Howmet Aerospace Inc (HWM) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 Arconic Earnings Conference Call. My name is Shelby, and I'll be your operator for today. As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn your conference over to your host today, Patricia Figueroa, Vice President of Investor Relations. Please proceed.

Thank you, Shelby. Good morning, and welcome to Arconic's Second Quarter 2017 Earnings Conference Call. I'm joined by David Hess, interim Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by David and Ken, we will take your questions.

I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation. Any reference in our discussion today to historical EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix.

With that, I'd like to turn the call over to David.

Good morning, everyone, and thank you for joining the call. Before we move to the details of our second quarter earnings results, I'd like to first address the tragedy at Grenfell Tower that I know remains on the minds of many of you on this call and certainly those at this company and around this table.

The Grenfell Tower fire has been a terrible tragedy. The leadership and the board of this company, in addition to myself, have spent a lot of time working to understand how our product was involved, and Arconic has offered its full support to the authorities as they conduct their investigations. Many of you have had questions about our involvement in the development of the cladding system. And given the importance of this issue, I wanted to address several aspects upfront.

First, I want to clarify the way the supply chain here worked, particularly given the reports from investigators that something on the order of 60 different organizations were involved in the construction, management and/or refurbishment of the building. Reynobond panels were just one component in this complex supply system which also included a number of components we did not manufacture.

We supplied one of our products, Reynobond PE, to our customer, a cladding system fabricator, which used the product as one component of the overall cladding system on Grenfell Tower. The fabricator supply this portion of the cladding system to the facade installer who then delivered it to the general contractor. Arconic was not involved in the design or installation of the system used at the tower, nor did we have a role in any other aspect of the building's refurbishment or original design.

Second, it's important to understand the regulatory framework. Our Reynobond products, including Reynobond PE, are permitted to be used in accordance with local building codes and regulations in the United States, in the U.K. and other countries around the world. Cladding systems contain various components selected and put together by architects, contractors, fabricators and building owners, and those parties are responsible for ensuring that the cladding systems are compliant under the appropriate codes and regulations. For our portion in the supply chain, we believe we've been compliant in the sale of our product.

Importantly, it has been reported through a number of recent public references to other buildings that a cladding system with aluminum cladding material and a building it is on can be considered safe given proper cladding system and overall building design and installation.

Finally, I wanted to address our decision to discontinue local sales of Reynobond PE for high-rise building applications. As I noted, our products are sold for use in cladding systems that comply with local code and regulations. Given the tragedy at Grenfell Tower and out of an abundance of caution, as we do not control the ultimate design and installation of the final cladding system, we announced on June 26 that we would no longer sell PE products for use in high-rise construction regardless of the local codes and regulations.

Many of you have had questions about the market for this product and the financial impact of our decision to discontinue Reynobond PE for high-rise applications, so I want to address that as well. We are one supplier of many in a fragmented local market. We understand there to be at least 18 suppliers of aluminum composite material, or ACM, which is the generic name for our Reynobond material. Of those suppliers, we believe most of them also manufacture a PE version of ACM.

For Arconic's part, our total 2016 Reynobond PE global revenue for building applications was less than $60 million, and a fraction of that ends up in high-rise applications. And of the $60 million in revenue, approximately $3 million was Reynobond PE sales into the U.K.

So to close, I want to reiterate, we extend our deepest sympathies to those who have lost so much. Everyone at Arconic continues to keep them in our thoughts. And importantly, we remain committed to supporting the investigations that are seeking an outcome that makes it unlikely that a similar tragedy will ever occur again. Now given the investigations and where we are, there isn't much more I can say at this time on that matter.

Now I'll turn to our discussion of the second quarter results. In Q2, Arconic delivered our second consecutive quarter of year-over-year revenue and earnings growth, margin expansion and net cost reduction. For Q2, revenue was up 1% and 5% year-over-year adjusting for the Tennessee packaging business.

Revenues were driven by volume increases in all 3 business groups and a pass-through on higher aluminum prices. We had 1% revenue growth in aerospace and defense businesses, with lift from next-generation engine and narrowbody ramp-up and defense, partially offset by continuing headwinds from destocking and selected wide-body ramp down.

27% revenue growth in the auto segment is driven by continued aluminization trends and 9% growth in our commercial transportation business. Revenue growth in the quarter was partially offset by a 7% year-over-year decline in our industrial gas turbine segment due to continued softening in those markets.

EBITDA was up 3% driven by volume and continued net cost reduction of 1.8% of revenue through the first half of 2017. EBITDA margin, excluding special items, expanded by 20 basis points year-over-year in the second quarter, resulting in EPS of $0.32 a share.

Year-to-date annualized RONA of 8.7% is on track to deliver our full year target of 9%. Also in the quarter, we monetized the remainder of the Alcoa stake and exchanged it for debt for a total debt reduction of $1.25 billion. And finally, we generated $91 million of free cash flow in the quarter to bring our quarter ending cash balance to $1.8 billion.

Now I'm going to turn it over to Ken so he can take you through the numbers in a little bit more detail. Ken?

Thank you, David. Similar to the last quarter, I will move rather quickly through the financial slides in order to leave more time for questions. We have added several slides in the appendix, which provide additional details if needed.

On Slide 6, you can see David mentioned that revenue for the second quarter came in at $3.3 billion, up almost 1% year-over-year, driven by volume gains in all segments. The impact of higher aluminum prices in the quarter of $124 million was more than offset by lower revenue from our Tennessee packaging business of $138 million. Adjusting for Tennessee packaging, revenue was up 5.4% year-over-year. We had previously announced our plan to exit the low-margin North American packaging business by the end of 2018.

Combined segment EBITDA margin was 17.1%, down 40 basis points year-over-year as combined segment EBITDA decreased 2%. For the first half, combined segment EBITDA margin was 17.2%, which is in line with our annual guidance of approximately 17%. I will cover segment performance in the segment slides that follow. Arconic's EBITDA margin, excluding special items, was 14.9%, up 20 basis points, as Arconic's EBITDA increased 2% to $486 million on a year-over-year basis. Excluding LME impacts, EBITDA margin would have been 15.7% versus the 14.9% reported.

For the first half, Arconic's EBITDA margin, excluding special items, was 15% versus the prior year, which is in line with our annual guidance of approximately 15%. EBITDA dollars, excluding special items, were up 6% versus the prior year.

Our capital efficiency measure, RONA, which is return on net assets, was 8.6% on an annualized basis for the second quarter and 8.7% on an annualized basis for the first half. This result puts us on track for the full year target of approximately 9%.

Gross debt was down $1.25 billion in the quarter, from $8.1 billion at the end of the first quarter to $6.8 billion at the end of the second quarter, which is consistent with our guidance of reducing debt by $1 billion in the first half of 2017. Cash ended the quarter with a strong balance of $1.8 billion, which is approximately $1 billion more than our operating cash target of $750 million.

Net debt to adjusted EBITDA is now below 3x, as we finish the second quarter at 2.87. Second quarter free cash flow was $91 million.

Now let's take a closer look at the financials, starting with the income statement on Slide 7. We talked about revenue, so let me cover a couple of other key areas. Overhead reduction continues to be a key focus area for Arconic. In the second quarter, SG&A was impacted by proxy, advisory and governance-related cost of $42 million pretax.

Excluding special items, our SG&A as a percentage of sales was 5% for the quarter, with SG&A being down $32 million year-over-year and $25 million sequentially. EBITDA for the second quarter was $444 million. If we exclude proxy, advisory and governance-related costs as mentioned above, EBITDA was $486 million, up 2% year-over-year.

The interest expense line of the income statement includes $76 million of pretax cost associated with the early redemption of the $1.25 billion in debt. Excluding the impact of the early redemption cost, our annual interest expense going forward will be lower due to the debt buy-down and closer to $400 million. So this is going to be approximately $100 million reduction in interest expense compared to 2016.

The other income line includes $167 million pretax gain on the debt-for-equity exchange of the remaining shares of Alcoa Corporation. This transaction is intended to qualify as generally tax free to Arconic for U.S. federal income tax purposes.

Restructuring charges of $26 million include $16 million primarily related to headcount reductions across all segments, including corporate. These reductions are part of our plan to reduce corporate overhead by $45 million in 2017. We've achieved approximately half of our corporate overhead reductions for the first half of the year. The remaining $10 million of restructuring charges relates to costs associated with exiting certain locations and facilities. Approximately 85% of these costs were cash.

The effective tax rate for the quarter was 21.2%, which reflects the nontaxable gain on the debt-for-equity exchange of the remaining shares of Alcoa Corporation. The operational tax rate for the quarter was 32.9%. We expect our 2017 annual tax rate to be closer to 32% versus our previous guidance of 32% to 35%. Net income was $212 million or $0.43 a share. Excluding special items, income was $165 million or $0.32 a share.

On the right hand of the slide, you can see the special items for the quarter were $47 million after tax in total. I've already discussed the first 4 special items listed and I will just note that the amounts listed are pretax. The last item associated with taxes include not only the tax impact of the first 4 special items but also includes a $26 million favorable discrete tax item in the quarter.

Now let's turn to the cash flow statement. Cash from operations was $217 million in the second quarter. Cash used for financing activities was $860 million, primarily due to payments of $820 million to retire long-term debt and dividends. Cash used for investing activities was $125 million in the second quarter, driven by capital expenditures of $126 million and the receipt of the remaining $5 million in proceeds from the sale of Alcoa Corp's Yadkin, North Carolina hydroelectric plant.

Finally, as I've mentioned before, free cash flow was $91 million in the second quarter, and we ended the quarter with $1.8 billion of cash on hand.

Now let's move to the segment performance, starting with EP&S. In the second quarter, EP&S' EBITDA declined 6% versus prior year and its EBITDA margin dropped 160 basis points, driven by unfavorable mix, price and ramp-up costs. Revenue increased 1% versus the prior year quarter. Although aero revenue increased by 1%, let me provide more transparency into the components of EP&S as aero revenue.

For the second quarter, commercial aero engines were up 8% and aero defense was up 9%. However, commercial aero airframes were down 4% driven by destocking and declines in wide-body build rates on select platforms. Moving to EP&S' other major markets, IGT was down 7% and was up partially offset by commercial transportation, which was up 6%.

Looking ahead, commercial aero engine revenue is expected to increase in the second half compared to the first half by another 4%. That increase translates into an increase of 16% if we compare the second half of '17 to the second half of '16. Commercial aero engine revenue is expected to reach more than $2 billion annually. In total, we expect $200 million in aero engine revenue growth this year.

Aero defense will continue its positive trend. Aero airframes will continue to be weak in the second half as wide-body build rates on select platforms declined in the near term. However, we expect destabilized -- destocking to destable -- we expect destocking to stabilize for the EP&S segment. Regarding EP&S' other major markets, we expect weaker demand in IGT, partially offset by strength in commercial transportation.

EBITDA of $310 million for the quarter was down 6% year-over-year. EBITDA margin, as we have discussed, has been down 160 basis points to 20.9%, primarily driven by product mix of $29 million, which was driven by lower shipments of our higher-margin products impacted by destocking and lower build rates of select aero platforms. Additionally, mix was impacted by lower shipments in our Industrial Gas Turbine business and a higher contribution of Firth Rixson, which is at a lower margin.

ramp-up costs were $9 million year-over-year unfavorable, and pricing was unfavorable, $19 million. Pricing pressures and ramp-up costs were more than offset by net cost savings of 2% or $29 million. Volume was favorable, $13 million.

Regarding EBITDA margin, EP&S' second quarter was up sequentially 30 basis points. We expect stronger second half compared to the first half driven by better mix, higher net cost savings and lower ramp-up costs. Full year annual EBITDA margin will increase 30 to 60 basis points versus the prior year to 21.2% to 21.5%.

Before leaving the EP&S segment, I wanted to provide details on the ramp-up cost. As I mentioned, ramp-up cost in the quarter were $9 million year-over-year, unfavorable. Sequentially, ramp-up costs are down in both absolute dollars and as a percent of aero engine revenue.

Ramp-up costs in the second half of 2017 are expected to continue to stabilize and decline as a percentage of aero revenues as we continue to work down the learning curve on a large number of new product introductions in the face of this unprecedented ramp-up in the next-generation auto engine -- aero engine deliveries.

To put the magnitude of this ramp-up into perspective, deliveries of our structural casting and airfoils business in the new commercial engine platforms for the GTF, the XWB, the GE9X and the LEAP grew nearly 75% for the first half of '17 versus the first half of 2016.

Also included in ramp-up costs are costs associated with transitioning portions of our fasteners and rings businesses from high-cost to new low-cost operations. Our facility in Acuna, Mexico, which we're still ramping up, nearly tripled its manufacturing of engine rings year-over-year. These include typical learning curve costs such as higher direct labor cost variation, lower manufacturing yields, new process development and employee training.

Lastly, while we're on this topic of engine ramp-up, despite what you may have read, we have not encountered manufacturing issues that would prevent us from delivering our financial targets for the year. GE and Safran are and will remain a large and very important customer base for Arconic.

Now let's take a look at the GRP segment. In the second quarter, GRP improved its EBITDA by 1% versus the prior year and its EBITDA margin by 50 basis points, driven by automotive growth and net cost savings of 2.1% of revenues. We did have an increase in LME in the second quarter compared to the second quarter of 2016. If we normalize for this impact of LME, GRP's EBITDA margin for Q2 would've been 14.4% rather than 12.9% as reported. We've included a reconciliation in the appendix for your review.

Second quarter revenue was down 4% compared to the second quarter of 2016 and up 8% when excluding Tennessee packaging. Auto sheet revenue was up 37% despite U.S. passenger vehicle and light truck sales being down 2% through June as the aluminization trend continues to drive our business. In the quarter, revenue was impacted by destocking in airframes, where the impact of the supply chain optimization is stabilizing and volumes are expected to rebound next year, lower aero wide-body build rates on select platforms and pricing pressures in our regional specialty markets.

Looking forward to the second half, we expect to see -- continue to see year-on-year growth in auto sheet, destocking in airframes and continued declines in wide-body build rates for select platforms.

EBITDA of $164 million for the quarter was up 1%, while EBITDA margin improved 50 basis points to 12.9%. Year-over-year volume growth in automotive shipments of $10 million was more than offset by unfavorable mix of $22 million, while net cost savings of 2.1% or $26 million more than offset the pricing pressures in our regional specialty markets and in aerospace of approximately $15 million.

GRP's first half EBITDA margin is 13.3% with an annual estimate of around 12.2% to 12.4%. Higher metal unfavorability impacted EBITDA margin, however, annual EBITDA dollars are expected to improve over our prior guidance.

Finally, let me move our performance to the TCS segment. In the second quarter, TCS improved its EBITDA by 8% versus prior year, and its EBITDA margin by 10 basis points, driven by volume and net cost savings of 2%. Revenue was up 7% versus the prior year quarter driven by strength in commercial transportation and North American and European nonresidential construction.

We saw a recovery in the North American heavy-duty truck market. Comparing the second half of '17 to the first half, we expect full year growth in North American nonresidential construction and a direct recovery in the North American heavy-duty truck market.

EBITDA of $82 million for the quarter was up 8% year-over-year, and EBITDA margin improved 10 basis points to 16.4%. Volume were strong, and net cost savings of 2% more than offset the pricing pressures in heavy-duty truck and our mix. TCS' first half EBITDA margin is 16.2% with an annual estimate of 16.1% to 16.3%.

Now let's take a look at our SG&A in a little bit more detail. As I'd mentioned previously, we remain committed to reducing our overhead spend. Excluding special items, our SG&A as a percentage of revenue was 5% in the second quarter. This level of spend compares favorably to our peer groups, namely the S&P 500 Industrial Index and the S&P 500 Aerospace & Defense Index.

Given the progress to date, we are reducing the SG&A target from 5.6% of revenue to 5.4% of the revenue for the full year 2017. At the same time, we continue to accelerate the plans for lower corporate overheads to be 1% of revenue for 2017.

Now let's take a moment to review the transaction associated with our retained interest in Alcoa Corporation. In the first quarter, we monetized approximately 64% of our retained interest in Alcoa Corporation or more than 23 million shares. The shares were sold at $38.03 per share, which resulted in $888 million of proceeds. The sale generated a pretax gain of $351 million and an after-tax gain of $238 million.

In the second quarter, we completed a debt-for-equity exchange on the remaining Alcoa Corporation shares for approximately 13 million shares. The shares were exchanged at $35.91 a share, which resulted in a retirement of $429 million of debt and $36 million of accrued interest in early tender premiums. The exchange generated a pretax gain of $167 million. This transaction is intended to qualify as generally tax-free to Arconic for U.S. federal income tax purposes. And as you can see, the Alcoa Corporation stake yielded $1.35 billion, which was more than $500 million above our target at the time of separation.

Now let me turn it back to David to wrap things up, and then we'll be happy to take your questions.

Thank you, Ken. So we've had a solid start to 2017. Through the first half of the year, organic revenue was up 7% adjusted for Tennessee packaging. And adjusted EBITDA, excluding special items, is up 6% year-over-year. And looking forward to the back half of the year, we expect to see continued strength in aero engines, auto sheet, North American nonresidential construction and heavy-duty trucks.

In all of our relevant markets, except for industrial gas turbines, bookings are running at or above plan. Based on solid first half performance, we're adjusting our full year guidance, raising the high end of revenue guidance by $300 million and narrowing the range by $200 million due to higher aluminum prices, higher volume and our increased confidence in the full year.

Similarly, given our increased confidence, we have narrowed our EBITDA guidance range by $40 million, with higher volumes and higher net cost savings, offset by higher aluminum prices. This results in an updated earnings per share range of $1.15 to $1.20.

Thank you. And now, we'll open the line to taking your questions.

(Operator Instructions) Our first question comes from Sam Pearlstein from Wells Fargo.

I wanted to just go back at -- you made a comment that despite what we've read about manufacturing issues on some of the engine parts, and I guess you're referring to the LEAP, can you just talk a little bit more about why there seems to be a disconnect? Because I know a lot of parts are dual sourced, so it's relatively easy for the OEM to shift between suppliers.

I'm not sure what you mean by disconnect, Sam.

I thought Ken made a comment that despite what we've read, you have not had any manufacturing issues in terms of parts on the LEAP.

I think what Ken said is that despite what you may have read, that we don't expect any financial impact, either this year or the 3-year plan, as a result of any issues that we may or may not have had. And I know there's been some speculation in the media, but I'm not aware of any statements that have been made by any of our customers about this issue and I'm hesitant to get out in front of our customers on any issues. I mean, the only statement that I can direct you to is Keith Leverkuhn's statement, who is VP of the 737 MAX program, who commented, I think, the issue that, that the media attention he considered a hiccup. I think that kind of puts it into perspective.

Okay. And then when I look at your adjusted earnings so far in the first half of the year and I just compare it to even the raised guidance in terms of the EPS, it does imply that the second half's earnings are going to be modestly below the first half's. Is there a seasonality? Is there any reason to see that? Is that a more normal seasonality? Anything you can help with that.

Yes. Traditionally, Sam, we had some seasonality as we go into the second half, specifically on the GRP business. We anticipate strength in the EP&S business and the TCS business, but the GRP business does have seasonality in the second half.

And is that auto related?

Some of it is auto related and some of it is packaging. And then we've also got, as we've talked about, some destocking and lower build rates on the wide bodies on some of the select platforms.

The next question comes from Josh Sullivan of Seaport.

I think you might have just answered the question. But can you clarify comments on aerospace plate destocking? Did the channel assumed any more wide-body cuts? Or is it matching OEM production needs on narrow body and wide body, maybe in 2017 or 2018?

I think there's 2 things going on. We're seeing both effects. We're seeing the ramp down in selected wide-body, that certainly has an impact. And at the same time, we are seeing some destocking in sheet as it kind of worked its way through the supply chain. I mean, keep in mind, a lot of the material that we deliver doesn't go directly to our airframe customers, not necessarily to Airbus or Boeing. In some cases, it goes to an intermediate person who's fabricating parts of the airplane. And so there's some destocking that's going on in that element of supply chain as well. So there's really 2 effects going on. We're seeing both of them now.

Okay. But you still expect it to stabilize in late '17? Or has there been any change to that timeline?

Well, I think the destocking, we expect to stabilize in the back half of the year and then start to resume growth, start to pick up again in early 2018. The ramp-downs are kind of airframe by airframe. I think you're as familiar with the Airbus and Boeing announcement as we are in terms of which ones are going down. But that continues. I think some of those build rate reductions continue through next year.

Okay. And then just one question on Grenfell. Can you quantify any liability insurance policies you guys may hold which could offset any potential impact?

I mean, as you expect, for a company of our size and complexity, we have, I'd say, appropriate insurance coverage. I can't say anything more than that.

And your next question comes from Seth Seifman of JPMorgan.

Dave, with regard to engine execution. Maybe instead of talking about the financial impact, can you address it in terms of share and talk about maybe your share on some of the major engines that are ramping up? How it's developing and how it's developing compared to your expectations? Not necessarily with one part, but overall.

Overall, I think we're on track or even better. We see our share in the marketplace growing. And certainly, our volumes are growing. I mean, if you look at our content, I think we've shared some of this in some of the briefings that we've had with our shareholders and analysts. But if you look at our content on next-generation engines as compared to the earlier vintage, our content is way up. So we're gaining share in the marketplace and I don't see that changing.

Right. And with regard to stuff where you may have gained some -- an opportunity to sell on a part of an engine, but maybe it's dual or triple sourced. The way that your share is evolving as the ramp-up proceeds, is that in line with your expectations?

Yes, it is.

Great, great. And then maybe, Ken, just if you could talk a little bit about getting to the cash flow guidance and the kind of components of working capital release that you're looking at in the second half of the year.

Yes. The guidance that we gave on cash was $350 million plus for the year, right? The $350 million number is our floor. So we've had a little bit of uptick here in the guidance on EBITDA. That's going to help. And we're on track for our working capital for the year. We do, as you know, have some seasonality in the second half to deliver on that cash. And then lastly, CapEx, as we go through the year, is looking favorable, which is probably going to help with the plus portion of that $350 million. And I think the process that David and I have put in around capital efficiency is working for CapEx. Now if you look at the first half of the year, we've spent about $229 million of CapEx. We said that we would have not to exceed CapEx number of around $650 million for the year. So my -- you can't really take your first half CapEx and annualize it because, historically, we have CapEx in the second half of the year as you have summer -- seasonal shutdowns in the second half. But I think we'll be probably below our $650 million cash CapEx number, which will also help cash for the year. But we feel strong in the $350 million plus. Again, that's the floor. So we think we'll have some upside to that.

(Operator Instructions) We do have a question from Gautam Khanna from Cowen & Company.

First question I was hoping to get an answer to is what do you anticipate the timing of when a CEO, a permanent CEO, will be named? And David, have you made a decision on whether to throw your hat into the ring for that position?

When we -- sure. I mean, with respect the timing, I mean, it's hard to give you a fixed time frame. I can tell you that the CEO search is well underway. And as you can imagine, it's a top priority for our board. The search committee was formed back in May. They since selected an executive recruiting firm, and they are working and evaluating through the list of candidates now. So we're making good progress. And again, it's a very heavy focus of the board and the selection committee right now. Given where we are in the selection process and given the -- and with respect to confidentiality, and I think that is required here, I think it would be inappropriate of me to kind of comment as to who the candidates are or are not, including myself. But again, that -- right now, that process and decision stands with the selection committee and the board, and I think they're working very hard on it. In the meantime, I continue to be focused on driving the business, improving our operations, delivering on our commitments and working to meet or exceed the expectations of our shareholders and customers. And they are working on a CEO.

All right. And earlier on the call, you made a comment about the content figures you've provided. I was thinking of the November Investor Day of last year where you had revenue per ship set on a number of aircraft programs. Have those actually expanded on a net basis? Or have they declined, given pricing and maybe yield improvement downstream? Just curious if you could give us some update on where those numbers are.

I don't there's -- I don't think anything has changed since we shared that information with you last year. We're basically on those marks.

Okay. And on the last quarter, I asked you guys about any problems on the GTF or PW1000. Are you suggesting that the problems were over -- they were overcome and it's been a nonissue? Or that there weren't any problems from manufacturing at around that time?

On the GTF?

GTF or LEAP engines.

Again, I mean, you need to talk with our customers on that. We don't like to get ahead of our customers. And I think I'd refer you to Pratt or CFM.

Okay. But as it stands today, there are no operational issues that are holding back your throughput on those programs?

No. Correct. We have lots of parts on both engines and we continue to manufacture and deliver parts, including discs.

Okay. One other one -- Boeing has talked a lot about moving into the aftermarket. And just curious how, if at all, will that impact Arconic's business? Do you get better pricing on any aftermarket sales? Or is it mostly just volume as opposed to you getting a better price on some of the aftermarket-oriented products? And if there is incursion -- yes, David.

Yes, the pricing is the same. It's basically incremental volume.

Okay. And have they indicated any interest in pursuing these faster aftermarket in your mind?

Not that I am aware of.

And your next question comes from Howard Rubel of Jefferies.

David, a number of your customers have continued to pursue all sorts of cost-reduction strategies. And some of them, obviously, put lots of pressure on your pricing. What are you doing to work with them so that you create some value but also leave something for shareholders?

Well, I think there's 3 elements to it that I see, Howard. One is, and you've heard us talk about it plenty, and that's kind of the innovation angle that we continue to push. And I think through innovation, we've been able to develop parts that create a value proposition for our customers. And as you can expect, we like to share in that value proposition. So it creates value to them. It also creates value for us. I mean, one good example that I can talk about because I have some knowledge of it from my UTC days at Pratt, and that's the mid-turbine frame that Arconic supplies to Pratt. I mean, formerly, this was a part that was fabricated from 16 individual parts, very difficult to manufacture, very expensive, very difficult for Pratt to hold tolerances. And we are able to develop a single-piece cast part that dramatically improves their assembly process, gives them better yields and tolerances and things of that sort. And at least Pratt has told us that they think we're the only one in the world that could do that part. I think it's just one example of kind of the innovation we use to create value that allows us to, quite honestly, offset some of the pricing pressure that, as a reality, the markets that we're in today, both aero and auto. So that's one element. The other element, obviously, when they ask us for cost reduction we try to work with them on not just margin transfer from Arconic to our customers, but work on joint cost reduction, where we actually collectively work on a part to take cost out of the part, and we both share the margin gain that comes with it. And then often, we try to work in exchange. If we do have to concede on price, which is not unusual. When we do, we like to get additional new business or volume, we do that. And then at the end of the day, we continue to do -- to be relentless on cost reduction. I think we made good progress on cost reduction through the first half of the year. We're going to see the benefit at the back half of the year across Arconic, I think, particularly in our EP&S business. But it's really those kind of 3 elements that we use to deal with the pricing pressure, which is -- it's a reality in aero, it's a reality in auto and in just about every market we serve.

Just 2 follow ups on that. One, could you talk for a moment about where you are with 3D manufacturing? And then I think Ken referred to some improvements in Firth Rixson. How would you characterize the progress there versus where you'd like to be?

Let me take the second one first, because it is a shorter answer. But I think we're -- through Q2 of this year, we're on track with the ramp up of what used to be Firth Rixson. I think that business is growing nicely. We expect high single-digit revenue growth in that business this year, with somewhere around 16% EBITDA margins. So good progress for the Firth business. I visited a number of the former Firth sites myself recently. And as you can imagine, given the amount of attention and focus on those sites and given the fact that those sites are going to be a big growth engine for Arconic in the next 3 years, we're paying a lot of attention to them. With respect to 3D, quite honestly, I like our position there. There's a lot of people that, obviously, are spending a lot of money and making investments and working hard on building 3D and additive manufacturing capability. And in some cases, to some of our customers. I think what's unique about Arconic that I see and that I like is that we have the capability to formulate powders that are used by all 3D manufacturers, both nickel alloys, aluminum alloys and titanium that can be used in the supply chain. So there's an opportunity in terms of formulating new powder alloys for our customers or anyone who does 3D manufacturing can use. So it's a market opportunity in that respect. But what's unique about Arconic, I mean, there's other people that make powder in the marketplace obviously, and anybody can go buy a machine and start manufacturing 3D parts. What's unique about Arconic is really the combined expertise we have in the 2. The fact that we have such deep knowledge of the powders, and we are developing proprietary powders today to be used in additive manufacturing, and we have expertise in terms of how that process works at the machine level and are able to characterize the parts that's made to -- so that we can assure you that as the part is manufactured, you get consistent performance characteristics of that part. We have expertise in how to characterize both the process and the part when you 3D manufacture it. Not all of our -- not everyone who's trying to manufacture 3D parts have those capabilities. And beyond that, if you look at our capability in forging and some of the other operations, we actually got some very innovative technology we've developed, kind of combining 3D or additive manufacturing with forging to give you kind of the benefit of both worlds in some of these large structural parts, where we're able to forge the part and then add additional material using 3D, which saves you a lot when you look at your buy-to-fly cost ratios. So we've made some significant investments. It's a large area of focus for our Arconic Technology Center in Pittsburgh. And we've invested quite a bit, roughly $60 million in recent years in both capability to manufacture products -- powders as well as some of the manufacturing capability that goes along with it. So I kind of like our position in the marketplace. A lot of work to do. We need to be quick. But I like our position in the marketplace, Howard.

And our next question comes from Josh Sullivan of Seaport.

Just a follow-up on the EP&S segment. You just provided some updates on Firth. Are you able to provide any updates on RTI?

Yes, regarding RTI, we're right in line with our expectations for the first half of the year. They delivered EBITDA margins of 20.6% through the first half, right in line with where we see them. There will be some additional net cost savings for the RTI business in the second half and also some favorable mix. So right on track.

(Operator Instructions) Your next question comes from Seth Seifman of JPMorgan.

Just 2 quick follow-ups. First of all, on Reynobond, maybe outside of the Grenfell Tower. There's no thought about any exposure with regard to replacing material in other buildings given that the architects and designers of those buildings were the ones who made decisions to put the product on those buildings. And if they want to do that, that would be basically their decision that they would pay for. But you don't see any exposure to Arconic in that regard. Is that a fair characterization at this time?

I mean, I really can't speculate on our exposure, Seth. What I can tell you is that, more often than not, when we sell that material just like anyone selling any other building material or construction material, more often than not, we don't know where that material is headed when it's sold. So we can't tell you which building it's on or not on, or where it's been applied or how it's been applied. We supply the building material and that's our only role in the supply chain.

Okay. And then one follow-up on -- of all the end markets you talked about, I guess the one that stood out as a little bit weaker was IGT. And just wanted to follow up. As for the business as a whole, IGT, we're talking about kind of a low to mid-single digit percentage of sales. A, is that correct? And b, how much worse have things gotten in IGT maybe relative to what you expected at the start of the year?

Yes, you're right. The IGT business, shifting to your perspective, is about 4% of our total revenue base. And we see it being down probably for the year, about high single digits. And then a lot of that is driven by 60 hertz platforms. We're just seeing that erode a bit through the remainder of this year.

And your next question comes from Gautam Khanna from Cowen & Company.

Yes, I was wondering if you could give us the Firth Rixson revenues and EBITDA margin in the quarter?

Gautam, this is Ken. Yes, the revenue was $250 million for the second quarter. If you compare that to last year same time, we're up about 8%. And the EBITDA margin was 14.4% for the second quarter. If you fast forward to the first half, revenue, up 5 -- revenue was $504 million, that compares to about $468 million from last year. So that's up still around 8%. And the EBITDA margin is at 14.3%. But we are seeing a lift in the second half as we talked about the ramp-up costs coming down, the productivity. And we've invested some CapEx in the first half of the year in the Firth Rixson facility, which will also drive some more net cost savings. So to David's point, we're more towards the high end of the revenue guidance on Firth Rixson. We had given a range of $970 million to $1 billion, so we're on the high end there. And we'll probably be about 16% EBITDA margin for the full year.

Okay, that's very helpful. Very helpful. And then just -- you made some comments about it earlier, with the isothermal parts that you're getting qualified now. When should we expect to see revenue contribution from those parts? Will it be in 2017 Q4 still? Or is that moving to the [right?]

Gautam, we're probably looking at some of the isothermal revenue in the late part of 2017 in the low single digits from a millions of dollars perspective. We have approximately 78% of the parts qualified for 2017. They've been forged and are undergoing customer qualifications right now. So again, latter part of 2017.

Okay. And one last one. At this point, are the -- is the bill of materials and the opportunity for market share pretty much fixed, i.e., there's not a whole lot of opportunity on the LEAP, the PW1000 and the other existing engine programs? Are these pretty fixed at this point? Or do you anticipate your content could, in fact, expand over time?

I'd say they're relatively fixed, but there's always discretion at our customers in terms of how they split the share. And it's our objective to perform at a high level, both on quality and delivery performance with a competitive price, to win more than our fair share. There's always a little bit of flex in the way the contracts are established.

And to that point, can you give us some sense for how much flex, how much opportunity is there?

I don't know if I can quantify that.

Is it 5% more or 10% more? Or...

I'd say it's probably in the order of 10%.

And your last question comes from Chris Olin of Longbow Research.

Just wondering if you could provide a little bit of color or thoughts on this current Section 232 investigation into aluminum. Just wondering what the potential impact, say, a 20% duty could have on the Arconic segments. Or do you see this as a potential supply risk going forward?

I mean, it's hard to quantify. It's still not clear what's going to work its way through Congress and come out in terms of legislation. As you can imagine, our Washington operations are following very closely and trying to contribute to the process so that there's a clear understanding as to the potential financial or jobs impact of some of these decisions. So we're working very closely with the administration.

Is there a way you can tell us in terms of how much aluminum is sourced from outside the U.S. right now?

Well, I think most of our aluminum comes in through Canada. Very little from outside of North America, I believe.

Since there are no other questions in queue, we will now close the call.

Thank you very much. Appreciate everybody joining us today. Look forward to speaking with you again after the third quarter.

Thank you for your participation. You may now disconnect.