Arconic Inc (ARNC) CEO John Plant on Q4 2018 Results - Earnings Call Transcript

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About: Arconic Inc (ARNC)
by: SA Transcripts
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Earning Call Audio

Arconic Inc (NYSE:ARNC) Q4 2018 Results Earnings Conference Call February 8, 2019 10:00 AM ET

Company Participants

Paul Luther - Director of Investor Relations

John Plant - Chairman, Chief Executive Officer

Ken Giacobbe - Executive Vice President and Chief Financial Officer

Conference Call Participants

Carter Copeland - Melius Research

Gautam Khanna - Cowen and Co.

Rajeev Lalwani - Morgan Stanley

Seth Seifman - JPMorgan

David Strauss - Barclays

Matthew Korn - Goldman Sachs

Chris Olin - Longbow Research

Martin Englert - Jefferies

Operator

Good morning. My name is Shelby and I will be your conference operator for today. At this time, I would like to welcome everyone to the fourth quarter 2018 Arconic earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Mr. Paul Luther, Director of Investor Relations. Please go ahead, sir.

Paul Luther

Thank you Shelby. Good morning and welcome to Arconic's fourth quarter 2018 earnings conference call. I am joined by John Plant, Chairman and Chief Executive Officer and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will take your questions.

I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings.

In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation.

With that, I would like to turn the call over to John.

John Plant

Good morning everyone and thank you for joining the call today. I am going to begin with a brief introduction and then pass it across to Ken. He will take you through the financial results and guidance in a little bit middle bit more detail. And after that, I intend to provide an update on the strategy going forward of Arconic and then that will take your questions.

Let me begin by saying that I plan to lead Arconic through its new direction. I am going to try to explain that plan in more detail during the call. My background is that I was CEO of TRW Automotive from 2003 to 2015 until it was sold to ZF, a German Corporation. At that time, TRW employed 65,000 people, plus a minus, 190 facilities and generated nearly $18 billion of revenue per year. It was ranked amongst the 10 top global automotive suppliers. I have been a Director of Arconic since early 2016.

Joining the team with me is Elmer Doty, also a current director of Arconic and he will serve as President and Chief Operating Officer and he is going to focus on enhancing the company's operations. He has extensive experience in Arconic's core markets, including aerospace and defense. And Elmer is going to help support me in charting a new direction for the company and deliver value to the shareholders.

Turning to slide five and commenting on the fourth quarter and the highlights of 2018. Revenue for the fourth quarter was up 6% year-over-year and if you adjust out for things like FX or aluminum, it's up 10% organically. Revenue for the full-year was up 8% and 7% organically. Volume was up in each segment and all our main end-markets remain healthy. Demand for products is strong. Excluding special items, operating income was down 6% in the fourth quarter and down 4% for the year.

The unfavorable aluminum price impact was $36 million in the fourth quarter and $94 million for the year. Without the unfavorable impact of aluminum prices, operating income was up 5% year-over-year in the fourth quarter, compared to 2% for the full-year. And so we exited 2018 with momentum to grow profits in 2019. Operational improvements are taking hold in a number of our businesses. For example, in aero engines, the yields are improving. In rolled products, scrap utilization is increasing. In commercial transportation, automation and flow path optimization is being driven by our smart manufacturing initiatives.

In addition to our operations, we continue to focus on overhead and SG&A, as a percentage of revenue and that dropped to 4.1% of sales in 2018. We have made structural improvements in cash generation reflected in the adjusted free cash flow of $465 million for the year, about three times that of 2017. Working capital improved eight days resulting $392 million of inflow and improvement year-over-year. Not included in the $465 million is another $300 million for the proceeds of selling Texarkana and this enhances our overall cash position and optionality going forward.

We continue to attack legacy liabilities reducing net pension and OPEB liability by almost $0.5 billion while improving our cash position, liquidity and leverage ratios. Approximately 90% of the gross pension liability associated with defined benefit pension plans has now been closed to future accrual. Finally, our return on net assets improved 90 basis points to 9.2%.

And with that, I am going to hand it across to Ken to take us through the results for 2018 in a little bit more detail.

Ken Giacobbe

Thank you John and good morning everyone. Now let's move to slide six and the key financial results for the quarter. Revenue for the fourth quarter came in at $3.5 billion, up $201 million or 6% year-over-year. Organic revenue, which adjusts for aluminum prices, currency, Tennessee packaging and the divestiture of the Latin American extrusions business was up $306 million or 10% for the quarter on a year-over-year basis. The reconciliation for organic revenue can be found on slide 22 in the appendix.

Revenue growth was driven by volume gains in all of our segments. All of our key markets continued to be helping. Organically, our aero engines and automotive were up 14%, commercial transportation was up 12% and aero and defense was up 26% year-over-year. Double digit growth in these markets was supported by solid organic growth of 8% in aero airframe. The growth in the aero airframes is notable as you may recall that we experienced weakness in aero airframes due to wide-body production mix in the first three quarters of the year. In the fourth quarter, growth in single aisle aerospace volume more than offset the wide-body decline and we will have a tailwind as we go into 2019. We have included year-over-year market growth rates on slide 24 and 25 in the appendix.

Excluding special items, operating income was $323 million in the fourth quarter, down $20 million or 6% year-over-year. Without the unfavorable impact of aluminum prices, operating income was up 5% year-over-year, which represents the third straight quarter of year-over-year improvement when we exclude the price impact. In the fourth quarter, operating income was favorably impacted by $56 million due to higher volumes across all segments, particularly in aerospace and defense in our EP&S business, as well as automotive and commercial transportation in GRP. Aluminum prices unfavorably impacted operating income in the fourth quarter by $36 million on a year-over-year basis and operating income margin percent by hundred basis points.

While average aluminum prices decreased sequentially, aluminum prices were still 4% higher in the fourth quarter versus last year. The favorable impact of declining aluminum prices on LIFO was more than offset by the unfavorable impact of metal lag in the quarter. Lower aluminum prices at the end of the year resulted in an unfavorable mark-to-mark loss on aluminum derivative contracts in the quarter. Higher scrap spreads continued to impact us unfavorably as we are net seller of aluminum scrap. The components of aluminum price impact as well as aluminum price impacts by segment can be found on slides 20, 21 and 23 in the appendix.

Finally, our operating income was driven by $33 million unfavorable mix primarily caused by new product introductions in aerospace. In our aero engines, specifically more than half of our product mix is comprised of the new engine platforms. Operating income margin percent excluding special items was 9.3% for the fourth quarter, down 120 basis points year-over-year with 100 basis points of the decrease due to higher aluminum prices. We have also included a reconciliation of operating income excluding special items on slide 34 in the appendix.

Adjusted free cash flow, as John mentioned, in the fourth quarter was $478 million or $102 million more than the fourth quarter of 2017. The improved free cash flow generation was driven primarily by favorable operating working capital that drove a $116 million benefit year-over-year. Days working capital improved eight days year-over-year. Compared to last year, lower pension contributions offset the increase in capital expenditures. Two-thirds of our capital spend in the quarter was for return seeking projects as we continue to expand our wheels capacity at Hungary, install the horizontal heat treat furnace in Davenport, Iowa for the industrial and aerospace markets and expand aero engine capacity in Whitehall, Michigan and Moorestown, Tennessee.

Diluted earnings per share excluding special items was $0.33, or $0.02 higher than the fourth quarter of 2017. Lower pension and OPEB expense and lower interest expense offset the unfavorable earnings per share impact of higher aluminum prices. Finally, operational results largely driven by strong volumes across all segments improved earnings per share by $0.02.

Now let's move to the segment results on slide seven. In the fourth quarter, EP&S' revenue was $1.6 billion, an increase of 8% year-over-year. Organic revenue was up 9% due to double digit volume growth in aero engines and aero defense. Segment operating profit was $220 million, down $8 million or 4% year-over-year. Growth in the aerospace and defense markets as well as a favorable impact from aluminum prices were more than offset by the unfavorable impact of new product introductions in aerospace and lower pricing particularly in our fasteners business as we continue to gain share in fasteners. Additionally, manufacturing challenges in the engineered structures business unfavorably impacted results, including a $10 million impact in the fourth quarter due to Cleveland press outage. Presses was repaired and operational at the end of the fourth quarter, which was four weeks ahead of our schedule. Segment operating profit margin percent was 13.6%, down 170 basis points year-over-year.

In the fourth quarter, GRP's revenue was $1.4 billion, an increase of 9% year-over-year. Organic revenue was up 13% due to double digit growth in automotive, aero airframes and commercial transportation. Segment operating profit was $77 million, down $14 million or 15% year-over-year. Growth in the automotive and commercial transportation markets as well as favorable pricing in aerospace and the industrial markets were more than offset by the unfavorable impact of aluminum prices and higher transportation costs. Segment operating profit margin percent was 5.7%, down 160 basis points year-over-year, including an unfavorable 150 basis point impact from aluminum prices.

In the fourth quarter, TCS delivered revenue of $497 million, a decrease of 6% year-over-year. Organic revenue was up 4% as we continued to see strong growth in commercial transportation. Segment operating profit was $63 million, down $14 million or 18% year-over-year. Higher volume in commercial transportation and building construction along with net cost savings were more than offset by pricing pressures in commercial transportation as well as the unfavorable impact of aluminum prices. Segment operating profit margin percent was 12.7%, down 190 basis points year-over-year, including an unfavorable 330 basis point impact from aluminum prices.

Now let's move to the fourth quarter key achievement slide on slide eight. For the fourth quarter, EP&S' revenue was over $1.6 billion which was a record quarter for any quarter in EP&S' history. The record revenue continues to be driven by unprecedented customer demand for our products and reflects double digit volume growth on a year-over-year basis in aero engines up 13% and aero defense up 26%. Regarding GRP, in the fourth quarter, we continued to deliver strong growth in the major markets as automotive revenue was up 13% organically and commercial airframe revenue was up 15% organically as weakness in wide-body volume was more than offset by strength in single aisle volume. In TCS, organic growth in commercial transportation continues to be strong with a 6% increase year-over-year. And the TCS team continues to consistently deliver improved net savings, driven by smart manufacturing initiatives.

Now let's move to slide nine and I will touch on some of the key themes for our full-year 2018 results. Revenue for the year came in at $14 billion, up $1 billion or 8% year-over-year. Organic revenue increased $843 million or 7% year-over-year. As we have been saying all year, our key markets remain healthy and strong with double digit year-over-year growth in automotive, aero engines, commercial transportation and aero defense. Excluding special items, operating income was $1.4 billion for the year, down $60 million or 4%. Without the unfavorable impact of aluminum prices, operating income was up 2% year-over-year.

Higher revenue and strong markets resulted in a $195 million favorable volume impact to operating income while a weaker aero airframes production mix and new product introductions in aerospace contributed $115 million of unfavorable mix to operating income. Aluminum prices unfavorably impacted operating income for the year by $94 million on a year-over-year basis and operating income margin by 90 basis points. The unfavorable aluminum price impact was evenly split between unfavorable mark-to-mark losses on aluminum derivative contracts, higher scrap spreads and operational losses. For the year, the impact of LIFO and metal lag essentially offset each other, which is expected given the rise and fall of aluminum prices throughout the year.

As I mentioned before, adjusted free cash flow was driven by strong working capital improvements as we achieved an eight day reduction in days working capital. Two-thirds of our capital spend for the year was for return seeking projects. 2018 diluted earnings per share excluding special items was $1.36 or $0.14 higher than 2017. Lower pension and OPEB expense, lower interest expense and lower taxes more than offset unfavorable earnings per share impact of higher aluminum prices.

Now let's move to slide 10 for our 2019 guidance. Supported by growth in most of our key end-markets, we are expecting to see organic revenue growth of 6% to 8% in 2019. That would put revenue at approximately $14.3 billion to $14.6 billion. The aerospace and defense markets are expected to continue to experience robust growth. We are also uniquely positioned in automotive and commercial transportation to continue with solid revenue growth, which we also anticipate strong growth in our industrial markets.

As we continue to focus on operational performance and driving further cost reductions, we expect that earnings per share excluding special items in 2019 will be between $1.55 per share to $1.65 per share, which would represent a 14% to 21% improvement in earnings per share excluding special items versus 2018. The guidance would exclude any favorable impact of share repurchases. Favorable impacts from volume, net cost savings, aerospace pricing and lower aluminum prices will be partially offset by new product introductions in aerospace as well as transportation costs in aluminum scrap spreads.

Regarding aluminum prices in 2019, we expect at least a $25 million tailwind based on our current metal assumption of $2,400 per metric ton, including LME and Midwest Premium. One of the key drivers is the adoption of a new accounting standard which allows most of our hedge contracts to qualify for hedge accounting which will significantly reduce our mark-to-market exposure. Regarding free cash flow, our target for 2019 is in the range of $400 million to 500 million. I will note that this is an annual target and reflects an expected first quarter usage of cash based on the anticipating timing of interest payments and pension contributions as well as working capital increases.

On slide 11, we have provided key assumptions to derive the 2019 guidance. I will note the following. As previously mentioned, aluminum price assumption used for guidance is $2,400 per metric ton for LME and Midwest Premium. The capital expenditure assumption is approximately $700 million including a potential expansion of our Tennessee operations to capture growth and demand for industrial and automotive aluminum sheet.

Before turning it back to John, let me cover a few items that can be found in appendix. On slide 18 in the appendix, we have summarized four special items for the fourth quarter. The first category relates to restructuring, which resulted in income of $11 million pretax which consisted primarily of the following four subcategories.

First, income of $154 million related to the gain on the sale of Texarkana rolling mill. The transaction closed on October 31 and resulted in cash proceeds of $302 million plus an additional continuing consideration of up to $50 million.

Second, a non-cash charge of $43 million related to the loss on sale of our forgings business in Hungary. The transaction closed on December 31 and resulted in cash proceeds of $2 million. This was a small plant in our portfolio with about $30 million of annual revenue.

Third, a non-cash charge of $92 million related to pension settlement accounting for one of our larger U.S. pension plans, which was previously disclosed in our third quarter 10-Q.

Finally, a non-cash charge of $9 million related to pension curtailments associated with the U.K. pension plan freeze announced in the fourth quarter 2018 and is effective in the first quarter of 2019. As John mentioned earlier, 90% of our gross pension liability associated with defined benefit plans are now closed to future accruals.

The second category of special items is a $4 million charge for external legal and other advisory costs related to Grenfell Tower which were recorded in SG&A. This level of spending has been consistent with previous quarters.

The third category of special items is a $7 million charge for external costs related to the strategy and portfolio review, which were recorded in SG&A.

Our last category is related to a number of discrete tax items in the fourth quarter. I will touch on these quick. First, we recorded the tax charge of $45 million related to the finalization of our analysis of the U.S. tax reform that enacted at the end of 2017. Second, we recorded a $74 million benefit related to the reversal of foreign tax-deferred liability. And finally, we recorded a $30 million benefit associated with the current tax year law and tax rate changes as well as another listing of various jurisdictions. All of that information will be detailed in the 10-K, which will be issued later this month.

The last item I would like to talk about is on slide 19 in the appendix. We have provided an update on our capital structure as we continue to manage debt and reduce our liabilities. We finished the year with $2.3 billion of cash, up $750 million sequentially. Gross debt is $6.3 billion and net debt stands at $4.1 billion. Net debt to EBITDA continues to improve and stands at 2.05 times, which is an improvement of approximately 39% since the fourth quarter of 2016.

With that, I will turn it back to John.

John Plant

Thanks Ken. And I would now like to give you an update on our plans. The plan involves three things to talk to, cost reduction, portfolio and capital allocation. So let me start with cost. We have commenced plans to cut operating costs by approximately $200 million on an annual run rate basis. The plan is designed to maximize the 2019 impact. We will further examine this potential as we move through 2019.

Second item is portfolio. We determined that we will separate the portfolio into two fundamental areas, the engineered products and forgings business and the global rolled products. The determination of which company is the RemainCo and which SpinCo will be optimized to maximize future shareholder returns.

In addition, we will consider the sale of businesses that do not best fit into the engineered products and forgings or the global rolled business. We will have more details to share with you on these actions as they develop. We plan to follow accelerated timelines and provide quarterly updates on our progress.

Regarding capital allocation, we intend to execute the $500 million of previously authorized share repurchases in the first half of this year. The Board has also authorized an additional $500 million buyback effective to the end of 2020. We will also reduce the quarterly dividend prospectively to $0.02 per share from the current $0.06 per share. This will provide us with a $60 million cash benefit in 2019 and $80 million in 2020.

And with that, I wills top and open the line for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question comes from Carter Copeland of Melius Research.

Carter Copeland

Hi. Good morning gentlemen. Just a couple of quick ones. John, on the split that you have talked about here, how do you get truly comfortable with the standalone EPN&S, given the potential volatility we may see on some wide-body programs, I think most notably the A380, should that shutdown relatively soon? I would assume that would have an impact similar to what you have seen in the last couple of years. As well as, I think there will almost certainly be a lot more investment in Whitehall and Moorestown to get to the rates the airframers are talking about and pushing for a couple of years out?

John Plant

Okay. So let me start with, I would say, airplane builds. Every projection that I have seen says the total aircraft build increases, narrow-body in particular. And my understanding is that we have at least a seven year backlog of airframe deliveries which are [indiscernible]. If anything, it's increasing. So while I wouldn't claim to be an expert in the aerospace sector, that's the future demand profile that I have never enjoyed previously in my life. And I think it's just a tremendous platform that we have and it gives us the ability to grow into the future.

So if we the A380 will be cancelled, yes, I guess we would lose some sales, but assuming that people are still buying aircraft, they will buy other ones and maybe that will work out just fine. So I wouldn't get too concerned about one individual, I would say, airframe and focus more on the whole market. That's the first comment I will make.

And the second part of your question was, I think, additional capital. I think I answered that pretty clearly by saying that we are going to spend less capital in 2019 than we spent in 2018. That's been reviewed and being reviewed already. In fact, I am going to say, after a day on the job, it's about $100 million lighter than I think it was envisaged. And by tomorrow or the day after maybe, it will be a lower number, I don't know. But the guidance that I have given of $700 million is what you should assume. And that contains within it all of the investments required to drive the investments in Whitehall and elsewhere to provide the ability to meet the engine ramp.

And so I don't feel concerned about that. I am hoping that we continue with the increasing yields that we are currently seeing in those, say, turbine blade plants and hopefully we begin to work our way through the backlog. Right now, I am not aware if we have any major, I would say, customer deliveries but we certainly have a backlog and look forward to trying to clear that with the investments which we have already made in 2018 and the high yields which are beginning to come through and which you have seen in the run rate in the fourth quarter that we talked to earlier.

Does that answer your question?

Carter Copeland

Yes. I guess I am just wondering if you affect the transaction to spend by the time it closes, I completely understand the capital plan for 2019. But when you look at what the capital plans will need to be is we talk about rates on the narrow-bodies that are 70 and higher or investments in the military, should we need to be higher and I am just wondering about the capital structure of that smaller entity, especially as you continue to deal with the new program impacts on EBIT and cash and whatnot, just as it pertains to capital structure, as it pertains to how much wriggle room you will have in that, that's really just what I was looking for.

John Plant

Yes. I mean, I just don't see that is the fundamental worry that I should have at this point. I am hopeful that EPS margins will improve, cash flow will improve. There will be a keener eye to investment. We will invest to make sure we meet customer demand and also improve efficiency. And I am particularly focused on driving up OEE in the plants and that will be one of the critical metrics going forward. And coming from an auto industry background, I expect to see ongoing improvements quarter after quarter in that. And you should assume that those questions will be being asked.

Carter Copeland

Okay. And just for the follow-up. On the new program EBIT impacts, you called that out in GRP, but excuse me, but I missed it in EPN&S, but were EPN&S new program impact on EBIT better or worse than GRP? And how are those trending? Any color you can give us there, I think would be helpful?

John Plant

I think that's more of a Ken question at this point in time and so I will ask Ken to respond to that as it's interplay between them.

Ken Giacobbe

So we think the wide-bodies and the jumbos from the GRP side with sheet and plate, it's pretty much stabilized, right. They have been coming down. We have taken a hit this year. But now we are seeing the single-aisle leapfrogging the wide-body. So that is a heck of a lot more single-aisle planes to offset the wide-body. But we actually saw a net increase leaving Q4. So we feel confident as we go into next year. That should be a tailwind for the GRP business in terms of sheet and plate.

On the EPN&S side, on the engines piece, we are about a little over 50% is the new engine platforms. As we are going through that, we have we got new products. Our learner call cost on those new products takes us a little bit more. But at the same time, our engines team has been working through the operational improvements, getting cost out. And on most of the products that we have were at or above our contractual share. So as the commercial teams look at additional volume to come through the plants, we are looking to get incremental price associated with that.

So we feel optimistic on both the GRP. As we go into 2019, there will be a tailwind and cost structure improving in EPN&S along with the commercial effort to get more price.

Carter Copeland

So Ken, embedded in your plan, just to be specific in EPN&S in the guidance, do you envision that there will be new program EBIT headwinds, 2019 versus 2018? Or will those flip to tailwind since you are still going up significantly in volume?

Ken Giacobbe

I think that net net there would be puts and takes here, but I think it will be a net tailwind as we going to next year, margin expansion.

Operator

[Operator Instructions]. As a reminder, we asked participants that you limit yourself to one question and one follow-up only. Your next question comes from Gautam Khanna of Cowen and Co.

Gautam Khanna

Thank you. First question would be, what do you envision the cost to actually due to breakup to be? Cash costs over what timeframe? And anything you can say there about cash cost and to synergies?

John Plant

I would like to give you a number. I can't today. I would hope it's fundamentally a lower number than the split numbers for Alcoa in 2016. I will update you on that next quarter when we have got more detail.

Gautam Khanna

Thank you. A follow up question would be and please forgive the question, but I get it all the time. What happened? Chip Blankenship was just recently put in. It looked like the operational processes were improving. You guys talked about abating losses and improving profits on the next-gen engines. And yet, we are at our fourth CEO in four years. I am just curious if you can give any context around what's really going on? Thank you.

John Plant

Well, I think the most important thing is to look forward not backwards. I don't see why my answering that question provides, I would say, anything to do with quality of revenues and quality of profits going forward. So I will give you some commentary but those things which were in the past, you can do nothing about and what we really about is managing, driving and mapping out the future. So that's the most important thing.

And so I would say, my approach is, I spend 95% of my time looking at the front windshield and maybe 5% of my time looking through the rearview mirror. And I think that's the most important aspects of leadership. So let me first of all take issue with, I will say, the four. I mean, certainly if I am the fourth, one of them was someone who voluntarily stepped in for a period of time in the immediacy of the aftermath after the 2017 proxy battle that went on.

And as you can imagine, directly after a proxy battle, you are not in any great shape to immediately stick someone into the job. And so we carried out the search process. Chip was appointed. I have only good things to say about the things that Chip did. And to carry us forward, to carry out the direction that I have talked to this morning, the Board felt it is appropriate to make not only, I would say, a new direction in terms of the strategic intent of the company, but also it is appropriate to make a change in leadership. It's that straightforward.

Gautam Khanna

I appreciate it. I had to ask. Thank you.

John Plant

Of course, I mean I guess I expected that somebody. It just happened to be you, Gautam, that asked the question. If not you, it would be somebody else. So don't feel worried or concerned about it.

Gautam Khanna

Thank you.

John Plant

You are welcome.

Operator

Your next question comes from Rajeev Lalwani of Morgan Stanley.

Rajeev Lalwani

Hi. Good morning gentlemen.

John Plant

Good morning.

Rajeev Lalwani

I am actually going to pick up after the last question. So I will apologize in advance too.

John Plant

Okay.

Rajeev Lalwani

John, just from a Board perspective, can you just provide some color as to what happened over the last couple of years. I know you prefer to look forward. I get that. But just why did it take so long to come to a decision to split up the company?? I mean it seemed like that was potentially a logical decision couple a years ago as opposed to today. So that's the first part of the question.

John Plant

Let's just track back through time. I mean, I don't really know that much before 2016. I saw, I am going to say, reports maybe the first thoughts, speaking from the analyst community, about spitting Alcoa was around about the 2010 or 2011 timeframe. And I can't exactly be that sure about how that decision was formed in 2015. So I came into the Board just after and was really, I would say, experiencing the full, I will call it, tumult of trying to split a corporation that's over 100 years old and all of that entailed. And it wasn't an easy split by any means, given some of the, I will say, legacy issues and some of the joint venture relationships that was occurring or had been put in place.

And so we had to find the means of minding all of that. And so let's call it a new Alcoa was spun out and Arconic was a new name but the historical company was RemainCo. You can argue about which was better to have a clean, I will say, future entity or not, but it is what it was. And we are sure, at that time that was the best arrangement. And I mean that in itself was a pretty momentous activity and really I think the company probably needed to have some period of stability for a period of time. And that's, I will say, what we have had in terms of trying to be together, the single Arconic. And I will say, management in place to do that.

Now when I look at, I will say, the thoughts that the Board has considered over the recent months, it's a plan that I feel is entirely right. I was highly engaged in, say, crafting if not originating it and say this is the time to move on. And it strikes me that there are fundamentally different rhythms, return profiles, capital allocation requirements in terms of investment between raw products in aerospace. So the logic, I think, is there. I mean you could argue, well, maybe it was there before, but it's unusual that we would have done that in 216. We got to it in 2019 and most important thing is we are doing it now.

So maybe you could critique us for timing, but I don't think you could critique us for intent. And so you again, going back to let's look through the windshield and look forward, we are on our way. The path is determined and the teams are being wound up to achieve that with what I believe will be a higher clock speed of an organization which is what I believe in. And that's it.

Rajeev Lalwani

Thanks for that, John. And then I have a follow-up to Ken. Ken, you talked about improving margins going into next year. But if we look at the fourth quarter, it looks like and correct me if I am wrong, there was a sequential decline in a number of fronts, specifically to EPN&S from 3Q to 4Q. Can you just provide some comfort on the improvement going forward? Was that just a mix dynamic, the Cleveland press outage? Was that what was creating the weakness is 4Q? And so maybe the trend in 4Q isn't the right run rate to use, if you will?

Ken Giacobbe

Yes. That's right, Rajeev. So the Cleveland press outage, that's a one timer of $10 million that impacted the results. That press is running operationally. It's delivering on customer demand. There is other things that are going on in the business. Again, as were getting incremental volume going through the plants as we move into 2019, we have got better absorption. There has been a lot of very good work in terms of operational improvements in, I will use rings as an example and we talked about, I believe, on the last call about deploying continuous improvement engineers to the rings business. We put five resources there. We have seen substantial improvement. They cut their past dues by around 28% in 2018. They improved their quality by reducing PPM by about 25%. They had record revenue for the year as we exited out as well. So we are getting these bottlenecks improved and you can see it sequentially as we go into next year as well. So I see that as a favorable item as we move forward for margin expansion.

Rajeev Lalwani

I will leave it there. Thank you gentlemen.

John Plant

Thank you.

Operator

Your next question comes from Seth Seifman of JPMorgan.

Seth Seifman

Thanks very much and good morning. So one question, I guess a two-parter about strategy and the portfolio. John, do you intend to preside over the split of the company during your time at CEO? And secondly, I noticed that the release mentioned potentially selling businesses, but not specifically the BCS business which had previously been on for sale. I wonder if you can address that including in the context of any potential Grenfell Tower exposure which is an entity that came up frequently in the press in recent months.

John Plant

Okay. I guess it's better to make a note because you rounded about three or four things into that one. So I didn't comment on BCS because that's previously announced and I will say, the process is underway. I have no update on that to provide to you today.

In terms of my timeframe, I agreed to step in. I understand that I have put a time expiry date on that. The plan is that starting next week, teams are going to be engaged and focused on the separation and all of us are required to do that and it's obviously a major project when you do that. And that's probably I am going to guess nine to 15 months. So the spin, I am going to say, will be either done or largely underway and certainly framed in the timeframe that I envisage my engagement with the company.

You mentioned asset sales. Obviously there's work required to get from intent to implementation. I deliberately didn't call out what those might be today and I have no plans to do so in answering any questions. But obviously financials are put together and strategies developed to maximize the outcome of those, whether it's in the form of sale or some form of Reverse Morris Trust transaction. All the things are up for debate. And I will say though the plans may be a little bit more advanced than you think.

Regarding Grenfell. Yes, it's certainly got a lot of the press and some of that, I think, is regrettable in terms of stuff that's somehow got leaked into the press while we are examining the whole company transaction and then may be what may have seem to be an impediment to that. My update for you on Grenfell is that there is a public inquiry. I think the Phase 1 is just about complete. I guess a report is going to be produced. Maybe there will be a second public inquiry developed from that which comes out of the first one. And outside of, I will say, the derivative claims we may have had, there is currently no current, I will say, specific claims for compensation or anything like that coming from it and neither does the company believe that it was the cause of this incident. And obviously lawyers are engaged. We will continue to examine the facts. But right now, I think we have a reasonable view of the fact pattern.

Seth Seifman

Great. Thank you very much.

John Plant

Thank you.

Operator

Your next question comes from David Strauss of Barclays.

David Strauss

Thanks. Good morning. John, the cost reduction program that you highlight today, can you give any detail there in terms of what it consists of and how this might be different than prior cost reduction programs we have seen the company undertake?

John Plant

Yes. Well, first of all, I am not that familiar apart from seeing the numbers in terms of the approach. So the I way I look at it right now is that, I will say, I am here in New York dealing with this and the portfolio stuff. Meanwhile, Elmer is in between Cleveland and Pittsburgh developing a level of granularity on those cost reduction plans, which I am going to be reviewing over Saturday and Sunday in Pittsburgh and with a view that we are going to implement sooner rather than later.

There is nothing magical about cost reduction programs. It's always the same stuff in terms of, I am going to say, both semi-fixed costs and that's obviously staffing levels. It's all about matters of efficiencies. It will look at discretionary spend. It will look at things like indirect spend. The only thing that I haven't put on the agenda for the first wave of this is any direct material cost focus beyond jus the normal things that are going on. So it will just be traditional looking at fundamental benchmarking compared to competitor sets and in particular, I do like to see efficiency and productivity developments each quarter of each year.

So I am interested in things like value added per employee, seeing progression in all of that absolutely. And I don't really know what else to say to you. There is nothing magical about cost reduction. It just is. And I am hoping that everybody gets the sense of urgency that I believe is required around all of this. I recognize that if I look back over a decade, I could argue that shareholders haven't seen sufficient returns and it will be, maybe the word is inappropriate, it would be nice to see them improved. That's about it really.

David Strauss

As a follow-up, so I know that you have this ongoing sale process for building construction. What is left of TCS? Where is that contemplated going as part of all this? And then could you maybe give us a little bit of help on the pension liability and how that potentially could be divvied up among the separate businesses, separate companies on a go forward basis? Thank you.

John Plant

The words I have given you today around the two fundamental businesses, give me enough, I will say, room to decide whether the commercial wheel business is part of the first segment I have talked about. It's not part of the rolling assets for sure. And we will just look at that amongst, is that the best fit and best destiny for it? Don't know yet. So that's the answer to the one question.

What was your second one, again?

David Strauss

Pension.

John Plant

All right. Pension.

David Strauss

Obviously you have a large pension liability, how that might be allocated among the go forward companies?

John Plant

Well, the first thought is straightforward in terms of what naturally belongs there and then in a company with the, I will say, size legacy of Arconic, will have a lump left in corporate and I think that has yet to be determined exactly where that would reside. And it's all going to be into intertwined with, I will call it, RemainCo versus SpinCo and what's the best profile and ability to have, I would say, the liabilities attached to which entity which has to be a good future for both of them, because there is only good intent to have two strong businesses emerge which hopefully, I will say, trade at multiples that they could hope for. And so just don't think I can give you a number nor should I, if I was even been able to, let's say, to where am I going to allocate that corporate pension part of the liability against any specific business at this point in time. But whatever it is, it's going to be there to benefits, I will say, the outcome in terms of the, I will call, shareholder value.

David Strauss

Thank you very much.

John Plant

Thank you.

Operator

Your next question comes from Matthew Korn of Goldman Sachs.

Matthew Korn

Hi. Thanks and good morning. John, a question for you on autos. The auto OEMs globally have offered a pretty dire outlook into 2019. How are you qualifying the risk as you see it in your automotive business, in particular on weak demand and production outlook overall?

John Plant

Okay. So I guess I have some perspective, having come from the auto industry and I get peripheral understanding some segments of various, I will say, Boards I am on to look into it. And I still get like a daily summary of auto world. So it's interesting. I haven't completely gone to the beach, if that was the thought of it.

In terms of outlook, my guess is that we are into a level of auto sales and production, which is been sustained at a high level, particularly here in North America for some time. I think the thing which I find particularly encouraging about the Arconic position is probably the underlying, I will say, direction of light weighting in the industry. And therefore the opportunity for a secular growth trend in putting in lighter weight metals into the vehicle. And I will say aluminum is right at the forefront of doing that. And it's much cheaper, I think, than for example putting in magnesium sheets into body panels and structures.

So I think the, I will say, tensile strength, lightweight characteristics of aluminum are rights in that sweet spot of the lightweighting of vehicles. Currently, the majority of the outlet for Arconic's product is into the light truck market and the pickup truck in particular. And I think there is a feeling that that's still very strong. But when you look at the cadence of future platform launches and each of those having additional aluminum content on them, then I can persuade myself that the trend is good. I haven't had the time to calibrate, I will say, points of the order cycle and what the demand profile might be by way of production of just underlying quantity versus that secular growth. That's something I am just not at that level of knowledge about yet. It's something I will be interested in looking at.

Matthew Korn

I appreciate that. It sounds that it's a matter of penetration. It's a matter of platform. And I believe I heard you earlier, I think you mentioned a potential expansion there at Tennessee for ABS, if I am correct. Could you give any more detail there? Is that approved? Is that still under consideration? And what would be cost and timing and additional capacity there, if I heard you right?

John Plant

Yes. I am not sure whether we have made any announcements on the Tennessee investments. But I can tell you, it had a lot of scrutiny in December. And we have looked, I am going to say, I looked at it to a high degree personally, even as Chairman and decided that when I look at the demand profile of what we see going forward for the next few years, I will say, the path of investment, which starts off slow but we can use, I will say, a lot of leverage to get the benefits from that investments as you go through. It's something which and the returns that I envisaged, we have a contingency again. So it's returns in terms of coming at a lighter level of capital than we authorized. But the answer is, it's been agreed. So it's going ahead. I think it's is great for the future revenue stream for the rolled parts business. And I think that's going to be particularly important when rolled products is its own independent entity and being able to articulate a good future.

Matthew Korn

I appreciate it, John. Good luck to you.

John Plant

Thank you. Yes, I appreciate the lat comment.

Operator

Your next question comes from Chris Olin of Longbow Research.

Chris Olin

Yes. I was wondering if we could get a progress report on the restructuring efforts that were going on with the aerospace frames and disc business. And I got the sense that Chip was personally leading the efforts to basically restructuring those two operations. And I guess, now what, would be my question?

John Plant

Well, I am certainly familiar with the issues which emanated from the 2015 decision to buy Firth Rixson. In fact, that was my first exposure in February 2016 to, I will say, something which was a little bit different to what I thought was the case. Rings and discs, my understanding is that it's showing some improvement. There is still a long way to go. It's receiving and will receive a lot of scrutiny with a view to, I will say, controlling the cash flow and looking at the pricing of such business, again to basically make an improved outcome for that business going forward. So it's certainly one of the big things on the radar screen. And I am not sure that Elmer and I are going to get through it this weekend inside the engine business. We will be spending time looking at that for sure.

Ken, is there anything else you would like to add at this point?

Ken Giacobbe

Yes. I think you hit on it, John. As we look at the revenue of that business, it was good. We were up about 8% year-over-year. We are seeing the impact of the debottlenecking. I mentioned the rings comments earlier in terms of what they are doing there. The disc business is well. Volume growth. We invested some CapEx down there as well in the disc business to in-source some of the material, but we are seeing improvement as we exit the year second half more favorable than the first half in terms of profitability. So a lot of work to still be done down there, but the resources are deployed and the team knows what to do.

Chris Olin

Okay. Thanks. And then just quickly, when you look at the two new segments for the portfolio, I guess I was curious if there's anything that will be done to enhance the GRP value? And I guess, what I was thinking is, would the titanium business stay within EP&S or the Forgings business or would that move? And then my second question was, in terms of the $200 million cost goal, is that broken out by each segment? Thanks.

John Plant

No. I can't give you that analysis between the two at this point in time. That will be the, I guess, one of the things we will talk about in the future. In terms of trying to make raw products as good as it can possibly be, I think that's just normal stuff that management should do. And I think it is a solid business. Again, I am looking for further throughput and yield and uptime in terms of those mills and being very selective on any investment going forward. It should be good cash generative business.

Chris Olin

Thanks. Good luck.

John Plant

Thank you.

Operator

Your next question comes from Martin Englert of Jefferies.

Martin Englert

Hi. Good morning everyone.

John Plant

Hi Martin.

Martin Englert

I wondered if you could touch on the scrap spreads as it still remains a headwind for the company? Talk a little bit about what's being done there to mitigate the cost headwinds? What's factored into the guide for 2019? And then, will the company remain scrap long as they exit the year?

John Plant

Yes. So scrap spreads right now were up still 40% on a year-over-year basis. We will probably have a headwind for the first half of 2019 as we start to overlap last year's performance. What the GRP team is doing a nice job is greater scrap utilization in the business. If you look at Q1 and you go out to Q4, it's about 180 basis points improvement in scrap utilization, 180 basis points. Each 100 basis points is worth about $10 million of profit. GRP team sees more opportunity for that as we go into 2019. There could be anywhere between 200 basis point plus as we going to next year.

Martin Englert

Okay. Thanks for that detail there. And then on the guidance there and you provide a good sensitivity around the LIFO impact for aluminum. Can you talk about your assumptions for LIFO impact from other non-aluminum base metals and inputs?

John Plant

It should be small, somewhere probably in the range of $20 million to $25 million on an annual basis.

Martin Englert

Okay. Thanks for that detail.

Operator

Seth Seifman has another question.

Seth Seifman

Thanks very much. Ken, you mentioned that you are taking some share in fasteners. You also talk about declining prices. Can talk a little bit about the state of the market there? How much price competition is intensifying and the trade-off between price and share gain and earnings?

Ken Giacobbe

Yes. Similar to last quarter, we talked about fastener prices. Well, we mentioned where we did give us some price to get more volume and more share. The advantage of the increased volume in share more than offset the price reduction. We talked about margin expansion in Q3 in the fasteners business. We are seeing the same thing from an operational perspective in fasteners in Q4. So we have margin expansion given up little bit of price but more volume, better mix, as we run that through that business. So we are confident as we going to next year. That's a favorable in terms of margin expansion.

John Plant

I am going to come in and give a comment as well, is that one thing that I have been introducing and now look at it from a Board perspective was getting reported out in the second half of last year and obviously now we are looking at it is basically a view each quarter in terms of pricing getting stronger or weaker. And in particular looking at the profitability of new contracts is an important discipline in the company. And so philosophically, I don't believe in buying business. We have to earn the right technologically and so it's one where the rigor in pricing is important. So I just wanted to make sure that attitudinally, you know where I come from.

Seth Seifman

Okay. Thank you very much.

John Plant

Thank you.

Operator

Thank you everyone for joining us today. That's all the time we have. Thank you for your patience for connecting. You me now disconnect.

John Plant

Thank you.