Howmet Aerospace Inc (HWM) 2017 Q3 法說會逐字稿

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

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

Thank you. Good morning and welcome to Arconic's Third 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.

We 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 thanks for joining the call today.

You've seen our announcement this morning. I've been promising you in prior calls that the board was taking the time and appropriate due diligence needed to select an exceptional CEO to lead Arconic into the future. Well, I'm very pleased to report this morning that we have achieved that objective.

Chip Blankenship is both a colleague and someone I know well and respect. We had the opportunity to work together on a JV. We got to know each other when we were both in our aero engine days so I can personally attest to Chip's excellent fit for Arconic. He brings significant aerospace and other industry operating experience, the right academic and technical credentials, strong leadership qualities and a strong track record of delivering results, all of which make him well-equipped to help Arconic deliver on its full potential for shareholders and for customers. I couldn't be happier with the board's selection and I'm looking forward to Chip's arrival on January 15 and working with him on the transition as I continue to serve on the Arconic board. Until then, I'll continue to lead Arconic.

I also wish to thank Pat Russo for her service as the interim chair. Pat stepped into the chair role on a temporary basis at the board's request to help steer the company through the transition period.

I also welcome and congratulate John Plant on his new role as the incoming chair of Arconic. John has had a distinguished career in the automotive industry in many years of service, both leading a public company and serving on public company boards. In the short time that I've had the opportunity to work with John, I have quickly learned him to be a superlative executive and I look forward to working with him on the board.

We also announced business management changes to streamline and strengthen our operational leadership. Both Eric Roegner and Tim Myers are proven operational executives with deep commercial expertise and market knowledge and a track record of driving profitable growth and meeting or exceeding the expectations of our customers and our shareholders.

Now moving to the third quarter results. In 3Q, Arconic delivered its third consecutive quarter of year-over-year revenue and EBITDA growth. We are demonstrating consistent improvements in operating performance on the back of healthy organic revenue growth coupled with better-than-planned progress on streamlining, restructuring and net cost reduction. Uniquely in this quarter, our results were negatively impacted by a noncash LIFO charge resulting from a spike in aluminum prices. Reported revenue was up 3%. Organic revenue growth was up 5% with year-over-year volume increases in all 3 segments. Reported third quarter year-to-date revenue growth for Arconic is 3% with 5% organic growth.

Looking at revenue growth by market. We had 3% revenue growth in our aerospace businesses driven by 9% growth in engines and 12% growth in defense, partially offset by the continuing headwinds from destocking and select wide-body build rates; 16% growth in our auto segment driven by continued aluminization; and 31% growth in our Commercial Transportation business, largely driven by a recovery in the North American heavy-duty truck market; but all saw growth in China and the rest of Asia. Revenue growth in the quarter was partially offset by a 12% year-over-year decline in our Industrial Gas Turbine segment due to continued weakness in that market.

Reported EBITDA was up 14% with a favorable compare resulting from 3Q 2016 separating spending -- separation spending. EBITDA, excluding special items and including the unfavorable impact of higher aluminum prices, was up 2% in the quarter and 5% year-to-date. Higher aluminum prices in 2017 have resulted in an unfavorable LIFO and metal lag noncash accounting charges at corporate of $49 million in the third quarter and $19 million year-to-date, and year-over-year negative impact to EBITDA in the segments of $11 million in the third quarter and $23 million year-to-date. EBITDA margin, excluding special items, was down 20 basis points year-over-year, but up 30 basis points year-to-date. Aluminum prices and LIFO and metal lag negatively impacted the quarter by 250 basis points and 90 basis points year-to-date.

We continue to make significant progress on restructuring and cost reduction in corporate SG&A and other overhead accounts. Our SG&A forecast for the year has improved by $25 million from our original guidance and is favorable by $100 million compared to last year, with additional run rate savings going forward into 2018. Net cost savings were 1.5% of revenue in the third quarter and 1.7% of revenue year-to-date. All this resulted in an adjusted EPS of $0.25 a share. Year-to-date, annualized RONA of 8.1% was negatively impacted by our working capital as we build inventory to support the aerospace engine ramp.

And finally, we generated $41 million of free cash flow in the quarter to bring our quarter-ending cash balance to $1.8 billion.

I will now turn it over to Ken so he can take you through the numbers in more detail.

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

As we look at Slide 7, revenue for the third quarter came in at $3.2 billion, up 3% year-over-year, driven by volume gains in all segments. Year-over-year, the favorable impact of higher aluminum prices of $115 million and foreign currency of $17 million were more than offset by lower revenue from our Tennessee packaging business and divestitures of $170 million. Organic revenue was up 5% year-over-year. Details of organic revenue growth for Q3 and year-to-date are in the appendix Slide 21.

Combined segment EBITDA margin was 16.6%, up 20 basis points year-over-year, as combined segment EBITDA increased 4%. Year-to-date, combined segment EBITDA margin is 17%, which is in line with our annual guidance of approximately 17%. I will cover segment performance in the segment slides that will follow.

Arconic's EBITDA margin excluding special items was 13.5%, down 20 basis points, as Arconic's EBITDA increased 2% to $437 million on a year-over-year basis. Year-to-date, Arconic's EBITDA margin excluding special items was 14.5%, up 30 basis points versus prior year, which is in line with our annual guidance of approximately 14.5% despite the higher aluminum prices. EBITDA dollars excluding special items were up 5% versus prior year.

As David mentioned, versus the prior year our EBITDA results were negatively impacted $60 million by higher aluminum prices in the third quarter and $42 million on a year-to-date basis. Higher aluminum prices also impacted our EBITDA margins excluding special items by 240 basis points in the third quarter and 90 basis points year-to-date. The unfavorable impact is driven by 3 items: the LIFO method of inventory valuation accounting, metal lag and processing cost in the segments.

Under the LIFO method of inventory accounting, the higher aluminum costs were charged to expense as opposed to inventory and resulted in an unfavorable $47 million charge versus the prior year. LIFO is a noncash expense. The metal lag component was $2 million unfavorable versus the prior year and includes our ability to generally pass through aluminum price increases to customers or mitigate price increases through hedging.

Finally, higher aluminum prices resulted in higher processing costs such as melt loss and regional premiums that reside in the segments. Segment costs were $11 million higher versus the prior year quarter. The details of these impacts are provided on Slide 20 in the appendix for both the third quarter and the year-to-date.

Since the rise in Q3 aluminum prices was significant, I wanted to provide our estimated impact for Q4. At current aluminum prices, we expect Q4 LIFO and metal lag impact on corporate to have a negative EBITDA impact of approximately $10 million to $15 million versus Q3's negative impact of $46 million.

Regarding the Q4 segment impact of higher aluminum prices, we expect the Q4 impact to be similar to Q3 with a year-over-year negative impact of $13 million. On an annual basis, we expect the year-over-year negative impact from LIFO and metal lag of approximately $55 million at corporate and approximately $35 million negative in the segments for a total year-over-year impact of approximately $90 million.

Our capital efficiency RONA was 6.8% on an annualized basis for the third quarter and 8.1% on an annual basis year-to-date. RONA has been negatively impacted by higher working capital levels as we grow volumes and increase our aerospace rate readiness to meet customer demand, particularly in the EP&S business.

Gross debt is at $6.9 billion and cash is at $1.8 billion where we -- and we're approximately the same as the second quarter, as free cash flow was $46 million in the quarter.

Now let's take a closer look at the financials, starting with the income statement on Slide 8. We've talked about revenue so let me cover a couple of other areas.

Overhead reduction continues to be a key focus area for Arconic. In the third quarter, SG&A was impacted by external legal and other advisory costs related to Grenfell Tower of $7 million pretax. Excluding special items, our SG&A as a percentage of sales was 4.6% for the quarter, with SG&A being down $27 million year-over-year and $14 million sequentially.

EBITDA for the third quarter was $430 million. If we exclude the external legal and advisory costs related to the Grenfell Tower as mentioned earlier, EBITDA was $437 million, up 2% year-over-year.

Restructuring charges of $19 million include $11 million related to headcount reductions in the EP&S segment and in corporate as we continue to focus on reducing corporate overhead. Year-to-date, we've reduced approximately 600 positions, which will result in approximately $70 million in cost savings on a run-rate basis. The remaining $8 million of restructuring charges related primarily to costs associated with decisions made prior that caused us to exit certain facilities in 2017 and 2018. Approximately 60% of these costs were cash.

The effective tax rate for the quarter was 30.8% and the operational tax rate was 33.3%. We continue to expect the 2017 annual operational tax rate to be closer to 32%.

Net income was $119 million or $0.22 per share. Excluding special items net income was $132 million or $0.25 per share. As David mentioned, net income was impacted by higher aluminum prices, which drove an unfavorable $30 million in net income from LIFO and metal lag in the quarter. This compares to a favorable $2 million net income impact in the same quarter last year.

On the right-hand side of the slide, you can see the special items for the quarter totaled $13 million after tax. I've already discussed the first 2 special items listed and I'll just note that the amounts listed are pretax. The last item associated with taxes includes not only the tax impact of the first 2 items but also $5 million of favorable discrete tax items in the quarter.

Now let's turn to the cash flow statement on Slide 9. As I mentioned before, free cash flow was $41 million for the quarter and we ended the quarter with $1.8 billion of cash on hand. CapEx spending year-to-date is $360 million. As we manage cash, particularly in light of our higher working capital requirements, we continue to rigorously manage capital expenditures. As a result, we expect to come in approximately $50 million to $75 million below our full year CapEx target of $650 million. Net debt to adjusted EBITDA continued to be below 3x as we finished the third quarter at 2.85x.

Now let's move to our segment performance, starting with EP&S on Slide 10. EP&S's third quarter revenue increased 5% versus the prior year quarter. Aerospace revenue increased 5% as commercial aero engines were up 9%, commercial aero airframes up 2% and aero defense up 6%. In EP&S's other major markets, Commercial Transportation was up 13% and IGT was down 14%. Year-to-date, commercial aero engines are up 8% year-on-year, and we expect to be up in Q4 5% from Q3.

For the full year, commercial aero engine revenue is expected to increase approximately 9% or $150 million. Aero defense is expected to continue its positive trend, while aero airframes are expected to be down sequentially as wide-body build rates on select platforms decline in the near-term. The effect on fasteners of destockings is stabilizing as expected.

Regarding EP&S's other major markets, we continue to expect weaker demand in IGT, particularly offset by strength in the Commercial Transportation market.

Turning to EBITDA. I will note that EP&S's EBITDA as well as its EBITDA margin are up for the third consecutive quarter. In the third quarter, EP&S's EBITDA of $312 million was up 5% versus prior year quarter, as EBITDA margin was up 20 basis points sequentially and flat on a year-over-year basis at 21.1%. Volume was favorable $21 million due to growing aero demand and net cost savings of 1.4% or $20 million, including the higher impact of aero ramp-up cost. The positive impacts were offset by unfavorable pricing of $16 million, which has been declining as a percentage of revenue.

Regarding cost, our aero engine ramp-up costs are not coming down at the rate that we had projected and are creating a headwind for EBITDA growth and EBITDA margin expansion. During the second quarter conference call, I outlined the challenges associated with transitioning a large number of new product introductions into high-volume production in the face of this unprecedented ramp-up in next generation aero engine deliveries. These costs include impacts from customer-driven configuration changes, lower-than-planned manufacturing yields, direct labor variation and premium and expediting fees associated with shipping and capacity-constrained outsourced operations like our heat treat nondestructive testing and machining. Ramp-up costs will come down over time as we work down the variation levels and bring in internal capacity online to reduce outsourcing and expedite costs.

Before moving on from EP&S, I wanted to provide an update on Firth Rixson and RTI. Firth Rixson revenue for the quarter was $235 million for an increase of 7% versus the prior year quarter, which leaves us on track to meet or exceed the target range of $970 million to $1 billion for the year. Third quarter EBITDA was flat to prior year quarter at $31 million. EBITDA margin was 13% versus 14.2% prior year quarter for all the reasons that I outlined above, including the Hurricane Irma impacts on our Savannah, Georgia facility, which was approximately $2 million of EBITDA and about 100 basis points of margin. As a result, annual EBITDA margins are anticipated to be closer to 14% for the full year versus our prior guidance of 16%.

Regarding RTI, RTI continues to perform with revenue of $193 million in the third quarter, which is up 10% versus Q3 of 2016. EBITDA was $40 million in Q3, which is up 11% versus Q3 of 2016. EBITDA margin was at 21.1%, which is flat to the prior year.

Now let's take a look at our GRP segment on Slide 11. Revenue was down 4% compared to the third quarter of 2016 and up 1% when excluding Tennessee packaging, divestitures, as well as higher aluminum prices and foreign currency. In the quarter, higher aluminum prices, higher auto sheet, Commercial Transportation revenue were more than offset by planned ramp-down of our Tennessee packaging business, airframe supply chain optimization, lower aero wide-body build rate platforms and pricing pressures on regional specialty products.

Looking forward, we continue to see year-over-year growth in auto sheet but still destocking airframes, which will stabilize by the end of the year. We'll also see continued declines in wide-body build rates for select platforms.

In the third quarter, GRP's EBITDA of $140 million was down 2% versus the prior year while its EBITDA margin increased 20 basis points to 11.3%. Year-over-year, lower volumes in packaging and aerospace and pricing pressures in regional specialties more than offset cost savings of 1.6% or $20 million. The increase in aluminum prices impacted GRP's EBITDA margin in the quarter by 170 basis points. While higher aluminum prices continue to be an unfavorable impact to EBITDA margin, GRP's EBITDA dollars are expected to meet the prior guidance.

Finally, let's move to the TCS segment on Slide 12. Revenue was up 15% versus the prior year quarter, driven by strength in Commercial Transportation of 30% and North American and nonresidential construction markets of 5%. Looking forward, we continue to expect full year growth in North American nonresidential construction and recovery in the North American heavy-duty truck market.

In the third quarter, TCS's EBITDA of $83 million was up 9% versus the prior year, while its EBITDA margin decreased 80 basis points to 16.1%. Volumes were stronger and net cost savings of 1.4% more than offset pricing pressures and mix. The increase in aluminum prices impacted TCS's EBITDA margin in the quarter by 120 basis points.

Now let's take a look at SG&A in a little bit more detail. On Slide 13 you can see, as I previously mentioned, we remain committed to reducing our overhead spend. Excluding special items, SG&A as a percent of revenue was 4.6% in the quarter. This level of spend compares favorably to our key peer groups. Given progress to-date, we are further reducing our SG&A target from 5.4% of revenue to 5.1% of revenue for the full year. The reduction would yield a $100 million reduction in SG&A full year 2016 versus 2017. At the same time, we continue to accelerate plans to lower corporate overheads to be 1% of revenue for 2017 versus our original guidance of 1.1%.

So in summary, we are confident in our full year guidance and expect a strong Q4. Year-over-year, we expect double-digit volume increases in Aero Commercial Engines, Automotive, Commercial Transportation, as well as favorable mix. We expect continued improvement in net cost savings, particularly in SG&A, which should be lower by approximately $40 million in the quarter.

Lastly, although the impact of higher aluminum prices will unfavorably impact the year-over-year basis, it will be significantly less than Q3.

Now let me turn it back to David to wrap things up, and then we can take your questions.

Thank you, Ken.

So we continue to make solid progress toward delivering on our full-year guidance for Arconic with better-than-planned performance in GRP and TCS and greater-than-planned cost reduction in SG&A and other overhead accounts being offset by the negative impact of higher aluminum prices and higher-than-planned production cost in EP&S associated with the next-generation engine ramp.

EP&S delivered 5% year-over-year revenue growth and 5% year-over-year EBITDA growth in the quarter and the third consecutive quarter of margin expansion with EBITDA margins now up 50 basis points over Q1 of 2017. For the full year in EP&S, margin expansion is now expected to be about flat, recognizing the impact of higher-than-planned production costs associated with transitioning more than 600 new part numbers into high-volume production as the GTF and LEAP pension deliveries more than doubled on an annual basis. These costs include lower manufacturing yields, direct labor variation and expediting and premium fees for logistics and outside operations in our supply chain that is capacity-constrained.

We are not satisfied with our cost reduction progress here and are taking actions to ensure better performance and continued margin expansion going forward. The reductions in margin expansion guidance for GRP and TCS are a function of higher metal prices. Absent the increase in aluminum prices, both segments would be up over prior guidance. Full year EBITDA dollar expectations for both these groups translated in better-than-planned performance.

So for Arconic in total, we're raising our revenue guidance to the range of $12.6 billion to $12.8 billion, primarily to reflect the higher aluminum prices, and we are reaffirming our EBITDA and margin expansion guidance for the full year. This results in an earnings per share range of $1.15 to $1.20, RONA guidance is now 8% to 8.5%, and we remain focused on a strong finish to 2017.

So thank you, and now we'll open up the call to your questions.

(Operator Instructions) Your first question comes from the line of Carter Copeland with Melius Research.

Dave, I hope this means we'll still see you somewhat; you don't get too much beach time out of this.

No. As I said, I will be here, completely focused on delivering on our commitments to our shareholders and customers, until January 15. And even going forward after that, I'll be serving on the board and continue to stay involved. So you'll see me around.

That's great. Look, I will stick to the one question, but hopefully I can have a sort of part A and B here. I just wanted to dig in to the cost headwinds in EP&S that you called out and specifically the chart in the appendix. You had the $20 million 2 quarters ago and the $9 million of ramp-up last quarter. And then you didn't specifically call out that number this quarter. I wondered if you might, for an apples-to-apples basis, be able to give us a sense of what that is. Presumably that's included in the cost headwind number that you've provided in that chart.

And then maybe just to give us a sense of what you're dealing with there, within that 9% engine growth that you've got in the quarter, I mean, how much of that is new engines' positive growth versus older generation engines' negative growth? Anything you can help us with color on that $72 million bar would be helpful.

I mean, on an apples-to-apples basis, the ramp-up costs are roughly flat. But what we're talking about now I guess I'd characterize as a more comprehensive definition of ramp-up cost. And, I mean, you well understand the historic proportions of the ramp that we're in the midst of now with the next-generation narrow-body engine deliveries more than doubling on an annual basis.

So you're right in terms of we've got a number of things going on here. We've got legacy engines ramping down along with the next-generation engines ramping very steeply right now. And so the costs that we're talking about are essentially various forms of variation. I mean, there's the more traditional forms of variation in terms of direct labor variation, lower manufacturing yields and things of that sort. But as we continue to work to climb up the ramp here, we're incurring expediting and premium fees, particularly where we've got outsourced operations in machining and heat treat and in things like nondestructive testing, where we're in the midst of adding capacity. So as we add capacity over time, those operations will come back in-house and will -- and those premium fees and expediting fees for all those external operations as well as transportation will diminish over time, along with the direct labor variation diminishing and improving manufacturing yields.

So we're not happy about it. We're taking actions to work harder on the cost side of the equation to make sure that those costs come down, as we had committed to our shareholders, and we're working hard on that. And we'll be talking more about that in our guidance as we deliver guidance early next year. But it's basically variations of different types.

So I totally understand the expedited fees and all that other stuff is pretty normal and it's temporary, but in terms of rough quantity here, are we talking fives of millions of dollars or tens of millions of dollars in the quarter? What -- how big of an impact was that on your -- on a cost performance in EP&S?

On the apples-to-apples basis, the way we were characterizing ramp-up costs, I think we're on the order of about $10 million. But what we're talking about now I guess is a more comprehensive definition of ramp-up costs.

Your next question comes from the line of Gautam Khanna with Cowen and Company.

I was wondering if you could comment on some of the management changes, not just the CEO change, but the division changes, what precipitated that and what skill sets the new personnel bring, especially at EP&S? And relatedly, do you anticipate your new permanent CEO to update the 2019 targets that were laid out on your costs about a year ago? And if so, do you expect him to kind of affirm that, or do you expect any major changes operationally under his new guidance that will maybe change those numbers in a meaningful way?

Well, with respect to the management changes we've made, we've announced a number of changes that are intended to accelerate our progress here. We've announced Eric Roegner to now lead EP&S. Eric is a veteran of that organization. So he's got, I think, more than 11 years of experience here at Alcoa and Arconic, with most of that in EP&S. And he had other experiences in industry, operating experiences in industry prior to that. So he's a proven executive. He's got deep knowledge of the EP&S business. And we know that he'll be able to hit the ground running and drive improvements in EP&S.

I'd say the same thing about Tim Myers. He is a proven executive here at Arconic. He's demonstrated strong performance leading our TCS business and I think is ready to kind of take the next step with taking on the GRP business as well.

With respect to Chip, I don't want to presume to speak on behalf of the new CEO. I'm sure when Chip gets in here he'll assess the plans and the targets and do what he thinks is right for Arconic and for our shareholders.

If I'm allowed one follow-up, I was wondering if you could talk a little bit about, last quarter we had asked if you guys were a bottleneck in the LEAP or GTF production system. And I'm going to ask the same question again. You mentioned the external suppliers, the cost to expedite. Is Arconic a bottleneck in the production systems of either of those engines? And have you seen any share erosion perhaps resulting from it, if there has been?

Well, I would encourage you to talk to our customers to get...

(technical difficulty)

This is David Hess. We're back on the line if there are additional questions.

Your next question comes from the line of Josh Sullivan with Seaport.

Just one on the GRP side. Can you update us on the scope and timing of the ramp-down on the Tennessee packaging facility? And then I guess relatedly, are you seeing any upside pressure to your automotive sheet needs where you may need to add any capacity?

Josh, it's Ken. In terms of the Tennessee ramp, as we've previously communicated, that will be completed by the end of 2018. That's going as planned. There's no issues there. So that's working out nicely.

In terms of capacity on auto, auto was strong for us in the quarter, both from a revenue and a shipments perspective. We don't see any current issues with any kind of capacity constraints on the auto side.

Your next question comes from the line of Gautam Khanna with Cowen and Company.

Yes, I wanted to just follow up. A year ago you guys had laid out some content figures at your Investor Day on each platform. And I was just wondering how those have evolved over the past year, if you still kind of anticipate a 3% to 4% step-down in content across the platforms or how, if at all, they've changed?

Gautam, it's Ken. I think the driver there is we've got 2 things going on. We've got the legacy platforms declining and we've got the next-generation increasing. Next-generations of course are more profitable for us, but as we're working through the ramp-up costs, that's got a little bit of a hang on the margins until we can eliminate those ramp-up costs going forward. But we're starting to see the shift between the legacy and the next-generation platforms.

But the actual revenue per ship set on each of those platforms as you outlined them has not changed?

No. It's up dramatically.

And we see aero engines, Gautam, this year being up, as I mentioned earlier, about 9% for the full year. Our year-to-date performance is up about 8%. So we're seeing it on the engines. Airframes are a little bit tighter just because of some of the supply chain optimization that's going on right now. But we're definitely seeing it on the top line revenue.

Okay. And speaking to seasonality, since we are in a pretty steep ramp on the new engines, does this buck normal seasonality on an aggregate basis as we look at EP&S in Q4 and into next year, where normally you'd have a softer Q3 and Q4 but -- if you could talk about that a little bit.

Yes, absolutely, Gautam. Normally we see a little bit of a dip in Q3 and then a decline in Q4. But as you can see from our current results, our Q3 was actually up sequentially versus Q2. And as we see that ramp in Q4, we anticipate positive performance in Q4 as well. So the historical seasonality specifically on the EP&S business doesn't carry going forward, just because of the ramp on all the next-generation platforms. So our biggest challenge is meeting the customer needs and getting those ramp-up costs down.

And I presume that would prevail as well in 2018 and 2019, just given the trajectory on those programs? Normal seasonality wouldn't apply in Q3 and Q4 of next year and the year after?

Yes, we'll be giving guidance in 2018 around the January time frame, Gautam, but yes, the historical seasonality in this business really doesn't carry based on this unprecedented growth that we've got.

Last one for me. Just -- you've heard a lot from Boeing about pursuing -- getting a bigger share of the aftermarket. And I know you guys supply the fastener market through distributors to address the aftermarket. And I'm just curious what, if any, changes do you anticipate in any of your businesses from Boeing's kind of reenergized focus on the aftermarket?

I mean, we don't anticipate any impacts with respect to Arconic. I mean, as you know, we have a different model than Tier 1 or system or engine (inaudible) suppliers with respect to the aftermarket. I mean, from our perspective, a part is a part. So we provide the part to our customers and they take the aftermarket for that part. So we get the volume benefit, but it's not a differential in pricing as you would see in the next tier up.

Your next question comes from the line of Seth Seifman with JP Morgan.

I wanted to start off with a clarification on one of the prior questions. We understood from before that the 2019 targets were not really Klaus's targets, they were the board's targets and not necessarily the function of who is the CEO. Is that still the case?

The basis for the targets were the management team and the board through extensive work to put together the 3-year plan. So that's the basis for the targets in the 3-year plan.

Okay. And then maybe to follow up on the engine side, I definitely appreciate a lot of the challenges here with the ramp, but it was also fairly clear coming into the year that it was going to be a challenging ramp. Are there one or two things you would point to that have surprised you on the engine side this year? And then, guess how much of the added ramp-up costs would you associate with Firth Rixson? And are you still planning to be shipping out of the isothermal forge in Q4? And if not, when?

Well, let me talk to Firth Rixson in particular. The short answer to the question is yes, we still expect to be generating revenue out of Firth Rixson, specifically Savannah and the isothermal press. So the answer to that is clearly yes.

With respect to Firth in total, again, we've been very clear in the past about our -- about some of the challenges we've had with the Firth Rixson integration, specifically with the ramp-up of Savannah and the isothermal press, and we're making sure that we're taking appropriate actions now to ensure that we get that on track. In fact, I'll be visiting, spending the day in Savannah myself this Thursday to review operations and review their improvement plans. So we continue to focus very heavily there.

With respect to the question on ramp-up costs in total, I don't think we've been surprised. Obviously, we were forecasting that our costs would come down at a faster rate than we're seeing. I mean, this is a very challenging ramp. I understand the difficulty. I think, as you appreciate, I mean, this is a historic ramp, the likes of which probably haven't been seen since literally World War II, in terms of the steepness of the ramp. And everybody in the supply chain, I think, is challenged by the ramp-up in next-generation narrow-body engine deliveries.

And that's part of the issue that we've had as we go into the supply chain to get heat treat, machining and nondestructive testing. Our supply chain is challenged as well. So again, as we continue to push through there to make sure that we're supporting the ramp and meeting the needs of our customers, our engine customers and our airframe customers, again, we're having to pay some premium and expediting fees to make sure that we get our spot in line, that we get priority, and that we're able to deliver on time.

Your next question comes from the line of Rajeev Lalwani with Morgan Stanley.

Just coming back to the EP&S headwinds. What is it going to mean for working capital and CapEx going forward? And then just on CapEx, it seems like you're pulling in the number a bit this year. Any forward implications there as we think about the next couple years?

Right. In terms of the CapEx, I think we're in very good shape. We've made the substantial investments already, particularly in EP&S. The LaPorte facility, which is up and running, that's for the large structural castings business; and then the aluminum lithium forging operation in Lafayette, which is now the world's largest aluminum lithium cast house; and then, lastly, the titanium aluminide.

So in terms of the CapEx spend in the business, that's done. That's taken care of. There are always opportunities to optimize in the portfolio, but I don't see any spikes on the CapEx side.

On the working capital, we are carrying more inventory as we get ready for rate readiness. So that is a bit higher than I initially anticipated for the year, but that's all around making sure that we have enough product for our customers, and we're working through some of the bottlenecks in the supply chain.

And that working capital, is that going to be contained to this year? Or should we think of it as carrying forward maybe in the next year or so as the ramp continues?

I would say it wouldn't increase next year. Probably at constant levels to this year.

Okay. And then just real quick on the CapEx one, a follow-up there. That $600 million or so this year, is that a good number to use going forward?

Well, we said that $650 million was our target this year and we're seeing anywhere between $50 million to $75 million less. I would look at it more as a percentage of revenue as we move forward, somewhere in the 4% to 5% range.

Your next question comes from the line of Jorge Beristain with Deutsche Bank.

I guess my question is for Ken. Ken, at the November Investor Day, you gave a guidance of working capital reduction of 3 to 7 business days for 2017, I believe. Could you just update us to where you're tracking on that? And am I to understand that because of this rate readiness that some of those goals have been put on the back burner?

Yes, Jorge, you're correct; we gave guidance of 3 to 7 days. I think we're probably more in the 0 to 3 range right now. And that's all driven by the EP&S additional inventory that we've got in the chain.

And then just in terms of when we could expect the next kind of mark-to-market update of your 3-year plan, with the new CEO coming in until January 15, would we be looking at a March, April time frame to -- for him to kind of roll up his sleeves and come out with his view of the 3-year plan update? Or are you still going to have your typical end-of-year update cycle? Just trying to get a sense on what the next timing window would be.

I expect we'll be giving you guidance for 2018 in the first quarter of next year.

So following 1Q results?

Yes, the last...

Sorry. 4Q results. Thank you.

Yes.

Right.

Your next question comes from the line of Sam Pearlstein with Wells Fargo.

So should I think about the $50 million to $75 million reduction in CapEx is roughly what the working capital build increase is since net income didn't change?

The working capital rate, a day on the working capital, Sam, is worth about $15 million -- excuse me, $35 million, right? So the offset of CapEx and working capital should be approximately in the same range.

And are these projects that you no longer have to do because you found other efficiencies on the CapEx? Or are they things that will be pushed out into subsequent years?

Well, as you know, Sam, I -- one of the things we've done in CapEx is David and I are now reviewing approximately 85% of all the CapEx that comes across. And it's been good interactions with the businesses. These are not deferrals. These are not cancellations. It's more efficiency in the business, not only on the growth side, but on the sustaining CapEx or maintenance CapEx as well. So I believe our process this year that we implemented early in the year is working very well for us.

Yes. Let me just build on that, Sam. I mean, while we've introduced some rigor into the process, I want to be very clear. We are not constraining growth capital. And wherever we need capital to support the ramp, we are approving it, without hesitation.

If I could just follow with one. The reorg -- or the management changes that you announced, putting both GRP and TCS under one person, is that a temporary change? Or is that how you envision things being run in the future?

Everything is permanent until it changes.

Your next question comes from the line of Josh Sullivan with Seaport.

Just another follow-up on the jet engine ramp. Is there a LEAP or a GTF production number where we can look to get to the other side of the ramp-up costs? Any way to frame the learning curve at this point?

Well, the production numbers have been communicated by the engine manufacturers, so I don't want to comment on their numbers. But, I mean, it's clear what they have talked about publicly are engine build rates and delivery rates more than doubling on an annual basis last year to this year or this year to next year and going forward.

Okay. I mean, is there any way to time it, maybe not a specific engine number, but just, as we look into '18, maybe where we get on the other side of it? First half? Second half?

We're working through all that now. As we work through our improvement plans and our cost reduction plans, we're assessing all that and you'll hear about that in a lot more detail when we give guidance for 2018.

Your next question comes from the line of Carter Copeland with Melius Research.

Dave, I like that pearl of wisdom on the permanence. That was a good one.

I want to ask a question about the -- I know you don't want to give 2018 guidance, but conceptually I just want to understand. In the growth rate that you guys are calling out for engines this year, that 9% that you mentioned, Ken, is there an element of inventory stocking at your customer, at the engine OEMs similar to the stocking, the working capital dynamic that you're seeing in your own facilities? Meaning are you ahead of the underlying unit growth in production? I mean, is there a de-risking effect that's making your '17 numbers inflated somewhat? I just want to get a sense of if there's something there we should know about.

I guess what I'd say, Sam, is that it's not unusual to see a working capital build like this heading into a steep ramp. So in that sense I guess it's not surprising. But we're making sure here that we do what we need to do to protect our customers and deliver on our commitments to our customers. So if that means carrying a little bit more inventory, if that means having to incur some higher expedite and premium fees to make sure that we're getting our fair share of capacity in our supply chain, we're going to do what we have to do to protect our customers.

(Operator Instructions) We have a follow-up question from Gautam Khanna with Cowen and Company.

Just to follow up, I was curious if you anticipate any changes to the incentive comp or kind of the operating philosophy at the company now given the management changes at the segment levels?

Well, I mean, we review that every year as a board, Gautam. I mean, as you can imagine, it will be something that gets discussed in our fourth quarter December Arconic board meeting. As you know, there has been considerable change in terms of the board composition and some of the experiences that our new directors have may, at some point, result in adjustments to the compensation plan going forward. So it's always something that we take a look at, to take a look at what the industry benchmarks are doing, what our peers are doing, what's proven to be successful in terms of motivating the right behavior with our employees here at Arconic. And given the new board composition, I'm sure this is something we'll revisit on an annual basis.

As you stand here today, you've been in charge for a while now. Would you say that there have been -- that the company is in need of material operating philosophy change, which was something one of the major shareholders had made a point of in January? I'm just curious, was that your impression as well? Or do you think a lot of the criticism was unwarranted or maybe overstated?

Arconic needs improvement in performance across the board. We need better -- we need to do a better job in terms of meeting our commitments to our shareholders. And as you know, there's been some disappointments in the past. And we need to continue to deliver on our commitments to our customers. So I think, as I've said before, I think opportunity abounds here at Arconic to continue to improve operations to deliver higher levels of performance, both to our shareholders and to our customers. And I think our new CEO, Chip Blankenship, is the perfect CEO to deliver on those commitments and to help Arconic realize its full potential.

Your next question comes from the line of Seth Seifman with JP Morgan.

One quick follow-up. On the question of cash deployment, do you anticipate having the new CEO come in and participate in that decision with the board and maybe announce something about that later next year in terms of the excess cash that you've talked about deploying? Or is that something that the board might determine before Chip steps into the role?

Chip will participate in that. Chip will be obviously delivering 2018 guidance, and as part of that guidance we'll talk about capital allocation. But we're not waiting for Chip. We're having serious discussions with the board and the finance committee around capital allocation now. It's front and center on our agenda in December. And we'll be in a position to make some recommendations to Chip when he arrives in January 15 of next year and then in position to discuss our plans when we give guidance for 2018.

Your next question comes from the line of Jorge Beristain with Deutsche Bank.

I just -- if I could get a follow-up in. I just was wondering if you could give us any color on how some of your non-aerospace segments are doing such as oil and gas-related sales, energy, transport? Just if you could just talk about, are you seeing any kind of demand pull for some of these heavier forgings and castings from some sectors that may have gone quiet in the last few years and how you would kind of balance that against the paramount need to obviously focus your guns on the aerospace ramp? But if you could just tell us, do you see some improved utilization coming from those other sectors as well?

Yes. Jorge, it's Ken. Just a few items. On our Commercial Transportation business, as I mentioned earlier, we're seeing double-digit growth in that market and that will continue as we move forward. I think there's 2 things going on there. One is just the market dynamics, but the second part is just related to our differentiated product, right? Again, our aluminum wheel is, I believe, the benchmark in the industry at 47% less weight than steel. And it's a quick payback for our customers as we move forward there.

The building and construction business as well continues to be on a nice trajectory as we move forward, not only in North America but in Europe. So we're happy there.

In terms of automotive, that will continue to aluminize. Shipments are still strong on a year-over-year basis. We have not seen any of the impacts -- real significant impacts from hurricane demand yet based on what's happened there, but that market continues to be strong.

So I would say across all of our major markets, with the exception of IGT, IGT is down, we feel very confident that we're in the right markets and we have differentiated products to help us grow profitably.

Your next question comes from the line of Karl Blunden with Goldman Sachs.

A lot of focus just on your operating goals for the coming months. I do appreciate that. As you think about the balance sheet, is there anything you can do there to optimize -- to increase return on equity for the equity holders over time or has that not really been in discussion yet? I know, if you go back a year, you were thinking investment grade. That hasn't really happened. But is there just more room to flex that in order to satisfy all stakeholders?

Yes, in terms of the investment grade, that's important to us as we move forward. In terms of what we're doing with the balance sheet, we were fortunate, as we monetized the Alcoa Corp stake earlier this year, that gave us more cash. But as David mentioned, we are continuously working with the board actively in terms of uses of -- excess uses of that cash, and that could span multiple areas. It could be debt paydown, share repurchase, initiatives on our pension program, potentially dividends. But we're looking at all different aspects and the relative returns of each one of them. So that is actively working right now and we will provide guidance with that in terms of January, when we go through Q4 earnings.

Your next question comes from the line of Rajeev Lalwani with Morgan Stanley.

Just a relatively quick one on Grenfell. Any update there, maybe when we're going to hear on the various investigations and inquiries? And then maybe just the extent to your involvement as you've been getting questions, et cetera? That would be great.

Nothing really new to communicate. Obviously, there's an ongoing investigation and we're absolutely supporting the investigation. So really there's not much new to say.

Any color on time line?

On timing?

Correct.

I mean, it's hard to predict, obviously, or speculate on that, but it is not unusual for these things to take a number of years to resolve.

(Operator Instructions) Your next question comes from the line of Gautam Khanna with Cowen and Company.

I apologize for asking all these questions, but I think I disconnected when you were answering so I'm just going to ask it again. Is there any -- are you guys a -- were you a bottleneck, are you a bottleneck in the production of GTF and LEAP? I seem to have disconnected when that -- when you were answering it.

And also, just do you have any view on whether you've lost share on these programs? I'm just curious because, again, a lot of us model the business on the revenue per ship set disclosures you've given, and I'm just curious if there has been any change, either because of share or anything else, so that we don't overshoot on consensus.

Sure. Yes, I apologize for the line drop, Gautam.

With respect to bottleneck, what I said is you ought to go ask the engine manufacturers. But to my knowledge, no, we have not been a bottleneck or pacing or stopping engine deliveries to the airframers. I speak very frequently with the most senior level executives at the engine manufacturers at Safran, at GE and at Pratt and at Rolls-Royce to make sure that we're not getting in their way or pacing deliveries. But again, I would encourage you to talk with them.

With respect to share, there's always puts and takes, but I've seen no evidence that we've lost share. In fact, I've seen evidence that in certain areas we've picked up share.

There are no further questions at this time. We'll turn the call back over to Ken Giacobbe.

Yes. Before we turn it back to David to close here, this will be David's final quarterly earnings. David has worked tirelessly with our team, spending a lot of time with employees on the plant floor, staying very close to our customers and calling out on investors, many of the people that are on this call. We have no doubt that David will continue that pace right up to the day that the new CEO arrives. But on the sake of the entire management team and employees, David, I'd like to thank you for all your efforts.

Thank you, all, and thank you again for joining the call today. And I look forward to listening in for the fourth quarter earnings report with our new CEO. Thank you very much.

This concludes today's conference call. You may now disconnect.