Alcoa Corporation
Q2 2012 Earnings Call Transcript

Published: 10 Jul 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Alcoa Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Ms. Kelly Pasterick, Director of Investor Relations. Please go ahead, ma'am.

[Kelly Pasterick:]

Thank you, Keith. Good afternoon, and welcome to Alcoa's Second Quarter 2012 Earnings Conference Call. I'm joined by Klaus Kleinfeld, Chairman and Chief Executive Officer; and Chuck McLane, Executive Vice President and Chief Financial Officer. 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. Reconciliations 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. And with that, I'd like to hand it over to Chuck McLane.

[Charles D. McLane:]

Okay. Thanks, Kelly. As we start out on the first slide here with a financial overview, I'd kind of like to break down the highlights here between those that relate to profitability and those that relate to liquidity. So let's start with profitability. Loss from continuing operations in the quarter was $2 million or $0.0 per share and if you exclude our restructuring and special items, income from operations is $61 million or $0.06 a share. As you can see, EBITDA and ATOI decreased sequentially, primarily due to lower LME prices. But if you go through and break that down by segments and let's first look at our upstream business, which is Alumina segment and the Primary segment, the quarter was marked by planned maintenance overhauls and power plant outages amidst the declining metal price. The businesses partially overcame these headwinds with continued productivity, higher regional premiums and favorable currency costs. The Global Rolled Products group generated higher volume and productivity to essentially offset the unfavorable pricing as they delivered another strong quarter. And in the downstream segment, volume and productivity exceeded not only the cost increases but the effect of the Massena fire as well as it generated another record quarter. In fact, both the midstream and downstream segments achieved record first half results. So if you take those in the context of how we're progressing against our 3-year targets, in the upstream we're continuing to try to move down the cost curve, taking curtailments and taking other actions against the headwinds in our productivity. And in the midstream and downstream, we're progressing against our revenue goals and we're continuing to set margin records in both businesses. Let's move over to liquidity. We generated positive free cash flow of $246 million. That enabled us to pay down debt and finish the quarter with $1.7 billion of cash on hand, and we continued our streak on record low days of working capital, in fact finishing the quarter at 33 days, which is 5 days lower than our previous record for the second quarter which was set in 2011. The debt-to-cap ratio increased to 36.1% but on a net-debt-to-cap ratio basis where you'd include the cash component, we are down to 31.6%. And as you can see on the liquidity stands right now that we're in a very strong liquidity position, and it's been supported by cash sustainability efforts. As you're aware, this is the fourth year now of our cash sustainability efforts. And we've previously achieved all of our targets in the previous 3 years, and we intend on achieving those as well this year. So let's move to the income statement. Revenue was steady sequentially on lower realized metal prices that were down 4%, but that was offset by slightly higher alumina pricing and higher volumes in our Global Rolled Products group. Our COGS as a percent of sales increased sequentially, basically because of lower metal prices. And we've added another category in the income statement this time, the other income expense item. You can see the change there. It's up $38 million, and that's driven primarily by corporate fees of currency translation, which was a negative impact of $26 million in the quarter. If you look at our tax rate, it's obviously indiscernible this quarter because you're dealing with $6 million of loss before taxes and a positive tax of $13 million. Obviously, if you have the taxes in the various jurisdictions in the low income amount, it's going to give you an odd number. But within that we had $10 million of discrete tax items, which I'll cover in the special items in a minute. The main thing you should take away from this is the effective tax rate going forward, and we estimate that to be at 29% right now. So you finish out looking at the bottom of the income statement at a $0.0 per share and a $2 million loss from continuing operations before special items. And now we'll flip over to the special items, and I'll give you a breakdown of those in the quarter. Really, none of these are special items that we haven't shown in previous quarters. I'll start off, $63 million in total. I'll start off with the restructuring piece, which permanent headcount reductions and lease terminations resulted in a $10 million charge. Then right below that, we've got the $10 million of discrete tax items that I referred to in the previous page, which were essentially prior period adjustments. We have an environmental reserve of after-tax of $13 million. We have revised action plans for -- have been approved in 3 of our environmental sites. Actually, 2 of those are increases and one of those is a decrease, the net of which gives us the $13 million in after-tax impact. We also have an $18 million litigation reserve. And during the quarter, we proposed to settle the Alba civil suit by offering Alba cash payment of $45 million. We also offered a long-term alumina supply contract. Based on the cash offer, we recorded a $45 million charge. We currently estimate an additional possible charge of up to $75 million to settle the suit. In addition, we have been in dialogue with the DOJ and the SEC regarding their investigations. If a settlement of government's investigations can be reached, it is probable that the amount would be material in a particular period to Alcoa's results of operations. Since this is a matter involving ongoing litigation, we'll have no further statement. Moving to the next item, which is -- relates to the Massena fire. We had $12 million charge after-tax in the quarter, but it came from the Primary Metals group of $7 million and Engineered Products business of $5 million. So the sum total of all of those charges in the quarter was $63 million, gives us a net income from continuing ops after special items of $61 million or $0.06 a share. Now let's move on to the sequential earnings bridge. You can see we had $105 million of profitability in the first quarter, and that's gone down to $61 million. That's a decrease of $45 million -- $44 million sequentially. Obviously, it was a negative impact to the declining LME price and the net impact of that in currency gave us a $30 million negative impact in the quarter. We had $17 million profit improvement from volume, price mix and productivity. And unfortunately, it's not able to offset completely the $31 million of net increase in costs. But let me hit on a few of these major items here. First of all, the price mix of $31 million. We had an unfavorable price mix in Global Rolled Products, which I'll talk more about when I get to the segment data and that was partially offset by favorable original premiums in the Primary group. We also had $53 million of increased cost on this slide, as you can see, which related basically to maintenance and half of which we highlighted in the first quarter guidance. We also had $41 million of productivity after taxes. That's being driven by improvements such as higher utilization rates, process innovations and efficiencies, lower scrap rates and usage reductions. In summary, currency and productivity was not enough to overcome the impact of lower metal prices and plant outages. So let's take a look further now and break it down by segment and you're going to get a more revealing picture of the actual business performance. We'll start with the Alumina segment. In the Alumina segment, production and shipments were lowered, driven by the curtailments that we announced and the Australian maintenance overhauls. Third-party revenue is at $750 million, that's down 3% sequentially on the lower volumes. And the ATOI of $23 million is down from the $35 million that we recorded in the first quarter. In essence, the Australian dollar and Brazilian real weakened by 4% and 10%, respectively, and that resulted in a net LME and FX benefit of $25 million. Continued productivity gains of $7 million only partially offset the increased cost of $29 million from higher caustic usage, higher energy costs, as well as the plant maintenance overhauls. As we look to the third quarter, pricing on alumina price index will be at about 34% of third-party shipments, and the other pricing will continue to follow the 60-day lag. We expect caustic prices to remain level. Maintenance overhauls that have now been concluded will provide us $9 million of additional -- of profitability in the third quarter, and we expect productivity gains to continue. We now move on to the Primary segment. Third-party revenue of $1.8 billion, down 7% sequentially on a lower realized aluminum prices. In fact, if you look at the prices, the LME price is down 6% sequentially on a 15-day lag basis, whereas our realized prices are down 4% sequentially and 18% year-over-year. When you look at the first quarter, we were at a $10 million profit, and that's gone to a $3 million loss. If you exclude the effect of Massena, the Primary Metals segment was essentially flat sequentially even in the light of a significant decline in metal prices. So how did they achieve that? You could see the $39 million impact of LME and currency, and that's been offset by $33 million of improved performance. We had the Rockdale and Warrick Power Plant outages that we referred to in the first quarter guidance, which were more than offset by unfavorable energy. We also had improved carbon cost, provided $6 million; improved productivity of $10 million; and as I referred to in the income statement, we had a favorable price mix of $15 million due to the improved regional premiums. So very solid quarter given the slide in metal prices. If we look at the third quarter guidance, we would expect LME to follow the 15-day lag. Energy impact is expected to have a negative $20 million impact on ATOI as the seasonal variations drive higher energy prices. However, Rockdale and Warrick outages are now complete, so we'll have $11 million improvement next quarter from that and our productivity gains will continue and expect to offset the net impact of the energy and the outages. Our carbon costs are expected to remain flat. The Massena fire -- or the impact of the Massena fire is expected to be flat as well. So if you take a step back and you look at the Alumina segment and the Primary segment combined, we would expect a net productivity improvement sequentially. Let's move to Flat-Rolled Products. Third-party shipments are up 32,000 tons or 7% sequentially with adjusted EBITDA at $390 per ton. We've got revenue up 4%, driven by stronger aerospace, commercial transportation, consumer electronics and the seasonal increase in packaging. Increased volume of $18 million and $12 million in productivity gains essentially offset price mix and cost increases. Let's spend a minute on price mix. If you look at how our price in -- with our customers follows through LME prices, it's usually 15- to 30-day period that prices of the LME impact our customers, yet the cost of our metal flowing through is more like on a 45- to 90-day basis. So you'd see normally compressed margins on falling metal prices and increased margins on rising prices as you see this quarter. If you look at the first half, we set records on ATOI and EBITDA per metric ton in this business, both at 6% higher on ATOI and 7% higher on EBITDA per metric ton. In fact that's $409 a ton, which is 74% higher than the 10 year average. If we look to the third quarter, aero and auto continues to be strong. European demand remains uncertain, pricing demand pressures persist. We expect slower growth rates in China and Russia and productivity gains to continue. Let me point out as we have before, that if you look at the seasonal declines that take place, both from holidays, automotive changeovers and the like, especially in this segment, historically we've seen somewhere between a 30% and 35% decline. If you were to exclude the impacts of metal pricing currency, we would expect, because of our productivity efforts and the impacts that we've made in markets and volumes, that we would be down only 10% to 15% sequentially in the third quarter of this year. Let's move on to the Engineered Products and Solutions segments. Really another strong performance in this segment. Revenue, EBITDA and ATOI are all up sequentially and year-over-year. In fact, we set a record margin for the quarter at 19.4%, and that's including the impact of the Massena fire. In fact without that, we'd be over 20%. We're on track to achieve our 3-year revenue and margin targets. If you look at what we expect in the third quarter, we would expect more of the same to tell you the truth, even with a seasonal slowdown we've seen in Europe and the impact from nonresidential building construction, and we do expect heavy duty truck rates to be down in the second half versus the first half. But with all of that and our continued share gains and productivity, we would expect this segment to be flat, and that's even in the context that we normally would see a 10% decline on a seasonal basis. But going into third quarter this year based on current condition, we expect it to be flat. Now let's move to the cash flow statement. From a cash flow statement, we had cash from operations of $537 million. That led to a positive free cash flow of $246 million. Obviously what jumps out at you right away is this $202 million in the first quarter and taxes, other adjustments and -- a $478 million in the second quarter. As you may remember the first quarter, we have annual and semiannual payments that get made on both interest variable comp that don't repeat in the second quarter. In the second quarter, we also had a tax refund of $70 million. And all the reserves that I went through on the special items, they are run through income, but they're obviously on a cash advance in the first -- in the second quarter, so we pulled those back out. That's the reason for the biggest change here. If you look at where we stand on pensions, we continue to fund our pension plans with cash after $213 million in the first quarter. It was another $139 million in the second quarter. And I'm sure you're all aware that there was a bill just passed, the highway bill just passed that had pension relief. I'll give you some information around that and how it impacts us. The new pension funding requirements are going to start using a discount rate that has a 25-year average instead of 24-month average. We would expect to benefit from that. We're taking a look at what it would mean to us this year. We would expect relief this year to be anywhere from the $100 million to $130 million range and relief going into next year anywhere from $225 million to $250 million. We think this will bring our Arista Funding up to approximately 90%. If we move down to the debt to cap, it's at 36.1% but that's due to currency translation impact in our equity from a stronger U.S. dollar. And as I've said earlier if you use the cash component, it took on the net debt to cap down to 31.6%. We've got $1.7 billion of cash on hand, and we showed a 5-day improvement on days working capital. Let's move to the next slide, and I'll embellish on that. We ended the quarter with 33 days. That's a 5-day improvement versus last year. That equates to about $325 million worth of cash. In fact if you go back to 2009 when we initiated the cash sustainability work, we were at 50 days in the second quarter. That's a 17-day improvement up to this quarter, which is equal to about $1.1 billion in cash. This is the 11th consecutive quarter that we showed year-over-year improvement, and it's across every one of our businesses. We expect to continue as we move forward. Let's now move to our next slide. Just a few comments about this slide. As you can see, we show a historical view to show in the context since the recession occurred in late '08 and beginning '09 where our efforts around cash sustainability have really enabled us to even generate profitability in the face of volatile economic environment and significantly declining metal prices but more important, to continue to be -- put ourselves in a good liquidity position. By showing you previously we got $1.7 billion of cash on hand, but we're also able to pay off $200 million of debt. We've increased our free cash flow to $246 million. You can see from this historical basis that we see a benefit coming out of the first quarter, which is usually a cash use of funds and we expect to be in our targeted range of 30% to 35% on debt to cap as we move forward and by the end of the year. So let me take a minute and summarize, if I could. First of all about our annual targets and that's in the middle column, and the overarching target is to be positive free cash flow. So I'll start at the bottom with you. Maintaining the debt to cap at 30%, 35%; I told you that's our goal for the end of the year. If you take our expenditures, sustaining CapEx, growth CapEx in Saudi Arabia, that all adds up to $1.7 billion, and we're on track to achieve that expenditure level or be within that expenditure level. On both overhead and working capital, we're going to achieve both of those targets. And on productivity gains, just to give you an idea where we stand, we have put forward productivity gains of $800 million. We're through 6 months, we're already at $591 million for the year on a year-over-year basis, so tracking extremely well against that. Klaus is going to elaborate further on how we're executing against our strategy. But if you just look at the second quarter results, we've continued to execute against the curtailments and try and drive down costs in our upstream operations. We're progressing well against our revenue targets in our midstream and downstream. And in fact, we've set records for first half margin on both midstream and downstream segments, so performing well against our liquidity goals, as well as our 3-year targets. And with that, I'll turn it over to you, Klaus.

[Klaus-Christian Kleinfeld:]

Well, Chuck, thank you very much. So why don't we start with -- in the usual fashion, where we look at our end markets and let's try to make it quick, as quickly as possible. So the picture that we're seeing here is a mixed picture. But overall, and I stress it today, we see positive growth continuing in most of our end markets. So let's go through the segments and let's start with aerospace. Our view really has not changed. We expect 13% to 14% growth for this year. It's really driven by strong performance on the last commercial aircraft segment. Today, we see about 8,300 aircraft as a backlog. This is basically at today's production and 8 years backlog. That's pretty amazing. We also see on the business jets side the confidence. We have come back. The recent single largest order in history that has ever been placed in the segment is the clear underlining for that group of net jets, facing an order of up to 425 business jets. But we also believe that the impact of the business jet segment is probably going to get compensated by the anticipated decline in the military aircraft side. Let's move onto automotive as the next segment. We expect 4% to 8% growth on a global basis. This is on our projection, up slightly from 3% to 7%, which we actually projected for the year at the last quarter. And that's driven basically by North America, where we see and expect 10% to 14% growth. If you look at the June seasonally adjusted annual rates, it comes out with 14.05 million vehicles. This is up 22% year-over-year or 15% year-to-date. That's a pretty substantial number. Europe is down minus 4% to minus 9%, and that's truly a function of the economic turmoil. China remains positive. We see 2% -- plus 2% to plus 7% despite a slow start in the year. Heavy trucks and trailer, mixed picture, down compared to the view that we had in the first quarter. North America is really driving it. We believe that heavy truck production will slow down in the second half of the year, and this will get production in line again with lower orders. We see plus 4% to plus 8% growth for the full year. That's lower than what we saw before in the first quarter. But let's also remember if you look at the fact here, the average age of the fleet today is 6.69 years. That's the oldest on record. The 20-year average is 5.85. So obviously, there is a need for replacement at one point in time, and that is going to drive demand. For Europe, we continue to see declines. We project minus 3% to minus 8%. But for China, we revised our forecast from 0% to 5% growth to minus 3% to minus 8%. This is mainly driven by the delayed infrastructure spending, which is supposed to begin now in the third quarter of this year. And we believe the market in the second half is going to see a pickup. Next segment, beverage, cans, and packaging. We continue to expect to do 3% global growth, driven by China, South America, Middle East, North Africa, Europe. Those are the main drivers basically of growth. And even in North America, always keep in mind North America always makes up for almost half of this segment. And we see early signs of improvement from your market segment. That's a good thing. Commercial building and construction, globally we continue to project 2.5% to 3.5% growth. China, Brazil, India and other emerging countries are really the foundation for that. But if you look at North America and Europe, we continue to see this heavily under pressure. The most leading indicators are either flat or a near record low or even deteriorating. So no good news on that and so far when it comes to North America and Europe. Last segment here, industrial gas turbines. We're increasing our growth expectations to 3% to 5% from what we had originally in the last quarter 1% to 2%. And this is really driven by 2 factors

[Operator:]

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

[Jorge M. Beristain:]

My question is actually for Chuck. I just wanted to follow up on the comment you made about the potential to change the discount rates and how that could lead to some savings in your annual pension contribution, if I heard that correctly. Could you just quantify again what the annual cash contribution savings could be and what the discount rate could change from and to?

[Charles D. McLane:]

Okay, Jorge. The expected savings right now, well, they will be publishing the rates and just taking a quick look at that, the rate that we had been using was 5.4%, but this is on the Arista side. This is the funding side. And it was essentially a 24-month average. We think that, that rate will go somewhere between 6.7% to 7.0%. And as a result of the rate change -- and then there's a factor, a multiplier factor that will be used that will go down 5% per year. So the first year it's 90%, then it goes to 85%, then it goes to 80%. So without elaborating any further, our estimate is that we'll save $100 million to $130 million this year and $225 million to $250 million next year on the required funding.

[Jorge M. Beristain:]

And that $225 million to $250 million would be on a projected contribution of around $500 million to $600 million?

[Charles D. McLane:]

Well in total -- total would be global for us, that would be the U.S., the global for us would be more like $650 million to $700 million next year that the $250 million would come off of.

[Operator:]

Next question comes from the line of Brian Yu with Citi.

[Brian Yu:]

Chuck, in that Slide 11, I think this is the first time I've seen where you mentioned about the 3-year revenue and margin targets. We know what the revenue target is. Could you point out what the margin target is?

[Charles D. McLane:]

Yes, in both the midstream and the downstream, what we said was our 3-year target would exceed historical highs. And as you can see, we're already there as far as exceeding our historical highs when we set those targets in 2010. But the -- but our path forward is to continue to improve on both of those.

[Brian Yu:]

So there isn't like a specific number? It seems like you've already set that target.

[Charles D. McLane:]

No, there's not a specific number, just to be in excess of our historical high. That was the target.

[Operator:]

Your next question is from the line of David Lipschitz with CLSA. David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division Can you just talk about -- you have the aluminum market in deficit. Can you just talk about how you calculate that because other stuff I've read and seen is that we've been in a surplus for the first 4, 5 months of the year? So just wondering how your calculate deficit.

[Klaus-Christian Kleinfeld:]

Well, Dave, I mean take a look at -- maybe we can bring that slide up again here the alumina market because you really have all the numbers right there. Can you bring that up? That's Alumina. David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division The aluminum.

[Klaus-Christian Kleinfeld:]

Aluminum or Alumina? David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division Aluminium, make it easy for you.

[Klaus-Christian Kleinfeld:]

Aluminium. Okay, well you basically -- it's up there. I hope it's up also on the web, right? Is it? Okay, well you have all the numbers right there. We break it down into where we see China and the rest of the world. And you basically see there we have on an annualized basis, China, in May annualized rate, China are currently at 19,400. Then we believe the production that's going to be added, 1,750. Then we think that there's going to be curtailments, further curtailments in the second half of 350,000... David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division I'm sorry, I don't mean to interrupt you. I'm more talking more like Slide 23, where I believe you've had the deficit in the first 2 quarters of '12. And from like I said, everything I've heard and seen that we've been in a surplus for aluminum in the first 2 quarters of '12. So I'm just wondering if you look at Slide 23 how -- what you're using to calculate those numbers, that's all. I guess it was your -- I see you have Alcoa estimates per comp. But I've seen stuff where it's been in a deficit. So I'm just wondering how -- is there a different way you guys calculate it or are the other people I've seen wrong? Or just...

[Klaus-Christian Kleinfeld:]

No, I think -- we'd be happy to take that offline. There's other numbers, okay, in the same fashion than I've just -- I thought you were asking on this one here. It's same calculation that we are always using. There is nothing different from that. I'd be happy to take it offline.

[Operator:]

Your next question is from the line of Timna Tanners with Bank of America Merrill Lynch.

[Timna Tanners:]

So I was just wondering about the Tapoco hydroelectric project. If you can talk a little bit more about what kind of contribution that might have been generating? And just conceptually, are there projects or other assets like that, that you can monetize down the road that we might not be contemplating?

[Klaus-Christian Kleinfeld:]

Well, Tapoco came into play really because we permanently shuttered the smelter in Tennessee. And I think we have released -- have we released the financials around Tapoco, Chuck, do you want to give any more details? We have not.

[Charles D. McLane:]

We hadn't. I told the anticipated proceeds, but I can.

[Klaus-Christian Kleinfeld:]

Well I think we could yes. Exactly, Chuck, why don't you give those?

[Charles D. McLane:]

Okay. As Klaus said, we permanently closed Tennessee. As soon as we did that, we're looking at this as potentially being sold. So we went through a process, came up with $600 million, which is almost 20x the 2012 pro forma EBITDA. So it's -- and if you look at it on a kilowatt per hour basis, you're talking about $1,700 per kilowatt. And if you look at those on a comparable transaction, you would see that's at the high end of the range as well. So we expect closings to take place in the fourth quarter.

[Timna Tanners:]

Okay. And the contribution that you are receiving -- okay, so I just calculate that from the...

[Charles D. McLane:]

It's about $30 million. It's about -- pro forma basis because some of it is it's self -- it's used to apply a rolling facility. So on a pro forma basis, it's about 20x, over $30 million.

[Timna Tanners:]

Got you. And are there other assets like I have to -- that could be monetized that are kind of stranded perhaps as well?

[Klaus-Christian Kleinfeld:]

Well, Timna, we're looking at these things permanently. And whenever we see an opportunity that creates value for the shareholders, we go forward with it.

[Operator:]

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

[Sohail Tharani:]

Can you tell me -- could you tell us what other curtailments are you looking at in terms of the aluminum and alumina production? Klaus, you made a comment in one of your -- I believe it was a shareholder meeting about Brazil also. How things are going over there?

[Klaus-Christian Kleinfeld:]

Well, I mean I have commented already on the announced curtailments which are underway. I mean all on the alumina, as well as on the aluminum side. Those curtailments, as well as the permanent closures, and I think I've commented on that. On Brazil specifically, we have raised the issue of competitiveness or not -- lack of competitiveness of energy prices in Brazil already 2 years ago. We started a, I think, a pretty public debate in Brazil. And I was down in Brazil about 4 weeks ago and had a meeting with President Dilma Rousseff, who has put that on the forefront of her political agenda, together with a couple of cabinet members. And she has clearly declared and there are specific actions also around that, that she wants to bring the energy costs back for high-energy intense industries back to competitiveness. And I believe that there is going to be actions taken rather sooner than later in Brazil.

[Operator:]

Your next question is from the line -- David Gagliano with Barclays.

[David Gagliano:]

My question is related to the profitability of your upstream, Alumina and Primary Metals businesses. Obviously in the second quarter, the Alumina segment was slightly ATOI positive. Primary Metals generated an ATOI loss. Given the lags in Alumina pricing and the decline in Primary prices, I have a 2-part question. First, should we expect the Alumina segment to continue to be ATOI positive with all the offsets that you're working towards here? And then second, I was wondering if you could comment on your view, is the upstream businesses, are they now appropriately sized in the current pricing environment? Or should we expect additional closures?

[Klaus-Christian Kleinfeld:]

Well, look, Dave, I cannot forecast where the metal price is going to go and I cannot forecast where the alumina price is going to go. So the absolute number is an issue. But I think what you've seen and you have been watching us for a while and certainly through the downturn is that we have taken a lot of actions. We will continue to take a lot of actions, and they basically are targeting every single [indiscernible] that you have, I mean from optimizing the procurement side to curtailing to permanently closing to finding productivity in every corner to bringing days of working capital down. And I believe that that's what we are doing and that's what we are going to do, and then let the market do what the market is going to do. The right thing is to increase our competitiveness, particularly -- and then those segments and the upstream segment the best way to do it is to come down on the cost curve. On Alumina, we are not that badly positioned. We're around the 30s percentile these days, so that's not really -- that's really good. I mean, and we will be shaving off 1 to 3 percentage points here by the end of next year, which is also a nice, nice thing. On the aluminum segment, we are not that nicely positioned because we're in a middle of the cost curve, and that's why we have a more aggressive target to come down 10 percentage points. And we believe 3 to 6 percentage points, we're going to be able to shave off next year, and you've seen all the actions around that. But we really can't leave out anything there Saudi Arabia on aluminum is coming online in 2013, so that's going to help. And it's just one thing adds to another.

[Operator:]

Your next question is from the line of Brian MacArthur with UBS.

[Brian MacArthur:]

Two very quick ones. The number you gave Timna for Tennessee, $600 million, is that an after-tax number? Or is that cash in the door?

[Charles D. McLane:]

That's cash in.

[Brian MacArthur:]

Okay. And just secondly, on the litigation, you mentioned $18 million in litigation reserve. But we talked about a $45 million, which I assume is paid, then another $75 million. Is that $18 million a provision for the $75 million? Or exactly what's in the accounts and what's yet to come?

[Charles D. McLane:]

Yes. I can answer that, Brian. It's -- $45 million is the charge and the $18 million is after tax, after minority interest.

[Brian MacArthur:]

So the $18 million goes with the $45 million. So going forward, there will be an additional $75 million, if that's the number, and then whatever the settlement is with the DOJ, if that goes that way?

[Charles D. McLane:]

If that's determined at a later date.

[Operator:]

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

[Paretosh Misra:]

Just wanted to understand how to reconcile your minority interest and your ATOI in the Alumina segment. And normally, they are very well correlated, but this quarter your minority interest seems to be positive. So if you could explain that, that would be great.

[Charles D. McLane:]

I think it was just explained by the special item that we had that doesn't -- that's not in the segment, that is the $45 million, and the -- going to $18 million after tax after minority interest.

[Operator:]

Your next question is from the line of Carly Mattson with Goldman Sachs.

[Carly Mattson:]

Just 2 quick questions. One, just to confirm the investment in Saudi Arabian project, it's not including capital expenditures, correct? So how should we think about free cash flow when factoring in the $350 million of spending anticipated for this year? And then the second question is just could you kind of walk us through how you're thinking about pension contribution going forward and kind of the give-and-take between equity and cash? And really in that context, as long as free cash flow is positive, should we anticipate that the company will continue to fund those pension contributions with cash rather than equity?

[Charles D. McLane:]

I can answer the second part real quickly for you. I mean obviously, that's a factor, but it's forward looking. And we're looking forward at what all of the major expenditure items that we had. And right now, the view is just as we came into the year, we anticipate funding pension plans for now into the foreseeable future using cash. That's our view right now. And I'm not sure that I've understood the first part of your question. Could I ask you please to repeat that?

[Carly Mattson:]

Sure. Yes, on the free cash flow guidance, it looks like, and correct me if I'm wrong, the investment, the $350 million of anticipated investment for your Saudi Arabian project this year, is it included in free cash flow guidance? So how should we think about free cash flow if that $350 million spend were to be included?

[Charles D. McLane:]

Yes, it would be lower but...

[Carly Mattson:]

Would it be positive?

[Charles D. McLane:]

No, no. It would be -- our free cash flow doesn't include the Saudi Arabia investment, so you would take that out of it, and it would be lower. It'd still be positive for the quarter.

[Carly Mattson:]

And for the full year, we should anticipate it should still be positive, including the Saudi Arabia spend?

[Charles D. McLane:]

That's our target.

[Operator:]

And ladies and gentlemen, that is all the time we have for Q&A today. So with that, we will close out our call. Thank you very much for your joining us, and we'll see you again next quarter.

[Klaus-Christian Kleinfeld:]

Okay, thank you very much. Goodbye, then.