Howmet Aerospace Inc (HWM) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arconic's Third Quarter Earnings Conference Call. My name is Julie, 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, Paul Luther, Director of Investor Relations. Please proceed.

Thank you, Julie. Good morning, and welcome to Arconic's Third Quarter 2018 Earnings Conference Call. I'm joined by Chip Blankenship, Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by Chip and Ken, we will take your questions.

I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's 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 in today's presentation.

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

Good morning. Thank you for joining the call. I'll begin with an update on the strategy review and third quarter highlights, then Ken will take you through our financial results. I'll conclude with the guidance and we'll take your questions after that.

As a reminder, the goal of our strategy review is to develop actions that will enhance shareholder value, streamline the portfolio, tighten our strategic focus and strengthen our financial profile. We have completed significant milestones as reported last quarter. However, we are extending the scope and duration of this activity. We now anticipate completing the strategy review in the fourth quarter.

Two publicly announced outcomes of earlier phases of the strategy review are already in motion. The sale process for the Building and Construction Systems business is well underway and has drawn robust interest. We signed an agreement to sell our Texarkana aluminum rolling mill to Ta Chen, monetizing a substantially idle facility for $300 million in cash as well as $50 million in earn-out potential. This is one element of the GRP transformation growth strategy that we are developing.

Before Ken takes you through the financial results, I'd like to share some highlights from the third quarter. Revenue was up 9% year-over-year, 7% organically. Volume was up in each segment. Earnings per share increased by 28% year-over-year. Segment operating profit was flat overall for EP&S with engines and fasteners posting growth, offset by performance shortfalls in structures. Segment operating profit increased for both GRP and TCS. Adjusted free cash flow was $115 million, up from $41 million in 3Q the previous year. Working capital improved by 8 days, ending the quarter at 54 days. Our liquidity remained strong with $1.5 billion cash on hand and access to a total of $5.3 billion.

Now I'll turn it over to Ken.

Thank you, Chip. I will move rather quickly through the slides so that we can get to the updated annual guidance and your questions. We've also included several slides in the appendix for added transparency.

Now let's move to Slide 5. Revenue for the third quarter came in at $3.5 billion, up $288 million or 9% year-over-year as aluminum prices accounted for $108 million or almost 40% of the increase. Revenue growth was driven by volume gains across all segments. All of our major markets were healthy.

Organically, Automotive is up 21%, Aero Engines is up 16% and Aero Defense is up 34% year-over-year. Double-digit growth in these markets was supported by solid organic growth of 7% in the Commercial Transportation market and 5% in the Building and Construction market. Organic revenue, which adjusts for aluminum prices, currency, Tennessee packaging and the divestiture of the Latin American extrusions business, was up $233 million or 7% for the quarter on a year-over-year basis. The reconciliation for organic revenue can be found on Slide 15 in the appendix. We've also included year-over-year market growth rates on Slide 18 in the appendix.

Excluding special items, operating income was $348 million in the third quarter, up $12 million or 4% year-over-year. The increase in operating income was driven by higher volumes across all the segments, particularly in Aerospace in EP&S and Automotive in GRP. The higher volumes were offset by unfavorable aero engine mix, lower aero pricing, principally in our fasteners business and unfavorable net cost savings driven by transportation cost increases. The unfavorable net cost savings includes the favorable impact of a lower annual incentive compensation accrual and an unfavorable impact of higher scrap sales.

Approximately 75% of the aero price reductions is with our fasteners business. We've seen an increase in fastener volume and net cost savings. The net cost savings are driven by our low-cost country production strategy in Mexico, Morocco, Hungary and China. The net impact of the price, volume and net cost savings is an increase in fastener operating profit dollars and a 90 basis point margin improvement in the third quarter versus last year. The third quarter impact of higher aluminum prices unfavorably impacted operating income by only $1 million on a year-over-year basis and operating income margin by 30 basis points.

As you may recall, last year, in the third quarter, we recorded a $46 million LIFO metal lag charge as aluminum prices increased in the quarter. This year, we recorded a $25 million LIFO metal lag charge, resulting in a favorable year-over-year impact of $21 million as aluminum prices decreased in the quarter. This favorable year-over-year impact was offset by higher scrap sales and higher operational impacts.

Although aluminum prices have come down sequentially, aluminum prices were still 15% higher in the quarter versus last year. Although there's a lot of moving pieces in there, the net impact of higher aluminum prices versus last year was small at only $1 million unfavorable. The aluminum price impacts are detailed by segment on Slide 14 in the appendix.

Operating income margin percent excluding special items was 9.9% for the third quarter, down 50 basis points year-over-year, including an unfavorable 30 basis point impact due to higher aluminum prices. We've also included the reconciliation of operating income excluding special items on Slide 28 in the appendix.

As Chip mentioned, adjusted free cash flow generated in the third quarter was $115 million or $74 million more than the third quarter of 2017. The improved free cash flow generation was driven primarily by favorable operating working capital that drove a $70 million benefit year-over-year. Days working capital improved 8 days on a year-over-year basis.

Lastly, compared to last year, lower pension contributions and lower interest rate payments partially offset the increase in capital expenditures. 2/3 of the capital expenditure increase in the quarter was from return-seeking projects as we expanded our wheels facility in Hungary. We also installed a horizontal heat treat in Davenport for industrial and aerospace markets and started the expansion of the aero engine capacity in Whitehall, Michigan and Morristown, Tennessee.

Diluted earnings per share excluding special items for the third quarter was up 28%. Lower pension and OPEB expenses, lower interest expense and a lower operational tax rate drove the improvement.

Now let's move to the segment results on Slide 6. In the third quarter, EP&S' revenue was $1.6 billion, an increase of 6% year-over-year. Organic revenue was up 6% due to volume growth in Aero Engines and Aero Defense. Segment operating profit was $238 million, relatively flat to the third quarter of 2017.

Growth in the Aero Engines and Aero Defense markets as well as favorable impact from aluminum prices was offset by unfavorable engine mix, lower aero pricing principally in our fasteners business and manufacturing inefficiencies in the Structures business. Segment operating profit margin percent was 15.2%, down 100 basis points year-over-year, including a favorable 30 basis point impact of higher aluminum prices.

In the third quarter, GRP's revenue was $1.4 billion, an increase of 16% year-over-year. Organic revenue was up 9% due to volume growth in Automotive, Industrial and Commercial Transportation. Segment operating profit was $74 million, up $10 million or 16% year-over-year, driven by strong volumes in Automotive, Industrial and Commercial Transportation as well as favorable aluminum price impacts. These favorable impacts were partially offset by higher transportation costs and higher scrap volumes. Segment operating profit margin was 5.2%, unchanged year-over-year, including a favorable 30 basis point impact of aluminum prices.

In the third quarter, TCS delivered revenue of $530 million, an increase of 1% year-over-year. Organically, revenue was up 8%, as we continue to see strong growth in Building and Construction as well as Commercial Transportation. Segment operating profit was $77 million, up $3 million or 4% year-over-year. Higher volume in Commercial Transportation and Building and Construction as well as net savings and favorable product mix were partially offset by an unfavorable aluminum price impact, driven by mark-to-mark losses on open hedges. Segment operating profit was 14.5%, up 40 basis points year-over-year, including a 280 basis point negative impact of higher aluminum prices.

Now let's move to the third quarter key achievements on Slide 7. In EP&S, we continue to see unprecedented customer demand for our products. We remain focused on improving throughput and capacity to meet that demand. As a result, on a year-over-year basis, Aero Engines was up 15% and Aero Defense was up 38%.

In GRP, we continued to deliver strong growth in major markets. Automotive was up 20% organically, Industrial was up 6% organically and Commercial Transportation was up 7% organically. In TCS, both of the major markets remained strong. Commercial Transportation grew 8%; Building and Construction, 7%, both organically. TCS continues to deliver improved margins despite headwinds from aluminum prices. In the third quarter, margin expanded by 40 basis points despite an unfavorable aluminum price impact of 280 basis points.

And for the company in total, we continue to focus on managing our legacy liabilities as our pension and OPEB payments were $20 million higher on a year-to-date basis versus last year. Lastly, as a result of our actions this year, our unfunded pension and OPEB net liability has decreased $519 million since the start of 2018.

Before turning it back over to Chip, let me cover a few items that can be found in the appendix. On Slide 11 of the appendix, we've summarized special items for the quarter. I'll touch on some of these briefly.

Restructuring-related special items resulted in income of $2 million pretax which consisted of the following 4 items: first, income of $28 million associated with the elimination of pre-Medicare retiree medical for U.S. nonbargaining employees; second, the charge of $15 million related to the consolidation and closure of a facility in Mexico; third, severance charges of $8 million for the elimination of 85 positions primarily in EP&S and corporate; and fourth, a charge of $4 million related to pension settlement accounting for one of our smaller U.S. pension plans.

Also, in the third quarter, similar with previous quarters this year, we incurred $5 million of external legal and other advisory costs related to Grenfell Tower, which we recorded in SG&A. As previously disclosed in our 10-Q for the second quarter, the company recorded 2 discrete tax items in the third quarter, which explain the majority of the discrete tax items for the quarter.

First, we recorded a tax charge of $59 million related to an unfavorable decision from Spain's National Court, which disallowed some certain interest deductions. In conjunction with that booking of the tax reserve, we had a related benefit of $29 million that was recorded representing Alcoa Corporation's 49% share of the net liability pursuant to separation-related agreements. Second, we recorded a tax benefit of $38 million after receiving notification from a foreign tax authority that our inquiry related to 2016 tax return was complete.

On Slide 12 of the appendix, we have provided an update on our capital structure as we continue to manage our debt and reduce our liabilities. We finished the quarter with approximately $1.5 billion of cash, up $80 million sequentially. Gross debt remains at $6.4 billion and net debt stands at $4.8 billion. Net debt to EBITDA continues to improve and stand at 2.4x, which is an improvement of 28% since the fourth quarter of 2016.

Finally, I'd like to give you some context on aluminum price impacts for the remainder of the year. Our updated guidance that Chip will cover in a minute assumes an aluminum price of $2,520 per metric ton for the remainder of the year. The third quarter average was slightly lower than that at $2,510 per metric ton with a downward trend throughout the quarter. As a result of the lower aluminum prices experienced in the third quarter and the lower aluminum price assumption in the fourth quarter, the full year average aluminum equates to about $2,561 per metric ton or roughly $100 per metric ton lower than our previous full year view.

As a result of the revised aluminum assumption, our estimated unfavorable aluminum price impact for the year is now approximately $100 million, which is $30 million better than the previous estimate of approximately $130 million. We have provided 2 slides in the appendix to help you understand the revised aluminum price estimates and impacts. Slide 16 in the appendix will be familiar to you as it provides the detail of the LIFO charge by quarter. And then Slide 17 in the appendix provides a breakdown of the year-over-year unfavorable aluminum price impacts.

Briefly, a breakdown of the $30 million improvement from prior guidance associated for aluminum price can be broken down into a couple of components. First, the recent reduction in aluminum prices improved the year-over-year LIFO metal lag noncash impact by $35 million. Second, our current estimate for the trading desk remains unchanged. Third, scrap spreads, this one actually has gotten worse as they've doubled -- more than doubled since the third quarter of last year. The current guidance is more unfavorable on scrap spreads by $20 million. The driver of this increase in scrap spreads is less scrap going to China due to Chinese imposed tariffs on imports. Aluminum scrap has a tariff on it, going into China right now, of about 25%. And we expect that, that will continue through the fourth quarter of '18. Lastly, the change in our operational estimates is roughly in line with our sensitivities and has improved by $15 million from the prior guidance.

Finally, before turning it over to Chip to cover the 2018 annual guidance, I'd like to note that the updated assumptions used to derive the annual guidance can be found on Slide 13 in the appendix.

With that, I will turn it over to Chip.

Thank you, Ken. Before I provide updated guidance, I'll share some news regarding a forging press in our Cleveland Works facility. Our 15,000-ton press experienced a hydraulic leak resulting from a cracked cylinder that caused operators to shut down the press. The length of the outage has not yet been determined, but we do not anticipate return to service in the fourth quarter. We are moving work to other presses in the facility and working with our customers to prioritize shipments.

On the topic of guidance, we are raising and tightening our guidance range for the full year from the range of $1.17 to $1.27 to the new range of $1.28 to $1.34. This $0.07 to $0.11 increase reflects updated aluminum pricing of $2,520 for fourth quarter, as Ken mentioned, decreased variable compensation accrual, operational improvements in engines, fasteners, GRP, wheels and BCS, with pressure coming from the 15,000-ton press outage in structures.

With that, I'd like to open the line for your questions.

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

I was wondering if you could update us on the performance in the Rings and Disks since you didn't mention that. And certainly, during this last quarter, we heard a lot from OEM customers and engine makers about on-time yield, et cetera, from various parts of the supply chain. So can you just talk a little bit about your own on-time performance versus past yields, really how you're faring in that?

^ Sure, Sam. So if you just get to the bottom line with Rings and Disks, we feel like these operations are stabilizing. We've -- as I've said earlier, in the last quarter, we surged resources into these locations and helped them with their operational capability. Revenue is up 11% year-over-year for the quarter. This is actually the third consecutive quarter of adjusted operating income improvement from each of these operations in Rings and Disks. We've taken some pretty substantial actions on in-sourcing, which reduces overall lead time, especially in the area of machining. We've reduced our cost there by over 50% just by bringing those operations in-house with the [sub] -- with the -- also an improvement in reducing lead time. Our on-time delivery is up substantially in both Rings and Disks. So I'd say, as of now, we're pleased with the progress. There's more work to do and the teams continue to put their shoulder to it and continue to improve. As I've said before, from -- really from being able to attack substantially the arrears position in Rings, we really need to bring on the 10-K press, which is under construction right now. We anticipate that in the first half of '19 coming online. The team and the project bringing that to fruition is on schedule and on budget. We're pleased with that progress. That will be my update on Rings and Disks, Sam.

And can you tell us a little bit about what happened in the Engineering Structures this quarter?

So it really comes down to 4 categories, Sam: manufacturing inefficiencies; outsourcing costs; transportation expedites because of a little bit of increased lead time with the inefficiencies in the outsourcing; and also raw material cost, mostly in the area of vanadium. So the master alloy addition that we add, ALV is up substantially year-over-year in terms of cost. So we're attacking each of these areas, mostly in terms of equipment OEE, sales inventory and operations planning to make sure we're putting the best mix possible through the factory to get the most out of the assets as well as we are increasing our utilization to scrap to lessen the need for ALV additions to the melts. So we've got teams on it. We're seeing improvement month over month and trying to bring that back in line.

Our next question comes from Gautam Khanna from Cowen & Company.

I was wondering if you could just expand upon the 15,000-ton press. What products it makes? And what the P&L impact will be from it being out and what the cost to repair will be, et cetera? I mean, if you can give us an absorption opportunity, cost of revenue and the like.

So this is a press that's dedicated almost completely to the aerospace arena, we're working with the customers. All the parts are qualified on other presses in the facility, and we've already begun making those parts across the other presses in the Cleveland facility. As far as the cost to repair, it really is going to depend on what scope of action we choose to take. We want to make sure the return to service condition of this press. We have a lot of confidence that it will run for a substantial period of time with high confidence to deliver for our customers. So we are taking the time to do the complete work scope to make sure we've got the right plan of attack on that. We have the spare parts and the plans in terms of how to take this action that we're developing. So we're ready to act and we've already begun the process. We just need to make sure we have the work scope right for return to service.

And on top of that, Gautam, in terms of the P&L impact, as Chip mentioned, we can move some of that production onto other qualified assets. However, we do have some absorption that we won't be able to take. However, we've included that in the increased guidance that we've given for the year. So we're assuming that, that absorption is lost and is being completely lost for the fourth quarter and that's baked into the guidance.

Okay. And then if you could just give us some color on what you're doing at Rings and Disks. Do you have all the -- do you have kind of the root cause identified on some of the challenges you've had on yield and the like? And do you now have the personnel in place to scale whatever improvements you've identified across the entity? I mean, where are we in terms of know-how at the facility?

Gautam, I'd say that we like very much our current state of progress. So we have the -- we've gotten some help, technical help from the rest of the Engines business. We have there the quality team. That was one of the reasons we put Rings and Disks with our investment cast engines business because that expertise for Six Sigma quality, daily management, problem-solving, application of the theory of constraints, what are the bottlenecks, how do we solve them, how do we make sure that there's -- the sequential bottleneck is not going to starve the asset that we block the asset that we really want to focus on. We've got the right people on the ground and we've seen improvements, double-digit improvements in daily, weekly output from these plants, first pass yield up substantially and we like our progress. So I think we've got the right people on board to help make it happen.

And the last one for me, any update to the free cash flow guidance for this fiscal of -- I think it was $250 million previously? What do you think of that?

We're sticking with that $250 million, but I'll turn it to Ken for any other color.

Yes, I think we've made some good progress. You saw it on the days working capital improvement of 8 days year-over-year. Some terrific work by our procurement organization, renegotiating with our suppliers, particularly on the metal side. Inventory is showing improvement as well. And receivables, very high percent. [The current] on receivables is over 90%. So we feel good about that, Gautam. We're going to hold to the $25 million -- $250 million. You could call me conservative on that. But we're going to hold to that number right now.

(Operator Instructions) Your next question comes from David Strauss from Barclays.

Just wanted to see if you could give a little bit more color around extending the strategic review into the fourth quarter. What exactly do you mean by addressing the additional scenarios? I think previously, you had said you were evaluating 25 product lines, maybe an update there in terms of how far through the 25 you actually are?

Yes, David. Thanks for that question. It's been a robust process. We've had lots of dialogue with our board, with customers, with Arconic leaders, employees, and the more I travel around and ask questions and observe really what our capabilities and strengths are, the more we learn and we ask further questions. Really glad we embarked on such a holistic project. The dialogue has led us to fully examine additional opportunities and perform more analysis. We're looking at all those 25 product lines that you mentioned. And we're just trying to make sure we put our very best foot forward in our recommendations to the board and the output of the review. It's very good work. It's a big team effort. We're just not quite done yet.

So would the expectation be -- I think you've been talking about you were going to share the outcome at an Investor Day in Q3. Is the plan now to do an Investor Day in Q4?

We're focused on wrapping up the study and getting our board approval, and we'll communicate the kind of how we're going do that based on the output of that.

Okay. And as a follow-up, Ken, you talked about the pension improvement year-to-date in terms of the underfunding situation. Could you talk about what that could mean in terms of -- or I guess, talk about what you're thinking about for discount rate and where your running rate -- or your rate of return is running year-to-date? And what that might mean for pension expense next year and your contribution level?

Right. So what we've included in our estimate of the $519 million reduction was based on our original assumptions that the discount rate would be 3.75% and the asset returns would be 7%. We normally talk about what those actual rates are when we publish the K, right? But what we've done is we've looked internally. As you know, discount rates have gone up, maybe our asset returns are in the 7% range. But we've done an estimate for the full year, and we feel that the $519 million will stick for the remainder of the year. And really, if you had to break that down, that net reduction is made up of really 4 major items. We've made $288 million of pension contributions year-to-date. We froze the U.S. salaried and non-bargained plan, that generated a $136 million reduction. As we talked about in my opening comments there, we've eliminated retiree medical benefit, that was worth $32 million. And we've made OPEB payments of around $59 million, right? And there's other of about $4 million left. But that's how we get to the $519 million. And we're confident that we'll be able to hold that at the end of the year.

And our next question comes from Seth Seifman from JPMorgan.

Chip, I wonder, if we look at the Engineered Products business and what we see, $238 million of EBIT in the quarter, which is around what it was in Q2 if you add back the inventory write-down, so there's a lot of different puts and takes in terms of different pieces of the business growing versus shrinking and the outage you talked about versus operational improvement. At what point do you think we can see that number start to grow?

Well, let me take that one first and then I could turn it over to Chip. If we peel back within the EP&S business, the Engines business is growing year-over-year on an operating income basis. So we're happy with the progress there. We see it on the top line, we see it flowing to the bottom line. Same thing on the fastener side, and I mentioned that earlier. Dollars are going up, percentage is going up. Where we've got the challenge right now is in the Structures business that Chip talked about earlier. We have deployed SPAs to the key plants in that portfolio where we think we have opportunity. So we see that we should have sequential improvement in the Structures business, Q4 versus Q3, that even includes the impact of the press outage. But we expect to see improvements in the fourth quarter.

And maybe as a follow-up, is there anything you can share about the Grenfell Tower liability and how that plays into the sale process of Building and Construction and whether that -- it stays with the company or not?

Well, as of right now, Seth, we see no material update in the liabilities associated with the Grenfell tragedy. So let's just get that out there in the open. As for the sale process, that's an ongoing process, and we really don't want to comment about the details of how we're structuring that approach at this time.

Our next question comes from Rajeev Lalwani with Morgan Stanley.

Two relatively quick questions for you. One, just a straightforward one. You did a nice job with selling the Texas rolling mill for $300 million or so. Despite no real profits there. I mean, how much more opportunity is there like that within Arconic overall that we are just not aware of? That's one. And then the other -- on the EP&S side, as we think about the business over the next maybe couple of years, can you just talk about on net, do you see more of a pricing headwind or tailwind? I know you've got more content on next-gen platforms going forward, but then there's also the dynamic of price step-downs from the engine and the Structures OEMs.

Let me jump into it first. Just a couple of notes on Texarkana. I don't think we have other assets -- that was an idle asset, right, for the most part. I don't think we have any additional ones of that size. But you're right, a $300 million sale with a $50 million earn-out. Just so you know, the net book value on that was about $62 million. So very nice work by the team.

Yes, that was a big opportunity generated through our strategy review. And --you know Ken's right, there's nothing other very large opportunity like that of an idle asset. But we do see opportunity at each of these 25 business units for us to further prune and improve the portfolio returns going forward. And there will be some actions that announced -- associated with the strategy review that reveal some additional value that can be monetized and improve our focus at the same time.

And on the EP&S side, just as far as pricing headwinds and tailwinds going forward, given all the puts and takes?

In EP&S, I think it's a mixed bag of some pricing pressure in certain parts of the industry and certain parts of our portfolio, but also coupled with price-up opportunity in places where the industry is constrained and we have very high value to contribute.

Our next question comes from Chris Olin from Longbow Research.

Just wanted to circle back on the pricing commentary and really more specifically, what you were saying on aerospace fasteners. I guess I was just curious how the movement in pricing this year compares to previous years. Was it a headwind in the second quarter? I don't recall that. And I guess, I'm just wondering if the pricing weakness has anything to do with the shakeup that's going on within the distribution channel.

We're continuing to get pricing pressure across the entire portfolio. We had the pressure, again, in the prior quarters well on fasteners. But we're trading off volume for that. So we're getting incremental volume, which is helping with absorption in the business. But at the same time, we're moving some more of our production down into Mexico, Morocco and more of the standard fastener parts. So we are getting a labor arbitrage which is significant. Some of that we'll share with our customers through the pricing impacts. But net-net, when you look at that labor arbitrage, you look at the incremental volume that we're getting with giving up the price, that's a net impact benefit on both the dollar and a percentage basis. So that trade-off is working for us. So if you look at the total pricing impact that we've mentioned for the quarter, 75% of that is related to the fasteners business. As Chip talked about in the other parts of the business, you have puts and takes, but most of our differentiated product right now we are able to either retain the price or get some incremental price. So tremendous amount of demand in the market.

Okay. And then just shifting gears quickly. I realize you do have your hands full with the whole turnaround at Firth Rixson. But I guess, I'm curious as to how you think about future isothermal forge capacity. And the reason I ask is, if you start looking at some of these numbers, it looks like capacity gets pretty tight, 3, 4 years out. I'm just wondering if that is a place you could see adding more capital or greater investments?

Chris, as part of the strategy review, we are looking at how we serve the market with the isothermal forge we have at Savannah. We're qualifying parts for customers right now, and we're evaluating further investment to what return we could get if we put additional capability and capacity around that press to be able to serve more volume. So no decisions at this time. But we have proposals -- and plans in front of our strategy team, thinking about how we could serve that market. But right now, we're focused on using the asset that we have as it stands to qualify parts and participate in that market.

Our next question comes from Josh Sullivan from Seaport Global.

Just one on the automotive side. Given concerns around automotive SAR rates, can you frame maybe how Arconic's Automotive business would grow if we had a scenario where SAR was down, say, 5% or something along those lines?

Well, the problem is, Josh, looking at the total SAR's percentage can be a little bit misleading for our business. The last breakdown that we had is if you carve it up, cars are down about 9%. Light truck, SUVs and vans are up 5%. That's more of our sweet spot right now. We're more on the light truck, SUV and van space, so it doesn't impact our business as much. That's why you're seeing the organic growth rates of 20% in the business. Moreover, when we look at the aluminum content on, say, a light truck versus a car, it's about 3x. So we're comfortable with our position right now in terms of where we stand. It's not to say that we're moving away from cars. We're actually bidding on a lot of new business in the cars section, but we think there's a lot more opportunity for us in the SUV and light truck space.

Okay. And then just one on the expansion of the engine capacity at Whitehall. What percent increase is this? Does this provide you with any speculative capacity if OEMs do take up production skylines? Or it's just related to announced production rates at this point?

The -- our plans right now are to serve the business that we see going forward with our long-term contracts and our -- the customer business that we've won. We do quite often reserve the ability to put more equipment in the expansion to take advantage of potential upside. But we're very careful with the capital outlay to make sure we have confidence in being able to get return on that investment.

Our next question comes from Gautam Khanna from Cowen & Company.

A couple -- maybe I missed it, but -- the question regarding pension and cash contributions in 2019. Did you actually give a number? I may have missed it if you did.

No, we did not.

Okay. Is there any framework you can give for what that might shake out to be?

So the latest estimate is around $440 million.

Okay. And that's for 2019?

Yes, that's correct.

Okay. To follow-up on the fastener discussion, I thought last quarter, you guys were talking about mix, more non-aero versus aero. Did anything get incrementally worse than aero this quarter? I mean, did price actually deteriorate further? Were there some contract resets or anything else?

No, not for the most part. Really, Gautam, what's driving it is we're getting more volume, right? We're getting it on the industrial side. We're getting it on the aero side. We've talked a lot about destocking in fasteners. Airbus has been coming down, but we're getting more volume out of Boeing. When you push those 2 together, it's a net favorable. So good net favorable on aero, good industrial, really like what the team is doing around the net cost savings that we talked earlier and they're getting the incremental volume. So we're happy with the fasteners business.

Okay. And then just on the 15k press, I know you mentioned they're Aerospace products. Can you specify what types of products are made? I know you're going to make up the volume elsewhere. But on the other presses, just I'm curious about the specific products.

These are Aerospace wheels and some blades.

Okay. So it's an engine product?

Engines and airframe, wheels and brakes.

Wheels, okay. And last one, just someone asked about the KLXI, Boeing combination. Is that -- I mean, have you seen any impact yet on that? Or has there been any kind of change to purchase indication?

We haven't seen any impact, Gautam.

Would you expect to or not?

We do not expect to. There's always room for the unexpected, but we don't expect that.

(Operator Instructions) Our next question comes from Phil Gibbs from KeyBanc Capital.

Chip, can you point to the mix headwinds that you're talking about in engines and elaborate on that a little bit and when does that get better?

The mix headwind is really associated with the legacy parts that are all the way down the learning curve as it were to the next-gen engine products, be it LEAP geared turbofan, this sort of product that we're currently coming down the learning curve on and improving our profitability and our ability to serve the customers. So that's a mix headwind. It's not a big one. It's just the part of the ramp we're in, in the new engine introduction process and the new part introduction process to support our customers.

Okay. And I think you mentioned that vanadium is a bit of a headwind. And the question is what specific products that would be hitting? And is there potential for a pass-through with that material embedded within your existing contracts?

So it's a major alloying element in the alloy titanium 6-4, 6 aluminum, 4 vanadium. So that's the product, whether it's sheet or plate or forgings coming out of our Structures business. That's where the majority of it is. There's some casting products associated with it. But really, our -- the volume and what we're seeing is -- where it's associated with our titanium mill products in our Structures business. We are working with customers and other ways to abate that impact mostly focused on scrap utilization at this point.

There's no way within the contracts to pass that increased cost-through on that alloying element?

We have a variety of contractual terms. And at this point, some of our contracts do not allow that pass-through.

Yes, so some do.

Some do, some don't.

Some don't. But the net impact for the quarter was less than $3 million, to give you, even though the price has more than doubled.

Our next question comes from Seth Seifman from J.P. Morgan.

Chip, maybe to follow-up on Aero Engines. If you can talk about how your share has been trending maybe relative to your expectations 3 or 6 months ago, are there any differences?

As far as trending, I mean, our share is pretty stable. We are producing more than our contractual share on some parts and less than our share on others. It's really in a constrained environment, making as many parts as we possibly can and continue to creep our assets as much as possible to provide the maximum number of parts to our customers. What we're seeing, our customers do really is try -- is prioritize what they need, and we're focused on supporting their assembly and their overall process needs and making sure that we stay ahead of that. So I mean, overall share, we're pleased with our share. Our focus right now with the full shop is trying to prioritize delivery to meet our customers' most urgent requirements.

Okay. And then this might be -- it's probably oversimplifying things a bit. But if you were to characterize sort of what inning you're in now in terms of having your capacity in Aero Engines on the narrow-body side directed toward new generation engines versus the engines that are -- that you're stopping, the CFM56 and the V2500, kind of where are we right now?

The new next-generation parts are -- make up about 60% of the output of our investment cast airfoil business. But you got to be careful because the legacy parts don't go to 0. These are high-usage parts in the overhaul business and the spares stream. So we still, for a number of years, will make very many of the last-generation parts to serve that ongoing market, and we will remain focused on that as well.

Our next question comes from Brian Lalli from Barclays.

Real quick one for me, and I appreciate that it may be difficult to answer if you continue to go through the strategic process. But is it possible to give, maybe on the balance sheet side, some guideposts around how you would think about capital allocation under various scenarios ratings? I know you've talked in the past about wanting to maybe get back to investment grade if that option is presented to you. That would be, I think, helpful for the fixed income side.

So we're split-rated right now. First, S&P has us at investment grade and Moody's does not. So we're split-rated right now. I think through this strategic review, we spend a lot of time -- or looking CapEx in a couple of different buckets or the required for growth to meet the demand, what is required for productivity to get more volume through the plants and help our working capital at the same time. And then lastly, a lot of work around the sustaining part just to keep the normal maintenance of the business going. So there's been a lot of work in the 25 subsegments. I think we have some great visibility on that. But we'll be releasing more information as we complete the strategic review.

I guess, if I could just follow-up quickly. As you talk about creating shareholder value, I appreciate a lot of that can come from organic avenues, like you said, investing on the CapEx side. But is that something where you may look to shift some of the capital allocation to shareholders? And maybe in that mindset, BB ratings, high-yield makes sense? Or I guess, again, how do you think about that versus the desire to be investment grade?

Yes, we like being investment grade, but we look at the capital allocation based on relative returns. And once we complete that strategic review, we'll be able to communicate more information.

We have no further questions in queue at this time. And this does conclude today's conference call, and you may now disconnect.