Alcoa (NYSE: AA) reported Q3 EPS of $0.07, $0.07 worse than the analyst estimate of $0.14. Revenue for the quarter came in at $5.6 billion versus the consensus estimate of $5.68 billion.

Alcoa reaffirmed FY2015 guidance.

2015 End Market Forecasts

In its global end markets, Alcoa maintained 2015 estimates for global aerospace sales growth of 8 to 9 percent. In industrial gas turbines, Alcoa increased its 2015 forecast for global airfoil market growth of 3 to 4 percent, up from 1 to 3 percent.

In North America, Alcoa tightened 2015 estimates for automotive production to up 2 to 4 percent, from up 1 to 4 percent; maintained its 2015 estimate for heavy duty truck and trailer production growth of 9 to 11 percent; held steady its 2015 projection for commercial building and construction sales growth at 4 to 5 percent; and kept its 2015 packaging estimate unchanged at down 1 to 2 percent.

In Europe, the Company updated its projection for 2015 automotive production growth to up 1 to 3 percent, from down 1 to up 3 percent; raised its 2015 heavy duty truck and trailer production forecast to up 1 to 3 percent, from down 2 percent to flat; maintained its 2015 commercial building and construction sales growth estimate at down 2 to 3 percent; and kept its 2015 packaging estimate unchanged at up 1 to 2 percent.

In China, Alcoa lowered its estimate for 2015 automotive production growth to up 1 to 2 percent, from up 5 to 8 percent; reduced its projection for 2015 heavy duty truck and trailer production growth to down 22 to 24 percent, from down 14 to 16 percent; reduced its 2015 commercial building and construction sales growth to up 4 to 6 percent from up 6 to 8 percent; and kept its 2015 packaging estimate unchanged at up 8 to 12 percent.

In addition, Alcoa reaffirmed its projections that global aluminum demand is expected to increase 6.5 percent in 2015 and double between 2010 and 2020; so far this decade, global demand growth is tracking ahead of this projection. Alcoa is also projecting a global aluminum deficit for 2016.

Value-Add Portfolio Transformation

After the separation, the innovation and technology-driven Value-Add Company will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. In the third quarter, these combined business segments reported revenue of $3.4 billion, after-tax operating income (ATOI) of $257 million, and adjusted EBITDA of $508 million.

In the third quarter, the Company acquired RTI International Metals. Earlier this month, Alcoa announced an approximately $1.1 billion contract with Lockheed Martin that draws on new titanium capabilities gained through RTI. Under the contract, Alcoa becomes the titanium supplier for airframe structures for all three variants of the F-35 Joint Strike Fighter over nine years, from 2016 to 2024. RTI is expected to contribute $1.2 billion in revenue and its profitability is expected to reach 25 percent EBITDA margin, both in 2019. Separately, Alcoa announced an approximately $1 billion contract with Airbus for high-tech, multi-material fastening systems, Alcoa’s largest-ever fastener deal with the aircraft manufacturer. Under the contract, Alcoa will supply primarily titanium, steel and nickel-based superalloy fastening systems for every Airbus platform.

The Company announced a $60 million expansion at the Alcoa Technical Center to accelerate advanced 3D-printing materials and processes. Alcoa is building a multi-metals powder facility to make the critical input material for metallic 3D-printed parts. In addition, Alcoa has developed the patented Ampliforge™ process. With this process, the Company can design and 3D-print a near complete part, and then treat it using a traditional manufacturing process, such as forging, to enhance metallurgical properties, including toughness and strength.

In automotive, Alcoa continued to make significant headway with both its breakthrough Micromill technology and material, and rolling mill investments to meet growing demand for aluminum intensive vehicles. Alcoa’s automotive revenues are expected to increase 2.4 times from 2014 to $1.8 billion in 2018.

In the third quarter:

• Ford and Alcoa announced a joint development agreement to collaborate on advanced automotive aluminum alloys using Micromill technology. Ford also said it will debut Micromill material on its 2016 Ford F-150 truck, making it the first automaker to use the advanced automotive aluminum commercially. To date, the Company has Micromill qualification agreements in place with nine major automotive customers on three continents, including Ford.
• Alcoa signed a letter of intent with the Danieli Group to work toward an agreement to license the breakthrough Micromill technology to customers around the world.
• A new midstream business unit, Micromill Products and Services, was established to drive revenue from licensing Alcoa’s intellectual property and technology associated with manufacturing advanced Micromill products. The business unit will provide services like training and technical support as well as generate product sales from San Antonio Works starting with automotive sheet in North America and expanding into other market sectors and regions.
• In Tennessee, a $300 million automotive plant expansion backed by customer contracts opened and began shipments four months ahead of schedule. Alcoa also announced plans to restart its Texarkana, Texas casthouse. It is expected to ramp up production in the first half of 2016 and produce aluminum slab for the North American automotive market.

The Company also realigned its value-add portfolio to drive further profitable growth.

• In the third quarter, Alcoa created a new downstream business segment, Transportation and Construction Solutions (TCS), comprising Alcoa Wheel and Transportation Products and Alcoa Building and Construction. The segment will expand into emerging regional markets, in addition to capturing continued growth in existing markets.
• Global Rolled Products is also strengthening its ability to capture profitable growth opportunities in attractive market sectors and regions. The segment will now consist of four business units comprising Aerospace and Automotive Products; Brazing, Commercial Transportation and Industrial; Global Packaging; and Micromill Products and Services.

Upstream Portfolio Transformation

After the separation, the Upstream Company will comprise five strong business units that today make up Global Primary Products - Bauxite, Alumina, Aluminum, Casting and Energy. In the third quarter, the combined upstream businesses reported revenue of $2.2 billion, ATOI of $153 million, and adjusted EBITDA of $379 million.

Alcoa made progress in building its third-party bauxite business. In the third quarter, the Company received approval from the Government of Western Australia to export trial bauxite shipments from its Willowdale and Huntly mines, targeted for early 2016. Alcoa has the world’s largest bauxite mining portfolio with a low 19th percentile position on the global bauxite cost curve.

Since 2007, the Company has divested, closed or curtailed 1.4 million metric tons, or 33 percent, of total smelting operating capacity. In addition, Alcoa’s review of 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for possible curtailment or divestiture remains active.

In the third quarter, Alcoa:

• Announced the curtailment of the remaining 887,000 metric-tons-per-year of Suralco’s alumina refining capacity in Suriname. The refinery is scheduled to be idled by November 30, 2015.
• Permanently closed the Anglesea coal mine and power station in Australia on August 31, 2015.
• Completed the mine at the Ma’aden-Alcoa joint venture in Saudi Arabia, the lowest cost aluminum complex in the world. The joint venture’s smelter is on track to produce nameplate capacity of 740,000 metric tons of aluminum and the refinery is projected to produce 1 million metric tons of alumina, both in 2015.

In addition, Alcoa has launched an improvement plan in its Primary Metals segment to increase productivity between $110 million to $130 million in 2016.

As a result of strategic actions, Alcoa has dropped eight points on the global aluminum cost curve since 2010 to the 43rd percentile and is targeting the 38th percentile by 2016. On the global alumina cost curve, Alcoa has dropped five points since 2010 to the 25th percentile and is targeting the 21st percentile by 2016.

The Company also continued growing its value-add casthouse products, which are projected to represent approximately 70 percent of 2015 smelter shipments. From 2010 to 2014, growth of total value-add product shipments from its smelters delivered $1.3 billion in total incremental margin. In Alumina, Alcoa estimates approximately 75 percent of its total third-party smelter-grade alumina shipments will be based on Alumina Price Index/spot market pricing this year.

Upstream Portfolio Transformation

After the separation, the Upstream Company will comprise five strong business units that today make up Global Primary Products - Bauxite, Alumina, Aluminum, Casting and Energy. In the third quarter, the combined upstream businesses reported revenue of $2.2 billion, ATOI of $153 million, and adjusted EBITDA of $379 million.

Alcoa made progress in building its third-party bauxite business. In the third quarter, the Company received approval from the Government of Western Australia to export trial bauxite shipments from its Willowdale and Huntly mines, targeted for early 2016. Alcoa has the world’s largest bauxite mining portfolio with a low 19th percentile position on the global bauxite cost curve.

Since 2007, the Company has divested, closed or curtailed 1.4 million metric tons, or 33 percent, of total smelting operating capacity. In addition, Alcoa’s review of 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for possible curtailment or divestiture remains active.

In the third quarter, Alcoa:

• Announced the curtailment of the remaining 887,000 metric-tons-per-year of Suralco’s alumina refining capacity in Suriname. The refinery is scheduled to be idled by November 30, 2015.
• Permanently closed the Anglesea coal mine and power station in Australia on August 31, 2015.
• Completed the mine at the Ma’aden-Alcoa joint venture in Saudi Arabia, the lowest cost aluminum complex in the world. The joint venture’s smelter is on track to produce nameplate capacity of 740,000 metric tons of aluminum and the refinery is projected to produce 1 million metric tons of alumina, both in 2015.

In addition, Alcoa has launched an improvement plan in its Primary Metals segment to increase productivity between $110 million to $130 million in 2016.

As a result of strategic actions, Alcoa has dropped eight points on the global aluminum cost curve since 2010 to the 43rd percentile and is targeting the 38th percentile by 2016. On the global alumina cost curve, Alcoa has dropped five points since 2010 to the 25th percentile and is targeting the 21st percentile by 2016.

The Company also continued growing its value-add casthouse products, which are projected to represent approximately 70 percent of 2015 smelter shipments. From 2010 to 2014, growth of total value-add product shipments from its smelters delivered $1.3 billion in total incremental margin. In Alumina, Alcoa estimates approximately 75 percent of its total third-party smelter-grade alumina shipments will be based on Alumina Price Index/spot market pricing this year.

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