Apr 10, 2007
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Executives
Tony Thene - Director, Investor Relations Charles McLane - Vice President, Chief Financial Officer Alain Belda - Chairman, Chief Executive Officer
Analysts
Michael Gambardella - JP Morgan David Gagliano - Credit Suisse Kuni Chen - Banc of America Securities Ross Clifford – ABN Amro John Tumazos – Prudential John Hill – Citigroup Charles Bradford - Bradford Research John Redstone – Desjardins Securities Mark Lenima - Morgan Stanley Victor Lazarovichy - BMO Capital Markets
Operator
Good day, ladies and gentlemen. Welcome to the Alcoa 2007 first quarter earnings conference call.
(Operator Instructions) At this time, I will turn the presentation over to Mr. Tony Thene, Director of Investor Relations.
Please proceed, sir.
Tony Thene
Good evening, and thank you for attending Alcoa's first quarter 2007 analyst conference. In today's conference, Chuck McLane, Vice President and Chief Financial Officer, will review first quarter financial results, as well as current and next quarter’s anticipated business conditions.
In addition, Alain Belda, Chairman and CEO, will give an overview of current market conditions and a review of recent actions. Before I turn it over to Chuck, I would like to remind you that in discussing the company's performance today, we have included some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements relate to future events and expectations and involve known and unknown risks and uncertainties. Alcoa's actual results or actions may differ materially from those projected in the forward-looking statements.
For a summary of the specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to Alcoa's Form 10-K for the year ended December 31, 2006, filed with the SEC. In our discussion today we have also included some non-GAAP financial measures.
You can find our presentation of the most directly comparable GAAP financial measures calculated in accordance with GAAP and our related reconciliation on our website at www.alcoa.com under the “Invest” section. At this point, let me turn it over to Chuck.
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Charles McLane
Thanks, Tony. Good evening, everyone.
We continued to build on our record 2006 earnings with very strong financial performance in the first quarter. In fact, it was the most profitable first quarter in the company's history.
Excluding the residual impacts of our previously announced fourth quarter restructuring, income from continuing operations was $691 million, or $0.79 per share. Quarterly revenue of $7.9 billion was up 1% sequentially and 11% higher than the year ago quarter.
Cash from operations was $527 million, up $740 million from the year ago quarter, also a record first quarter performance. Our debt to capital continues to stand at the low end of our target range at 30.9%.
Remember, we achieved that leverage ratio despite being in the midst of executing on our significant growth plans. ROIC stands at 12.7% or 15.6%, excluding our growth investments.
With that as a back drop, let's move on to the sequential quarterly income statement. Starting with cost of goods sold, our COGS as a percent of sales decreased again this quarter to 76%.
Higher pricing and cost improvements supported this 220 basis point decrease from the prior quarter. This improvement was achieved despite increased costs associated with the Guinea strike and the Intalco and Iceland start ups.
SG&A as a percent of sales also decreased from 4.7% to 4.5%. Restructuring charges of $26 million were related to the program we initiated in the fourth quarter, the vast majority of which was associated with the accelerated depreciation at the shuttered facilities.
Interest expense was lower, primarily due to increased capitalized interest. We obviously didn't repeat the discrete tax benefits from the fourth quarter.
Our tax rate for the first quarter moved back to an operational rate of 29.8% which should also be considered our annual projection. Excluding the restructuring charges, as well as the discreet tax items in the fourth quarter, our earnings per share from continuing operations moved from $0.66 to $0.79 per share, or a 20% sequential improvement.
The next slide will bridge the quarter over quarter differences. There are several items which I need to point out on this chart.
First of all, the LME column includes both the effects of higher alumina and aluminum prices as well as the impact of LME linked costs and lower premiums in the quarter. Secondly, the operational taxes were higher and are projected to remain at this level for the remainder of the year.
Finally, our productivity in favorable mix essentially eliminated the negative impacts of energy and costs inflation. As a result, the favorable price impact fell to the bottom line.
We now would like to move on to the alumina segment. In our alumina segment, the higher price impact was offset by lower shipments, the impact of the Guinea strike -- which was about $12 million after tax -- and a strong Australian dollar.
Production was down 4% sequentially, or 135,000 tons, due primarily to a shorter quarter in terms of production days, the ramp down of Point Comfort, and the residual impact of the fourth quarter Pinjarra power outage. Remember, last November we took down one of six digesters at Point Comfort, which equates to approximately 380,000 tons per year.
That's being replaced by the lower cost production out of Western Australia. Third party alumina price increased 6% sequentially, which is exactly in line with the two-month lag.
In the second quarter, we anticipate alumina pricing to follow the two-month lag proxy. In addition, we expect second quarter production to increase by approximately 4% as a result of improved performance in Western Australia.
We will also incur the final effects of the Guinea strike, which are expected to be approximately $8 million after tax. Now I would like to move to the primary segment.
Sequentially, primary metals ATOI increased by 5% due to higher LME prices. This favorable impact was partially mitigated by the following items: higher carbon costs of $8 million; increased energy costs associated with the shutdown of units 1 to 3 at Rockdale of $8 million; unfavorable currency, principally the euro, of $7 million.
In addition, in this segment we incurred the following costs: Iceland start-up costs of $16 million and Intalco restart costs of $7 million. I think it would be good if we took a minute and dissected the price change.
The LME cash price on a one-month lag increased 8% or $209 a ton from $2,609 to $2,818 per ton. Our third party realized price increased 5% or $136 a ton.
The difference was mainly attributable to a $47 a ton decline in the Midwest spot premium and an unfavorable mix of value-added products, principally North America. Looking forward to the second quarter, the higher energy costs at Rockdale will continue and Iceland start-up costs will be approximately $25 million after tax.
Now, if we can move to flat rolled. In flat rolled products, aerospace volumes in mix continue to be robust.
Productivity gains offset cost inflation, including energy. The Swansea shutdown costs continued, but were lower than those experienced in the fourth quarter.
Swansea ceased operations in early February. Increased productivity and higher sales volume improved profitability by $22 million.
This was essentially offset by the elimination of the fourth quarter tax benefit. The one-weak sector is the distribution market in the U.S.
Inventory destocking and lower shipments to the commercial transportation and the U.S. building and construction markets contributed to the weakness.
However, aerospace, consumer durables and the European building and construction markets had more than mitigated the decline. Looking forward, we expect continued strong demand across most of our markets, as well as productivity gains.
In addition, we anticipate increased volumes from our Russian mills. Moving to the engineered solutions segment, this segment delivered another strong result with record first quarter earnings.
This segment also established a quarterly revenue record. ATOI for the quarter at $93 million was up $20 million, or 27%, on a sequential quarter basis and $10 million or 12% above the year ago quarter.
The record result was achieved despite the known decline in the commercial vehicle market and continued weakness in our automotive base in the U.S. In addition, the ASL wire harness business benefitted from a positive discreet tax item of $26 million in the fourth quarter that obviously didn't repeat in the first quarter as they moved back to an operational rate.
The forgings business benefitted this quarter from a settlement of the Cleveland strike in the fourth quarter. The major drivers contributing to the outstanding quarter were higher aerospace sales, underpinned by a strong market, share gains and new products.
Commercial vehicle share gains and new product sales helped to offset the impact of the Class 8 market decline. In the first quarter Class 8 builds were down 25% compared to the year ago quarter.
Also, continued productivity improvements in fasteners, forgings and investment castings. As we look forward to the second quarter, aerospace is anticipated to remain strong with continued productivity increases.
Commercial vehicle production is expected to decline at an accelerated pace of 45% versus last year. In addition, North American automotive production cuts are projected to continue on specific platforms.
We anticipate that productivity gains in fastening, forgings and castings to continue. Next, if we could move on to extruded and end product segment.
ATOI increased $7 million sequentially as this segment experienced solid markets in building and construction and aerospace, whereas North American automotive and Class 8 trucks suffered a decline. In addition, the improvement was driven by the ceasing of depreciation on the assets held for sale.
The significant $34 million improvement over prior year quarter was due to increased volume, improved pricing and improved productivity across all businesses. Looking forward, we expect seasonal increases in the building and construction markets, as well as European soft alloy extrusion demand.
Strong demand is expected to also continue in aerospace. Finally, I need to give you a quick update on the soft alloy extrusion joint venture.
The joint venture will now close in the second quarter. Keep in mind that when this occurs the income statement components associated with these assets would be stripped from our consolidated results and our portion of profitability will be treated as equity income.
Now, I would like to move to the packaging and consumer segment. The packaging consumer segment ATOI increased 138% over the prior year quarter and decreased 27% versus the sequential quarter.
The sequential decrease was driven by the normal seasonal downturn in the consumer business. The other three businesses within the segment -- closures, foodservice and flexible packaging -- all improved sequentially.
Due to the predictable seasonality in this segment, the real comparison is always year over year. The year-over-year improvement of 138% has been quite impressive and driven by productivity improvements as well as the impact of the restructurings hitting the bottom line.
As we look to the second quarter we expect seasonal volume increases in both closure systems and consumer products and continued productivity improvements across all businesses. We also anticipate resin price stability to continue.
Now let's move onto the cash flow statement. We continued a string of solid cash generation quarters with record first quarter cash from operations of $527 million.
That's up $740 million from the year ago quarter. As you're probably aware, the first quarter is usually a lower cash generation quarter due to the restocking or working capital levels.
In this case, working capital did increase in absolute dollars but in terms of days of working capital, the most appropriate measure we held flat at 51 days. Capital expenditures for the quarter were $783 million, with 67% of that total devoted to growth projects.
The largest expenditures in the quarter were in Iceland, Sao Luis refinery expansion, the [Anote] plant in Moscheen and the development of our Brazilian bauxite mine at Juruti. These four projects alone accounted for almost half of the overall total.
Debt to capital now stands at 30.9%. I would also note that we repurchased 2.6 million shares at a cost of approximately $88 million in the quarter.
I would also be remiss if I didn't point out the dividend increase of 13%, which you remember was a key component of our first quarter shareholder value initiative. Now I would like to turn to a couple of our performance trend measures.
In the first quarter, we continued our trend of improving financial performance with the second-highest quarterly revenue and ATOI in the company's history. Our upstream businesses were able to take advantage of the increased metal price while managing through the known start-up costs associated with bringing on Intalco and our new Iceland smelter, in addition to the costs associated with the labor strike at our Guinea mine, higher carbon costs and the higher energy costs at the Rockdale smelter.
Our downstream businesses continued to make significant improvements compared to last year through increased productivity, share gain, improved mix and the introduction of new products. All of this accomplished in spite of the Class 8 truck decline and the production cuts on specific North American auto platforms.
In fact, the quarter played right in line with the qualitative guidance we provided you in the fourth quarter. The bottom portion of this slide provides you with the Bloomberg trailing 12-month ROIC metric and our outstanding improvement trend.
Not only are we adding value by producing returns higher than cost of capital, these numbers include both the impact of restructuring as well as the impact of the construction in progress that is not yet contributing to the bottom line. Let me close on the next slide by again highlighting and reaffirming our core financial targets for 2007.
First, our ROC will continue to exceed the cost of capital. We were significantly over this threshold in 2006 and we will be again in 2007.
Cash from operations will fully fund our capital expenditures. Volume, mix and productivity will completely offset cost inflation.
EBITDA margins will increase year over year in every downstream segment. Debt to capital will remain within our 30% to 35% range, and we project our annual capital expenditures to be in the range of $3 billion to $3.2 billion, in line with our 2006 expenditures.
Thank you and I would like to turn the presentation over to Alain.
Alain Belda
Thanks, Chuck and good evening, everyone. Well I am certainly pleased with another strong quarter, the highest first quarter ever.
On the fourth quarter call, I stated as great as 2006 had been, I believed the work done had laid a foundation for 2007 to be another successful year, and we have started that way. With a strong first quarter behind us, I am even more confident in that statement.
Chuck covered the quarterly financial performance, so there is no need to repeat those metrics. What I would like to do is to provide you with an update overview of the alumina and aluminum physical market, as well as our views of the downstream end market.
Then I want to close with a review of our most recent actions, what I like to call momentum builders. Before I do that, let me speak briefly about a very important subject, one in which Alcoa has taken a strong leadership position.
Last week the Supreme Court ruled that the EPA has the authority and the obligation to regulate CO2 emissions, and the U.S. Congress is considering legislation that would set limits on greenhouse gases to address climate change.
In Europe, some of our business already operates within a CO2 emission trading scheme, and Australia is moving ahead with proposals to limit CO2. We pride ourselves at Alcoa of anticipating required business practices and have been leaders in shaping the policy debate.
Working with manufactured leaders like GE, DuPont and Caterpillar, and mainstream environmental groups like the [PEW] Center and the WRI, we formed a U.S. partnership which has endorsed a comprehensive framework to fight climate change.
Comprehensive global schemes to cap CO2 and help climate change present risks for energy-intensive industries. We know that.
We are well positioned to mitigate those risks and we fundamentally believe there is no other choice, this is the right thing to do. First of all, we have been active on this front for many years and have reduced our footprint by lowering our direct greenhouse gases emissions by more than 25% since 1990, that on an absolute basis, despite a 90% increase in our production of metal in the same time period.
We moved from 1.8 million tons to 3.5 million tons in that period. Our research and development activities and application engineers have offered a solution to our customers to reduce their footprint.
Our lightweight metal helps improve fuel efficiency in cars, for example, and trucks, and creates more energy efficient, greener buildings and delivers cleaner energy whether as a solar panel or in more efficient natural gas turbines. Aluminum can be recycled again and again, using only 5% of the energy required for primary production.
We have been increasing our recycling substantially. Over the last two years we've increased our usage of scrap by 30%.
Finally, we continue to invest in research and development with processes in alumina that can result in substantial capital, operating costs and greenhouse gases emission mitigation. So as the government begins to move, we are ahead of the game taking action, shaping policy, offering solutions, increasing recycling and investing in research and development.
Now let me give you a safety update. Last year we celebrated 20 consecutive years of improved safety performance and we continued that impressive trend into 2007.
For the first quarter our lost work days rate was 0.099, and our total recordable rate was 1.08. This has to be considered a benchmark performance level for a global industrial company.
We are committed to continuing to improve our processes and practices and the protection of people's safety and their healthcare. Now let's get into the current market conditions.
As I have stated many times, I believe in the significant growth of aluminum consumption over the next 15 years. In November last year our primary folks provided our outlook of the aluminum supply and demand balance for 2007 and 2008.
We are continuously reviewing and updating our projections. We have teams on the ground, they visit plants all over the world and in China as well.
But that does not mean that we cannot be surprised, and that does happen and more often than not, that happens in China. What we now realize is that we underestimated China's primary production as well as its primary consumption.
We now see China primary aluminum production increasing 23% in 2007 compared to 2006. Fortunately, current indications also points to a 23% growth rate for China aluminum consumption.
We see North American consumption leveling after several years of strong growth, the two primary factors behind that projection are distributors that drove up their inventory levels and are now correcting, the known Class 8 truck downturn; but however, we see solid growth in Europe and good growth in India at 10%, albeit on a low basis and the same in the Russia area. Bottom line, after all these ups and downs we continue to see overall world consumption growth to hold at about 7.7% for 2007.
Now let's take a look at the changes in flow through to our updated supply side projections. First, we adjusted our 2007 alumina surplus from a range of 1.5 million to 3 million tons to a range of 1 million to 2 million-tons.
The primary drivers behind reducing our projected surplus are the increased demand from Chinese smelters and the impact of recent job site disruptions in Guinea and other parts of the world. In addition, global smelters will rebuild working inventories of alumina, which in 2007 were drawn down to dangerously low levels.
At current metal prices, no smelter will want to risk disruption due to an alumina short fall. For aluminum, we have moved 2007 from a balanced position to a 300,000 ton surplus.
In a 37 million ton market, this is less than 1% adjustment, so this does not change our overall market view going forward. We see continued strong demand and growth, and as we look at several years we still believe it will be challenging for new smelter constructions to keep pace with demand growth.
China government, where the largest production growth is happening, is trying hard to hem in investments in aluminum due to its energy intensity. We believe they will succeed.
But to keep all of this in the proper perspective, we need to look at days of consumption. Based upon the best intelligence available, daily global consumption is now nearly 102,000 metric tons per day.
Our estimated market balance of a 300,000 ton surplus therefore represents slightly less than three days demand. Given the generally positive outlook for global demand, the market surplus that will be accumulating during the course of 2007 will be eroded by year end, leaving the market with only a moderate increase of one day additional implied consumption as we enter 2008.
Our analysis makes no allowances for potential increase in working inventories to support the increased downstream fabricating requirements which continue to grow at a healthy rate. This is especially noteworthy in China, where the downstream capacity continues to grow impressively.
For example, with 2 million metric tons increase in production of fabricated products requires about 60 days of inventory in fabrication and logistics be invested, which in itself consumes about 300,000 metric tons. Now let's take a look at the downstream markets.
Let's start with aerospace, which accounts for about 10% of our total revenue. It continues to be a very strong end market for us.
We still see robust demand for large transport, as evidenced by the five-year backlog at Boeing and Airbus. We see strong aerospace demand will be also fueled by continuing increase in the build and pick-up of the A-380 demand in the fourth quarter of this year.
We see record demand in the regional and business jet markets, and in addition, we see Russians and China taking definite steps to design and build planes in their home countries. The defense business is picking up at the same time, offering great opportunities to use our technologies which we have developed for armor plate, aerospace and automotive industries.
What does this mean to Alcoa? it means that we are at or very near capacity at most of our facilities.
Though this is good news, it certainly poses a challenge constraint with respect to delivery performance and our ability to respond to sudden spikes in demand. It also poses opportunities in developing new materials, design and process technologies for the next generations of aircraft.
To meet our customer needs in this increasing tight market, we are focusing on expanding our output via AVS, bringing additional capacity to market in our flat rolled facilities in [Belia], in Russia, and our fastener expansions in Hungary and China. Next, let's look at the automotive market which accounts for 9% of our total revenue.
North American production is tracking to be roughly flat with that of 2006. The consequent share loss in the traditional North American auto producer will continue to challenge our cast wheel and ASL businesses, and therefore we continue to work towards increasing our market share.
European production is expected to be up about 2% versus 2006, and once penalty levels have been established for C02 legislation in the EU, this will lead to interesting opportunities in light weight. This legislation will place favorably for Alcoa as we capitalize on the increased interest in lighter weight materials.
Moving to commercial transportation markets, which accounts for 7% of our revenues. As we have been mentioning for some time, the Class 8 truck demand downturn in 2007 was no surprise.
In North American Class 8 first quarter production is down approximately 25% from the year end quarter of 2006, and we'll see an additional decline for a decrease of 45% for the year ago quarter. The North American trailer market is also experiencing weakness as it is down about 9% on a sequential quarter basis.
In the second quarter, the trailer market is expected to be down about 14% year over year. We are mitigating the impact of these headwinds by better mix and price and by increasing share via our proprietary value-added products like Durabright wheels which we have shown to several of you.
In Europe, the Class 8 market remains strong, where we continue to increase our market penetration. Truck wheels investments completed in previous years such as those in Hungary and Mexico are paying off as they are now fully booked.
At the New York Auto Show last week, we showcased our first original equipment Durabright 20-inch on the new Shelby Mustang. Now let’s move to the nonresidential building and construction market, which account for 8% of our total revenue.
In North America, we see a market that is still growing at approximately 6% this year, albeit at a lower rate than in 2006. Real GDP and industrial production growth accompanied by stable unemployment and interest rates will support this growth.
In particular, we expect the manufacturing, lodging, healthcare, office and education sectors to be the main contributors to growth in this market in 2007. In Europe, the German recovery and strong growth in Ireland and the Netherlands will position the region to have above-average growth of approximately 2% to 3%.
Chinese construction market is expected to remain strong. It will not be as hot as it was in 2001 to 2006 periods, but the projections are still for 13% growth in this region in 2007.
Alcoa Building and Construction Systems Group is capitalizing on the strong growth conditions in this market. I was just visiting our planted in Bloomberg which is starting up 100% door assembly business under the brand name of [Conear].
New products are being introduced to capture share and investments are being made in our brands so that we can strengthen customer perception and awareness. We're also establishing in and exploring markets where we do not have a geographic presence today.
Let’s talk about industrial gas turbines and industrial products, which account for 14% of our total revenue and which industrial gas turbines is a key segment. Driven by increased power demand in Europe and the Middle East, heavy industrial gas turbines build rates have been on a steady path of recovery since 2002.
Overall orders for IGT were up 6% in 2006, and our latest forecast show a 15% increase over 2006 at a run rate in 2007. The small industrial gas turbines for oil and gas markets remains strong and we have an exclusive position with the main manufacturers of these turbines.
Alcoa has multiple facilities capable of producing industrial gas turbine products; this however must be considered against the requirements of a strong aerospace market, and we are currently balancing capacity across our system. We are also working on some technologies and manufacturing supply chain enhancements as a means of improving our position in this market.
Finally, the industrial distribution market, which accounts for approximately 7% of our total revenue. We have seen common alloy demand softness since the third quarter of 2006.
As the market softened, Alcoa gained share due to the launch of standards being produced and a simplified business model where SKUs had been reduced significantly and lead time drastically reduced. We also offset some of the market decline by recognizing new distributors and increasing share at existing customers.
In summary, markets in general remain robust. Europe is stronger than the U.S., but China continues at a solid pace.
In the instances where markets have weakened such as commercial transportation, we have demonstrated the capability to grow share, improve mix and introduce new products to offset the decline. Over the next couple of slides, I would like to talk about the strong foundation of 2006 performance and the actions we have taken to build upon a strong foundation -- what I will call momentum builders.
For 2006, we generated record revenues and record income from continued operations. We were able to offset much of the costs, drive 97% of the revenue increase to the bottom line, and made significant improvements to our downstream businesses.
We set several financial targets for 2007. Among them, cash from operations will exceed capital expenditures and EBITDA margin in all downstream businesses will increase over 2006.
We also now know that 2007 will be our peak capital spending year, as the Iceland smelter in [Mujan] and those plants are completed and we move further into our Brazilian investment. With a high level of confidence, in January of this year we executed a debt restructuring program which extended our average debt maturity from four years to over nine years at roughly the same cost.
We increased the annual dividend from $0.60 a share to $0.68 a share and announced a 10% share buyback program over the next three years. We took these actions because we are confident in our cash generation capability and our strong balance sheet.
We took these actions because they are the right thing to do for the shareholders. Another momentum builder is our continuing action to strengthen our overall business by actively managing our portfolio.
In 2006 we sold our Alcoa home exterior business, a good business, but not core to our overall strategy. We also announced a soft alloy extrusion joint venture with [Orkla and Safa Group].
That process will be finalized in the second quarter and eventually offered to the public via an IPO. We believe this is the mechanism to extract the most value possible for the shareholders.
At the same time, we announced a downstream restructuring program to further improve returns and profitability. Actions were taken across all four downstream businesses with the most significant being the closure of the Swansea facility in the United Kingdom.
This program is expected to save $130 million pretax on an annualized basis. In terms of our packaging business, I am very happy with the way Paul Thomas , our Group Executive VP, and his new team of management has attacked the issues.
Earnings have increased 138% compared to the prior year quarter. The benefits of restructuring programs are hitting the bottom line, and productivity is achieved across the business and has improved significantly.
Before you ask, that does not change the fact that we continue our portfolio review concerning these assets in 2007, and we will keep you informed as we make our decisions. Another momentum builder is the fact that many of our growth projects are reaching completion.
The 657,000 ton Punjarra refinery upgrade is in place. We have experienced a couple of minor operating issues that we are working through, but overall we're very happy with this project.
We have expanded our aerospace sheet and plate production by 50% since 2004. Capacity is coming online at the perfect time during the strong aerospace cycle.
In February, I was in China and then visited our Russian facilities, and they continue to show improvement. First quarter shipments were 20% above year ago quarter, and March was a record month.
We expect to ship over 250,000 metric tons this year. Aerospace was started in the first quarter, and we expect to be qualified to Western aerospace specifications by the end of this year.
They have reduced headcount by 35% to date, and anticipate further productivity gains throughout the year. Two weeks ago I was in Brazil to visit the San Luis refinery expansion site and the Juruti bauxite mine.
Those projects are on track to be completed by the end of 2008, and Jurati is the first bauxite mine developed by Alcoa in the last 40 years. It is being developed in a sustainable manner with full community support and will provide at least 50 years of high quality bauxite.
Of course, I am really excited about our new Iceland smelters. Our first greenfield smelter in 25 years is now complete.
We will pour our first metal in the next 60 hours, two years and nine months after we broke ground. When we announced the ground-breaking back in July 2004, we signaled first production would be in the spring of 2007.
This project has come in exactly on schedule. The smelter is really quite impressive, with 15 acres under roof and more than 1,200 yards long, this smelter will be the most environmentally friendly smelter in the world.
It includes all the improvements we have developed in the process, as well as all of our ABS learnings. As with all construction projects in today's environment, capital costs did increase.
Over the last year you have heard the project being 50% to even 100% over budget. Our Iceland smelter will come in approximately 30% over the original budget, not including currency -- well below the norm, because we started early and managed the project very effectively.
I am looking forward to being in Iceland in early June with our board for the official grand opening. Another momentum builder is the continuing improved performance of our downstream businesses.
Many have treated our entire downstream operation as one entity and labeled it as a performing poorly. That is just not accurate.
The group of assets, for instance, in our flat-rolled product segment is without question the best in the world. Our proprietary technology and unique equipment sets us apart.
Our facilities are operating very well and Helmut Wieser, the EVP of flat-rolled products, tells me that there is even more upside. In the first quarter, our Davenport facility established numerous records in areas such as plate production, plate shipment and skin sheet recovery.
Our can sheet plants at Warrick and Tennessee set records for ingot output and ingot recovery, to name just a few. Obviously the losses in our newly acquired Russian and China mills are a drag on margins in this segment at this time.
But you cannot stand still in today's marketplace and future profitable growth comes at a price. This will soon be behind us.
We must continue to profitably grow our businesses in areas that are projected to have double-digit growth over the next decade. We are investing in these geographic areas, as well as in the United States and Europe to produce high value-added products such as aerospace products, litho and grazing sheets, and we must perform now while at the same time building for the future.
That is exactly what we are doing in our flat-rolled product business segment. The improvement in our engineering solution segment over the last 18 months has been impressive.
ATOI was up 63% in 2006 compared to 2005. Segment ATOI margin increased by 50% over the same time period.
Again, in this segment, Bill Christopher the EVP of the segment, tells me they can continue to improve and are doing so. We have been very open that in this segment we have AAFL business that is not performing up to our standards and we understand the issues.
New management put in place last year are on an accelerated path to drive change. The other businesses in this segment fasteners, forging, and investment castings have really hit their strides.
Over the last four years they have doubled their productivity, they have achieved organic growth in excess of the market rate driven by new products, new markets and great productivity. In the extruded and end products segments, we have sold home exteriors and joint ventures soft alloy extrusions, the underperforming business in the segments which eventually will be IPOs.
The remaining two businesses are well positioned. They are hard alloy extrusions with their exposure to the aerospace market and building and construction systems, tied to the commercial markets.
The final segment, packaging and consumer, is in a turnaround mode and as I mentioned earlier, has made significant improvements year over year. So really, we have quite a strong and profitable group of downstream businesses that are improving quarter over quarter and provide unique proprietary products into a growing end market.
With that, let me use this last slide to summarize. We had a record financial performance in 2006.
We've increased dividends, we started a share repurchase program, got an active portfolio management, and we have projects coming to the bottom line. We have improved downstream businesses, providing unique and proprietary product to the growing end markets, and we have a great upstream position in alumina and aluminum.
With that as a back drop, the momentum continues with the strong market fundamentals, another strong quarter as supported by exceptional returns on capital and impressive cash generation. That, to me, describes what is Alcoa.
Thank you for your time, and now we would be happy to take on your questions.
Operator
Your first question comes from Michael Gambardella - JP Morgan.
Michael Gambardella - JP Morgan
Good afternoon. Alain, what do you consider to be core in the downstream businesses?
You mentioned that the home exteriors business was a good business, but you sold it because it wasn't core, you said, but how would you categorize what is core and downstream?
Alain Belda
In the case of the home exteriors business, it had moved towards mostly a plastics siding business and the growth was either nonexistent or we were losing market share to people that were producing cheaper products and importing products. So it felt like a business that wasn't going to go many places, and we had better use for the money.
So to me, core is really about profitable growth, and it wasn't providing that any more.
Michael Gambardella - JP Morgan
So what do you consider to be core in the downstream businesses that you have today?
Alain Belda
The business that that today offers access to the same markets -- like for instance aerospace, all of them -- or truck and trailer businesses, or transportation business in general, are businesses where we can complement our offer to these businesses by selling sheet, plate, foil extrusion, fasteners, air foils, and all these products are industrial products are very much the core of the company.
Michael Gambardella - JP Morgan
I guess then packaging would be considered non-core?
Alain Belda
It took three questions to get there, Mike. We've looked at packaging as a core business for some time, in the way that this business was bringing to our DNA of industrial semi-manufactured products, the ability to train people and develop the conscience of customer satisfaction and speed and developing of new businesses, new products.
As I told you and everybody else in the market, we've looked at this business. We are in a turnaround business and we will make a decision at the end of the year of, where does it fit into our portfolio?
Michael Gambardella - JP Morgan
Thank you.
Operator
Your next question comes from Ross Clifford – ABN Amro.
Ross Clifford – ABN Amro
Good afternoon. My question relates to alumina and your dominant position in that market.
I was wondering if you can talk about your strategy generally there, and particular reference to the fact that you're at a time when spot prices are heading north. I am just a bit curious about that decision if you could go into that for me, please?
Charles McLane
We have stated for a long time that we considered Point Comfort, it is a very high cost refinery and it is a flex refinery in our portfolio of nine refineries. What we do with it is when we bring in a big slog of production like we've just done in Punjarra, we flex the capacity at Point Comfort down because we are adding low cost capacity.
As you know, we do not look at the spot market as a business that we normally participate in. We are in the long-term contract business.
When we have a refinery coming on like we have this one, and next year, by the way, we will have the start-up of the Brazilian operation, you should see additional flexing of Point Comfort capacity.
Ross Clifford – ABN Amro
You also state you see through '08 the supply/demand balance getting tighter, so more demand for alumina there, you don't think Point Comfort could meet that, or the costs are just too high to justify?
Alain Belda
We don't tend to sell in that market. We have long-term contracts and we basically look at Point Comfort as flex, high cost; we substituted for low cost by low cost refineries.
Sometimes we'll take some spot market, but just because we have an extra ship or something.
Charles McLane
I will add something to that. If you noticed in the 2007 timeframe we're showing a surplus in the alumina market, and the reason it goes to flat in 2008 is because our anticipation is that capacity will be brought back to make that level.
You don't build alumina inventory.
Ross Clifford – ABN Amro
Thanks for that.
Operator
Your next question comes from John Tumazos – Prudential.
John Tumazos – Prudential
Congratulations on $0.50 a pound of EBITDA. That's a good performance even though the earnings per share didn't look as good.
You mentioned the Iceland and some specific new assets that haven't turned to black yet. Could you estimate what portion of the $37 billion corporate assets don't earn a profit and what portion of the $5.6 billion of revenue, aside from alumina and primary, don't earn a profit?
Charles McLane
John, I don't think I understand your question. What are you referring to?
John Tumazos – Prudential
How much of the company doesn't make money, measured in assets or revenue?
Charles McLane
I think the breakdown that we provide to you shows some of those assets within the businesses within the different segments that we're showing as unprofitable right now. I think that would be the clearest breakdown that we would give you.
We'll continue to look at that and see if there are further breakdowns that will make it more transparent to you, but that's it for right now.
Operator
Your next question comes from Kuni Chen - Banc of America Securities.
Kuni Chen - Banc of America Securities
Good afternoon. I just had a question on Iceland.
Are you guys seeing any change in the investment climate over there? Seems like there has been a little bit of a resurgence in environmental concerns and push back against further growth of the aluminum industry in Iceland.
I just wanted to see what you guys have been hearing lately and how that may affect your plans for a second greenfield over there?
Alain Belda
We are having great relations with the people in the eastern part of Iceland. We have seen no evidence of any change in climate.
The people in the northern part of Iceland are also welcoming the opportunity of having the first smelter run by geothermal power. We haven't seen any change in Iceland that affects us.
Operator
Your next question comes from John Hill - Citigroup.
John Hill – Citigroup
Thank you and congratulations on the forward progress with the results. I was just wondering if we could take another look at flat rolled products on a year-over-year basis.
Sales are up $335 million, yet ATOI is actually down from $66 million to $62 million, and some of these undercurrents of spending – China, Russia, et cetera -- while they vary quarter to quarter, were going on a year ago. How should we be looking at this?
Charles McLane
John, I think that the three roll mills that we're dealing with there, as you said, Russia and China and [Cunshoon] and as we're trying to bring on capacity and qualify Russia, you're naturally going to be incurring extra expenses. We are in a mode right now of bringing on, so you are going to have some of those expenses that are hurting you in year-over-year.
Within the product mix of flat-rolled, they're having outstanding returns if you segregate it and look at the businesses serving the aerospace market and the brazing and litho. I think you would have to isolate the ones that are in a semi start-up mode for various reasons if you can get to the real answer.
John Hill – Citigroup
Fair enough, but if we set these start-up costs aside and then perhaps realize some of the business opportunities that we're shooting for, I mean what kind of margins should we be looking at? We've been pegged down at 3.3, 2.8, 2.7.
These are very, very low numbers in the best flat rolled, best metals, best aerospace cycle in 20 years or more. Many of the comps are well up into double-digits.
What's your realistic target over the foreseeable future?
Charles McLane
In some of the supplemental statements that we give you, I think you can look at what we're showing as the last 12 months Russia and bauxite net losses. I think if you turn around and pull those back out you will get a pretty good idea of what the run rate on the margin is right now.
Operator
Your next question comes from Mark Lenima - Morgan Stanley.
Mark Lenima - Morgan Stanley
Thanks. I was wondering if you can give a little more detail about what you're seeing in China?
What the risks are to the 23.1% growth rate and if there are any key end markets you see that are driving that demand? thanks.
Alain Belda
I think the issue with China at the moment is on April 26th they're coming up with new regulations and new taxes on imports of alumina, on fabricated products and to a certain extent this first quarter numbers are distorted by some pressure to export and to realize sales and purchases before the change in regulations. When we talk to the government, they told us is, it four, five years ago that they would shut down the old inefficient [Solderberg] plant, and they have done that, it is mostly shut down.
The small inefficient plants have solved their problem of being small and inefficient by being big and I hope more efficient, and that growth is the one that we can see in the numbers that are coming out on the statistics here. I think China continues to be a balanced production/demand place.
It is a place that will, at least for some time, continue to surprise us and the rest of the market in every single market it operates. This number in the first quarter, in my opinion, was to a certain extent distorted by the actions around the change in taxation and I think we should wait for the second quarter to get a better picture this year.
Bottom line, we said from the beginning that their strategy was going to be a balanced supply/demand kind of situation, including some play on scrap and export of fabricated products, and I think that's where it is.
Operator
Your next question comes from the Charles Bradford - Bradford Research.
Charles Bradford - Bradford Research
Can you tell us what the current status is of the Trinidad proposal?
Alain Belda
The Trinidad proposal has been tabled with the government. We had chosen a location which was not acceptable to people in the area, and the government has requested us to look at different locations, and we're studying that at the moment.
There is no date for start-up of that facility.
Operator
Your next question comes from the line of David Gagliano - Credit Suisse.
David Gagliano - Credit Suisse
Coming back to the flat-rolled question earlier, can you just tell us what the total operating loss was at the Russian assets in Q1 '07? When do you expect those to turn profitable?
Thanks.
Alain Belda
Just a second, we're getting the exact numbers.
Charles McLane
I have the last 12 months sitting here at $79 million. I don't have the quarter for the Russia sitting in front of me now.
We would be glad to get that for you, though.
Alain Belda
We expect this year to be in the black somewhere at the end of the third quarter and the fourth quarter.
Operator
Your next question comes from Victor Lazarovichy - BMO Capital Markets.
Victor Lazarovichy - BMO Capital Markets
I have a couple of questions on the Russian plants again. I am not sure I caught the number that you said you would be shipping this year.
Was it 200,000 tons or 250,000?
Charles McLane
250,000 tons.
Victor Lazarovichy - BMO Capital Markets
What is that operating rate in terms of percentage of available up time?
Alain Belda
Well, I don't have it in percentage of operating time. What we said was that eventually this plan could produce somewhere between 350,000 and 450,000 metric tons.
This will be 250,000 which by the way, is 20% higher than last year and continues to grow.
Victor Lazarovichy - BMO Capital Markets
Right. As it is concurrently configured, can you do 350?
Alain Belda
350 we could do on that facility as configured, and with the capital expenditure, new equipment that we're putting in . A lot of the equipment is coming in this year, like water-based lubricants, new cutting lines, new slitting lines, we have just started two casting complexes with brand new casting machinery for aerospace.
We just started to commission our heat-treating furnaces, so there is a lot of work being done. This is very typically the top year in capital expenditures and productivity and also getting the qualification to Western standards.
Operator
Your next question comes from John Redstone – Desjardins Securities.
John Redstone – Desjardins Securities
Good afternoon, gentlemen. It is great to hear that [inaudible] will soon be pouring metal, but when do you expect that smelter to reach full capacity?
Alain Belda
Probably sometime by the end of the year, fourth quarter of the year.
Operator
Ladies and gentlemen, this now concludes the question-and-answer session. At this time, I will turn the call over to Mr.
Tony Thene for closing remarks.
Tony Thene
We would like to thank all of you for attending our call this afternoon. That concludes the first quarter 2007 analyst presentation.
Thank you.
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