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Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Arconic Earnings Conference Call. My name is Jennifer, and I will be your operator for today’s call. 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, Patricia Figueroa, Vice President, Investor Relations. Please proceed.
Thank you. Good morning and welcome to Arconic’s second quarter 2018 earnings conference call. I’m 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 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’d like to turn the call over to Chip.
Good morning. Thank you for joining the call. I’ll begin with an update on the strategy review and 2Q highlights, then Ken will take you through our financial results. I’ll conclude with guidance and we’ll take your questions after that.
As a reminder, the goal of our strategy review is to develop actions that will enhance shareholder value, streamline the portfolio, tighten our strategic focus and strengthen our financial profile.
In the first phase, we divided our three business segments into 25 product lines for granular assessments of return on net assets, competitive advantage, business synergies and market attractiveness to be made in more meaningful and actionable ways. We also kept in mind practical consideration such as organizational capability, distractions, and growth opportunities. From that analysis, we categorized each product line into one of the four buckets shown on the chart.
We are now in the second phase of the review, where we are analyzing alternatives and making decisions. One of the outcomes of this phase is a decision to initiate the sale process for our Building and Construction Systems business. This is a very well run business with strong markets and products, but we’ve decided that the building and construction market will not be a core emphasis for Arconic going forward.
The business overview is shown on the next slide. BCS is a leading supplier of building materials and construction systems, with well regarded brands, technology, fabrication and service centers, serving all the relevant commercial customer segments.
As I said, the decision to initiate the sale process for BCS is the first outcome of our strategy review project. We remain on track to complete the project in the third quarter. We plan to hold an Investor Day in November to communicate the output of the strategy work and associated actions.
Before Ken takes you through the financial results for the quarter, I’d like to share some highlights from 2Q. As I said last time, we are reinvigorating our commitment to the fundamentals of lean manufacturing. We created a central organization to provide support to each of our businesses.
The first area is training resources for the fundamentals of lean manufacturing all the way up to very advanced concepts. The second is in the area of quality assurance and Six Sigma methodology for process control. The third is smart manufacturing, using the latest physical and digital automation techniques, with sensors and data collection and analysis to improve equipment uptime, production output and reduce costs.
The newly created manufacturing and continuous improvement organization will play a critical role in strengthening our culture of operational excellence and driving process improvements that enhance business results and customer satisfaction.
I recently appointed a Vice President, reporting directly to me and the team is at half its targeted staffing level and already driving results. We formed surge teams to support plants in need of help. And in each case where they are deployed, we have increased output more than 10% so far with more to come. The surge teams are also charged with improving the capability of the local team alongside executing the specific improvement projects.
We will be holding the first ever Arconic Plant Manager Summit in August. We’re holding the summit to provide plant managers with more business context and framework that will help them lead their teams and make the best decisions for the company. This will allow us to empower them to optimize performance of their plants.
I’m excited about this event, as it will help us continue building momentum at the heart of our company, our operations. We made several announcements during the Farnborough Airshow, including a new long-term contract with Boeing to supply aluminum sheet and plate for all models produced by Boeing Commercial Airplanes.
This contract is the largest to date and captures growth in the build rate increases of the Boeing 737 program. The agreement also includes new business for the supply of structural plate used on a variety of applications, including wing ribs for carbon fiber platforms such as the 787 and the 777X.
This morning, we announced expansions of operations in Morristown, Tennessee and Whitehall, Michigan, which will provide additional capacity to meet growing demand from our aerospace engine customers.
The expansion projects will require more than $100 million of investment, about one-third of the total spend will happen in 2018 and is already included in the 2018 CapEx plan. These expansions are expected to be operational near the end of 2020. While we have a lot of work ahead of us, I’m encouraged by the positive customer and operational momentum coming out of the first-half.
I’ll now turn it over to Ken.
Okay. Thank you, Chip. Now, let’s move to Slide 7 and the key financial results for the quarter. Revenue for the second quarter came in at $3.6 billion, up $312 million, or 10% year-over-year, as aluminum prices accounted for $149 million, or almost 50% of the increase.
Revenue growth was driven by volume gains across all segments. All of our major markets are healthy, and on a year-over-year basis when normalizing for the impacts of aluminum prices in currency, commercial transportation is up 20%, automotive is up 14%, aero engine is up 10%, and aero defense is up 20%.
The strong growth in these markets was offset by anticipated weakness in aero airframe production mix, which primarily impacts our Global Rolled Products and Fasteners businesses.
Organic revenue, which adjust for aluminum prices, currency, Tennessee packaging and the divestitures of the Fusina rolled products in Latin American extrusion businesses was up $169 million, or 5% for the quarter on a year-over-year basis.
The reconciliation for organic revenue can be found on Slide 18 in the appendix. Revenue in the quarter included a $38 million negative impact for the settlements of certain customer claims, principally related to product introductions. We are satisfied and our customers are satisfied with these settlements.
We have also included year-over-year market growth rates on Slide 20 in the appendix. Excluding special items, operating income was $381 million in the second quarter, down $7 million, or 2% year-over-year.
Operating income and operating income margin percent continue to be negatively impacted by higher aluminum prices, as average aluminum prices increased approximately 30% in the second quarter versus last year.
The second quarter impact of higher aluminum prices was less than expected, but unfavorably impacted operating income by $20 million year-over-year. Aluminum prices also impacted operating margin percent by 100 basis points. The aluminum price impacts are detailed by segment on Slide 17 in the appendix.
During the first quarter earnings call, I said that we expected the aluminum price impact would be unfavorable $45 million to $50 million in the second quarter. The impact was less than expected and was unfavorable $20 million driven by two factors.
First, while average aluminum prices for the quarter was slightly higher than our assumption of $2,720 per metric ton, aluminum prices dropped at the end of the quarter. As a result, the aluminum price used in the second quarter LIFO calculation was closer to $2,600 per metric ton. Therefore, LIFO was approximately $20 million favorable in the quarter compared to our expectations.
Second, I mentioned the inability to hedge some aluminum purchases due to sanctions in the second quarter for our Russian plants in Samara, and that would be approximately $10 million unfavorable in the quarter. Although this remains a potential risk going forward, we were able to mitigate this impact in the second quarter when we were able to resume hedge activities.
In addition to higher aluminum prices year-over-year, we had two further unfavorable items of note. First, we experienced unfavorable market factors related to aerospace wide-body production mix; and second, net savings in the quarter were offset by continuing challenges in our Rings and Disks operations, and a $23 million charge related to a physical inventory adjustment in one of our facilities.
The unfavorable items were partially offset by volume gains in commercial transportation and in aerospace. We have also included reconciliation of operating income, excluding special items on Slide 30 in the appendix. Operating income margin percent, excluding special items was 10.7% for the second quarter, down 120 basis points year-over-year. More than 80% of the year-over-year margin decline was due to higher aluminum prices.
Adjusted free cash flow generated in the second quarter was $289 million, or more than doubled the second quarter of 2017. The improved free cash flow generation was driven primarily by favorable operational working capital that drove a $98 million benefit year-over-year.
Days working capital improved six days year-over-year, compared to the year ago quarter, lower pension contribution and lower interest rate payments more than offset the increase in capital expenditures as we continue to focus on operations in our plants and insourcing operations where it makes sense.
Diluted earnings per share, excluding special items was $0.37, or $0.05 higher than the second quarter of 2017. Operational improvements driven by volume growth, lower interest expense and lower operational tax rates offset the impact of higher aluminum prices.
Now let’s move to Slide 8 to go to the segment results. In the second quarter, EP&S’s revenue was $1.6 billion, an increase of 7% year-over-year. Organic revenue was up 6%, due to volume growth in aero engines and aero defense. Segment operating profit was $212 million, down $38 million, or 15% year-over-year.
Results were impacted by a $23 million charge related to a physical inventory in one of our facilities, as well as higher aluminum prices and performance shortfalls in our Rings and Disks operations. These items more than offset the strength in aerospace engines. As a result of the items mentioned, segment operating profit margin was 13.3%, down 350 basis points year-over-year.
In the second quarter, GRP’s revenue was $1.5 billion, an increase of 14% year-over-year. Organic revenue was up 5%, as volume growth in automotive and commercial transportation more than offset the decline in aerospace airplanes production mix.
Segment operating profit was $123 million, down $10 million, or 8% year-over-year, driven by higher aluminum prices and an unfavorable aerospace wide-body production mix. These items were partially offset by higher automotive and commercial transportation volumes, as well as net cost savings. Segment operating profit margin percent was 8.5%, down 200 basis points year-over-year, including $120 million negative impact of higher aluminum prices.
Regarding TCS in the second quarter, they delivered $562 million, an increase of 12% year-over-year. Organic revenue was up 11%, as we continue to see strong growth in Commercial Transportation, as well as our Building and Construction businesses.
Segment operating profit was a record $97 million, up $26 million, or 37% year-over-year. Higher volume in commercial transportation and building and construction, a favorable product mix and net cost savings drove the improvement despite the higher aluminum prices.
Segment operating profit margin was 17.3%, up 320 basis points year-over-year, including a 150 basis point unfavorable impact of higher aluminum prices. All the way, these results resulted in a very strong performance by our TCS team.
Now let’s move to the second quarter key achievement on Slide 9. While we still have a lot of work to do, we are driving for improvements across the company. In EP&S, we saw a double-digit growth in aero engines and aero defense as we ramp up production to meet unprecedented customer demand.
For our fasteners business, aero frame revenue was up modestly after declining in the prior quarter. And finally, investment casting costs are moving as we improved down the cost curve for new product introductions.
In GRP, we continue to deliver strong growth in automotive, as revenue, excluding the impact of aluminum prices and currency was up 13%. Our growth in automotive is backed by innovative solutions to help customers increase performance and decrease weight as evidenced by our recent announcement that Arconic is supplying a new proprietary in highly formable aluminum alloy for 2018 Jeep Wrangler.
As Chip mentioned, we also announced our unique manufacturing technology in aerospace, which led to the signing of our largest multi-year supply contract with Boeing to supply sheet and plate for all models of its commercial airplanes.
In TCS, the segment delivered record segment operating profit, which was up 37% year-over-year. The segment also delivered record margins of 17.3%, which was up 320 basis points year-over-year.
For the company in total, adjusted free cash flow in the second quarter was $289 million, or more than doubled the prior year quarter, as improvements in operational working capital drove a six-day reduction in working capital days on a year-over-year basis.
Corporate expenses, excluding special items were favorable 23% on a year-over-year basis, as we continue to look for ways to reduce our overhead structure. And finally, we renegotiated our corporate revolver with a three-year renewal, including a reduction in fees and more favorable terms.
Before turning it back to Chip, let me cover a few items that will further clarify our financial results. First, we have included two slides that will provide more detail than we have previously provided.
First on Slide 21 in the appendix. We had previously provided a reconciliation of adjusted EBITDA as presented in 2017 to segment operating profit as recast in 2018. As you may recall, we changed our primary measure of segment performance from adjusted EBITDA to segment operating profit in 2018 to more closely align segment performance with operating income as presented on the income statement. We have added LIFO and derivative activities to the reconciliation.
On Slide 16 in the appendix, we have summarized major elements of our adjusted free cash flow guidance, including pension, OPEB, capital expenditures, working capital and cash taxes. There is no change to guidance, we’re just summarizing for your convenience.
On Slide 13 in the appendix, we have summarized special items for the quarter. Restructuring-related charges were $15 million pre-tax, which consisted primarily of $9 million of pension curtailment charge associated with a union contract that was ratified in the second quarter, and also $5 million related to the relocation of the New York office to Northern Virginia. In the second quarter, we incurred $4 million of external legal and other advisory costs related to Grenfell Tower, which were recorded in SG&A.
As previously discussed, we had a $38 million reduction in revenue for settlements of certain customer claims, principally related to product introductions. Finally, the impact of discrete tax items for the quarter was a charge of $21 million, primarily related to revised estimated – estimates associated with one-time transition tax that was enacted as part of the Tax Cuts and Jobs Act of 2017.
On Slide 14 in the appendix, we have provided an update on our capital structure as we continue to manage our debt and reduce our liabilities. We finished the quarter with approximately $1.5 billion of cash, up $250 million sequentially. Gross debt now stands at $6.4 billion, the net debt stands at $4.9 billion. Net debt to EBITDA continues to improve and stands at 2.49 times.
Finally, I would like to give you some context on aluminum price impact for the remainder of the year. Our guidance assumed in aluminum price of $2,720 per metric ton for the remainder of the year. The second quarter average was slightly higher at $2,737 per metric ton. While aluminum prices ended the quarter lower at approximately 2,600 a metric ton, that really understates the recent volatility that we’ve seen.
In the second quarter alone, aluminum prices won more than $700 per metric ton between the quarters high and lows. Given this volatility, our aluminum price assumption remains unchanged at $2,720 per metric ton for the remainder of the year. For the full-year, that equates to an aluminum price average of $2,664 per metric ton, which is in line with our guidance.
Therefore, our estimated unfavorable aluminum price impact for the year versus 2017 remains unchanged at approximately $130 million, which means the unfavorable price impact is expected to be higher in the second-half of the year, as compared to the first-half of the year. We continue to have risk in our Samara facility in Russia, as well as the impact of unfavorable scrap spreads.
Now let me turn it back to Chip to cover our 2018 annual guidance.
Thank you, Ken. Our guidance for the year remains unchanged. This is the same slide that we showed last quarter. As we continue to pursue long-term shareholder value creation, there’s a lot of work ahead of us, yet there are opportunities all around us.
I’d like to share a couple of highlights from my recent trips, because I think you’ll ask me about that anyway. At Rancho Cucamonga Rings plant, I saw tangible improvements with better product flow, more employee engagement and progress working down the work-in-process inventory.
The project to install a 10,000 ton press remains on schedule for the first-half of 2019 installation, as well as part qualification, and it’s just one of many projects aimed at increasing throughput and lowering costs.
Wichita Falls, the home of our low-pressure turbine blade and vane investment casting operations is off to a great start using lean tools and already have excellent engagement on Six Sigma process control. A great line of sight on serving customers here, customers I met with previously cited this plant as an example of excellent customer service and collaboration.
Waco, Texas, home of our industrial fasteners business, is experiencing steep growth and we’ve been raising to fill direct labor positions and commission new equipment to serve customers and capture the revenue and margin opportunities. The team is recovering from the order onslaught and growing to meet the demand.
In Hampton, Virginia, they’re doing a very good job managing through the significant volume downturn in industrial gas turbine by moving select large aerospace investment cast blades and vanes into the available capacity. I’m pleased with how we’re optimizing the network, preserving capability and optimizing costs simultaneously.
On the other side of our campus, the Hampton structural casting team is growing with the aerospace cycle and they remain 100% on-time to customers for 19 straight quarters. Our Savannah Forging facility is now demonstrated significant improvements to on-time delivery and lowered costs by insourcing substantial amounts of machining operations.
And GRP is making progress managing our scrap loop. Although the financial improvement was modest this quarter, we’re moving in the right direction on this important topic.
From the customer contracts, we announced at Farnborough to the enthusiasm of our teams and driving operational improvements where we needed the most. We are gaining momentum and there is significant opportunity ahead.
With that, I’d like to open the line for your questions.
[Operator Instructions] And our first question comes from line of Carter Copeland with Melius Research.
Hey, good morning, guys.
Good morning, Carter.
Good morning.
Just a couple on just kind of understanding the performance in EP&S in the quarter. The unfavorable product mix, was that related to specific market vertical, or was it programmatic in nature? And then can you just give us some clarification on the challenges in Firth and whether that was a loss-making in the quarter or not?
Hey, Carter, this is Ken. Good morning. Related to the mix in the EP&S, IGT is a small percent of our revenue as we move forward. But it’s been a good margin business for us, so we’re seeing an impact there. Also, we’re seeing an increase in our Fasteners business on the industrial side. We have good performance in terms of aero fasteners, but we’re bringing more industrial fasteners into the market and that’s impacting our mix.
Regarding Rings and Disks, what we can say there, we’re not going to go into the profitability of that business. What I can tell you is, revenue for Rings and Disks was up about 7% on a year-over-year basis. So continuing to get inbound into that business and the operating income is improving sequentially modestly. But we’re seeing progress in that business, we’re not going to disclose the specific numbers.
So it’s fair to say that the additional $15 million decline in our profit that wasn’t part of the inventory adjustment, it was largely mix?
That – that’s a big part of it. Correct, Carter.
Okay. And then one, Chip, just briefly on the capacity expansions. You guys called out in both Morristown and Whitehall. Is that capacity incremental to the current plans, or is that necessary to meet what you’re contractually obligated to do?
That’s necessary to meet our forecast and our customers forecast of requirements for the 2020 time period, Carter. However, I would add, it’s more volume than was forecast four years ago when we first started planning for the narrow-body program. So as of now, it’s in the forecast, but that’s quite a race forecast compared to what was originally forecast.
So with respect to the production rates studies and whatnot that we hear about from Boeing and Airbus that there could be some incremental investment beyond what you’re talking about here to hit the rates that are being talked about in the 2020s?
We really don’t get involved in the direct rate requirements from the air framers. We take our forecast and do our own work based on what we see from the engine manufacturers, because the split out of the requirements really are varied by part number in terms of who is playing and what product and what part. So…
Okay.
…it’s just – we just take that, Carter, directly into our capacity planning and we put our own thoughts about where it’s all going.
All right. Thanks for the color, Chip.
Yep.
Your next question comes from the line of Gautam Khanna with Cowen.
Yes, thanks. Good morning, guys.
Good morning.
Good morning.
A couple of questions. Ken, first, I was wondering last quarter you had given us some of the aluminum impacts in aggregate LIFO, the Samara lack of hedging, scrap, negative scrap arbitrage or whatever you want to call it, et cetera. And it aggregated to about $130 million. You gave the LIFO and then did I – I just want to make sure I have that walk correct relative to what was given last quarter. Is the Samara thing now zero, not $10 million, but zero. If you could just walk through those what may have changed there?
So good morning, Gautam. We put a LIFO schedule in the back of the deck for you to show the aluminum impacts, so you have that there. So the end of quarter number although the quarterly average was about $2,737, it dipped at the end of the quarter. So we got a favorable LIFO. But when we’re assuming that metal is going to stay at $2,720 for the remainder of year, we give that back in the second-half.
Scrap spreads continue to move around, Gautam, so we’re thinking, it’s more going to be in the $0.33 to $0.35 per pound range. So that we would probably got some risk there. The Samara hedges, the $10 million, we were able within the quarter with – when we resumed hedging activities to dispose of that. But Russia in general, just has risk as we move forward. That’s why we didn’t change the $130 million guidance. You could call me a little conservative there, Gautam, but that’s why we didn’t change it.
That’s helpful. Thank you, Ken. I also wanted to just ask Firth Rixson, not just Rings and Disks, but all in Firth Rixson sales and EBIT in the quarter?
Yes, Gautam, as I said earlier. the revenue for the combined is up 7% compared to Q2 of last year. But we’re not going to go into the details of the EBIT or operating margin. But I can tell you, it’s improved sequentially quarter-over-quarter.
And, Gautam, we’re not really tracking…
Okay.
…we’re not really tracking Firth Rixson as an entity. We’re trying to focus in our strategic review about what value each product line provides to customers in our business and shareholders and looking at it that way as we fold it into the measured operations like Arconic engines, for example.
Got it. And with respect to what you’re already planning to divest the BCS. Is the Cladding business embedded within that, or is it somewhere else?
I’m sorry, Gautam, which business? It’s Cladding, yes.
Within…
Yes, you’re correct.
Yes.
So there’s two parts to that business. We have the systems business, which are primarily windows, doors, framing systems, curtain wall, that’s part of the business. And then the cladding system Reynobond is included in BCS. Then there’s a third product line called, Reynolux, which is similar to Reynobond, it just doesn’t have the core between the aluminum. So, yes, included.
Got it. Last question for me and I’ll requeue. Could you comment maybe on whether – where you guys are on the leap production ramp, if you’re on schedule? GE mentioned being four weeks behind, which was better than seven weeks behind as of March. But I wanted to get a sense for how caught up are you guys and you mentioned some of the internal throughput improvements. But as you catch up if you’re not caught up, we get more cost pressure as we move into Q3 as tight supply get caught up with the targets for the year? Thank you.
What we’re doing, Gautam, is daily prioritization and production meetings with each of our engine customers making sure that we’re providing the parts they need for their engine assembly and service needs. It has us in some cases hand to mouth. But we believe we are supporting their needs at this time and working through the issues and making sure that we keep our customers in metal, which is one of our guiding principles.
And have you continued to ramp up to the higher rates in the second-half of the year? Do you feel the cost pressures will intensify, or do you turn the corner on those on a unit cost basis?
Hey, Ken was pretty descriptive in terms of how we are coming down the cost curve on the new products that we are introducing. In some cases, there’s expedite fees, in some cases, there’s transportation. And we’re doing some outsourcing to make to make sure we load our factories with the most important work that that we need to complete the deliveries. But for the most part, we’re coming down the cost curves and seeing better performance from our operations.
Thanks a lot, guys.
Yep.
[Operator Instructions] Our next question is from the line of Sam Pearlstein with Wells Fargo.
Good morning.
Good morning, Sam.
Could you talk a little bit more about building and construction in terms of the sale? I’m just trying to think about, I know in the slide deck, you said $1 billion in sales, trying to think about the financial impact. And how you think about do you replace those earnings with buybacks? Is the intent to just free up capital? Is it to improve your RONA? Just how are you thinking in terms of what drove you to this conclusion and then what the impact will be?
This is Chip. I’ll start and then turn it over to Ken for more color. But the way we think about it is, we made a strategic decision not to emphasize that market. And this is a great business that we think we can get substantial value for the shareholder by selling it to a company that really prioritizes and wants to be in that business.
So as far as what we do with the proceeds, that’s folded right into the strategic review that we’re conducting and that’s just going to be part of what we talk about in November when we tell the rest of the story.
And I think that’s spot on. The only thing I would add is, Chip mentioned a great business in terms of our capital allocation moving forward. That’s just not part of the business that we’re going to investing going forward. So we thought it was the best to start that process.
And if I can follow-up just separately the physical inventory adjustment. Can you just describe what went on there and how I guess, we can be sure that the rest of the inventory is fairly staying across the company?
Yes, what we’ve done, Sam, is our team and our auditors believe this is isolated to the one plant in the EP&S portfolio. Majority of that impact was in 2018 when we took the account, but we are – believe it’s isolated to this one plant.
Okay. Thank you.
Your next question comes from the line of Seth Seifman with JPMorgan.
Thanks very much, and good morning.
Good morning, Seth.
Good morning.
I was wondering if you could tell us what the growth was on new engine in the quarter?
Yes, Seth. A couple of things on engines. We were up about 11% in the quarter on new engines. And the engine mix now within our business as we look at the next generation engines compared to legacy, we’ve crossed over. So about 60% of all the revenue was coming from next generation. So total engine is up about a 11%. We’re seeing that flip. Now we’ve crossed over with next-generation engines higher than legacy engines.
Right, okay. But you are – are you able to say what the growth rate was on the next gen in the quarter?
We’re not going to give that particular detail, but it was a good performance.
All right. And then when you look at the $38 million on the corporate side in settlements related to new products, I presume that’s – is that related to engine products? And if so, do you see that being the conclusion of the settlements that are going to be required?
Seth, this is Chip. What I’d say to that is, we’re not going to identify the customers of the segment there. But I can tell you with confidence that these issues are behind us. And we’re satisfied that we’ve got the right process and product discipline going forward and our customers are satisfied as well.
Okay, great. And then maybe last one moving back bigger picture, the press that you talked about installing for the first-half of 2019. Is that sort of the last big piece that you need in place in EP&S to kind of get caught up and be where you need to be in terms of volumes and rate?
This is – that’s a big piece of the equation. It’s – it will be a big help to the industry and the Rings business and supporting the engines and in some cases a couple parts of aero frame customers, but that’s a big step in that direction. The – an announcement we made on Morristown and Whitehall is a piece of the puzzle though in terms of hitting the second-half of 2019 and the 2020 timeframe in terms of production rates.
Gotcha. Thanks very much.
Sure.
Your next question comes from the line of Curt Woodworth with Credit Suisse.
Hey, good morning, guys.
Good morning.
Good morning.
I was wondering if you could talk a little bit more about the progression in Firth Rixson. Can you kind of give us an update on where you stand in terms of qualification and sort of the level of consensus product and what your exit rate could look like in terms of the revenue base there?
What rate could like, I’m sorry?
The exit rate this year for revenue?
No, we’re not really calling out Firth Rixson as a separate entity anymore. What I would share with you though is that, we’re continuing to improve in our first pass yield. First – not having a first pass yield leads to engineered concessions on parts that don’t meet the strict process window specification of the customer.
What that does is that adds cost to our parts, because we need to do engineering review, it adds cost and time to delivery for our customer, because they have to do engineering review and sign off. It does not result in a price issue, it’s purely a cost incurred by us and cost of goods sold. But it also impacts our on-time delivery.
As we see that first pass yield come up, both in our Rings and our Disks business, we’ll be reducing working capital, improving our throughput and serving customers better and reducing cost of goods sold. So I can assure you, we have a very solid focus on that with engineering resources from across the company helping these plants.
Okay. And then follow-up question just on the wide-body issue. Can you give us a sense for what your revenue mix is between narrow-body versus wide-body? And is that issue primarily with respect to the GRP segment, or is it split sort of evenly between EPS? Thanks.
It’s primarily related in the GRP segment. We don’t really give the details, but sheet and plate would be the biggest impact to business. But you also would see some impact on the fastener side, but primarily GRP.
Okay, thanks.
Your next question is from the line of Rajeev Lalwani with Morgan Stanley.
Good morning, Chip. Good morning, Ken.
Good morning.
Good morning.
Chip, in your prepared remarks you talked a fair amount about the Boeing contract on the sheet and plate side. Can you just talk about how the economics are looking versus what you see today? How competitive was a bidding process if there was one? And may be if you’re displacing a competitor? And then a follow-up for you.
There was always competition at the Boeing company. We believe we came to a contract term that is mutually beneficial for both companies. I’ll also reveal not a secret, we are an active participant in partnering for success. So, we had our share of negotiations and challenges to be competitive in the out years that we accept from a productivity standpoint. So bottom line is, we think it’s a fair contract and it offers us a lot of opportunity for the future.
Rajeev, part of that, too, is just the asset base that we have there as well in a very thick plate stretcher in Davenport, that helped us differentiate ourselves in that equation.
Okay. And then just taking a step back from the operational side of things some of these contracts. There has obviously been a few headlines out there around third-party interest in the company. Should we assume that that’s now in the past, given that you’re moving forward with strategic review and operational improvements and so on?
We’re not going to comment on the rumors out in the press. I’ll just focus your attention to what we’re reporting on today, which is progress in the strategic review of the company, as well as operational improvements.
Okay. Thanks, guys.
Yep.
Your next question comes from the line of David Strauss with Barclays.
Thanks for taking the question.
Good morning.
Good morning. I want to ask about the financial impact, the cost you’re incurring to get back on schedule on the new engine side. Could you quantify that for the full-year, where you think the impact is and kind of how that splits out first-half versus second-half of the year?
I’m sorry, Dave. We just don’t track it that way. We’re focused on total cost of goods sold and meet the customer requirements. And as Ken related earlier, we are coming down the piece part cost curve in the engine business, which is good news.
So nothing from kind of a lost productivity standpoint or anything along those lines in terms of the impact you think you’re seeing?
If I understand the question correctly, no. We’re focused on improving our costs and reducing our time to serve.
Okay. As a follow-up, I want to ask about the receivable sales. I think, you had talked about $350 million for the full-year, fair amount in the second quarter. Can you just run through kind of the status of that and what we should expect for the full-year? Thanks.
Hello, David, this is Ken. So on Slide 31 in the deck, we detailed there that our AR securitization plan hasn’t changed during the quarter. So there’s no impact, it’s around $350 million. We anticipate that that will hold through the remainder of the year as well. So there won’t be a favorable or an unfavorable associated with the AR securitization plan.
Okay. Thank you.
Welcome.
Your next question comes from the line of Josh Sullivan with Seaport Global.
Hey, god morning.
Good morning, Josh.
Good morning, Josh.
When you look at the strategic review for Global Rolled Products, what’s the thinking on CapEx investments? Automotive aluminum penetration continues to be able to swept the Devonport assets. But how long can that continue? And then what are the thoughts in the Micromill at this point?
As we look at GRP, Josh, we’re having plenty of success in the automotive market. The industrial market is strong as well commercial transportation. So, we continue to work our assets hard to serve customers and grow our revenue and EBITDA.
As I – as we look at the future though, we’re actively bidding and pursuing new platforms, new vehicles that are in development, then how we do on that we’ll inform what our investment path is going forward to make sure that we have the capacity we need to serve a growing industry.
So as far as the strategic review goes, that’s all in the equation in terms of where we invest and how we see capacity needs going forward, we’ll be in a better place to talk about that in November.
As far as the Micromill goes, we are coming up to speed, running at rate, demonstrating this next phase of the development program and selling product to customers who are very excited about that technology, the throughput it offers, as well as some unique properties of material.
And then, I guess, just as a follow-up to that. You mentioned a highly formable metal related to the Jeep Wrangler. Was that a Micromill product, or is it something different?
No, that’s an alloy composition that allows excellent formability.
Okay. Thank you.
Your next question comes from the line of Chris Olin with Longbow Research.
Good morning.
Good morning, Chris.
Good morning, Chris.
So when we talked to some companies in the aerospace faster in marketplace, late deliveries comes up as a problem or a potential risk. And I guess, I just wanted to better understand what you were talking about when you referred to Wichita. I guess, is that a business that you would consider underperforming on the margin side that could be a tailwind for 2019. I’m just curious if you think you have enough capacity to support all these rate increases going forward?
So I’ll take the last part of the question first. We have enough capacity to support the aerospace business. We’re always looking at more efficient ways of those to produce fasteners of the high-rate production that’s required there. So I’m not saying we’re not buying a piece of equipment here or a piece of equipment there, but no large-scale changes to capacity in the fasteners business.
We have a factory in Acuna, Mexico that has plenty of capacity available, surge capacity as we bring them online and get them qualified with various new parts. The Waco comments were really about the industrial side of the Fastener business, which is we’re seeing quite a bit of demand in that area and that is actually driving some of our mix that Ken referred to earlier in terms of more industrial, less aero mix in the Fastener business. I don’t view any of this as headwinds. I view this as opportunity to continue to grow our Fastener business.
But the margins are in line with expectations right now?
Yes.
Okay, thanks.
And we have no further questions in queue at this time. And this does conclude today’s conference call, and you may now disconnect.