Arconic, Inc. (ARNC) Elliott Proxy the Tonic for Arconic? TP now $33 as Margin Upside Looking More Realistic

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1 Americas/United States Equity Research Non Ferrous Metals Rating OUTPERFORM [V] Price (09-Feb-17, US$) Target price (US$) (from 27.00) week price range (US$) Market cap (US$ m) 12, Target price is for 12 months. [V] = Stock Considered Volatile (see Disclosure Appendix) Research Analysts Curt Woodworth, CFA curt.woodworth@credit-suisse.com Serena Rocha Calejon serena.rochacalejon@credit-suisse.com Share price performance A p r Ju l O c t Ja n A RN C.N S& P IN D EX On 09-Feb-2017 the S&P 500 INDEX closed at Daily Feb11, Feb09, 2017, 02/11/16 = US$ Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Arconic, Inc. (ARNC) INCREASE TARGET PRICE Elliott Proxy the Tonic for Arconic? TP now $33 as Margin Upside Looking More Realistic We are increasing our medium term earnings forecasts and our price target to $33 for Arconic, as we now incorporate more substantive cost reductions to account for more aggressive behavior from current management and the potential for more sizeable "shock therapy" if a new CEO is appointed following the annual meeting anticipated in early May. Our 2017 EPS goes to $1.17 from $1.13. Our legacy bullish view on Arconic was primarily driven by our differentiated views on channel dynamics and the overall cycle, as well as implied margin uplift as volumes recovered in the very high incremental margin end markets of aerospace and auto sheet. Thesis Now Incorporates More Material Cost Reduction: Our segment analysis and peer benchmarking suggest more material cost down potential at ARNC and improvements to asset turns as the market recovers. Our analysis skews towards the "low case" of improvement outlined by Elliott in their Jan 31 st presentation (newarconic.com) and we see the potential for more radical change both from at a broader portfolio level and with respect to corporate overhead if the shareholder base aligns with Elliott's views. EPS and PCC Comparison is Warranted: While ARNC has a relatively small large structural castings business at La Porte (~$300mm), the EPS segment is a global leader in medium sized castings and fasteners. Our analysis suggests EPS should be able to close the gap with PCC to within bp, with recovery at Firth Rixson by far the most critical element. Valuation: We believe there still exists room for multiple expansion over the next year as margins start to recover and upside scenarios become more realistic from both management actions and cycle dynamics. Our $33TP assumes ARNC trades at a SOTP based multiple of 9.3x our blended 18/19 EBITDA est. Key risk to thesis remains potential cyclical slowing in aerospace. Financial and valuation metrics Year 12/16A 12/17E 12/18E 12/19E EPS (CS adj.) (US$) Prev. EPS (US$) P/E (x) P/E rel. (%) Revenue (US$ m) 12, , , ,541.0 EBITDA (US$ m) 1, , , ,158.3 OCFPS (US$) P/OCF (x) EV/EBITDA (current) Net debt (US$ m) 6,217 5,803 5,370 4,827 ROIC (%) Number of shares (m) IC (current, US$ m) 11, BV/share (Next Qtr., US$) 11.4 EV/IC (x) 1.6 Net debt (Next Qtr., US$ m) 6,084.5 Dividend (current, US$) 0.24 Net debt/tot eq (Next Qtr.,%) Dividend yield (%) - Source: Company data, Thomson Reuters, Credit Suisse estimates DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Arconic, Inc. (ARNC) Price (09 Feb 2017): US$27.96; Rating: OUTPERFORM [V]; Target Price: (from US$27.00) US$33.00; Analyst: Curt Woodworth Income Statement 12/16A 12/17E 12/18E 12/19E Revenue (US$ m) 12, , , ,541.0 EBITDA 1,702 1,841 1,965 2,158 Depr. & amort. (535) (532) (535) (542) EBIT (US$) 974 1,308 1,429 1,617 Net interest exp (499) (415) (330) (310) Associates Other adj PBT (US$) ,099 1,307 Income taxes (1,465) (307) (374) (444) Profit after tax (990) Minorities Preferred dividends Associates & other 1, Net profit (US$) Other NPAT adjustments (1,495) (14) (25) (25) Reported net income (990) Cash Flow 12/16A 12/17E 12/18E 12/19E EBIT 974 1,308 1,429 1,617 Net interest (499) (415) (330) (310) Cash taxes paid Change in working capital 2, (88) (82) Other cash & non-cash items (2,345) Cash flow from operations 873 1,176 1,097 1,246 CAPEX (1,125) (650) (545) (585) Free cashflow to the firm (252) Aquisitions Divestments Other investment/(outflows) Cash flow from investments (757) (650) (545) (585) Net share issue(/repurchase) Dividends paid 0 (113) (119) (119) Issuance (retirement) of debt 0 (1,000) 0 0 Other 1,136 1,000 (0) (0) Cashflow from financing activities 1,136 (112) (119) (119) Effect of exchange rates (7) Changes in Net Cash/Debt 1, Net debt at start 7,462 6,217 5,803 5,370 Change in net debt (1,245) (414) (433) (542) Net debt at end 6,217 5,803 5,370 4,827 Balance Sheet (US$) 12/16A 12/17E 12/18E 12/19E Assets Cash & cash equivalents 1,863 1,277 1,710 2,253 Account receivables ,056 1,116 Inventory 2,253 1,856 2,009 2,124 Other current assets Total current assets 5,886 4,893 5,572 6,288 Total fixed assets 5,494 5,612 5,622 5,665 Intangible assets and goodwill 5,148 5,148 5,148 5,148 Investment securities Other assets 3,513 3,513 3,513 3,513 Total assets 20,041 19,166 19,854 20,614 Liabilities Accounts payables 1,726 1,462 1,619 1,711 Short-term debt Other short term liabilities Total current liabilities 2,731 2,467 2,624 2,716 Long-term debt 8,044 7,044 7,044 7,044 Other liabilities 4,104 3,964 3,824 3,684 Total liabilities 14,879 13,475 13,492 13,444 Shareholder equity 5,136 5,665 6,336 7,144 Minority interests Total liabilities and equity 20,041 19,166 19,854 20,614 Net debt 6,217 5,803 5,370 4,827 Source: Company data, Thomson Reuters, Credit Suisse estimates Per share 12/16A 12/17E 12/18E 12/19E No. of shares (wtd avg) CS adj. EPS Prev. EPS (US$) Dividend (US$) Dividend payout ratio Free cash flow per share (0.56) Earnings 12/16A 12/17E 12/18E 12/19E Sales growth (%) (0.2) (1.6) EBIT growth (%) Net profit growth (%) EPS growth (%) EBITDA margin (%) EBIT margin (%) Pretax margin (%) Net margin (%) Valuation 12/16A 12/17E 12/18E 12/19E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) P/E (x) Price to book (x) Asset turnover Returns 12/16A 12/17E 12/18E 12/19E ROE stated-return on (%) (11.5) ROIC (%) (0.2) Interest burden (%) Tax rate (%) Financial leverage (%) Gearing 12/16A 12/17E 12/18E 12/19E Net debt/equity (%) Net Debt to EBITDA (x) Interest coverage ratio (X) Quarterly EPS Q1 Q2 Q3 Q4 2016A E E Share price performance A p r Ju l O c t Jan A RN C.N S& P IN D EX On 09-Feb-2017 the S&P 500 INDEX closed at Daily Feb11, Feb09, 2017, 02/11/16 = US$ Arconic, Inc. (ARNC) 2

3 Execution on Business Unit Optimization to Occur One Way or Another Reiterate Outperform We are increasing our medium term earnings forecasts and our price target for Arconic as we now incorporate more substantive cost reduction in both business unit and corporate levels to account for more aggressive behavior from current management and the potential for more sizeable "shock therapy" if a new CEO is appointed following the annual meeting anticipated in early May. Our bullish view on Arconic, which we detailed in our company deep dive report in December (Don't Get Lost In Transition), was driven by our differentiated views on channel dynamics and the overall cycle for aerospace and our estimate for modest margin expansion across the business unit levels. We have strongly felt that improving macro dynamics and a return to just meeting numbers for Arconic would allow for consensus numbers to move higher and the multiple to expand. The latter has recently occurred principally to a more formal and public proposal by activist shareholder Elliot Management (owns ~10.5%) to remove CEO Klaus Kleinfeld and put in place former Spirit AeroSystems CEO Larry Lawson, who is a consultant for Elliott. We note that in the past two weeks First Pacific (4.5% holder), Orbis (1.8% holder), and Douglas Lane Associates (0.5% holder) have voiced strong support change at the CEO level. In our view a transition at the CEO level would likely result in a more aggressive approach towards corporate and business unit cost reduction and revenue optimization, and also allow for broader portfolio level discussion. Figure 1: Elliott Management Low and High Case for ARNC Margins and Implied Equity Value Low Case High Case Amount Multiple Value $/Share Amount Multiple Value $/Share 2017e Performance/ Current Price $1, x $27.96 $1, x $27.96 EPS Margin Improvement $ x $3,078 $6.31 $ x $5,643 $11.56 GRP Margin Improvement $ x $1,131 $2.32 $ x $2,153 $4.41 TCS Improvement $36 7.3x $262 $0.54 $ x $371 $0.76 Cut Corporate Costs $50 8.6x $434 $0.89 $ x $858 $1.76 Overall Improvement $ x $4,905 $10.04 $ x $9,025 $18.49 Improved Credibility & Multiple Exp. $1, x $2,541 $5.23 Total $2, x $38.00 $2, x $51.68 vs. Current Share Price 35.9% 84.8% Source: Elliott, Bloomberg. Proxy Fight Details Elliott plans to nominate five new board members to Arconic in addition to the three they have already on the board (which consists of 13 members); in the event they are successful in the proxy fight Elliott's nominated board would have a majority. February 5 th was the nomination deadline and final proxies will become definitive within the next several weeks. The shareholder vote for the board positions will be determined at the annual meeting, which is usually held in the first week of May. We understand there are five directors up for election in this class, one of which is Chairman Klaus Kleinfeld. In the event shareholders do not reelect Dr. Kleinfeld to the board, it becomes very likely in our view that the board would move to find a new CEO and we would expect Larry Lawson to be the most likely choice to move Arconic forward. We note that Chris Ayers, one of Elliott's nominated Board members, operated Precision Castparts forging operations and also was President of Global Primary Products at Alcoa and in our view could potentially fill a role at the business unit management level. Arconic, Inc. (ARNC) 3

4 Dissecting Margin Upside at Arconic There is no debate the downstream margin and ROIC performance at Arconic over the past year has been very disappointing due to macro headwinds in aerospace / industrial, poor execution at GRP and Firth Rixson, and broad based pricing pressure. We believe there is substantial room for margin improvement across all aspects of the business and especially in the EPS segment, which should see sharp acceleration in revenues as airframe build rates accelerate and next generation jet engines ramp. We would expect management to become more aggressive on corporate spend and R&D optimization as Arconic's $150mm R&D budget compares to ~$30-40mm for Precision Castparts and $50-60mm for Novelis. Figure 2: Elliott Margin Scenarios Relative to ARNC's 3-5 Year Guidance Low Case Objective Realistic USmm Low Case 2017 EBITDA 2019 revenues EBITDA Improvement Elliott implied EBITDA Elliott implied margin ARNC 3-5 Year Target Variance (A) (B) (C) (A x C) (A x C) / (B) EPS $1,286 6,785 $342 $1, % 24.9% -90 bps GRP $578 4,918 $150 $ % 13.9% 91 bps TCS $302 1,998 $36 $ % 18.6% -168 bps High Case 2017 EBITDA 2019 revenues EBITDA Improvement Elliott implied EBITDA Elliott implied margin ARNC 3-5 Year Target Variance (A) (B) (C') (A x C') (A x C') / (B) EPS $1,286 6,785 $513 $2, % 24.9% 666 bps GRP $578 4,918 $245 $ % 13.9% 589 bps TCS $302 1,998 $36 $ % 18.6% 12 bps Source: Elliott Management, Credit Suisse estimates We believe ARNC could achieve total SGA / R&D savings near $100mm over the next two years. Given the track record of Larry Lawson at Spirit and his reputation as a tough manager and change agent, we could envision more broad based changes at Arconic including: rationalizing the footprint, divesting the GRP business, restructuring underperforming contracts, and implementing a leaner corporate culture. Figure 3: 2017 Arconic Guidance US$ bn ARNC EPS GRP TCS Revenue grow th bn (+) low (-) high (+) low single digit single digit single digit EBITDA improvement +40 bps bps bps bps Adj. EPS $ RONA 9% Gross Debt 7.1bn Cash 1.2bn Free Cash Flow 350mn Capex 650mn Quarterly Dividend $0.06 Figure 4: End Market Outlook for GRP ABS growth key Market % of 2015 Market Growth Arconic GRP Segment Revenue Revenue Drivers Global Aero 22% -1.4% 5.0% -Low eral w ide-body build rates Airframes -Ramp up of CFRP3plane build rates +Thick Plate Stretcher starting mid 2017 North America 15% 20.3% 23.3% -Decided against conventional capacity Auto Sheet expansion to avoid overcapacity +Ramp up Tennessee, creep Davenport +MicromillTMcommercialization Brazing 8% 1.6% 2.9% +Technology leadership +Global presence Comml Trans 10% -4.0% 4.8% +Differentiated product pipeline Industrial 21% 1.8% 1.8% +Commercial capability and technology Other 24% -Packaging volume pressure Arconic, Inc. (ARNC) 4

5 Figure 5: Credit Suisse Summary Model Relative to ARNC Guide US$ in millions CS estimates ARNC Guidance e 2018e 2019e GRP Sales (incl. Interseg.) 4,982 4,590 4,674 4,918 4,583 5,297 % growth -6% -8% 2% 5% -8.0% 7.5% EBITDA EBITDA margin 11.6% 12.6% 13.4% 13.9% 12.0% 15.6% Margin Y/Y (bps) Volume 1,469 1,288 1,356 1,410 n/a n/a EBITDA / t $ 393/t $ 449/t $ 462/t $ 486/t n/a n/a EPS Sales 5,728 5,927 6,401 6,785 5,814 6,719 % growth 7.2% 3.5% 8.0% 6.0% 1.5% 7.5% EBITDA 1,195 1,286 1,471 1,610 1,245 1,536 EBITDA margin 20.9% 21.7% 23.0% 23.7% 21.4% 22.9% Margin Y/Y (bps) TCS Sales 1,802 1,847 1,940 1,998 1,838 2,124 % growth -4.3% 2.5% 5.0% 3.0% 2.0% 7.5% EBITDA EBITDA margin 16% 16% 17% 17% 16% 18.6% Margin Y/Y (bps) Corporate Corporate EBITDA Segment level EBITDA 2,063 2,167 2,427 2,640 2,095 2,758 Total Adj. EBITDA 1,702 1,862 2,152 2,370 1,795 2,488 Segment EBITDA % 16.6% 17.7% 18.9% 19.5% 17.1% 19.5% Total EBITDA % 13.7% 15.2% 16.7% 17.5% 14.7% 17.6% Engineered Products Upside Arconic through a sizeable investment at La Porte (~$100mm) has significantly expanded its large structural casting capabilities, where EBITDA margins are in the ~40-45% range. When we asked ARNC management on their recent quarterly conference call as to why the margin gap between EPS segment and PCC (Precision Castparts) is so wide they noted ARNC doesn't have as much exposure to the large structural castings market, which was ~$1.4bn or about 15% of PCC. ARNC expects their large structural castings business to achieve $300mm in revenue once La Porte is scaled (likely by end of 2017), which would account at that point for ~5% of segment revenue. Historically PCC generated EBITDA margins near 25-30% with the most recent year reported in 2015 at 27%. Alcoa's EPS segment had EBITDA margins of 20.8% in If we adjusted PCC for only a 5% mix of large structural castings then we see comparable margins in the ~25% range. PCC also is backward integrated into titanium sponge with Timet which provides some cost advantages relative to Arconic s RTI business, however, we understand RTI has attractively priced supply agreements and thus don't view this as a material differentiation between the two. Arconic, Inc. (ARNC) 5

6 Figure 6: Overview of Arconic EPS Segment Sales Division Product $1.8bn Pow er & Propulsion Global leader in jet engine and IGT airfoils. Leader in structure engine components 85% of sales from No. 1/2 market share $2.2bn Fastening Systems & Rings Global leader in aerospace fastening systems and rings; commerical transportation systmes $1.0bn Forgings & Extrusions Leader in defense airframes forgings and extrusions; 40% of sales from No. 1/2 share $0.3bn Titanium & Engineered Products Leader in titanium aersopace ingots and mill products; leader in multi-material subassemblies Source: Arconic. However, we believe ARNC has a richer product mix that PCC on the high margin fastener business (PCC s mix is more commoditized) and also has a lower mix of forgings relative to PCC. That said ARNC has aluminum forgings and castings (PCC does not) which are lower margin than the nickel and titanium based products of PCC. As of 2012 this business reported revenues of ~$700mm. Overall we believe the structural margin gap with respect to PCC is closer to ~150bp. According to Elliott's presentation they worked with a number of consultants and former employees and customers of both Arconic and PCC and they conclude the businesses are "substantially similar". What we don't know if how much corporate level spend and R&D spend flows through the business units which could account for some of the variances. Firth Rixson has been the critical issue with respect to poor performance at the EPS segment owing to execution issues with the isothermal forgings and the collapse in nonaerospace revenue over the past two years. Firth Rixson s non-aero revenue declined to $107mm in 2016 from the initial ARNC target of $420mm while the aero revenue shortfall was $330mm. Firth EBITDA was $136mm (EBITDA margin of 14.7%), falling well short of the $350mm target at the time the $2.85 billion (ex the $150mm isothermal earn-out) acquisition was made. Note that Arconic is now guiding to 2019 revenue of ~$1.25bn and EBITDA margins of 18-19% at the mid-point, at essentially the level when the business was acquired for margin structure. Figure 7: PCP vs. ARNC Unit Revenue Contribution 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Precision Cast Parts vs. Arconic Unit Revenue Contribution 8% 11% 24% 24% 32% 12% 32% 28% 28% Other Titanium Castings Fasteners Forgings Figure 8: PCP vs. ARNC EPS EBITDA Margin PCP vs ARNC EPS Business EBITDA Margin PCP ARNC EPS 30% 28% 28% 29% 26% 19% 20% 21% 22% 18% 31% 32% 24% 24% 28% 21% 0% PCP ARNC EPS Arconic, Inc. (ARNC) 6

7 We don't believe that uplift would be enough for ARNC to fully bridge the gap with our mix adjusted margin level for PCC. To be fair we also don't know exactly what EBITDA margins are today at PCC; hopefully Berkshire will comment on the business strength when they report earnings later this month. If we exclude Firth Rixson as well as RTI, we derive EPS EBITDA margins of 22.7% for Arconic legacy EPS. Note we assume 2016 RTI EBITDA margins of 18.6%. The question really then is what is the potential for Firth Rixson to improve margins by at least bp over the next three to four years, especially if heavy industry markets don't recover meaningfully and thus we assume Firth would have underutilized capacity. The entire issue of asset utilization is going to be a key factor for ARNC going forward in both key segments as GRP must find sources of demand to mitigate packaging volume loss and we believe EPS has excess capacity as well. We looked at the combined asset turns (sales / net PP&E) of Novelis and Precision Castparts for their most recent financials and calculated a 3.3x ratio which compares to Arconic at 2.3x. A combined PCC (FY15 PP&E and calendar TTM 3Q-15 revenue data) and NVL (FY16 data) would have a similar business mix to ARNC. CSTM asset turns for TTM 3Q-16 were 3.5x and for 2015 were 4.1x. Figure 9: Asset Utilization Metrics Need to Improve Asset turns Figure 10: ARNC Returns Closer to Rolling Industry EBITDA RONA 120% 100% 80% 60% 40% 20% 0.0 AMAG Aleris Arconic Kaiser Novelis CSTM PCC 0% Aleris AMAG CSTM Arconic Novelis Kaiser PCC Source: Company data, Bloomberg. Source: Company data, Bloomberg. We struggle to solve for this as we do believe revenue growth will be material as next generation engines ramp sharply higher over the next several years and the very high margin isothermal forgings see substantial growth. Also the viabilities of longer term forecasts is clearly called into question given ARNC's issues in Note that at mid-year 2016 ARNC guided Firth Rixson EBITDA to $160mm at the mid-point, equating to a ~38% shortfall for the implied 2H-16 guide. To Arconic's credit they have done well integrating RTI with EBITDA margins as of 3Q-16, forecast at 19% for 2016, up from ~15% at the time of acquisition. Arconic has outlined a plan to achieve 400bp of total margin improvement in the next 3-5 years which would bring EBITDA margins to ~25% while Elliott sees $ mm of EBITDA upside which equates to margin upside of bps which seems somewhat aggressive based on our understanding of the business structure. For margins to achieve 25% for example the legacy Alcoa EPS segment would need margins near 26%, Firth Rixson at 22% and RTI at 24%. Arconic, Inc. (ARNC) 7

8 We believe this would be achievable but would require support from the cycle and a very aggressive approach towards cost reduction and revenue optimization. Also EPS/GRP has won $14bn of aerospace contracts over the past ~18-24 months and thus a large degree of conversion margin is essentially locked in. We note that prices normally step down over the contract duration with volumes growth and productivity allowing margins to expand over time. The cycle is therefore critical but ARNC s focus on more value add content has resulted in shipset value growth on every new commercial airframe platform, which helps underpin the revenue guidance provided by Arconic. Figure 11: ARNC EPS Revenue Guidance Figure 12: CFM vs LEAP Product Ramp-Up Curves Source: Arconic Source: Arconic Figure 13: Non-Aero Revenue Declined 90% from Initial Arconic Guide Aero Off 29% US$ mm Figure 14: Utilization and Mix to Improve at Firth Rixson as Next Generation Engines Ramp Higher US$ mm Arconic, Inc. (ARNC) 8

9 Figure 15: Credit Suisse Engineered Products Segment Model US$ in millions Q16 2Q16 3Q16 4Q Q17e 2Q17e 3Q17e 4Q17e 2017e 2018e 2019e Third Party Sales $Mn 5,733 4,217 5,342 1,449 1,465 1,406 1,408 5,728 1,463 1,494 1,476 1,492 5,927 6,401 6,785 YoY Grow th % 4% 11% 27% 15% 15% 1% 0% 0% 1% 2% 5% 6% 3% 8% 6% YoY Grow th - Core % 9% 4% 4% 0% COGS (ex-dda) $Mn 4,500 3,203 4,232 1,144 1,136 1,110 1,143 4,533 1,156 1,173 1,152 1,160 4,640 4,930 5,175 EBIT (adj.) $Mn 1, ,018 1,203 1,342 Income taxes $Mn Tax Rate % 32% 34% 32% 33% 33% 30% 31% 32% 35% 35% 35% 35% 35% 35% 35% ATOI $Mn YoY Growth % 19% -20% 3% 4% 9% 7% 12% 8% -4% -8% 3% 25% 3% 18% 12% EBITDA (adj.) $Mn 1,233 1,014 1, , ,286 1,471 1,610 EBITDA Margin % 21.5% 24.0% 20.8% 21.0% 22.5% 21.1% 18.8% 20.9% 21.0% 21.5% 22.0% 22.3% 21.7% 23.0% 23.7% Y/Y Margin Chg. bps Q/Q Margin Chg. bps Incremental Margin % 16% -26% 41% 80% 46% 39% 36% Acquisitions RTI ( ) Revenue $Mn YoY Growth % -6.0% 3% 2% 3% 4% 4% 3% 5% 3% EBITDA $Mn EBITDA Margin % 15% 14.5% 19.5% 21.5% 17.9% 15.4% 18.6% 19.0% 19.0% 19.0% 19.0% 19.0% 20.0% 20.5% Firth Rixson ( ) Revenue $Mn 1, ,105 1,259 YoY growth % -3% -1% -3% -4% 4% -12% -4% 5% 5% 8% 10% 7% 12% 14% EBITDA $Mn EBITDA margin % 18.0% 18.0% 14.3% 15.1% 15.8% 14.3% 13.5% 14.7% 15.7% 16.0% 16.5% 17.0% 16.3% 17.3% 18.6% Incremental Margin % 27% 19% 44% 52% 39% 26% 28% EPS ex > RTI & Firth 1,034 1, ,005 4, ,144 4,463 4,668 YoY growth % 1% 0% -11% -14% 5% 5% 8% 10% 3% 8% 5% EBITDA $Mn ,113 1,200 EBITDA margin % 22.6% 24.2% 23.4% 20.6% 22.7% 15.7% 16.0% 16.5% 17.0% 23.5% 24.9% 25.7% Figure 16: Arconic 3-5 Year Value Stream Map to +400bp of Margin Improvement Source: Arconic. Arconic, Inc. (ARNC) 9

10 Figure 17: Credit Suisse OEM Airframe and Jet Engine Model based on ARNC Shipset Values Commercial Aircraft Shipments Revenue per ARNC Commercial Aircraft Revenues 2016E 2017E 2018E 2019E 2020E Aircraft (CSe) 2016E 2017E 2018E 2019E 2020E Boeing B , , , , , ,869 B ,570 59,127 39,418 39,418 39,418 39,418 B ,706 35,176 43,294 81,176 81,176 81,176 B , , , , , ,744 B , , , , , ,153 Airbus A-320 fam , , , , , ,268 A-330/ , , , , , ,016 A , , , , , ,847 A , , , , , ,963 Total 1,419 1,498 1,611 1,705 1,756 3,454,178 3,466,160 3,641,490 3,826,053 3,991,453 Y/Y Growth 2% 6% 8% 6% 3% 2% 0% 5% 5% 4% Commercial Aircraft Engine Shipments Revenue per ARNC Commercial Aricraft Engine Revenues 2016E 2017E 2018E 2019E 2020E Engine (CSe) 2016E 2017E 2018E 2019E 2020E GE Genx engines , , , , ,953 LEAPx engines ,500 1, , , , , ,064 GP GE , , ,899 20,545 33,360 GE9x CFM56 1,633 1, , , ,981 43,700 3,966 CF ,076 30,076 25,780 23,631 21,483 CF ,000 80,000 80,000 60,000 40,000 GE Total 2,779 2,742 2,644 2,310 2, , , , , ,827 Y/Y Grow 7% -1% -4% -13% 2% 16% 0% 4% -3% 7% P&W PW1000G (GTF) , , , , , ,068 V ,576 12,394 9,915 4,958 - GP ,400 8,000 4,000 3,000 - PW , P&W Total , , , , , ,068 Y/Y Grow -1% -16% 57% 23% 12% 20% 10% 67% 26% 14% Rolls Royce Trent ,734 27,209 4,484 2,538 2,538 Trent ,800 10,800 11,200 14,400 15,200 Trent ,800 23,040 23,040 26,560 26,880 Trent XWB , , , , ,319 Trent ,745 43,627 80,274 80,274 80,274 Spare engines ,250 6,250 8,750 10,000 11,250 Rolls Royce Total , , , , ,462 Y/Y Grow 36% 28% 6% 11% 6% CS Estimate 46% 50% 9% 9% 8% ARNC Value Total 3,751 3,743 3,942 3,833 4,034 1,149,384 1,254,817 1,401,549 1,456,302 1,583,356 Y/Y Growth 9% 0% 5% -3% 5% 20% 9% 12% 4% 9% Arconic, Inc. (ARNC) 10

11 Global Rolled Products In our view the GRP segment is the least complicated of Alcoa's businesses from an operational standpoint but the most perplexing from a performance and strategic direction level. The aluminum rolled products business with the exception of more advanced heat treat automotive and alloyed plate products is largely a commodity business with high utilization the key objective given very high fixed costs in rolling operations. The secular decline in packaging markets appears to have negatively impacted Arconic more than its peers as evidenced by the sharp decline in Tennessee packaging revenues from 2015 to 2016 (from $803mm to $552mm) and Arconic's decision to significantly retrench from its North American can sheet business by moving Warrick operations to Alcoa Corp and creating a tolling structure with Alcoa Corp to wind down its Tennessee packaging volumes. Arconic's Tennessee rolling facility is one of the largest in the US with capacity near 600,000 tons and one automotive line as well as two can sheet lines. ARNC noted ~50kt of packaging volume was sold in 4Q-16 and we estimate total 2016 volumes were near 230,000 tons. We understand the vast majority of the volume at Tennessee has historically been low margin body stock for can sheet, which Arconic has been strategically moving away from over the past several years. Our industry contacts suggest ARNC has significant exposure to Ball / Rexam (together = ~60% of US can sheet market) and has been pressured over the past several years. Furthermore Chinese can sheet imports continue to steadily gain share in the US market albeit from relatively base level volumes. Note that ARNC guidance table pro forma for EBITDA is actually higher without the Tennessee packaging volumes suggesting the business is EBITDA per ton negative, which was very surprising to us. We believe Arconic is operating one heat treat automotive sheet line at Tennessee and would have expected ARNC to announce additional investment to increase auto sheet capacity to leverage significant spare hot metal capacity created by the ramp down of the packaging volumes. Figure 18: Credit Suisse GRP Product Level Model for 2017 US$ in millions GRP 2017e Breadow n - CS Est. Sales % EBITDA/t Conversion/t Volumes % of Mix % of EBITDA EBITDA Mgn Automotive Sheet % 600 1, % 32% 18% Auto Brazing Sheet 400 9% 350 1, % 9% 12% Packaging % % 9% 5% Construction / Industrial % 250 1, % 13% 8% Aerospace Sheet % 750 2, % 31% 18% Commercial Transportation 400 9% 250 1, % 6% 8% Total ex Tenn Packaging 4, % 394 1, % 12.3% Source: Credit Suisse estimates ARNC has yet to provide capacity and capital spending numbers for the Micromill. However ARNC noted on the 4Q-16 conference call they don't intend to build out the automotive capabilities at Tennessee and instead would likely "modify it and use it for some other value-add good, but it will not go into automotive". Instead we expect Arconic to eventually construct its first commercial scale Micromill at some point over the next months. The ARNC Davenport is at capacity and ARNC continues to ramp up auto sheet at Tennessee but did guide ABS volumes for 2017 to be below market. ARNC market guide was 20% growth for 2017 and the CAGR was estimated at 23%, which is above the Credit Suisse market growth CAGR view of ~16%. In our view, we believe Arconic's strategy to move packaging volumes outside the company is based primarily on the company's objective to improve margin structure in the business. Between Warrick and Tennessee packaging, ARNC has removed ~$1.8 billion of sales (based on 2015 data) and we estimate the volume impact was 266,000 tons at Warrick and ~300,000 tons at Tennessee (based on 2015 data). Arconic, Inc. (ARNC) 11

12 Note that GRP has sold or closed 8 mills and most were in packaging or more commoditized products over the past several years. CRU estimates that fixed costs account for ~50-55% of total costs for rolling mills and thus low utilization is a major issue for any downstream rolling products operator. Arconic has yet to provide guidance for its plans to offset the volume loss at Tennessee from the shift away from packaging which does create margins risks entering 2018 in our view. We don't believe margin per tonne is the key metric for management to be managing towards but cash flow per hour of mill time, which is how Kaiser views optimal use of their asset base. Given the fixed asset intensity of aluminum rolling mills, we would expect Arconic to aggressively move to fill the excess hot mill capacity that will exist at Tennessee. Figure 19: ARNC Margin Trend as of 1Q-16 Figure 20: ARNC 1Q-16 Auto Sheet Revenue Guide Source: Arconic Source: Arconic It does appear that Arconic has been significantly underperforming peers in the US packaging market as that their guidance implies EBITDA accretion from the removal of the Tennessee packaging volumes. We believe that Constellium's Wise Metals facility is now generating EBITDA/tonne near $210/tonne and Novelis generates EBITDA/tonne near $275/tonne in its US can sheet business (~70% of total North American volumes for Novelis). In our view a mix shift strategy only makes sense assuming you can replace those volumes with higher margin products and thus make the volume swap cash accretive. We look for more details from Arconic on this dynamic going forward. In our view it might make sense for ARNC to divest its Tennessee facility to a player that is short hot metal capacity and could potentially lever that upstream capability into more automotive growth and allow ARNC to focus on Micromill and Davenport. This brings us to what level of margin upside to expect from GRP and how to interpret the tables provided by Elliot suggesting EBITDA upside of $ mm. We note that even without Warrick and Tennessee, Arconic still has ~20% revenue exposure to packaging in the GRP segment. Also we estimate that total exposure to automotive sheet and aerospace now accounts for ~60% of segment EBITDA and ~40% of total volumes. We also note that GRP is very capital intensive with $ mm spent annually over the past two years despite weak performance and the decision to exit much of the US packaging market. We would expect capital spending to be cut significantly at GRP going forward given the excess capacity issue that will become more prevalent in 2018, when the Tennessee tolling arrangements winds down. Arconic, Inc. (ARNC) 12

13 Figure 21: Potential Cost Improvements at GRP Per Elliott Can Body Stock Plate Brazing Sheet Auto Body Sheet Heat Treated Auto Structural Other TOTAL Industry Avg. $70M $32M $1M $20M $2M $1M $21M ~$150M Best-in-Class $99M $81M $31M $15M $22M $1M $89M ~$340M Best-in-Class w/ Best Demonstrated Practice on Overhead $127M $95M $35M $15M $27M $1M $102M ~$400M Best Demonstrated Practice Across the Board $242M $117M $53M $59M $42M $10M $218M ~$750M Source: Elliott. The rolled products business is highly competitive and overall is a commoditized business in most product areas. We believe that potential consolidation in the US market will be a very positive event for all downstream players and will likely occur in some form over the next 3-5 years. Figure 22: ARNC 2017 Guidance US$ in millions ARNC Guidance EPS GRP TCS Revenues Revenue grow th Up low single digit Dow n high single digit Up low single digit EBITDA EBITDA improvement bps bps bps Guidance scenarios low -end high-end low -end high-end EPS 1% 3% 21.2% 21.5% GRP -9% -7% 12.2% 12.7% TCS 1% 3% 16.1% 16.3% Implied 2017 revenue / EBITDA ($ mn) EPS GRP TCS Total Y/Y -2.3% -0.3% 0.1% 4.3% Figure 23: EPS Revenue Breakdown % 2015 Revenue Defense Engines 4% Commercial Trans-portation 5% Industrial Gas Turbines 8% Defense Airframes 3% Other 12% Commercial Aero Engines 33% Commercial Airframes 35% Source: Company data Source: Company data Arconic, Inc. (ARNC) 13

14 Valuation We continue to rate Arconic Outperform and have increased our price target to $33 from $27 to account for a higher target multiple and modestly higher earnings and FCF estimates. In our view the market is likely to award ARNC a higher multiple going forward owing to the expectation for more material cost reduction, potential management changes, and a reacceleration in growth rates for both aerospace and automotive sheet we forecast in 2H-17. By using a blended forward multiple of 9.4x EV/EBITDA we arrive at equity value based on blended 2018/2019 estimates of $33. We expect the market to migrate to a 2018/2019 framework as 2017 remains a transition year both in terms of Arconic's cost down potential and the cycle. Figure 24: ARNC Valuation Table Current EV Stock Price Market Cap 12,408 Interest in Alcoa 1,362 Net Debt 5,807 5,374 4,831 ARNC Adj EV 16,854 16,420 15,878 EBITDA 1,841 1,965 2,158 Current EV/EBITDA 9.2x 8.4x 7.4x Pension Adjusted Unfunded Legacy 3,300 Legacy Expense 260 Cash Funding 400 Pension Adj EV/EBITDA 9.6x 9.5x 8.0x FCF Yield 4.0% 4.0% 4.8% Figure 25: CS Target Multiples for ARNC Target EV Target Multiple EPS 10.5x 62% GRP 7.5x 25% TCS 7.0x 13% CS Target Multiple 9.3x Valuation ARNC EBITDA Forecast 1,841 1,965 2,158 YE Net Debt 5,807 5,374 4,831 Implied Equity 9.4x 11,301 12,887 15,230 Equity value per share $24.11 $27.49 $32.49 AA stake value per share $2.91 $2.91 $2.91 SOTP Value / Share $27.01 $30.40 $35.39 Upside / Downside -3% 9% 27% Figure 26: Aero Component Suppliers Trade at 11x Figure 27: Downstream Materials Trade at 7.5x Peer Group: AIR, BEAV, COL, HRS, MOG/A, SPR, TDG, TGI, WWD Peer Group: ATI, CRS, CSTM, HAYN, Hindalco, UACJ 12.0x 9.0x 11.0x 8.0x 10.0x 7.0x 9.0x 6.0x 8.0x 5.0x 7.0x 4.0x 6.0x Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Bloomberg 3.0x Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Bloomberg Arconic, Inc. (ARNC) 14

15 Figure 28: Arconic Valuation (2017e EV/EBITDA) versus Margin Matrix 13x WWD US 12x BEAV US EV/EBITDA (FY17) 11x 10x 9x 8x AIR US MOG/A UACJ ATI US HAYN US CRS US ARNC US KALU US HRS US y = x R² = x HNDL IN SPR US CSTM US TGI US 6x 7% 9% 11% 13% 15% 17% 19% 21% 23% 25% EBITDA Margin, Bloomberg Figure 29: Arconic Valuation Comp Table Multiple Should More Closely Align to Aerospace Peers Downstream Aluminum Specialty metals Aircraft & Parts P/E EV/EBITDA 17 EBITDA 17 FCF Div Company Ticker Price Mkt Cap EV Margin % Yield Yield Arconic Inc ARNC US $27.96 $12,260 $19, x 20.4x 9.2x 8.4x 14.3% 4.0% 1.3% Constellium NV CSTM US $7.55 $797 $2, x 6.4x 5.8x 5.3x 9.2% -15.5% 0.0% Kaiser Aluminum Corp KALU US $81.77 $1,464 $1, x 14.9x 7.8x 7.4x 15.4% 7.7% 2.2% Hindalco Industries Ltd HNDL IN $2.75 $5,687 $15, x 9.2x 7.8x 7.5x 12.5% 11.9% 0.7% UACJ Corp 5741 JT $2.67 $1,151 $3, x 7.6x 7.9x 7.4x 9.7% -11.3% 2.0% AMAG Austria Metall AG AMAG AV $39.64 $1,398 $1, x 23.1x 9.8x 8.6x 15.9% -5.6% 3.2% Allegheny Technologies Inc ATI US $21.11 $2,299 $3, x 18.3x 9.4x 8.0x 13.3% 3.7% 1.1% Carpenter Technology Corp CRS US $41.99 $1,962 $2, x 17.6x 9.5x 8.1x 15.2% 4.5% 1.7% Haynes International Inc HAYN US $41.69 $522 $ x 16.4x 9.0x % % TransDigm Group Inc TDG US $ $13,296 $21, x 17.9x 12.8x 11.9x 52.2% 5.4% 0.0% Harris Corp HRS US $ $13,005 $17, x 15.7x 11.6x 10.4x 20.3% % Rockw ell Collins Inc COL US $90.52 $11,843 $13, x 15.5x 9.8x 9.3x 26.4% 5.1% 1.5% Spirit AeroSystems Holdings In SPR US $55.91 $6,801 $7, x 10.8x 6.6x 6.4x 16.1% 8.0% 0.4% B/E Aerospace Inc BEAV US $61.82 $6,276 $8, x 15.3x 12.4x 12.0x 22.7% 4.6% 1.4% Woodw ard Inc WWD US $70.39 $4,325 $4, x 19.3x 13.1x 11.8x 18.8% 4.1% 0.7% Moog Inc MOG/A $67.06 $2,402 $3, x 18.2x 9.7x 9.1x 13.1% 4.4% -- Triumph Group Inc TGI US $27.75 $1,376 $2, x 6.2x 5.9x 5.4x 12.7% -1.9% 0.6% AAR Corp AIR US $33.03 $1,134 $1, x 15.1x 7.9x 6.8x 9.3% 1.2% -- Average - Aluminum 11.4x 9.5x 7.3x 6.9x 11.7% 9.8% 1.6% Average - Spec. Metals 31.1x 17.4x 9.3x 8.1x 13.8% - 1.6% Average - Aircrafts & Parts 16.6x 14.9x 10.0x 9.2x 21.3% 4.7% 1.1% Average 19.0x 14.9x 9.2x 8.5x 17.2% 5.5% 1.5% Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse estimates In our view, Arconic has compelling medium term growth as automotive growth remains strong (ARNC targeting 45-50% y/y volume growth in 4Q-16), aerospace airframe and jet engine markets recover in 2H-17, and packaging headwinds fade owing to displacement into automotive. The EPS segment is a very high quality business unit with EBITDA margins near 20% and industry leading positions in the vast majority of end markets where it operates. Arconic, Inc. (ARNC) 15

16 Figure 30: Arconic Peer Group Metric Rankings We believe as ARNC starts to execute in 2017 and margins recover following a series of reduced margin targets during 2016, the market will gain greater confidence in the 2018 EBITDA ramp and consequently the multiple will start to close the gap versus Arconic's high quality aerospace peer group. In our view ARNC should trade between its pure play aluminum downstream peers and higher quality aerospace component suppliers owing to the majority of EBITDA driven by aerospace (~50%) and the fact that the EPS segment which accounts for 60% of total company EBITDA has similar characteristics to best in class aerospace or automotive Tier 1 suppliers. Also we expect that M&A activity in the downstream sectors will remain high as players seek scale and content leverage; we highlight the potential acquisition of Aleris by Zhongwang for $2.33bn or ~11x LTM EBITDA. EBITDA Net Debt EBITDA growth R&D to Capex ROIC Margin to EBITDA 2018 (rank) 2017 Sales to Sales TDG US 52% HAYN US -2.0 ATI US 17.2% 215.7% COL US 16.1% 5741 JT 7.3% BEAV US 19% COL US 26% SPR US 0.4 AIR US 17.0% 8.5% BEAV US 10.1% CRS US 5.5% COL US 17% BEAV US 23% KALU US 0.5 CRS US 16.5% 32.6% WWD US 6.2% KALU US 5.2% SPR US 17% HRS US 20% AIR US 1.0 ARNC US 11.6% 4.1% MOG/A 6.1% ARNC US 5.2% TDG US 12% WWD US 19% COL US 1.4 HRS US 11.1% -3.6% HRS US 4.1% WWD US 4.9% KALU US 10% SPR US 16% WWD US 2.0 WWD US 11.0% 11.1% TGI US 2.7% CSTM US 4.7% WWD US 10% KALU US 15% MOG/A 2.1 CSTM US 10.2% 12.9% TDG US 1.8% HAYN US 4.5% MOG/A 8% CRS US 15% CRS US 2.3 TGI US 10.1% 26.6% ARNC US 1.1% SPR US 3.8% ARNC US 7% ARNC US 14% TGI US JT 7.3% 24.6% HAYN US 0.9% ATI US 3.6% AIR US 5% HAYN US 13% HRS US 2.6 TDG US 7.1% 9.7% CRS US 0.9% COL US 3.5% HRS US 9% MOG/A 13% BEAV US 3.2 MOG/A 6.3% -1.7% 5741 JT 0.8% MOG/A 3.3% HAYN US 4% ATI US 13% ARNC US 3.3 KALU US 6.0% 1.0% CSTM US 0.7% BEAV US 2.9% 5741 JT 2% TGI US 13% HNDL IN 5.7 COL US 5.0% 5.3% ATI US 0.4% HNDL IN 2.5% CRS US -11% HNDL IN 12% TDG US 5.9 HNDL IN 4.0% 16.2% SPR US 0.4% TGI US 2.5% HNDL IN -18% 5741 JT 10% CSTM US 6.9 BEAV US 3% 7% HNDL IN 0.4% HRS US 2.4% ATI US -15% AIR US 9% ATI US 10.4 SPR US 2% 15% AIR US 0.0% AIR US 2.3% CSTM US -21% CSTM US 9% 5741 JT -- HAYN US KALU US 0.0% TDG US 1.7% TGI US -31% Note that following concerns of both "peak aero" and relatively substantial supply chain disruptions during 2016, the pure play peer group has re-rated higher over the past several months driven by the overall market multiple expanding and better commentary from the OEMs on the medium term delivery outlook. Arconic's peers that are more closely related to the GRP segment (i.e., KALU and CSTM) have recovered somewhat but generally remain relatively depressed, which we believe is also an opportunity for deep value investors in Constellium, which is the closest pure comp to ARNC. SOTP Framework is CS Methodology The Engineering Products and Solutions (EPS) segment is ARNC s highest margin business (21% EBITDA margins), with strong secular growth in the aerospace industry (~75% of segment EBITDA). We attribute a 10.5x EV/EBITDA multiple to the EPS segment a small premium to the ~10.0x long-term average of its aerospace supply chain peers but at a discount to the current one year forward multiple of 11.0x EV/EBITDA. We believe the EPS segment has best in class ROIC, growth rate potential, and market leadership in the areas of focus which warrant a multiple above the peers on the specialty metal arena. Again, we believe EPS should trade near PCC historical multiples. We value ARNC s GRP segment at 7.5x EV/EBITDA, a multiple that we believe is in line with downstream aluminum peers such as CSTM and KALU. For 2017 we expect some pressure from aero plate destocking, which should be to some extent offset by margin improvement following the exit of its Tennessee Packaging business. Longer term, the Arconic, Inc. (ARNC) 16

17 continuous shift away from lower margin packaging into higher margin automotive sheet and aerospace sheet / plate should continue to drive margin improvement. Arconic, Inc. (ARNC) 17

18 We spent a significant amount of time to develop a proprietary demand model for aerospace plate by working with industry consultants and former sales and operational management member of our coverage universe. Downstream Aerospace Outlook Downstream consumption patterns, destocking cycles, and market share analysis for the aluminum aerospace end market historically has been next to impossible to model as companies do not provide aluminum plate volume details and therefore most investors rely on anecdotal evidence to determine developments. All of our companies under coverage (KALU, CSTM, ARNC) would not provide data regarding aerospace capacity, current utilization rates, or conversion margins and also would not provide data on aluminum intensity per airframe leaving us with many unanswered questions. Our proprietary aerospace plate model was constructed following various due diligence calls with industry consultants which we believe has allowed us to triangulate aluminum content by platform and inventory dynamics based on shifts in build rate expectations vs actual. We believe our framework for modeling stocking cycles and apparent demand is unique and, while our framework is only as sound as the assumptions underlying the model, we believe the model is defendable and certainly provides investors with directional understanding and helps to quantify the various cross currents with a reasonable standard error. We outline our key forecasting calls below. Destocking Based on our proprietary model and recent channel checks we believe the destocking in the aerospace plate market will negatively impact 2017 volumes by ~12,000 tonnes relative to the total market size near ~215,000 tonnes. Widebody vs. Narrowbody Build Rates The excess channel inventory has been driven entirely by a slowdown in expectations for widebody build rates relative to months ago with Boeing generally earlier in their destock process relative to Airbus. Our channel checks suggest destocking will subside by 2Q-17. Commercial Aerospace Outlook Credit Suisse global aerospace analysts remain constructive on the medium term build rate and forecast growth of 4% in 2017 and 2% in The bullwhip effect on the aluminum plate industry should result in volume headwinds of ~4% in 2017 followed by a sharp recovery of 13% in Note that the downstream aluminum market generally has 9-12 months lead time versus OEM deliveries. Aerospace Jet Engine Market The jet engine market is set for significant growth in 2017 and 2018 owing to pent-up demand following manufacturing bottlenecks on next generation engines and a solid build rate outlook. We believe ARNC is uniquely positioned to benefit from strong growth in geared turbofan (GTF) engines through Credit Suisse multi-industry team forecasts P&W and GE jet engine deliveries to decline by 4% in 2017 and increase by 5% in However, next generation growth rates are forecast at 104% and 79% for 2017/18, respectively. Furthermore we believe we have unique insights into the competitive landscape of the aerospace plate market as well as the differences in sourcing strategy and needs between the two major OEMs Airbus and Boeing. ARNC has provided shipset revenue by both airframe and jet engine platform (i.e., $6.5mm on the B787 and $740k on the GEnx 1B), however we don't know Arconic's volume exposure by platform. That said, we can derive a market size opportunity set (i.e. end market growth model) by looking at total industry units and ARNC revenue per unit metrics. Note that Arconic aerospace revenue to split ~35% jet engine, 55% commercial airframe, and 10% defense. Also we understand that ARNC has greater exposure to Boeing relative to Airbus, which is positive in our view given our view that Boeing has lower excess inventory than Airbus. Our model indicates that the destocking issues in 2016 began at Boeing and Pratt and Whitney early in the year and started to impact Airbus later in Arconic, Inc. (ARNC) 18

19 Figure 31: Credit Suisse Proprietary Aluminum Aerospace Demand Model Credit Suisse Demand Forecasts Used to Derive Inventory Build for 2016 Jan-2017 Delivery Forecast Jan-2016 Delivery Forecast 2015A 2016E 2017E 2018E 2019E 2020E 2015E 2016E 2017E 2018E 2019E 2020E B-737 Narrow body Monolithic B-747 Widebody Monolithic B-767 Widebody Traditional B-777 Widebody Monolithic B-787 Widebody Mixed A-320 fam Narrow body Monolithic A-330/340 Widebody Monolithic A-350 Widebody A-380 Widebody Monolithic Total 1,398 1,419 1,498 1,611 1,705 1,756 1,398 1,434 1,533 1,651 1,781 1,822 Y/Y Growth 2% 6% 8% 6% 3% 3% 7% 8% 8% 2% Jan-2017 Consumption Estimate Jan-2016 Consumption Estimate 2015A 2016E 2017E 2018E 2019E 2020E 2015E 2016E 2017E 2018E 2019E 2020E B-737 Narrowbody 29,700 29,400 32,040 35,640 37,440 37,440 30,060 30,240 32,940 35,640 37,440 37,440 B-747 Widebody 4,680 2,340 1,560 1,560 1,560 1,560 3,900 3,380 3,120 3, B-767 Widebody 2,240 1,820 2,240 4,200 4,200 4,200 2,100 3,360 3,360 4,200 4,200 4,200 B-777 Widebody 16,660 16,830 12,580 7,140 7,140 10,200 17,000 17,000 12,240 12,240 14,280 17,000 B-787 Widebody 22,950 23,290 22,950 24,480 24,480 24,480 22,270 21,420 24,480 24,480 24,480 28,560 A-320 fam Narrowbody 44,280 47,700 51,300 55,890 60,210 62,100 44,280 47,160 51,210 55,890 62,010 62,100 A-330/340 Widebody 20,200 12,400 15,000 13,200 13,200 13,200 20,200 13,200 10,800 11,200 13,200 13,200 A-350 Widebody 2,025 6,750 9,990 12,960 15,120 16,740 2,025 6,480 11,340 13,770 16,740 16,740 A-380 Widebody 19,600 20,300 9,800 8,400 8,400 8,400 19,600 20,300 17,500 14,000 14,000 14,000 Total 162, , , , , , , , , , , ,240 Airbus Widebody Boeing Widebody Total Widebody Airbus Narrow body Boeing Narrow body Total Narrowbody Aerospace Demand (12 month lead time) 160, , , , ,320 Year Ago Demand Pipeline 162, , , , , Stocking Impact per Given Year 1,710 9,530 11,070 CSe Inventory Chg for Base Year 3,812 7,258 Bullw hip Effect 2,000-2,000 Real Demand - Aero 159, , , , ,320 Real Demand % y/y -5% 3% 10% 5% The implied inventory build in a given year is derived by the change in build rate expectations over a 12 month period given long lead time for aerospace plate & sheet - we assume channel disruption in 2H-16 and 1H-17 and no destocking impact from 2018 on. If for example build rate expectations were to increase in the next twelve months would could assume some restocking required for Regional / Biz Jets 24,500 25,000 25,750 25,250 25,650 US Military 19,200 19,500 20,475 20,065 20,450 Global ex US Military 20,000 20,000 20,000 20,000 20,000 Total Demand 222, , , , ,420 Real Demand % y/y -3% 3% 7% 4% As a result of the 2017 destocking impact, 2018 aero plate apparent demaind is set to increase meaningfully Y/Y. Downstream Aluminum Growth Rates - Y/Y Airbus Widebody -6% -12% -1% 6% Boeing Widebody -5% -11% -5% 0% Total Widebody -5% -11% -3% 3% Airbus Narrow body 8% 8% 9% 8% Boeing Narrow body -1% 9% 11% 5% Total Narrowbody 4% 8% 10% 7% Total Airframe Market -1% -2% 4% 5% Total Military 1% 2% -1% 1% Total Market -3% 3% 7% 4% Arconic, Inc. (ARNC) 19