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Good day, ladies and gentlemen, and welcome to Arconic's First Quarter 2019 Earnings Conference Call. My name is Christina, and I will be your operator for today. As a reminder, today's conference is being recorded for replay purposes.
I would now like to turn the conference over to your host for today, Paul Luther, Director of Investor Relations. Please proceed.
Thank you, Christina. Good morning, and welcome to Arconic's first quarter 2019 earnings conference call. I'm joined by John Plant, Chairman and Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John 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 in today's presentation.
With that, I'd like to turn the call over to John.
Good morning, everyone, and thank you for joining the call today.
I'd like to update you on a variety of topics, commencing with the first quarter results. And so, if you turn to Page 4, you will see that the revenue for the quarter was up 3% year-on-year and 9% organically adjusting for the effects of FX, aluminum and disposals.
Volume increased in each segments and all key end markets remain healthy. Demand for our products continues to be strong. Excluding special items, operating income was up 15% year-over-year and operating margin, excluding special items was up 120 basis points.
Both adjusted income and adjusted earnings per share excluding special items were quarterly records, since separation. Engineered Products & Solutions improved operating profit margins by 210 basis points driven by volume, price, operational performance and cost reductions.
We launched our first cost reduction program swiftly after taking the helm in February and initiated our first action on the 4th of March. And we expect to see savings of approximately $230 million on a run rate basis, and $120 million of savings in 2019.
Adjusted free cash flow improved by $151 million year-on-year with an 8-day improvement in working capital days. Pension and OPEB cash contributions were $76 million in the quarter and we took actions regarding health plans and life insurance to reduce OPEB liabilities by $200 million year-on-year.
$700 million of shares were repurchased at an average price of $19.21 to return money to shareholders. Our return on net assets improved 210 basis points to 10.7%, the highest quarterly level, since separation.
Before we broaden the update, I wanted to state that we recognized the scale of the task at hand. We are trying to accomplish several things at the same time. Firstly, a fundamental profit performance improvement program. This incorporates not only cost takeouts, but top line increases as well.
The separation of the company into an Aerospace-focused business and a Rolled Products business. The sale of certain businesses with revenues of approximately $400 million. These businesses either do not fit with the Arconic focus or are not material to its bottom line. And if accomplished, will assist in driving the margin performance of the company.
We plan to appoint two new CEOs and business teams later in 2019. We will create two boards as we move into 2020. And finally, improvement in the morale and confidence of the company's employees starting with seeing success in the things that they are doing. Morale is always difficult to measure and clearly headcount reductions do not help. But I hope that getting these behind us swiftly and providing clear direction and purpose will build confidence commensurate with our achieving success in each quarter and the execution of the plan.
Everyone can enjoy being part of something successful and it's my role to enable this by doing the few things which are necessary and most importantly, defining the things that we are not going to do to prevent wasting our time on these things.
Now, let me turn it over to Ken to give you more details on our quarterly results before I give you an update in more detail on the operational performance.
Thank you, John.
Now let's move to Slide 5 and the key financial results for the quarter. Revenue for the first quarter came in at $3.5 billion, up 3% year-over-year. Organic revenue which adjust for portfolio changes, currency and aluminum prices was up 9% for the quarter on a year-over-year basis. A reconciliation for organic revenue can be found on Slide 21 in the appendix.
Revenue growth was driven by volume gains across all segments. All of our key markets continue to be healthy. Organically year-over-year revenue for Aerospace was up 13%, Commercial Transportation was up 15%, and Packaging was up 15%. Double-digit growth in these markets were supported by solid organic growth year-over-year of 6% in both Automotive and Building and Construction. We've included our year-over-year growth rates by market on Slide 22 in the appendix.
Operating income excluding special items in the first quarter with the highest level since separation is $397 million, up 15% year-over-year. First quarter operating income was favorably impacted $48 million by higher volumes primarily in Aerospace, Commercial Transportation and Packaging.
As John mentioned demand for our products continues to be strong, and we are driving higher prices where possible when we are fulfilling above our contractual share, we are doing contracts and selling non-contractual spot business. Higher pricing resulted in a $31 million favorable year-over-year operating income impact in the first quarter driven by aerospace and industrial products. We expect a favorable pricing year-over-year to continue throughout the remainder of the year.
Our incremental cost out program was launched in the first quarter. This has mitigated the expected, unfavorable mix impact of new product introductions. On the downside, the transition of our Tennessee plant from packaging to industrial products negatively impacted operating income in the first quarter by $22 million on a year-over-year basis. Our total processing agreement with Alcoa Corporation expired on December 31, 2018 and the Tennessee plant is transitioning from packaging to more profitable industrial products. This was a one-time impact and we do not expect to see the same level of impact year-over-year in the second quarter.
The cost and capital investment are part of the previously announced $100 million investment in Tennessee. The benefits of the transition in capital investment will begin in the second half with full effects realized in 2020.
Our confidence in the returns of this investment is backed by the recent common alloy duties enacted by the U.S. International Trade Commission. These duties would range from 96% to 176% are on common alloy imports from China. The duties are expected to be in place for at least the next 5 years.
One final comment on operating income. Operating income margin excluding special items was up 120 basis points year-over-year driven by EP&S and TCS. We've also included a reconciliation of operating income excluding special items on Slide 33 in the appendix.
Adjusted free cash flow in the first quarter was negative $266 million or $151 million improvement over the first quarter of 2018. The improved free cash flow generation was driven primarily by lower pension contributions in OPEB payments of $118 million year-over-year, also higher net income and lower interest payments.
We continue to focus on days working capital with an improvement of 8 days year-over-year to 51 days. Capital expenditures increased $51 million on a year-over-year basis to $168 million, approximately three quarters of the capital spent in the quarters was for return seeking projects as we expand our aerospace engine capacity in Whitehall, Michigan and Moorestown, Tennessee, and we are also expanding our wheels capacity in Hungary.
Capital expenditures are expected to be reduced by approximately $120 million annually on a year-over-year basis to $650 million. Diluted earnings per share, excluding special items was the highest since separation at $0.43 per share. This was $0.09 per share or 26% higher than the first quarter of 2018.
Now let's move to the segment results on Slide 6. Before reviewing the individual segments, I wanted to highlight that in the first quarter, we transferred our aluminum extrusions operations from the EP&S segment to the GRP segment. We are now leveraging operational expertise from our global growth products team and optimizing metal management including scrap utilization across our global rolled products and extrusion assets. It's important to note that the prior period financial information has been recast to conform to this new structure.
So EP&S, EP&S in the first quarter had record revenues of $1.5 billion, an increase of 5% year-over-year. Organic revenue was up 7% due to double-digit volume growth in aero engines and aero defense. Segment operating profit was up 21% year-over-year to $253 million, which is a record for the EP&S team. Resulting segment operating profit margin expanded 210 basis points year-over-year to 16.8%.
The increase in segment operating profit was driven by volume growth in aerospace engines and aerospace defense markets, higher pricing in aerospace, and net cost savings. These favorable impacts were somewhat offset by the expected unfavorable impact of new product introductions in aerospace engines and the continuing learning curve effect of new aero for production.
In the first quarter, GRPs revenue was $1.5 billion, an increase of 1% year-over-year. However, organic revenue was up 10% due to double-digit volume growth in packaging, commercial transportation, and aerospace airframes. Segment operating profit was down 14% or $17 million year-over-year to $107 million.
Growth in our major markets, as well as favorable pricing in the industrial and commercial transportation markets was more than offset by the $22 million one-time unfavorable impact as we transition our Tennessee assets out of packaging to the more profitable industrial sales. We also had unfavorable performance in our aluminum extrusion business.
Segment operating profit margin decreased 130 basis points to 7.1% including an unfavorable 140 days impacting the Tennessee transition. We've had two consecutive quarters of margin expansion in the GRP segment, and we expect continued margin expansion in the second quarter as we transition to industrial products at Tennessee and realize additional cost out savings.
In the first quarter, TCS delivered $535 million of revenue, which was flat year-over-year. Organic revenue was up 7%, as we experienced solid growth in both commercial transportation, and building a construction markets.
Segment operating profit was up 30% year-over-year to $87 million which was the team's best ever first quarter. Segment operating profit margin increased by 380 basis points to 16.3%. The increase in segment operating profit was driven by higher volume and commercial transportation, and building construction, as well as net cost savings.
Now let's move to the first quarter key achievements on Slide 7. EPS had record quarterly revenue and segment operating profit. Aerospace engine's revenue was a quarterly record and up 12% year-over-year. EP&S segment operating profit margin improved by 210 basis points as we started to see favorable aerospace pricing improvements of $15 million year-over-year.
Additional price negotiations are ongoing work approximately $15 million on an annualized basis. GRP, we continue to deliver strong growth in major markets on a year-over-year basis. Commercial airframe revenue was up 23% organically and commercial transportation revenue was up 21% organically. GRP delivered pricing improvements in the industrial and commercial transportation markets of $18 million.
TCS had the record first quarter segment operating profit. Organic growth in TCS continues to be strong with 8% increase in commercial transportation and 6% increase in building and construction on a year-over-year basis. The TCS team also continues to consistently deliver improved net savings driven by smart manufacturing initiatives.
For Arconic in total, in addition to the highest adjusted operating income and earnings per share since separation, we achieved the highest quarterly return on net assets and separation of 10.7%. Return on net assets was up 210 basis points year-over-year and provides confidence as we look forward to further improve return on net assets.
We continue to focus on our legacy liabilities as we reduced the net pension and OPEB liability by approximately $160 million sequentially due to payments in the quarter and reductions in OPEB benefits.
In the appendix, on Slide 18, we provide more details on our pension and OPEB obligations. Finally, we improved our first quarter free cash flow on a year-over-year basis by $151 million.
So before turning it back to you, John let me briefly cover four items that can be found in the appendix. The first item is on Slide 19, where we have summarized the special items for the quarter. Restructuring related special items resulted in a charge of $12 million pre-tax, which consist primarily of two items.
The first is a charge of $67 million related to headcount reductions that are linked to our cost-out program. Also a non-cash credit of $58 million associated with the elimination of retiree life insurance benefits.
In the first quarter, we incurred $2 million of external legal and other advisory costs related to the Grenfell Tower, which we recorded in SG&A. The level of spending is lower than prior quarters and John will comment further on Grenfell Tower in his closing remarks.
In the first quarter, we incurred $6 million of external costs related to the conclusion of the strategic review. Additionally, there was $3 million of costs related to the planned separation both items were recorded in SG&A.
The second item that I wanted to touch on is on Slide 20 in the appendix where we provided an update on our capital structures. We continue to manage our debt and reduce our liabilities. We finished the first quarter, approximately $1.3 billion of cash after executing the $700 million share repurchase program.
Gross debt is $6.3 billion and net debt stands at $5 billion. Net debt to EBITDA continues to improve year-over-year despite the cash outflow associated with the $700 million share repurchase.Net debt to EBITDA stands at 2.48 times, which is an improvement of 5% compared to the first quarter of 2018.
The third item is on Slide 25,where we've provided a reconciliation of segment reporting changes. As I mentioned earlier, the aluminum extrusions business has moved this quarter from the EP&S segment to the GRP segment in all prior period financial information has been recast to conform to the new structure.
The fourth and last item is related to aluminum prices. Aluminum prices have stabilized over the last few months. The year-over-year impacts are unfavorable to revenue by $59 million and favorable to operating income by $7 million.
Details on Slides 23 and 24 in the appendix outline the changes. At the current aluminum prices, we're expecting continued segment operation profit favorability in the second quarter on a year-over-year basis.
Furthermore, on the last earnings call, we mentioned that in 2019 we now qualify for hedge accounting for almost all of our aluminum hedges. As we look forward, the new accounting treatment and the continued stability of aluminum prices are expected to reduce the volatility of our operating profits related to aluminum prices.
With that I will turn it back to John.
Thanks Ken.
And you can see the results of the first quarter were an improvement. Revenues increased, margins were expanded and the team delivered record adjusted operating income, earnings per share and return on capital since separation.
When I take you through the earnings guidance, you will see that I expect the improvement trend to continue into the second quarter. Slide 8 lists key focus areas of operating performance, cost reduction, capital allocation and portfolio separation and I'll provide an update on these each quarter.
Turning to Slide 9. Operating reviews have been instituted which touch all aspects of the business. I held by each division and focus on financial performance, revenues, costs, headcount tracking, price, product launch status with economics and OEE which is plant and equipment efficiency and finally, employee productivity. Monthly and quarterly forecast, reviews are conducted with more sales in a detail format.
Let's move to Slide 10.The cost reduction program that I spoke to you about in February on the earnings call had an annual run rate of $200 million. That plan is set, solidified and already partially accomplished starting with our employment reductions in March. The current stage of the program is that the annualized plan now stands at approximately $230 million of which we expect $120 million will be realized in 2019. Naturally, the past year effect of this program going into 2020, will provide further earnings lift next year. Updates will be provided next quarter.
Now moving on to Slide 11.The share buyback announced in February on the 19th is now complete. 31.9 million shares were delivered to Arconic on February 21 and a further 4.5 million per shares were delivered on April 29that an average price of approximately $19.21, $300 million remains available under the prior repurchase authorization to the end of 2020. The quarterly common stock dividend was reduced from $0.06 per share to $0.02 per share.
Slide 12 outlines our progress on separation. The project team is set, work is underway and the business parameters are concluded. The intention is to hold these business parameters frozen such that the separation is accomplished in the fastest possible time.
We plan to file our initial Form-10 in the fourth quarter of 2019 and complete the separation during Q2, 2020.Critical closing conditions are clearly identified, timelines for each individual steps are set out and of the major tasks to be done none are currently coded as red.
One-time costs of the separation will be in the range of $130 million to $160 million excluding debt breakage.
On Slide 13, it’s a set of perimeter of the two public companies. They will be headquartered in Pittsburgh. The search for two CEOs will be conducted looking at both internal and external candidates.
Our wheels business currently inside TCS will be part of the engineered products and forgings business. Operational synergies including shared facilities and complementary forged process technologies will benefit our aerospace wheels business. Aluminum extrusion has already been moved to the Rolled Products business.
Moving on to Rolled Products. The Building and Construction Systems Business will be retained as part of rolled products. We did not believe that the manner in which the sales was conducted no likely net cash outcome would generate most value for our current shareholders and that will always be my focus. Instead, I expect that we will expand the margins of this business on plans to achieve a 200 basis points improvement in margin as we move through 2019 into 2020 by providing clarity of direction, cost reductions, revenue enhancements and improved focus.
The leadership of this business is firmly engaged in the execution of the plan. We're focused on profit and cash generation. Although we will not sell BCS, we are targeting to sell certain businesses with revenues of approximately $400 million. These businesses either do not fit with our focus nor material to its bottom line and if accomplished will assist in driving enhanced margin performance for the company.
We expect aggregate proceeds from these asset sales to be in the range of $100 million to $200 million. None of these disposals will detract from the company's mission and will provide the margins of the - and will improve the margins of the two new companies.
We expect to sell these assets prior to separation. We also expect corporate costs to be in line with industry leading peers and below current our current costs. There will be minimal or zero stranded costs.
Lastly, we have clear ideas on which business will be SpinCo to optimize shareholder returns and we'll communicate further on this topic during our next earnings call.
I would now like to take you through our financial guidance on Slide 14 for the balance of 2019. For the year, we continue to envisage sales to be consistent with our previous guidance of $14.3 billion to $14.6 billion. We now envisage that earnings per share will increase to a range of $1.75 to $1.90. This is increased from the prior guidance range of $1.55 to $1.65.
For reference, this updated guidance depending upon which point in the range of selected is approximately 40% to 50% higher than either of the two prior years since separation. Capital expenditures will be further reduced to approximately $650 million from the prior guidance of $700 million given in February.
Adjusted free cash flow for the year is seem to be in the range of $650 million to $750 million, an improvement from the prior range of $400 million to $500 million. The guidance we gave last quarter did not include the benefit of these cost reductions. Today, we've updated the guidance reflecting the operating performance, as well as the approximately $120 million of expected cost reductions.
As you can see or at least reverse engineer from the guidance numbers given, there will be further margin enhancements as we proceed with the execution of our plans in the coming quarters. More specifically, we are also providing earnings per share guidance for the second quarter of $0.46 to $0.51 per share as we continue with the implementation of the plan.
Before taking your questions, I'd like to provide a brief update on Grenfell as it pertains to our comments. This is appropriate since it's been some time since the company made any reference on this matter. And secondly, there were leaks to the media during the second half of 2018, which in my personal view were essentially done to put the company and board and address during the potential transaction discussions.
Firstly, let me say that Grenfell Tower with this loss of life was a terrible tragedy. Our French subsidiary Arconic Architectural Products or AAP is participating in the U.K. public inquiries as a core participant. Phase 1 of the public inquiry, has been named with examination of the circumstances, leading up to and surrounding the fire. This phase of inquiry finished in the second half of 2019. And we expect a report will be forthcoming. There are approximately 500 entities, participating in the inquiry as co-participants. There is a second phase of the public inquiry commencing later in 2019 which is expected to examine why the fire spread.
AAP will participate in the second phase as well. Police investigation also assisted by AAP is not expected to be complete until late 2021. And only after the second phase, the public inquiry has completed its work. We remain committed to offering our full support to the authorities and to the public inquiry as they continue to investigate the complex issues surrounding the Grenfell Tower. Currently, there is no litigation against Arconic in the UK. In the U.S., there are two federal securities lawsuits. Arconic believes that these claims have zero merits and will be vigorously defended to the fullest extent.
And with that, I'd like to now open the call to your questions.
[Operator Instructions] Our first question comes from the line of David Strauss from Barclays. Your line is open.
John, can you just give us a little bit more detail exactly what you're doing in terms of the cost reduction plan? Is this just the headcount reduction plan? I know you also touched on plant productivity any sort of metrics you can give there. And were there any actual cost savings that came through in Q1?
First of all, yes there were cost savings in Q1. We've taken action on a variety of fronts, well beyond employee headcount reduction. We've addressed the legacy liabilities as I mentioned, and those costs we've addressed the issuance of shares in the company and the extent of those. We looked at all our variable expenses that have done the initial phase of that program and there will be further work coming in the latter part of this year on those I’d say variable expenses.
But I think if you went down the - I’d say the P&L, you would find action, pretty much in every dimension on the cost side analysis it’s just not even commenting on the price side of the business. So I would say if you picked one we’ve probably touched it and those programs are continuing from March, we've already taken another step in April and we will do so, and hopefully conclude the majority of the things we're looking at by the end of the second quarter with some I think small carryover into Q3.
And essentially, those are down to just taking a little bit longer in Europe as we go through the correct processes to the headcount reductions there. But again all aspects of I would say cost have been addressed I guess I'd probably leave at that unless you have any follow-up on that side.
No, that's great. I wanted to ask a follow-up on the free cash flow forecast. When I look at it would appear that you're forecasting relatively flat working capital for the full year, is that correct. And also on pension based on what's in your 10-K disclosure looks like pension funding while down this year is going to actually increase from here? Thanks.
Okay, on the pension side, certainly we restricted funding in the first quarter and we’ll make an assessment of what's appropriate, we go through the year. We're also I'm also very cognizant as we go through separation we’ll make a fundamental assessment of how the pension splits and what's the appropriate funding level as we go into the future companies. But I'd say everything is I think in good order regarding those pension contributions.
We noted the significant improvement in working capital in the first quarter. I mean I tend to give a little bit more on the year, but I think we’re expecting to show year-on-year improvement albeit maybe not at that level.
Yes, so we do have a big revenue uptick year-over-year still although the days will improve. You'll see modest improvement in dollars, which will flow to cash. The team has continued to do a very nice work on the inventory side. Yeah, we continue to see reductions on inventory in the first quarter alone there were three-day improvements. So I would say the days will continue to improve. But as we ramp up the revenue on a dollar basis - it will be a modest contribution to that cash number.
And then finally if I come back in and say quarterly operating reviews are increasingly being focused on efficiency in the plant. Not just the OE level of equipment efficiency that I mentioned. The corporate also added value per employee and those type of efficiencies. Our days of inventory and with a firm belief that if we can improve inventory days that drags along many other benefits with it in terms of quality and efficiency within the business, including the uptime of machines, which have to perform at a higher order than they have in the past.
Our next question comes from Seth Seifman from JPMorgan. Your line is open.
I wanted to start off by asking about pricing, you touched on the improvement in the quarter. And I think the idea that a lot of people have had about this business particularly EP&S is that. This is a deflationary business and every year your pricing is down let's say 1% to 2% and then there has to be cost reduction.
That's in excess of that to yield margin expansion. Do you think of this business that why do you see that business in that kind of paradigm. And then to the extent that there is pricing goodness now, what do you attribute that to and is it kind of a one-time thing that will be done this year?
First of all, let me say, yes I do understand the principle of being in a deflationary industry from a price perspective as you know having spent some years in the automotive industry. But I actually fundamentally reject that as it stance within - for the markets that Arconic plays into and into the aerospace business in particular. So price, I think is a very important not only just setting price the start of a contract, but also looking at price upon LTA renewal.
And a feature of the aerospace market is those LTA renewals and looking at that. So yes in the first quarter we did push over the line, let's say approximately split 1 million of improved pricing, which will occur in 2019. And it will be a continuing focus as we move through the balance of the year and also a discipline I put in place regarding the LTAs which are coming up to 2020 and 2021 are already being subjected to scrutiny and indeed what our stance is regarding those. So I’d say, it's a little bit different to maybe the way you perceive it in the past.
And then as a quick follow-up I noticed in the slide you talked about a prudent capital structure for both companies after the split. Does that mean investment grade rating for both companies?
Not necessarily, I was pleased by the way that our meetings with S&P went and their reaffirmation of continuing investment grade for 2019. And of course, you prefer to have a higher rating rather than low rating. I there is possibly some merit to be investment grade in the aerospace market. That's essentially yet to be proven to me, but assuming that it is, but I don't necessarily believe that both companies have to be investment grade.
So it will be, what I believe - at least to be the most efficient capital structure including underlying cost of capital for those companies as we go forward and I have spent many years being in that non-investment groups space. And so it holds fundamentally no concerns for me at all. But again, we'll make those detailed assessments as we do all of the financing around the separated companies there.
Our next question comes from Rajeev Lalwani from Morgan Stanley. Your line is open.
John, I wanted to come back to some of the comments that you made around the spend services questions, clarifications. As far as we financing needs and tax matters, can you talk a bit more about what they are. I think you're implying that those numbers wouldn't be too material relative to that 100 plus million one-time costs that you talked about? And then as far as recurring costs, I think you were alluding to this that we shouldn't think of there being any incremental recurring costs around headquarters and back office and that sort of thing.
Yes, basically let me do with the latter point first, in terms of corporate costs clearly, we've already made some reduction in those and let me just give you a little bit more detail. So if I sort of bit the percentage reductions of employment that we've gone through, then the highest percentage actually has been in the corporate area and I felt that’s being appropriate. And when I look at what I believe to be benchmark world class for super costs then my intention is that the two new separated companies will be at that benchmark.
And most importantly, by the time we finish the program as we go through 2019, there will be no stranded costs. I said the headquarters will be in Pittsburgh, and that obviously improves the situation regarding stranded costs fundamentally. And the headquarters just moved here already, and so there is no drag, no friction at all from today to tomorrow's future states regarding that. I did comment on the cost of separation for the operating expenses
And I gave you that number between 130 million and 160 million and I haven't commented any further yet in terms of more detail on tax, which I don't think is a big issue and on the financing. But more to come as we go through that in the balance of the year, but I think importantly you got the dimensions around all of that and you can see that basically if we’re successful on the proceeds from the disposals, we’re talking about, then that will more than pay for those operating costs.
And if I may for a follow-up and John, this will be useful particularly given your background. As far as the auto and commercial transportation markets, I think there is a view out there that there is going to be some pressures there or lack of growth, maybe even some contraction within commercial transport. How does that relate to growth within Arconic i.e. your ability to not be hit by any pressures that we see there and your ability to outgrow those markets?
So let me do with the commercial business first, I mean we have a strong business there as, we have chosen to invest further in that, in particular in Hungary in Europe. And which gives us the ability to serve a greater portion, not only the European market, but also access a lower-cost source for those we’ll compare to some of our existing sites around the world. The investment is on track. The financials for that look healthy and even with potential slowdown. I think light weight truck should one occur and I don't think that's going to provide any interruption to the earnings momentum of that business.
So I think that deals with that. In terms of the rolled products business and its interface into the automotive market, a couple of things there we are particularly faced off to the light truck, pickup truck SUV part of the market, which as you know is getting a higher percentage market share. So that's good. Secondly, the amount of aluminum and light because this is light weighting which is going on its increasing the basic with each fresh model that comes out. And so unless there is an absolute collapse in the industry in terms of volume, secular trend of that light weighting and aluminization will actually cause us to actually supply more product than today.
And we're also have been hard at work expanding our customer base and indeed have also achieved a significant new position in the new customer in the first quarter of this year. And so again we allocated diversification of the customer base, the fundamental light weighting trend and our technology position within the alloy constructions, I'm actually really infused by having that as a backlog to this business.
Our next question comes from Gautam Khanna from Cowen and Company. Your line is open.
This is Jeff Molinari on for Gautam. Thank you for taking my question guys. Hi, I wanted to ask you about historical free cash flow of each entity either on a percent of total free cash flow basis or on a free cash flow conversion basis. Kind of want to get an understanding of how these entities once they are spun will be converting, and what the free cash profile will look like for the two of them and relatedly the capital need to those two?
So let me deal with it on an asset basis first, and then try an attempt to provide you some sort of an answer on the split entities. I think you can assume that if we were to achieve the guidance given that the free cash flow yield of the company is increasing and will increase at that level though historically we have not achieved. So I guess that's the first good point. And within that the free cash flow yield will improve in each of the segment levels. So it's not confined to one segment.
So that gives you a broad statement of not only what is, but also what I intend will be and as we go forward into the future, first of all our plan is to provide pro forma financials for those two new companies, possibly as soon as next quarter but if not the quarter after this. So you'll be able to see that. And again the free cash flow yield of those will be - you could anticipate it will be more than adequate to cope with the debt structure of those. But inevitably the companies I see focused on aerospace will have fundamentally - truly fundamentally higher margins and that will fundamentally higher free cash flows.
And I also see that for a lot of the required investment. So for example in the new say range of let’s say aerospace engines or air structures is a lot about has been done, because we will continue to invest healthily but appropriately going forward. And similarly for the rolled products business, we've made a major investment in Tennessee that gets up off its knees in terms of the industrial business during Q2 and firmly by Q3 and into Q4. And I expect that to continue with again and improved free cash flow yield going forward.
But I'm not giving you any granular detail at this point. I'm giving you a directional, but you can see the free cash flow yield on an obvious basis using the guidance numbers.
And if I may just one follow-up, how should we think about the allocation of pension liability between the entities? Is there any way to…
Clearly, one part its very easy in that which pertains to the aerospace business, or the rolled parts business flows naturally into those that's very easy. The judgment which has yet to be made is indeed for the current corporate pension costs, those are allocated and thus cannot be made in isolation without also looking at the debt structure of those two separate companies going forward.
So the allocation of debt to that which is SpinCo any dividend back and also providing the degree of what I call hard liability, which is the cash, the debt part of the equation. Compared to what will the softer type of liability, which is the pension deficit, which is you know moves around with the yield curve, the asset returns and also mortality.
So I think all of that is up for place, but essentially it's around the corporate pension costs which, for which the judgment has to be made beyond the fundamental allocation of the liability structure of the company.
Our next question is from Matthew Korn from Goldman Sachs. Your line is open.
A question on EPN&S, John operationally, where is EPN&S overall versus what you see is its potential. Are you seeing progress made year-over-year, quarter-over-quarter on yields and sustainable cost performance, whether at the Firth Rixson assets or overall? And do you have a division - do you have a vision that what kind of margin should be achievable at the new EPN&S segment upon reaching that potential?
Well, I'm certainly not going to give you future margin guidance at this stage and I'm still going to claim that I don't know enough. I think on the last earnings call, I told you that I didn't know anything about aerospace. Well, first of all, that wasn't actually quite true. I do know something, but in terms of, it's a big, if I just stick to the businesses. I think we have some really strong positions, I'll say the response, focus and continuing to build momentum to the - I’ll say the new challenges that put upon the businesses.
I think our engines business has been coming through strongly. And I think that will continue to be the case. In fact, in fact also relaxed about the earnings will actually went to one of the engine facilities yesterday to take I’ll call it day trip go look a bit more and see those assets being put into place as we need to make more in the future.
I think you know and very encouraged by the solidity of our business and the dedication of the management there. So improvements in that business. On the fastener side, similarly strong business with I think improvements going to be shown in the fastener business. And then on the structure side, we are taking, I've taken some steps to reorganize that that was at the fundamental disappointment in that business and there’s been already some management change, and in fact someone joins us next week to take on the responsibility of the revised structures business, but again I'm seeing good responses to the focus that that's been given.
Commenting on the Rings and Disks, I see that the Rings business is improving again only actually taking time to visit about three or four plants, one of those is Rings plant and I'm convinced, it's always good enough to pinch yourself but there's going to be margin improvement as we go through 2019 on that. And further significant improvement in that Rings business as we go into 2020. But they know exactly what they've got to do.
They know the expectations. We have the benefits in addition of a new extrusion press coming online during the next, I'll say gradually during the next couple of quarters and should be up and running by the fourth quarter this year at a reasonable level of efficiency.
And so all of that's good. The business which is more perplexing to me currently is the Disks business. But as you know, I think that this business is a fairly small. I'm going to call it $200 million $300 million revenue business. So that's not going to be the biggest issue in terms of materiality to driving EPN&S forward.
So I think there's a great first step in the EPN&S. I think 210 basis points of margin improvement is not shabby by anybody's standards. It marks a reversal from the trend of what EP&S has been doing, which has been some declines. Maybe sequential declines over the last couple of years and I expect that to continue.
And clearly I want to give them the guidance that I gave without feeling confident that's going to be the case. Don’t expect me to give you an earning or an earnings guidance in terms of margin for the business at this point.
Now, what you gave me was actually much more useful in that. It's good to hear. I'll pass it on from you.
Our next question comes from Martin Englert from Jefferies. Your line is open.
So for the potential non-core asset sales that you've identified, thus far. Can you provide any incremental detail there, what segments they might be associated with?
Actually that's the sum from each of the two future companies clearly in keeping the perimeter pristine I shall be pulling those disposal as of what will become SpinCo as we finalize that in the coming couple of months.
So, yes, there will be some in aerospace, what's been interesting to me is that we have some, some sites, which - some business which are producing, what I call really high quality levels of return and there are some sites, which in my vernacular I think I’ll fix them, close them or sell them and so these disposals fit firmly into that category.
And I'm hopeful that we will sign our first shared purchase agreement with a potential buyer this month. I should say May because this month is last day of the month. but, so it's the first stage is imminent. And that really is focusing the company on things that need to do. And more importantly identifying things which are completely irrelevant to its future mission and clean those up.
Thanks for all that detail there. Any detail that you can provide within GRP, as well?
Yes, I mean this one I will say small country based business, which in my view can't really develop into anything which is significant. I'm not planning whatever the fundamental new capital limit, and if you choose that you're not going to put future capitals for growth into the business then its probably better off in somebody else's hands and so that's the plan there.
Okay, thank you for the detail. If I could one last quick one, what was the LIFO impact on the quarter? And then why stop providing the detail?
Going to ask Ken for that level of detail. The most important thing is the whole volatility to aluminum is a much reduced state going forward given what Ken has always said to you about the implementation of hedge accounting. And so I think this, the whole month the aluminum effect, the whole quarter sorry was about $7 million at the profit level. LIFO I'm giving Ken plenty of time to be able to pull it up. If it's relevant, if not you'll get back to you.
Yeah, the LIFO and we push metal lag those two together, it was pretty much flat for the quarter on a year-over-year basis. To John's point, total impact was a $7 million favorable item for aluminum, because we had some operational improvements and as we said earlier, we're going to see a tailwind as we go into the second quarter as well on aluminum prices.
Our next question comes from Carter Copeland from Melius Research. Your line is open.
Just a couple of quick clarifications and a question the, it sounds like the pricing and EP&S was an LTA renewal. I wondered if you could just tell us that that was airframe or engine-related. And then on the pension, I can appreciate that there's some variability there in the middle on the corporate pension cost, but how much of a range of a split should we assume there is given that two pieces of that will sort of go naturally with GRP and EP&S.
Okay. Let me give a pricing on first it affected - pricing is expected to -- of our Aerospace business, some in engine and some pricing benefits in fasteners and I'm not going to categorize the degree on those at this point. And also regarding pension, the allocation of the corporate pension, I'm not prepared to say anything further than I've already done in terms of the allocation because there is too much work, which remains to be complete, and I think that's one of the I’d say last balancing items as we set these companies up.
Okay. And then just a question on the 737 MAX production, any potential impact there. If it's either providing opportunity for your manufacturing processes, if it's having any impact on expedited shipping or less of that or if you continue apace with no real change any perspective, you can give us on that?
Yeah, I mean if I, if I look at this month and maybe Q2, I really don't see anything in terms of our revenues and profits impacting the upon the second quarter guidance, that has been provided to you.
And if the plans go forward as publicly stated by both Boeing and also by the other suppliers that we - sub supply into then that's clearly taking account of in the guidance that's been provided to you.
What you should note is that actually broaden the guidance range. So you had previously $0.10 guidance range. I've given you a $0.15 guidance range in the call today. And I’ve also tried to work out, to what if, what if Boeing didn't go back up to 52, backup that no plan to go to 57 build and how much impact would that be on 2019.
So basically I said, if we flip the flat line this, 42 build a month for the balance of the year and not see us going backup then my feeling is that round about $0.03 plus or minus a $0.01 or $0.02 in terms of the impact but given the range that I've given you for I'll say $0.02 to $0.04, it's not going to change the guidance I’ve given you.
This is where I see it. But again, there’s probably too many factors yet that are unknown and can’t be commented upon what the real build of the 737 MAX will be, but if you assume $0.02, $0.04, that's a good guide for now and you can assume it's covered.
And if I could sneak one last one in, can you just maybe give us some color on the considerations that went into the SpinCo determination and as you mentioned in the release, the value maximization there just the thought process and broad strokes? Thanks.
Yeah. I mean, the first principle is pretty, pretty easy like an aerospace business and a rolled business and then beyond that looking for, I'll say any like technology or share facilities, which makes it easier and so I might clean up anything I didn't feel was appropriate going forward for the aerospace segment.
And again some of those who disposed, we've moved the Extrusions business with cost to it's all aluminum and belongs much more clearly with the rolled product segment and you seen it's high aligns the building construction business with the rolled product segments. I think that's again more appropriate, it's aluminum is Extrusions on, it just gets better.
But I think the most important thing is whether you look at the sequential improvement in margins on the rolled products business as you gone from Q3 last year, Q4 into Q1, you've been going for about the 5%, 5.5% level, plus 7% level.
And Ken's commented on the hopefully improving prospects as we go to industrial business, and then I'd also commented about the clear mission, that building and construction business has yeah, told you it made no sense to sell it, it was not appropriate in terms of what the value to shareholders would get. And then I look at the things we can do with that business and putting 200 basis points margin similar to the 200 basis points, totally on the EP&S margin, I mean, all of that's good.
Our next question comes from Josh Sullivan from Seaport Global. Your line is open.
Just the separations outlined here. Does it preclude any scenario where GRP signs a partner public or private. I mean do you feel the sale or partner avenues for GRP, have been examined at this point and I guess exhausted?
First of all, haven't tried to sell GRP, don't intend to sell GRP, and certainly, I'm not willing to entertain any discussions from anybody about GRP. Not now and not in future during my tenure with the company. Since that would fundamentally jeopardize the tax free nature of assets for the company and that will be fundamentally a degradation to the value to shareholders.
And so I think I've told you like once, twice and now thrice on the call that's my focus and putting huge tax leakage into a transaction, the premium required to overcome that leakage would be so enormous. It's fundamentally no interest in me whatsoever. Its like certainty for you.
One more, just on the RTI asset side. How are those assets performing there’s been some discussion, some titanium middle market share shift here?
Okay. Well, you got me there. I don't know about share shift in the titanium markets. Well, I can see is that titanium business has increased in terms of its revenue. I'm currently not satisfied with its fundamental performance and that's enough in my view, one of the areas we need to make further improvements, both in its underlying operation, it’s profitability and its growth. I think there’s a lot of potential there. And looking to work with management, employees, unions to achieve all of that but fundamental share shift to different bucket share not aware of it.
Thank you. That is all the time we have for today. This concludes today's conference call. You may now disconnect. Thank you. Have a great day.