everybody for making it to Davenport. I known via the e-mail traffic that I saw yesterday that it was not an easy trip for a lot of people, but it means a lot that you've come out to see our facility. My name is Chris Ayers. I have responsibility for our upstream business, Global Primary Products. So for the next 30 minutes or so, I'm going to walk you through our business and what we're doing. When I get done with that, we're going to ask Tim to join me back up on stage and we're going to have an opportunity to answer some questions, both about our market and about our business specifically.

I'm sure we're going to get that taken care of before he gets too much further along.

So Global Primary Products, when you think about our business, we are really broken down into 4 segments. Starting off with our Mining business, where we have the lowest cost position of bauxite mining feeding into our refining position. A couple of things important about our Refining business, not only are we the world's leading producer of alumina. And while that is important, it is also equally important that we have the lowest cash cost position on the refining cost curve. So it's important that we have that position, but also that we understand our business and we continue to drive improvement in that business.

Next up is our Smelting business where we are a global leader in the smelting world. And then the fourth business segment that we talk about is the Energy business. And really, a couple of things to note there. 85% of our power needs are locked up through 2025 in long-term contracts. We also produce about 25% of the power that we need ourselves and 2/3 of our power that we use comes from renewable assets, like hydro assets. In total, we're going to do just over $15 billion in sales this year in 2011.

The next series of slides, I'm going to walk you through kind of what our business looks like, taking you through the different segments of our business.

So starting off with mining. We have 8 bauxite mines around the world. Five of those are integrated with our refineries, so we have 2 that are in Western Australia with refineries. We also have 3 that are located in Latin America, in Brazil and in Suriname and in Jamaica where we have mines located with the refineries. And then in addition to that, we have 3 standalone mines, two in Brazil and one in Africa. In total, our mining system mines 51 million tons of bauxite on an annual basis.

Those 8 mines feed into our 9 refineries. And again, our refineries are located worldwide. Three of them are on the Western Coast of Australia. That produces just over 50% of our output from those refineries. We also have a refinery located in Europe. We have a refinery in the U.S. and then we have a series of 4 refineries in Latin America and the Caribbean. In total, we have capacity for 18 million tons of alumina out of those refineries.

Next up is our smelting system, and again 23 smelters worldwide. We have the capacity to produce 4.5 million tons of aluminum. Currently, we're producing about 3.8 million tons. And even though we are located worldwide and our worldwide system is very important to us, the dominant source of aluminum out of us is out of North America and U.S. and Canada and also out of Europe, but we think our footprint around the world gets us closer to our customer and allows us to feed into those markets in a very efficient manner.

Lastly is our power sources. We have 17 power plants around the world, 14 of those are hydroelectric power and then the other 3 are coal-based power plants. In total, we generate just about 3.5 gigawatts of power. And again, back to an earlier comment, that is about 25% of the power needs that we have for the GPP business.

So if you kind of roll all that together, there's a couple of things that I want you to take away from this chart. First, you see the addition of our joint venture in Saudi Arabia, Ma'aden Alcoa. I will spend some time on that later in the presentation about the status of the Ma'aden Alcoa. But the one thing on this chart I want you to take away from, a truly integrated system, all the way from the gas fields, up through the power plants into the mine, into the refinery, into the smelter, the casthouse, ultimately the rolling mill. When we have it finished, it's going to be the lowest position on the cost curve. So we're going to go into more detail there. But we are very excited about this investment opportunity and the status and where we're at, at this point in the project.

The other thing that I think is important as you look at this chart, you see the regional structure and the regional structure with how we're organized within Global Primary Products. So you see the Australian region, the European region, the U.S., Canada and Latin American region. It's going to be important because I'm going to reference back and forth between that regional structure and also the Centers of Excellence that we have that we helped to improve our businesses with. In total, we have just over 20,000 employees currently within our upstream business.

Klaus mentioned this. Last year, when we spoke to this group, we talked about really 2 significant accomplishments that we wanted to put out there. One was moving down the refining cost curve by 7 points from the 30th positioned to the 23rd, and moving down the aluminum cost curve or the smelting cost curve from the 51st to the 41st position.

I am, over the next series of slides, going to talk about the steps that we've taken, the structure that we've put in place and how we are going about accomplishing these commitments that we've made.

So when you think about our strategic priorities, we kind of break them down into 3 areas: operational excellence, margin and cost improvement and then also what are we doing about the future.

So on operating excellence, we have Centers of Excellence that we have put in place across the 4 business segments that I talked about. These Centers of Excellence help us kind of rapidly get best practices into operation. They allow us to take great ideas, whether it's across our system at GPP or across the broader Alcoa and get those systems quickly integrated.

Klaus also talked about daily P&L. I am a huge fan of daily P&Ls in our businesses because it does a couple of things for us. One, it allows us to give immediate feedback to the folks that are running the plants about what yesterday looked like, what they did well, what they did poorly relative to the profit and loss of their business. It also gives us a mechanism to get the people that are on the floor that are running the operations, to give them the business information to understand the profitability of the business so that they can tie their decisions that they're making on a daily basis into its financial impact of the plant that they're in.

So while we're doing the things that are so very necessary on the operating side of the business, it is also very important that we're spending time looking at our market and doing the things that we can do to improve margins. Alumina price index is one of those things. I'll talk about that in a future slide. Also what we're doing through our casthouses to ensure that we are getting maximum value out of our casthouse system.

And lastly, we have a portfolio of equipment. And we need to make sure in facilities that we are running that as efficiently as we can and understanding where they sit on the cost curve and continuing to improve the assets that we have in place.

Now it's important that we drive those 2 areas very efficiently. At the same time, though, you always have to look at what your future opportunities are, what your future growth opportunities are. And you have to ensure that one, you're prepared for those opportunities. But two, that you are aware of them, you know where they are, you know where they potentially will be, and when they come to the surface that you have the capabilities to step in and become part of one of those opportunities. Clearly, our modern Alcoa JV is one such opportunity, and we're very pleased to be part of that.

Lastly, I have the great pleasure of working with 20,000 Alcoans in the Global Primary Products. We have built our business around these folks, and we have fantastic people. And without that, this business would not be possible. So it is a pleasure to work with the folks that we have and to run this business with them. None of this is possible without those folks on board.

So disciplined cost reductions, so talk a little bit about what have we accomplished or where are we at in 2011 or what do we believe we will accomplish. In 2011, we believe that our Centers of Excellence, along with the regional structure that we have in place, we'll deliver. We project to deliver $520 million of savings across the system in productivity. We're going to go through some of those items that we've done and talk about the value of them.

We also spend a lot of time, if you look at the right-hand side of this chart, benchmarking ourselves against the market and understanding the procurement of raw materials. I mean, it is very beneficial, Alcoa is a big company. It is very beneficial to use that entire buy to help give us leverage when we are out there purchasing what we need for the specific businesses. So even though Global Primary Products is a big business, it's part of a much bigger business, and we see that benefit when we're out in the market. We believe we buy strategic raw materials, the things necessary for the Global Primary Products at a 5% advantage to the competition when we're out on those markets.

At the same time that you're kind of working on earnings, whether it's through productivity savings, raw material purchases, we want to ensure that we are very good stewards of the working capital that we have and the assets that we have in our facilities.

So through our third quarter, if I compare Q3 of 2011 against Q3 of 2010, we have seen a 6-day -- days working capital reduction. We're looking at receivables, inventory, payables. That has helped us generate, in excess of $200 million in cash through that 6-day working capital reduction.

I talked about the Centers of Excellence a little bit. I'm going to go through several slides on it now. We have COEs in place for mining, for refining, for smelting and for energy. These COEs work across our regional structure. So even though we have a regional structure that is in Australia, we have 2 smelters there. They benefit from the fact that we have 23 smelters in our system and the smelting COE is working across all 23 of those smelters to rapidly bring the best practices into place and bring them in as quickly from another smelter, sometimes even from another part of the company, into our organization so that we see the benefits of that as quickly as we can.

So over the next 4 slides, I'm going to walk through each one of our Centers of Excellence. When you talk about the mining Center of Excellence, I've been part of our Global Primary Products for just over a year. And when I came in the door, if you would've told me that mining was -- I would've told you mining was something not easy to do, but it was a simple business. And it's quite the opposite. Coming in the door, you think mining is something where you move the dirt to the side, you pull the bauxite out and then you rehabilitate and you move on. And really mining is a much more complex operation that we do because it is so integral to how our refineries run. Our mining COE that we've really established is our latest Center of Excellence. It has a potential to bring, I think, large, large value to us because of the intimacy between mining and refining and the need for those 2 to work so closely together.

So this year in mining, we have -- we are projecting $37 million in savings. We've got our Juruti operation where we've improved output by 32% this year over last year, and we are well beyond the capacity that we had anticipated when we put that installation in. We're beyond that output, and we continue to see ways to grow beyond what we're doing today. At the same time that we've gotten that 32% improvement in production, we've been able to reduce cost 30% across our mining system in Juruti.

When it comes to exploration, very important because moving mining equipment is very capital intensive. You want to ensure that when you have moved to a location that you are ready and you understand how to mine there and you understand fully how that's going to fit in with the refinery.

So we spend a lot of time on mine plans. All of our mines, we have plans that are 5 and 10 years out that are very detailed as to the areas that we're going to mine and how those areas feed into the refinery. We also have plans that are as far as 25 years out, so we understand the necessary moves of equipment, when they need to occur and what's going to drive us to move that equipment. So very intense business from that perspective. It has to be very well planned out.

And then when you talk about reducing cost, it's how do we apply what we're learning at the different mine sites across the system, getting involved in a mine in Juruti that is somewhat different than our other mines because of the amount of material on top of the bauxite. We call it overburden, getting involved and understanding how to move that efficiently and quickly so that we can get to the ore that we want to remove from the ground.

The mining COE brings that technical excellence to us. And it is also, after the establishment of the mining COE, a way that we can further attract high-talent employees into our business because they can come into a mining COE where they have expertise and further help us.

Next up is the refining Center of Excellence. Now, the refining Center of Excellence is a more mature COE for us. It's been in existence longer. This year, we're projecting $110 million in savings. We've got 4 of kind of the ideas or the thoughts up there around those savings.

Increasing production. Every one of our refineries is a capital-intense business. Anything that we can do to make that refinery more productive out of the current assets is to our benefit and helps us with our profitability and productivity goals.

So one of the things that we work on is the productivity of the liquor stream inside the refinery. If we can yield alumina better each time through the system, that refinery is going to produce more and it's going to produce more cheaper. So we spend time on technology advancements that allow us to understand what's going on in that stream of fluid and to help us adjust how the refinery is running to maximize the productivity of the output of those assets.

Increasing reserve life. Our mines have to be very well-tuned to our refineries. If they are not, then we can get into situations where input stock into the refinery is not tuned to exactly the refinery that we've built there. One of the things I talked about on the mining COE is we spend a lot of time ensuring that the quality of the bauxite going into the refinery is within a very tight standard and it is suited to that refinery so that we maximize the output of it. It also allows us to ensure that we're getting the maximum amount out of the mine plan that we're running that we can yield all of the bauxite out of there. Those 2 are very well-tuned together.

Reducing capital. We are a capital-intensive business but we look for every way that we can to avoid capital or to reduce it. One of the byproducts of the refining process is an oxalate. Typically, this oxalate has to be burned to get rid of it. We have found a way to reduce and eliminate this oxalate by introducing a microorganism that breaks it down into something that we can further use or that we can dispose off through our residue system. This is saving $20 million of capital because we're not having to build those kilns. It is also saving the cost of the fuel or the gas that is used to fire those kilns.

And you're going to see from me really across everyone of our systems, energy is a big cost. We want to make sure that we spend time every place that we can, reducing the cost of energy and reducing the amount of energy that we use. So you're going to see it here in refining and smelting. We're going to look for those opportunities whether it's through just the productivity of the energy we have or whether we're more efficiently using the byproducts of the energy that we have in all of our facilities.

The smelting Center of Excellence is next, $124 million in savings projected this year. And again, in smelting, one of the biggest cost components is energy. We want to ensure we're doing all that we can to effectively and efficiently use that energy. So the low-energy cathode that's highlighted there on the left, developed with the smelting Center of Excellence, also developed with our technology center in Pittsburgh, is a way that we can help improve the energy efficiency of our pots, so that we are not losing part of that energy through the efficiency of the cathodes. We've been able to help improve this. This is something that we rolled across through a few of our smelters. We're starting to see the benefit, and we will be rolling across more of our smelting system as we are changing those cathodes out.

The STARprobe. I have to tell you, I'm a big fan of the Alcoa advantage. We are a big company and there are opportunities to get best practices from other parts of the business, and I think the Alcoa advantage is one of the things that makes us a truly great company.

I also have to tell you, for the first time today, I have seen the downside, the downside of the Alcoa advantage. Because if the COE -- if the CEO sees something in your presentation that he likes, a really cool technology, he's more than happy to talk about it in his presentation because he knows he's coming first.

The STARprobe. We've spent a lot of time developing the STARprobe and it is a really cool technology because it allows us to get the chemistry of what's going on in the pot, to get the bath chemistry, what's going on with the aluminum, to get this on a more frequent basis to wirelessly feed this into the computer systems that are controlling the pots and automatically update the control systems for those pots. This is something that we have going on at a lot of our smelters. We continue to roll it out. It's a great technology. It gives us that feedback and allows us to adjust the pot characteristics on a daily basis around the information that's coming. We really think it's a cool technology, and we see the benefits of it when we've implemented it in our smelters.

Raw materials. This year has been a year where raw material prices have increased, no doubt about that across our system. We are out there actively looking for other sources than our traditional sources of things like coke for our anodes. And we are with the smelting Center of Excellence and at times our technology center in Pittsburgh, looking at how can we improve the use of more sources of material and integrate those into our smelting system.

So having that Center of Excellence, I believe, reduces the risk when we introduce nontraditional cokes into our system. And it allows us to understand that and then quickly disseminate that opportunity across the rest of our smelting system when we see success at it.

Last but not the least, by any means, is a crisis response. This year, since the last time that we met in New York a year ago, we've had several -- not several, we certainly had a couple of crisis that I think were fairly significant. These are power outages going to our smelters. In Fjardaal, December of last year, we had a transformer failure. Obviously, power is interrupted to our facility in Iceland. It was a significant interruption. Not only that, when power came back to the plant, it was not at the same steady rate that we had seen before for a period of time. If you think about a facility in Iceland and you think about the ability to try to get people there to help, you're not going to be able to get people there very quickly to help.

The Center of Excellence, we were really able to utilize our COEs, both in Australia and in Montréal to give input into that smelter so that they could -- the folks that are there that are on the floor that are trying to deal with all of the problems that we have, they are getting the technical advice from experts around the world and around the clock so that they can reduce and minimize the impact of that. And certainly, it was a -- it had the potential to be a significant issue. And in the end, it was really not that significant because of the great work of the folks in Iceland but also the great work of the folks in that COE as they helped across this crisis.

The second one is a power failure up in Québec, in our Baie-Comeau facility. We had a power failure, a thunderstorm come through. It must have been quite a thunderstorm because it killed power from kind of multiple sources into the plant. So power came back up at different time frames. We had a Söderberg line that was without power for 7 hours. To have that Söderberg line be able to come back and produce metal without it going all the way cold, pretty phenomenal accomplishment, able to be done, again, by the folks at that facility, working hard, understanding what to do, but also getting the technical input from resources around the world who has seen similar-type incidents, maybe not to this magnitude, but have been able to give them the advice and the guidance that they needed during this crisis.

Lastly from our Centers of Excellence, our energy COE. This year, we project a $107 million in savings. I talked about it on one of the earlier slides, 85% of our energy needs are locked up through 2025. 26% of the power we need, we generate ourselves. Our energy Center of Excellence is always working within our region structure as we look at different power contracts. In one place, we have somebody who have seen the power contracts from around the world, understands the benefits of them and can help us as we negotiate and go forward with future power needs.

At the same time, we have investments in hydroelectric power assets. We are finishing one of those investments down in Brazil. It's a dam system called Estreito. The dam itself is built. The physical structure is built. We are now in the process of putting the power plant into the dam. Three of the power plants are there in the dam and running, generating power that we are back on the grid with. And we are in the process of putting the other 5 in place. It is per the schedule, but we'll be putting those in over the first half of 2012 and continuing to improve the generation that we have into the system.

And then last but not the least, reducing costs. This Center of Excellence works across our entire business. We are not the least bit shameless about the fact that if there is a energy-saving practice that is in one of our other businesses. If Helmut in the midstream business has an energy-saving practice or if Olivier in the downstream business has that, our energy COE help apply that across our entire business segment. It also helps take the ideas that we have in our system and implement them across the other businesses. So it may reside in GPP at this Center of Excellence and across the system, but it clearly is something that we use across the system to implement the best practices there.

Now, as I kind of change from what are the things we're doing within the 4 walls of the plants to improve our business, I want to talk about the things that we're doing that are helping our top line and helping generate value through the things that we're doing with our customers.

Alumina price index. Alumina price index is really important to us, I think for 2 reasons. One, to us and our customers. From a customer perspective, it gives our customer a pricing mechanism that allows them to get long-term supply of very high quality alumina. So we have a pricing mechanism that is understood, that allows longer-term contracts to be put in place, and that is the value to our customers. From our perspective, it is a pricing mechanism that better reflects the dynamics of the aluminum market and also the cost structure that's within the Refining business. We think it makes a lot of sense. We made the commitment that as we transitioned out of LME-based contracts that we would be transitioning all of those contracts into API-based contracts as we move forward.

Now we started this in the middle to late 2010. We have seen an enormous amount of success in getting those contracts moved over. To date, we have not had a single contract that came to conclusion that was LME-based not get transitioned into an alumina price index-based commitment going forward.

So if you look in total in 2012, we see about 40% of our business being sold on the alumina price index. So we're very pleased with that. We are at this point where we thought we would be in the process, and we've been very pleased at the transition from our customers from the LME-based into the alumina price index-based pricing mechanism.

Next is the casthouses that we have across the system. We have 40 casthouses in total within Alcoa, both in -- really across all 3 business segments, we have these casthouses. This is a potential for us to unlock additional value, really in all of our businesses. From a Global Primary Products perspective, it is an ability for us to understand the markets that we're in and to maximize what's going into those markets to generate the most amount of value that we can.

So today, we're generating $150 per ton of incremental value over just selling the straight metal out of the smelting system. We continue to look for opportunities where we can produce certain products into the markets. Tim talked about his responsibility as a materials market. He is a key player in helping us to understand what's going in the market and what metals we need to be producing into those markets where we see tightness in the ability to get the margins over the normal Midwest or the normal regional premiums that we would see.

You can see, over the last couple of years, we have seen significant margin improvement over the premiums that you would get just from the regions that you're in. And we see this as a potential as we go forward, understanding the market, understanding the tightness, having the physical assets with the flexibility to react to those markets and be able to deliver into them.

Last, when you talk about portfolios and what are we doing with the assets that we have, we have been spending an awful lot of time ensuring that the assets that we have, that we have in place are delivering the values that they should be delivering. Juruti, for example, I talked on an earlier slide, production is up 32% this year over last year. The cost of mining that bauxite is down 30% this year over last year. Again, mining Center of Excellence working with the Latin America regional staff, we've been able to significantly improve that mine operation.

Our São Luis refinery, the expansion is now complete. We continue to work on it, but we are at nameplate capacity, very pleased with the improvements that we've been able to make during the course of this year to get the capacity out of that refinery that we believe we would be able to get were there. And again with the refining Center of Excellence, we still see opportunities to improve, just like the rest of our refineries, to improve the output and to improve the utilization of that asset.

I talked a little bit about Estreito in the lower left corner here. Three of the 8 power plants are up and running. When all 8 are running, our share of that dam will be 277 megawatts that we will be using to help facilitate a reduced cost into the smelting system that we have in Latin America.

And then, finally, this year, we restarted capacity in 3 of our smelters, in Massena, in Wenatchee and in Intalco. And in the restart of those smelters, we were able to restart them actually ahead of the plan that we thought. We were very successfully in being able to get those smelters back online, getting the production out that we had anticipated. This year, we've generated $33 million of additional ATOI through the start of those smelters. And again, I think it's one of the things that's a fantastic accomplishment, not only out of the U.S. regional structure in getting these started, but also out of this smelting Center of Excellence as we -- as they were on site as we restarted these facilities or restarted lines in the facility. And on a side note, we were able to do this without a significant injury with the new employees that we brought on board and what you can only imagine as kind of nonstandard work as we went through the start-up procedures around these facilities.

Talk a little bit about sustainability, and to talk about this, I want to put it into context of why as an investor in Alcoa you are -- I think you should be very interested in this part of our business. The sustainability I've broken down into 3 segments; economic, social and environmental.

On the economic side, I think as an upstream business, we don't often talk a lot about, nor do we get credit for how we interface with our customers. Each year, we take a survey of all of our customers across the entire business, but certainly also across all Global Primary Products to understand our customers' thoughts on our business, where they think we're doing a good job. They also give us feedback on the competition so that we have a comparison. We've done this over several years now so we can start to see trends on customers that we are doing a good job with, that we have a great relationship. We can also see the -- on occasion, the customer that may not be pleased with us and we have an opportunity to get feedback to that customer in a very short period of time. So I think it's unique to see an upstream business that is this focused on their customer base and puts the survey in place as a way to improve that relationship and ultimately improve the value for our business and for our shareholders.

From a social perspective, if you take this for a minute and look inward, we want to make sure that our facilities are very safe and we value our employees. We want to show them that value by ensuring that they have a safe place to come to work and we have an expectation and they have an expectation that they do their day's work in a way that's safe.

Klaus talked about our safety record. I think it's second to none. We're an industry leader, and we continue not to rest on that but to push forward with the improvement around that leadership position. If you look outward, we want to ensure that each community that we're involved in that we are a vibrant partner in that community, that we are involved, that we are really understanding our influence in that community and paying back to that community through a lot of different ways.

We just finished up the month of October, that is the month of service for Alcoa across of all of Alcoa. We spend time in the communities that we work in and that we live in, giving back to the different projects that have been highlighted through volunteer service. Through my business, over 7,000 employees, oftentimes with their families, were involved in a month of service projects that I really think helps with our partnership in the community.

And then environmentally, the easy answer is you got to live through the environmental regulations of where you work, right? And we all get that and understand that. But we want to make sure that we're doing that, but that we're also running our facilities that shows that we want to be a good partner in that community. And at times in our mining operation, when we're done with the mining that we're rehabilitating that back to the way that we've left it. So across those 3 areas, we think we're taking big steps and it's important to us.

Now why should it be important to you? To me the reason that it's important is that it is what helps establish Alcoa's reputation and continues to keep our brand where it's at. This is important because when growth opportunities come around, people want to be partnered with Alcoa, not only because of the advantages that we bring from a technical perspective and an operations management perspective, but also because they understand we will be a good partner with wherever we're located.

Two such opportunities, Ma'aden Alcoa, our joint venture in Saudi Arabia. We are in the midst of this construction project right now. There is going to be a video after the break. It will do a much better job than I could at describing where we're at and the process that we're in.

The message I want to leave you with is we're on time. First, metal for us is in 2013. We are on time to get that done. We have finished up the cathode ceiling plant. We were 12 days ahead of that schedule. We have installed the first pot into our pot line. We are right on schedule with that. So this has been, I think, an enormous effort on our part and the part of our partners to put in the rigorous structure that we have in place of reviewing this project, not only from are we getting done, what we need to get done on time, are we doing it at the cost that we need to be doing it, comparing our cost today with where we thought it would be when we put the very detailed budgets together. We believe that we've got a cost advantage right now and that we're going to be able to bring this on time, on cost.

And then lastly, it has to be a low cost, it has to be the low-cost, it has to be the low-cost position on the cost curve. We've got to be able to deliver on all 3. We feel very comfortable that we have the systems in place to deliver on that and that we're well along the process of doing that.

So last August, I was there, along with Helmut. We visited because we're kicking off the refining groundbreaking ceremony and also pouring in the first concrete in for our rolling mill. So again, it is going to plan. There is an extensive amount of follow-up that goes on, I think, rightfully so. And we continue to see that we're making progress on it.

The second growth opportunity has been in Québec. We announced a further movement down that path on the Québec modernization on Monday, the signing of the MOU that locks up power for us until 2040. And it also gives us the opportunity to move further in our engineering on this modernization project. When it is complete, we believe it will move the Canadian system 13 points down the cost curve and it will also move the Alcoa system 3 points down the cost curve. Very -- I think a very good project. We are pleased that we have a partner like the government of Québec to work with. We've been very pleased through these negotiations. We're glad to have the MOU behind us, and now we need to get after finishing up the engineering and design work on this project and moving forward with the project.

So again, I think both of these are fantastic opportunities for us. Both of them are made possible because I think we're running our business better. We're also generating the cash that we need to be generating to help us look at funding these opportunities and at the same time ensuring that our balance sheet continues to be in such a strong position.

So to wrap it up, what are the things that you can expect from Global Primary Products? One, we are absolutely going to be relentless on our cost reduction efforts. We're a commodity business. We understand that. We understand we need to be moving down the cost curve, and we are going to be relentless.

2011, we generated $520 million in savings. We have detailed plans for 2012. We are now into the execution phase of how do we continue with that momentum that we've generated in 2011. We're going to deliver Ma'aden Alcoa on time, on budget. And when we're done with it, we're going to see that it is a leading position on the cost curve when it's complete.

We're going to continue to look at our future opportunities. I think there's a big scope of work on what we're doing today, but we can never lose sight about what's occurring in the future. We have to keep our eyes open on the future and we have to be great stewards of our resources when we look at those opportunities to see what we can invest in, in the future. So we have a plan going forward and we will deliver on our commitments. Thank you.

So I'm going to invite them back up, and open the floor up for questions.

Question-and-Answer Session

Roy Harvey

Great. Just one quick note, one of the glamorous items of Investor Relations is that we get to serve as timekeepers, and we're right on track. So we have some time. We will have questions after each of the group presentations and there will be time at the end for Klaus to answer some questions, as well as Chuck.

So with that said, why don't we open up? Who has the first question? Mr. O'Carroll, I saw your hand go up first. I think we have a microphone that's coming up right there.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Yes personally, I consider the primary cost or reduction, the most ambitious target you have and probably the most critical in terms of leverage of earnings over that period. And forgive me if I give you a long preamble for the question. I can think of 5 ways to get there. New low-cost capacity, Ma'aden. You can repower existing portfolio either offensively like you've done in Québec or defensively to keep relatively high cost becoming extremely high cost. You can shut down high-cost capacity which might occur within the power contracts in Europe or South Carolina. Your day-to-day cost-cutting, most of which will have to go initially to keeping costs from rising.

Chris L. Ayers

Absolutely.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Yes, the famous Chuck McLane's bridge chart. That's the way I think of it. And then putting capital in to put -- improve technology into the smelter, and I think of Massena at some point it's got to be outdone. What do you see as the relevant contributions from those strategies to get to your goal? And I'm just trying to get a feel for is this achievable and I'm trying to get a feel for how you're going to get there.

Chris L. Ayers

Right. So I thought for a while we're going to have to switch places just so with that question. But we've -- I think you've said it well. There are a lot of ways to get down on the cost curve. I appreciate the fact that you recognize our targets are ambitious because we do believe they're ambitious. But we also believe they need to be that ambitious today and it helps to kind of drive and motivate the organization. There's no doubt, the current cost reduction activities are helping us overcome the headwinds that are in the industry and they're also helping us to improve our business. That absolutely has to be part of it. When we benchmark the first half of this year against some of our competition, we believe we've made -- that we have, through the first half of 2011, that we've been better than our competition relative to the cost structures and the increases that are going in place. Also I think that the, as you've mentioned the investments that we're making, whether it's in the Saudi Arabian JV or the modernization that we're doing in Québec, those are going to be significant drivers for us in the ability to come down that cost curve. But how one is prioritized over the other? They're all very important to us and they all kind of get an equal amount of scrutiny and focus as we're going forward. There is no doubt when you look at the employment and the people that we have at Alcoa, both of these are also important relative to ensuring that we have an engaged workforce that is attacking the objectives we're trying to meet. Without that growth, you don't always have the opportunity for people to do more. Also, people want to see that they're very successful in the current assets that they have. So I think both are equally important to us and continue to get a significant portion of leadership time to ensure that we're delivering on them.

Roy Harvey

Okay. We have Tony Rizzuto.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

I've got a couple of questions on that. In line with the Rio Tinto Alcan, interesting developments recently, and partly a follow-up on Lloyd's question, how do we think about -- might we see a smaller base of smelters within the Alcoa portfolio as we go forward with some of those less efficient smelters, if you will? And then secondly, more of a broad question in terms of the primary aluminum market with aluminum prices at $2,100 a ton. It's certainly not a good price for the industry, but it's not really at a price that's going to elicit, at least thus far, too much of a supply response, and I just wondered what the response is to that. Do we need to see a lower primary aluminum price to really force out some of that higher cost capacity?

Chris L. Ayers

Yes, I'll tell you what, if I can take the first part of that question, then I'll turn the back half of the question over to Tim. Relative to announcements that are out there in the industry, we go through a very detailed portfolio analysis within Global Primary Products. We have just finished that up, so that we understand at what levels, what decisions need to be made. And this is something that is, by no means, a static document. It is something that we continue to update and to look at. And we always are looking at opportunities in the industry. When we see things going on with that same eye to say are there investment opportunities or are there divestment opportunities. And we're going to manage our portfolio. We're going to keep the same rigid structure in place that we have, looking at opportunities as they present themselves, and we've got that in place. It was very much part of our planning cycle around 2012, so we understand at what points we would take what steps, and we've got that playbook in place as we see -- your comment was around the price of aluminum. It's really about 2 factors. It's the price of the alumina. It's also about the ForEx that's going on at the same time and the combination of those 2.

Timothy D. Reyes

I guess in the market, I would say, where the price is today, I think it is going to drive production out of the market, and I think you look exactly to what we talked about, which is the China. They've got a lot of that high cost capacity. I don't think you're going to see it the day it's happening. I think you're going to see it in a lagging way as you start to report the numbers. I think as you look across the next few months, you don't also just see the challenges around the existing price, but you're already starting to see the impact of the energy shortages that typically exist over the winter start to potentially impact production as well. So I think somewhere in there, you potentially will see that coming through the numbers. But I expect that to start happening now.

Roy Harvey

Jorge, there upfront.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Jorge Beristain with Deutsche Bank. My question is looking at your business, it's extremely complex all the way from mining to downstream value-added aerospace applications. When you make the investment allocation decisions of throwing capital at a business, how do you charge the different units? What kind of cost of capital assumptions do you make for each unit? And are they sort of risk-weighted? Because obviously, primary metals faces a huge global volatility. The price is completely out of your control. Of course, it seems to me like in the downstream stuff like automotive, it's more of a captive market. And so could you just talk about those allocation decisions? Because I think it comes back to the fundamental question of how long do you want to be primary aluminum versus the downstream stuff where you can control the market better.

Timothy D. Reyes

Absolutely. I would tell you the 2 gentlemen on the front table there spent a lot of time talking about the returns on capital, which I think is a very rigorous process for us and rightfully so because as we look at all of Alcoa with investment decisions, it's around where is the best return going to come for our shareholders and also taking into account the risk of those potential investments. And I think when you look at the 2 kind of big investments that are going on right now in Global Primary Products with our Saudi Arabian joint venture, that's a big investment for us. It's a huge investment for us, the biggest project that we've been involved in. And certainly, we have expectations on the return side that reflect that this is a difficult project and that we're in charge of bringing it together and delivering on it. The Québec modernization is very much the same way. We look to see the returns on the project and the expectations of what those returns will be. And that is put up against the rest of the investments that we have within the company. So both Klaus, I don't want to speak for him, and Chuck review that as they look at the total kind of cash allocation that's going out for the businesses to ensure that we're getting the returns on those investments that are in line with our expectation.

Roy Harvey

A question right here. Dave?

Unknown Analyst -

I was just wondering if you could quantify your capital spending needs over the next 3 years and how you plan to finance it, if you need to finance it externally.

Chris L. Ayers

Certainly, I can talk about that for Global Primary Products. I mean, if you think about our capital needs going forward, there is a portion of our capital that's sustaining capital that's kind of the ongoing business that we look forward to that we continue to invest in our businesses. There's also really kind of 3 investments out there from a Global Primary Products perspective. There's a continuation of the Ma’aden-Alcoa JV and the spending around that. There is also the Québec modernization that was just announced, and there's also a modernization project in Massena that is also in our kind of our future plans. So one of the things that we work to ensure is that we are doing what we can to support those investments with our current cash flow in addition to all of the other -- in addition to the other cash needs of the company. So when we look at 2012, for example, it is how do we make those investments and, at the same time, be cash flow neutral as our group is looking to roll that up.

Unknown Analyst -

[indiscernible]

Klaus Kleinfeld

I'm going to give you some perspective on that from the whole company later on if I could just wait to go through in that presentation on it. Hopefully, it'll be a little more specificity, okay?

Unknown Analyst -

Okay, great. And since I got the mic back, I'll just ask another one. Just on the primary market, on the primary side, I was wondering if you just kind of -- what you think will happen if those inventories are held in those financing arrangements start to -- when those financial arrangements start to unwind, what do you think happens to the primary aluminum price?

Timothy D. Reyes

I think there's a difference between the financing structures that take place today and the absolute price. I think there's 2 different drivers around those dynamics that are driving the incentive to hold inventory and the incentives to buy or sell the market. So I think firstly, when you take the market as it is today, there's a lot of -- a lot of the daily news items that you can see that are impacting the overall price of aluminum, and aluminum is trading in a cycle along with a lot of the other commodities. And you see what's driving those every day in the news. There's a lot of uncertainty out there. But on the financing side, I think it really is a function of the structure that you have there, the appetite for financing aluminum, which I don't think the structure goes away. I don't think we see higher interest rates in the immediate future on the horizon. I think that's a very important function of that, and I think again, on the LME, we probably see continuous -- contangos on the forwards as we go forward. So I think the structure's going to hold today as far as the intention to keep the inventory away from the market. I don't see where in the near future that structure is going to get broken that's going to drive that inventory into the market.

Unknown Analyst -

Just a question on your bauxite. Have you thought about selling bauxite directly to customers potentially in China, for example?

Chris L. Ayers

The question is have we thought about selling bauxite out to customers. Certainly, we do have a fantastic footprint of bauxite that today, 5 of our mines are integrated with refineries, 3 of our mines are not, and we have external sales for those mines that we have. We continue to look at opportunities to see if there's opportunities to mine out of Australia. It's part of the projects that we look at as we move forward to ship out to China. Certainly, as Tim mentioned, our belief is that the Chinese refining system is a higher cost system, and a big portion of what drives that is the quality of bauxite that they currently have available and the cost of their mining of that bauxite. So we do believe it's a future opportunity for us.

Roy Harvey

We have a follow-up question from Tony.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

There have been some initiatives by the Indonesian government. I know a lot of the bauxite that China gets is from Indonesia, and they're talking about some very severe initiatives to basically restrain the amount of bauxite going to China. What are your thoughts on that?

Timothy D. Reyes

Yes, well, I mean, I think firstly, it highlights the risk of relying on imported bauxite, and that is obviously a huge component of the imports of bauxite going into China today, roughly 75% coming from Indonesia. So it's a definite risk to the system in China today. And not only do you have the potential for the Indonesians to put restrictions on the bauxite that's going out of Indonesia through higher mining taxes or simply through restricting it and holding it back. You also potentially have more competition. I mentioned India before and difficulties they have on developing their bauxite. We've seen some of the refineries in India going out and running around and looking for bauxite to import in as well. So I think as you go forward, it's an issue that the Chinese are going to have to face.

Roy Harvey

One final question. Sandeep, why don't we go with you?

Unknown Analyst -

The 3% gain that you mentioned from Québec smelter, you said included in the 41% base target that you have. That's the first question. Second question is that when you look at smelters, typically, suppose I know that there's a significant cost implication with shutting down and restarting a smelter. So in your estimate, how many months will a smelter make a loss before the company has to decide that okay, maybe we should have to shut it down? And third will be if the Rio Tinto Alcan...

Chris L. Ayers

Roy said one last question. No, go ahead.

Unknown Analyst -

If the Rio Tinto Alcan, that project goes ahead and they actually divest some of the smelters and there is increased fragmentation in the smelter world, do you think that that is more negative for the overall smelter situation in the world because they'll be less inclined to shut down their capacity even in periods of distress?

Chris L. Ayers

So let me see if I can go back to the questions. The first question was the 3-point move in the overall Alcoa system around the Québec modernization part of our plan, the 10-point reduction, the answer is absolutely, it's part of that. It's part of that plan and built in as part of the steps that we would take. I talked a little bit earlier about the fact that we go through a pretty rigorous analysis of our assets to look at what points you might make decisions around portfolio management. We certainly have a period of time that we look at relative to at what point do we make that decision. That is something that's part of the analysis portfolio that we review as we're doing that to ensure that it makes sense to us. As you talked about each one of our smelters, there are costs associated with them, and those costs, they can differ by -- depending on what part of the world we're in relative to the potential cost to the employees. It can also be a function of the power contracts that we have. So we have to put all of that into the analysis as we look as to whether or not we're at a point to take a decision around a curtailment or something along that nature. Today, as we look forward, we don't see any of that eminent, but we do know where we would -- at what point that we would take those actions.

Unknown Executive

Good. Two other things just to throw in there to clarify a bit. We look at it not just from an P&L basis, cash basis because when you get down to the economic environment like it is today in the volatile -- the metal prices, you take into consideration the cash cost and what you're doing to generate cash, number one. And the other thing in addition to things that Chris said, which were all accurate, is a forward, our forward view of where metal prices are going. Because of the cost associated with shutting down and bringing it back, you certainly have to have that perspective.

Chris L. Ayers

That's okay. And the last question about Rio's announcement on their divestitures or their intent to do something different with their business, I mean, we're always out looking and trying to understand what's going on with announcements like that and decisions like that. I don't think anything in that announcement -- and Tim will help me out here. I don't think anything in that announcement changes what we believe is going to occur with the price of aluminum or what's going to go on in that market. So I don't believe that that announcement helps or hinders or really affects that.

Timothy D. Reyes

No, I would agree. I think it's exactly that. No, someone will take the assets potentially and then figure out how to operate them. But I don't see that whole complex changing the environment that we work in today.

Roy Harvey

Great. Thank you very much. We'll be adjourning until 10:30 now and then get started back again.

[Break]

Roy Harvey

Okay, everybody. I know everyone's excited to get back to the presentations. We do have an exciting second half to the morning ready for you. So we're actually going to start with a short video on Saudi. So why don't we go ahead and get that started while people are sitting down?

[Video Presentation]

Helmut Wieser

Impressive video. Good morning again. Good morning to Davenport, the center of the world's largest rolling mill in the world for sheet and plate of aerospace, also #1 supplier to the aerospace industry. I'm very happy that you had a chance to see it with your own eyes yesterday, and thank you for visiting the plant. I hope you saw -- also, some of you came here 5 years ago. You saw the big difference, and also that our people, our management and our shopful of people were very honored that you took the time to come to Davenport and to visit the plant.

I'm Helmut Wieser. I'm President of the Flat-Rolled Products Global business, and I would like to show you what we achieved and what we are going to do in the future in our business. As I walk you through in the first slide, I would like to have some key takeaways. We are going to change the profitability in this business, and we are going to exceed our incremental growth and our historical average profitability by EBITDA per metric ton. How we are going to do this? We are growing faster than the market, and we are growing it through -- growing in the aerospace industry, innovation in automotive, in packaging and in consumer electronics, and we are growing in the emerging markets.

We have -- today, we run 18 operations in the world in 10 countries, 5 continents. We generate $6.3 billion revenue and with [ph] around $550 million EBITDA. We employ 15,000 people in the GRP business. We have 3 strategic product segments. We have the aerospace, the regional specialty and the regional commodities. The aerospace is around 10% of our revenue. The regional specialty is around 60%. This means packaging, automotive, bracing, which is heat ventilation and the air-conditioning, we have defense, commercial transportation, very strong, consumer electronics, lithographic sheet, and then 30% are the regional commodities.

We want to be even closer to our customer in the future, so we reorganized our business into 3 segments from a structure -- from asset-based structure to a customer-based structure. We organized the business units for packaging, global packaging for aerospace, transportation and industrial and China with consumer electronics. The movement for this fast-growing market on consumer electronics is going to be produced in China and in the Asian market. So we have also the capabilities not to produce it only in the U.S., also in Europe, in Russia and mainly in China.

What did we tell you last year in November? That we are going to exceed -- we have an incremental growth until 2013 of $2.5 billion. Where we are today, as Klaus mentioned it already, we are today at around 40% to 50% of this target in 2011. So we are confident to achieve our 2013 incremental revenue growth, and we are exceeding our profitability from the historic levels, so better than historic levels. As you can see here, EBITDA per metric ton, we are around 14% over historic levels, which was actually last year.

Our business is driven also with megatrends, which we already talked about, but what is the impact for our Flat-Rolled Products? When you see the population grow to 7 billion people on earth, 2050, 9 billion, we have the emerging middle class coming through very, very fast also to the megacities, and we focus on sustainability and recycling.

The megatrends are, in our business, really impactful, for example, for the air travel. Around 5% compounded annual growth rate in the air travel, driven by Asia. For example, that today, we have around 25 million tourists, Chinese tourists traveling. In 2015, the expectation is this will grow to 100 million tourists, only tourists out of China. We have there auto demand, new legislation, CAFE regulation, corporate average fuel economy, 35 miles per gallon in 2015. And you know there's a new legislation coming already for 2025 to 54 miles per gallon. So there is a big impact not only from the legislation in different countries to reduce the CO2 emission but also that the car output is going to grow.

Today, we have around 70 million cars worldwide. In 2018, the projection is around 100 million and over 100 million cars. So we are going to participate here. And then we have the world's best average package, which is the aluminum can, there is no doubt, and enormous growth opportunities like we have a per capita consumption in India is one can per capita. In China, it's around 10 to 12. In the U.S., it's 300. The percentage for a beer packaging is China is 4% today. In the U.S., you can guess it's 60%. The beverage can percentage is 60% in the U.S. on beer package. In China, 4%. In Russia, for example, around 18% to 20%, so a real great opportunity.

And then we have around 20 million tons for the Flat-Rolled Products business worldwide. This is as you saw before. 50% of the world aluminum consumption goes into this business, 50%. And the growth rate was around 7%, so good fundamentals. The drivers for growth is coming from aerospace. We estimate around 9% compounded annual growth rate over the next 4 to 5 years, 9% in aerospace. And then, through the innovation. Automotive, we have a growth projection in automotive, 32%. And consumer electronics, we will see more details, and the packaging. As I said before, in China, today, we have 15 new can-making facilities under construction right now. And not only that, it's -- in China, it's the first time that a steel company who runs also can-making facilities is installing the first aluminum can plants for steel. We see a lot of changes of steel can-making facilities to aluminum: Egypt, India, Europe, Spain, and this is driving demand in Brazil, in many, many places of the world. As we go down now, the growth in emerging markets is Russia, China, then we have Brazil and Ma'aden where you just saw the video.

So let's talk a little bit more of what you saw yesterday in the plant about aerospace. Aerospace is -- we are the largest provider to the aerospace industry on structural components. And you can see that the build rates are going up in all major airframes. So this is the so-called single-aisle aircraft, which is the 737 and the 320. And then you have the twin-aisle aircraft, which is a 330, Airbus 340, a 777 and a 787; and then the large commercial aircraft, which is the 380 and the 747. And the single-aisle aircraft is for the large commercial airframes. It's around 75% of single-aisle aircraft is from the whole system. 15% is the twin-aisle aircraft and around 4%, the large commercial aircraft.

So as you can see that the build rates are going up, it's publicly announced from Airbus and Boeing going from 30 to 35, 38 starting to going to 42 per month. We are participating in this build rate growth, but with our proprietary and unique alloys and unique capabilities, we are even growing further. So you see build rate increase of around 20%. Our GRP aerospace growth until 2014 will be 35%. So the capabilities, through proprietary alloys and the focus on new product development, which we showed you yesterday and you can see it here, aluminum lithium alloy has a much better performance, better corrosion-resistant and it's lighter and better properties. So we had this product also at the Paris Air Show already in large scale, and it had a great reception. The people from the aircraft industry were absolutely impressed, and this is already in big-scale tests using aluminum lithium fuselage sheet.

When we talk about the single-aisle aircraft, 75% of the whole aircraft maker goes into this segment. We have like the new generation now, the so-called 737 MAX and the 320neo. The decision was made by these aircraft makers. They are going to have a new engine, to re-engine. But they use this unbelievable, very, very durable and proven capabilities of an aluminum structure for the next 15 to 20 years. And the fuel consumption, as you see from the previous models, it's around 50% increase on the fuel consumption. And then from the newer generation, new generation on 737 and 320, it's around 15% to 16% increase. So better fuel consumption and in addition through the new engine. And it is all demonstrated also with the enormous order intake this year, already around 1,700 orders we have given to the aircraft makers for the new generation of this aircraft.

Now another very exciting part of our growth story is automotive. And automotive is CAFE regulation. It is new innovation bonding technology, and a big change in the industry. So we are participating. We are -- you can see here also that we are already committed to invest here in Davenport, $300 million, with our partners. And we are going to grow this business here 5x from today and really ramp up. We will have the new investment started up in 2013 and ramp up in 2014, and so 5x growth here in this model using more aluminum in the car for lightweight, also to achieve this CAFE regulation or the CO2 per 100-kilometer regulations in Europe. This goes worldwide. The mark-initialed companies are changing the structure of their business for lightweight. And we are going to participate in this market and we are continuing to focus on product development here.

Everything happening in Davenport. This is a very nice thing also for today's discussion, 9% growth on aerospace and 32% growth on automotive. Consumer electronics, huge market. Probably in many cases, you even don't know that you have an aluminum application in your iPad, in your iPod or in many -- at home, at your to television, in many areas, aluminum is playing. A huge growth here in this market, talking about tons around close to 400,000 tons worldwide. We have capabilities worldwide and we are focusing now also on our new mill in China to grow this product in China, where the action is for consumer electronics.

Recycling, it's the best beverage packaging in the world, it's aluminum. You have the can, you have the can here on the table. You have the can, the can goes into recycling and it comes back to the shelf in 60 days. And we can prove it, we can show it to you. We invested also in recycling capabilities in our Tennessee facility. And the packaging, the aluminum packaging today has 68% recycled content. When you talk about the PET, PET bottle, only one bottle out of 4 goes into the recycling, the other 3 go to landfill. And we don't want to have the landfill. We are working very hard also to bring the recycling rate up. Today in the U.S., we have 58% recycling. We have a target, as you probably know, 2015, to bring this to 75%.

Good challenge in many areas. We work in many areas, I mean we worked -- I went with Klaus and with the executive team even in Europe to the central park. We put recycling bins there. Hundreds of recycling bins that the people take their aluminum can and put this in the recycling content. And we have a good story here for the future. It's big impact also for the environment. We save around 95% of the energy if we recycle the can, and there's actually no reason that the aluminum can goes into landfill. So we are working on several projects to make this happen.

And then worldwide, recycling is a big focus for all of us. And you see the growth opportunities in the emerging markets, also our customers are investing significantly. The large can makers, their capital expenditures around 60% to 70%, goes into the emerging markets. And as I mentioned already before, you see China, you see Brazil, we see investments in Vietnam. We see investments, heavy investments in the Middle East from our customers, waiting really so that we are going to start up our Ma'aden rolling mill to supply them with good product in the region. And our Russian and our China facilities are supporting our mark initial customers also with the good product from these mills. And you see the recycling content in Brazil, China. And we work already in the MENA region, so Middle East and North Africa, on educational programs, and the same in Russia with the advertisement and working with the supply chain that we use instead of PET, instead of glass, which is very heavy, to use more aluminum. Then the growth in the emerging markets. We talked also last year about Russia. We are now 5 years into Russia. We're increasing productivity; we're increasing our profitability on the ATOI on the EBITDA basis. And the really good thing is that our customers are also investing in Russia because they are convinced that -- and happy that we are producing their material locally, and now, they have the courage also to go into Russia and to invest.

The good story and focusing on new developments. One quick story about commercial transportation, the penetration in Russia on aluminum and commercial transportation, which means truck, trailer, taxis, rail, it's 2% to 3%. It's nothing. I mean there is an opportunity even you double it or you triple it, you are going to go to 10%, 15%, which is absolutely necessary also with the upcoming in Russia, upcoming CO2 regulations. So great opportunity. We have unique capabilities there, and we substituted all the inputs, for example, into Russia. There is no 1 can-sheet kilo going into Russia. It's all supplied out of our facilities already.

Then we have China. In China, we are growing with a ramp-up of these 2 mills so that we have 3x the market. And we have a positive EBITDA for this year and focusing on, really, differentiation of the product. You have to be differentiated on the product in China and training the people. And a good performance in China. A little bit with the seasonality still impacting, but we are building a sustainable differentiation in China. And then the Ma'aden project, around 7% growth in Ma’aden, in the region. And also, as I mentioned before, we had already a change from a can-making facility in the region to -- from a steel can-making to aluminum facility, which will be a potential customer for us in the future. And then our execution, how do we execute. We have 3 strategic levers. The operational excellence is around $136 million productivity performance this year for all our plants. But when you walked yesterday to the CoE, to the Center of Excellence here, and you saw the ABS, the Alcoa Business System, the Alcoa Production System deployed in the mill, I hope you had a good -- you got a good feeling what we are doing with the engagement of the people, also with the talent, what we have especially here. You saw engaged people talking to you and very professional, with very good education. And we use these also -- these capabilities in many other places in the world. The auto body sheet and the growth. So I talked about the growth and they enable us recycling business system.

So coming to an end, again, we are changing the profitability in the business. We walked away also from some businesses, which we could not achieve the profitability, what we expected. We are exceeding our revenues of what we told you last year, in 2013, and also the historic levels on EBITDA per metric ton. With the aerospace upturn and the aerospace build rate increase and the automotive story, which is a step change in the aluminum industry and the innovation in the consumer electronic business and in the packaging. And then growing the emerging markets, which I showed you, mainly in Russia, China, Middle East and Brazil. This is the summary of the global world products business, and thank you very much for your attention.

Roy Harvey

Great. We'll be taking some questions for Helmut. Who would like to get started?

Unknown Analyst -

My question has to do with -- I think it was Slide 12 where you showed the growth in the automotive market. Is that for Alcoa or is that the global market?

Unknown Executive

[indiscernible]

Unknown Analyst -

The automotive sheet market.

Helmut Wieser

The automotive sheet market is going to grow globally. It's now with -- especially with the CAFE regulation, it's really mainly driven in the U.S. But the mark initial companies, if they are going to produce an all intensive vehicle in the U.S., they want to roll it out to the world. They want to roll it out to China. You know that they started in Europe many years ago on the, as Klaus said, on the very high-end class like the Audi, the Jaguar, the Range Rover. But now, it's changing to more high volume cars. And it's the project is going on, as we know, in different countries of the world, it's global.

Unknown Analyst -

So from that 215,000 to 494,000 tons, that's a global market. What would you say your share of that is today and where do you hope to take that to?

Helmut Wieser

It depends in a different market, but we are accounting for around a 40% share of the automotive in the U.S.

Roy Harvey

Gree [ph], why don't we go Gree right there, and Paretosh next.

Unknown Analyst -

I guess from your last slide, Helmut, showing the different end markets that are going to contribute to your $2.5 billion revenue growth, I assume that's more or less rank-ordered. You have the aerospace on top, and then auto and consumer and then emerging markets down below. Can you just help us bridge that $2.5 billion and give us some order of magnitude? Is aerospace half the growth? Is auto $400 million or $500 million? If you could just help us frame that please.

Helmut Wieser

I mean if you see that the aerospace growth in the emerging markets, if you think they -- more or less the aerospace and the automotive together, it will be around 20% to 25% of the total growth in 2014.

Unknown Analyst -

And then so the rest is consumer? I mean emerging markets would be the bulk of it then?

Helmut Wieser

Yes, consumer electronics is from a relatively low level, growing just 100%, over 160%. I don't have the number right now, but it's still a relatively low number on the consumer electronics because we are producing around 2.4 million tons.

Roy Harvey

Paretosh?

Paretosh Misra - Morgan Stanley, Research Division

Helmut, what kind of operating rates are you seeing now in your Russia and China mills?

Helmut Wieser

What kind of?

Unknown Analyst -

Operating rates, utilization rates?

Helmut Wieser

Utilization rate. In general now, when we talk about Russia, it's around 80%, and in China, around 65% right now.

Roy Harvey

Any additional questions? Jorge.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Helmut, on the $300 million Davenport auto investment that you're doing here, I'm assuming that is not included -- the incremental revenues are not included in the $2.5 billion target because the auto revenues come on sort of in 2014? And so could you kind of quantify what incremental revenue or EBITDA you expect to see from that investment or talk about returns on capital projected there?

Helmut Wieser

Yes, I mean the 2014 number is the startup of the program. It's around 60%. The full ramp up of the automotive new models and projects will come into 2015. And the EBITDA growth here will play in 2015 with -- from an incremental perspective. From revenue, it's around $500 million, and it's double-digit EBITDA growth.

Roy Harvey

And over here.

Unknown Analyst -

At your Davenport facility, it seems like there is a bottleneck, not today, but in the future for producing the A380 and for Boeing's plane. And I was wondering what your guys' plan is since you're adding automotive now at that plant, there's not really room to add another 220-inch mill, another plate mill. Where were you guys looking to do that in the future when their demand for those parts increase?

Helmut Wieser

No, I think this is a very good question, but you saw yesterday that we have already installed 4 hot mills in -- which is the key equipment for a rolling mill. So a normal rolling mill in the world has 2 hot mills, a reversing mill and a continuous mill, and we have 4 mills already installed so there is enough capacity for the growth. When you talk about the automotive and the aerospace, these -- and you saw it yesterday, 2 different flow parties. So you have the aerospace, where we invested in the timeframe of 2005-2006 heavily on the inspection and on the ultrasonic inspection, and also on the systems, on the control systems of the mills and the stretcher and the aging and heat treatment facilities. They are invested for further growth. So we are well aligned here. Now the second flow path from the coil side, for the automotive, we have enough hot mill capacity. We have additional pre-heat capacity and we have enough casting capacity there. And we are well set with the new investment for the next 3 to 5 years.

Roy Harvey

Tony [ph]?

Unknown Analyst -

Helmut, could you discuss a little bit -- I've seen some announcements recently, some of the competitors', but maybe at some of the plants that would more closely be competitors to Davenport, maybe Isla [ph] and Dufel [ph] and what those companies are doing in terms of expansions in the auto and aerospace area, are there any other major increases in heat treat capacity? Kaiser Trent was doing a little debottlenecking, stuff like that.

Helmut Wieser

As far as I know now, the additional capacity in Isla, I do not -- I know they invested also in 2005, 2006, and which is a huge mill. I did not see specific additional investment. I know they are debottlenecking, as you said, on the heat treatment capacity or on the aging capacity, but not on the rolling capacity. And then you mentioned Dufel also or no?

Unknown Analyst -

Yes, I did. Are they really competitive on the auto side a little bit?

Helmut Wieser

In Europe, they invested in a heat treat facility several years ago and they are playing a role in Europe. But I did not hear also additional investment on this side. So on the aerospace, yes, but I mean we invested heavily for the coming upturn, they are already in the past. And then as what you saw yesterday with the segregate capabilities and also with our improvement, what you saw -- our people showed you yesterday, I think we have a good opportunity to use this equipment in a much more productive way in the future.

Unknown Analyst -

So capacity is -- so the expansions are already taking place maybe aside from debottlenecking. The industry inventories have all been destocked for the most part here in North America and Europe, so really as we move forward, we could see the true capabilities being unleashed?

Helmut Wieser

Yes.

Unknown Analyst -

And tracking the build rates?

Helmut Wieser

Yes, totally right. And you put the next 2 to 5 years going out.

Roy Harvey

Any additional questions? Okay, good. Thank you, Helmut. And moving on now, Olivier Jarrault, Engineered Products and Solutions.

Olivier M. Jarrault

Good morning, everyone. Thank you very much for being here with us this morning. I'll be talking to you about our downstream businesses, our Engineered Products and Solutions group. Let me start with briefly reminding you who we are. We have diversified the portfolio of 5 businesses, manufacturing technically complex and highly differentiated products, I would say, and serving mainly 4 markets: First, aerospace; industrial gas turbine; commercial and transportation; and nonresidential construction.

Our revenues in 2010 were $4.6 billion. We employ 21,000 now current across 18 countries, and we operate 91 manufacturing sites. Our Power and Propulsion business is our largest business, and it's actually the global leader, global leader for jet engines and industrial gas turbine airfoils. Same position as well for Fastening System business within the global aerospace fasteners industry. This business also has a leading position in North America for within the commercial transportation as fasteners industry. I mean by that, fasteners used on heavy duty trucks, on trailers, on buses and on, well, car.

Our Building & Construction business has 2 main activities that have leading position within the global, nonresidential construction market. First, we are the architectural system market leader in the U.S., and we're also well positioned in Europe, leading the U.K. and the Holland market. By systems, I mean windows, store fronts, curtain walls. We also manufacture aluminum composite materials used for wall cladding applications on facade and we're #1 in the U.S., we're #2 in Europe. We're also the global leader for aerospace and defense aluminum forging, the next versions. And finally, our Wheel business is a global leader as well for forged aluminum wheels used on heavy-duty trucks, on buses and on trailers.

Our group was formed early in 2003, and while we shed, I would say, our portfolio across the years, primarily by reducing our exposure to the automotive market, we very early on, very early on focused on driving share gains. Share gains through, as Klaus was explaining, new product introductions and technology. We have by now, across the 5 businesses, I would say, implemented, established a very successful standardized business system for innovation that positions actually all our business as the leader in each of the market for new product introduction, but also, that we'll cover later on, will enable us and has already enabled us this year, but will continue to enable us in meeting the $1.6 billion organic growth target that we set for our group back a year ago, between 2010 and 2013. $1 billion, as Klaus was explaining to us, $1 billion of it will be coming only and only from share gains through new project introduction.

We have also for the past couple of years established a strong manufacturing position in low-cost countries. We're now in China, we're in Mexico, we're in India, and more recently in the past 14 months, we have established ourselves in Morocco to serve on the aerospace side, the Western European market.

We are continuing also, as you will see, to increase our new project content, our new platform, our new aerospace platform within the engine and new airframe. And we're also offering across our 4 markets, a very wide range of innovative solutions, all in that sustainability and energy efficiency. You might have heard that we acquired in March of this year the [indiscernible] aerospace fastener business from TransDigm, very nice acquisition for our Fastener business. It does strengthen our position in Europe. We've [indiscernible] in particular with [indiscernible], with Rolls-Royce and there such. The integration of the business is doing fine according to our business plan and actually has been free cash flow accretive since day 1 of the acquisition. We'll keep on looking at further inorganic growth opportunities in the coming months within the aerospace engine and airframe segment.

Let's take a look, if you don't mind, at how our main markets are performing in 2011 versus 2010. First, aerospace market, very important to us as close to 47% of our revenues serve this market. We think this year, a very nice growth, 6% to 7% as Klaus and Helmut were talking about, primarily driven by commercial jet deliveries increasing about 13.5% in value in '11 versus 2010. Actually, the second half of the year would be stronger from a global aerospace market standpoint versus the first half by about 12%, primarily driven by the increase in build rates of the single-aisle aircraft as Boeing is ramping up its Boeing 737 to about 35 aircraft a month in the fourth quarter, as Airbus ramps up the production of the A320 to about 38 aircraft a month in the fourth quarter.

Also, you have certainly heard about the recent Boeing announcement in regards of delivering between 15 to 20 brand-new Boeing 787 and 747-8 in the fourth quarter. If you look at the combined net orders of Boeing and Airbus, September YTD versus last year, they are up 9%. And I'll come back to the aerospace market in my next slide.

But, unfortunately, the same story for nonresidential construction. With the market growing a couple of points globally, primarily driven by the Chinese market, with 10% to 12% growth year-over-year as the retail segment is expanding in China, as well as the tier 2 cities. Unfortunately, in North America, for now, the third year in a row, the market is dropping another 10% to 12%, primarily driven by the lack of financing, available financing due to contractors and builders. Same story in Europe, 4% to 6% drop year-over-year as a result of the sovereign debt crisis. However, very, very good -- very good market story for commercial transportation for heavy-duty trucks as we saw -- as we're seeing this year in North America, an increase in build rates for heavy-duty trucks of about 60%, as the build rates are moving from 154,000 last year to 250,000 new trucks this year. Same in Europe, about 30% growth as the build rates are moving from 250,000 trucks to close to 340,000 this year. China is not doing as well, declining actually slowly in the second half versus the first half. But let's remember that the Chinese market is about 900,000 trucks a year, about 4x the size of the North America market, and therefore, a lot of opportunities for us, which I'll describe to you later on.

Finally, our industrial gas turbine market, slow growth, a 4% to 5% growth driven by some projects in China, some projects in the Middle East, but offset, still offset by an excess of spare parts inventory in the supply chain.

Let me say, share a few more thoughts and words about the aerospace market as it grows to 50% as you saw of our revenues serve this market. First, definitely, as Klaus was talking, was explaining to us -- I mean the aerospace market is a great growth story not only for aluminum for aircraft, but for our group, Engineered Products and Solutions. Very intense, as you can see on the left side, very intense demand for the short term and the long term has driven a very strong backlog of about 8,500 new commercial jets. I mean here, there are some passenger aircraft, Boeing, Airbus, but also regional jets Embraer and Bombardier. And that does equate to 8 years of production, at 2010, demonstrated build rates. Continued orders and strong backlog in turn drive a projected annual growth rate in the next 4 years in values of the aircraft of about 16% per year. So as you can see, as, I would say, as uncertainty reaches our global economy in 2011, clearly, the aerospace market is a winner today and will continue to be a winner in the next few years. Actually, if you look at the next 20 years, the next 20 years, the expected travel demand will grow about 5% a year. That requires to add, in the next 20 years, an additional 33,000 new commercial jets. New capacity will be required in emerging countries and the replacement of aging aircraft, less efficient fuel aircraft, will be required as the world continues to search for efficiency solutions. So that does equate -- building those 33,000 new planes in the next 20 years equates to raising the combined Boeing and Airbus build rates from about 1,100 units in 2010 to close to 1,675 planes per year. Or viewed another way, it means consistently increasing at about 3.8% to 4% the build rates across the next 20 years.

Let's take a look at how we're executing towards our 2011 targets. First in terms of revenue, if we look at our annualized revenue, we'll be at $5.3 billion, so clearly on track to meet the $1.6 billion organic growth target I was referring to. 55% of the growth between 2010 and 2011 will be realized through share gains, very strong share gains on the aerospace side, on the commercial transportation side and on the nonresidential construction side. On EBITDA to sales performance, we're delivering against our target to continuously increase year-over-year our EBITDA to sales. And we'll continue to do so next year, bringing the EBITDA to sales in 2011 annualized about 2 points higher than last year.

Same story on reduction of debt to working capital, where we have reduced our working capital by about 7 days from 2009, while increasing, improving our on-time delivery service level to our customers as our markets ramp up.

We have realized close to $800 million of net productivity savings across the past 3 years versus 2008. As you can see, we're pulling all levers of productivity of, as labor procurements and raw material usage. We have strengthened our position in low-cost country, unlocking some additional capacity. We have optimized our supply base for the past couple of years, and we have also protected ourselves through raw material cost of pass-through contract. We're sitting today across our global manufacturing system and across our 4 markets with about 25% to 30% of the valuable capacity, which means that we will not have to spend heavy capital dollars in the next few years to fulfill the growing demand of our market such as aerospace.

Okay, let me now share with you at a high level, the value proposition, if you will, of the innovation that we are offering in each of our key markets. First, on the commercial aerospace side, we're -- as I would summarize, we are offering a set of innovative fasteners, forgings and extrusions that primarily reduce weight while increasing the strength and also the corrosion resistance. In regards to defense industry, and here is a great story, it's a great story working for Alcoa. It's using the Alcoa parental advantage. It's using the Alcoa technical sensor in Pittsburgh. It's using the Alcoa across business units defense market sector team that has enabled us to find new opportunities within the defense industry.

I would mention our new aluminum and titanium bulkage forgings for the Joint Strike Fighter, which we forged in our Cleveland plant. And I would refer as well to multiple fasteners, forging and extrusion applications for technical wheel vehicles in the defense market.

In regard to Power and Propulsion, as you certainly know, OEMs are constantly increasing the operating temperature of the turbines, while reducing their weight in order to increase their efficiency. But, of course, as they do so, they need to avoid any potential durability issues due to those very harsh operating conditions. To give you an example, a very simple example, the high-pressure section of a commercial jet engine turbine runs at temperature much higher than the melting point temperature of the metal. So therefore, our innovative technology has been and will continue to be a key enabler for OEMs to meet those very difficult objectives. Our aluminum-forged wheels offer heavy-duty trucks a combination of lightweight solutions with increased strength in order to respond to the global changing fuel efficiency regulations.

In regards to Building & Construction, as a result of markets not doing well for us, we have intensified very heavily the introduction of new products, of new systems, all aimed at sustainability. So not only our new systems help, I would say, architects meet the increasingly rigid energy requirements, both in Western Europe and in North America, but also they help architects improve the aesthetics of their buildings.

Let me walk you through more details, but let me share with you, I would say, the core technologies in each of those markets. First, in relationship to airfoils and turbines. As I was saying, industrial gas turbine OEMs have set a very, very, very aggressive target in terms of efficiency: efficiency improvements, 60%; reduction in NOx emission, and they've set a factor of 2 for the expansion of the number of stock-stop cycles and operating hours between measure overall. We have responded and offered a set of very cool techniques, many of them that we'll only talk about the capital proprietary, one, our platform core technology first in very simple words. It means directing very clean cooling air in area of the blood where it has never been before by adding some internal cooling fasteners to the platform of the airfoil. What does it do? It enables the turbine to run at very, very high temperature while keeping the platform, the base of the blade below the oxidation temperature. And of course, as I was explaining, high current temperatures means better efficiency and reduction in emissions. We also have developed across the past 12 months a very advanced metallurgical processes that enable us to manufacture those blades, those vents with airfoils, that of which we call is single crystal metal, meaning free of any imperfection, which translating to, in simple terms, higher strength at higher temperature, meaning extension of stop-start cycles.

Switching to the next generation of jet engines, I'm here talking about the General Electric Lipex engines. I'm talking about the perhaps [indiscernible]. I'm talking about the Rolls Royce 21000, all those new engines that would be powering with next generation of commercial jets in the next 15 to 20 years. Also, as you can see, very, very aggressive targets fueled on reduction emissions, 50% reduction in emissions, a decrease in noise, improved maintenance cycles. So we're of course utilizing the 2 techniques, the 2 technologies I just described to you. And we have, in addition to that, in the few recent really months developed a very proprietary manufacturing methods to produce what we call very advanced, 3-dimensional and complex cooling schemes in the airfoil, once again, to increase -- to enable the turbine to run at much higher temperatures. Also, a lot of work being done on advanced single crystal in order to reduce -- I'm sorry, will increase the melting point temperature by about 12%, while improving the oxidation resistance. We're also the leader in what we call the thin wall technology, which, in fact, simply translates into reducing the weight of the blade by about 20%, primarily reducing the thickness of the trailing edge of the blade. All those new products, those new technologies will bring us around $80 million of additional revenues in 2013 versus 2010. Switching to our Fastener business, in here, once again as a result of continuous innovation across the past couple of years, we have, as you can see on the right side, we have definitely increased our product content on new platforms such as the Boeing 787, such as the new Airbus A350 versus legacy platform, the Boeing 757 or the Boeing 737. But also very importantly, what we have done is to increase as well our new product content, our new proprietary product content. For instance, a specific range of new fastening systems were developed for the Boeing 787, and now, for the A350, to integrate, say, the function of lightning strike management with the structural fastening of the airplane. That translates into an overall content on the Boeing 787 or the Airbus A350 of about 4.5x the content, of content on the Boeing 767, same size aircraft with about 70% of that content being made of patented products. All those airframe applications plus some others, some on the engine side, on the equipment side, on the commercial transportation side, will bring us $120 million of additional revenues versus 2010.

Within the nonresidential construction market, it's actually interesting to note that the construction of green buildings will be about -- will represent 25% to 30% of the global industry by 2013. We have introduced in May of this year a new finish, a new patent called the EcoClean, which either finish that incorporates titanium dioxide nanoparticle that have a particularity, the property to remove NOx from the [indiscernible] pressure. To give you a simple example, imagine a 10,000 square feet facade, an average 10-story building, Hilton hotel or Marriot hotel, covered, painted with this product. It will remove the pollution of 4 counts per day, equivalent to what 80 trees would do on a daily basis. But we have also and we're continuing actually year after year, year-over-year to improve the thermal installation of our system, of our curtain walls, of our doors. This year, we achieved up to 25% improvement in thermal efficiency, while keeping on decreasing the installation cost of our system. We've introduced another brand-new line of external aluminum sunshade that cuts about 50% solar heat gains. Actually, they are very well liked in Europe, the sales in Europe and in the U.S. as well, by architects as they improve the aesthetics of the building. We're targeting with many other -- I can only here mention 3 of them, but with all the projects we're introducing and we have introduced in the past couple of years, an additional $80 million of revenue in 2013 versus 2010.

Switching to our forging and extrusions. Here, the improved mechanical and metallurgical properties of our new aluminum alloy enable us to either displace older aluminum solution, displace titanium and also have opened the door to brand new applications, very interesting applications within the aerospace market. I would refer to the flow structure and the seat tracks of the next generation of commercial jets, where aluminum lithium extrusion solutions can help serve up to 15% in weight versus the old aluminum alloys being used today. I'm referring to the platform of the Boeing 737. But also and certainly, most importantly, for the industry, it's the ability -- the property of our new aluminum lithium extrusions to improve the coercion resistance, which is very critical to our flood [ph] rate applications, extremely critical. In regards to the different industry, we're here also introducing a set of brand-new solutions that all has to do with weight reduction, with improved strength and with cost savings. I would mention the structure of some GPS-guided bombs [ph], where we're offering a monolithic aluminum forging solution as a replacement to the assembly of many, of up to 14 different castings. I will refer as well to a very simple application that consists of switching from steel to aluminum mortar breast plates, saving up to 14 pounds. Very much appreciated, of course, by our soldiers who have to carry those in their backpacks.

In terms of oil and gas, once again, same story. Removing -- using aluminum, removing weight, removing weight from the down hold tooling of the drill pipes, removing weight from the equipment being supported by the surface vessels, enable existing drilling equipment to drill deeper, 40% deeper access to what we call ultra-deep water. 10,000 feet or further horizontally. Then, it is what we do with steel solutions.

We're also offering several aluminum extrusions, retrofit kits for -- that enables older drilling ships to be upgraded from deepwater drilling or exploration to ultra-deep water drilling exploration. So our forging and extrusion business requires those 3 markets and will rely an additional revenue of $150 million in 2013 versus 2010.

Talking now about our forged aluminum wheels and heavy duty trucks. Here, looking forward, there are, as you know, some very favorable external factors such as increased fuel efficiency, such as the tightening of greenhouse gas emissions, such as mass reductions turned out that are going to be accelerating in the coming years, the use of forged aluminum wheels, all heavy duty trucks displacing steel wheels.

You can see the penetration of forged aluminum wheels in North America, Western Europe, Australia and Japan has grown from 27% to 34% in 2011. Still lots of room, lots of growth, right, but potential growth opportunities knowing that 1 point of penetration equates to about 100,000 new wheels. Now in addition to that, if you look at the emerging economies, if you look at Brazil, if you look at China, the expected growth rates of heavy duty trucks is about 8% per year in the next 3 years. What's going through that changing the infrastructure of the roads. They are deploying, enforcing mass reduction standards and the heavy duty trucks OEMs are adopting radio, tubeless tire systems, which is a key driver for adoption of aluminum wheels replacing steel wheels. So therefore, lots of growth opportunities as well in the emerging markets.

Within North America and the automotive industry, the gas fuel regulations recently enacted by the Obama administration and moving the passenger car standards from 27 miles per gallon to 35 miles per gallon in 2016 is certainly a driver for automakers to use lighter and lighter components.

Our forged aluminum wheels are 15% lighter than casted aluminum wheels for motor application and they are 200% stronger. They also offer a very appealing style, and we have met some very, very strong share gains in North America in the auto markets using these forged aluminum wheels, especially on the GM, the Cruze model where we have 100% of the application. We are the only forger of aluminum wheels in North America for the automotive industry.

Nice adjacency -- I will end up with this. A nice adjacency for that business in regard to the defense industry. At the ground system -- ground baker system budget in North America gets cut by 50% in 2012 versus 2011, down from $13 billion to $6 billion, money is being redirected into retro fitting for the tactical wheeled vehicles, Humvees with a special focus on safety, safety of passenger, safety of the driver, which is a very good fit with our expertise in underbody body aluminum blast shield protection. Our aluminum blast shields are 30% lighter than steel blast shield and they offer a much better resistance to cracking.

As a conclusion, as you -- I hope I have communicated to you, we have restructured our cost base across the past few years. We have established ourselves in low-cost positions, unlocking additional capacity. We have reshaped our portfolio. We have clearly established ourselves in each of our markets as the clear leader for new technologies, new products. We are demonstrating a sustainable EBITDA to sales financial performance and we'll continue to do so next year. We have a team of very, very experienced managers, knowing very well the specific industries in each of the business.

And therefore, despite the uncertainty that may be affecting some of our markets in 2011 and next year, I feel very confident that we are extremely well positioned across the 5 businesses to keep on growing our top line and our bottom line. Thank you.

Roy Harvey

Okay, questions for Olivier.

Unknown Analyst -

You talked about aluminum lithium alloys with regard to the improvement on aluminum. Can you talk about how they are stacking up against composites and against titanium and what you're hearing from the manufacturers on the differences and the advantages, disadvantages?

Olivier M. Jarrault

Absolutely. I will talk more about aluminum lithium forging and extrusion solutions that I said is very, very key and critical on 4-wheel applications. But the main advantage of aluminum lithium is clearly a corrosion-resistant improvement. Some existing airframe structures have demonstrated some corrosion due to the mix of composite and titanium, especially in the wing box area of the plane. So therefore, the aluminum lithium solutions are clearly ahead in terms of weight improvement while combining as well an improved corrosion resistance. Also, as I was saying, yes. As a result of it that I was talking about, the -- as a result of that corrosion resistance improvement, the checks for corrosion are now in the typical aircraft about 8 years leverage, 8 years using aluminum lithium. You can extend those intervals right up to 12 years, which is actually a very, very important, very well appreciated by Boeing Airbus and by the authorities. You will see that on the new, as an example, the new Airbus A350 will have that characteristic.

Roy Harvey

Lloyd?

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Within your portfolio of businesses, are all of them profitable? And I'm obviously pointing to building construction systems that is very bad markets. And can you assure us that today, both Reynobond and the systems are profitable today and will be profitable going forward?

Olivier M. Jarrault

Two questions. I mean, in fact to answer the first, yes. The answer is yes. All our businesses are profitable and actually are increasing quarter-over-quarter. They’ve been that with such performance. Now in relationship to our building and construction business, as you said, markets have been playing against us for the past 3 years. That's why we have introduced -- designed and introduced brand new products, whether it would be systems and brands and projects, in order to gain share and to improve our profitability. And we are making money, of course, across the 2 -- among the 2 activities today, not only in North America, but as well in Europe. We have proceeded across the past 24 months with very intense restructuring. We have cut our costs in France, Germany, in the U.K., in the U.S. We continue to do so, and we are driving profitability.

Roy Harvey

Yes?

Unknown Analyst -

[indiscernible]

Roy Harvey

Okay. I think Sandeep [ph] had a question right here.

Unknown Analyst -

The $1.6 billion guidance that you've given, does that include the TransDigm acquisition or the TransDigm revenue comes on top of that?

Olivier M. Jarrault

The $1.6 billion target is a pure organic growth target. It does not include any acquisition. It would be an addition. Any acquisition we're making would be in addition to that $1.6 billion growth.

Unknown Analyst -

Okay. And also, can you just give a pointer to how much of the revenue comes from defense? And do you see any downside to that revenue from the budget cuts that are being discussed right now?

Olivier M. Jarrault

Our defense revenue for the group is somewhere around 3% to 4%, very small. Okay. And as I was explaining, as the budget gets cut year-over-year, the example of the Humvees are very critical one, very good ones. I mean, they are trying to retrofit, improve the mechanical performance of each of the vehicles, right? So we're finding brand new applications and we're gaining share.

Roy Harvey

Paretosh?

Paretosh Misra - Morgan Stanley, Research Division

So about half your total revenues come from aerospace. Within that, how much from power and propulsion? How much is from fastener and how much from forgings?

Olivier M. Jarrault

You mean the space byproducts?

Paretosh Misra - Morgan Stanley, Research Division

Yes, byproducts.

Olivier M. Jarrault

Roughly, I'm going to give you percentages. Roughly, 80% of our platinum business is aerospace between engine and airframe applications, 80%. Our investment casting business, our power and propulsion business is about 60% aerospace. Our forging and extrusion business, as the 3 activities, then one is aerospace and is about to become the forgings of the forging plants in Cleveland, the bulkhead, I mean the wheel, the aluminum wheels, the extrusion is about 55% or 60% as well aerospace. Okay?

Roy Harvey

Any additional questions? Mr. O'Carroll.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

How does your margins in power and propulsion compare with your main competitor, Precision Castparts, and why?

Olivier M. Jarrault

We don't display anything. I mean, despite really our own margins were entered by byproduct lines. So what I would say is -- which I compare versus the competitor you are referring to, a very valued competitor by the way which we compete very aggressively with across, a few of our markets and partners in forging, in extrusion, investment, casting. I think what really differentiates us at the point to communicate and to explain to you is our leadership right? Our leadership in technology and new projects, which have -- which will actually, as the new engines gets launched under the 21,000, the turbo fine energy in fact will bring us additional incremental, right, EBITDA to sales in the next few years.

Roy Harvey

Over here.

Unknown Analyst -

Klaus said -- started the meeting with, there is all these disparate -- all these businesses and they have different functions and the entire Alcoa brings more value. If you guys were theoretically spun off, what do you think you would lose not being part of the Alcoa family?

Olivier M. Jarrault

It's a very, very, very good question. I'm going to be answering you very sincerely as I have come myself from running across the years a small business, $1 billion business, so was my previous experience. Joining Alcoa actually has been a great experience for me and for my people and for our team, why? First, you have to think about the -- what I call the Alcoa parental advantage about the proximity to the Alcoa technical center. Huge, huge amount of new ideas, of new solutions that are very -- that are being put in place in our plant extremely quickly. We have the best metallurgist that would not -- we would not as a small business, a small forging business, a small extrusion business, would not have access to, right? So very, very strong engineering proximity to research and to speed, speed, speed a new project information. That's number one. Number two is the -- from a talent standpoint. You saw on Klaus' slide, the first point was talent. When you're a small business, a small extrusion plant, a small forging plant, a small tactical plant, a $2 million, $3 million, $4 million, $5 million business in California, in France or in U.K., it's hard. Actually, it's hard to find talent, to attract talent and then to keep, to retain the talent. Thanks to Alcoa, to our reputation, to our size, to the excitement that we can provide when we hire young engineers, young financial guys. I mean, new people you retain, you can attract. You attract talent and you retain talent. And that's the key differentiator which we have seen, which we have experienced and lived in the past few years, which I'm living every day, all right? So it is really a key. But again, as Chris was explaining us, the theory as an example, the theory -- general theory, right? All those cost business, you need to cost. Both technical and managerial activities are extremely positive, very, very positive, are fueling, fueling growth, fueling for EBITDA to sales improvement.

Unknown Analyst -

Will you do the customers side, on the customer?

Olivier M. Jarrault

Oh, yes. Yes, absolutely. It's very, very good. It's very, important as well, the customer, because the level of -- the level at which you can -- you communicate with the people that you meet with. When today, when we go to Boeing, when we go to see Airbus, we have access to the top manager in procurement, the top research leader, which you cannot do, obviously, when you are a small business, a midsized business. So all those factors when combined are extremely important, very, very, very important. And I'm seeing -- we're seeing it every day in, of course, each of our business, not only on aerospace, but also in commercial transportation. And also, as I was explaining, thanks to that Alcoa parental advantage, we are finding new opportunities in the different industry, in the automotive industry, okay?

Roy Harvey

Any additional questions? Paretosh, another follow-up.

Paretosh Misra - Morgan Stanley, Research Division

Just kind of a margin question. If you had to compare the margins of the aerospace products within your segment with the rolled products, how would those compare?

Olivier M. Jarrault

About the rolled products, right? Well, there's a difference. Of course, there are difference in margin. But I mean, the difference is associated with the type of processes that you use. The type of -- the volume, although this time, we're on aerospace, on...

Klaus Kleinfeld

Why don't we just say entire?

Olivier M. Jarrault

Excuse me?

Klaus Kleinfeld

Why don't we just say entire?

Olivier M. Jarrault

Okay, I'm going to get there, Klaus. The entire. I will tell you to explain my entire, Klaus.

Unknown Analyst -

[indiscernible]

Olivier M. Jarrault

No, entire.

Unknown Analyst -

But that's something which you can't move against the [indiscernible] but the [indiscernible]

Klaus Kleinfeld

I think they are higher in this industry. I mean, but there's more industry dynamic than an achievement necessary because -- I mean, here, you have -- depending on which product you pick out, you have more aspects where you can innovate and use innovation as a leverage, right? You have left from the rolling and you have different industry dynamics on the rolling side, which probably will never go away that way. And we can -- we're happy to discuss that if you want to elaborate on that. But they are substantially higher. And you see -- I mean, you see when you look at the profitability. And I believe if we continue to do what we're doing here and doing it very well, we will continue to, I mean, perform extremely well and the targets are also ambitious. I mean, I don't know whether you heard or you're seeing that, not only does he believe he wants to be above his story at norms, but he wants to perform every year better, right?

Roy Harvey

Additional questions? Great. Okay, thank you very much. Now I'd like to introduce Chuck McLane, our Chief Financial Officer.

Charles D. McLane

Okay. First, I'd like to thank you for your patience today. I know it is extremely difficult to sit out there and look at these presentations one after another.

I have the privilege of actually bringing to you and try to put some perspective into pulling this together, from all the work that's gone on from these group presidents and how they've positioned their businesses to you. So there's 2 things I want to cover really, very briefly and then we'll do a big Q&A. Okay? One is about the value proposition. So you've seen each one of these group presidents come up and go through their businesses and talk about their multiyear targets to you, and so the first question is whether or not those targets are truly a value proposition for Alcoa, and then therefore, are they value proposition for the shareholders? And then secondly, what's the status of the balance sheet and the strength and health of the company, okay? So I hope to cover both of those for you.

First of all, the targets, whether or not they are a value proposition. They're truly are going to create value over this timeframe. Somebody had said earlier that the upstream target, 7 percentage points and 10 percentage points. You take your pick at where that might be, but we know the whole industry moves correctly. Everybody is trying to go through productivity action, but this is moving on the cost curve. And I think any way you slice it, these definitely are going to produce significant value if achieved.

The midstream, the revenue targets that are given there. The key is at margins that are higher than historic highs, and these guys have been saying and they're going to build on it each year, so sustainable margin improvement from 1 year to the next. And then Olivier just finished saying the exact same thing. He's got a revenue target that's organic growth, no inorganic activities to it, and he's going to be at margins higher than his historic highs, which he's done the last 2 years and he will do next year and the year after.

So then if you do believe that, that's a value proposition for Alcoa, there's only one other question, do we have the capability and commitment to execute on it? And there, I would make the point that if you look back at the goals that we put out when we went through the great recession in 2009, we put out specific to your goals to you and we achieved all of those goals. In fact, we did most of it a year early. This was around procurement and overhead and working capital and CapEx. We reestablished those goals and exceeded them. And now we've gone out with some financial goals which you see at the financial targets for this year, along with these 3-year goals. And I would tell you that the fact of the matter is that we're achieving each one of those. We're ahead of the revenue improvements in each of the -- in the downstream and midstream businesses. We've exceeded the margins that we're at historic highs, and we are reaching each one of the financial targets. And I would tell you, the organization is absolutely committed to hitting the value proposition of those multiyear targets.

So the financial targets that we had. We put these out there, and I know there's great interest about, and we'll talk about that in a minute about what these future targets are. But we put these out so you would have an idea in the given year exactly what we're going to do around discipline, around managing our CapEx, working capital, Ma'aden expenditures, et cetera, and we're going to hit every one of these in the year 2011. We're going to come in, in that debt-to-cap range 30 to 35 and we'll be positive free cash flow. Through 9 months, we were $250 million, and I'm going to give you an idea what the fourth quarter is going to do for us with regard to that as well.

Okay. Along with that hitting our target and managing our balance sheet, we've said before that we are committed to being an investment-grade company. And I've had some people say to me, "Hey, what's the big deal suppose you slip a notch, the incremental cost is not that significant?" But I would tell you, we look at it from 3 aspects. One is the cost because there is some incremental cost. Two, is reputational because we think our global reach and the leadership position that we had that we should remain investment grade. But third is flexibility, flexibility around covenants and debt agreements, flexibility about what markets we can go to. We're one of the very few, if not the only one that I know of, BBB- companies that has access to the commercial paper markets, and we plan on maintaining that line of flexibility, okay?

So if you looked at what we've done over the time period to try and maintain this. First, look at the left-hand side and you can see that we've had several refinancings that have occurred. If you look at us back in '06, '07 timeframe, you would have seen some maturity powers on debt that was staring at us in the face, where our average debt maturity was under 4 years and we had to do something about that. What you can see is that we've restructured the debt portfolio. So today, we stand at over 9 years maturity and really a lower interest rate than what we had when we started this process. In addition, we just recently consummated a new revolving credit agreement at very competitive rates. So we have $3.75 billion that was just pawned in July of this year. It's tenure is for 5 years. So that puts us in a stable position.

Now to the right-hand side, what are the rating agencies care about? Leverage and coverage. And if you can see in both of those categories, we've moved back into a solid range of where we need to be right now and look to continue that from the range that we came from when we were in the middle of the recession, okay?

Okay. I'm going to spend a few minutes and give you some very specific facts around this slide. And that is, if you looked at 2011, we gave you -- first, let's cover 2011. You can see that we have maintained discipline in sustaining CapEx. First, you could see where we were in the '06, '07 and '08 timeframe with regards to sustaining CapEx, the recession, the downturn hit Klaus had referred to earlier. We developed a set of tools for the downturn and we managed those extremely well. And we took our sustaining CapEx down to $500 million. Now remember, our depreciation is about $1.3 billion. A really efficient level of spending on sustaining CapEx would be about 80% of that or $1 billion. So we went through 2 years where we spent at 50% of that level and then this year, we had placed a target of $1 billion, which is only getting back to that 80% of depreciation. And we will come in a little under that, okay?

On working capital, we've taken $1.3 billion out. I mean, each day to us is worth $70 million, and we just didn't take it out once. We've maintained it during this entire 3-year period, and we will finish this year. We've said this year as the stated goal of positive free cash flow. So through 9 months, we're at $250 million.

Now a gentlemen earlier talked about, "How do you decide when to shut facilities and when not to? Do you look at the -- when they're losing money?" And we started experiencing somewhat of a little bit of a downturn now that we've talked about, right? I mean, the metal prices decreased by 30% and we've seen slowdowns in Europe and some other slowdowns in specific markets, okay?

We have to manage for cash. If you haven't gotten the perception, these are some highly fixed incentive businesses. So if you look to the fourth quarter this year for instance. In the fourth quarter of this year, we've come out and we give you qualitative guidance. Well, I'm going to give you some quantitative guidance around that right now. If you exclude LME and ForEx from the fourth quarter, our fourth quarter will be down about $0.05 to $0.07 a share versus the third quarter, okay? However, on a cash standpoint, our estimate right now is that we will generate $500 million to $550 million in cash in the fourth quarter. That would put us at $750 million to $800 million this year. So just as before, we are going to continue to manage through any situation that hits us and continue to keep on earning cash as we do that.

So when you look at 2012, what does that mean? I cannot tell you how many plans we have put together and scenarios that we have run for 2012, okay? And so there's a host of variables: supply and demand, fundamentals, surplus, deficits, metal prices, ForEx, energy. And going through these various scenarios that we've gone through, we came to the conclusion that our overall the stated goal for 2012 is to be at least free cash flow neutral regardless of the circumstances. So when you start to ask me about specific capital spending, we're going to manage it based on what we're faced with in the environment that we're operating under, okay?

I'll give you for instance -- let's take the sustaining CapEx for instance. If you looked at that, we operated 2 years at $500 million. We went up to $1 billion. If the current environment were to last through into next year, we would definitely not spend $1 billion as the same in CapEx. Probably, it wouldn't be as low as the $500 million. Probably, it will be somewhere in between. Do you see what I mean? We're going to manage based on the circumstances that exist in the marketplace. That goes for running our facilities as well. So we're going to maintain sustaining CapEx and working capital at those levels to remain neutral at least, okay, with the intention of being free cash flow positive again in 2012.

Let me fill out a few other pieces or tidbits of information that people have been asking about, so I can tell everybody at once. If you looked at our debt profile, you would see that we've got about $1.3 billion that coming due over a 5-year period, with about $350 million of that due in 2012, so an easily manageable debt profile. Ma’aden. Ma’aden is a $1.1 billion spend over 4 years. That will be in the $300 million to $350 million range next year, okay? And pensions. Pensions, as we see right now, will obviously still depend on where asset returns end up for the year, but we estimate that, that would be in the $600 million to $650 million range, okay? So when you take a step back, you listen to everything that you've listened to today, the level of confidence about achieving the goals that were placed out to you on these multiyear goals, based on the recent history on what we've been able to do in '09, '10 and '11 should tell you that we are absolutely committed to those goals, and they will absolutely deliver value for the company and for the shareholder. We're going to continue to manage our cash in a very disciplined manner based on the circumstances that we deal with, based on the economic conditions. And our intention is, as I said, to be in a position that regardless of those circumstances, we will be at least cash flow neutral, okay?

That's it for me, short and sweet. And now I think we're going to have a Q&A that will encompass the entire executive group. Is that right?

Roy Harvey

So what we'll be doing next is that we will be doing a Q&A. It will be -- we will have Klaus up here upfront, and then he will also be directing that down to the group presidents as well or the other Alcoa members we have here in the audience. So feel free to ask any questions that you have. Do not limit them just to Klaus. We're happy to have other people since Chuck has not had a Q&A as well. So we do have some time. So we're happy to let you guys ask the hard questions. Jorge, we'll let you go first.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Klaus, we heard a lot about the Alcoa advantage and I think all the divisional managers basically believe that they're getting a fair or maybe more than fair return from the corporate. But from an accounting point of view, your corporate SG&A is large. And has there been a thought maybe to reallocating some of that to the divisional levels as a way to essentially have them taxed fairly for the advantages that they take out of the corporate?

Klaus Kleinfeld

Well, that's a really good point. And I think you have to distinguish between what you do internally and what you do externally. And I think internally, you could have asked everybody here who's running a group or who's the CFO of a group and they know exactly the amount of overhead, so to say that they actually cause -- or that they have to cover. And some of it is legacy stuff, I mean, with these pensions from retirees that come from that, that division and other stuff is technology and other kinds of other things. So that is very, very well understood. And when people are saying they we want to be cash flow positive for the group, they are not just talking about the cash flow that comes out of their own group. They are also talking about covering those types of overheads that they directly or indirectly cause. So that's -- we do that. We do that, and I think that's -- I think you're right. This is a good discipline. So it's also good to -- it's a good internal dialogue also to understand is this worth it? Because in the end, I mean, you have ask yourself -- I mean, is this -- am I receiving the right type of value for the cost that I'm having to incur? What you do externally -- I mean, I think we basically oriented ourselves towards what has been the common practice in the industry. So that it also makes it easier for you all to compare how we are doing in the business as compared to others, and I think that has been more influencing the practice that we have been following on the external reporting. Is that a fair way to describe it, Chuck? Can you put -- maybe have you to use your -- the other one, Chuck, probably.

Charles D. McLane

One of these would work. In addition to the SG&A which Klaus was referring to, it's really everything. Everything else, interest, et cetera. So the corporate is standalone 0, and when the businesses are looking at what they have to cover, it's their portion of everything so that they can end up being in the position of being cash flow positive.

Jorge M. Beristain - Deutsche Bank AG, Research Division

I guess my question was, would we expect any change in how that accounting is done between the corporate and the divisions? And I guess Klaus was saying that's industry practice.

Charles D. McLane

I don't see necessarily that we would change it externally, but how we manage the business internally is all allocated.

Roy Harvey

I think we have Lloyd next. So right behind you.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Okay, I'm going to ask Chuck the pension question. The chatter is running around on the street, I guess allegations that with the vagaries of pension accounting using the December 31 AA utility, the value liabilities, that the pension liability will explode year-on-year and threaten the investment grade status of Alcoa. What is the answer that you can give to those bears running around chattering on that why that is not a reasonable argument?

Charles D. McLane

Well, there's really not too many vagaries when it comes to [indiscernible] rules on pension and pension contributions. There's specific discount rate rules to follow on what you can and can't use and signed up for, but that's -- it's already set, period. And in the asset returns, which we're running up, pretty positive asset return right now, we know what our minimum contributions are, barring a collapse in the markets between now and the end of the year. And that's where I get the $600 million to $650 million from. And as I said, we're going forward to be cash flow neutral. We would look at that right now and thinking that, that's based on the cash outlay for that pension, but we're going to have to see how the year unfolds and also see what happens in the marketplace. But there's not any vagaries that there's going to be some type of explosion that we don't know about right now, Lloyd.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

So considering your [indiscernible] and so that the liability will go up just because of the change in the discount rate and -- I mean, my answer to them is if there is -- if this exists for Alcoa, it also exists for IBM and every other company with defined contributions.

Charles D. McLane

That's exactly right. Everybody follows the same discount rules. Interest rate is at all-time lows. The markets have not been returning anything. There'll be a liability on the balance sheet. But in both balance sheet -- from the both balance sheet and a recent basis, we were over 80% funded as a result.

Roy Harvey

Okay. Yes, Dave [ph]?

Unknown Analyst -

I have 2 questions. First of all, just to finish the capital spending for next year, Québec. How much is going to be spent next year in Québec modernizing?

Roy Harvey

Chuck, do you want to give a run down on that?

Charles D. McLane

Right now, we're looking at something in between $100 million and $120 million range.

Unknown Analyst -

Okay. So my follow-up question. Pension, $600 million to $650 million. Ma’aden, $300 million to $400 million. Quebec, $100 million or $120 million, sustaining $1 billion. Add it all up, what aluminum pricing do you need to be basically cash flow neutral with and still fund?

Charles D. McLane

Dave [ph] we had to sit here and you have to go to assumptions on fuel oil and currencies and just not going to do that, right? I think -- and I didn't $1 billion for assisting asset. Based on current conditions, it would be between $500 million and $1 billion. And all I'm telling you is we've got all of those levers just as we had last time, which we're trying to control in order to stay cash flow neutral and we'll reuse them all.

Roy Harvey

Here we go. Carly?

Carly Mattson - Goldman Sachs Group Inc., Research Division

Carly Mattson, Goldman Sachs. Just a follow-up on the pension question, just to clarify. So if push comes to shove and you're close to free cash flow, would you -- or were you essentially saying that you'd be willing to contribute stock again rather than fund with cash?

Charles D. McLane

I'm saying that's an option always available to us depending on what's going on. Our view right now is based on supply and demand fundamentals that we look forward to next year that, that would not be our intention. But is there anybody here that can guarantee me prices not going to get to $1,800? Or who knows what happens in 2 countries who have a crisis with regard to their debt? So right now, it's a lever. I won't rule it out, but it's not intended to happen that way. We're intending to use cash based on current conditions.

Carly Mattson - Goldman Sachs Group Inc., Research Division

And then just a follow-up question on the maturities that are coming out next year. With rates so low right now, we've seen a lot of opportunistic refinancing. Is this something that Alcoa would consider?

Charles D. McLane

We've done a host of that. We've done it for the last 3 years. In fact, our interest rate is 70 basis points better than we began this refinancing and its over 9 years. What's coming due next year is in the $350 million range. And right now, we're not looking to refinance, but again, that could change.

Roy Harvey

Timna [ph]?

Unknown Analyst -

Aluminum is a global product but we're getting asset increase when we buy our clients for us to quantify and clarify company exposure to Europe. So can you talk about where you might see some vulnerability or where you might see some changes in your outlook if Europe is heading into recession or if things are worsening there?

Klaus Kleinfeld

On the European side specifically or in general?

Unknown Analyst -

Your exposure to Western Europe.

Klaus Kleinfeld

Western Europe. Well you already saw the exposure to Western Europe in the third quarter in numbers. And it particularly hit -- it hit us particularly on several sides in a way because we originally interpolated it as the seasonal weakness that you typically have more in Europe than what you would see elsewhere. And then when we saw nothing came back in September, I mean it was clear that there was a true impact on the economy through the Eurozone crisis. We've gone through our third quarter announcements, gone through market segment by market segment, and you've seen a cut out of that today also when Olivier was reporting about his numbers. The interesting thing is when you go to North America, we still continue to see growth here in North America. We just saw the numbers there. I mean, he was talking about aerospace as well as commercial transportation, as well as automotive. And we even see activity coming back on the industrial gas turbine markets. So these markets, we believe, are continuing to perform well in North America. And then obviously, we see Asia continuing to, I think, grow very nicely. So on the European side, our assumption currently is that we will probably see a scenario that Europe is not going to recover that quickly in 2012. And that's built into all of our computations.

Roy Harvey

Right here.

Unknown Analyst -

On the maintenance CapEx, you saved lot of money over the last 3 years and it sounds like you might next year as well. Does that imply to some extent that you've been under investing? And when things improve, there'll be kind of a big catch-up investment for whatever the spread has been over the last several years to that kind of 80% depreciation?

Klaus Kleinfeld

On the sustaining CapEx side?

Unknown Analyst -

That's right.

Klaus Kleinfeld

Well, when you listen to what we said and how we managed through the downturn, it was clear that -- we said that we don't want to compromise the future of the facilities and we also do not want to compromise the safety. I mean, these were really clearly the 2 guiding posts that we use, and I think we've done very well. I think we've gotten much, much better in understanding how to do -- how to use the sustaining capital in a more intelligent way. And that comes with some of the things that we've done in the central [indiscernible] as you go to refinery these days. I mean, refinery is a big sustaining capital that comes through pumps, motors, sensors. We, today, have an overview by the level of this equipment worldwide. So we -- actually, we can tell you exactly which pump has what age, how it has been used, when it was maintained last and have used that to be much better in predicting what preventive maintenance do we have to do and how can we, in a better way, use the existing equipment for a more prolonged timeframe. So we believe that we have substantially reduced the amount of sustaining capital we need by managing it much, much better. So it's not that you would -- I mean, I think the underlying assumption is a little bit, "Hey, you know, we're saving on this and on that" and then at the same time it's like a wave. At a later point in time, the wave hits you. That's not how it is. It's absolutely not how it is. We've reduced the -- by better management, we reduced the amount of sustaining capital that we do need.

Roy Harvey

Jorge?

Jorge M. Beristain - Deutsche Bank AG, Research Division

Two questions, just maybe for Chuck a technical one. But in 2014, you have the convertible debenture coming due and that's about $600 million. Is it your intention to let that convert to stock?

Charles D. McLane

Yes.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Right, so that would be about a 6%...

Charles D. McLane

Well, it's actually built into most everything that goes on now, unless the earnings levels get low that's automatically -- those shares are included into dilution calculations that take place today. So right now, the intent would be for those to convert.

Jorge M. Beristain - Deutsche Bank AG, Research Division

And my second question is for Klaus. And I know this is totally theoretical, but if you were to drop down from space today and redesign Alcoa, from this point forward, given what you know about where the growth is going to be in aluminum demand in the next 20 years, would you have your plans where you have them now? Or would you like to have a bit more Asian exposure? Would you like to be a longer raw material? Are you happy with the downstream versus upstream exposure? Is there anything sort of from a portfolio management point of view tweaking going forward?

Klaus Kleinfeld

That's a big question. I mean, it's a short question, but it's the big question. So let me try to chunk it up and then if it doesn't satisfy you, you should let me know and I'll elaborate on that. We are -- I think when you have a point where you are happy with where you are, you've reached a point of complacency. That's, I mean, my personal opinion on that. I mean, standing still for me means sliding down, all right? So we always have to push ourselves. So on what end? We have to push ourselves to be better on the cost curve side when it comes to the commodities side. That's the biggest lever we have to -- I mean, let me go through the segments, probably it's easier. If I go through the upstream segment, what is the biggest leverage we have there? The biggest leverage we have there is improving our position on the cost curve. Why is that so? It makes us less vulnerable to external swings and it increases the profitability. The second biggest level we have there is the pricing side. We have successfully changed the market. And I tell you, I mean, I think we have all reasons to be very proud of as a team and has done that around the primary -- I think has done an outstanding job and continues to do an outstanding job. That is a very, very, very important value. We're very happy with that. The third biggest performance drive on that and it's the question about China. How China is going to behave? When is China going to start to import substantially? And I think every signal we have been seeing emphasizes our view that the time is coming. And nobody would expect that. I mean, nobody who knows China well would expect that this is like a digital function. It goes from 0 to 1. It grows actually gradually, and it's a process. And I believe that you're in the course of a 5-year -- the 12 5-year program that they've just started this year. This is happening. Because when you interpret these things and how -- they are now talking about sustainable growth and they have given to the provinces very serious -- I mean, the efficiency targets. And the new leadership that is coming in is actually currently coming in but formally would be disclosed next year is a group of people that are very, very determined to making these things happen. So I believe -- then on top of it, you have China, you have an issue on the environmental side, which partially becomes a social issue if it is not managed well. So I think in terms of value creators, these are in my view the biggest value creators there, right? To bring it down the cost curve, I mean, Lloyd has said that before, there is a whole host of -- and you summarized it well. I mean, I think there's a whole host of levers and we cannot afford -- given how drastic this target is, we cannot afford to leave any single one of that out. Now it's also important to note not each one of the levers we have full control over. Therefore, it would have been irresponsible to build the target, as well as the plan on just one scenario. We would not have done that and would not have gone out with it if we wouldn't have made a couple of assumptions in there. But I can tell you that this is, as said before, enormously ambitious, right? So that's the value creation on that end. If you go to the midstream side -- and to go to the midstream side, I think there, the biggest value creation comes through expanding in those markets that have growth regionally. And we, if you look at markets like -- where have we done that really successfully. I think that most of you who followed us for a longer time would say to date, our expansion into Russia is a big success. I mean, it's been painful. It took too long clearly, but the end result that we have today, I think, we all have good reasons to be proud of that. And we're only seeing the beginning here. I believe we're going to see more of that. China, we are making good strides. I think one of the big value drivers there is the expansion and the move over into consumer electronics because of the -- and that's where the new organizational structure comes into the game. Because of the past, we have seen and Helmut and his team had struggled with this. Who wants to give up value-adds? I mean, if you are managing a region, do you want to give up your value-add to another region? But in the end, that's not how you win the customer. The consumer electronics segment is located in East Asia, right? And China and the main. So if you are not manufacturing there, you eventually are not going to grow fast enough, right? So this is one big value driver there on the regional side. Brazil is an area that we have in the past -- we have a very, very good footprint in Brazil. We have a very good standing in Brazil. I mean, it couldn't really be any better. If you look at Brazil, the development in the next years there, there's a lot of opportunities also on the midstream and on the value-add side, how we can improve our position there. So that's potentially an area for growth in my view. So -- and then when you look at industrial segment, it's really the move on the -- I'm extremely proud, honestly, and again many of you I think understand why I say that, on the aerospace side. When I joined Alcoa end of 2007 and I have the first conversation to understand what is going on in the different segments, I think the general -- and also with many of you here in the room or colleagues of yours, the general impression that I was given, the general sentiment in the industry was aerospace in the future will not be aluminum. It will not be aluminum. It will be composite, then face it. Get over it. The battle is lost. We didn't accept that. I mean, when we took a deeper dive into -- in it with our technologies, we saw a lot of flaws in the argumentation. We didn't accept it, and we used all of the Alcoa advantages including, I mean, that we have the capability to reach to the highest levels in the organization to bring that out, including that we have great capabilities on the technology side. And we actually changed the marketplace. Today, we changed the marketplace because there's a commitment out there that aluminum planes will at least be -- I mean, and the big volume planes will be made out of aluminum at least for the next 15, 20 years and that's a big, big achievement. And the midstream is going to profit from that huge, huge achievement. The second huge achievement on the market segment side there is automotive. And I said it in my introduction, I still remember when I was young and the first aluminum car came out. I lived over in Germany and the AA was an icon. I mean, everybody said, "Wow, this car doesn't rust anymore." I mean, today, rust in cars are not that natural as they pictured in the streets. At that time that I remember, this was normal. I mean, your car basically fell apart and rusted away. So it was a big break. Today, we see this breakthrough is now going into volume segment, and that's another big, big, big growth driver. On the downstream segment, the EPS segment -- first of all, that we have EPS now with a portfolio that is firing on all cylinders. I mean, that by itself is something unique. And I understand the skepticism around building on because -- and I'm glad you asked the question. I'm glad you asked the question because these folks -- I mean, they're really outstanding under fire and continue to do outstanding under fire. Not that we believe we're there, but what they've done is pretty, pretty remarkable, and it's true for the whole portfolio. That portfolio change in there, there's operational management in there and there's growth markets in general. I mean, you see that in general, the exposure there in growth market is very high. And the innovation power -- if you scale how strongly innovation can play into it, obviously, the further you go downstream, the more you see in it, right? So that's how I would see the value driver as separate. And now, on your larger question, what does that mean in terms of capital? I mean, how do you distribute capital? Because that in the end is the question of who's going to grow. I think you've seen from our moves in the past that we -- in the past, I would say 18, 24 months that we are very, very selective in putting our money behind where we believe the largest levers are for creating value. I believe that. I assume we have nobody in this room who would question that investing in margin was a very, very good decision on all fronts, right? And I'm obviously very happy that we see the project coming along as you just saw in the film. At the same time, it was clear and we said it from the start on, we want to build out the downstream business. And that's not because we just fell in love with the business and because we like one business over the other. That's not how we think. I mean, because it makes us more money per $1 of invested capital. That's as simple as it is. It's less capital intense. And if you select the right segments, you get a better return on it, period, right? Now the problem with that is, would I have loved to grow much faster also inorganically? Absolutely. We did a couple of very nice tuck-in acquisitions. And as Olivier has said, I mean, accretive from Day 1 on. What does that tell you? It tells you that we also are very wise in selecting the right targets. Because how often -- I've always said to buy a company is -- as I said when my kids were still young, it's so simple that even my then 12-year-old daughter, I could teach her that in half a day. She could buy a company, right? It's not about buying a company. It's buying it at the right price, right? And then having an execution skill to create the value, right? And one of the issues there is -- I think we have been extremely good in selecting the targets. Now am I totally happy that we haven't been able to grow faster? No, I'm not because I believe this segment is a segment where we want to deploy more and we want to grow faster. Is that covering kind of the range?

Jorge M. Beristain - Deutsche Bank AG, Research Division

Certainly. I guess [indiscernible]

Roy Harvey

The microphone is not working. It's still not working.

Jorge M. Beristain - Deutsche Bank AG, Research Division

Sorry, I do want to monopolize here. I just sort of meant holistically, could you see sort of maybe tucking in a little bit smelting, shutting some of the higher cost melters down or at the margin, maybe investing more in some downstream products in the end markets that are the fastest growing and that's sort of what I meant by...

Klaus Kleinfeld

I can absolutely see that, but I cannot see it as a goal by itself. I can't. Because that's why -- I mean, what do we do when we talk about shutting down? First of all, don't just think it's shutting. It's running or shutting, right? That's the first thing, I think, you have to change on the mental model, because we now have ways how we can scale this. This is not -- we have -- I mean, from shutting a plant to running it at full, there is a multiple range of how we can adjust capacity, huge range. And every single point where we move has implications on it with cash, right? Much more cash. We have to pay for something or how much less cash we make. How much it would take to bring it back online? How much blah, blah. Whatever. So we know that very, very well. For each asset on the level of the pot, right? So that's the level of granularity, which I think you need to make the right decision. It starts with questions of, do I reline the pot in a certain place? Or do I just -- I mean, relining is a necessary evil. Or do I just say no? Or do not continue to reline those because I do not see that this place has a longer-term future, certainly in this environment, right? So I can absolutely see all these things. But the primary target we have there is, does it make sense in terms of creating value? And where does that get us in terms of cash generation?

Roy Harvey

A question back here [indiscernible].

Unknown Analyst -

So regarding China, like over the last decade or so, you guys have made a lot of predictions about the Chinese supply dropping because it's too high of cost and then you guys could be able to import -- or export more to China. And it hasn't happened, and it keeps not happening. And you guys keep saying it's going to happen. What is going to right for them or wrong on your end that's resulted in the Chinese aluminum industry surviving for the last decade? Well, there's been more than just you guys predicting its demise?

Klaus Kleinfeld

I think that a lot of the predictions have gone right. And it's not that they didn't import. In fact, I mean, when you look at the chart that Tim was showing, I think one of the charts, which was the longer term, you could see that there was a period in, I think, late 2008 when they -- and early 2009 when they were pretty heavy importer of metal. The Chinese were the first ones to respond to the falling metal price of 2008, 2009, and they curtailed roughly 30% of the total capacity, if I recall that correctly. So at last, when you see what new capacity has been built and what happened in terms of curtailing old capacity and bringing new capacity on, you already see that in that equation. The market dynamics have been working. The big question now is, when is it going to come to a real substantial reduction of the primary production? And I mean, I give you again the variables that play into that. One variable is power cost in China. Another variable is the ecological environment. Another variable is the jobs in the specific region, right? And certainly, the normal variable on where is the price for alumina, where is the price for aluminum, that normal stuff. And this is the dialogue that currently goes on in China. And I'm really pretty positive that we're going to see this going into that direction. And as I said early on, China has very rarely shown dynamics that are discontinuous. I mean, usually, what you see in China is that it is well managed. And in the course of the 12 5-year program, they will manage in that area. And a function of that is how quickly they will be able to build up jobs in the regions that will curtail those plans in other areas. And ideally, they want jobs which they call higher value-add jobs that are better paid jobs and jobs that they now have as a measure for the attractiveness of the provincial government. They now have a measure out there which basically says, I mean, how much energy you use per -- what's the energy per -- energy usage per employee -- employed citizen or so in the state. And they use that as an indicator to see are they moving up the scale or not. So it's happening. I mean, I've just spent -- 2 weeks ago, I spent almost a whole week again in China. I think that this is happening there. Will it happen again, I mean, overnight? It won't. But I'm also very confident that with a new leadership coming and they have exactly the same thought, they'd probably have a little bit more of a drastic approach to it.

Roy Harvey

Right here?

Unknown Analyst -

Steve Farr [ph] for DC Capital [ph]. Maybe can you talk a little bit about where you are today in terms of returns on invested capital in the upstream and midstream and the downstream businesses? And then looking forward, as you roll out your plans, where are you targeting to get it?

Klaus Kleinfeld

We talked about investment -- return on invested capital, Chuck, in the past, but I don't believe we have done that. The red microphone, yes.

Charles D. McLane

What we've talked about before is the return on projects, which Jorge asked about earlier, I think. And that is cost of capital is as related in the 9% to 9.5% range. We set a threshold in evaluating capital projects from an IRR basis of 12% risk adjusted. And so that's kind of a minimum. On invested capital standpoint, we really haven't talked about it that much, but each one of the businesses, obviously, has aggressive ROIC targets and additional other targets. We thought it was more important to go with EBITDA based on existing assets.

Klaus Kleinfeld

Yes. Ultimately, it gives you a better comparison when you see the numbers here. I mean -- because pretty much, it gives a better comparison also to competitors in that space. I mean, that was our logic to that. But when it comes to approving investments, I mean, we always look very, very specifically at the IRR and also at the capital returns with a special -- and with a risk profile.

Unknown Analyst -

Klaus, with your captive power in the U.S., there's movement against coal, and natural gas is becoming cheap. Drillers are willing to enter into long-term work interest agreements. Is there an opportunity there for you to try to lower your power cost by moving over to gas and especially with everything that's going on with EPA?

Klaus Kleinfeld

Yes, yes. And I think you have already seen what power deals that we brought in here on the West Coast with Intalco, which I think in 2007 we would never have thought that, that would be possible. And I think 2007 made folks that while the U.S. smelting system is doomed for basically being sold and we now see with a plant like Intalco. If you just purely look at the power cost, it has a very, very competitive power rate. And that was one of the reasons why we decided to bring some of this capacity back up. And you just saw the numbers that Chris showed. I mean, there was a good financial impact there, with a good promise of a good financial impact. Same thing I would say holds true from Athena. And the general power cost in the U.S. have strongly been influenced by the shale gas finds. And therefore, I think there is a positive scenario -- or there's a potential for a positive scenario that you could see power cost being -- continuing to be or going more into an area that is very competitive. I do believe the chance for the U.S. in that regard to higher than they've ever been.

Unknown Analyst -

[indiscernible]

Klaus Kleinfeld

You mean replacing them? Well, look, I mean, that depends on many factors. Number one, I mean, when you have an asset, you have to run it well and you want to make the best returns with it. I mean, I think on the replacement side, we would look at it opportunity by opportunity. In reality, we are looking at some opportunities also here in the U.S. But in reality, I mean, until this comes online, until those opportunities will come online in the quantity that we would need to run smelters, it is still going to take quite a while. And in the meantime, I mean, we are not negative on coal at all. I mean, if you run it well, you can have decent returns and have very, very competitive power rates with that. So I'm not necessarily against coal at all. But we have it on our radar all the time, all the time, all the time. And all around the world, not just on the U.S.

Roy Harvey

Here you go, Paul.

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

How far does the program that you just announced in Canada, as well as Ma’aden, get you towards your refining cost targets in 2015? And how many more of these projects that you have the potential to actually get into sort of go into these modernization projects?

Klaus Kleinfeld

Are you specifically talking about Canada? Or you want to have that -- you want to know that for the entire system?

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

I guess, in this 2015 target, it's come down the smelting cost curve. I mean, with Ma’aden and the modernization project in Canada get you -- I mean, how far does that get you?

Klaus Kleinfeld

Well, modernization. We just earned 3 percentage points for Alcoa in total. And Ma’aden, we have the number -- can you give them the one?

Charles D. McLane

Yes. I mean, if you look at the modernization projects, the Ma’aden -- our portion of the Ma’aden share would move us 1 point down the cost curve. There's the -- another modernization project that I talked about relative to Massena that we've not launched yet. When we get closer and have the engineering done on that, then we'll be able to quantify kind of its movement down the cost curve. But the Canadian and the Ma’aden themselves are going to be 4 points of the movement.

Roy Harvey

Another question? Here you go, Sandeep [ph], right above there.

Unknown Analyst -

The power contracts that Alcoa has, like do you always interest on a fixed power or is it more like linked to LME?

Klaus Kleinfeld

Part of what?

Unknown Analyst -

Linked to the aluminum price or is it at fixed cost price for the power?

Klaus Kleinfeld

Power is very different depending on where you go. I mean, we almost have everything there. I mean, the recent power contract here that has a clause in there, which is linked to LME on the Canadian side. It's linked to LME at certain threshold levels and it's -- I mean, it's capped and has a threshold level from where it fluctuates with the LME. But we have all kinds of things. I mean, we have -- I mean, depending on where you go, the creativity on power deals is huge. And yes, it's huge.

Unknown Analyst -

One more question. With the midstream and downstream divisions getting bigger, I mean Alcoa will become less levered to aluminum price, hopefully. So I mean, is that intentional? So like is Alcoa that bullish on aluminum price? Or is it just that you see all your growth in the downstream segments?

Klaus Kleinfeld

Look. I'm -- I wouldn't say that the leverage around aluminum price is the major reason for -- I mean, driving in these other directions. I would rather say we want to make it more profitable first and less in the -- more independent of price swings, right? So that's why I mean bringing it down on the cost curve, obviously, makes it less dependent on it. Because no matter where the price goes, I mean, you still are going to be better than anybody else and that's in the end your best protection, right? So that's really the biggest driving force there. I mean, to really make sure that you have left more factors in your own hands and less influence from purely outside the market volatility factors. That's the way I would describe it.

Unknown Analyst -

Klaus, obviously, the efforts of the company is making on the smelting side to move down on the cost curve. It doesn't happen in a vacuum obviously. The competitors are doing the same thing. So I guess when I hear the 4 percentage points and dropping that down 4 points, you still have a lot of work to do. And what kind of assumptions do you make about the competition in terms of -- at the end of the day, are you still going to be kind of in the middle 50% of the capacity out there that's in the middle of the cost curve and very subject to price?

Klaus Kleinfeld

Well, that's what I meant before and that's I think also why early on -- I mean, we were not going into all of the specifics there. You're absolutely right. You have to make assumptions about where the competition is then. Now the good news is the industry is relatively transparent on the current assets and we have a good view on what comes online. I would say at least in the next 3 years, right? So you can make some assumptions on that. And the assumptions there are pretty precise. And you can make other assumptions on where is China is going to go. None of that gives you the mathematic precision, what you and I would probably want if we were to be sent up to a moon mission, right? So -- and not want to miss it, right? And end up in infinity somewhere. So I think you understand that that's not the way this works. I mean, so the way this works is you have to take those assumption into account then look at what you have in store. Some of these things we've talked about, and what other things are there, and then come to a relatively good assessment, say, on where is that going to get us, right? So this is how we have done it and this is how we execute on it.

Roy Harvey

Okay. One question back here and then Paretosh, we are coming towards the end so...

Klaus Kleinfeld

Microphone, white microphone. It's still not on.

Paretosh Misra - Morgan Stanley, Research Division

On alumina pricing transient to spot for next year, should expect a step change in the first quarter? Or would it be more gradual transition to that 40% target for next year?

Klaus Kleinfeld

Tim, why don't you talk a little bit about it?

Timothy D. Reyes

Yes, I mean, I think it's more of a step change because of that fact that we've got contracts that are rolling off, annual contracts that are rolling off and you start to see the change come through when we start the new year.

Paretosh Misra - Morgan Stanley, Research Division

Just real quick on the Airbus A380 and Boeing. You guys are the only mill in the entire world that can produce those wings. Is there an incentive for Boeing or Airbus to go to one of your competitors, try to convince them to build a mill as well just so that they have 2 sources of supply? And are you guys talking with Boeing and Airbus about potentially building an additional mill location somewhere that can do this as well, so that they don't ask your competitors to produce as well?

Klaus Kleinfeld

Well, there's more than one protection there. Part of the protection is also that it is a specific alloy, right? The patented alloy for the A380, right? So it's not that easy to say it's just another mill and another competitor and they take it on. I mean, they would have to have another mill and they would have to have an alloy that would be able to replace with all the capabilities, would be able to replace our own designed alloy. So the hurdles to move are very, very high. Now realistically seen, I mean, there are certain points where people are inventive enough, I mean, and willing to switch out things. On the aerospace side, that risk -- the risk is way too high in most cases that people are willing to do that, same thing by the way also in the automotive industry, at least I would say in the safety automotive industry today. And I think that gives us additional opportunities in the space to use proprietary alloys and proprietary process technology, which has in their codings for instance or special ways how to treat the material that others cannot copy at least that quickly. In the end, I mean, I believe that in the end, you can always be copied. But it takes a while. You have a time advantage and you have to use it wisely to also move the needle further, and that's what we're doing. And you can bet that the competitors -- or that the customers will always want more than one source. I mean, if you were in their shoes, absolutely. But I think they also are realistic enough and assessed their own risk profile. So I don't think that particularly with the example you used, the risk is very high for us. I think they're very happy with how we are doing and we're very grateful that we have been able to come up with that solution. Because otherwise, they would never have been able to design the A380 and that is a great success for Airbus.

Roy Harvey

Lloyd, you got the last question.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Just a clarification on moving down the smelter cost curve, Ma'aden in 100 bps, is that as your current ownership or the 40% solution?

Klaus Kleinfeld

Current ownership.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Okay. So with the 40% solution, the 100 bps turns into what?

Klaus Kleinfeld

Okay. I mean, we have 25.1 to date. We have an option to bring up to 40, right? So that's very simple.

Okay, with that, first of all, let me really thank you for coming out here. I know that number one, in general, it's not easy to get here. And specifically, some of you had quite a bit of something to go through yesterday, but I hope you enjoyed it. Please give us feedback. Roy and the team, please give us feedback whether this was what you like, because that's why we do it, right? I mean, we know our plans relatively well, right? And I hope you also see that we know our business relatively well, but we do it because we want to continue the dialogue with you. I had with some of you some side conversations, and what I would also encourage you -- I mean, if there are some folks out there that are not convinced about the story or have specific questions, let us know because we are not shy to take this on. I personally believe you cannot convince everybody, but I think we've got good arguments. And I think this is always a learning process and that's the best we can do about it. So please don't be shy to reach out, and we always appreciate it. And we will hear from each other -- I mean, at the latest again then when we announce on the 8th of January or is it something in that timeframe? In a very short timeframe. Okay. Thank you very much. Thank you. Again, thanks.

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Source: Alcoa, Inc. - Analyst/Investor Day
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