Alcoa 2013 Annual Report Download - page 68

construction, awarded nonresidential contracts are up in North America while the decline in Europe is slowing down.
The packaging market continues to see a conversion from steel cans to aluminum cans for existing products and the
emergence of new products is increasing. For automotive, growth continues in both the U.S., as automakers strive to
meet stricter emissions regulations, and China, due to a higher percentage of the population driving automobiles.
Conversely, management expects a decline in the industrial gas turbine global end market due to pressure from low
price coal in Europe and rising gas prices in the U.S. In the commercial transportation global end market, growth in the
U.S., as orders and backlog have increased significantly, is expected to be offset by declines in Europe, due to
regulatory change in emissions requirements.
On a company-wide basis, management has established and is committed to achieving the following specific goals in
2014:
• generating incremental savings over those realized in the previous five years from procurement, overhead,
and working capital programs;
• generating positive cash flow from operations that will exceed capital spending; and
• achieving a debt-to-capital ratio between 30% and 35%.
Looking ahead over the next one to three years, management will focus on new strategic targets that build on the ones
established three years ago. Previously, these targets included lowering Alcoa’s refining and smelting operations on the
cost curve to the 23rd (from 30th) and 41st (from 51st) percentiles, respectively, by 2015 and driving revenue growth,
while improving margins that exceed historical levels, in the midstream (increase of $2,500) and downstream (increase
of $1,600) operations by 2013. Management made significant progress on the 2010 targets as described below.
At December 31, 2013, Alcoa’s refining operations were in the 27th percentile, a three-percentage point improvement,
and smelting operations were in the 43rd percentile, an eight-percentage point improvement, on the respective cost
curves. In 2013, actions taken to improve Alcoa’s position on the cost curve for both refining and smelting operations
included productivity improvements, which encompassed new initiatives as well as the full capitalization of initiatives
implemented in 2012. Additionally, for the smelting operations, management initiated a permanent shutdown of
146 kmt of capacity in Canada and the U.S. combined and a temporary curtailment of 131 kmt of capacity in Brazil,
virtually all of which was completed during the second half of 2013. These decisions were based on a 460 kmt smelting
capacity review initiated by management in May 2013. The review of the remaining 183 kmt is expected to be
completed in the first half of 2014 (see Primary Metals in Segment Information below).
The new targets for the refining and smelting operations are to further extend the 2015 target reductions on the cost
curve by an additional two-percentage points and three-percentage points, respectively, by 2016, resulting in attaining
the 21st percentile and 38th percentile, respectively. The full operation of the smelter and the refinery at the joint
venture in Saudi Arabia is expected to provide a two-percentage point reduction on each of the respective cost curves.
Additionally, initiatives to drive further productivity improvements will continue.
The new targets for the midstream and downstream operations are to increase revenue, while improving margins that
meet or exceed historical levels, by $1,000 and $1,200, respectively, by 2016, of which 90% and 75%, respectively, is
expected to be generated from innovation and share gains. A portion of the revenue increase for the midstream
operations is expected to be generated from the expansion of the rolling facilities in both Davenport, IA (beginning in
2014) and in Tennessee (beginning in 2015) to meet rising U.S. automotive demand due to changing emission
regulations and the construction of the rolling mill as part of a joint venture in Saudi Arabia (began in December 2013,
additional automotive capacity by the end of 2014). For the downstream operations, the expansion of aluminum lithium
capabilities in Lafayette, IN (beginning end of 2014) to meet the growing demand in the aerospace market is expected
to contribute to the increase in revenue.
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