Alcoa Corporation (AA) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Alcoa Inc. Earnings Conference Call. My name is Jonathan and I'm your operator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I'd now like to hand the call off to Mr. Roy Harvey, Director of Investor Relations. You may proceed, sir.

Thank you. Good afternoon, and welcome to Alcoa's Second Quarter 2011 Earnings Conference Call. I'm joined by Klaus Kleinfeld, Chairman and CEO; and Chuck McLane, Executive Vice President and CFO. After comments by Chuck and Klaus, we will take your questions. Before we begin, I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's press release and presentation and in our most recent SEC filings. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliation to the most directly comparable GAAP financial measures can be found in today's press release, in the appendix to today's presentation and on our website at www.alcoa.com under the Invest section. Any reference in our discussion today to EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix. Chuck?

Okay, thanks Roy. We really appreciate everyone joining us today. Before we start our normal presentation, I'd like to take a couple of minutes and go through what we think is the real success story this quarter. There are 4 main themes: First, we've grown in every segment. We know and you know that growth for the sake of growth is irrelevant. What I'd like to point out is that we're going both margins and profitability faster than revenue. In fact, we've set records in 3 of our segments. Our businesses are stronger, and we're on track to deliver our long-term profitable growth targets. Second, I would like to stress that we're taking firm actions to combat energy and raw material inflation. I'll spend some time illustrating these activities. Third, I would like to highlight that our Flat-Rolled Products and Engineered Products and Solutions segments had set margin records for the second time this year. And finally, our liquidity position has improved substantially. It was strong at the beginning of this year but it's been improving steadily as the year progresses. Now let's take a second quarter overview. Income from continuing operations in the quarter was $326 million or $0.28 per share. Restructuring and other special items totaled in negative $38 million, which brings us to an EPS, excluding special items of $0.32 per share. This represents an increase of 146% versus the second quarter of 2010 and a 14% sequential improvement. Revenues grew 27% year-over-year and 11% sequentially. All end markets demonstrated significant revenue growth on a year-over-year and sequential basis. Adjusted EBITDA of $1 billion rose 44% year-over-year and 9% sequentially and was our best result since the second quarter of 2008. Both our Alumina and Primary Metals businesses are performing at EBITDA per metric ton greater than the 10-year average. Flat-Rolled Products generated a record EBITDA per metric ton, and Engineered Products and Solutions segment achieved a record EBITDA margin. Our days working capital was 6 days lower than the second quarter of 2010, equivalent to approximately $500 million of cash. We continue to operate our businesses at sustainably low levels of working capital. We also remain committed to a strong balance sheet. We continue to perform within our 2011 financial targets as our debt-to-cap-ratio stood at 32.6 or 100 basis points lower than the first quarter and in the middle of our 30% to 35% target range. During the quarter, we reduced our net debt by $319 million and extended our maturity profile through a successful tender offer and new debt issue. Lastly, liquidity remains strong with cash on hand at $1.3 billion. Now let's move to the income statement. Our revenue increased $627 million sequentially. While 33% of this increase was due to a higher LME, the remainder was due to actions we took to increase volume and improve pricing. This illustrates we're not just depending on commodity prices to fuel our top line growth. Cost of goods sold as a percent of revenue was 79.7%, driven by currency and higher input costs, somewhat offset by higher pricing and productivity improvements. SG&A at 3.8% of sales represents the lowest ratio in more than a decade. Our effective tax rate for the quarter was 26.3%. Our operational year-to-date is 27%, and going forward, we'd expect our operational rate to remain at that level. Income from continuing operations was $326 million, 6% higher sequentially and 138% improvement from the second quarter of last year. Now let's take a quick look at the special items in the second quarter. Special items totaled $38 million. This includes a $16 million restructuring costs, driven mainly by litigation charge related to Saint Croix, a nonoperating location. Our non-cash mark-to-market impacts on power contracts was a $10 million benefit in the quarter. Finally, in connection with the tender offer and redemption of our bonds completed during the second quarter, we recorded charges of $32 million, predominantly related to the premiums paid on the transaction. Now let's move on to the sequential earnings bridge. LME less currency provided an increase in profitability of $32 million, with major currencies strengthening 5% to 6% against the U.S. dollar. The benefits of higher volumes, the restarts in the U.S. and improved productivity were partially offset by higher energy and raw material costs. The combined effect of these 2 category shows that we are passing through more than the full benefit of LME less currencies. Let's break it down and look at each segment. In Alumina, we continue to capitalize on our investment at São Luis and the flexibility in our system to ramp up production at swing plants. We succeeded in reaching record quarterly production, up 3% sequentially, driven by record production in São Luis, the Point Comfort ramp-up and solid performance in Australia following the maintenance outages in the first quarter. Our actions to increase production were timely, given strong Alumina pricing and our move to restrict new contracts for those based on the Alumina index. We realized record quarterly shipments up to 8% sequentially, and record quarterly revenue up 14% sequentially. Our margins also continue to improve. We reached the highest ATOI results since the third quarter of 2008, up 31% sequentially due to higher LME base pricing, the continued shift in customer mix to spot and index pricing and higher volumes. EBITDA per metric tons for the quarter was $81, $10 better than last quarter and $20 better than the year-ago quarter. Additionally, we had an equity income pickup of $14 million associated with our investment in the Dampier to Bunbury Natural Gas Pipeline. These favorable impacts were partially offset by negative currency effects from a strong Australian dollar, increased caustic cost and higher prices of fuel oil in Europe and Latin America. Days working capital improved by 10 days versus the second quarter 2010, a significant accomplishment given the prior reduction of 20 days from the previous 12 months. Moving to the outlook for the third quarter, production is projected to increase 85,000 tons, and LME-based pricing will follow a 60-day lag. We expect to see continued pressure in our key input costs, including fuel oil and caustic. Okay. This chart's new. In our continuing efforts to improve transparency, we're going to expand our disclosure to the 5 sensitivities around energy and raw materials. You'll remember that in each index, we provide the sensitivities around the LME and currencies, now we're going to add the raw materials to that. As you can see on this slide, the key raw materials in refining include fuel oil, natural gas and caustic soda. We've also provided a table identifying inventory flow, pricing conventions and ATOI sensitivities for these key commodities. On the graph below that, we've referenced a number of third-party indices that reflect the underlying changes in these prices in the general market. We used these indices to help define our success in limiting inflation in these key raw materials. Key levers in Alumina includes the arbitrage associated with the global scale of our operations, our internal ability to optimize logistics, diversity in our supplier base and the optimization of contract wins. Using caustic as an example, let me give you a couple of specific actions we're taking. First, we've increased our ability to minimize delivered costs to our locations through our global footprint and the optimization of our steamship fleet. As a concrete example, following the Japanese tsunami, we were able to quickly bring caustic from the U.S. Gulf to Australia to avoid the Asia-Pacific tightening. We're also acting to identify and develop new supply sources with the addition of 4 non-traditional suppliers. With these actions, we'd been able to consistently beat the market and will continue to use these in additional levers to limit raw material impacts. Let's move to the Primary segment. Primary Metals is a segment experiencing most cost inflation. Still, our decision to restart capacity in the U.S. has proved fortuitous as this provides some stability in the time of rising foreign currencies, as well as exposure to one of the tightest physical markets in the world. In future quarters, these plants will provide additional profits as their pipelines further stabilize and incremental margins improve. Due to these restarts, we increased our production 5% sequentially. Revenue increased 9%, driven both by increasing volume and improvements in pricing and mix. We continue to enjoy strong Primary end markets and regional premiums. ATOI was flat sequentially, but $92 million higher than the prior-year quarter. EBITDA per metric ton decreased sequentially as we experienced high raw material costs, primarily carbon. These increases were partially offset by productivity gains and our profitable restarts. We continue above our 10-year average and improved by $142 per metric ton versus the prior-year quarter. We've also improved our days working capital by 4 days versus the second quarter of 2010, and are operating at a record low number of days for this time of year. Looking forward to next quarter, we continue to estimate a 15-day lag to the LME. We expect to see 30,000 metric tons of additional production led by the U.S. region. Productivity improvements will continue as restarts continue to deliver profitable results, which should help to offset some of the anticipated increases in raw materials. We expect to see an additional impact on energy, mainly due to a structural energy change in Europe. Let's now move to the supplemental statement for Primary. As with Alumina, we've listed our key cost components and highlighted 2 of our main raw materials for which we have provided ATOI sensitivities. For Primary Metals, our key levers include creating strategic partnerships, optimizing material specifications and contract lends and exploring the use of new or nontraditional sources of raw materials. In coke specifically, one of our main actions is to increase our internal calcining capacity at Lake Charles, where we've already cracked capacity by 20% this year. We are also actively exploring other backward integration opportunities and partnerships. We've taken advantage of nontraditional suppliers in China and India when market conditions permit regional arbitrage opportunities, and we continue to rationalize our quality specifications utilizing our plants. As with our refineries, we've been able to consistently beat the market despite strong inflationary pressures, and I can assure you we'll continue to use these and additional levers to limit these costs. Now let's -- moving on to the Flat-Rolled Products segment. Flat-Rolled Products continues to set records, achieving record ATOI, EBITDA and EBITDA per metric ton. The structural changes that were made in this business, moving to higher margin products, while restructuring and improving our cost structure are continuing to drive improving performance. ATOI increased 22% sequentially, and EBITDA increased 12% sequentially on stronger volume and improved productivity. EBITDA per metric ton for the quarter increased $25 a ton and $274 from 2009. Russia experienced a significant increase in volume, 41% higher than prior year. They achieved a record quarter in volume, ATOI and EBITDA. ATOI increased five-fold when compared with the prior year and EBITDA nearly doubled. China has improved significantly this quarter as it progresses through the qualification process in Bohai, with volume up 30% versus prior year, and a significantly improving product mix. China has also assumed positive trends in productivity. The second quarter achieved record EBITDA, reaching levels more than 10x better than the prior year. We continue down our path towards the $2.5 billion incremental revenue target. As we did last quarter, we are increasing our 2011 expectations for achieving this goal. We now expect to reach 45% to 60% of the 2013 target, while improving margins above historical levels. Days working capital improved by one day versus the prior-year quarter, which was a quarterly record of good results given the stronger market. In the prior 2 years, Flat-Rolled Products has reduced their days working capital by 15 days. Next quarter, we expect to see continued demand strength, especially in aerospace and commercial transportation but with the normal seasonal effects. Let's now move to the Engineered Products and Solutions segment. Our Engineered Products and Solutions segment has also completed a record-breaking quarter. Revenue increased $123 million sequentially. Adjusted EBITDA increased by $32 million. We've again achieved a record EBITDA margin of 19%. We increased 60 basis points sequentially and nearly 200 basis points versus the prior-year quarter. This is the fifth quarter in a row that this segment has delivered record results when compared with previous year's quarters, and our portfolio of current products and new innovations in the pipeline support continued strong growth. ATOI increased by $19 million sequentially, and was the highest ATOI since the second quarter of 2008 and was driven by increased volume and productivity improvements. We continue down our path towards $1.6 billion incremental revenue, with increasing margins by 2013. We continue to project that we can achieve 25% to 30% of that targeted increase in this year. Days working capital improved by 2 days sequentially. Looking ahead, we anticipate incremental improvements in all of our markets except building and construction, along with additional gains and market share across the portfolio. We also anticipate normal seasonal impacts. Let's now move to the cash flow statement. Our cash flow and liquidity are continuing to strengthen. EBITDA was over $1 billion. Cash from operations was $800 million. Free cash flow of $526 million in the quarter places us in a position of positive free cash flow for the first 6 months of this year. Our debt-to-cap continues to decrease, and we finished the quarter with $1.3 billion of cash on hand. Part of that story is our relentless management of working capital. Moving to the next slide. On days working capital, we've achieved an impressive 12-day drop compared to the second quarter of '09, and a significant 6 days compared to 2010. As I stated previously, those 6 days are equivalent to roughly $500 million of cash. Both of our upstream segments had delivered solid improvements, while the mid- and downstream segments remain flat in the face of improving business conditions. We believe this performance attest to the continued sustainability of our working capital reductions. Now let me summarize and recap our progress on our 2011 financial targets. As we look at each of our 2011 financial goals, you can see that we're achieving every goal that were outlined at the beginning of this year. We're targeting sustaining and growth capital not to exceed $1.5 billion, and we're well on our way to meet those targets. The same holds true for the Ma'aden product at $400 million. Our debt-to-cap, we continue to meet that target range. On free cash flow, we're free cash flow positive year-to-date, and we anticipate we're going to be there for the rest of this year. But before I turn the presentation over to Klaus, I'd like to circle back to my introductory 4 themes. First, you've seen that we're growing margins and profitability much faster than revenue; second, we've shown the actions we're taking to limit inflationary pressures on our upstream business; third, both our midstream and downstream segments continue to deliver record results; and lastly, we've strengthened our liquidity and financial positions. I'd now like to turn the presentation over to Klaus.

Well, thank you very much, Chuck, and in the usual fashion, why don't we start, we'll look at the Alcoa end markets? So let's start with aerospace. The positive momentum is continuing. We're expecting 7% growth this year, and obviously, we do see additional growth for the further out years, primarily the -- obviously, in the large commercial aircraft segment. So let me refer to what something that happened 3 weeks ago in the Paris Air Show, that really set a very positive sentiment. Originally when people went in there, they expected about 100 to 300 orders for Boeing and Airbus, and the actual number turned out to be 872 orders that came in. To give you a real feel for the magnitude, that equals $94 billion of order volume. The order volume was up for Boeing and Airbus, 203% year-over-year. The combined backlog now is over 7,300 planes. That basically means that 7.5 years of current production levels. So both Airbus and Boeing consequently have announced those rate increases for virtually every one of their aircraft in their portfolio taking effect over the next 12 to 36 months. IATA for aerospace, expecting 4.7% growth in global travel demand but at the same time, they cut their projection of profitability of the airlines from what used to be $8.6 billion to $4 billion. The main issue here is rising jet fuel costs. We do not expect this to impact new aircraft demand and I said that many times, and we actually do see that in the market. A strong driver actually is this rising fuel cost, because modern airplanes have lower total costs. You see that if you for instance, take an A320 new, very often, it replaces an order MD-8 if you compare those 2 with each other, you get a 35% improved per-seat fuel burn efficiency. That's what's driving it. So let's move onto the next segment, Automotive. We have a positive view, we've seen some softening, particularly in the U.S. but we believe it's temporary. We expect a healthy year-on-year global growth, and we expect the U.S. sales volume to bounce back to the first quarter levels later this year. So let's go into North America on Automotive. Year-to-date, U.S. auto sales to June is up 13%. The seasonal-adjusted selling rate slowed down from the February peak to June. Main factor here is the supply chain disruption from the Japanese tsunami, as low inventories for the consumers less choice, little more lead times, and the industry has responded by basically lowering their intentions, which basically turns out to be a price increase for their customers. So in line with what we are seeing our customers to expect, we actually see 8% to 11% growth projection for this year. Furthermore, if you just look at what it means for aluminum, there is an even stronger story behind that, given the stricter emission regulation that drives light weighting, and then aluminum becomes the material of choice. Just in the last weeks, when you follow the news on the discussion in Washington, a substantial debate about increasing the fuel efficiency standards, the number that's discussed there is 56.2 miles per gallon by 2025. Keep in mind, today's number is 25.5 miles per gallon, and the new legislation that's in place as for 35.5 miles per gallon after 2016. So we're talking almost about doubling off of fuel efficiency onto 2025. Now that's a discussion that's going on, but it clearly shows things are pointing in the right direction, and aluminum is the material of choice, light-weighting is the name of the game here. So let's go to Automotive Europe, seeing some more or less flat year-to-date, strong uptick in May. June numbers are unfortunately, are not out. When you look at production numbers first half, flat 2% all over Europe. Russia, having an incredible year. Until June, the sales were up 56% compared to last year, and we expect the Russian market to be bigger than the biggest European market which was Germany by 2015, so roughly 4 million cars. And overall, we expect the growth in Europe to be between 1% to 3%. China Automotive auto sales faced some headwinds after the -- I mean, nothing else but blistering pace growth in 2010. The first half saves up 5.8%. The headwinds that we see is basically the government incentives have ended, and that Japanese tsunami disruptions, purchasing limits in some large cities and higher interest rate, but we still see a growth rate here Between 5% and 8%. Let's move onto the next segment, heavy truck and trailer. Our North American and European truck and trailer customers are just having a fantastic year. During the downturn, fleets delayed replacement of older trucks and trailers. This led to a higher maintenance costs as trucks age, and now they're getting replaced, also as financing costs have dropped and freight rates are growing again. We raised our outlook to 7 -- to a plus 7% to a plus 12%, before we had a plus 5% to 10%. Leveraging cans and packaging the next segments, we expect global demand to grow 2% to 3%, driven basically by China, Brazil, Middle East, North Africa and Europe, and this is more than offsetting a slight decline in North America. If you just look at China and Brazil, you get a feel for what is happening here in the bright hotspot from the market and how substantially and fast the market expands. In China, we project 225 billion cans this year, and we believe that in less than 10 years, this will have -- China would have reached the level of the U.S. today, which is about 100 billion cans. The total world market is about 200 billion cans, so that gives you a feel for what's happening there. If you look at Brazil this year, we expect 20 billion cans this year, and we're also going to believe that the market will double in the next 10 years. So a very, very interesting market to be in. Commercial building and construction. Early mix of 2 worlds, continues to be a mix of 2 worlds. U.S. and Europe continue to be in decline. U.S., we expect a decline of minus 9% to minus 12%; Europe, minus 3% to 6%. China continues to grow. We expect a growth of between 10% and 12%, mainly driven by increased activities in the retail sectors as tier 2 cities are continuing to develop. And last but not least, industrial gas turbines, we expect an increase between 5% to 10% as the market recovers from a very steep decline. The mid- to long-term outlook, I don't want to go too much in depth here. I think it's bright for gas turbines as they have advantages over pretty much all other methods of power generation. So let's go to the next slide. So what's out there are mean now for aluminum demand. And in a way, it's a boring picture because it's pretty much the same than what I showed you last year. Last quarter. I mean, we actually see 12% growth is our projection for this year. And when you look at what we've seen in the first half of this year, we pretty much feel that our view is confirmed to that compared to a 13% of last year, so that's a pretty good picture. Let's move on in the good old-fashioned to our inventory picture and the regional premiums. So on the left-hand side, you see the inventory pictures, you stack up LME, China, Japan Port and producer. So let's first take a look at where the global inventories are, and essentially, they are flat compared to the first quarter. If you look at the LME and some of you on the phone, I know are following it very, very rigorously. It seems as though we've seen some decrease there, and I don't want to go into this in depth this time, because I spent quite a bit of time on this subject during my first quarter presentation, where I explained what we believe is happening here, depending on where the metal forward curve goes. We do see shifts between visible and invisible inventories, and we believe what you see in the visible LME of metal having moved out, is not -- does not really mean that the metal has moved into the consumption level, but it's moved into invisible inventory, whereas before, we've seen this moving into visible. So that's a move there that we see. And the regional premiums on the right-hand side, which is kind of the most sensitive indicator of where physical demand and supply are, are continuing to go up. And you see this here on the right-hand side for the red and yellow curve, I mean, the Europe and Midwest strengthened in the second quarter, even more and they already were on a pretty high level. And Japan, kind of surprisingly, in spite of the Fukushima disaster, the Japanese premiums are continuing to -- have shown a slight, slight increase here. So let's move on to the aluminum supply and demand picture. And if you look at the numbers here, we believe that there is a deficit in China 750,000 surplus; in the West, 865,000. So we are seeing a slight tightening in the second quarter. We're now projecting a surplus, if you look at those 2 of about 115,000 tons. That's half of what we saw in the first quarter, and it's mainly driven by slower start-up rates in both areas. So let's focus a little bit on China. And this might look as a complicated chart but I spent a little time on this, because I think it's important to understand what's going on in China and very often, triggers a lot of good debate. So when you look at the chart that I just showed you, you actually see that the market in China is in a deficit. So you expect that you would either see imports or you'd see inventories to shrink. And what you see here on the left -- upper left-hand side, you actually are seeing Chinese visible inventories have come down substantially according to the expectation, right, as we haven't seen imports. And that brings us down to the lower left-hand side, which is a little complicated but I'll run you through it. So let's start with a red line there. And the red line basically depicts on where the Shanghai ferrous metal exchange price stands compared to the LME. If it's above the 0 line, it basically means that there is a premium in Shanghai. If it's below the 0 line, it means that's a discount. So actually, you can see that in the early part of 2009, pretty much through the mid- to end 2009, the red curve stayed above the 0 line, so there was a premium in Shanghai compared to the LME. So that's why we introduced this insignia of the red corridor which is above it. And the red corridor basically means whenever the red curve goes into the red corridor, it means that now it's attractive for someone to import metal from the West into China. And why does it start at 120? Because we're assuming 120 premium, so it has to go above the 120 regional premium who get it in there, right? And interestingly enough, we also put in here this blue bar. So the blue bar basically show where the net trading balance is. So the blue bar goes down here, meaning immediately when a little after basically, the red line goes into the red corridor, guess what's happens? A metal flows into China. And so it shows that the logic works very well. Now the red curve, I mean, the premium discount to LME has moved quite a bit. As you can see, it moved from a premium to a discount, currently moving back up again but it's still in a discount tender. That's also why, I mean, a lot of people are asking the question, "Hey, is there a risk of exports from China into the rest of the world, given the tremendous amount of metal that is produced and can be produced in China?" That's why we introduced this green corridor down there in the green line. And that basically is, whenever the red curve were to hit that green corridor, I mean it would potentially be attractive for Chinese producer, always granted, I mean, that's our generalizations in there to export metal. And because the green corridor is simply taking into account, if somebody wants to export metal from China to the West, they would have to pay a 50% export duty, they would lose the 17% VAT refund, and they would also lose the $90 regional premium that count against it. So that's kind of, I think, a very neat way to look at it and to monitor what's happening in the market. And now, if you add to this picture the situation we have on the Chinese aluminum industry structure, you get a complete picture, and that's here on the right-hand side. And let's spend a little time on that so that we fully understand what's going on there. I mean, you have a situation where the smelters, 45% of the smelters that we have in China are on the worldwide cost curve in the top quartile. 20% of the Chinese smelters are outdated and use inefficient technologies. And many people are talking about, "Yes. Well, that's a picture of the past, but what about the move to the west?" I mean, interestingly, more than 50% of those, I mean, highly-acclaimed, new Western smelters will be coal-fired. Now how does that work when it comes to being in congruence with the sustainability targets that have just been put out in the fifth, 12-year -- 12th fifth-year (sic)[5-year] program. Then when you look at the logistics costs, they're going to double, right? And one other thing, which is also, I think, pretty remarkable, when you would look at what is known so far about the new projects in the West, and then add to it, I mean, what does that mean in terms of material that has to be moved to the West, the material that will move from the west to the major consumers in the East? We'd actually have to add 55,000 trucks or rail cars per year to transport material. And keep in mind, I mean, China is big, so we're talking about, on average, I mean, something like 2,000 kilometers between East and West. And now if you put that in perspective to the total usage of rail car trucks, whatever you want to use, I mean, you're talking about an impact that's between 1% and 5% of the total transportation that is added as an additional stress to a transportation that's already under a quite substantial stress. You go to refining, the picture doesn't get any better. 37% of all the refineries in China in the top quartile, 78% are in the top half, 40% of the bauxite gets imported, and of the bauxite, that is mined in China, 20% to 30% are mined underground and I could go on and on and on, I think that with all this, there is a picture here, I assume that you would come to the same conclusion that we have come through, that's not sustainable. We will -- we actually very strongly believe that we will see substantial changes in the next years to come. Let's move on to Alumina. So on the Alumina side, it's a very simple -- we continue to see a picture of a balanced situation, and that basically concludes the market side. So let's now move on to the Alcoa business segments. And let's start with Alumina. You all remember that we have a clear strategic focus. We want to drive down on the cost curve, that's one thing, from the 30th percentile where we are today to the 23rd percentile, and the second thing is, on the pricing side, we've changed pricing to Alumina index pricing, today 20% of our volume is priced by index or spot. And when you then look at the upper right-hand chart here, which is a 10-year performance, EBITDA per metric ton, a very, very good way to measure that, you actually do see in the second quarter and another uptick. Another uptick and all of these things, the cost control, as well as the pricing adds into it. $81 per metric ton is what we achieved in the second quarter. If you look at the 10-year average here, it's $66. So really, substantially above the 10-year average. And if you compare it to the first quarter, we actually also to do see that it's a substantial improvement compared to the first quarter. And all of that in spite of the headwinds that we saw in the raw material side, as well as on the currency. And part of it is also that we've been able to crank production up in the second quarter, and you all may remember, last year, we spent on bringing São Luis and Juruti online, ramping it up and we now see that we can consistently perform on pretty nice and high levels there. So next segment is aluminum. And on the aluminum side, we see a strong performance basically, despite off of this headwinds. Also here, we have a clear cost curve target. We want to come down from the 51st percentile to the 41st one, 10 percentage points, that's very, very tough. When you look at on the right upper-hand side at the performance today, $423 per metric ton, that's where we stand in the second quarter, and that's well above the 10-year average at $390 per ton, and again, in spite of the headwinds here, mainly currency and raw materials. One thing that I want to add here, because very often, we only talk about cost control than on the aluminum side, and that's very important, and I think we're getting very good at that, out of those things that we have under control, obviously, currency is not one of those things. But I want to add the other thing here is, there's also an element of differentiation in here which we rarely talk about, and that is using the global casthouses in a smart fashion. And I think we've really gotten good at it. I'm not saying that we can't get better, but we're really getting good. And we're getting good at using the casthouses as a differentiator in terms of using it with the right shapes, the right alloys, the right regions, and this has added $30 million of profits in the second quarter, so that's a good achievement, a great job that the team has done here. And obviously, I haven't talked yet about one of the most exciting things that happens inside of Alcoa, and that's our project, our expansion in Saudi Arabia. And I believe that as we started last time, pictures tell more than words so I brought you some pictures here that show the current situation on the ground where once you saw sand, you now see the pipelines are coming out of the ground, you actually see that we broke ground for the second phase, which is the rolling mill here in April on the upper right-hand side. And worth to mention is the first locomotive arrived on May 23, and what's not on here is something that happened in the background but equally important, is the financing. The first phrase that you may remember, we concluded end of November 2010, and now in the second phase, we received financing by June this year. Good response from the banks, we see $4.3 billion commitment for only $1 billion that we really need as a requirement here. So let's move to the next segment, Flat-Rolled Products. Strong top and bottom line growth, and you actually see on the upper left-hand side nice margin performance of 9%. But honestly, when you look at the 9%, I don't think that, that really tells the story. I think you have to strip out the metal price impact here, and that's why we've put in here the lower left-hand slide, and basically, this is the EBITDA per metric ton. And if you look at the blue line, right, you actually see what is happening there. It's a very, very different business today. I mean, they're offering portfolio, the value pricing, the regional presence and last but not least, certainly also, the cost level that we have been able to achieve. I mean, you see on the EBITDA per metric ton, I mean, a substantial difference from where this business once was. Also on the growth side, we're well on track on the growth. We have a 3-year target to add $2.5 billion, and we actually believe now from what we see this year that 45% to 60% of that $2.5 billion, we will be able to add in 2011, great achievement. Last but certainly not least, and I assume that everybody holds our shares agrees with that, Engineered Products and Solutions, a record quarter, 19% EBIT margin, $261 million EBITDA, that's really another step up in the solid trend over the last years. And also on the left lower side, you see the adjusted EBITDA margins, and we used the downturn to improve our portfolio and reduce our cost, and you see that you now have a substantially improved year. We achieved 22% revenue growth in the second quarter. We have a 3-year target of $1.6 billion revenue growth, and we now believe from what we're seeing that 25% to 30%, we can achieve this year. So before I totally conclude here, I brought 2 examples with me. Because the great performance that you are seeing is based on so many factors. The profitable growth of innovation is very important. And it is our goal to create value for all of our customers, to enhance their profitability. And I brought 2 examples with me that kind of give you a flavor for what we are doing. And I want to start with a fast-growing wheels business, nicely profitable but we very rarely shine the light on them, so we decided to do a little bit of that, and I know all the folks from Luis business are very happy about that. So but when you look at what they've done here, they've used innovation to really compete very, very nicely against, for instance, at steel wheels. If you look at on the left-hand side, you look at the advantage that aluminum wheels bring compared to steel wheels, you get a 3% fuel efficiency. Now you can decide whether you wanted a fuel efficiency as a truck owner, or most truck owners would say, "Hey, I can load on more cargo and charge for it." So you get a 1,350-pound phase per truck and trailer so you can load that up, right? And on top of it, you get a resale value of 75% off of the original purchasing price. All these factors add into 26 months payback and a $210 million return on investment for our customers. So that's compared to steel. And when you look where does Alcoa stand when we compare ourselves to other aluminum wheel producers, we are 5% lighter than normal aluminum competitors. And we use also our capabilities in terms of surface treatment with proprietary coating to reduce the painting and cleaning, and I mean, we're almost kind of self-cleaning here with the wheels. So very, very cool thing. And as we always talk about internally, also about environment, health and safety, it is no surprise that we're also bringing down our sustainability footprint, ramping up our sustainability footprint on -- depending on how you want to see it by bringing down our energy usage by 25%, a very, very good thing and hopefully, more news to hear from those folks, right? The second example comes from the aerospace sector. And I was just reminded when President Obama visited Davenport, how important really the Aerospace segment is for Alcoa and how important Alcoa is for the Aerospace segment. 95% of all aerospace alloys ever used has been developed by Alcoa. And the good news is, we've constantly innovated and substituted our own solutions. Now we are winning the competition against carbon fiber, with a combination of new aluminum-lithium alloys, as well as advanced structural solutions. And the reason for it are simple and they are depicted here on the left-hand side. 10% weight saving, that's one thing. The second thing on the life cycle cost-savings, 30% life cycle cost-savings, and they come from the manufacturing side, the operations, as well as the repair. If you add all of these in, you get a 12% increased fuel efficiency through this aluminum-lithium alloys, as well as advanced structural solution. That comes in addition to typically 15% efficiencies that you get from new engine designs when you design a new plane. So taking that into account, it is absolutely no surprise that at the Paris Air Show, we have been able to sign the multiyear $1 billion contract with Airbus. And out of curiosity, let me also mention to you that the first use of the Alcoa aluminum-lithium, actually is in the Boeing 787. And also of interest for this was created by all of our customers worldwide. So let me summarize. The second quarter sets a successful milestone on a road to sustained better performance. You see on the left-hand side, top line growth, 27% year-on-year, 11% quarter-on-quarter. Bottom line, doubled it. If you look at year-over-year, 15% increase quarter-to-quarter. You actually see an improved liquidity on the financial position. We continue to believe that there is aluminum demand growth of 12% this year. Record results in Flat-Rolled as well as Engineered Products and Solutions. And then when you look at our aggressive profitable growth targets, we are meeting slash exceeding them, GRP, $2.5 billion and EPS $1.6 billion. While we are doing that, we continue to improve our bottom line also. So the second quarter was a very good step in the right direction, and that is why next slide, Alcoa can't wait for tomorrow. With that, let me open for Q&A.

[Operator Instructions] And our first question is coming from the line of Jorge Beristain with Deutsche Bank.

Gentlemen, Jorge here with Deutsche Bank. My question is just regarding the last -- second to the last slide, where you're seeing this $1 billion agreement with Airbus. Is this additive? And is this new news coming out of the Paris Air Show? And what is the timing you think as to when that would start hitting your numbers?

This new news coming out of the Paris Air Show, obviously, we announced it when it was signed 3 weeks ago. The timing depends very much on the build rates in Airbus. And I think when I went to the end market segment, I also gave you our expectations on where build rates will be going. But it's a multiyear contract, clearly.

Your next question is coming from the line of Sal Tharani with Goldman Sachs.

Klaus, you had put out a press release recently about -- regarding the new development you have made in the aluminum-lithium alloy. Can you give us some more part on that, what are you targeting on that? Is that for the current platforms, or is this something you're developing for the next series of platforms or next single out planes that will be developed next decade?

Sal, the way the market works is whenever they go -- typically, they don't replace something on an existing plane, right? What happens is if people go for a major revamp of a plane or go to a new plane, that's when the discussions are opening up for new materials and that's when we have the discussion with our customers. Obviously, I mean, given what I -- that's why I threw out this number of 95% of all aluminum alloys ever used in aerospace have been made by Alcoa. That gives you an idea of how intense the relationship is between our R&D folks, our metallurgists in this field and the corporation with the aerospace firm. And there's pretty much none of the aerospace firms being as big or small that we are not intensely talking to whenever they consider that they want to redevelop their planes or when they want to build a new one.

Your next question is coming from the line of Paretosh Misra with Morgan Stanley.

I just had a question on Engineered Products segment, in particularly the demand from aerospace. What are you seeing just near term? Just trying to figure out that normally, third quarter is a big quarter for that segment, but this year, there are expectations that you may see aerospace restocking. So I just wanted to get your thoughts on the third quarter for that segment.

Yes, Paretosh, that's a very good question. And obviously, we do see that the stock is coming down, and I would say we're nearing an end of the destocking here, and it's starting depending on what segment you talked about, it's starting to hit the real demand coming to us as the manufacturers.

Your next question is coming from the line of Brian Yu with Citi.

Klaus, with the upstream businesses, I've seen some weakness in Aluminum prices lately, and it seems like you're guiding for higher costs. If you look out 6, 9 months, is there anything within the cost structure where you think they're probably a little bit elevated now and have the potential to decline, let's say 2 or 3 quarters out?

So Brian, I mean if we all had ahead of view on where the world will be going, it will be a little bit more simpler, right, so that's a difficult one, as you know. And I don't feel -- I mean, you started out saying while we saw a weakness in metal prices, I would say we saw a pretty strong metal price there. Still and when you look at the regional premiums, I don't know how many people you have heard. I mean, I certainly hear a lot. I mean, they are going into my years already for the last 18 months that regional premiums are going to go down. Regional premiums are to me, the most sensitive indicator of where physical demand really is, right. And we continue to see physical demand being strong as I showed in the slide. In addition to that, I mean, the situation in China is a potential upside, in my view, and that's why I spent a little bit of time today on it again. I believe that, that is not sustainable. Now I can't tell you whether how much is going to happen tomorrow or how much is going to happen a little bit later. I mean, what you see clearly is that the Chinese authorities are trying very, very hard now from a central perspective to come down on some of the provinces that are building out capacity. I mean, there is published information that individuals from the MDRC have been traveling to some of the regions and been speaking to the provincial leaders to basically force them to not open the capacity or to even stop projects. All of that comes into the mix when it's the question about where is aluminum supply demand going to go. Chuck, you want to add anything to it?

I'd say on the cost side, Brian, what you need to think about and what we do on an ongoing basis as you're looking at currencies, energy and energy derivative type of products, those are commodities as well, and there's a correlation between those and the movement in LME. What you end up having though is you have a little different lag associated with how the LME moves and how that hits our results, and how some of these costs move. That's why we try to give you the additional disclosure around that. So as you see one move, one commodity and the currencies, as I say the ones we are involved with, follow as does energy in many cases.

Your next question is coming from the line of Brett Levy with Jefferies & Company.

Yes. On the raw material side, can you talk a little bit about what the story is in calcine coke? I feel like the problem there is so inherent. And it goes back to the raw materials. Same thing I'd say for silica. Can you guys talk a little bit about kind of what you guys are doing in those basic materials and backward integration, new technologies, just talk about that a bit?

Yes, and I would say you hit it all. I mean, we cannot leave out any one of the levers that, that exists out there, and it very much depends on the situation. I think that Chuck gave you an example on the caustic side, that where we respond really quickly with the tools that we have at hand with our own fleet of ships. And basically, we're able to move material from the Atlantic into the Pacific before the market started to tighten up. And the other aspect, there are discussions on, as we have said before, on some projects for backward integration. On both of those aspects that you mentioned, calcine coke particularly, and there are some other things where we are buying longer-term cargoes. Honestly, I mean, given where the market is today, I mean, we cannot afford to let any lever out here on the procurement front and the team is very active. Chuck?

Yes, just to mention a couple of others. For the last 2 years, we've talked about quality of specifications in our facilities and running those, and we had over 20 specifications that had been moved down to 10 specifications. And we have plans in place now through a lot of hard work from our -- not only on operating folks, procurement folks, also our technical folks to try and move those to 2 specifications inside of our facilities to bring additional savings. So as Klaus said, we look to be involved in the coke market, as well as the calcine. And if you look at what the markets had done in both caustic and in coke, and what we were able to achieve in the quarter, we actually had savings in the raw materials in the Alumina segment of 20% better than market, and in that Primary segment 18% better than market just to give you a flavor.

Your next question is coming from the line of Tony Rizzuto with Dahlman Rose. Anthony Rizzuto - Dahlman Rose & Company, LLC: I've got a question -- 2 questions, if I may, very quick but if you could elaborate a little bit more on China, in which markets you're seeing that are slowing versus markets that maybe perhaps accelerating? And also some quick comments, if you could, on the proposed carbon tax in Australia and how that might affect you guys in the cost structure?

We give you a special treatment, that's 3 questions for that. So on the China side, I mean, I think -- that's why I threw the chart in there and I'd be happy to elaborate and when I sit down with you guys. I mean, I've said a million times over, I mean, their -- we see a lot of the right behaviors from the central government there, and I think it's the kind of a struggle between the central government seeing that these things are not maintainable. They go against the energy efficiency targets. They go against the greenhouse gas targets. They go against sustainability targets that I clearly mentioned in the 12th 5-year program. There just recently, I guess, a couple of days ago on the Chinese officially came out with a list of 8 industries, 8 strategic industries where they want to do a major restructuring and aluminum industry, I mean, no surprise is one of those. And as I've said before, I mean, there's also quite a bit of information out there that the MDRC folks are traveling now to some of the provinces and are having discussions with the local government there.

So that's what we are seeing there. And the second thing, I really -- I mean, I really hope that you appreciate that one slide that we put in to hopefully clarify once and forever the dynamics on when could China become a net importer and when could China potentially be an exporter. I regularly see 0 risk for China being an exporter of primary metal. The story on the fabricated one is a different one. On the markets that are slow, I think the one that is most slow is basically the building and construction end market here. I mean, it's pretty much dead when it comes to Europe as well as the U.S. and we do not see that moving up. The good news actually for our building and construction segment is because we've been using innovation here, and maybe next time, I'll show you some of those, the things now that we've talked about it, we've been able to gain market share in the down market pretty substantially, and also been able to improve our performance in there, that might be a good extra. And the last thing on Australia, while I mean this only came out, I mean the results only came out over the weekend, so our folks in Australia are sitting there studying it. I mean, a lot is in the details and the detail's here around what credits are given to the energy-intense industries, and that's what we are looking at. And obviously, this depends on -- this very much depends on whether Australia leads them to a situation with this new carbon tax of carbon leakage, and will lose jobs and will become uncompetitive. At this point in time, we are still optimistic that the legislators have moved in a smart fashion. I'd take a little while to figure it out until we really have gone through all the details there.

Your next question is coming from the line of John Redstone with Desjardins.

I'll try to keep it to one question as much. Can you give us as much detail as you can as where you see the Aluminum index going? How it will affect Alcoa going forward and where the progress has been?

So alumina index, I mean, we basically see that when we announced that we will be changing or we actually said already at the change over time, that number one, it's a much better way to conclude business. Because I mean, what does it have to do with the -- what the change in aluminum, that's rather tied to something that deals with alumina-specific cost structure? So that's number one. Secondly, we now have transparency with enough indexes out there. And typically when we sign contracts, we have a basket of indices. Thirdly, we said we'll take about 5 years, given that 20%, on average, 20% of all volume becomes available every year. It will take about 5 years for a full change over on our end, and this is the first year that we are concluding now, and guess what, 20% of all volume is now traded either on an Alumina price index or spot. And let me also add even thought that wasn't in your question, there have been recent reports, that some people are saying, "Well, I mean, are there really Alumina index price contracts that are done with end users?" And all I can tell you is we have signed contract on Alumina basis -- on Alumina index basis with end users to be crystal clear here and take all of the rcrap out of the market, hopefully once and forever. I think this is the last question that we have time for, right? Who is the lucky one?

Your question is coming from the line of Timothy Hayes with Davenport & Company. Timothy Hayes - Davenport & Company, LLC: I think there was an article this week saying that you had recently secured more financing for the modern bauxite and Alumina project. I was curious, are you financing sort of in silos, effectively financing the upstream than financing Primary separately, and the rolling mill separately? And if so, why would -- why are you doing it that way?

It's basically 2 tranches and there was a first one, because it comes as -- their whole project, is executed in 2 tranches. The first tranche, which comes online in 2013, is for the smelter and the rolling mill, and the second tranche is for the refinery and the mine. That's what the logic behind it. I mean, Chuck, you may want to add something.

No, that's right. There are 2 phases. The commitments were made against the first one in close, and the commitments have been made against this one and will be closed later on. And the first one's about $4 billion and this one's $2 billion.

Very good. Thank you very much, and let me conclude finally here. I assume you agree this was a strong quarter, solid revenue and earnings growth. I mean, you can rest assured our team here is absolutely focused on delivering results. We constantly look at our costs, getting our costs, continuously down. Look at getting the assets -- asset management under -- continuing under control and focusing on innovation and profitable growth, and that's what you will be seeing going forward. Thank you very much, and have a good day.

Ladies and gentlemen, thank you for your participation in today's call. The presentation is now ended. You may now disconnect. Have a good day.