Alcoa (AA) Update on Alcoa's Separation: Filing of Initial Form 10 (Transcript)

| About: Alcoa, Inc. (AA)
This article is now exclusive for PRO subscribers.

Alcoa, Inc. (NYSE:AA)

Update on Alcoa’s Separation: Filing of Initial Form 10

June 29, 2016 08:30 AM ET

Executives

Matthew Garth - VP, Financial Planning & Analysis and IR

Klaus Kleinfeld - Chairman and CEO

William Oplinger - EVP and CFO

Analysts

Timna Tanners - Bank of America Merrill Lynch

David Gagliano - BMO Capital

Evan Kurtz - Morgan Stanley

Justine Fisher - Goldman Sachs

Harry Mateer - Barclays

Justin Bergner - Gabelli & Company

Matthew Fields - Bank of America Merrill Lynch

Yuriy Vlasov - Berenberg

John Tumazos - Tumazos Very Independent Research

Mark Wade - Rogge Global Partners

Presentation

Operator

Good day ladies and gentlemen and welcome to the Alcoa’s Form 10 Filing Conference Call. My name is Shannon and I will be your operator for today. As a reminder, today’s conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Matthew Garth, Vice President of Financial Planning & Analysis, and Investor Relations. Please proceed.

Matthew Garth

Thank you, Shannon. I’m joined today by Klaus Kleinfeld, Chairman and Chief Executive Officer and William Oplinger, Executive Vice President and Chief Financial Officer. After comments by Klaus, we will take your questions. But before we begin, I’d like to remind you that today’s discussion will contain forward-looking statements relating to future events and expectations. You can find factors that may cause the Company’s actual results to differ materially from these projections in today’s presentations and in our most recent SEC filings.

Before turning to Klaus, I’d like to give you a brief overview of today’s discussion. This call is meant to provide you a summary of the major elements of the Alcoa Corporation’s Form 10 Filing and the status of our separation timeline. Specific financial results related to the second quarter, our third quarter outlook and the overall market dynamics will be addressed at the second quarter conference call on July 11th.

Moving to the next slide, the financial information presented in initial Form 10 includes carve-out financials for Alcoa Corporation. The carve-outs may not reflect Alcoa Corporation’s results as a standalone company, but do reflect the general corporate expenses allocated on a direct usage relative revenue basis. Also note that a pro forma adjustment has been made to the pension and OPEB attributable to Alcoa Corporation. Looking ahead, in the second half of 2016, we will file amendment to the initial Form 10 with additional pro forma adjustments, the capital structure and information regarding the Company’s Board of Directors.

With that, I’d like to turn it over to Klaus.

Klaus Kleinfeld

Yes. Good morning, everybody. We thought, as this is today another important milestone that we are reaching by filing the initial Form 10, we thought, we offer you this short conference call, so to guide you to the major points as well as give you an opportunity in case there were any questions that we could address them. And Bill obviously is also here together with me.

So, when we started the separation last year, I showed you this slide, and I already at that time said by first half 2016, you will see us filing the initial Form 10, and it has a lot of details in there. And that’s what we have been doing today. And let’s go through this and get a little bit of a better understanding of what is in there and how this reflects what we are doing on the separation.

So, let me start with a summary so that you get a good feel of the most important point. The most important point is probably around the structure of the separation. So, the way this structure will go is Alcoa Corporation which is New Co will be listed on the New York Stock Exchange through a tax-free spinoff to our shareholders.

Alcoa Inc. will be renamed into Arconic and Arconic will be Remain Co. Alcoa Corp will raise approximately $1 billion. Estimated pro forma pension and OPEB obligations for Alcoa Corporation are around $2.6 billion and Arconic around $3 billion. In light of the volatile commodity and debt markets, Arconic will retain up to 19.9% of Alcoa Corporation. And the separation is on track to be completed in the second half of this year.

So, let’s go into the details. So, let me first remind you of what will those two companies be, right? And let’s start with Arconic Company. This is how Arconic will look like. You’ve seen this picture; those that follow us have seen this picture a number of times. Arconic is a premier supplier of high performance advanced multi-material products and solutions and is positioned very well in quite a number of different growth markets and it can benefit from significant customer synergies between the very attractive portfolio. And the portfolio is comprised of three groups. Our rolling products people, they are catered to the aerospace and automotive business, brazing and commercial transportation and industrial material and Micromill; and our Engineered Products and Solutions Group that has the business units power and propulsion, fastening systems and rings, forgings and extrusions, titanium and engineered products; and our TCS Group that comprises building and construction system and wheels and transportation products.

We have actually, to also give you a more in-depth understanding of Arconic, we have in addition to the Form 10 produced an Arconic overview document. And I would highly recommend for those that are interested in also understanding more in-depth Arconic and how we see Arconic to go to our website; you will find it that they are very, very easily; you will see that and it is on there as we speak now, also together with obviously the description of Alcoa Corporation’s initial Form 10, but I would highly recommend to take a look; I think it’s a very, very good overview piece.

So, let me also remind you again what we are referring to when we’re talking about the other company that will be created here at Alcoa Corporation. And Alcoa Corporation will have these five businesses, the bauxite business, it is the world’s largest bauxite miner; and Alumina, it’s the first, it has the first quartile cost curve refining portfolio; energy, we’ve been able to flexibilize our energy assets and bring them to market; aluminum has a very good strategic global footprint; cast products, value-add products; and also the rolled products, can sheet, it is a leader here in North America.

So, let’s now talk about the structure after separation. As you can imagine, we have done a lot of work in looking at alternatives and multiple options on how we best separate it in the interest of creating the most value to our shareholders. And the guiding principles that we use are basically to look at how can we create an optimal capital structure for both entities comprising also of things like pension/OPEB, debt restriction; how can we optimize the opportunities for financing and how can we minimize the separation costs, things like debt breakage, financing as well as taxes; and also how can we minimize execution risks. And this all -- evaluating all these options led us to the structure that we’ve chosen, the structure that I already mentioned.

Arconic will be Remain Co. So, Alcoa Inc. will be renamed into Arconic and will continue to trade on the New York Stock Exchange and the ticker symbol will be ARNC. Alcoa Corporation will be New Co. Alcoa Corporation will also trade on the New York Stock Exchange and the ticker symbol will be AA.

In regards to the capital structure, we really were looking for creating the strongest possible balance sheet for both entities to optimize the financing opportunities; and as I already said, minimize the debt breakage as well as other financing costs. So, the intended capital structure for Arconic as Remain Co is going to be that Alcoa Inc.’s debt will remain with Arconic. Arconic will use the cash received from Alcoa, and I’ll come to this, from Alcoa Corporation to pay down a portion of the debt retained from Alcoa Inc. Arconic is not expected to issue any debt. Alcoa Corporation, the New Co will conduct a capital raise. We believe it's going to be approximately $1 billion of funded debt. The proceeds basically net of fees, and that will be used to pay Arconic. Alcoa Corporation will also obtain upto $1.5 billion of liquidity facility through a senior secured revolving credit facility, and this will allow cash flow flexibility going forward.

Another very, very important point of the separation is the next point. And this point is that Arconic will retain up to 19.9% of Alcoa Corporation. And let me explain to you what led us to the structure. We have seen since the announcement of the separation in early autumn or late summer last year, we've seen a major increase of volatility in commodity markets. And I would say we have really reached recent historic lows. At the same time then, when it came to the beginning of this year, we've also seen a very volatile high yield markets; it's eased up quite a bit today. But these things have led us to decide that Arconic will retain up to 19.9% of Alcoa Corporation. The way this will be done is by Alcoa Inc. we’ll basically do a pro rata distribution of at least 80.1% of the outstanding shares. What does that do? It provides Arconic a liquid security that can be monetized to strengthen the balance sheet. The intention here is to monetize in the first 18 months but there is an option to do it no later than five years. This reduces the relying on Alcoa Corporation to raise debt and enables Alcoa Corporation to be separated with lower leverage, and it gives Alcoa Corporation significant flexibility to manage through future market cycles. We have filed this -- asked the IRS for private letter ruling for doing this 80-20 structure. We will continue at the same time to monitor the market conditions in the commodity as well as in the high yield debt market, assess -- and assess the impact of that situation on how to structure our separation transaction.

Let's also spend a bit of time on how we allocated and separated the liabilities. This is the question that many of you that I have met within the last month have asked. So, let me start with the liabilities and legal and environmental liability. On the legal and environmental liability, the guiding principle that we use is a relatively simple one. The allocation is generally to that business where these legal or environmental liabilities originated from. So, I want to also point out that Grasse River, which is a large liability, will go to Arconic and some of you know and might say why is that? So, we always thought Massena [ph] is primarily an upstream facility that is primary to in this case this liability has been caused by rolling mill that we laid at there and basically PCP [ph] environmental issues that led us to clean up the Grasse River.

So, that’s on the legal as well as on the environmental side. On the Pension and OPEB side, it's a little bit more complicated but not really because we first are going to look at where has the employees’ last business affiliation been, and that's going to be the primary choice but at the same time there are quite a number of retirees that are coming from close divested or divested entities or from headquarter entities. In this case, we have been allocating these liabilities along the line of balancing the funding level of both, Arconic and Alcoa pension and OPEB structures as well as the respective contribution requirement. In total, and I said that already in the beginning, the total pension and OPEB liabilities are $5.6 billion at this point. And Arconic will carry about $3 billion of this and Alcoa Corporation will carry about $2.6 billion of those liabilities.

So, with this, again finishing here with what we started. As I said, I mean, this is a major milestone on the way to complete our separation. And we are well on course to get it finalized in the second half of 2016. So, I think all of you should get ready for the launch of two strong new companies, Arconic as well as Alcoa; you see the logos here. And if you also want to get some, to have some fun and get a feel for these companies, each of the company has produced a short video. And the video is also on our website. So, I would also recommend that if you’re interested and have a little time enjoy, enjoy both of the videos. You also will get a very, very good impression of how different the companies are and it makes a very good point on how the companies will go forward and show also the emotional strength that’s behind this.

So with this, I hopefully addressed the major points. And Matt and Bill, we’re ready to take questions, if there are any. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Timna Tanners from Bank of America Merrill Lynch. Your line is open. Please go ahead.

Timna Tanners

Hi. Good morning, guys. My colleague, on the debt side, we agree between us who’s going to ask more of in-depth question related to the allocation of debt and pension. So, I’ll just queue up for that. But before getting into that more from the equity side, I wanted to know, if you could comment a little bit more on AWAC’s concerns. And also, as I go through all the paper work, I’m trying to understand where are the different components of EBITDA, and you have a lot of -- to try to get a better sense of company’s earnings power? If you could help us delineate the components between the growing businesses that are being assigned, the power sales, alumina and aluminum or if you could at least tell us if that’s something that might available down the road? Thanks.

Klaus Kleinfeld

Timna, let me take the AWAC question. And I guess, Bill, you want to refer to the second one. On AWAC, it’s relatively simple. We are confident that the separation does not require Alumina Limited content. And we expect the litigation to be resolved in expertise basis and we look forward to putting this matter behind us as soon as possible, Timna.

William Oplinger

And Timna, let me address your second question. And, I understand we just put out the Form 10 probably about an hour ago. You’ll need some time to digest it. There is significant level of detail of around Alcoa Corporation included in the Form 10 that breaks down not only prior years, but the first quarter. And given the fact that the upstream business has reorganized into five separate businesses plus the North American can sheet business, we have actually given segment level detail for sales, shipments ATOI for those six segments for 2015 and the first quarter of 2016. And then in addition to that, we have given the segment level detail for the alumina and smelting segments for three-year time period. So, you can see all of that in the Form 10 in the MD&A such.

Klaus Kleinfeld

And if I may add, Timna, I know that you have a broad interest; I mean that’s also the reason why we produce the Arconic [ph] investor overview paper. So, you will see that there is a similar structure, not backwards, but -- I mean because backwards, [ph] we publish most of these things; so that’s relatively transparent. And so, but you will see a lot additional information in regards to how we see the market as well as how the businesses are performing and what we see as the strength of the future Arconic. So, I will highly recommend for those that have an interest to also look at that side.

Timna Tanners

I’ve only gotten through about half the material; I don’t [ph] have some qualitative conversations. I guess, we’re trying to get a sense if AWAC concerns -- I’ll look through that more separately, and thank you for providing that guidance. But just one follow-up, if you can give us at least more qualitative guidance on why you haven’t been able to resolve things yet with AWAC? It seems kind of late in this age of things [ph] to still be going back and forth legally with them.

Klaus Kleinfeld

Well, the issue is that, they believe, they have content rights; we believe they have no content rights. So, trust me, Timna, and you know as well, we have gone through a lot of things to get this matter resolved. But as always, as you know, it takes two for this. And unfortunately, I mean there is a point, when you basically have to say the legal side has to resolve this, right. And that’s the path that we are going. And as I said, I mean we want to get this behind us as quickly as possible. That’s why we’ve asked for an expedited process and have been granted an expedited process. So, that’s the way it is.

Operator

Your next question comes from the line of David Gagliano from BMO Capital. Your line is open. Please go ahead.

David Gagliano

Similar to Timna, I haven’t finished reading through this yet. But, right now, I don’t seem -- I can’t seem to find any numbers associated with incremental costs associated with corporate expenses et cetera associated with the split. Is there anything in there or is there a number that you can give us?

Klaus Kleinfeld

Well, you’ve seen actually the separation cost we separated out in the first quarter. And if I remember the number correctly, we had up till then $89 million of separation cost in the first quarter. As you know two weeks from now, we have the second quarter call, and we will also give you can update on the separation costs that have been incurred since then. In general, I mean in general and also if you include other factors, the benefits of the separation, I mean strongly outweigh I mean the one-time costs or smaller synergies. I mean if you take alone the overhead reduction program that we are currently running, that alone will bring out for the next two years for both companies together an impact of $225 million of cost reduction and roughly a 100 of this will come this year. And also in the first quarter when you saw we provided an update on this in the first quarter. In the first quarter, we had already been able to achieve $25 million of this. And as you know, we are very, very strong fans of benchmarking and we have benchmarked both companies against their respective industry peers. And what the benchmarking shows that we expect to be substantially better when it comes to overhead cost than the average of the respective industry peers. So that’s really how we see it.

William Oplinger

And the other thing to keep in mind, David, if I can just add on to that really quickly, you know and I think your question alludes to the fact that we have some overhead costs that typically reside in the corporate segment. In the Form 10, the costs associated with Alcoa Corporation are the direct costs that are upstream and can sheet business have in addition to an allocation of the corporate costs associated with that business. In the Form 10, you have to choose a way via -- the SEC requires you to choose a way to allocate corporate costs. Those corporate costs, as I believe Matt alluded to, have been allocated on a percent of segment revenue basis. And you can see a breakdown of those corporate costs in the Form 10 broken down between SG&A, COGS and R&D.

David Gagliano

And just a quick follow-up; I am looking at page F-44 of the Form 10 and which is the split on the various segments, ATOI by various segments. It looks to me like 74% of the ATOI in 2015 is in the bauxite and alumina segments. And my question is how much of that is AWAC’s and how much is yours?

William Oplinger

Yes. Recall that in our bauxite and alumina segments, the vast majority of that is owned by the AWAC entities. There is a small portion of the refining business, specifically at Alumar that is directly owned by Alcoa but the vast majority of that is coming out of AWAC. I can’t give you an exact number but assuming almost all of it, you’re going to get very close.

Klaus Kleinfeld

Exactly, I think that’s fair.

Operator

Your next question comes from the line of Evan Kurtz from Morgan Stanley. Your line is open. Please go ahead.

Evan Kurtz

So, similarly, I haven’t had chance to read the all 328 pages yet, but I didn’t see a pro forma cash flow statement. So, one of things I was wondering, you had a big working capital use in the first quarter. How should we think about how much of that was to the downstream versus the upstream?

William Oplinger

Yes. So, both for the first quarter and for the annual historical carve-outs, we’ve provided a cash flow statement for new Alcoa. So, you can see that. I’ll get my page numbers wrong, but you can find that in the Form 10. We actually have a full cash flow statement for the quarter for new Alcoa and also for the year looking back historically, so for ‘16 and ‘15.

Evan Kurtz

Okay, great. I’ll keep digging in. And then, just one other question on AWAC, Alumina’s claim is that the New Co is an unaffiliated entity that’s taking its stake in AWAC. Is part of the reason for the 19.9% stake to be able to argue that it’s affiliated with current Alcoa, does that factor into it or is this a separate point?

Klaus Kleinfeld

No, it’s a totally separate point; it’s really driven by the volatility, I mean, the reduction on the commodity side as well as the crazy volatility that we saw on the debt market, particularly beginning of the year and basically finding a way how to derisk the separation and have more control over it. Lets’ say we did this and then we added another work stream to the separation which is the monetization of non-essential assets. And I think you’ve seen some of the things that we’ve done already in the recent months. So, this is not related to AWAC at all.

Operator

Your next question comes from the line of Justine Fisher from Goldman Sachs. Your line is open. Please go ahead.

Justine Fisher

The first question that I had is on the decision to put rolled products in the Alcoa business. From your previous slide presentations and from what our understanding was, it wasn't initially expected that the rolled -- that the can sheet business would be in upstream Alcoa. So, why is the decision to put it in upstream; is it because the multiple would have dragged down the Arconic multiple?

Klaus Kleinfeld

That's a nice side effect, I agree with that, but that was not the driving force. The driving force was really two things here. And the first was, when we looked at the physical separation of the businesses, in most cases that was relatively simple. But, in this one case, it was very -- it got very complicated, and this was the Warrick side. I don't know Justine whether you had a chance to be in Warrick. You have a facility that is highly integrated; it has three coal mines; it connects to the river and then you have a coal fired power plant on site; next to it you have a smelter and next to it you have the rolling mill and we have a casthouse and the rolling mill. This is heavily integrated. We also then looked at what we try out [ph] from a re-permitting, right? And you get into kind of nightmarish discussions. And that's what led us as we also then saw that we have a similar situation of very highly integrated assets in Saudi Arabia. And when we put these things together as we are trying to find more optimal solutions to avoid any kind of friction costs here, it led us to find this idea of saying well -- and that's the second point, well, if we look at the North American packaging market, over the last year, it has become more and more a real [ph] commoditized market, driven very strongly by one dimension, only dimension is cost down. So, it has the typical characteristics of what the commodity business has to follow. And when we put this together and then said, well, how would this work if we had Warrick as one and then have the responsibility for North American packaging in Alcoa Corporation? This also allows Ma’aden actually to gain an advantage because Ma’aden has the issue with the rolling mill to be underutilized. And Ma’aden Rolling Mills can make packaging material. So, put these two things together, and it also allows Arconic on the other hand to free up capacity in Tennessee. And as you know, Tennessee was or still is our packaging mill in North America. But, we've been converting it into an automotive mill. So, this all came together. And then, you also mentioned the other point which is a really nice additional side effect.

Justine Fisher

Okay, thanks. And then the second question is about the cash flow at Arconic. So, I was wondering, and may be you will only update this on the second quarter earnings call, but it’s really looking at -- I am sorry, the cash flow at Alcoa. Sorry. If we’re looking at Alcoa's ability to put CapEx into the AWAC assets, and as I understand that's one of the priorities for alumina to make sure that those assets are maintained and that they can grow. If we’re looking at the Arconic -- or the Alcoa pro forma cash flows, number one, is there an update for maintenance CapEx of that business going forward? And then number two, I know that historically the pension expense, the non-cash portion and cost was more or less similar to the pension contribution, so net-net they would cancel each other out as we look at the cash flow impacts of suspension. On a going forward basis, based on how you guys have split up the pension, should we still expect that there is a net zero effect on pension for Alcoa such that when you add back the expense, it will offset that contribution or should we expect to see a negative pension contribution outflow?

William Oplinger

Yes. So, let me address the second question first. As you all know, the contributions will really vary depending on what expected rate of return that we end up getting on our assets. I don't have a direct answer to your question around whether it matches expense, but I can give you a rough estimate of what the cash outlay associated with the global pension plans for the Alcoa Corporation. And in the first year, it would be around a $165 million and in 2018, it would be around $230 million. To answer your second question, we will not be providing an update on forecasted CapEx for 2017 and 2018 until later in the year. Most likely, Alcoa Corporation, when we do our road show before the spinoff, will provide that information as part of that road show, and it will become publicly available at that point.

Justine Fisher

Alright, fantastic thank you.

William Oplinger

And I did want to address, I don't know if it was Dave’s question. Dave, corporate overhead allocation is page 128 and 129 in the document. So, you can find that there. So that will save your paging through all 300 pages looking forward.

Operator

Your next question comes from the line of Harry Mateer from Barclays. Your line is open. Please go ahead.

Harry Mateer

I guess, first, can you just discuss how targeted credit ratings and leverage of the two entities played into choosing the $1 billion funded debt number upstream? Is it reasonable to assume that you know larger are targeting Arconic to receive investment grade ratings out of the gates giving the limited debt reduction there upfront?

Klaus Kleinfeld

First of all, I mean, what credit rating we have, whether we have -- whether we can keep the current rating or not is really not essential for getting the separation done. So that’s the most important thing. But we continue to target for Arconic to basically keep the current credit rating, which is the split rating. And for Alcoa Corporation, we are targeting high non-investment grade rating; that really hasn’t changed.

Harry Mateer

Got it, okay.

William Oplinger

Harry, that clearly all factors in. I mean to answer your question very exclusively, that does all factor into how we estimated raising a capital and how we have capitalized at least on a preliminary basis, both of the businesses. And we believe that given in the capitalization that we’ve outlined in today’s presentation that we can achieve a split rate in Arconic and a strong non-investment grade rating at Alcoa Corporation.

Harry Mateer

And I guess relate to that, I mean how do you think about deleveraging capacity of Arconic over the next couple of years? Can you give us a sense of what you think the right amount of debt is for that company longer term? Is it where it’s going to be out of the gates with the $1 billion of debt reduction or do you anticipate paying down more debt over the course of next couple of years?

Klaus Kleinfeld

Well, look, I mean, the most important thing is the cash flow capabilities that -- the operational cash flow capabilities that Arconic has, and they are strong. And we look at that, we model that. So, then the question of use of cash is something that we will have to address at a later point in time to make sure that we generate the biggest return for the shareholders.

Harry Mateer

Okay, thanks. And then, just if the high yield market fields firm and the commodity stabilizes, is it a possibility that you would raise more initial debt at upstream than $1 billion funded that’s indicated in the Form 10?

Klaus Kleinfeld

On the funding level really it’s more. What we have here, and that’s why created this way is looking at the current environment. In the current environment, this is what we see. And then the question is also, I mean how does the commodity environment look like and what is the carrying -- what is the debt carrying capability of Alcoa Corporation. And we will face -- at the moment, we face the capital raise. And as you’ve seen, which is one reason why we chose the 80-20 the market has been very volatile. And in the recent weeks, [indiscernible] I would say, they now have stabilized. So that’s why we will continue to monitor it. And in the end to the moment, Alcoa Corporation goes out, we would see where that’s at. But obviously, we keep the flexibility that would be margin, [ph] not keep the flexibility.

Harry Mateer

And then just last one for me with respect to the pension breakdown. So, gross liability, there is a pension and OPEB 2.6 at new Alcoa and then 3.0 at Arconic, so that’s close to equal. My initial read of the Form 10, it seemed as if more of the unfunded pension might be at Arconic. Am I reading that right?

William Oplinger

The funded level -- and Harry, it’s a great question because as we look through how do we separate the pensions, there are a number of different factors that we have to consider. But to answer your question, the overall gap and risk of funding level at Arconic will be slightly lower than what is at Alcoa Corporation. And there is reasons for that, but probably the biggest reason for that is that Alcoa Corporation will have more of the retirees in our pension plan. And we’ll have just by the way demographics worked out have an over retiree population. And hence the PBGC requires us to ensure that the upstream is slightly better funded than the Arconic. But to put things into consideration… [Multiple speakers]

Klaus Kleinfeld

But the needs are earlier.

William Oplinger

The risk [ph] levels for Arconic should be around 90% and you well know Harry, this will all change between now and when separation is done, depending on what markets and interest rates do. And the risk [ph] level for the upstream should be up 90%.

Operator

Your next question comes from the line of Justin Bergner from Gabelli & Company. Your line is open. Please go ahead.

Justin Bergner

Good morning and congratulations on getting to today’s Form 10 Filing. First question, just to clarify, can you just repeat for the listeners, which rolling assets are going with the upstream company?

Klaus Kleinfeld

Yes. I mean, first of all, Justin, hello and thank you. So, it’s very simple. It’s the Warrick rolling mill as well as it’s the Ma'aden rolling mill. So, those two assets are going to Alcoa Corporation. And there is also a, we call it, swindling [ph] agreement between the two companies, basically a non-compete over a certain period of time.

William Oplinger

It’s a four-year period and sold out in the very back of the Form-10, there is a description of what the non-compete would look like between the two companies for that four-year time period.

Justin Bergner

Okay, great. And obviously the pension split was not done in a vacuum but I assume it was done as you talk with the PBGC. Can you give us any sort of qualitative update as to where those talks end?

Klaus Kleinfeld

Yes, we are very close to an agreement with the PBGC at this point.

Justin Bergner

Okay. And then, the split of the pension deficit were up being relatively equal, obviously there were some guiding principles but you clearly have an eye towards what the ultimate split would sort of come out as the upside of the guiding principles of which retiree belongs to which entity. I mean was there a desire to sort of be close to 50-50 on the pension liabilities and if so why?

William Oplinger

Well, ultimately, and I think as Klaus very well alluded to, there is a debt carrying capacity ability of both firms, right? So, you start with what is the carrying capacity of both firms. Secondly, we were looking at trying to roughly split the pension and OPEB. And the numbers that we gave you are both, pension and OPEB. We are looking to roughly split those between the two companies fairly evenly. And you can see that we got to a $3 billion versus a $2.6 billion split on underfunded. That all at least in association with the U.S. plans, gets reviewed and agreed to with the PBGC, so you always have to take that into consideration. And then, the third point is that we look at the ability to make contribution and to ensure that we continue to have the pensions funded well. And so that gets built into the calculus also.

Operator

Your next question comes from the line of Matthew Fields from Bank of America Merrill Lynch. Your line is open. Please go ahead.

Matthew Fields

Hey, Klaus and Matt. You guys mentioned that you are looking to pay down a portion of the Arconic debt with $1 billion send-over from Alcoa. Can you talk about sort of what you’d be targeting; would it be front-end of the curve?

William Oplinger

We’re not providing any guidance on which particular tranche that we would be looking at paying-off. When we do the separation, we will make the assessment of what is the best use of those funds, specifically on which tranche is to pay down at this point.

Matthew Fields

Okay. And then, just going back to I think Harry’s question about the funded status versus the sort of gross pension obligation that you mentioned. It looks like in the Form 10 and I’m looking on page F-58 here that the funded -- net funded status of Alcoa is about 400 million underfunded versus the I guess the 2.6 billion in the presentation. Am I just -- are we talking about two different things in the Form 10?

William Oplinger

Yes. So, let me point you to -- and again, I won’t be able to give you a page number. But, there is a pro forma, and maybe we should start it with this. When you look at the Form 10, there are really a number of set of financials in the Form 10. There are carve-out financials that provide a three-year look back for the new entity, Alcoa Corporation. In addition to that, there is a pro forma set of financials in the Form 10. That pro forma set over time, as we release new amendments to the Form 10, will be filled out on pro forma adjustments for Alcoa Corporation. The first set of pro forma adjustments that we made is to indicate the pension on underfunded status for Alcoa Corporation. So, if you see that page, there is a $2 billion pro forma adjustment for the long-term pension, long-term liability, and I believe another $175 million or $125 million short-term addition to the liability. And if you do the math and add up what the 400 million that you’re showing on the carve-out financials plus the $2 billion of long-term liabilities plus another $175 million of short-term, you get to the $2.6 billion that Klaus referenced in his presentation.

Matthew Fields

Okay, got it. Yes, I’ll follow that. Thank you very much for clearing that up. And then lastly, just conceptually, how does the 19.9% stake sort of reduced reliance on Alcoa to raise debt; is it that it makes the sponsorship from Arconic, makes it potentially easier to raise debt or would there be a guarantee from Arconic to the new Alcoa debt [Multiple speakers ] on high level?

Klaus Kleinfeld

It just requires Alcoa Corporation to raise less debt that's basically what it does.

William Oplinger

It essentially puts an asset on the balance sheet of Arconic and that asset allows them in the future, and as Klaus referred to the intention would be to liquidate that asset over 18 months. But, it could be up to five years and that would be cash generated for Arconic, and how does that tie back to Alcoa Corporation, the cash that Arconic would generate would not have had those then funded by a debt raise in Alcoa.

Klaus Kleinfeld

Exactly.

Matthew Fields

So, raise a $1 billion at Alcoa and keep 20% rather than raise $2 billion at Alcoa and retain no stake?

William Oplinger

Raise $1 billion in Alcoa and keep 20% versus some number and you threw out [Multiple speakers] but just higher number.

Matthew Fields

Sure.

Klaus Kleinfeld

That’s exactly right.

Operator

Your next question comes from the line of Yuriy Vlasov from Berenberg. Your line is open. Please go ahead.

Yuriy Vlasov

Good morning, gentlemen. It's Yuriy Vlasov from Berenberg. Two quick questions following the previous questions, it looks like the Company ended the first quarter with a large pile of debt, $1.4 billion if I am not mistaken. Do you have any preferences whether this cash is going to be used to paying your debt or funding your gap and pension liability? That's the first question. And the second question regarding the potential divestments of 19.9% baked in upstream business. Have you got any aims or any goal, any triggers that would -- internal triggers that you would look for the divestments?

William Oplinger

Yes. So, let me address the first question. The $1.4 billion you referred to is the cash on hand at the end of the first quarter. As we go through the capitalization of the two firms, we've provided to you a couple of data points, one is pension and the OPEB, the second is the expected debt levels, which you can then infer what the debt levels at Arconic would be. We have not yet provided to you but we will as amendments to the Form 10 and as we get closer to the actual separation, how that cash will be split between the two firms. And to answer your question, at this point, we are comfortable as Alcoa Inc., keeping around a $1 billion on hand. And at this point, we don't have any preconceived notions of how we would use that cash, either to pay down debt or to reduce the underfunded status, but all of that will become clear as we are closer to separation for the two firms.

Klaus Kleinfeld

And in terms of your second question, in terms of whether we have any internal trigger when to monetize that. The reason why we do it as I described earlier is basically to avoid being at the mercy of a really low commodity situation and then have the separation exactly at that point in time and need to a relatively uneven distribution of debt here as well as to avoid being also at risk here with relatively tighten and volatile debt market. That's why we've been doing it. The moment this normalizes, we will take a look at that. The good thing is we have 18 months that we've been targeting. And as I said already, it looks as slow markets are going to more a normalize situation and we will assess that as we go, once we see these being going more toward normalized situation. And, if the 18 months are not sufficient, the maximum time that we have is five years and I assume that in this time frame, it is relatively likely that you will have different environments than the one that we've been seeing, particularly at the beginning of the year, Yuriy.

Operator

Your next question comes from the line of John Tumazos from Tumazos Very Independent Research. Your line is open. Please go ahead.

John Tumazos

Thank you. This is John. Thank you very much for your efforts to do all this work for the split up. We all admire you.

Klaus Kleinfeld

Thanks John. I wonder what the question is. [Multiple speakers]

John Tumazos

If I recall the cost [ph] over $3 billion to build the Juruti bauxite mine, this is just the little part of the bauxite and alumina segment. And the market value of Alumina Limited, the 40% stake is near $1 billion. Then, it would seem like it might cost at least $15 billion to try to recreate the bauxite and alumina assets, if they were available. Why not let this right to first refusal auction process handed in the partner's litigation happen and give people a chance to make bids for the bauxite and alumina business where the current stock price of your partner doesn’t really favor it very much for it.

William Oplinger

Yes. There is a bunch of questions built into that one question, John. First of all, I don’t have the book value of the Juruti mine immediately available to me, but it is not 3 billion. I believe you need to think that the 3 billion was spent on the combination of Juruti and the expansion of the Alumar refining. So I don’t know that certainly changes you argument. But it is clear that the $1 billion that you referenced to Alumina Limited valuation, I comment on Alumina Limited valuation, but I think you need to look at the screen differently, because I don’t think Alumina Limited’s valuation is only $1 billion dollars at a 100% basis. And then the third, I think will probably revert back to your hypothetical about should lead just allow the ROFR process to go through. We’re involved in a legal suit currently; we’re going to let that legal suit run its case. We are confident that we will win that legal suit. And at this point it probably doesn’t but who, us or our shareholders to comment much further than that.

Klaus Kleinfeld

Yes. John, let me repeat what I said to Timna already at the beginning of the call. You know as well as does Timna, I mean you should assume that we have been trying quite a number of avenues here to find a solution outside of court with Alumina Limited. But as I said earlier, it takes two to tangle. And there is a point in time when things are not value creating, but potentially value destructive and then you have to draw line in the sand. And that’s what we’ve been doing here.

Operator

Your next question comes from the line of Mark Wade from Rogge Global Partners. Your line is open. Please go ahead.

Mark Wade

Good afternoon, gentlemen. I’ll keep it much briefer. Two questions if I am. Firstly, you say, you want to continue to monitor market conditions in commodities and high yields base. Can you give us a flavor as to what the variance is in the capital structures that before you get to -- you finalize any capital structure? And with that follow on from that is, what are the conversations with [indiscernible] what positive from one stable from another negative from another? Are you confident that you will not see negative rating actions as a result of the conclusion of your discussions?

William Oplinger

Yes. So again, I’ll address the second point first. And that is during separation process like this, you have a touch point with the rating agencies at a number of times during the separation. We have done the initial touch point with both Moody’s and S&P. We are confident that the information that we’re providing to you is accurate and that is, we think that we can achieve a split rate for Arconic; we think that we can achieve strong investment grade for Alcoa Corporation. And that was part of the original discussion with rating agencies around options of capitalization. As we get closer to the separation, we will have a second round with the rating agencies and go through a new set of numbers. But at this point, to answer your question, we are confident that the information we’re providing to you is accurate, and that there is always a range around rating agency outcomes, but the ones that we’re anticipating are the ones that we’ve provided today.

Klaus Kleinfeld

And on the second question of what we believe, I mean what is going some change in terms of the debt market line is different and the commodity market line is different. Mark, just, I mean just for you -- to give you an idea of how we got to the 80-20, it was really in light of the two things. One is what we’ve been seeing in the commodity space and the relatively strong decline from last years, mid of last years to now, as I said already stabilizing. And then the, I would say spooky situation that we all faced in the debt market earlier in the year. And we wanted to make sure that we are not left at the mercy of some market fluctuations, and that’s why we chose the 80-20 structure. And, we will look at how this further develops and then see you what else we can be doing in regards to -- and it will be limited in the end by the debt carrying capability that Alcoa Corporation has.

Operator

Your next question comes from the line of Larry Oxley of MetLife. [Ph] Your line is open. Please go ahead.

Unidentified Analyst

Hello guys. Just a follow-up question on the rolling mill. If you look at the production tonnage capacities for the piece that’s going with Alcoa smelter value chain versus staying with Arconic; what is, like 50-50 or could you give a closer split than that?

William Oplinger

No, no it is that the production tonnage that Alcoa Corporation is a small sub segment of Arconic’s production tonnage.

Klaus Kleinfeld

Yes, absolutely.

William Oplinger

Arconic does not provide -- or I should say Alcoa Inc. does not necessarily provide tons produced for the rolling segment, but you can see the tonnage now that work as a separate segment; you can see that in the Alcoa Corporation segment on the tons that they are producing. But that is a small total component of the rolling business of GRP. And, I will ask Klaus.

Klaus Kleinfeld

I think the more critical thing is, I mean, if I put my hand on Arconic, Arconic will not think in tons; Arconic will think in value creation. And when you look at how well our rolling team has managed to upgrade their portfolio over the last years by basically closing or selling or modifying their plants moving up to the portfolio to higher value, which has worked very, very well, and you see it reflected in the last quarter the announcement; I showed this I mean how the test happened and how well they have been doing; you can see it in the profit per metric ton. That's probably a good measure. So, this leaves Arconic with a much, much better profile in regards also to their differentiation on the aerospace side, automotive side. And these are the big segments where innovation also pays and where we are highly differentiated also on the rolling side there.

Operator

That is all the time we have for questions today, ladies and gentlemen. I would now like to turn the conference back to Mr. Klaus Kleinfeld.

Klaus Kleinfeld

Yes, thank you very much. So, thank you for your engagement and diving in. This obviously is a major milestone in completing the separation. We will keep you informed as we have done in the past, as we continue on this process. And I look forward to hopefully having many of you joining us on July 11th, after the close of the market when we release our second quarter results. And with this, I wish us all a great day. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.