Q3 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the Arconic third quarter 2019 earnings Conference call.
My name is Dennis and I will be your operator for today.
As a reminder, today's conference is being recorded for replay purposes.
I would not want to turn the conference over to your host for today, Paul Luther Vice President Investor Relations. Please proceed.
Thank you Dennis good morning, and welcome to our economy third quarter 2019 earnings Conference call.
I'm joined by John <unk>, Chairman, and Chief Executive Officer, Kenji, Cobiz Executive Vice President and Chief Financial Officer. After comments by John again, we will take your questions.
I'd like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that could cause of the company's actual results to differ materially from these projections listed in today's presentation and earnings press release in it and in our most recent SEC filings in addition.
We've 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 from 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. This morning.
We have a lot of content to get through so let me start talking some of the items.
Let's move to slide four.
Starting this quarter.
We will be reporting the results.
Into new segments.
Just to provide increased visibility into the two successive companies post separation.
On slide four you will see that's a previous three segments of E. D N S.
Tcs NGL awfully.
Well now be reported as engineered punch and forgings.
Global rolled products GLP.
He PNM contains four business units of engine products.
Fastening systems, and you need structures and fourth wheels.
18 has some good part as a new company how much aerospace.
And we'll be Remainco.
Regarding global rolled products.
We'll be adding a building and construction business.
For this segment.
This entity will be Spinco and named Kinda Corporation.
Throughout the presentation. Today will then we will refer to as you know on GLP at the new segments.
And then move to slide five no comment that highlights the third quarter.
The third quarter with strong.
Revenue was 3.6 billion.
Organic revenue would you just the currency aluminum price and portfolio changes was up 6%.
We continue to grow in many of our key markets.
N.F. organic revenue was up 8% you as the F and G off the 5%.
Operating income excluding special items was up 36%.
And margin was up 340 basis points year idea.
20 basis points sequentially from Q2.
I would like to coal mines on each segment's year over year margin profit mix expansion.
And your parts and forging segment operating margin expanded by 330 basis points.
Global Roll product segment operating margin also expanded 330 basis point [laughter] earnings per share excluding special items was 58 cents.
Up 81%.
Q3 earnings Bisha, what's the best Q3 earnings per share performance for calling.
Adjusted free cash flow, excluding separation costs was 142 million Q3 year to date and up 155 million last year.
We continue to return to shareholders with the completion of 200 million of common stock share repurchases.
Yesterday, we have completed 1.1 billion Soc share repurchases at a weighted average acquisition price at $20.67.
Total 53.2 million shares.
After tax return on net toss it was 13.8%.
550 basis points year over year.
Later in the cool I will comment on the regular items that I stated in the February or in school, namely cost reduction.
Pricing capital allocation.
Messages on portfolio separation.
I will then provide an update guidance.
Earnings per share guidance will be raised for the third time in 2019.
Let me take there was a can you give a deeper view of Q3 performance.
Thank you John .
Now, let's move to slide six in the key financial results for the quarter.
Organic revenue was strong for the third quarter up 220 million year over year, with FNF up 8% and GRP up 5%.
TNF.
I had growth in all of its markets its highest growth market was aerospace.
Which represents over 70% of its revenue.
GRP was up 5% and delivered double digit revenue growth in aerospace industrial products and packaging with softness in automotive.
Ford F 150 is transitioning to the next generation model.
In order to give you increased visibility into revenue for the two new segments.
We have added organic revenue by market along with revenue distribution for each new segment in the appendix.
Operating income excluding special items for the third quarter was 475 million up 36% year over year.
We delivered the third consecutive quarter price increases with a 36 million dollar favorable impact year over year.
Price increases span across both segments.
Driven by aerospace industrial and commercial transportation.
We expect favorable pricing to continue as demand for our products remains strong.
Higher volumes in the third quarter also favorably impacted operating income by 22 million, mainly driven by aerospace.
Lower raw material cost, including aluminum price was favorable to operating income 39 million in the quarter.
Net cost reductions were led by our cost out program, which generated approximately $70 million of year over year savings in the quarter.
This was partially offset by three items.
First.
The transition of our Tennessee plant out of North American packaging to more profitable industrial products. The Tennessee plant continues to improve each quarter, we expect Q4 to be the inflection point with year over year profit improvement.
The second item was performance at one of our aluminum extrusion plants, we are addressing the issues with operational improvements some pricing actions.
However, we have additional opportunities for improvement.
Lastly, we had higher compensation costs, driven by improved performance in profit cash and equity value.
We have included the reconciliation of operating income excluding special items on slide 32 of the appendix.
Adjusted free cash flow in the third quarter was a 175 million or 60 million more than the third quarter of last year. Please note that consistent with our guidance. We have excluded 21 million of unfavorable cash flow in the quarter related to the planned separation.
Pension contribution and open payments were 96 million in the quarter, which was 26 million more than the third quarter of 2018.
Year to date pension contributions and open payments are 276 million, which is on track with their annual estimate 350 million detailed on slide 17 in the appendix.
Capital expenditures in the quarter were 108 million, which is down approximately 100 million year over year.
On a year to date basis free cash flow, excluding separation costs is 155 million higher than the prior year.
Year to date, the improved free cash flow generation was driven primarily by four favorable items higher net income lower pension contributions lower capital expenditures and lower interest payments.
These favorable items were somewhat offset by working capital to support our revenue growth.
Diluted earnings per share, excluding special items was 58 cents per share and 81% higher than the comparable period.
The higher diluted earnings per share primarily was driven by operational improvements of 15 cents.
Lower raw material costs of six cents and lower share count to three cents.
Now, let's move to the pretax special items on slide seven.
In the third quarter, our reported results included 149 million a pretax special items.
Approximately 90% of the charges related to two items first.
Hundred 10 million dollar noncash charge, primarily associated with the divestiture, but the forgings business in the UK.
And then aluminum rolling mill in Brazil.
[noise] net proceeds associated with the divestitures are estimated to be approximately 110 million.
The second special item is the cash charge of 25 million associated with planned separation.
More details concerning special items for the quarter can be found on slide 18 in the appendix.
For the year majority of the special items incurred to date have been consistent with the stated plan.
Divesting of assets or businesses that that do not fit with our focused businesses that require significant capital investment with an acceptable returns or businesses that are not material to our bottom line.
As you would expect approximately 80% of the charges to date or non cash.
Now, let's move to slide eight.
In the third quarter EPS revenue was 1.8 billion organic revenue was up 8% segment operating profit was a record at 363 million up 28%.
The increase in segment operating profit was driven by several several favorable items, including volume growth in aerospace engines Aerospace defense and commercial transportation.
Additionally, we had lower lower raw material costs higher pricing and net cost reductions.
The resulting segment operating margin expanded by 330 basis points year over year to 20.2%.
In the third quarter GRP PS revenue was also 1.8 billion organic revenue was up 5%.
Segment operating profit was 161 million up 50% year over year.
The favorable year over year improvement in segment operating profit was driven by growth in our packaging industrial and aerospace markets.
Also we had favorable pricing in industrial and commercial transportation lower aluminum prices in net cost reductions, including improvements in our internal scrap utilization.
Despite the challenges in aluminum extrusions and the tendency transition CR P. segment operating margin increased 330 basis points to 9.1%.
Now, let's move to slide nine with the key achievements.
Our Ethernet business had record quarterly revenue for aerospace engines in aerospace defense.
On a year over year basis organic revenue was up as follows aerospace engines, 11% Aerospace defense, 18% in commercial transportation, 6%.
Favorable pricing improvements in the FNF continued in the third quarter as we achieved an 18 million dollar year over year increase in prices.
GR piece commercial airframe revenue was up 12% organically year over year.
Price improvements in the industrial products in commercial transportation markets resulted in an 18 million of year over year price increases.
Improvements in in internal scrap utilization resulted in more than a 25% increase in internal scrap consumption versus the same quarter last year.
Our contacts return on net assets was 13.8%, which was up 550 basis points year over year.
Year to date, Capex is 412 million down 85 million year over year.
Approximately 70% of the Capex has been spent on return seeking projects as we expand aerospace airfoils aerospace rings industrial products and forged wheeled capacity.
Lastly, a comment on our U.S. pension asset returns as of September Thirtyth, our year to date asset returns were approximately 17%.
At the ended the year, we will remeasure, our net pension and OPEB liability taking into account the full year 2019 asset returns and end of year discount rates.
Through September interest rates have declined substantially since 2018.
If we Remeasured had it remeasurement had occurred at the end of Q3, the strong asset returns would have partially offset the lower discount rate.
Before turning it back to John Let me briefly provide an update on our capital structure on slide 19 in the appendix.
We finished the quarter with approximately 1.3 billion of cash after executing approximately 1.1 billion of share repurchases year to date.
Gross debt is 6.3 billion in net debt stands at 5 billion.
Net debt to EBITDA continues to improve year over year, despite the cash flow associated with the share repurchases.
Net debt to EBITDA stands at 2.25 times, which is an improvement of 7% compared to third quarter of 2018.
We expect the based on our current guidance fourth quarter net debt to EBITDA will be less than a year ago quarter. Despite executing approximately 1.1 billion of share repurchases.
With that let me turn it back to John .
Thanks, Ken let's move to slide 10 on a key focus areas.
So all items.
We either ahead or on track with our commitments.
Third quarter year to date operating cost reductions were 137 million.
The 2019 annual cost reduction target is being increased to 180 million.
From a product commitments of 140 million.
Run rate operating costs are projected to be reduced by 280 million from upfront commitment of 260 million.
Regarding pricing, we have three consecutive quarters of year over year price increases.
Third quarter year to date price increases or 111 million.
And that's commented upon enterprise earnings call.
These increases are not just a 2019 phenomenon.
Not part of our Rolling L T a renewal process.
With the future how much aerospace business 2020, and 2021 price increases.
Already planned.
Moving on to capital allocation year to date, we completed three common stock share repurchases totaling 1.1 billion.
The weighted average purchase price was $20.67 a 53.2 million shares.
Management has a total of 400 million remaining common stock repurchase authority approved by the iconic board may of this year.
In addition, a convertible notes settled in cash for $403 million.
On October 15th.
And no new shares of common stock were issued.
This retirements, we heard that reduces diluted share count by 15 million shares.
This is additive to the 1.1 billion shares already dismissed on stock repurchases in 2019.
The benefit of reducing both gross debt burden on checkout.
Absent other activity given diluted share count is reduced by approximately so it reduced to approximately 440 million shares a 13% reduction year on year.
Capex continues to be on track with the year to date spend to 412 million, which based on what have been down 17% year to date.
70% about Capex useful return seeking projects on sustaining capital 30%.
Moving on to divestitures were on track year to date, we have signed for closed five transactions with approximately 118 million of net proceeds including the transaction last week, which is the sale of Chengguan Korean Extrusions flat.
For approximately $60 million.
Oh target proceeds will be taking 100 and $200 million.
These five transactions upon completion will reduce annual sales by approximately $350 million.
With a limited operating income.
[noise] impact as they were close to breakeven in aggregate.
We have a further to plan disposals.
Lastly, we have an update on separation, we continue to be on track for us. They did Q2 2020 implementation with the form 10 filing expected to be available during this quarter.
Appointment and recruitment of two boards and management teams are on track.
I see making onetime operating costs of separation on capex costs remain unchanged.
Having hamas aerospace be remainco results in debt breakage costs being a maximum of only $38 million.
By stating this you can deduce a substantial part of the future capital structure.
Moving on slide 11.
Before updating guidance I mentioned in Q2 that I intended to provide another example profit improvement as part of my statement I saw price and mix, making significant further contributions beyond the cost reduction program.
This is further to the BCS example, I provided in Q2.
This time I'll focus on global rolled products.
This segment improved operating income by 300, and by 30 basis points in Q3 compared to the prior year.
As we look forward to 2020 , a key driver of margin expansion will be the completion of the Tennessee Rolling mill profit improvement.
At the end of 2019, we exited the north American packaging business on returns.
Including making a 100 million dollar investment.
To expand our industrial rolled products business.
The project is on track to be completed by the fourth quarter 2020.
The plan has been to transition from North American packaging, a marginal business to industrial products, which is supported by the China common LR trade case implemented by the International Trade Commission.
The trade cases enacted anti dumping duties on countervailing duties on Chinese imports ranging from 96% to 176% effective December 2018, and we expect them to last for at least five years.
These duties were applied to approximately 800 million pounds of Chinese industrial rolled products.
Being imported into North America annually.
I will transition to industrial parks began in Q1 of this year.
Resulted and an unfavorable year over year impact in Q1 of $22 million.
The second quarter improved but was still unfavorable year over year on an impact of $60 million.
As we discussed earlier Q3 has improved once again to an unfavorable $5 million hit year over year, which was inline with our expectations.
Q4 is expected to be our inflection point, where we will see year over year profits.
We expect this transition when complete to more than double the profitability about Tennessee Rolling mill by the end of next year.
Tennessee is our second largest rolling mill in terms of revenue.
As you can model.
Eliminating low margin packaging business in North America on substituting an increasingly profitable industrial roll call business and sheet significantly adds to our margin expansion.
A second item that I would like to discuss these earnings volatility in the GRP segment, which results from changes in aluminum prices.
We continue to improve our commercial agreements with pass through arrangements.
Additionally, this year, Oh aluminum hedging program no longer clause cause and mark to market.
This combination of pass through contracts.
No hedging program mitigates the 90%.
About aluminum exposure in our old product segment.
We expect reduced earnings volatility from aluminum prices going forward.
That's our business is essentially the conversion of aluminum ingot into roll call. Some place on the dependency upon metal on hands volatility reduce.
Moving to slide 12.
Finally, an update on our 2019 annual guidance.
In the lots of current performance, we're updating and raising our earnings per share guidance for the.
This reflects our performance expectations in the fourth quarter and the fact that year to date, we have already on an adjusted earnings per share of at $1.58 cents.
The adjusted earnings per share forecast for the year increases to $2 on seven cents the $2000 an 11 cents.
Midpoint this would be an increase of approximately 54% year over year.
Honestly, the higher end, we'd be in the 60% plus.
Annual revenue will be revised to 14.15 to 14.35 billion.
This change is mainly attributed to the low assumed alumina prices for both Alan me and Midwest premium, which are mostly passed onto our customers.
And also to the divestitures, which are clues and plans to be close by the during the fourth quarter.
Organic year over year annual revenue growth for the year is expected to be between six and 7%.
Adjusted free cash flow guidance, excluding separation costs for the remains up between 700, an 800 million.
Further to the free cash flow guidance capital expenditures are projected to be 625 million.
Excluding capex associated with separation.
2019 Capex.
As a percentage of revenue is expected to be 4.4%.
The Capex Geisel 2020 .
I'm going forward is less than 4% of revenue.
Regarding free cash conversion.
Projected to be approximately 80% of net income in 2019.
EBITDA guidance has been increased I'm not road to two point.
Three to 5 billion plus or minus 25 million.
Mid point. This is an increase of approximately $350 million year over year, but the execution of our fundamental improvement profit improvement program, including pricing.
The updated guidance assumes that the Q4 737, Max will remain at current levels pending the outcome of regulatory risk release of the aircraft.
Let me provide context for the full year guidance.
Especially at midpoint to being raised again and by more than the beat from Q3.
The savings program results as noted earlier have been raised last for the $40 million and have more than offset the effects of three items.
Lastly, the increase in estimated costs to cover compensation due to the higher profit performance on the higher share price estimates for the fourth quarter.
Second slightly lower roll product aluminum coil sales due to a quarter of inventory correction by distributors. Following the over the importing product from Europe to cover the market shortfall emanating from the Chinese tires and thirdly, the effect of the GM strike, which is now being.
Settled.
The midpoint of the EBITDA guidance range has been raised on time.
Moving to slide 30.
You will see that's a new segments historical performance.
This segment information shows the EBITDA performance of what will become part of the future Hi, Matt.
This shows the hi, Matt is in the top quartile of aerospace companies.
On the shows safety is I truly differentiated company.
Also of note is the improvement in rolling asset returns.
From what is and also a truly unique set of rolling asset.
Improvements in volume.
Price and the cost that program are improving revenue segment operating profit and margin year over year I.
And we expect continued year over year margin expansion in both segments in Q4.
I just went up to 2020.
We will be providing revenue and profit guidance on the next earnings call as we had placed greater clarity on aerospace build rates, which impact both segments.
Regarding 2020 corporate costs on free cash flow conversion projections are as follows.
On your corporate costs, including corporate depreciation and amortization schedule, how much aerospace I expected between to be between 80 $90 million.
Okay cool will be similar well between 75, an $85 million.
As previously mentioned the total corporate costs of the combined two new businesses, who will be less than the corporate costs of today's Arconic, Inc.
Regarding free cash flow confession.
Well I kind of getting it is projected to be approximately 80% in 2019.
In 2020 .
We estimate that hasn't had much aerospace free cash flow conversion will be higher than 80%.
I'm, not calling corporation to be less than 80%.
Two final items before I tell you have to Q in a.
Hi, first regarding grant felt a last quarter I mentioned in addition to on the replacement planning for relevant high rise public building and housing UK government has established a fun to refurbish private high rise buildings, which have aluminum compensate cladding systems, which are.
Unlikely to meet future UK building regulations.
This fund will cover building, so which I don't know us.
Okay tax on structural engineers specified the ATM.
From a IP, so yes, a French subsidiary.
This clotting within fabricated and 50 by contract is one component of the flooding and installation system.
These potential clotting remediation will be beneficial regarding contribution at least systems to the future five risk and you'd say high rise buildings.
The details of the refurbishment process on funds continue to be developed.
Secondly, the first you take public inquiry has now been completed and its report was issued last week.
This is available for Youre reading.
You will recall the first inquiry and report the objective of examining the events that took place on the nice as a flat.
And has a higher spread on the response to it.
The second public inquiry will commence in 2020 and is expected to most likely reported in 2021.
This inquiry will examine why the events unfold it as they did unless certain choices, we made with regards to the sluggish but at the top.
Lastly.
Our next quarter updates.
We will be the form 10 filing which will be available later this year this quarter.
The Q4 results at the end of January which will include guidance for 2020 .
And finally, assuming everything continues to be on track the separation investor days will be held later in February so how much aerospace and clinical which the guidance an outlook will provide you for each of the separated companies.
Save the date note will be issued.
With that I'd like to open the line field questions.
[noise], Thank you and and we will now begin the question did answer session.
As a reminder, press star one to be placed in the queue in a Q pressed pound if you would like to be removed from the Q.
We request that you limit yourself to one question and one follow up question.
Our first question comes from the line of David Strauss with Barclays. Please go ahead.
Thanks, Good morning.
Hi, David.
John you previously talked about I think 300 basis points of margin Upsided BCS can you give us an update as to where that stands in terms of your progression towards that target.
I think we've already exceeded it a commitment the exact number.
Ken just going to pull it up but I think we'll do that but ER, Ken if you can yes. So.
Good morning, David.
The 8-K filing we did last week you can do that have the former segment structure and then you can look of the added patters.
For each of the businesses.
But.
If you looked at BCS from 2018 to the second quarter of 19 looking at about 390 basis points of improvements. So that's accelerated from end of 18 Q2, so to John's point already there.
But if you look through the AK finally get conceded that.
The former segments have accelerated from 2018 to the current state and then you can also see that BCS has accelerated and wheels has accelerated as well.
Okay.
As a follow up on the on the free cash flow guide for for the full year. It looks like working capital days were up a little bit in in Q3, where we're in working capital days have to get too.
Ken in Q4 day to hit that free cash flow target for the full year I think it looks like six and 700 million and free cash flow. That's implied in Q4. Thanks, Yeah I'll come in first and time to cross the Cannes Festival inventory days improved in the quota.
We were slightly off or on the on the receivable days, but Ken if you can comment so you're exactly right. So.
We missed about one day on on the DSL primarily.
A lot of our customers have been.
Pushing out terms, however, inventory and payables offset.
I don't expect a material change David in terms of working capital contribution for.
The the inventory.
Side or the house, but in aggregate.
Our working capital will be it contributed to free cash flow as we exit the year.
Okay. Thank you.
Thank you.
Next question is from a line of Gautam Khanna with Cowen and company. Please go ahead.
Hey, good my guys.
And Gulf them.
Couple of questions first I was hoping you could talk about the 737 rate you guys actually experienced in Q3, and what you expect in Q4, and maybe just categorize that by engine airframe and then I have a follow up.
Yeah the.
Craft, we understand is being built out of 42.
With them the fuselage has been building up so close to 52.
And ER in engine.
On the sites around about 48.
Engine build and maybe a little bit of Ah I must say inventories come out of outside in favor of the CFM.
Well for us CFM specifying that prioritize the supply.
And what's your expectation for Q4 as well.
Yeah exactly I think it's just stay in line with the with.
I think the the next event is a is the recertification, which everybody is waiting for.
And Ah hopefully that will occur or at the end at the yet and that will help us when we give revenue guidance at the end of January .
And chose not to do anything further at this stage two we know what they position regarding that aircraft.
Okay and as a follow up.
I ask if.
Hey, it's all about the capital structure in the pension allocation.
That might fall split between the two new entities and.
Maybe Kevin if you could just talk a little also about where the pension resides right now for pension okay deficit.
The older proportion to the two companies.
Yeah.
Hi, Good pad. Please go ahead.
I mean basically the majority of the a the pension.
It's allocation our Uh huh.
Set by the plot or the allocation of the corporate cost into the two future corporate headquarters.
In total is probably about 20% discretionary which is the remaining cool.
Well the allocation for retirees.
We have a plan and are saying we're going through that.
At the finalized.
December Board meeting.
To get back on the capital structure nail down.
And.
The only thing I'd add to that got them as.
It will will line up the pensions on January Onest, you should have a view of the capital structure in Q1.
As we are targeting separation in Q2, so you'll see the capital structure in Q1.
Okay.
Matt just asked one last one John are you actually considering staying on as part of the management structure for.
How maps.
Or is this going I actually don't want to preempt or the the search committee of the board, which is is active and that's been moving to the us and first round I think interviews and that being completed.
I will engage with the search committee or a as they.
Say shortlist during the latter part of a of November .
And then see where we are I mean, the the way that said weve or less. It is the are you now have a agreed to provide continuity through the peace and beyond that if necessary.
And ER. Meanwhile, the such companies trying to find the the at the right candidates to it to go forward and then it remains for a dialogue between myself and the board in Ah you knew should that process come to fruition and then also do as well so what are you.
Agent would they like to see a more engagement shareholders would like to see.
For me going forward.
Our next questions from a lineup Carter Copeland with a Meli US research. Please go ahead.
Hey, good morning.
I'm not a question on the on the Capex.
For you know you stated for 2020, the expectations around the fourth but less than 4% of revenue for the the aggregated entity should we think about capex for the two pieces being materially different than that or having having different investment profiles are 2020 and beyond.
They first of all the 4% was not meant just for 2020, I actually said 2020 and beyond Canada. Okay that was trying to give like a a view of how I think capital should be deployed in the business on a long time basis.
The so I was trying to get more meaning into those words, which may or may not.
No not being supported.
Inevitably there will be a difference between the the two companies but ER.
In my current sold a which will be amplified in those investor days.
Going forward is that both entities will be below full.
[noise] should there should we consider that there I guess what at the heart of the question is are there are different.
Investment profiles on opportunities in the two entities I would assume that some of the you know the rate upside for how Matt will point to different opportunities, but I'm not sure how how you consider that comparing.
Yeah I mean.
If you look at the underlying I'll say grows and grows opportunity with what I think I've tried to say is a truly differentiates you notice based business.
In a I think the prospects for the percentage growth.
As a that's what's the next phase of the aerospace cycle inevitably Oh great.
It is particularly not only when I look up the future aircraft build.
But when I went to but even beating importantly for me is that when I look at the last decade I'm beyond than we've had aerospace builds above 6%, maybe six or 7% and of course, that's been doing is to put a huge amount of a aircraft, which you being the aircraft Park.
And are not being particularly focused on what does that increase in that crop pockets like over the next decade, and therefore, the solidity of the future order book and things like just take the CFM engine, which is I mean, that's not going to peak in service visits suspect to shop until 2025.
So when you look up the suit aerospace I'll say production over the last decade also those aircrafts, we will get a being the POC regarding future servicing which is really important for our international business I'll talk more to that in February .
They're also growth opportunities on the the roll product side, but in no. I mean, these are huge singular us it investments.
And Weve I'm, only intending that we would add capacity breaking a foot bottlenecks, where we see a and I do see the opportunity of increasing substantially the throughput from our mills with very little capital.
Great. Thank you for the color and then can just a quick follow up can you help us maybe what the a.
Sensitivity around pension and OPEB funding a as you look out now given the change in the discount rate.
Yes quarter would I would look at his the a 10-K from 2018, we gave a two year look in there in terms of the cash contributions I use that to your average based on where we are right now we had a strike it today in Remeasured those asset returns at 17% or.
But better than 90% of our peer set so you push all that together I don't see a material change from the contributions that are listed in the 10-K from 2018.
Great. Thank you very much.
Thank you.
Our next question from a line of sets even with JP Morgan. Please go ahead.
Hi, Thanks, very much and good morning.
Yeah.
John I Wonder if you could talk a little bit about the and that 77 rate decrease that Boeing announced and and the impact that that might have.
Yeah, I mean, I I've seen a announcement of 14 aircraft coming out of 12 at the end of 2020.
Inevitably because the some of our products for example of a business.
Which will ultimately be impacted before that from the supply chain.
And I was I think everybody knows that.
In fact, our total content.
Oh, Hi, Matt is actually greater on a composite crop compared to a Ah I'd say the aluminum skin that crop, which is obviously good news in terms of the overall direction for the company. If there were more composite aircraft filled in particular, a fast those but when we look to the whole pace for next year.
At the moment, we see the impact since that rate reduction that told me I've found about two cents.
Impact, which within the context about 2020 guidance, when we give it really just lost in noise.
Oh, Okay. Okay. Thanks, and then maybe following up on a the Capex discussion you were just having I mean, you know 70% of the.
This year's Capex, I guess return seeking I mean, the implication there should we think about that the kind of the maintenance capex level as you know two hundredish million or a little below and the gap between that and for you know a little bit sub 4%. It sounds like you talk about as you know expectations of future returns seeking.
Projects.
Yeah, I mean, I think it's probably a little bit below the 200 million I'm, probably try to nail that for you a little bit more accurately or the end of the yet and we've completed the yeah.
ER and yeah, they the future essentially because obviously very by the compression of the to the top line of the tone capital.
Expenditure, but as you can imagine when you adjust for the underlying grows about business those are going to be up a in 2020, you were just obviously negatively for the disposal.
Plus so sub 4% number then you can see is going to be less than a this year's Ah number for sure I, maybe the percentage, which will be a maintenance will flex. According to the what's the total number is and we intend to give you at the end of January .
And so the only thing I'd add to that is you know there's four major projects. This year on the Capex that were in that return seeking.
Number it was that aerospace airfoils.
Expansion in Whitehall.
Michigan, the aerospace rings in Rancho Cucamonga in California, and the forged aluminum wheels in Hungary.
Those projects those growth projects.
Pretty much complete this year.
Fully operational in Q1 of next year might have only about a $50 million capex tail.
In 2020 for the helmet Aerospace business then if you look on the GRP side, it's the industrial expansion that John talked about probably have about a 40 to 50 million dollar till next year. There. So the growth Capex major projects are done to John's earlier point, if there would be growth it will be to de bottlenecks implanted some smaller amounts.
That's why we feel so comfortable in the sub 4% to Capex spend.
Great.
Thanks very much.
Thank you.
Your next question is from wind the about March in the Eagle Ford and with Jefferies. Please go ahead.
Hi, good morning, everyone.
Nothing.
In the GRP, you know to strengthen packaging volumes can you remind us again of your packaging exposure how much volume growth you saw there for the quarter versus the prior year and also if any contracts are reopening sooner than anticipated pricing on that.
Yeah, I'll give you the overall context on they give us across the Ken for the specific percentages.
So that's 50 by region.
North America packaging zero, we pulled out of it.
And that's the transition to industrial which when talking about.
In Russia.
We have something like a 95% plus market share.
Of the packaging business in Russia, and indeed exports are little bit into Europe , what's on the examining further opportunities given what I think is an emerging market for additional packaging in that region.
We also not that was exhibited strong growth and they are in the quarter.
And on this year.
In China, we also have packaging Joel So group.
I mean, we don't have the market share as I talked about scummy coming out of Russia.
But again a good gross in the in the quota, but those are the two regions of the world, where we still do packaging and as you know we will have withdrawn from Brazil by next year. So that so I choose not to comment on can the specific percentages, yeah, Hey, Martin so.
For third quarter Slide 22 of the appendix, it's about about 17% year over year for the regions as John mentioned and.
Again, we've taken our traditional organic revenue by market chart for total Arconic Inc. and split it out into the two new segments you have visibility there in terms of wouldn't growth rates are as well as the distribution of revenue.
So for example is I mentioned earlier and helmet aerospace you can see that 70% plus with the revenue is tied to era.
Okay. Thanks for all the color there I appreciate it and maybe just circling back I know you're expanding the Tennessee.
Our re purposing, the Tennessee, GRP operations away from packaging, but have you given any thought about reengaging the north American packaging market. After your noncompete concludes like 2020.
We haven't decided anything at the moment, that's not being a focus.
As you say, we have a noncompete and ER and the full for US it's not it's been a moot point.
I mean, I think the only thing I do note.
Is the us.
I'm going to call it the on T. plastic environmental movements seems to be gatherings speed.
It's probably led the more from.
Europe and Asia, but there are a two examples are a major so I'll say a beverage companies.
Moving to aluminum can.
What that produces over the next few years, you know I don't think any of US truly know at this point I don't think it's quite yet where we can say there's a CLIA.
You know take high school market.
The shortage and maybe we'll just watch that.
The one opportunity if any come of it and.
See what response the other than the I'll tell you the plastics industry makes to this because I've been pretty community over the years. So I see currently no case with jumping back into something and I think a wait and see if it's probably more countries at this stage and and we see how it develops.
Okay again appreciate the color and nice job with results.
Thank you.
Your next question from a line of Josh Sullivan with Seaport Global. Please go ahead.
Hi, good morning.
Hey, Josh.
Can you just expand on the overall pricing improvements are you getting price on the growth Capex, you're investing in here and then what products are Marta kits are you really having traction with on the pricing front.
Oh, it's going on the reversal, what's a normal I mean on GE off page a function of the industrial pricing.
Year on year because of the a the international trade agreement.
And combine that with that shortening in the market. It's a a becomes a shortage of capacity. So there's a there's that.
And that combined with the mix opportunity of pulling out of North American packaging.
Aerospace on Hamad Aerospace, it's a it's really a examining each of the contracts as they come up for renewal I'm not met coal as an average cycle of LTL phase.
The suddenly have yet, but there on a roughly a three year cycle. So that we have no clear line of sight of things, which are in ER and 2020, and 2021 and so on and me to examine the a the competitive dynamic in those segments and also making sure the.
It's a habit really has the.
Do you for what I think is some truly unique two unique capabilities, especially in the hot end of the a the aircraft engine and the most the Best example, I like to give.
This is the a and you temperatures which are the on the latest military jet. So for example, the a the joint strike fighter, whereas I was operated very much higher temperatures in the the commercial engine markets, but and we have.
The unique capabilities to meet a those those requirements with not only the sophistication of the pool is to go inside these Ah foils to provide the a the eflow, but also the converting that go with.
And unto operates substantially above the melt temperatures that those and those are up you know what into the you well above 3000 degrees Fahrenheit.
What happens after was of course is the with the emissions requirements for commercial aviation.
The so low Oh say lower emissions higher fuel efficiency, what that does he is basically it's more pressure on high attempts and so that's a that unique capability that we have enables us to slow that down into successive generations of the commercial.
Aerospace market and ER, so that doesn't mean they also the Prime example, we stop and find just to that I would look and other commodities as well, but that would be a that would be the best example, just to give you one on the on the telephone here.
And so just trying to make sure that the unique differentiated technology that we have is truly a is truly valued in the industry.
That's helpful.
Just on the divestiture front do you feel you mostly have the portfolios are the two entities.
Where do you want them at this point.
Could we see some additional portfolio shaping that that hasn't been announced so far.
I think in terms of disposals, when we've completed the next two.
That well all be it in terms of Ah I'll say disposal of assets, which I saw was a fundamentally are underperforming.
And contributing or in fact, dragging on the whole portfolio and chose the rather than try that you.
I'll say the ER.
I'd say the view that we can fix everything the answer is no the certain things, we caught and shouldn't bother with that supply our energy as to where we see more opportunities and so getting rid of things, which I think we are you.
Structurally disadvantage is the best approach focus I read it is on why we have true differentiated advantage for the future and to see where we can expand those those are both organically, but also if a if there were opportunities we look at those as well. So <unk>. So if you ask enough we got to sell small stuff the ounces from them.
No.
Thank you.
Thank you.
Your next question is from a line of a Rajeev Lalwani with Morgan Stanley . Please go ahead.
Morning, John Martin County.
Hey regimes winner.
Question on the revenue side, given all the moving parts coming into the end of year can you give us some puts and takes as we look into next year around the impact from aluminum any end market noise like 77 or commercial transport and then.
The impact of asset sales there to essentially I'm trying to see if we shouldn't be thinking of next year as being a mid single digit plus type here on organic revenues. However, overall revenues for that matter given all the moving pieces well, let me do with metal first because ER again, I'd like to blow away before.
Good blew away once and for all Lee, though confusion, we sometimes come around that.
Inevitably I mean, how much aerospace low volatility company top quartile performance, we should think about it.
In terms of GRP inevitably various metal volatility associated essentially with the I can you put into those entities, but we've been working hard to reduce the volatility on earnings because a pass through aspect of it we're conversion business.
Of course at the top line on what will be all clinical inevitably if I may drop since its drops let's say $150 per ton in the last few months.
That's about dropping Midwest premium inevitably a it's a revenue full so that's why there's large reason why we've trimmed a guidance for the year, it's irrelevant for the the bottom line and so in the corner.
Yeah revenue, we're probably 30 million light but.
Metals was like.
From a 17 million and so we over performed on organic basis.
We look forward what I expect is fundamentally low volatility from high Matt.
At cross filled increases, we'll get the Max out the way and so I see that so we should be adding value over and above whatever after I felt like I said, it's the way I think about have Matt.
In terms of GE off pay a the you've got a little bit of volatility on the he's got a bolt on top line of goes away, but as how that May go and Midwest premium less dampen volatility in the future on the bottom line.
But to be you've got fundamentally little bit a fraction more volatile business that exposed if you know obviously a much wider.
Mix of end market, so industrial commercial transportation plus aerospace.
On packaging outside of North America.
And you know what whereas it those markets go I'm thinking again aerospace up industrial Sadly commercial transportation is probably a probably on a on a downward thing, but at the moment into into 2020.
That's when you look at the opportunities from the shortage, which was in capacity in the North American alumina market No I just think it old ends up as a wash and with our ability to bring so as a throughput from our assets you know I mean, I'm encouraged by geography business, so more to be done.
But that's where I think about the topline.
Okay, and then I've a follow up looking out the engineered products business previously you talked a lot about operational headwinds where are we.
And that overall any parts of the business, where there are some weakness and then relating to that as would you start to get the Max ramping again, how confident are you that we won't start to see some of those prior headwind start to show up again.
Max being where it is there's been obviously to spina steadying influence for all speech enabled us to further improve down the learning curve. Some the on the leap engine in particular, so I'm not a an outside I'll say everything is smooth.
As the way I see the a the as you build developing into 2020 I would imagine it'll stay a wherever it is for the time being the may begin to inflect upwards towards the back ended the year should Boeing increase that production right to the 57 that they talked about.
Uhhuh with the additional capacities coming on stream from both Weiss hole for the casting operations and Morriston from the core operations, that's going to take a lot of stress out about system and a with the revenue opportunity of delivery model. So I don't expect pay.
Wins are going forward in terms of Oh production issues and we try to address those this year, including me we've had capacity show what you do not structural castings business.
Thanks Chuck.
Thank you.
[noise], ladies and gentleman that there's all the time, we have questions. Today. This does conclude the Arconic third quarter 2019 earnings conference call. Thank you for participating and you may now disconnect.