Alcoa Corporation
Q2 2008 Earnings Call Transcript

Published: 9 Jul 2008

[Operator:]

Good day, ladies and gentlemen and welcome to the Q2 2008 Alcoa earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Greg Aschman, Director of Investor Relations. Please proceed, sir.

[Greg Aschman:]

Thanks, Kim. Good afternoon, everyone. Thank you for attending Alcoa's second quarter 2008 analyst conference. On today's conference

[Charles D. McLane Jr.:]

Okay, thanks, Greg. Before I move on to the financials, let me first give you a brief synopsis of industry fundamentals. Aluminum prices have continued to show strength and those higher prices are supported by a host of factors. First, global supply and demand is essentially balanced, even though North America and Europe are experiencing significant weakness in specific end markets, global consumption remains robust. Secondly, energy costs and input prices have continued to escalate for the industry as a whole. In fact, as you know, energy supply constraints have caused smelter curtailments as well as postponements to greenfield expansions. And lastly, global mega-trends will continue to increase the per capita consumption of aluminum, as well as provide a catalyst for material substitution. With that as a backdrop, let's dive into the financial results. Earnings for the quarter were $546 million, or $0.66 per share, an 80% increase sequentially. All segments contributed to revenue and earnings growth and each segment had double-digit percent increases to profitability. Our Iceland smelter is complete, it's running at full capacity and will reach mature profitability levels over the next couple of quarters. Russia is showing productivity improvements and our engineered products and solutions segment achieved record revenue and profitability results. Cash from operations generated $1 billion in the quarter as we achieved significant reductions in days working capital. We continue to operate within our target debt-to-cap range and our Bloomberg ROC stands at 12.1% excluding the growth projects. Now let's move to the income statement. Excluding the packaging divestiture, revenue increased 11% on higher prices and volumes, and total segment ATOI increased 27%. Other income showed a significant improvement sequentially, yet most of the improvement is offset by items in the revenue and cost of goods sold categories. An example of that is currency translation. Currency translation was a favorable net income impact of $49 million in other income, yet this is essentially offset in cost of goods sold by a negative economic currency impact. For taxes, the operating tax rate for the year is now projected to be 28.6%. Lastly, the combination of higher prices and volumes led to a significant 80% rise in net income. Turning next to our sequential bridge, improvements in volume, pricing and productivity more than offset input cost increases, as well as the energy disruptions in Australia and Rockdale. Higher LME prices improved results by $238 million and includes the impact of both alumina and primary pricing. Higher raw material and energy costs reduced profits by $107 million. Caustic, carbon, natural gas, fuel oil and transportation costs continue to climb. In addition, we had two significant events in the quarter which exacerbated these results. First, the gas explosion on our supplier's pipeline in Western Australia caused an immediate reduction in our production capacity, as well as requiring us to buy alternative fuels at a much higher cost than the natural gas it displaced. Meanwhile, unreliable electricity supply at our Rockdale smelter forced us to purchase power at market rates frequently during the six-week period. The combination of these two reduced profitability by $39 million in the quarter. We like others have been communicating the rise of energy and raw material costs. Let me take a minute and review some of the specific price changes the industry is experiencing. We would like to make four major points to this slide

[Klaus Kleinfeld:]

Well, thank you, Chuck for providing a very good overview on our second quarter performance. Let's now look at the industry challenges and the opportunities. On a global basis, we see 2008 being another growth year. In our view, aluminum consumption will increase by approximately 8% and given the supply interruptions in China, South Africa and the U.S. to name a few, we see the global demand/supply picture to be generally in balance. The picture varies, however, substantially by industry and region. Let's go through that. The North American industries in which we participate are declining significantly this year. North American automotive production is projected to be at its lowest level in two decades. Similarly, heavy truck and trailer production are anticipated to remain below already weak 2007 levels. Commercial building and construction activity is showing signs of the decline that we have been anticipating due to the slowing business cycle and also to the tighter credit conditions. Europe -- the end markets in Europe have held up, although with signs of softness, especially in building and construction and truck and trailer, are becoming evident. Automotive production has held up and is expected to show some increase for the year. European C02 regulations are forcing OEMs to look at alternative solutions to comply with recent legislation. This is creating more and more opportunities for light weighting and here we can leverage our experience and technology. End markets in China continue to be showing strength. We expect consumption in China to increase approximately 20% this year. We've lowered our projection slightly due to the earthquake relief effort but the projected increased activities in building and construction and to more application and transportation-related areas such as auto and bus platform. Looking at aerospace and industrial gas turbines, IGT, in general we forecast continued global strength. In the aerospace industry, however, we do see marginally softer demand over the remainder of the year for some specific applications. We believe the 787 and A380 scheduled revisions will cause inventory adjustments for both fasteners as well as engine components as the supply chain is well-stocked at this point. Additionally, the engine side will see supply chain adjustments to account for lower spare demands caused primarily by fleet reductions. We do expect increased build rates for [single I] planes and we remain bullish for the next several years, even if we see some order deferrals or cancellations as new platform build rates increase. On industrial gas turbines, demand from Europe and the Middle East continue to strengthen. North America is also forecast to grow, fuelled by decreasing capacity margin and increasing spare sales. In summary, while sluggish end markets in North America and Europe negatively affect our midstream and downstream volume potential, we see the overall aluminum industry generally in balanced supply/demand position for the year. Let's talk about some industry fundamentals. Aluminum continues to combine a lot of characteristics like lightweight, high strength, durable, highly conductive, corrosion resistance, easy formable, recyclable and last but not least, a great relative price compared to other materials. In fact, given these very unique characteristics, aluminum is increasing as a material of choice in numerous industry and applications. Let me give you some examples for that. In the transportation business, light weight without compromising on strength provides obvious advantages like fuel efficiencies and safety, as well as driving dynamics. We are continuously invited to participate in the design of new auto, truck and bus platforms. For the packaging business, logistics costs, robust handling, good consumer appeal as well as high recyclability are crucial. That is why aluminum is highly valued here. The durable, high strength and corrosive resistant aspect of aluminum make it a natural fit for those looking for maintenance-free and aesthetically pleasing surface finishes, as well as the high recyclability. This is especially important in the building and construction and the more consumer-oriented markets such as consumer electronics. Also, the defense industry reaps benefits from aluminum almost since the date of aluminum's invention with increasing applications. These examples illustrate the fundamentals behind the predicted growth and make us confident about the future. We project that the amount will grow at 6% annual rate over the next decade. The growth will be fuelled by Asia, particularly China, with an anticipated growth rate of 9% over the next decade, and one could see this as a rather conservative estimate as it reflects only half the rate experienced over the last 10 years. One thing is also sure; serving this additional 30 million tons of aluminum demand will not be easy. Access to reliable power supply and quality bauxite reserves will be the most critical factors, as demonstrated almost on a daily basis and as we've seen again in the last maybe 48 hours. Energy demand surges in most regions of the world. The ability to secure clean, affordable energy is increasingly an issue the industry will continue to encounter. This year alone the industry had nearly 1 million metric tons of capacity curtailed due to energy or infrastructure-related issues. These have spanned the globe from China to South Africa to the United States. Many in the industry have seen natural gas as an efficient and relatively clean energy source for new smelters. Natural gas was once seen as stranded energy. With the emergence of liquid natural gas, it became transportable. This has made it much more difficult to ensure supply agreements of natural gas that are secure enough to base long-term investment decisions on it. Finally, there have been several smelter delays announced over the recent months; the common theme among all of them have been the inability to secure necessary economical long-term power supplies to justify the significant investment. As Chuck mentioned, our Fjardaál smelter is operating at full capacity and this happened now less than a year after opening. While we have efficiencies yet to gain, this has been a very successful project and it will help us with our operating cost position and support our profitable growth in the upstream business. Our success there gives us real confidence in other projects which we are currently evaluating. During the quarter we have made notable progress in three areas, and I'd like to run you through the highlights. Our relationship with the Icelandic community can be seen by the national and local governments’ agreements to extend our MOU for a second smelter in Iceland, most likely powered by geothermal energy. The feasibility study should be completed by September 2009. In Greenland, the Parliament endorsed moving to a second phase of a possible smelter construction and is funding studies covering economic, social and environmental aspects of the proposed smelter. These studies will be conducted throughout the next 18 months. From a mining and refining perspective, we are working with Vietnam's premier minerals development company. We are jointly reviewing the feasibility of bauxite mining and refining in the region. These projects, together with several others, are in a feasibility stage. Each one has a stage gate attached with specific decision-making criteria. And we consider aspects like margins, construction costs and various risks. You can be absolutely assured that we will make our decision based upon one criteria only

[William F. Christopher:]

Thank you, Klaus. I would like to -- three things I would like to cover today

[Klaus Kleinfeld:]

Well, thank you very much, Bill, and I hope this gives you all out there who are listening a little more color on our opportunities and how we are driving on those three strategic priorities

[Operator:]

(Operator Instructions) Your first question comes from Michael Gambardella. Please proceed, sir.

[Michael Gambardella:]

Yes, good evening. A couple of questions for Chuck; one, in the second quarter there was about $155 million positive improvement in other income from the first quarter. Can you go through some of the highlights of how that improved and also how the tax rate was somewhat lower?

[Charles D. McLane Jr.:]

Sure, Mike. I briefly alluded to it when I talked about it but all but $30 million of the improvement, there are offsets to that in other places on the income statement, both in revenue, cost of goods sold and GASE. One of them is currency. There is currency translation fees in other income, but if you look at the economic piece impact, you would see on our bridge that the net currency favorable for the quarter is 17. There are -- there’s differences between a metal activity between corporate -- excuse me, between the business, downstream businesses and upstream businesses that are upsetting -- offsetting trading positions and they have zero impact on the net between corporations. And then there’s some company-owned life insurance offsets because of a deferred compensation, which are offsets as well. So even through there’s a big improvement there, most of it is offset between three other categories on the income statement. And the tax rate is -- to get to the 28.6 on an annualized basis, the second quarter was lower than the first quarter. You know, each quarter we do a look at an annual rate for the company based on income by jurisdictions and we make our most recent estimate. It just so happened to be that looking at an annual run-rate now of 28.6 that we had a lower tax rate in the quarter to bring that on a level basis.

[Michael Gambardella:]

Okay, but the other income -- you said $30 million, there’s a positive $30 million in the quarter? Is that incrementally from the second quarter? Because the second quarter was an expense. Or is that just in the -- the first quarter was an expense, the second quarter is a big income. Is the $30 million just in the --

[Charles D. McLane Jr.:]

Did you add for the change between the two? The $30 million is the change between the two, net impact.

[Michael Gambardella:]

So the whole 155?

[Charles D. McLane Jr.:]

Yeah, 30 of the 155.

[Michael Gambardella:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of John Hill. Please proceed, sir.

[John Hill:]

Thanks and thank you for a very informative presentation across the board. There’s a fair bit of detail in the presentation about input cost escalation, caustic soda, coke, freight, gas, et cetera, yet these are couched in industry terms. Of these industry cost pressures, roughly how much showed up in second quarter and how much kind of pent-up lag effect increased costs can we expect to see as we go ahead?

[Charles D. McLane Jr.:]

John, if you look at -- just to refer you back to something, on a sequential basis you can see that we had cost increases from the first quarter excluding energy of -- excuse me, excluding currency of $51 million for energy and $56 million for other raw material cost. And we try to put it -- yeah, they were market indices we were using and you can, you know, without giving the specifics of what we have incurred in each one of those categories, we tried to put in perspective on what we’ve done on the cost curve. So we’ve looked at our position and tried to give you our relative position on alumina and refining that we’ve moved down eight points from 38 percentile on the cost curve to 30, even in light of the industry receiving all these cost increases. And in smelting, we stayed about at the midpoint based on the number of smelters we have all the way across the cost curve. We also made reference to the fact that Iceland, once it’s mature, its profitability level and its costs should help us to leverage that down from where we are at the midpoint.

[Klaus Kleinfeld:]

The same thing, if I may add, on the refinery side. [inaudible] for São Luís and the ground extenders that we are doing.

[John Hill:]

So the response is that the vast majority of the increase in the market price of these inputs is already reflected in the cost structure of the company and there will be minimal further escalation, should these remain at current levels?

[Charles D. McLane Jr.:]

No, I didn’t -- you know, these will depend on market factors. Is fuel oil going to increase in the third quarter over where it is today? Is natural gas going to increase in the third quarter? But the costs that are on that market basis right there that is shown first half to first half, yes, those costs are in our results.

[John Hill:]

Great, great color. And then if I --

[Operator:]

Your next question comes from the line of Oscar Cabrera. Please proceed.

[Oscar Cabrera:]

Good afternoon, gentlemen. My question has to do with your plans and expansions on your smelting capacity. Basically primary is one of the most important ATOI contributors and I just want to get an idea, I have two things here; first, are you planning to the balance in terms of your alumina and aluminum production? And secondly, can you give us an idea of what type of increases in capacity and your aim in terms of the cash cost curve going forward, assuming we stay somewhat constant? Where do you want to be? What’s the target?

[Klaus Kleinfeld:]

Well, first of all, and you know that very well, we are currently long on alumina and that has been traditionally a situation that we have been in. With our expanders that we are doing in Juruti and in other places, this situation will most likely not change significantly. And at the same time, we aim on the cost curve side -- and Chuck just said it, what we have been doing on the refining side has been a very, very good achievement. We’ve moved from the 38 percentile on the cost curve down to the 30 percentile and as I just said, in São Luís the expander that we are currently having underway will most likely move us even further down. On the smelting side, we are kind of at the midpoint and we believe that when you look at the smelting cost curve and the factors that are driving the cost of aluminum, you kind of have a natural floor of the LME price with the structural increases that we have been seeing there. And at the same time, you’ve seen also in the last quarter we have been very nicely managing price, volume, and productivity to allow basically to offset, to offset the cost inflation in that period, and the very fact I gave you a little color on some of those projects that are currently in the stage of feasibility and I think that is pretty unique. I mean, when we use the same slide that we showed you last time and that we’ve been using also in investor presentations and the very fact that you see -- I mean, the projects there are absolutely real and we are moving them further and we are pretty fast in moving them further. Greenland and Iceland, which are particularly interesting because they are based not only on stranded power but on very lean power. I think a very important factor going forward and we believe that this gives us -- first of all, it’s in line with the values of Alcoa; secondly, it gives us a great advantage going forward and the very fact that we could secure to move those projects into the next phase is a good thing. Vietnam, pretty much the same thing. That doesn’t -- and you’re around long enough to understand that we are not saying that each of their projects will actually come to fruition but all we can do at this point in time, moving it into the next phase and I think that’s a great achievement.

[Oscar Cabrera:]

No, no, granted, but are you looking to just capitalize costs as we see energy prices increase? Or are you looking to have to go down the cost curve? What is your strategy?

[Klaus Kleinfeld:]

Can you speak up a little bit?

[Oscar Cabrera:]

No, I was saying that is the strategy to capitalize costs or is it to go down the cash cost curve?

[Klaus Kleinfeld:]

Well, we are always trying to go down the cost curve. I mean, that’s absolutely clear. And as I outlined, on the refining side we have achieved that in a very, very nice way going eight percentage points down on the cost curve. On the smelting cost curve, you just have to see that we have a very, very large system and to move the system percentage point wise is much more difficult, obviously, because we have a pretty strong variation. And I think you outlined already that Iceland is going to bring us further down on the cost curve. At the same time, you have to see, and I showed that one slide, that the cost curve itself is moving upwards, which is very much dependent on where the oil price and all the other significant input cost factors are going to go. But it’s very, very clear our goal is to move down the cost curve, absolutely.

[Operator:]

Your next question comes from the line of Tony Rizzuto. Please proceed, sir.

[Anthony Rizzuto:]

Thanks very much. Good afternoon, good evening, gentlemen. I’ve actually got two questions here; on slide 42, where you have your investments in Russia, Bohai and Kunshan, you seem to be generating greater losses, yet your comments were talking about productivity improvements. I wonder if you could just describe the disconnect there, maybe help me to understand that better. And then a question on commercial aerospace; you alluded to marginally softer demand and some dislocation in the supply chain for engines and fasteners. Do you expect the same for heat treat sheet and plate?

[Charles D. McLane Jr.:]

I’ll take the first one, Tony. Actually, we also started breaking out Russia in the flat -- the Russia/China and growth on the flat roll products and if you look at it on a sequential basis, it’s an improvement in year-over-year. It’s negative but really what you have to look at that’s a little different right now is Bohai is just getting into a start-up mode where it’s bringing people online and bringing up the equipment, so there was an improvement in Russia and on a sequential basis, there was an improvement overall but you’ll start to see Bohai entering some start-up costs. I’ll let Bill take the other one on the commercial piece.

[William F. Christopher:]

Tony, on the commercial aerospace side, the two big drivers to the process we see going forward are driven first by the 787 delay and the ramp-up. There was a lot of demand for product in the first half of this year for supply chain and that really didn’t impact substantially the sheet and plate side of the business because it’s predominantly a composite aircraft. While they do have some content on it, it’s not nearly to the extent we have on fasteners. The second part is the spare demand in the jet engine market, which wouldn’t impact sheet and plate either, so generally I would expect sheet and plate and extrusions to perform pretty much in line with the build rates, and as the build rates expand on single aisle and things of that nature, they will be much less impacted by the same things we are seeing in the jet engine, supply chain adjustments and impact of the 787.

[Anthony Rizzuto:]

Bill, that’s great. Thank you very much.

[Operator:]

Your next question comes from the line of Mark [Lanoma]. Please proceed.

[Mark Lanoma:]

Good evening, guys. You highlighted in your outlook 20% typical seasonal weakness in the downstream segments. Would it be fair to expect any offset because of performance improvements in the downstream?

[Charles D. McLane Jr.:]

Well, we looked at that and took that into consideration, Mark, to tell you the truth and I would say that would -- we may -- there will be some underlying productivity improvements in there but when you are looking at the weakness in the markets in both North America and Europe right now that truly are weaker than just the normal seasonal decline, it will eat up that productivity.

[Mark Lanoma:]

Okay, thanks. And just, if you could comment, there’s been some trade press articles about shortening up payment terms with customers. Is there any read across into things that you are seeing in the U.S. market that could be weaker than as discussed?

[Charles D. McLane Jr.:]

Well, that was done for -- that was in the primary side of North America and that was done for some very specific reasons because of the credit situation has changed. And if you looked at the freight increases, we didn’t think the Midwest premium was taking that into consideration, nor the transaction price, the interest rate underlying the transaction price. And plus if you looked at primary, [inaudible] 20 is priced in other regions. We basically were just getting it on an even basis, so we think that’s eventually going to be accepted in the marketplace.

[Operator:]

Your next question comes from the line of Charles Bradford. Please proceed, sir.

[Charles Bradford:]

Good afternoon. There’s been some comments in the trade press about the smelter in Iceland producing a fair bit of off-grade material. Is that just the standard start-up that you would normally expect?

[Charles D. McLane Jr.:]

That’s right. When we talked about Iceland being at full capacity right now, they have reached 100% capacity in this quarter, but as part of the start-up costs, there will be some off-grade metal. You know, there are maintenance issues in getting some of the supplies up to speed right away, as well as the training that takes place on the people, so that’s why we said even though it’s at 100% capacity, it probably won’t reach mature profitability levels for a couple of quarters.

[Charles Bradford:]

Okay. Can you talk about what the difference would be between the mature level of profitability and what you achieved in the second quarter?

[Charles D. McLane Jr.:]

Not specifically for one client, no.

[Charles Bradford:]

Thank you.

[Operator:]

Your next question comes from the line of John Redstone. Please proceed, sir.

[John Redstone:]

Good evening, gentlemen. Two quick questions on the flat roll product; coming back to Tony Rizzuto’s --

[Klaus Kleinfeld:]

Can you speak up a little bit, John?

[Charles D. McLane Jr.:]

We’re having a hard time hearing you.

[Klaus Kleinfeld:]

Yeah.

[John Redstone:]

Most people do. On the flat roll products, yes, coming back to Tony Rizzuto’s comments for Russia, China, and other, certainly the ATOI is improving but I was wondering if you would give us some guidance when you expect to actually see profitable results from those operations.

[Klaus Kleinfeld:]

Right. Well, I mean, look; on Russia, we obviously see that there’s significant improvement in 2008 compared to 2007, but we remain in a loss position, as you correctly pointed out. At the same time, you have to see what is the general perspective on this investment, which we always considered a growth investment in a market like Russia that we continue to be optimistic about. We just visited the plants again the week before last. We took our whole board there for a second time to see the progress there with their own eyes. It’s very clear we have in Russia unique assets in the way of the physical location and the capabilities, but it’s at this point in time not coming fully out there. When you look at the packaging side, we are increasing the can sheet production and we are making good results there. We were putting the new [N and tap] line in there and we will be starting to go online and the demand, the packaging demand for aluminum cans is increasing in Russia, continues to increase in Russia and you see that also the can makers are investing pretty substantially over in Russia. We have the world’s largest exclusion press. We have the world’s largest forging press. A couple of examples were given here in Bill’s presentation, I mean, the capabilities that we have in oil and gas, some of that unique capabilities come through exactly those things that we have in Russia and also the experience that we have in Russia. The same thing holds true when it goes through the aerospace market. I mean, the aerospace market, not just the Russian aerospace market but the worldwide aerospace market, I mean, we have good capabilities there, particularly in [Valia Calipva] where we are finishing the upgrade of the aerospace capabilities. We’ve just gone through a major upgrade of our hot mill in [Tamara]. We’ve received the qualification from Boeing. We’ve signed a memorandum of understanding with the United Aerocraft Corporation in Russia. So all of that is really going into the right direction. We are about 75% complete with the total capital investments over in Russia and we see that the Russian society, as it becomes wealthy, I mean, along the line of what we see pretty much in all of the societies, continues to consume more aluminum. So we believe we are at a very good spot and if you now compare this and just see what the capabilities of the Russian facilities once they will be fully established are and then you compare it to how much money we are making with facilities that are comparable to this in established markets like in Europe and the U.S., you will be seeing that those businesses are earning well above cost of capital and as we continue to believe that the Russian market is going to be growing, we also see no structural reason why this will not turn out to be a positive development and eventually come to a good cost of capital earnings.

[John Redstone:]

Well, put it to you this way then -- given that the Russian demand seems to be growing on track, around double-digit, maybe as much as 11% a year, could we perhaps see positive numbers next year?

[Klaus Kleinfeld:]

Well look, we’re working as hard as we can to get things online and -- I mean, we are there to create value as fast as we can. The management attention is there at a maximum. We will clearly do our utmost best to get it to the best possible level.

[Operator:]

Your next question comes from the line of John [Tamozli]. Please proceed, sir.

[John Tamozli:]

John Tamozli, independent research -- could you explain please the $57 million credit item on the income statement in the business restructuring category? Thank you. I’m sorry. I was looking at last year. I’m sorry. Thank you. No question at all.

[Operator:]

Your next question comes from the line of Joe [Thorton]. Please proceed.

[Joe Thorton:]

I just have a quick question with respect to smelting and refining and potential expansion -- what do you anticipate the cost now would be to add either brownfield or greenfield refining or smelting capacity?

[Klaus Kleinfeld:]

Well, I would think that the current situation is different from what we’ve seen for quite a while because there is quite a contraction in the availability of construction capabilities, as well as engineering, and I don’t think that we are absolutely certain in what the established market price for those construction is. It very much varies also where you do it and under what circumstances you do it, whether you do it in Iceland or in Greenland or whether you do it in the Amazon in Brazil. And when you look at the recent projects that some of our competitors have completed, you do see that there is quite a bit of variation there. So I really don’t think that we want to put a number out there.

[Joe Thorton:]

Because the reason I ask is because when you look at some of the numbers from some of your competitors, it would auger for I guess materially, potentially materially higher for longer aluminum and alumina prices if these guys want to get returns for their investment.

[Klaus Kleinfeld:]

I absolutely agree. I mean, that’s what I meant with -- this whole thing is going to -- this increase is going to, and the demand increases for natural resources, going through the whole value-add chain, that’s what I meant when I said there are strong regional differences. If you, for instance, go into the Amazon region where we are currently finalizing the build-out of our Juruti mine, it’s literally a competition around getting the caterpillars there at the time after the rainy season and getting the people that drive the caterpillars, getting the engineers that overlook those resources, getting the project managers there because those are the scarce resources and unfortunately it’s not only Alcoa competing against that. And you see some of the hot spots around the world where those type of situations are pretty common these days, and I totally agree with your view that it fundamentally shifts not only the cost but also the return expectations and is a driver in our view of the metal price, as well as the alumina price on a long-term basis.

[Operator:]

(Operator Instructions) Your next question comes from the line of Brian Macarthur. Please proceed, sir.

[Brian Macarthur:]

Good evening. Two quick questions; just following up on Russia, if I recollect there were some issues about getting equipment into Russia that was going to basically help you going forward. Can you tell me whether everything is in place in Russia that you need going forward? And secondly, on a totally different issue, you talked about insurance for the explosion of the [Depashi] pipeline but is there going to be any insurance related to Rockdale as well? Thanks.

[Klaus Kleinfeld:]

Well, on Russia, I’m not sure whether I fully understood your question. If the question is how we are doing in terms of bringing the equipment into Russia --

[Brian Macarthur:]

Yeah, I could be wrong but it seems to me that there was some material -- one of the problems before, there was a delay getting equipment into the plant. It was supposed to be there by mid-year effectively, which obviously isn’t there. Now you should --

[Klaus Kleinfeld:]

Brian, you remember this absolutely correctly. This was one of the things that we have been struggling with for a variety of reasons. The equipment is pretty much there. We are now in the process of bringing the rest of the, as I said, 75% of the capital investment is there. We are pretty much now in the process of getting the 25% installed, so this is not about the issue of bringing equipment into Russia or into the plant. That part is absolutely taken care of. This is now getting it operationally done, pouring the parts of the concrete and getting the machines assembled and then ramping it all up and we are fairly -- I mean, what we’ve seen so far, we are fairly optimistic that this can be done. And on the second question on Rockdale, there isn’t any insurance on Rockdale.

[William F. Christopher:]

Well, we’re evaluating our opportunities for compensation, Brian. Let’s put it that way right now.

[Klaus Kleinfeld:]

Correct. But there are other means, Brian.

[Operator:]

Your next question comes from the line of Leo Larkin. Please proceed.

[Leo Larkin:]

Good afternoon. Could you give us any guidance, even just direction for capital spending in 2009?

[Charles D. McLane Jr.:]

Not yet. As Klaus said earlier on, each business is going through a three-year strategic planning process right now, coming up with targets and the like that we hope to go public with. So we will -- the capital expenditure level and the forecast around that will be made public at the same time.

[Leo Larkin:]

Okay. Thank you.

[Operator:]

Your final question comes from the line of John Hill. Please proceed, sir.

[John Hill:]

Thanks for your patience. Just a quick follow-up; Chuck, if we could go through the currency one more time. It was obviously a benefit on the bridge but could you first provide for us what was the non-cash translation gain --

[Charles D. McLane Jr.:]

Hold on just a second, John. The translation impact was a net income impact of $49 million.

[John Hill:]

Okay, and then the economic?

[Charles D. McLane Jr.:]

The economic would have been 17, less than that, so 32.

[John Hill:]

Great. Got it. Thank you very much.

[Klaus Kleinfeld:]

Thank you, John. I guess that closes the Q&A session and we thank you very much for attending this and we are looking forward to sitting down with you in the next weeks. I mean, there’s a lot of investor activities going on and we are all looking forward to that and I hope you’ve got a little bit more color on the great value of the company we present. Thank you very much, talk to you.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.