Alcoa Exec Insights: Discount Rates, Margin Target

On Monday, Alcoa Inc (NYSE:AA) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Discount Rates

Jorge Beristain – Deutsche Bank: 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?

A Closer Look: Alcoa Earnings Cheat Sheet>>

Charles D. McLane Jr. – EVP and CFO: Well, Jorge, the expected savings right now, well, they will be publishing the rates and just in us taking a quick look at that the rate that we had been using was 5.4%, but this is on the (indiscernible) 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 is 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 will save $100 million to $130 million this year and $225 million to $250 million next year on the required funding.

Jorge Beristain – Deutsche Bank: And that $225 million to $250 million would be on a projected contribution of around $500 million to $600 million?

Charles D. McLane Jr. – EVP and CFO: Well, a total would be a 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.

Margin Target

Brian Yu – Citi: Checking the Slide 11, I think this is the first time I’ve seen where you mention about the three year revenue and margin targets. We know what the revenue target is. Can you point out what the margin target is?

Charles D. McLane Jr. – EVP and CFO: Yeah. In Both the midstream and the downstream what we said was our three-year target would exceed historical highs, and as you can see, we are already there as far as exceeding our historical highs when we set those targets in 2010, but our path forward is to continue to improve on both of those.

Brian Yu – Citi: So, there isn’t like a specific number. It seems like they’ve already hit that target.

Charles D. McLane Jr. – EVP and CFO: No, there is not a specific number, just to be in excess of our historical high; that was the target.