Q4 2019 Earnings Call
My name is Nicole and I'll be your operator today.
As a reminder, today's conference is being recorded for replay purposes.
I would now like turn the conference over to your host for todays call later, Vice President of Investor Relations. Please proceed.
Thank you Nicole good morning, and welcome to our clinics fourth quarter 2019 in full year 2019 earnings conference call.
Joined by John Plant, Chairman, and Chief Executive Officer, and Kenji, Cobi Executive Vice President and Chief Financial Officer.
After comments by John again, we'll 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 of the company's actual results to differ materially from these projections listed in today's presentation and earnings press release in 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 in today's presentation.
With that I'd like to turn the call over to John .
Good morning, everyone and welcome to the goal this morning.
Oh, we have a lot of ground to cover today and I do recognize that we have lots of moving parts between.
The cost reductions performance program, a restructuring asset sales.
The the share count movements Illumina metal assumptions, and then finally, Bobby Max and I intend to provide as much visibility into these as possible.
I plan to cover the fourth quarter.
The 40 a performance.
And the results of these a major priorities.
The move on to discuss the approach that we've taken to the 2020 outlook.
Let's start on slide fall.
Ah today, we're announcing that we're targeting the separation to take effect on the host of April .
The majority of the work has been completed.
We're on track with all separation steps.
The planned operating date for the two future companies. These next week the first in February .
The legal separation into the two listed future public companies, it's like the first.
Regarding the strategic priorities, including capital structure.
Capital allocation.
Financial outlooks for the two future companies, we're targeting on Investor Day on February 25th in New York for both companies.
Let's move on to slide five to cover the fourth quarter results.
The results were solid.
We had record fourth quarter performance for operating income excluding special items on record operating margins and earnings per share.
Operating income excluding special items was $444 million.
The effective tax rate was 29.7%.
This was an unusually high number for tax compared to prior quarters, and driven essentially by the geography of earnings.
In the quarter.
And you parts and forgings year over year operating margin expanded 480 basis points.
Well GRP expanded by 370 basis points.
But he TNF and GRP demonstrate the progression in year over year margin for every quarter. This year.
And in NFV sequentially each quarter.
Fourth quarter earnings per share was 53 cents up 61% year over year under the maximum and divide guidance range.
Earnings per share for the it was a record $2 on 11 cents and up to 55% year over year.
Free cash flow was $870 million, 87% year over year.
This exceeded the midpoint of guidance by 120 million.
It's made a very notable improvement in free cash flow fool iconic from prior years.
And achieved a free cash flow conversion of 90% of net income.
Please note that the free cash flow conversion guidance I provided for the two separate companies at the time, though last earnings call.
The year in cash balance was 1.7 billion after 1.15 billion of share repurchases.
On the repayments of $400 million convertible notes.
The 1.15 billion of share repurchase it included a fourth quarter open market share repurchase of 1.6 million shares.
For the year, we've repurchased approximately 55 million common shares at a weighted average price of $20 a 97 cents.
This leaves open share purchase resource authority, a 350 million, which will carry over into the future had met company if not utilized before separation.
Net debt to EBITDA was 1.81 times, which was a record low on an improvement from fourth quarter 2019, which was 2.05 times.
And lastly.
The tax return on net assets improved year over year by 450 basis points to 13.7%.
Another record.
Now, let me turn things over the weekend to provide a more detailed view of Q4 under yeah.
Thank you John .
Now, let's move to slide six in the key financial results for the quarter.
In the fourth quarter organic revenue was up 38 million year over year with vpns up 2% in GRP flat.
N.S. had 5% organic growth in aerospace, which represents more than 70% of its revenue.
While commercial transportation declined 8%.
CR P. was flat as industrial products at 21% organic growth packaging, 6% and aerospace 3%.
These increases were offset by decline in automotive of 9%.
The Ford F 150 is transitioning to the next generation model and we had lower volumes due to the G.M. strike.
Building and construction was down 8% due to softness in Europe , and intentional exits of less profitable products.
Operating income excluding special items for the fourth quarter.
It was 444 million up 37% year over year.
We delivered the fourth consecutive quarter of price increases with a 42 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.
Weakness in our automotive and commercial transportation markets unfavorably impacted operating income by $29 million in the fourth quarter.
Favorable raw material cost, including aluminum price was a benefit to operating income of 34 million in the quarter.
Similar to price, we had our fourth consecutive quarter of net cost reductions.
Cost reductions were led by cost out program, which generated $76 million of year over year benefit in the quarter.
This was partially offset.
Hi, higher variable compensation and equity costs.
Which were driven by improved performance on profit free cash flow in equity value.
As expected the transition over Tennessee plant to more profitable industrial products showed a year over year improvement in the fourth quarter.
The impact was $13 million.
We have included the reconciliation of operating income excluding special items on slide 35 of the appendix.
In the fourth quarter adjusted free cash flow was a record at 728 million or 250 million more than the fourth quarter of last year.
Please note consistent with our guidance, we've excluded $28 million of unfavorable cash flow in the quarter related to planned separation.
Days working capital improved one day on a year over year basis to 43 days with the main driver being collections the year over year cash improvement was 103 million.
Pension contributions and open payments were 69 million in the quarter, which was 38 million more than the fourth quarter of 2018.
Capital expenditures in the quarter were 167 million.
Which was down 104 million on a year over year basis.
Diluted earnings per share excluding special items.
Was 53 cents per share and 61% higher than the comparable period.
The higher diluted earnings per share were primarily driven by operational improvements of 13 cents lower share counts of five cents and lower raw material costs of five cents.
Let's move to the year over year margin expansion on slide seven.
In the fourth quarter or Kinex margin improved 380 basis points on a year over year basis, while Nf improved 480 basis points and GRP improved 370 basis points.
It's it is noteworthy that the year over year margin expansion has improved each quarter in 2019.
This improvement reflects the trajectory of ongoing operational improvements improved pricing and cost reductions.
Now, let's move to the special items summary on slide eight.
In the fourth quarter.
Reported results included a net favorable impact of 75 million related to special items.
Especially items in the quarter, primarily related to three items.
First we recorded a 94 million dollar tax benefit related to a U.S. tax election, which caused the liquidation of a foreign subsidiaries assets into our U.S. tax parent.
The second special item was a cash charge of 34 million associated with the planned separation.
Third we received $21 million in cash related to an earn out associated with the Texarkana plant that was sold in the fourth quarter of 2018.
I would point out that the costs incurred in the quarter for legal and other advisory fees related to Grunfeld tower and the fire at our fasteners plant in France, largely offset by related insurance proceeds.
More details concerning special items for the quarter can be found on slides 20 829 in 35 in the appendix.
For the year majority of the special items have been consistent with its stated plan of divesting assets or businesses that do not fit our focus.
Require significant capital investment with unacceptable returns or are not material to our bottom line.
As you would expect approximately 80% of the charges for the year were noncash.
Now, let's move to the segment's results on slide nine.
In the fourth quarter EPS revenue was 1.7 billion organic revenue was up 2%.
Segment operating profit was a record for the fourth quarter at 354 million up 32%.
The increase in segment operating profit was driven by several favorable items, including volume growth in aerospace higher pricing lower raw material costs in net cost reductions.
The resulting segment operating margin expanded by 480 basis points year over year to 20.4%.
In the fourth quarter GRP is revenue was also 1.7 billion organic revenue was flat year over year.
Segment operating profit was a record for the fourth quarter 250 million up 61%.
The favorable year over year improvement in the segment operating profit was driven by favorable pricing in the industrial and commercial transportation markets lower aluminum prices.
<unk> cost reductions.
And improvements in internal scrap utilization.
Tend to see transition to industrial products helped offset the declines in automotive and commercial transportation.
Despite the challenges in aluminum Extrusions and flat organic revenue growth GRP segment operating margin increased 370 basis points year over year to 9%.
Now, let me move to the fourth quarter key achievements on slide 10.
Our peanuts business.
Had record fourth quarter revenue and segment operating profit on a year over year basis.
Aerospace organic revenue was up 5%.
Favorable pricing improvements and FNF continued in the fourth quarter as we achieved 29 million in year over year price increases.
For the year price improvements in the segment were $78 million.
Finally in Nf our expansion of the aerospace airfoils aerospace rings, and forge wheels capital expenditures are complete and ramping up in 2020.
Our GRP business had record fourth quarter segment operating profit GRP is industrial revenue was up 20% organically year over year.
Price improvements in industrial products in commercial Transportation's drove 13 million of year over year price increases for the year price improvement in the segments.
Or $75 million.
GRP is internal scrap utilization improved 180 basis points versus the same quarter of last year.
Our contacts full year free cash flow of 870 million resulted in a free cash flow conversion of 90%.
Return on net assets for the year was 13.7%, which was up 450 basis points year over year.
Capex for the year was 579 million approximately 4% of revenue was down $189 million year over year.
Approximately 65% of the Capex was spent on return seeking projects.
Majority of our growth.
Capex projects are now complete and we expect capex as a percentage of revenue to be less than 4% in 2020.
Our cash balance was approximately 1.7 billion after we repurchased $1.15 billion abouts standing shares in paid down approximately $400 million of debt.
Now, let's move to slide 11, and the key financial results for the year.
For the year organic revenue was up 894 million.
With both Ns and GRP up 6%.
FNF had 8% organic growth in aerospace and 4% growth in commercial transportation.
GRP is organic revenue increase was driven by double digit growth in aerospace industrial products in packaging.
Operating income excluding special items for the year was 1.8 billion up 29% year over year.
Price increases were 153 million for the year.
In split almost equally across the segments.
Higher volumes also favourably impacted operating income by 80 million for the year, mainly driven by aerospace.
Lower raw material costs, including aluminum price was favorable to operating income 99 million for the year.
Net cost reductions were led by cost out program, which generated approximately 213 million of year over year savings. This was partially offset by three items the transition of our Tennessee plant operational challenges at one of our aluminum extrusion plants in higher compensation costs driven by improved perform.
Vince.
Adjusted free cash flow in 2019 was 870 million or 405 million more than 2018.
Pension contributions and open payments were 345 million, which was 33 million less than 2018.
At year end, the pension and OPEB net liability was approximately 3.2 billion up approximately 200 million year over year as lower discount rates impacted the liability by approximately $900 million.
You as Pat pension asset returns were approximately 20% in these returns partially offset the impact of the lower discount rate.
Capital expenditures for the year were 579 million, which were down 189 million compared to 2018, while making significant investments in aerospace airfoils aerospace rings towards wheels and industrial products.
Diluted earnings per share excluding special items was $2, an 11 cents per share and 55% higher than 2018.
The higher deluded earnings per share were primarily driven by operational improvements of 47 cents lower raw material costs of 15 cents and lower share count of 12 cents.
Before turning it back over to John Let me briefly provide an update on our capital structure, which is on slide 19 in the appendix.
We finished the year with approximately 1.7 billion of cash after executing the $1.15 billion of share repurchases and reducing debt by 400 million.
Gross debt is approximately 5.9 billion net debt stands at 4.2 billion.
Net debt to EBITDA continues to improve year over year, despite the cash outflow associated with the share repurchases.
Net debt to EBITDA stands at 1.81 times, which is an improvement of 12% compared to the fourth quarter of 2018.
With that I will turn it back over to John .
Thanks, Ken and let's move to slide 12, well give you the results of the a key focus items.
Price increases for the over 153 million and we saw good progress at both the BNSF and geography.
Operating cost reductions with $213 billion for the year on ahead of a on you'll commitment of 190 million.
The annual run rate operating costs are projected to be reduced by $300 million.
Which is a full $100 million higher than our original commitment.
As a result of the share repurchases, which are detailed on the slide yearend.
Common stock share account was 440 million shares down 13% year on year.
Capital expenditure.
With $579 million, excluding 7 million associated with separation.
Capex was approximately.
Pulling us into revenue.
The major focus of a 2019 capital expenditures was the expansion of F. oils on rings capacity in the engines business.
You are paying wheels expansion and the Tennessee industrial expansion enroll products.
Annual divestiture proceeds of approximately $190 million are expected to exceed the operating on capex cash cost of separation.
Divestitures signed or close will reduce annual revenue by approximately $350 million.
With limited operating income impact.
Two previously announced transactions will close in the first quarter of 2020 Weve proceeds of approximately 100 million.
Now, let me move to separation.
Targeting separation for the first of April .
We filed an amendment to the form 10 on the 22nd the January where we provided greater visibility into management capital structure and pension allocation.
The next step is the financing of off clinical spend entity.
This financing commences today Annies Planful completion by February the 10th.
The form 10 is planned to be made effective by mid February .
The planned operating data for the two companies is the first the February .
Everything will be done by the two entities.
And legal separation into the two listed future public companies on the first of April .
This will have accomplished a rapid execution of separation from the time, it's I announced aplomb upon taking the C Bureau, CEO role in February 2019.
One last but very important item on separation.
Related to pension plans.
The separation just not trigger any incremental cash contributions.
Let's move to slide 13.
As you know this earnings call.
Proceeds the Boeing coal.
Which while it's not ideal.
These important effecting the separation timing on the debt financing starting this afternoon.
We have had many exchanges with Boeing during late December and every week throughout January .
Hence have a reasonable feel for the current plans in 2020 .
Naturally I will not provide any details of those conversations except to guide the iconic numbers.
Today, I will provide Q1 and earnings per share guidance numbers, plus a view of revenue on free cash flow for accounting.
That's a February Investor day, I will provide additional insight into how much aerospace and new all conical which naturally will be of more interest going forward.
The split I stated is set for the first of April .
Hence by achieving this early timing, we will be able to see three clean courses in 2020 .
Now, let me turn to the specific numbers.
But noting firstly that given the uncertainty.
To that which Boeing will exactly announce.
The future increasing production plans. This causes me to provide a wide upon wins of guidance, none would be normal.
Revenue is targeted to be in the range of 13.9 to 14.2 billion with organic growth in the range of 1% to 3%.
Aerospace revenue is expected to increase year over year.
When we exclude the Boeing 737 Mucks situation.
If we went to include the impacts of the 737, Max Aerospace revenue is expected to be flat year over year.
We expect continued aerospace price increases in 2020.
And growth year over year industry industrial products, driven by the transition about Tennessee plant into more profitable industrial products.
Commercial transportation is back to two experienced headwinds in 2020 different by slowing manufacturing and freight gross low and new truck orders on the increased current inventory levels.
We are targeting to mitigate those margin impacts for affords to wheels business by gaining market share supported by a differentiated like to wake products.
We continue to penetrate steel wheel market with aluminum wheels.
Moreover, a low cost manufacturing wheels expansion in Hungary is now fully operational and we will leverage a global footprint.
The global rolled products business will mitigate commercial transportation headwinds with cost reduction actions.
Earnings per share excluding special items is expected to be in the range of $2.22 to $2.42 per share.
At the midpoint year over year growth is approximately 10%, including a current view of the impacts of the 737 Bucks.
Year over year growth in earnings per share will be driven by run rate cost reductions actions in 2019.
Well as incremental cost reductions in 2020 , plus the continued price increases.
Earnings per share for the first quarter is expected to be 0.47 cents to 53 cents, which is an increase of approximately 16% year after year at the midpoint.
Adjusted free cash flow full cost these to be between $8 million to $900 million driven by earnings.
Capital expenditures of less than 4% of revenue.
Favorable year over year restructuring payments.
Pension and OPEB cash contributions are expected to be approximately $220 million higher than in 2019, driven by the drop in the discount rate.
Free cash flow conversion is expected to be 80%.
With a great to deal gel to provided Investor day on February 25th.
Finally regarding Grunfeld, that's been no activity this quarter and nothing has changed regarding astounds towards the Massa nor up you have the expected outcomes of the litigation no liability.
And with Us I'd like to open the line for your questions.
And we will now begin to question and answer session. As a reminder, press star one three placed in the queue and Q, Chris pound, if you would like terminals yourself from the field.
We do request that you limit yourself to one question and one follow up.
My first question will come from the line of David Strauss with Barclays.
Thanks, Good morning.
Hey, David.
John one two or I wanted to follow up on them on the Max So I understand you're you're not going to talk about exactly what do you assume be can you help us at all on what your Shipset content as it looks like gets me I'll, maybe around $2 million and what kind of.
Decremental margins would you expect to see on on lower volumes there.
Those are the probably the questions, which I'm unwilling to provide the answers on I've always been reluctant or the impact on any earnings calls I've never provided shipset values.
I've read.
But I'll say guesstimates in unless reports, which I'd say probably ought to follow up I don't really want to give specificity of what's the shipset volume what the margins of by by any aircraft.
Because the next question follow being well the next aircraft in the next aircraft and I'd Icefield disinclined to do that at this point.
Well, what I would say to you is.
Our assumption is we've got about a.
400 million dollar revenue hit plus or minus full the Max.
I've tried to take a fairly conservative view to guidance, a especially in the lights of.
The only when we actually know what the Boeing published position is that I think we can be a hub that greater certainty and then how do we address.
Cost structures Weve made assumptions.
And any particular importance to us is.
What will be the profile exactly of the future Boeing build boasting 2020 on really importantly in a in 2020 won a.
Because the Walid saga say.
Relatively easy to shed labor.
Getting a the sort of skills back given the the all say very high employment level in the U.S. I mean, those are all things, which are a really important for us to consider.
And ER, so you've got to see the whole thing and then also have the Boeing position yourself evolves over time I mean, what we've seen as you know over the last.
Six or nine months is a fairly.
This resulted in fairly optimistic assumptions.
And we see many changes to those an hour and situation with.
The production is currently halted.
With a few to restart and what's not viewed as a fairly conservative assumption regarding when the F 38 will release the aircraft and the corn to statements made in the last week by the the chairman of the phase. So I mean honestly say, it's it's pretty confusing.
And and when we have that greater clarity and you know I tend to be in the optimistic comp at some point.
The the aircraft production may rise above what we think it is.
That's what we need to be prepared for that and how we manage labor is critical to it.
Carrying cost about is and what we've built into the assumptions and that's why guidance itself is ER is particularly difficult at this point in time.
But neither I've given you something that I don't feel confident in our ability to achieve.
Did call out the facts the.
Provided a little bit why that guidance a normal to take account of some of this uncertainty.
Clearly we are going to be updating you as we go through the year.
We're going to give you further updates hopefully.
The Oh in the Investor Day on February 25.
On the he knows the I'll say the clarity emerges.
And not to try to give you color of how we've approached this whole situation.
On the fact that we're having to come out really a little bit earlier than normal just two effects the financing that so we're in the market for starting this afternoon.
On the labeling so I'll say a debt raise to occur to meet the separation timing sold these things are pretty much into linked and ER and I guess preferably ought to be in and I know a week or two later, but are the most important thing for the company was to achieve ice believes the earliest possible separation timing.
So hopefully that gives you a pretty wide view of where we've been thinking on this.
And ER and how we approach to David.
Yeah, that's helpful. Thanks, Sean and and as a follow up it looks like based on your guidance. Your your EPS guidance, you're assuming EBIT and EBIT dollars relatively flat at the midpoint, maybe up a little bit can you just help us with the walk there obviously, you have the cost scenes and and price scene and.
Tenancy benefit, but a young what what's what are some of the offsets the you've got baked into that thanks.
Okay, well I'll stop and 100 across to can I mean essentially.
As to where we sold we would be for stuff than plainly the.
Reduce production of the 737 is the most significant negative item.
There is some.
Reduction.
Associated with the I'll say the commercial.
Transportation business and not just essentially the the assumption on truck and trailer build.
Both in the in North America around in a in Europe .
I'll say on industrial fairly philosophy in terms of volume.
And ER. So that gives you some guidance on how we think about the the drags on a or Ah Ah.
EBITDA development, and then countering the us the the cost reductions both the ones we have currently.
Are the ones that we're trying to continue with.
Going forward.
And then as a the price, which I've mentioned so those are the a the major I'll say bridges and without anything else you want to add to that Ken I think to your point John that 70, 37, Max's the biggest items, but we did enjoy a little bit of in aluminum tailwind in.
2019 that won't repeat in 2020, so that's a bit unfavorable and then.
An offset to that would be a variable comp was higher in 2019, just true driven by improved performance in the free cash flow. So you have a little bit of an offset there, but the <unk> 737 maxus the biggest driver.
Great. Thanks for the time.
Thank you.
The next question will come from the line of stuff Siekman with JP Morgan.
Thanks, very much on a good morning.
But wanted to ask about the new warning the at the new our aerospace capacity.
Coming online.
Wells and and ring and sort of the you know the timeline on which you expect that to be sort of qualified and and profitably producing during 2020 and the degree to which any of that is kind of.
Had been expected to be directed toward the Max were or not.
Okay.
The.
Critical and you know assets with job in Whitehall Morriston full say the.
Testing and ER and coal production and then as you know we've invested a 10000 ton press for rings business in in California.
The trials and the initial production has commenced a full each of those assets and in fact first shipments a could.
In December Oh, he knew in small numbers.
Those those assets in particular, I'll say, the the F. for us its we'll see.
As a significant increase production in the first half of Ah of 2020.
And you know they would not.
You know the investments would not that is solely for the the leap engine.
It's going to provide welcome capacity relief for a for many of the for the F. full and ring programs that we have an so who I see those assets coming on aggressively or doing a during the year shipping increasing quantities quarter by quarter.
I've been talking we get to the exit rates of the I'll say everything will be I think it running I expect to be running it's a.
Very high capacity utilization.
It's still leaving something left for 2021 as we all see increase on all productivity program. So.
Right.
I just see them as soon as critical not just LC strategically important investments that are actually going to make it could be contributions to the bottom line as well in the.
Great and then as a follow up just a similar question on a on the rolling side and you know, Tennessee, when we think about what on the you know on the on the catchy side what that facility was doing a few years ago think about kind of where things might ramp up to from here.
And that now that we're kind of closer to it and in positive territory is there anyway to kind of size. The the impact that that new capacity will have either and 2021 or sorry, 2020 or or beyond.
Yeah I.
Well I do welcome the I'll say the sequential improvement in a those Tennessee industrial assets. During the course of 2019 I see that are continuing in 2020, you'll recall from the previous Ah commentary that the.
The major impact to that these in the second half of 2020 . When are the majority of those assets we brought on stream.
I'll say they won't be improvements a along like this that they know they will be.
But in the second half is when we when we've begun to deliver in a in quantity. Those are the study industrial production, which we've contracted with a with distributors and.
I'm going to look to Ken because I've got somebody numbers might I'm thinking a it's a capacity of 300 million pounds, but with about 100 million coming on in 2020 with a the backend being the most of the the most important part of that and Claytie then the run rate into 2021 is.
It is highly beneficial.
Great. Thank you very much.
Thank you.
The next question will come from the line of Carter Copeland nucleus research.
Hey, good morning, John can.
Morning.
Hi, John just to expand a little bit on just in principle how you.
You're planning on managing and the the production capacity in the staffing I mean, you hinted at its hard to.
But labor back on after you take it off but it sounds like you're going to staff in 2020 or plan to staff or resource those facilities in a way that had some stranded costs, but you're doing that purposefully for.
2021 is that is is that fair.
Yes, it's a it's the current way, we thinking about it weve flexing.
Clearly deleting overtime.
Looking at other means of trying to contain that labor whether its ah.
Hi.
I'm going to say some maybe.
Partially paid vacation, we're looking at a shift putins and <unk> and also my expectation is that we will actually be reducing.
Head count as well.
Theyd most difficult decisions that I see coming off a going to be as we move into the middle of the year.
And when we have a greater clarity.
Regarding the production.
What indeed voting themselves have greater clarity regarding.
Regarding production and I've commented that we know because we have seen a lot of noise and different assumptions.
It is critical to that decision or the finalization of how much we're going to flex a labor both the direct and indirect labor.
<unk> cost structure is going to be a view of 2021.
On the and if.
We feel as though and if we clear.
The the production is going to become much more healthy 21.
And potentially with upside that that's going to Oh, that's going to effects and color views about our willingness to hold labor or not.
And if we don't thinking positively then we're going to I'm going to cold die for the floor and just got the cost structure.
As necessary because that's what we should do is as good custodians of of shareholders.
Money.
But now it's a very.
On the approach.
Trying to.
The the is.
This responsible unresponsive as possible while protecting protecting the future you know because I have I am.
Perhaps I personally I'm optimistic even though we know plotting that you know we're not assuming that you are in our guidance.
Okay no. It makes perfect sense and then as a follow up just.
What do you think about the the offset embedded in a.
$400 million worth the growth to offset the 400 million dollar headwind how should we think about the biggest contributors to that given what's happening on a 77 in the Athree 80, and whatnot, where can you give us a sense of where the lion's share that growth is coming from.
The the thus the bright spot because as you say you can tick through the you can stick to the assumptions light what 787 and we've all seen all say recent rumor.
About whether that would be further costs or not.
There's no certainty around that was the triple Sevenx as you know excites first flight and where does that go and then we have the 737, they all seem to be or the big decision.
Obviously add bus is a a bright spot and then the defense I mean that is Ah that is a really been a bright spot for us and in fact in the.
In the fourth quarter sales into the defense sector.
27%.
And ER and we see that as a very strong bright spot for us in 2020 sneaking around the F 35, and the increasing our oh levels of deliveries for for the aircraft and engine program.
Great. Thanks for the color John Thank you.
The next question will come from the line of could come Connor with Cowen and company.
Thanks, John Im Ken.
Okay.
Couple of questions first I was wondering on on the 737 I know you can't speak to specifics on a rate, but can you talk about differences between the engine side of the structure side and how different your assumptions are for each just giving us the delta you've given that in the past.
Yeah the.
In the.
Early Pos.
Yeah.
I'm thinking the ER the.
Opportunity that we have.
Healthy discussion with GE around the.
Just bring forward and bill some of the spare engines is a is going to be a important but to cushion.
That production and production to have a smoother approach to this because.
While it's difficult to.
Move.
Okay stuff and out on let's quit the structural side of the aircraft, but on the engine side are you flex up and down a jewel Pavel.
And if we want to cut that.
And then try to rebuild it back to a number of 42 or 52 all 57.
And then that will become almost impossible not just full arconic, but for the whole of the industry.
So who.
It doesn't know flex just as a matter of Ah production I'll say difficulty complexity that doesn't flex anything like the structural side, even though not decided difficult.
Therefore, what we're thinking about is with Oh say some of the spares clearance and building a spare engines.
Which I believe is ER is being considered.
Planned.
That should help smooth.
Yeah.
And in particular provides the ability to move engine production.
Back up again.
Yeah, as we were 2021, but again, it's it's.
It's cloudy.
We should.
We had greater clarity of what exactly those bills will be for the next a 24 months and beyond.
But if we don't so we just need living in this will that we can habits and so at the moment or obviously.
Cushioning it.
Both ourselves on within GE, and then seeing how we can the minus the overall production both of them with a view of both the material input for the specialty metals and also the critical skills that we have in in that business.
That makes sense has there been any discussion around cash terms on the shipments you make in the interim while we're at a lower rate.
With GE or the structural guys I know G. Non cash right now on the three seven I'm wondering if that's flowing down do you guys.
We've had no discussions with GE or not so when we you know we we get paid after we ship deficit and time of course.
And there's been no dog around the hospital.
Okay last one on the guidance you did mention your expected offset some of the commercial transport downturn with share gain.
Can you put a finer point on what is embedded in your expectation for the decline in commercial transport sales at U.P. enough.
Okay.
[noise] induced memory and look at Cannes FA affirmation I'm thinking that we have around about 75 million plus or minus 20.
Baked into a a year on year assumptions.
For revenue.
And ER and then how it's highly transform the bottom line results to do with a cost management using new capacity and how successful we are in terms of both the share gain into so you can steal and also to the ability to influence a fleet manner.
Just to take the a the new opportunity of even further lightweight wheels, So who yeah, we're actively working it.
Trying to Oh say.
Maximize ourselves ball not deteriorating margins for the business one thing that's going to help us out a lot as the co FIM hungry plant expansion that came online.
The latter part of 19 rolling into this your cost structure is much more favorable there.
So that combination like John said penetration of steel wheels. So if you look at all the wheels right now across the globe, only 19% or them approximately or or aluminum. So there's an opportunity there and we think we have a differentiated process, but team has a bunch of triggering events here, depending on how fickle that market could be.
So theres triggers already bundled up ready to go if we have to take more cost out of the business.
Thank God. Thanks next question will come from the line of Matthew Korn with Goldman Sachs.
Hey, good morning, everyone. Thanks for taking my questions.
First a question for can I just want to confirm.
Your guidance for free cash flow should we assume that excludes any these expected divestments that you, but you're incorporating over the first half of the of the year.
And then secondly on that I am looking over at your at the separation costs expenses outlined the bottom of page 12, how much of these should actually be full cash drag. So for 2020 like for example, just hundred 30 160 million expenses at a fiscal year 20 number only does that exclude any cost over the last quarter any clarity there be great.
Yes, so the divestitures met or are excluded from the cash calculation. If you look at the the cash drag on separation.
About a 50 million of that we're sitting in 19 in the rest of it will hit in 2021 and in the first quarter.
Got great I appreciate that second thing regarding some of the end markets expectations into 2020.
Particularly for automotive and building and construction.
You mentioned highlighted this data for transitions, what's your expectations for autos over all are there any tailwinds into Europe into the spring that you're seeing particularly on the on the building and construction side.
So if a BCS were assuming roughly in line with a GDP.
And we've taken out lumps now in terms of losing out of some of the low margin business that we talked about.
And ER and the full that give you picked BCS so to.
As a small growth in a in 2020 a with the.
Overall.
And improve margin given the actions that we took during the course of last year and we've more than achieves the basis points improvement in margin that I talked about on on previous calls I think is Q2, when I called that out.
In terms of auto.
Yes difficult FA to gain anything fee, if I called it out to 70 million, but North America is an example, you wouldn't gain much from that you need to look more would be more specific in terms of what the underlying trends all of let's say truck bus is Pascal.
And clean as we mainly aimed at the that the SIFI and pickup truck markets.
And in fact, the the really I'll say notable changes in 2020 is one is.
Less of a drag from the food changeover.
Or less of a drag because hopefully well.
I think any reason why there would be another strike that you have seen as the contract is all done and it's a multiyear contract. So that's behind US and then a as you may recall from previous commentary.
We are a successful isn't increasing business with a major.
U.S. OEM.
Coming on stream in the middle as CEO I don't think we have a coal that name outside this morning, but ER.
Business or comes on stream round about the a the sort of late May June .
And ready for the next Monday of a major S. You the and pickup truck introduction.
Because that gives you a picture of how do we think about automotive. So you know a fairly obvious say oh say fairly good outlook for that as it pertains to clinical in 2020.
Sounds like a thanks very much.
Q.
The next question will come from line of Martin <unk> with Jefferies.
Hi, good morning, everyone.
Same often.
Can you provide a little bit more detail to maybe help us understand the lead times as it relates to your products and the airframe side and the engine side, specifically kind of how far ahead does this demand pull come for you. When you look at units being billed by the major commercial air Oems.
Well, it's a it's quite different bye.
Each of the each of the politics, so when we think about.
That reduction that was applied to 787 from I think use 40 inch.
A month down to 12 thing that was just taking effect.
The end of 2020, but in terms of the impact on a fast in the business.
And they really starts in the in the first quarter of 23, so there's a let's say at least at nine month lead time, no sort of let's say more structurally based pockets.
For engine.
Hey, good it's a it's not mobs.
If at all the ultimately longer than the structural side, but anything at that those those bills.
Change.
The end of this year than the we will see the impacts of that in the first off of.
2020, so it's a long lead times both for our own.
Hey, scheduling getting material availability and then the whole processing into an aircraft filled.
Engine bills.
Okay. I think on don't think I think nine months, plus or minus and made many plus.
Okay.
And then same would hold true for Aero heat treat plate to on the aerostructure side.
Yes.
Okay, and if I could one last one here can you discuss things take a long time to getting pulled in but it obviously they can be cuts off much more quickly like don't deliver.
Okay understood.
If I could one last one can you discuss a potential positive implications from increased metals content, both GSM see a plus the recent revisions on section two three to on the 232 side, where that's going to include more downstream aluminum products like body stampings in autos.
Yeah, we sold the announcement this weekend.
Regarding that.
The inclusions for additional.
Hi secondary products.
And obviously.
As a produce of those parts and some of the metals governance policies. So it's a welcome move because.
It's been very clear to us is that.
The effectiveness of some of those protections.
For the a common alloy trade case in particular.
We have that he side effects.
It was expected I mean, how the short term impact.
Then or not only we are all the countries importing into the U.S., but it appears that so some of those metals and some to second reports has also been able to find its way into the U.S. So your natural fact, the total north American aluminium production.
It was actually negatively impact and nothing the current administration is trying to do with some of that.
And so.
We've seen it what we don't yet have is the listing of what those those products and therefore, it's really difficult today to give you piracy.
Walter additional tonnage that May result in a full.
The I'll say the roles and extrude business in the in the U.S.
Its something that.
Obviously noted.
Being part of the upsell process or the guidance today.
With that hopefully it has a positive impact but to quantify it's like now is that it's just not possible.
Okay I appreciate all the color there and congratulations on the execution and progress with the separation over the last year.
Thank you very much.
I guess I should apologise to anybody for them to full my voice today, it's got to think a tone than normal.
The must be the cold.
And we do have time for one additional question. This question will come from lineup Curt Woodworth with credit Suisse.
Yeah, Hey, good morning.
So the 400 million and negative impact from the Max is is that a grocer in that number are you you know I assume you can offset some of the Max issues by pivoting more capacity into.
Airbus or defense and then could you just comment on the cadence of that revenue impact do you assume a much higher weighting of the revenue hit first half of the year versus second half.
Festival.
The on say the.
The gross number.
It's not really very easy cut for us to suddenly flippant sale Oh, let's go like a few more Atlas Pops it doesn't really work like that.
The.
Strained.
Around tooling, and then I'll say specific specialty alloy.
Requirements is such that.
We don't sell well weve, making less of these and and so we can flip it up and make more of those.
We do see Eplus trying to make more and we see.
The desire to build more engines and know the thatll be great and that will be also for the geared turbofan, but we know that you know some of the issues that which we can read about recently in India. So it isn't since the that capacities fungible you movie to somewhere else.
He doesn't look like that.
I'm pleased if it's a role sheet and that was there, but you need the aircraft a cellphone constrained by many of the factor. So it just doesn't E com say [laughter].
It's a 400 million, but that's now it's going to offset by.
100 million no. So we can go set elsewhere.
So.
So hopefully that gives you that one and what was the second party question just the cadence of the 400 million with <unk>.
Given comments from the F and others that you know, it's probably more like a mid year.
Boeing ramped it would it be safe to say that the majority of that revenue impact would be in the first part of the or.
Or how are you thinking.
I think it's going to get I'm going to say to you.
Probably bodies the sounds like a pretty unacceptable on so in that it's going to be pretty cloudy loans because holdings to show. We you know the we know that the Boeing announcement about cessation of production.
And then I'm not going to comment on which months. They said that they will recommence that's not for me to talk about on this call and then neither about the right. So if you think about it in a strict and logical sense it would be.
Obviously more impact in the in the first off of the year, just because ER wasn't enough producing any it's going to have a bigger impact the when you eat the assumption maybe the building a sudden quantity in the back end at the same time.
That may be the smooth the little bit.
I, oh by the willingness or not of a.
It's used to carry inventory, particularly by Boeing themselves.
And ER, so windows Dot and then that dialogue at the moment to tried to see new wallet.
Hi, good flow is exactly from the aircraft and what Im what part of inventory management take into account of all this to a again all with a view to trying to help the labor management situation that I've talked about.
Which is really the probably the most complicating part of this in trying to come up with the right judgment.
And.
My comments, which provides early which was the the critical thing is gonna be how do we see the exit rate for the year on what will be the 2021 production. So this this assays a lot of things to consider it's not just the stick the aircraft bills per se or coming no build.
Situation to hang of inventory management Labor management in all of its affecting both top and bottom line and he's profile during the course of the.
Yeah, if not that makes sense and then just just one quick one on.
It seems like in Tennessee, you still have at least 100 million pounds capacity or more there.
Can you talk about your plan to fill that and are you having any discussions with beverage can.
Suppliers, because it seems like there's a real clear emerging deficit in terms of what's going on on on the aluminum cans side in the U.S.. Thanks very much.
Okay, we've had no discussions with a.
And he counting manufacturers at this point in time inside.
Excluded.
Doing so.
By the agreement with Alcoa or Ah through the so quarter of.
2020.
What we do notes is the the continued movement.
Let's say, particularly from all from the onto plastic movement on which I think he's going to be a net benefits you mean, suppose glass bottle out into to aluminum cans.
On the full with the capacity, which has been taken out of the North American markets.
By ourselves and others.
And that might result in a position in the future.
Which might be interesting, but currently.
[laughter] we know.
I mean, all participating in discussions with that with them about it.
[laughter] gives me the assumption.
For the she was talking about the industrial market.
[laughter] excuse me not beverage can.
Thank you very much.
Thank you.
Ladies and gentlemen, this does conclude today's conference call, we think [laughter] and you may now disconnect.