Before I turn it over to Chuck, I would like to remind you that in discussing the company's performance today, we've 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, 2007 or Form 10-Q for the quarter ended March 31 2008, filed with the Securities and Exchange Commission.

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 Generally Accepted Accounting Principles and a related reconciliation on our website at www.alcoa.com under the "Invest" section.

At this point, let me turn it over to Chuck.

Chuck McLane, Chief Financial Officer

Okay. Thanks, Greg. Before I move on to the financials, let me first give you a brief synopsis of industry fundamentals. Aluminum prices have continued to show strength and those higher prices are supported by a host of factors.

First, global supply and demand is essentially balanced; even though North America and Europe are experiencing significant weakness in specific end markets, global consumption remains robust.

Secondly, energy costs and input prices have continued to escalate for the industry as a whole. In fact, as you know, energy supply constraints have caused smelter curtailments as well as postponements to greenfield expansions.

Lastly, global megatrends will continue to increase the per capita consumption of aluminum, as well as provide a catalyst for material substitution.

With that as a backdrop, let's dive into the financial results. Earnings for the quarter were $546 million, or $0.66 per share, an 80% increase sequentially. All segments contributed to revenue and earnings growth and each segment had double-digit percent increases to profitability.

Our Iceland smelter is complete, it's running at full capacity and will reach mature profitability levels over the next couple of quarters. Russia is showing productivity improvements and our engineered products and solutions segment achieved record revenue and profitability results.

Cash from operations generated $1 billion in the quarter as we achieved significant reductions in days working capital. We continue to operate within our target debt-to-cap range, and our Bloomberg ROC stands at 12.1% excluding the growth projects.

Now let's move to the income statement. Excluding the packaging divestiture, revenue increased 11% on higher prices and volumes, and total segment ATOI increased 27%.

Other income showed a significant improvement sequentially, yet most of the improvement is offset by items in the revenue and cost of goods sold categories. An example of that is currency translation.

Currency translation was a favorable net income impact of $49 million in other income, yet this is essentially offset in cost of goods sold by a negative economic currency impact.

For taxes, the operating tax rate for the year is now projected to be 28.6%. Lastly, the combination of higher prices and volumes led to a significant 80% rise in net income.

Turning next to our sequential bridge, improvements in volume, pricing and productivity more than offset input cost increases, as well as the energy disruptions in Australia and Rockdale.

Higher LME prices improved results by $238 million and includes the impact of both alumina and primary pricing. Higher raw material and energy costs reduced profits by $107 million. Caustic, carbon, natural gas, fuel oil and transportation costs continue to climb.

In addition, we had two significant events in the quarter which exacerbated these results. First, the gas explosion on our supplier's pipeline in Western Australia caused an immediate reduction in our production capacity, as well as requiring us to buy alternative fuels at a much higher cost than the natural gas it displaced.

Meanwhile, unreliable electricity supply at our Rockdale smelter forced us to purchase power at market rates frequently during the six-week period.

The combination of these two reduced profitability by $39 million in the quarter.

We, like others, have been communicating the rise of energy and raw material costs. Let me take a minute and review some of the specific price changes the industry is experiencing.

We'd like to make four major points to this slide. The composition of our cost, the magnitude of the increases, our relative cost position and actions we're taking.

First, the composition of the cost. As a reminder to you, caustic energy and bauxite account for approximately 65% of our refining costs, while alumina energy and carbon account for approximately 70% of our smelting costs.

Next we'd like to point out the sheer magnitude of the increases. From the first half of last year to the first of this year, these costs have increased between 35% to over 80%. In addition, the US dollar declined versus a market basket of the A dollar, the Real, the C dollar and the Euro by approximately 15%.

The third point is our relative cost position. Although external benchmark data has not yet been published for 2007, our own research indicates that the industry cost curves for both refining and smelting have seen double-digit increases in both 2007 and 2006. Through brownfield expansions and operational improvements, we see our position on the refining cost curves improving by approximately 8 points from 38 to 30 over the last two years while we maintained our midpoint status on the smelting cost curve.

Lastly, what are we doing to combat these significant increases? We expect both of these cost positions to improve as expansions in São Luís and Iceland are fully reflected in our performance in 2008 and 2009.

We are also continuing to analyze the total cost of ownership for every one of our strategic raw materials. Examples include joint ventures, backward integration, specification optimization and technology improvements to name a few.

As Klaus will reiterate later, one of our three strategic priorities is disciplined execution. We anticipate significant savings as we identify best practices, both internally and externally.

Let's now move to the individual segment results, starting with alumina. Production for the quarter decreased 50,000 tons primarily as a result of the unexpected gas outage in Western Australia. ATOI in the alumina segment increased $21 million sequentially. The positive effect of higher prices was reduced by increased costs for caustic, natural gas and fuel oil, as well as a continued deterioration of the US dollar to the A dollar. The impact of currency alone reduced profits by $17 million sequentially in this segment.

The incremental costs in the quarter rising from the disruption to our gas supply in Western Australia cost the company approximately $17 million in net income. We are working with our insurers to determine the recoverable amounts for the increased costs and lost revenues. We will net these reimbursements against any cost in future periods.

As we look to the third quarter, our current estimate is a cost to Alcoa of approximately $45 million in net income. That estimate is dependant on our gas supplier restoring partial supply midway through the third quarter. We are currently running at 100% of capacity, albeit at a higher cost base.

Now let's move to the primary segment. Production improved 3.5% from the previous quarter, as our new Iceland smelter reached its rated capacity. As I said, we are going to continue to see efficiency gains from this operation as we move through the year.

ATOI increased to $121 million sequentially, driven by higher prices and volumes. The increase in the realized price in the quarter was $257 per ton, whereas the LME price on a 15-day lag increased $237 per ton. As you can see, we were essentially in line with the 15-day lag, which is where we stood at the end of the first quarter.

Offsets to the higher pricing and volume were increased costs for energy, carbon and alumina. The impact of the weaker dollar reduced profits by $18 million on a sequential basis.

In June, we announced the curtailment of 120,000 tons of annual production in Rockdale. This was driven by an increasingly unreliable power supply that created financial and operational hardships to a point where we could not justify continuing full operation. The financial effect in the quarter of higher power costs, employee costs and lost production was $22 million.

We intend to bring this production back online when we are confident that the power supply has been resolved and is sustainable. If this outage continues through the third quarter, we estimate the effect to be approximately $22 million.

Moving next to the flat rolled product segment. The flat rolled product segment experienced a 3% reduction in overall shipments. North American industrial products are extremely weak in advance of entering their normally weak third quarter.

In fact, North America's sheet and plate shipment levels through May were at their lowest point in this decade.

In Europe, the latest data shows that new orders for sheet and plate products are down 10% compared to 2007. However, sequentially profits improved $14 million. Improved Russia results and productivity gains in North America and Europe helped to offset a negative volume impact of $21 million.

Looking ahead to the third quarter, we would expect a seasonal slowdown between European industrial holidays and North American automotive shutdowns. This typical seasonal effect is evident in the FRP segment results over the last two years, where on average the third quarter ATOI levels were approximately 35% lower than the prior quarter.

Now let's move to the engineered products and solutions segment. EPS continued its outstanding performance by once again posting all-time record revenues and ATOI results. This segment more than offset softness in the North American automotive market with market strength in aerospace, industrial gas turbine, commercial transportation and commercial building and construction. This combination led to a record revenue of $1.9 billion for the quarter.

Additionally, productivity improvements in the aerospace and forgings business enabled the record ATOI performance of $157 million. To put in perspective, this quarterly performance would place this segments return on capital in excess of 13% on an annualized basis.

Looking ahead to the third quarter, we would expect a seasonal slowdown between European industrial holidays and the North American automotive shut down. The effect of this typical pattern is evident in EPS results for the last two years, where on average the third quarter ATOI levels were approximately 25% to 30% lower than the prior quarter.

Now let's move to the cash flow statement. Cash from operations was a $1 billion, driven by higher profits and improved working capital. Significant improvement was achieved in our days working capital outstanding. On a year-over-year basis, days working capital improved 6.4 days and on a sequential basis, the improvement was 5.7 days.

Capital expenditures stand at $1.5 billion on a year-to-date basis and we are expecting it to total approximately $3.6 billion for the year. Cash received from minority partners would take the net CapEx down to $3 billion.

Growth capital represents 52% of the capital expenditures in the period and nearly 60% of the gross spend is invested in two projects: the São Luís refinery expansion and Juruti bauxite mine. Debt-to-cap stands at 30.6%, which is very positive given the spending on CapEx and shares repurchased through the first half of the year. Let's move to the next slide and summarize the share repurchases.

We continued to repurchase shares in the quarter. On a year-to-date basis we repurchased 18.3 million shares at an average price of $32.97. Total repurchases stand at 10% against our board-authorized level of up to 25%.

Now that I have covered the financials, I would like to turn the presentation over to Klaus.

Klaus Kleinfeld, President and Chief Executive Officer

Thank you, Chuck, for providing a very good overview on our second quarter performance. Let's now look at the industry challenges and the opportunities. On a global basis we see 2008 being another growth year. In our view, aluminum consumption will increase by approximately 8%, and given the supply interruptions in China, South Africa and the U.S., to name a few, we see the global demand/supply picture to be generally in balance.

The picture varies, however, substantially by industry and region. Let's go through that. The North American industries in which we participate are declining significantly this year. North American automotive production is projected to be at its lowest level in two decades. Similarly, heavy truck and trailer production are anticipated to remain below already weak 2007 levels. Commercial building and construction activity is showing signs of the decline that we have been anticipating due to the slowing business cycle and also to the tighter credit conditions.

Europe, the end markets in Europe have held up, although with signs of softness, especially in building and construction and truck and trailer are becoming evident. Automotive production has held up and is expected to show some increase for the year.

European C02 regulations are forcing OEMs to look at alternative solutions to comply with recent legislation. This is creating more and more opportunities for a lighter weighting, and here we can leverage our experience and technology.

End markets in China continue to be showing strength. We expect consumption in China to increase approximately 20% this year. We've lowered our projection slightly due to the earthquake relief effort but the projected increased activities in building and construction and to more application and transportation-related areas such as auto and bus platform.

Looking at aerospace and industrial gas turbines, IGT in general, we forecast continued global strength. In the aerospace industry, however, we do see marginally softer demand over the remainder of the year for some specific applications. We believe the 787 and A380s schedule revisions will cause inventory adjustments for both fasteners as well as engine components as the supply chain is well-stocked at this point.

Additionally, the engine side will see supply chain adjustments to account for lower spare demand caused primarily by fleet reductions. We do expect increased build rates for single-aisle planes and we remain bullish for the next several years, even if we see some order deferrals or cancellations as new platform build rates increase.

On the industrial gas turbines, demand from Europe and the Middle East continue to strengthen. North America is also forecast to grow, fuelled by decreasing capacity margin and increasing spare sales.

In summary, while sluggish end markets in North America and Europe negatively affect our midstream and downstream volume potential, we see the overall aluminum industry generally in balanced supply/demand position for the year.

Let's talk about some industry fundamentals. Aluminum continues to combine a lot of characteristics like lightweight, high strength, durable, highly conductive, corrosion resistance, easy formable, recyclable and last, but not least, a great relative price compared to other materials.

In fact, given these very unique characteristics, aluminum is increasingly the material of choice in numerous industry end applications. Let me give you some examples of that:

In the transportation business, lightweight without compromising on strength provides obvious advantages like fuel efficiencies and safety, as well as driving dynamics. We are continuously invited to participate in the design of new auto, truck and bus platforms.

For the packaging business, logistics costs and handling, good consumer appeal as well as high recyclability are crucial; that is why aluminum is highly valued here. The durable, high strength and corrosive resistant aspect of aluminum make it a natural fit for those looking for maintenance-free and aesthetically pleasing surface finishes, as well as the high recyclability. This is especially important in the building and construction and the more consumer-oriented markets such as consumer electronics.

Also, the defense industry reaps benefits from aluminum almost since the date of aluminum's invention with increasing applications. These examples illustrate the fundamentals behind the predicted growth and make us confident about the future.

We project that the amount will grow at 6% annual rate over the next decade. The growth will be fuelled by Asia, particularly China, with an anticipated growth rate of 9% over the next decade. One could see this as a rather conservative estimate, as it reflects only half the rate experienced over the last ten years.

One thing is also sure: serving this additional 30 million tons of aluminum demand will not be easy. Access to reliable power supply and quality bauxite reserves will be the most critical factors, as demonstrated almost on a daily basis and as we've seen again in the last 48 hours.

Energy demand surged in most regions of the world. The ability to secure clean, affordable energy is increasingly an issue the industry will continue to encounter. This year alone the industry had nearly 1 million metric tons of capacity curtailed due to energy or infrastructure-related issues. These have spanned the globe from China to South Africa to the United States.

Many in the industry have seen natural gas as an efficient and relatively clean energy source for new smelters. Natural gas was once seen as stranded energy. With the emergence of liquid natural gas, it became transportable. This has made it much more difficult to ensure supply agreements of natural gas that are secure enough to base long-term investment decisions on it.

Finally, there have been several smelter delays announced over the recent months. The common theme among all of them have been the inability to secure necessary, economical long-term power supplies to justify the significant investment.

As Chuck mentioned, our Fjardaál smelter is operating at full capacity and this happened now less than a year after opening. While we have efficiencies yet to gain, this has been a very successful project and it will help us with our operating cost position and support our profitable growth in the upstream business.

Our success there gives us real confidence in other projects which we are currently evaluating. During the quarter we have made notable progress in three areas, and I'd like to run you through the highlights.

Our relationship with the Icelandic community can be seen by the national and local governments' agreements to extend our MOU for a second smelter in Iceland, most likely powered by geothermal energy. The feasibility study should be completed by September 2009.

In Greenland, the Parliament endorsed moving to a second phase of a possible smelter construction and is funding studies covering economic, social and environmental aspects of the proposed measure. These studies will be conducted throughout the next 18 months.

From a mining and refining perspective, we are working with Vietnam's premier minerals development company. We are jointly reviewing the feasibility of bauxite mining and refining in the region.

These projects, together with several others, are in a feasibility stage. Each one has a stage attached with specific decision-making criteria. We consider aspects like margins, construction costs and various risks. You can be absolutely assured that we will make our decision based upon one criteria only: our confidence in creating shareholder value with the respective investments.

While our competitors are taking projects offline, we are moving forward. A lot of this is founded on consistently demonstrating a commitment to our communities and employees. We are committed to safety, the environment and our communities.

This commitment comes in actions every day, not just words. Our safety record is truly world class and in 2007 alone the Alcoa Foundation and the company combined provided $50 million in grants to the communities in which we operate.

Furthermore, we have taken a leadership position in sustainability issues throughout the world. All of this did not go unnoticed and has been recognized again this year by several organizations as depicted in this slide. Ensuring and demonstrating that we live our values everyday is a strong factor to make Alcoa a worldwide partner of choice.

The energy situation, along with the inflationary pressures on many materials has increased the cost of alumina refining and aluminum smelting by about 20% to 35% between 2005 and 2007 and we would expect a similar rate increase this year. Alumina pricing has doubled over the last three years, responding to the increased operating costs and the strong supply/demand fundamentals.

The forward curve reflects long-term forward prices that have increased over 40%, a significant change from just a year ago. This reflects the input cost pressures, the supply challenges as well as the increasing demand.

Our strong growth pipeline and our enviable mining as well as refining position established a solid foundation from which to move forward.

One thing you can be sure: we will take on the challenges and turn them into opportunities. Our three strategic priorities reflect this: profitable growth; disciplined execution, turning ideas faster into cash; and ensuring the Alcoa advantage as a value generator.

I continue to be encouraged by the energy and passion of the employees that I meet in all of our businesses, all around the world. They are engaged in these strategic priorities. They are working hard towards a well thought-out three-year plan, setting goals for each individual business to be among the best in the industry and they are specifying programs and actions on how to reach these. By the end of this year, we intend to have a three-year financial target by business that we will publicize on the strategic priorities.

Chuck mentioned that our engineered product and solutions business, EPS, has produced another record-setting quarter in terms of revenue and profit, and continues to drive productivity improvements to the bottom line. We believe there continues to be significant profitable growth opportunities in these businesses that are included in EPS. Therefore, I've invited on this call Bill Christopher, who is our Group President for engineered product and solutions. Bill will provide a deep dive on his businesses.

Bill, the floor is all yours.

Bill Christopher, Group President, EPS

Thank you, Klaus. There are three things I would like to cover today. I would like to start with an overview of the businesses that are inside the group; I would like to talk about the improvements we've driven across the group and how they are contributing to the profit growth we've delivered; finally, I want to talk about the opportunities I see moving forward to continue our track record of improvements and profitable growth for the company.

Our group is a diversified industrial products portfolio with leading market positions in aerospace, commercial transportation, energy, non-residential building and construction markets.

Talk about each of the businesses a little bit. Our fastening systems business is a combination of two of the best brands in the industry in Huck and Fairchild. It is #1, especially fastener aerospace systems globally, and offers the broadest range of proprietary and patented products.

Our power and propulsion business is a combination of Howmet investment castings and our aerospace and industrial forged products. Howmet has the #1 position in air coils for both aerospace and industrial gas turbines in the world, and on the forging side, they are the leading producer of aluminum structural forgings and aircraft wheel and brake.

Our wheel and transportation products combine our wheel business and what was our transportation systems business which is where our spaceframe technology resides. Our wheel business is the #1 supplier of aluminum truck wheels globally and the most recognizable brand.

On the building and construction systems side, we participate in the non-residential segment focusing on the exterior of buildings: curtain walls, windows, entry systems and our Reynolux and Reynobond architectural panel products. Our Conair North America business is the #1 supplier to the commercial building exterior systems in North America and they are recognized for best-in-class customer service.

Finally, our electrical and electronic solutions business, EES. This was formerly our AFL business. They make electronic distribution systems and electronics for the automotive, heavy truck and specialty vehicles.

One of the areas we focused hard on in growing has been our position in heavy truck and we are now the #1 supplier in North America to the heavy truck segment.

We talked a little bit about where we have been. I believe we have delivered a strong track record of profitable growth, driven by three things: one is sales gains, two is productivity growth and three is aggressively managing our portfolio.

On the sales side, when you adjust our sales increase for the divestitures and exits that we've had and for the impact on pricing of raw material pass-through that we have, we've had $850 million of real organic growth. $400 million of that came from being well-positioned in markets that we are growing: in aerospace, IGT and in building and construction.

However in each of the businesses we have been able to deliver significant share growth contributing $450 million of additional sales. That's been driven by new products, regional expansions and driving the penetration of our current offerings like our truck wheels around the world.

To give you an example, new product development is essential to our businesses. Over the timeframe 2005 to 2007 we introduced 140 new products and they delivered $250 million of incremental sales in 2007 with yet a lot of significant runway yet to go.

Three of our businesses have delivered double-digit annual growth over a five-year period: our fastening systems business, power and propulsion and building and construction systems.

On the profit growth side, what's driven this is our ability to consistently deliver productivity in excess of inflation. That's allowed us to expand our margin to sales by 36% over this period. One of the advantages we bring to the businesses in my group is the Alcoa Business System which is our lean implementation. The system was developed in the capital intense portion of the company -- smelting, rolling and extrusion -- and we have been able to take and adopt that system for the capital intense portion of our businesses.

We have adapted the tools and methods on the more labor-intense side of my businesses and we are delivering some very significant productivity improvements. One of the best examples I can give is in our Howmet investment castings business at Whitehall, Michigan, our largest casting facility. Over a two-year period of aggressively implementing our lean methodology, we increased the capacity of that facility by 30%, meeting very much-needed capacity for our customer demand increases for almost no capital.

We have also invested in cost advantaged positions around the world. We have opened two fastener facilities in China, one to service the aerospace market and one to service the industrial products markets. We have also expanded capacity in fasteners and investment castings in Mexico and in Hungary and we have expanded our wheel production capacity.

We are also bringing online two great facilities in Russia for aerospace forgings and industrial products, our Samara facility, we have great capability and an outstanding cost position. And in Belaya Kalitva we are bringing on wheel production as we speak.

Finally, we've aggressively addressed our portfolio. Over the last two years we've exited $300 million worth of non-strategic positions, most of which were in the automotive segment. We've invested in aerospace expansions in investment casting and in fasteners, and we've invested in the global wheel growth. When you pull all that together, we've been able to move our portfolio in 2003 from being 40% automotive sales, down to by the end of this year I expect it to be at 20%.

As Chuck and Klaus both mentioned, we've been able to continue that trend of significant improvement through the first half of this year, delivering record results. Our sales are up 6% and inside of that, though, we've had good market growth and share growth in our IGT building and construction and aerospace positions, offsetting very weak North American truck and automotive markets.

Our productivity improvements have been accelerating. Our margin to sales are up 19% year over year. Last year we announced aggressive restructuring in our EES business. Those actions are on-time and delivering the cost improvements we expect it to get and our lower cost facilities are continuing to ramp up to capacity.

On the portfolio side, not only have we've gotten the advantage of the exits in divestitures that we've done, but we have some very, very cost and capital efficient brownfield expansions that are beginning to pay off.

Again in our Howmet business, its customer demand was increasing dramatically beyond our ability just to deliver capacity for ABS. We've invested $20 million in growing capacity in that business. That $20 million will deliver over a $120 million of additional capacity.

Let me start now and shift to moving our look forward. As Klaus mentioned, we have three major strategic priorities for us: profitable growth, and that will be driven by our positions in growing markets, plus major trends that favor our capability to develop new products and we'll continue our productivity improvements.

The second area is leveraging the parental advantage. This is especially true in technology in leveraging our corporate procurement capability and in leveraging our corporate business systems. Two things our corporate business systems do for us: one is it allows me to keep my business unit leadership focused on markets, customers, products and productivity. The second is it gives us tremendous overhead efficiencies in our businesses.

Finally, while we've established a culture and capability for execution across these businesses, we're going to continue to build on that and accelerate our ability to deliver cash to the bottom line.

Let me move and talk about some of the markets that we are in and the outlook that we have. I will start with aerospace because that represents 35% of our portfolio. While Klaus talked about we see some short-term softening in market demand, we are still very bullish on the cycle. When we look at large commercial aircrafts greater than 100-passenger build rates we expect about 920 aircraft to be built this year.

When you add to that the announced increases by Airbus and Boeing to increased single-aisle production and the ramp-up of the A380 and 787, we see continued expansion through this cycle. They have a seven-year backlog which gives us some sustaining power and the A380 and 787 are especially important to us in fasteners and investment castings as these are new programs with new products, and proprietary products for us, so a very, very strong outlook through 2011.

Our heavy truck positions, we have in four of over five businesses across my group we will continue to see heavy truck production increasing, especially driven by the BRIC countries. But beyond that, we are also at a low point in the North American market right now. We expect to see that begin to recover in 2009, 2010 and 2011. When you combine the market recovery, along with the new economics of close to $5 a gallon diesel fuel in North America, these things play to our ability to deliver lightweight and durable solutions to the industry that increase payroll and the fuel efficiency of heavy trucks.

The other area we have for significant growth remains in our truck wheel business. When you look at the penetration of our aluminum truck wheels in North America it now stands at 55%, but in Europe it is 24% and in Japan 15%, so substantial runway for additional growth and that is going to be exhilarating because of the economics of higher energy prices.

On the non-residential part of our business in building and construction systems, Global Insight continues to forecast accelerated increases in non-residential structure spend. That is giving us opportunity for significant expansion opportunities in our systems business in the Middle East, Russia and India. And also, when combining that with the major trend for energy efficiency, it is allowing us to develop new products that not only are more thermally efficient but also integrating those products into exterior systems that will provide higher energy efficiency as a system than the individual products will by themselves, giving us continued growth prospects for our building and construction systems business.

The other markets that we are in fact very excited about is the energy market. We play in this market in two different places. First in industrial gas turbines. If you look at the heavy duty turbine builds, there has been a moderate increase from 2003 to 2007, but we are now starting to witness a very accelerated increase in new turbine builds, driven by Europe and the Middle East.

However, on top of that, we're starting to see the U.S. increasing activity in this area. Power generated by natural gas in the U.S. increased 20% from 2008 over 2007, and 66% over 2006. Now, that's not all driven by just new equipment installations, but it is also showing the capacity that was installed during the peak of 2001 and 2002 is now operating at capacity and that's very good for our spares demand in our investment casting business.

The other area where we're spending a lot of time on right now is oil and gas, specifically on the exploration side. The chart on the upper right-hand corner shows growth in active drilling and production rigs globally. But it's not just about drilling activity; it's about going after reserves that are farther and deeper away.

Existing steel technology limits the range and depth and we are developing aluminum systems that can cost effectively extend the capacity of existing drilling infrastructure. I'm going to talk more about this specifically later on in the presentation.

New products have been a very, very big part of our growth to-date and they will continue to be moving forward. Our current portfolio of products that are in our pipeline, we expect to deliver $1.3 billion of sales when they are at full maturity, both in the markets we are in today and in new and adjacent markets. This is not by chance. We have a very disciplined approach in every one of our businesses to review product positions and the pipeline annually. We identify regional preferences, new market trends and we combine strong underlying technology with strong customer relationships and a core competency in application engineering to deliver new products.

I'd like to talk about a few of these. One of those in industrial gas turbines is a new, high gradients single crystal casting technology that will extend the life of air foils significantly in the hot section of those engines. We are just now starting with our first commercial applications. We expect this to grow significantly as we move forward.

On the ground transportation side, we have products that are coming out like our ABDC door system, and the Fifth Wheel, which connects a tractor to a trailer that both take weight out and improve energy efficiency or increase payload. We are also developing fastening systems that are fasteners combined with installation tools that are significantly reducing the assembly time for our customers in building trucks and trailers.

Finally on the electronics side, we are investing in power management technology that will allow our customers to either increase the content or the efficiency, or reduce weight at the harnesses. We are also working on a new starting system that has the potential to reduce up to two batteries at 45 pounds each in each truck.

I've talked about our position in aerospace. On the fastening systems with the A380 and the 787, it's also worth noting that Howmet has a majority position on every new engine program that will be coming out in the foreseeable future.

I'd like to now move on and specifically talk about two areas, and that is oil and gas and defense. The chart here shows the landscape of exploration drilling equipment. This is a great example of leveraging capability across the entire company, not just my group, to develop aluminum systems that can really make a difference in the industry.

We are taking unique capabilities in large press extrusions and forgings; we are combining that with our alumina materials and joining technology at the tech centre and our depth of experience in the aerospace industry in structural performance, modeling and corrosion management.

We take all those and put them together and we are developing aluminum drill pipe systems and riser systems that will extend the capability or depth or range of existing equipment by up to 50%.

To give you a perspective on that value proposition, today if you wanted to purchase a new rig that would allow you to go to the depths you would like to be able to drill to, it is $500 million to a $1 billion and it is a four-year lead time. By contrast, we believe we have a system in the aluminum riser system which connects the ship to the ocean floor that can extend the range of that ship by 40% to 50%, so if you are limited to 6,000 feet you would be able to go up to 9,000 feet for $40 million to $50 million and be able to do that in six to nine months. We think this is a compelling value proposition for the industry, an exciting area of growth that you will see us talking more about in the future.

I think another area that represents the Alcoa Advantage at work is the Joint Strike Fighter. This starts with having strong customer relationships and credibility in the markets so you get a seat at the table, not only during early design, but I think everybody is aware this is a program that had some rather significant weight challenges midway through the design of this program.

Because of our relationships with the customer and our credibility, we got a seat at the table to offer up potential solutions. In this case, we found we are able to take an alloy 7085 that was developed at our tech centre for commercial aerospace applications in sheet and plate structures, and adapt that for forging applications and combining that with our unique capability to do very, very large closed die forgings in Cleveland, Ohio.

The 7085 alloy allows us to go to thicknesses that we are able to take the bulkhead forgings to one piece: say about 200 pounds in part weight when you take the system weight over 400 pounds for the structure which was a material and important weight savings for the program.

The other thing that was key to this was our speed to market. For us to be able to make a mid-design change and get from design to prototype inside the timeframe we had to cut our production cycle in half from 48 weeks at the industry standard to 24 weeks.

This program, when we combine with that our position on the engines and investment castings and our fasteners that we have developed specifically for this program will, at full run rate, deliver $130 million of sales for our group and it also will ramp up and come on about the same time we anticipate the commercial build cycle to start to weaken, helping to mitigate the impact across our group.

We are now extending this capability into land-based systems, specifically right now on the Joint Light Tactical Vehicle, or the JLTV, and are working with people on designing options for that also.

Disciplined execution is going to continue to allow us to drive productivity gains as we move forward. For all the progress we've made in putting our lean manufacturing system in place, there is still a significant runway both in productivity and capacity improvements.

We've got a great foundation of cost advantage positions in Hungary, China, Russia and Mexico and we have the ability to grow upon those now. We still have some very, very capital efficient expansions that we can make as we continue to drive this growth. We believe we can double the capacity of our Bohai wheel production for less than $5 million and we have great brownfield opportunities to increase our industrial gas turbine investment casting capacity in Hampton, Virginia.

We will continue to leverage the cost-efficient Alcoa business systems and we will be addressing the structural changes in the North American automotive market demand in our EES capacity; most of that will be done early in the third quarter of this year.

So in summary, we think we have built a strong track record of improvement based on disciplined execution. We like our positions in growing markets and in complex products and processes, because these give us great opportunities for product differentiation and cost reductions.

From a priority perspective, we are dealing with a very target rich environment on the growth side, so our focus right now is making sure that we adequately resource these and we have a disciplined deployment and execution to hit those growth targets.

We will continue to manage our portfolio. We will move our automotive portfolio to advantage positions and restructure to the realities of new demand patterns. We'll make sure that we understand and take advantage of major market trends and capitalize on those mega trends, specifically in transport and the energy ends of the business in building and construction.

Finally, we have some great opportunities in our asset base to optimize our global presence and to continue to take advantage of efficient brownfield expansions.

Thank you.

Klaus Kleinfeld, President and Chief Executive Officer

Thank you very much, Bill. I hope this gives you all out there who are listening a little more color on our opportunities and how we are driving on those three strategic priorities: profitable growth, Alcoa advantage, rigorous execution through all of our businesses.

As Bill just said, there is a lot of profitable growth we can generate from the EPS businesses and we are determined to doing so.

Also I want to make one other point here to avoid any misunderstanding, all of our actions are driven by a clear commitment to generate value. We look at all opportunities in all of our businesses. The reason why we asked Bill to be here is because we wanted to give you a little bit of color on EPS and this was just one example among many others that we have inside of Alcoa.

So with this, I think we should open the line for questions and answers.

Q&A

Operator

(Operator Instructions) Your first question comes from Michael Gambardella, JP Morgan.

Michael Gambardella, JP Morgan

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

Chuck McLane, Chief Financial Officer

Sure, Mike. I briefly alluded to it when I talked about it, but all but $30 million of the improvement, there are offsets to that in other places on the income statement, both in revenue and cost of goods sold. One of them is currency. There is currency translation fees in other income, but if you looked at the economic piece impact you would see on our bridge that the net currency favorable for the quarter is 17.

There are differences between metal activity between the downstream businesses and upstream businesses that are offsetting trading positions and they have zero impact on the net between the corporation. And then there is some company-owned life insurance offsets because of deferred compensation which offsets as well. So even though there is a big improvement there, most of it is offset between three other categories on the income statement.

The tax rate, to get to the 28.6% on an annualized basis, the second quarter was lower than the first quarter. Each quarter we do a look at an annual rate for the company based on income by jurisdictions and we make our most recent estimate. It just so happened to be that looking at an annual run rate now, 28.6%, that we had a lower tax rate in the quarter to bring that on a level basis.

Michael Gambardella, JP Morgan

Okay, but the other income, you said there is a positive $30 million in the quarter?

Chuck McLane, Chief Financial Officer

Right, yes.

Michael Gambardella, JP Morgan

Is that incrementally from the second quarter? Because the second quarter was an expense. Or is that just in the – the first quarter was an expense, the second quarter is a big income. Is the $30 million just in the --

Chuck McLane, Chief Financial Officer

If you add for the change between the two, the $30 million of the change between the two, net impact.

Michael Gambardella, JP Morgan

So the whole $155 million?

Chuck McLane, Chief Financial Officer

Yes, $30 million of the $155 million.

Operator

Your next question comes from John Hill, Citigroup.

John Hill, Citigroup

Thank you for a very informative presentation across the board. There's a fair bit of detail in the presentation about input cost escalation, caustic soda, coke, freight, gas, etc., yet these are couched in industry terms.

Of these industry cost pressures, roughly how much showed up in second quarter and how much pent-up lag effect increased costs can we expect to see as we go ahead?

Chuck McLane, Chief Financial Officer

John, just to refer you back to something, on a sequential basis you can see that we had cost increases from the first quarter, excluding currency, of $51 million for energy and $56 million for other raw material costs. They were market indices we were using and without giving the specifics of what we have incurred in each one of those categories, we tried to put it in perspective on what we've done on the cost curve.

So we've looked at our position and tried to give you our relative position on alumina and refining that we've moved down 8 points from 38 percentile on the cost curve to 30, even in light of the industry receiving all these cost increases.

In smelting, we stayed about at the midpoint based on the number of smelters we have all the way across the cost curve. We also made reference to the fact that Iceland, once it's mature, its profitability level and its costs should help us to leverage that down from where we are at the midpoint.

Klaus Kleinfeld, President and Chief Executive Officer

And the same thing, if I may add, on the refinery side would hold true for São Luís and the brownfield expansion that we are doing.

John Hill, Citigroup

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

Chuck McLane, Chief Financial Officer

No. These will depend on market factors. Is fuel oil going to increase in the third quarter over where it is today? Is natural gas going to increase in the third quarter? But the costs that are on that market basis right there, that is shown first half to first half, yes those costs are in our results.

Operator

Your next question comes from Oscar Cabrera, Goldman Sachs.

Oscar Cabrera, Goldman Sachs

My question has to do with your plans and expansions on your smelting capacity. Basically, primary is one of the most important ATOI contributors and I just want to get an idea of two things here.

First, are you planning to be balanced in terms of your alumina and aluminum production?

Secondly, can you give us an idea of what type of increases in capacity and your aim in terms of the cash cost curve going forward? Assuming we stay somewhat constant, where do you want to be? What's the target?

Klaus Kleinfeld, President and Chief Executive Officer

Yes, well first of all, and you know that very well, we are currently long on alumina and that has been traditionally a situation that we have been in. With our expanders that we are doing in Juruti and in other places, this situation will most likely not change significantly.

At the same time, I mean, we aim on the cost curve side and Chuck just said it, what we have been doing on the refining side has been a very, very good achievement. We have moved from the 38 percentile on the cost curve down to the 30 percentile. And as I just said, in São Luís the expansion that we currently have underway will most likely move us even further down.

On the smelting side we are kind of at the midpoint and we believe that when you look at the smelting cost curve and the factors that are driving the cost of aluminum, you kind of have a natural floor of the LME price with the structural increases that we have been seeing there.

At the same time, you've seen that also in the last quarter we have been very nicely managing price, volume and productivity to allow basically to offset the cost inflation in that period.

The very fact, I gave you a little color on some of those projects that are currently in this stage of feasibility and I think that is pretty unique. I mean, when we use the same slide that we showed you last time and that we've been using also in investor presentations, and the very fact that you see the projects there are absolutely real and we are moving them further and we are pretty fast in moving them further.

Greenland and Iceland, which are particularly interesting because they are based not only on stranded power but on very lean power, I think a very important factor going forward. We believe that first of all, it's in line with the values of Alcoa. Secondly, it gives us a great advantage going forward. The very fact that we could secure to move those projects into the next phase is a good thing.

Vietnam, pretty much the same thing. You were around long enough to understand that we are not saying that each of those projects will absolutely come to fruition, but all we can do at this point in time is moving it into the next phase. I think that's a great achievement.

Oscar Cabrera, Goldman Sachs

Granted, but are you looking to just stabilize costs as we see energy prices increase or are you looking to go down the cost curve? What is your strategy?

Chuck McLane, Chief Financial Officer

Can you speak up a little bit?

Oscar Cabrera, Goldman Sachs

Is the strategy to stabilize costs or is it to go down the cash cost curve?

Klaus Kleinfeld, President and Chief Executive Officer

Well, we are always trying to go down the cost curve. I mean, that's absolutely clear. As I outlined, on the refining side we have achieved that in a very, very nice way going 8 percentage points down on the cost curve. On the smelting cost curve, you just have to see that we have a very, very large system and to move the system percentage point-wise is much more difficult, obviously, because we have a pretty strong variation.

I think you outlined already that Iceland is going to bring us further down on the cost curve. At the same time, you have to see -- and I showed that one slide -- that the cost curve itself is moving upwards, which is very much dependent on where the oil price and all the other significant input cost factors are going to go. But it's very, very clear our goal is to move down the cost curve, absolutely.

Operator

Your next question comes from Tony Rizzuto, Dahlman Rose.

Tony Rizzuto, Dahlman Rose

On slide 42 where you have your investments in Russia, Bohai and Kunshan, you seem to be generating greater losses, yet your comments were talking about productivity improvements. I wondered if you could just describe the disconnect there, maybe help me to understand that better?

I had a question on commercial aerospace. You alluded to marginally softer demand and some dislocation in the supply chain for engines and fasteners. Do you expect the same for heat treat, sheet and plate?

Chuck McLane, Chief Financial Officer

I'll take the first one, Tony, how are you?

Tony Rizzuto, Dahlman Rose

I am doing well, Chuck, thank you very much.

Chuck McLane, Chief Financial Officer

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

Bill Christopher, Group President, EPS

Tony, on the commercial aerospace side the two big drivers to the softness we see going forward are driven first by the 787 delay in the ramp up. There was a lot of demand for product in the first half of this year for supply chain and that really didn't impact substantially the sheet and plate side of the business, because it's predominantly a composite aircraft. While they do have some content on it, it's not nearly to the extent we have on fasteners. The second part is spare demand in the jet engine market, which wouldn't impact sheet and plate either.

So generally I would expect sheet and plate and extrusions to perform pretty much in line with the build rates, and as the build rates expand on single-aisle and things of that nature they will be much less impacted by the same things we are seeing in the jet engine supply chain adjustments and impact of the 787.

Operator

Your next question comes from Mark Liinamaa, Goldman Sachs.

Mark Liinamaa, Goldman Sachs

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

Chuck McLane, Chief Financial Officer

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

Mark Liinamaa, Goldman Sachs

There have been some trade press articles about shortening up payment terms with customers. Is there any read across into things that you are seeing in the U.S. market that could be weaker than as discussed?

Chuck McLane, Chief Financial Officer

Well, that was in the primary side of North America and that was done for some very specific reasons, because the credit situation has changed. If you looked at the freight increases, we didn't think the Midwest premium was taking that into consideration nor the interest rate underlying the transaction price.

Plus, if you looked at primary, the P-10-20 is priced in other regions, we basically were just getting it on an even basis, so we think that's eventually going to be accepted in the marketplace.

Operator

Your next question comes from Charles Bradford, Bradford Research.

Charles Bradford, Bradford Research

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

Chuck McLane, Chief Financial Officer

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

Charles Bradford, Bradford Research

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

Chuck McLane, Chief Financial Officer

Not specifically for one client, no.

Operator

Your next question comes from the line of John Redstone, Desjardins Securities.

John Redstone, Desjardins Securities

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

Klaus Kleinfeld, President and Chief Executive Officer

Look, on Russia we obviously see that there is significant improvement in 2008 compared to 2007, but we remain in a loss position, as you correctly pointed out. At the same time, you have to see what is the general perspective on this investment, which we always considered a growth investment in a market like Russia, that we continue to be optimistic about.

We just visited the plants again the week before last. We took our whole board there for a second time to see the progress there with their own eyes. It's very clear in Russia we have unique assets in the physical location and the capabilities, but at this point in time it is not coming fully out there.

When you look at the packaging side, we are increasing the can sheet production and we are making good results there. We were putting the new tap line in there and we will be starting to go online. The demand, the packaging demand for aluminum cans is increasing in Russia, continues to increase in Russia and you see that also the can makers are investing pretty substantially over in Russia.

We have the world's largest exclusion press; we have the world's largest forging press. A couple of examples were given here in Bill's presentation. The capabilities that we have in oil and gas, some of those unique capabilities come through exactly those things that we have in Russia and also the experience that we have in Russia.

The same thing holds true when it goes through the aerospace market. I mean, the aerospace market, not just the Russian aerospace market but the worldwide aerospace market, I mean, we have good capabilities there, particularly in Belaya Kalitva where we are finishing the upgrade of the aerospace capabilities. We've just gone through a major upgrade of our hot mill in Samara; we've received the qualification from Boeing; we've signed a memorandum of understanding with the United Aircraft Corporation in Russia, so all of that is really going into the right direction.

We are about 75% complete with the total capital investments over in Russia and we see that the Russian society, as it becomes wealthy along the line of what we see pretty much in all of the societies, continues to consume more aluminum.

We believe we are at a very good spot and if you now compare this and just see what the capabilities of the Russian facilities once they will be fully established are and then you compare it to how much money we are making with facilities that are comparable to those in established markets like in Europe and the U.S., you will be seeing that those businesses are earning well above cost of capital. As we continue to believe that the Russian market is going to be growing, we also see no structural reason why this will not turn out to be a positive development, eventually come to a good cost of capital earnings.

John Redstone, Desjardins Securities

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

Klaus Kleinfeld, President and Chief Executive Officer

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

Operator

Your next question comes from the line of John Tumazos, Very Independent Research.

John Tumazos, Very Independent Research

Could you explain please the $57 million credit item on the income statement in the business restructuring category? Thank you.

I'm sorry, I was looking at last year.

Klaus Kleinfeld, President and Chief Executive Officer

That is last year, John.

John Tumazos, Very Independent Research

I'm sorry, thank you. No question at all.

Operator

Your next question comes from Joe [Thornton].

Joe Thornton

I had a quick question with respect to smelting and refining, potential expansion. What do you anticipate the costs now would be to add either brownfield or greenfield refining or smelting capacity?

Klaus Kleinfeld, President and Chief Executive Officer

Well, I mean, I would think that the current situation is different from what we've seen for quite a while because there is quite a contraction in the availability of construction capabilities, as well as engineering. I don't think that we are absolutely certain in what the established market price for those constructions is. It very much varies also where you do it and under which circumstances you do it, whether you do it in Iceland or in Greenland or whether you do it in the Amazon in Brazil.

When you look at