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Good morning and welcome to the first quarter earnings conference call.
I would now like to turn the call to Patricia Figueroa, Vice President, Investor Relations.
Thank you. Good morning and welcome to Arconic's first quarter 2018 earnings conference call. I am joined by Chip Blankenship, Chief Executive Officer and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by Chip and Ken, we will take your questions.
I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings.
In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation.
With that, I would like to turn the call over to Chip.
Thanks Patricia. Good morning and thank you for joining the call. I will begin with an overview, then Ken will take you through our financial results in more detail, after which I will provide an update to our 2018 annual guidance. We will then take your questions.
In the first quarter, revenue grew by 8% year-over-year, driven by volume gains in all segments. Our revenue was strong and our key markets remained healthy. Organic revenue growth was 4%. Operating income was lower than anticipated. On a year-over-year basis, we delivered net cost savings along with volume growth, but this was more than offset by headwinds from higher aluminum prices and performance shortfalls in our rings, disks and global rolled products operations.
Our progress since the acquisition of the rings and discs assets from Firth Rixson is unacceptable. Although revenue was inline with prior year, increased costs associated with outsourced operations and lower yields impacted our margins. Turning around these operations will require additional resources and time.
GRP operating income was below our expectations driven by higher aluminum prices and unfavorable aerospace wide-body production mix. We also experienced higher outside processing costs and lower material yield than planned, both issues that we know how to fix. We have a sense of urgency in our operational cadence and CapEx solutions to address both issues. TCS operating income was down slightly as strong operational performance was offset by higher aluminum prices. Free cash flow was inline with expectations.
In 1Q, we made incremental pension contributions of $124 million and had a favorable change in working capital of $112 million year-over-year. Our cash position is $1.2 billion and we have liquidity of $5 billion. Moreover, we continue to drive down our pension liability. In the first quarter, we decreased our pension liability by $315 million through cash contributions and the recently announced pension freeze. We completed the $500 million early debt paydown announced at the beginning of year.
Now, I would like to share some observations for my first 100 days. First on customers. I met with 12 of our largest customers and their feedback was mixed regarding our delivery performance. On some of our aerospace component programs, we are producing above our share to support customers, but on others we are behind customer demand. We have been prioritizing delivery to serve customers at incremental cost. The engine ramp up and demand for narrow-body aircraft is substantial and the team is focused on creeping our capacity upwards through lean improvements in the short-term. We have capital expansion projects underway to match our capacity with long-term demand. We know how to turn this for mixed results into a positive story and we are mobilized to do just that.
Second, our people. I am impressed with the dedicated Arconic team members that I met during my site visits. I have made three key personnel changes. First, the three EP&S business unit presidents now report directly to me. This change will improve the speed of communication and decision-making. Second, I added a head of strategy and development to accelerate our portfolio review. Third, I had a commercial leader to ensure that we are focused on growth in the markets where we compete while I am focused on operational improvements. Third, operational excellence. I have been to 31 of our 151 sites which represent 34% of our revenue. My single biggest conclusion is that I see too much variation across our factories. Therefore, we are returning to the basics and reinvigorating our Arconic business system version of lean manufacturing. The plants that are executing well right now have strong ABS DNA in their people and production management systems. We will increase asset utilization and first pass yield as well as reduce cycle times and increase velocity through the plants that are constrained. We are introducing digital and physical automation to solve problems faster and introduce sustainable controls. We will attack and tighten up our metal loops to reduce losses and increase revert utilization.
I like to highlight the performance of our wheels factories and overall equipment effectiveness, quality, productivity and revert utilization. They have achieve world-class levels in all categories using the combination of ABS and smart manufacturing. This makes them role models for the rest of our company. We will drive these best practices throughout our network. For us to course correct here, it will take resources and time. We are hiring process engineering, quality, lean and operations people now and we have capital projects underway that will come online in 4Q of this year and feather in throughout 2019. The capital projects will have multiple impacts, including reduced cycle time, improved quality and less outside processing.
On the technology front, I am impressed with our current technology portfolio in alloy development, processing and surface treatment innovation. During my visits to our plants and the Arconic technology center, I participated in deep dives into our differentiated technologies associated with aircraft engine airfoil investment casting, surface treatments for automotive sheet and forged truck wheel applications, fasteners and additive manufacturing, just to name a few. These technologies play key roles and they help our current business revenues. Further development and emphasis will yield even more in the future. As an example, last week we announced new aluminum alloy compositions specifically tailored for additive manufacturing featuring enhanced printability as well as higher temperature properties.
Lastly, the strategy and portfolio review. The project is progressing well and we intend to complete this work in 3Q of this year. As a reminder of our framework, we are determining our strategic advantage or lack thereof in each product line and examine the business models including the prospects of the markets served and returns available with world class performance. We are conducting this review with an eye on the purpose of the company as it relates to synergies available in technology and manufacturing, management focus and shareholder returns.
Now I will turn it over to Ken who will take you through our first quarter results in more detail.
Thank you Chip. Let's move to slide six and the key financial results for the quarter. Revenue for the first quarter came in at $3.4 billion, up $253 million or 8% year-over-year as aluminum prices accounted for $109 million or approximately 40% of the increase. Revenue growth was driven by volume gains across all segments. Most of our key markets remained healthy, including aero engines, automotive, commercial transportation and defense.
While commercial aero engine revenue was up 5% per quarter, it's important to note that our aero airfoils business delivered double digit revenue growth this quarter. These markets were partially offset by anticipated weakness in aero airframes production mix and industrial gas turbines. Organic revenue, which adjusts for aluminum prices, currency, the 2017 Fusina divestiture and the Tennessee packaging ramp down, was up 4% for the quarter on a year-over-year basis. The reconciliation for organic revenue could be found on slide 17 in the appendix. We have also included year-over-year market growth rates on slide 18 in the appendix.
The next metric is operating income, which can be found on the face of the income statement. Operating income excluding special items was $345 million in the first quarter, down $45 million or 12% year-over-year. Similar to 2017, our operating income and operating income margin percent have been negatively impacted by higher aluminum prices as the average aluminum prices increased approximately 20% versus last year. In the first quarter, higher aluminum prices unfavorably impacted operating income by $37 million year-over-year and operating income margin percent by 140 basis points.
The aluminum price impacts, which include widening scrap spreads and aluminum derivative contracts are detailed by segment on slide 16 in the appendix. Looking ahead to the second quarter, we expect that the aluminum price impact year-over-year will be an unfavorable $45 million to $55 million at current prices. We will continue to call out aluminum price impacts on future earnings calls.
In addition to higher aluminum prices year-over-year, we have had two further unfavorable items of note. First, an unfavorable inventory impact of the new pension standard which will not repeat in the second quarter. The second relates to an unfavorable market factors at aerospace wide-body production mix and IGT. Our unfavorable items were partially offset by volume gains in aero engines, automotive, commercial transportation and net cost savings.
My previous comments include the impact of performance shortfalls in the rings, disks and global products operations. We have also included a reconciliation of operating income excluding special items on slide 28 in the appendix.
Operating income margin percentage excluding special items was 10% for the first quarter, down 220 basis points year-over-year. Approximately two-thirds of the year-over-year margin percent decline was due to higher aluminum prices.
Free cash flow for the first quarter was inline with expectations at a $417 million use of cash. This compares to a $403 million use of cash in the first quarter of 2017. Pension contributions were $424 million higher in the first quarter of 2018 compared to the same quarter a year ago. We continue to expect full year pension contributions to be in the range of $350 million this year.
The change in working capital in the first quarter of 2018 was a favorable $112 million versus the first quarter of 2017. Days working capital were flat on a year-over-year basis at 59 days. Capital expenditures were $117 million in the first quarter, which is 14% higher than a year ago same quarter as we focus on increasing velocity through our plans and insourcing operations where it makes sense.
Diluted earnings per share excluding special items was $0.34, or $0.01 higher than the first quarter of 2017. Lower interest expense and a lower operational tax rate of approximately 27% offset the impact of higher aluminum prices.
Now let's move to segment results on slide seven. EP&S's revenue was $1.5 billion, an increase of 4% year-over-year. Organic revenue was up 2% as volume growth in aerospace engines, defense and industrial more than offset the decline in the IGT market and the headwinds due to aerospace airframe production mix. Segment operating profit was $220 million, down $26 million or 11% year-over-year. The performance shortfalls in our rings and discs operations combined with the unfavorable inventory impact of the new pension standard and the continued decline in the IGT market more than offset our favorable impact on aero engines in our net cost savings. Segment operating profit was 14.3%, down 230 basis points year-over-year, including 150 basis point negative impact due to the performance shortfalls in our rings and discs operations.
GRP revenue was $1.4 billion, an increase of 9% year-over-year. Organic revenue was up 4% as volume growth in automotive and commercial transportation more than offset the decline in aerospace airframe production mix. Segment operating profit was $112 million, down $24 million or 18% year-over-year, driven by higher aluminum prices and an unfavorable aerospace wide-body production mix. This was partially offset by higher volume in the automotive market. Segment operating margin percent was 8.2%, down 270 basis points year-over-year, including 170 basis point negative impact due to higher aluminum prices.
TCS delivered $537 million of revenue, which was an increase of 18% year-over-year. Organic revenue was up 13% as we saw strong growth in commercial transportation. Segment operating profit was $67 million, down $1 million or 1% year-over-year. Favorable impacts include higher volume in commercial transportation and the building construction business, favorable currency movements and net cost savings. These favorable items were more than offset by higher aluminum prices and unfavorable product price and mix. Segment operating profit margin percent was 12.5%, down 240 basis points year-over-year, including a 350 basis points negative impact of higher aluminum prices.
Now let's move to the capital structure on slide eight. We finished the quarter with $1.2 billion of cash which was above our minimum operating cash level of between $600 million and $700 million. Gross debt now stands at $6.35 billion after completing the early redemption of $500 million of debt in March. We have paid down $2.5 billion of debt since the separation on November 1, 2016, which has reduced our annual interest expense by approximately $150 million per year. Additionally, net debt to EBITDA has improved 23% since the end of 2016 to 2.6 times. Finally, in the quarter, we reduced our pension liability by $315 million, driven by cash contributions and the pension freeze for our U.S. salaried and non-bargained hourly associates. This was announced in January and took effect on April 1 of this year. Our liquidity is strong at over $5 billion and we remain committed to managing our debt and reducing our liabilities.
Before turning it back over to Chip, let me cover a few items that will further clarify the financial results for the quarter and our annual guidance. On slide 12 in the appendix, we have summarized a number of key accounting changes that were adopted this quarter in accordance with FASB guidance.
First, non-service related pension and other post-employment benefit cost for the current period as well as prior periods have been reclassified out of operating income and into other income and expense on the income statement.
Second, cash receipts from sold receivables for the current period as well as prior periods have been reclassed from cash from operations to cash from investing activities on the cash flow statement. Please note that we did not change the net cash funding in the quarter from our AR securitization program. As a result of this classification, we have revised our free cash flow definition to include cash receipts from sold receivables to maintain our historical comparability and maintain consistency with our 2018 guidance. Slide 13 in the appendix provides more details on this change.
Third, payments related to early debt redemption for the current period as well as prior periods have been reclassified from cash from operations to cash from financing activities on the cash flow statement.
And finally, as we pointed out on our fourth quarter call, we have changed our primary measure of segment performance from adjusted EBITDA to segment operating profit to more closely align segment performance with operating income as presented on the income statement.
I will also note that segment operating profit includes certain items that were previously included in corporate namely LIFO, metal price lag, intersegment profit eliminations and derivative activities. Please note, the prior periods have been recast to conform to the current year presentation. We have provided slide 19 in the appendix, which details 2017 segment performance to assist in the transition to the new measure. The slide provides reconciliation of adjusted EBITDA as presented in 2017 to segment operating profit as recast in 2018.
Also on slide 14 in the appendix, we have summarized special items for the quarter. Let me just touch on them briefly. Restructuring related charges were $7 million, which consisted primarily of a $5 million pension curtailment, which related to the pension freeze announced in January. In the first quarter, we also incurred $5 million of external legal and other advisory costs related to Grenfell Tower which were recorded in SG&A. Also in the quarter, we had $19 million charge to interest expense related to the early redemption of our February 2019 notes.
Finally, I would like to give you some context on aluminum price impact to our updated 2018 guidance. As the company with a large U.S. presence, we utilize LIFO accounting to a greater extent than our comparable companies. Therefore the increasing volatility in aluminum prices will impact results to a greater degree, both on the upside when aluminum prices go down and on the downside when aluminum prices increase. As discussed on this call and previous calls, aluminum prices have unfavorably impacted our results over the last three quarters. It is important to note that over time as aluminum prices go up and down, the impact of aluminum prices should offset. However, during times of steep increases or decreases, you will see significant impact to our results.
With the announcement of the aluminum tariffs and Russian sanctions, we have currently experienced a steep increase. In fact, since the separation of Alcoa, aluminum prices have steadily increased by more than 40%. While we have historically said that LIFO and metal lag tender offset overtime, this statement assumes metal price rises and falls through a cycle. Unfortunately, aluminum prices have continued to increase since separation. Moreover, our updated 2018 guidance assumes that current prices will hold at these elevated levels. The aluminum price impact is consistent with our previous communicated sensitivities and along with metal lag are estimated to have an unfavorable impact of approximately $100 million for the year. Should aluminum prices decline, there would be a positive impact to our guidance.
In addition to the public sensitivities and metal lag, we have two further items impacting our 2018 guidance related to aluminum with approximate impact of $30 million for the year. The first relates to mark-to-market losses on the first quarter on our aluminum derivative contracts as well as our inability to head some aluminum purchases in mid April for our Russian plant in Samara. The second relates to a discount on aluminum scrap which has increased 32% from our original guidance. Since currently we are a net scrap seller, this will unfavorably impact our results through the remainder of the year. We are aggressively working to improve our scrap usage by leveraging the Arconic network of cast houses as well as investing in new melting capacity.
Let me now turn it back to Chip to update us on the guidance.
Thank you Ken. As Ken said, due to rising aluminum prices and underperformance in our rings, disks and GRP operations, we are reducing guidance from the midpoint of $1.50 per share to the range of $1.17 to $1.27 per share. This assumes aluminum price and Midwest premium of $2,720 per metric ton for Q2 through Q4 and an average aluminum price and Midwest premium of $2,660 per metric ton. The 2018 average price is an increase over the 2017 average price by about $500 per metric ton and around $265 per metric ton over our original guidance. The impact of higher aluminum prices, including scrap rates and the trading desk, is $0.19 per share from our initial guidance.
Reduced earnings and higher metal costs will also impact free cash flow. We are reducing free cash flow guidance to $250 million for the year, down from $500 million. We are disappointed about lowering guidance for the year. Although two-thirds of the revisions are a result of higher metal prices, a significant portion is related to our operational performance. As I developed a deeper understanding of each business unit, it became clear to me that revisions were required. 2018 is a transition year as we are making investments in our future to position the company for long-term success and shareholder value creation.
With that, I would like to open the line for your questions.
[Operator Instructions]. Your first question comes from the line of Seth Seifman with JPMorgan.
Thanks very much and good morning. I wonder, Chip, if you can talk a little bit about your share in engines? The growth rates seemed to swell a little bit in the quarter to about 5%. We have seen some higher growth rates elsewhere. Are the execution challenges that you are having, particularly in rings and discs, having an impact on your share? And if so, do you see being able to make that up?
I think you called it right there, Seth. We are seeing a high double-digit increase in output from, say, our airfoils business, but rings and discs is really bringing down the overall increase that you noticed there in muting the engines output line in total.
Okay. And maybe can you give us a little bit more color about remediation plans you have? In terms of what you have seen so far, how much of the challenges in EPS are at rings and discs? Is it 100%? Is it 80%? And then when you think about the capital that you are investing, is the capital that you need just to have capacity or is the capital that you need to be more efficient? How would characterize it?
Well, Seth, on the use of capital, it hits both categories. So we need it just for pure capacity in rings and discs. But we also need it for capacity in airfoils. The demand is substantial there. And as I said earlier, in some cases on some part numbers we are providing significantly more than our share to support our customers. In other ones, we have struggled to get them going on. So we are investing in capital both for capacity sake as well as to insource operations, reduce costs and shorten lead time. So all of the above there.
As far as rings and discs goes, we have a big challenge in front of us. We have a lot of work to do. But the team has a good plan. We are in their map of the value streams and making sure that each step in the process has the proper capacity and the proper ability to produce a quality part first time through the process. That's what we are focused on.
All right. And Seth, I had also mentioned too in the airfoils business, as Chip touched on, last year we crossed a significant milestone with $2 billion of aero engine revenue in the first quarter. That was up about $530 million was our Q1 number for 2018. So we are trending positive. But also in that dynamic, we are seeing that the next generation engines are up 60% on a year-over-year basis. So that's good news and our legacy engines business is down about 14%. So we are seeing that change as we did in Q4. But that, in the near term, impacts our margins unfavorably as we learn out our cost on these next-generation platforms.
And I would elaborate further, just to summarize, Seth and say that we really have a good problem that we are facing in EP&S. Our markets are strong, order book is full. We have to execute and that's what we are focused on.
Okay. I think to the extent that you can talk about, I think maybe some of the concern among investors is about what happens because of the execution challenges, what might happen to your market share over time? And so, if you thought about the opportunities, Chip, that you thought Arconic had coming in? I know it's been a little hard to realize them in the near term, but when you think about the opportunity set, let's say, two years out from now, is that still the same or do you think some of it's been lost because of some of the struggles that you guys have had?
I think largely the opportunity, Seth, is the same if not more. We may lose a little bit here and there in the short term but the demand is strong. This narrow-body ramp and the engine programs associated with that, they need strong suppliers to deliver high-quality parts in shorter lead times and the extent we can demonstrate that over the next 18 months or so, I think we are looking at great opportunities in the future.
Great. And maybe last one. Just I know, Chip, that this predates your time at the company, but I think part of the idea behind the separation between Alcoa and Arconic was to have a downstream or value-add oriented company focused particularly on aeros and auto and here we are out here over a year later talking mainly about metal prices and the impact on the guide. Is that something that you and the Board and your team are thinking about as you go through the strategic review?
I would say we are incorporating all that in our strategy and portfolio analysis and it's really our time to lean into that and make sure that we understand exactly how all this fits together, examine the strategy by product line, look for the opportunities and we will have our completed work by the end of 3Q.
Great. Thank you very much.
And your next question is from Rajeev Lalwani with Morgan Stanley.
Hi. Good morning gentlemen.
Good morning.
Good morning.
Chip, I just wanted to come back to your answer there to Seth's question on the strategic review. Can you talk about how you sort of narrowed the scope of it here over the last couple of months? And then as it relates to when you are looking at assets to keep or not keep, can you just talk a bit more about the approach you are taking? Are you looking at margins relative to performance, the variability of profits? Just some color there would be great.
So we are really not in a position, Rajeev, to make any announcements related to the strategy and portfolio review. But I will share with you that we are focused on what returns are available and what are the best end markets to participate in and what are our technology and manufacturing capabilities. And we are trying to do the best job we can to assess all that. And we will be able to report out later in the year.
Okay. And then if I may, just a quick follow up. In terms of some of the adjustments that you are making to get the rings and discs side of the house back in order, can you talk about the timeline that we should be expecting to start to see some of those benefits come through? Is it something that we should look for as we go into next year and beyond? Or could we see that start to turn here in the coming months and quarters?
It's really early to forecast a complete turnaround in those portions of the business, Rajeev. I would say, we are not expecting margin expansion this year and we are focused on making sure we make the right long-term plays there while following our guiding principle of keeping our customers in metal.
Thanks.
Your next question is from Sam Pearlstein with Wells Fargo.
Good morning.
Good morning.
Good morning Sam.
At the end, I guess, when you reported the fourth quarter, you talked about and you put in place a share repurchase of about, I think it was $500 million. Just given the share weakness since you reported fourth quarter, I am surprised you didn't repurchase any in the quarters. Can you just talk about how you are thinking in approaching the buyback?
Yes. Hi Sam. You are correct, $500 million we were authorized from the Board. There is no time limit on that. As we said on the previous call, we are just looking at the seasonality of our cash flows in the business and then we will gauge the relative returns of different options of our capital and we will make a decision at that time.
Okay. And then just looking at the increase in CapEx this year and then just the overall reduction in free cash flow, I know that Chip, when you first came in, everybody wanted to know if you would be able to reiterate some of the 2019 targets. But just thinking about the step up going forward from here, now that capital spending is going up, first question, do you see this year as a peak in capital spending? That it might go down beyond that? And then, what do you think about the pathway of getting to some of those high numbers that were out there before for 2019?
I guess I will answer the second part of that first. We are not ready to talk about 2019 at this time. We will have to defer that till we get closer to 2019. On the capital spend, although we raised this year's target, it's too early for us to say that that's a peak. We have some really substantial increases in business opportunities in front of us that we need to evaluate, whether it's for the auto growth in global rolled product aluminum sheet or the engine business to support the narrow-body ramps and additional business opportunities there. So I would say, it's early to say that this is a peak or not. But we will be very mindful of our decisions to deploy capital based on sustainable demand and the returns available.
Okay. Thank you.
Your next question is from Gautam Khanna with Cowen & Co.
Yes. Thanks. Good morning guys.
Good morning.
Good morning.
Couple of questions. First, I was wondering, you mentioned one of the personnel changes you made. Do you have the people in place at the various plants that you need to affect the operational improvements at the rings and discs units?
Gautam, this is Chip. You know, right now we have open positions. As I said earlier, we are seeking to acquire additional experienced help and we are actively hiring and monitoring that every week in terms of filling roles like the plant manager minus one kind of roles where it's a process engineer or it's a lean ABS person or it's a quality engineer. We do need some additional resources to make sure that we have the horsepower to improve the plants while we deliver on full plants because that's a higher degree of difficulty, in my experience, than having one of the other of those not be the case.
Okay. From your comments earlier, we are obviously scaling the new narrow-bodies at a pretty extreme rate, the LEAP and the GTF programs. Is that where you guys are actually having the most difficult cost position in the rings and discs businesses on the new narrow-body stories or is it across the board?
It's really the total plant loading that requires us to respond and make improvements here. One of the reasons obviously that the plants are so heavily loaded is that ramp, but it's nothing unique about those parts that are driving our situation in the rings business, particularly. In some of the other parts of the portfolio, we are on a very leading edge of technology to deliver what these engines need in terms of performance and temperature capability. But we are solving those problems and we improving yields as we speak.
Okay. And to your opening comments and in your slides, you talk about mix in two places. I think you mentioned airframe mix is negative. Is that just fasteners down? And GRP wide-body mix, what specific programs or if you can elaborate on what that actually means, wide-body mix?
Yes. Gautam, I will just go ahead and put fasteners in GRP sheet and plate together and say that when 747 and A380 and 777, for example, go down that's very impactful to the ships at totals for those two business units. We are on the 787, A350. We have good scope there, but nowhere near the scope as the jumbos. So that's what we are experiencing.
So in effect, it's just volume is down because the wide-bodies are down.
Well, see the wide-body total numbers are up. So that's why I am being very careful about the mix. When you put A350 and 787 in there, the numbers can be, the total production rates are up, but what we see in terms of mix of those wide-bodies is not in our favor.
So Gautam, we are seeing the A380, it may be eight units this year. There is some inventory in the channel, right, in terms of our pool, it's a lesser number as well. So there is really a double hit and that ships at values over $10 million on that plane for us.
I see. Okay. That's helpful. And sorry to keep asking, but you mentioned EP&S, you are not expecting a margin expansion this year. Could you give us more clarity on what you are expecting? Are you expecting a decline? And if so, how much? And if you could also give us the Firth Rixson sales and EBITDA contribution in the quarter?
Yes. Gautam, let me give you the Firth Rixson piece first. We have moved to operating income. So if we look at Firth Rixson for the quarter, it's pretty much breakeven on an operating income basis. Revenue was pretty much flat on a year-over-year basis at around $250 million, $260 million.
Okay. Last one, Chip. Just stepping back, I know you are still early in the discovery phase as you have visited a handful of couple of dozen plants, but there is many more to go. Just your level of confidence honestly and the guidance? Because obviously, the Street has undergone a number of revisions downward over the last couple years. Do you feel confident that this bounds the lower end? Or is there still risks to actually hitting these numbers based on where you sit today? Just wanted to get your level of confidence?
Yes. That's a fair question, Gautam. We certainly designed this guidance to be that lower bound. But the reality of fact is that I have seen 20% of our plants and 34% of our revenue producing locations. So there is still more to see. But we believe we have done the best job we can through deep dives with each business unit as many, go see discovery site type visits as possible to produce these numbers. So we are focused on delivering these numbers a little better. We are giving up on improving still this year.
Okay. And did you guys answer the EP&S margin? How much may it decline this year? Maybe I missed it.
No. Gautam, we haven't given guidance on that. Until we get further visibility into the rings and disc business, in we are seeing favorable margins in the airfoils business that we talked about earlier. Our fasteners business is remaining strong. However, as we dig deeper into the rings and disc business, it's too early to tell in terms of what the margin impact will be.
Okay. Thanks a lot. Good luck guys.
Yes. Thanks Gautam.
And your next question is from David Strauss with Barclays.
Thanks. Good morning.
Good morning.
So in terms of the new airfoils ramp and how you are pacing there, can you just comment on where you sit today relative to the last time you reported three months ago? Are you further behind schedule? Or are you kind of in line with where you were a couple of months ago? And roughly how far behind schedule are you?
That's really not how I look at it exactly in terms of being ahead or behind schedule. Just to clarify, David, we are pretty well even with where we were last report out on airfoils. We are providing what our customers need to build engines. We are keeping them in metal. And we are continuing to improve our yields. And I think we get more orders when that happens. So it's a bit of a challenge to say, we are increasing our shipments, we are increasing our revenue, but the orders keep piling in. And we are using all that to decide how we deploy our lean resources to creep up the capacity as well as make more major capacity investments for 2019.
Okay. I just wanted to follow up on Gautam's last question on EP&S. Obviously there is some sort of margin assumption there baked into the guidance and it would seem like to get down to where your guidance is, is that we would have to assume sequentially lower margins from Q1. Is that a fair statement or not?
David, I just don't think we are at a position to forecast and break out the EP&S margin at this stage.
Okay. And then on free cash flow, can you talk about the change in how that's being reported now with the receivable sales? Can you tell us what, within that $250 million free cash flow guidance through the year, what you are assuming for full-year receivable sales?
Yes. They would be constant to last year and this year at about $350 million a quarter. So no increase or decrease.
Okay. All right. Thanks very much.
Thank you.
Your next question is from Chris Olin with Longbow Research.
Hi. Good morning. Thank you for taking my call.
Good morning Chris.
Just wanted to circle back on the fasteners marketplace. I know that had been an area of weakness due to some destocking going on in Europe. I am just curious if that has stabilized yet? And then have you accounted for the new production targets that are on the A330? I know those are going down. I kind of just wondered if that's going to have a big impact?
So as we look at the fasteners business, the destocking coupled with some of the declines programmatically in Europe with Airbus, are impacting our total number there for fasteners. We are making that up as we work hard to win more business in the industrial and commercial transportation markets. So we are playing the field there. It's a very good business. We have some wonderful product lines in fasteners and we are competing well in the other spaces to make up for some of the softness there in the Airbus production rates.
And we don't see a material impact, at least in 2018, of those revised production rates. It's more of a 2019 conversation.
On the A330.
Yes.
Okay. Just switching gears a little bit. What actually happens to your Russian rolling assets, if Rusal is actually kept on the sanctioned list? How do I think about that going forward?
So we have been very active in our discussions with various departments of the U.S. government here on the process and how these sanctions apply. And quite frankly, it's a little bit early to draw absolute conclusions. As we speak right now though, the Samara operation is the operating normally. It is a Russian entity run by Russians doing business with Rusal for their primary aluminum supply. And that's how it stands right now.
Okay. Just last question, I know you didn't give these numbers out, Chip, but in the past, some of the management teams have offered revenue ship set numbers and historically those numbers have not matched your aerospace performance. Looking at your guidance for 2018 and there is some reference on pricing weakness. I am just wondering if you have had to give back on pricing on some of these contracts in order to keep your market share or anything like that?
As you probably know, as contracts come up for rebid, they are typically competed and we work very closely with our customers to try and value sell the portfolio of products that we are competing with. But from time to time, we are competitively required to take price reductions. We certainly had some of those over the past few years, including this year as we work to secure volume. But we are actively working productivity to offset that and make sure that we have good business arrangements for the future.
So we have had some puts and takes on the contracts. We previously communicated, I believe, about 13 different platforms. Some are higher, some are lower, but in aggregate, there is no material change, right. But it does impact, as Chip mentioned earlier, on the wide-body production mix. We are heavily in some of those platforms, again, A380, 777, 747. That impacts the growth.
Okay. Thanks.
Your next question is from Curt Woodworth with Credit Suisse.
Yes. Thanks. Good morning.
Good morning.
I just wanted to drill down a little bit more into the aluminum sensitivity. So in your guidance cut for the year, the $0.19, to EPS is about $130 million of EBIT. But you only changed your base of the Midwest premium assumption by about $260 a ton which would be roughly $26 million based on the sensitivity you have provided. So it seems like there is $100 million delta there. And I know you talked about the impact of scrap spreads, I think a derivatives impact and the hedge. Can you just kind of walk through what those other pieces would be? And I guess if the scraps spreads stays wide on some of these other things, is the implicit sensitivity much higher than this $100 metric ton increase for $10 million EBIT impact?
Well, there is two parts on that. In terms of, you have got the operational $10 million impact but there is also the LIFO, metal lag impact, right, which is about $25 per move in metal. So as you go through the math and we can have Patricia walk you through the detailed calculations, but the impact of the LIFO, the metal lag and the operational is about $100 million of the $130 million. And the other $30 million relates to, we had to do some mark-to-market on some hedging, right. That was $10 million. As we mentioned with the sanctions in Russia, there was a short period there where we could not hedge our metal for our Samara plant just due to the sanctions. That's behind us now. That was worth about another $10 million. And then the scraps spreads, that's an issue that's within our control. Scrap spreads have gotten worse by about 32% from our initial guidance. That's a huge opportunity for us. One of the things that we are doing is first looking at melting capacity for our scrap. Right now we are net seller of scrap. We want to use that more in-house. So how do we leverage the Arconic cast house network? Are there opportunities to invest with good returns around incremental melting capacity and automation, which we are currently doing in the portfolio? And third, are there alternative uses for scrap in other parts of the business. So that piece right there in terms scrap spreads, that's worth another $10 million. That's within our control and we are aggressively working on that. So that's the breakdown of the $130 million.
Okay. That's helpful, Ken. And then Chip, can you talk about in terms of the feedback with the customers, I am more curious to get your take on the commerciality of some of these big contracts you have. Obviously, you have some of an inside look from the OEM perspective, given your time at GE. Do you feel like you like the commercial set that you have? And then can you talk to any ability to improve commercial terms going forward? Are there any sizable contracts coming up for rebid, 2018, 2019, 2020? And how we can think about the cadence of that? Thank you.
Sure. So one thing I didn't mention in my earlier comments was that I received universal feedback from our customers that they really value our technology and they like working with our team. And so really our challenge is around quality and delivery performance. And so that's what we are focused on. The nature of the commercial arrangements, we have lot of long-standing history of how we do business with our OEM customers and that's reflected in those contracts. We did inherit some contracts from acquisitions that frankly we think are opportunities for us and the OEMs to get on the terms that we are used to working together on and so that represents opportunity. There are a few contracts coming up over the next 18 to 24 months that we will be actively pursuing with the OEMs in terms of how do we, Arconic, provide more value to them to improve their products, not just kind of copy and paste here, but what are the opportunities to work together more closely and for us to represent obviously a better return for our shareholders.
Okay. Thanks very much.
Your next question is from Carter Copeland with Melius Research.
Hi. Good morning. Just a couple of quick ones. On the slide where you mentioned the guidance change on aerospace pricing, can you just clarify, is that related to the contractual or the new program mix discounting that you referenced before? Or is that something else? And then secondly on the inventory burn down, you mentioned Airbus having an impact. When do you see that bottoming out? Thanks.
First on the aerospace pricing. This is just continual pressure that we are getting from the OEMs around reducing pricing in the portfolio. Our goal is to offset that through our net cost savings. But that's going to continue as we move forward. So we need more productivity out of the business.
And then on the fastener front, some of our market intelligence says that during the latter part of this year we could see the bottom of that. But frankly I am not counting on that. We are going to take a look at how that develops and what the slope and trajectory is of that. I am a little bit weary of it. That bottom has been forecast before and not achieved.
Yes. Does the market intelligence include the lower 330s beginning next year. I would assume that would have an impact?
Yes. That's just one of the leading indicators, I would say, of 2019 and perhaps the third quarter or fourth quarter of this year is not the bottom on that.
Yes. Great. Thanks very much.
Your next question is from Josh Sullivan with Seaport Global.
Hi. Good morning.
Good morning.
Just digging down into the segments, if Firth was near breakeven, that means that RTI and the legacy assets must have been making up some of that difference. Can you just give us an update on those assets? And then maybe an update on the isothermal forge as well?
The RTI business is continuing to perform well. We are getting margin expansion there. We were up about over 600 basis points since acquisition. There are still opportunity for more improvement but RTI is performing well.
And on isothermal, Chip has just been down there.
Yes. On the isothermal, we continue to work with our OEMs on part by part number qualification. It's kind of an arduous process. It's very involved and time-consuming as it should be. We are working diligently to produce the parts and go through that qualification process. We are producing six right now in the isothermal forge. And we continue to work with the OEM to come up into production.
And then just one on lead times. What do they look like right now versus the end of the year in GRP?
For GRP, I think we haven't had any change in lead times that I know of.
Okay. Thank you.
This is all of the time we have for questions. Gentlemen, do you have any closing remarks?
Yes. I have some closing remarks please. So just to wrap up, we are taking actions necessary to improve our business performance. We have strong end markets and a solid technology portfolio. We have customers that support our efforts and capable people on our team. We are reinforcing our team with additional human and capital resources. Our strategy and portfolio review is proceeding at an accelerated pace and going well. Thanks everyone for dialing into today's call.
This does conclude today's earnings call. You may now disconnect.