Howmet Aerospace Inc

NYSE:HWM

Earnings Call Transcript 2018-Q4

[Operator]

Good morning. My name is Shelby, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Fourth Quarter 2018 Arconic Earnings Conference Call. [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, executive]

Thank you, Shelby. Good morning, and welcome to Arconic's Fourth Quarter 2018 Earnings Conference Call. I'm 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've included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation.

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

[John Plant, executive]

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

Let me begin by saying that I plan to lead Arconic through its new direction. I'm 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 or minus, 190 facilities and generated nearly $18 billion of revenue per year. It was ranked amongst the 10 top global automotive suppliers.

I've 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's going to focus on enhancing the company's operations. He has extensive experience in Arconic's core markets, including aerospace and defense. And Elmer's going to help support me in charting a new direction for the company and deliver value to the shareholders.

Turning to Slide 5 and commenting on the fourth quarter and the highlights for 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 a 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 structured improvements in cash generation, reflected in the adjusted free cash flow of $465 million for the year, about 3x that of 2017. Working capital improved 8 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'm going to hand it across to Ken to take us through the results for 2018 in a little bit more detail.

[Ken Giacobbe, executive]

Thank you, John, and good morning, everyone. Now let's move to Slide 6 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 extrusion 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 continue to be healthy organically. 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 airframe is notable. As you may recall, that we experienced weakness in aero airframe due to widebody production mix in the first 3 quarters of the year. In the fourth quarter, growth in single-aisle aerospace volume more than offset the widebody 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 100 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 continue to impact us unfavorably, as we are a 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, operating income was driven by a $33 million unfavorable mix, primarily caused by new product introductions in Aerospace. In our aero engines specifically, we are more than -- in aero engines specifically, more than of our half of our products 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've also included the 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 $116 million benefit year-over-year. Days working capital improved 8 days year-over-year.

Compared to last year, lower pension contributions offset the increase in capital expenditures. 2/3 of our capital spent in the quarter was for return-seeking projects, as we continue to expand our wheels capacity at Hungary, installed a horizontal heat treat furnace in Davenport, Iowa for the industrial and aerospace markets and expand aero engine capacity in Whitehall, Michigan and Morristown, 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 7. In the fourth quarter, EP&S'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 their Engineered Structures business unfavorably impacted results, including a $10 million impact in the fourth quarter due to a Cleveland press foraging -- Cleveland press outage. Presses was repaired and operational at the end of the fourth quarter, which was 4 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 airframe 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 cost. 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 and 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 8. For the fourth quarter, EP&S's revenue was over $1.6 billion, which was a record quarter for any quarter in EP&S'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 of 13% and aero defense of 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 widebody 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 9, and I'll 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 8-day reduction in days working capital. 2/3 of our capital spent 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're 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 cost and 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'll 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 the appendix. On Slide 18 in the appendix, we have summarized 4 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 4 subcategories.

First, income of $154 million related to the gain on the sale of the 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 noncash charge of $43 million related to the loss of our -- 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 noncash 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 noncash charge of $9 million related to pension curtailments associated with the U.K. pension plan freeze announced in the fourth quarter of 2018 and is effective in the first quarter of '19. As John mentioned earlier, 90% of our gross pension liability associated with defined benefits 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 of 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 quickly. First, we recorded a tax charge of $45 million related to the finalization of our analysis of U.S. tax reform that was enacted at the end of 2017. Second, we recorded a $74 million benefit related to the reversal of a 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'd 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 2.05x, which is an improvement of approximately 39% since the fourth quarter of 2016.

With that, I will turn it back to John.

[John Plant, executive]

Thanks, Ken. And I'd now like to give you an update on our plans. The plan involves 3 things to talk to: cost reduction, portfolio and capital allocation.

So let me start with cost. And 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 2 fundamental areas: the Engineered Products and Forgings business; and the Global Rolled Products. The determination of which company is RemainCo and which is SpinCo will be optimized to maximize future shareholder returns.

In addition, we'll consider the sale of businesses that do not best fit into the Engineered Products and Forgings or the Global Rolled business. We'll 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 through the end of 2020.

We'll 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'll stop and open the line for your questions.

[Operator]

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

[Phillip Copeland, analyst]

Just a couple of quick ones. John, on the split that you've talked about here, how do you get truly comfortable with a standalone EP&S, given the potential volatility we may see on some widebody programs, I think most notably the A380? Should that shut down relatively soon, I would assume that would have an impact similar to what you've seen the last couple years. As well as I think there will almost certainly be a lot more investment in Whitehall and Morristown to get to the rate that the airframers are talking about and pushing for a couple years out.

[John Plant, executive]

Okay. So let me start with, I'd say, airplane build. Every projection that I've seen says that total aircraft build increases, narrowbody in particular. And my understanding is that we have at least a 7-year backlog of airframe deliveries, which are [ orders ]. If anything, it's increasing. So while I wouldn't claim to be an expert in the Aerospace sector, that's a future demand profile that I've never enjoyed previously in my life, and I think it's just a tremendous platform that we have and gives us the ability to grow into the future. So if the A380 were canceled, yes, I guess, we'd 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'll say, airframe and focus more on the whole market. That's the first comment I'll make. In the second part of your question was I think additional capital. I think I answered that pretty clearly by saying that we're going to spend less capital in 2019 than we spent in 2018. That's been reviewed and being reviewed already. In fact, I'm 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'll be a lower number. I don't know. But the guidance that I've 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'm hoping that we continue with the increasing yields that we are currently seeing in those, say, turbine blade plants and hopefully begin to work our way through the backlog, even though right now, I'm not aware if we have any major, I'll say, customer deliveries. But we certainly have a backlog and look forward to trying to clear that with the investments, which have already made in 2018, and the high yields which are beginning to come through and which you've seen in the run rates in the fourth quarter that we talked to earlier. Does that answer your question?

[Phillip Copeland, analyst]

Yes. I guess, I'm just wondering if you were -- you affect the transaction to spin by the time it closes, I completely understand the capital plan for '19. But when you look at what the capital plans will need to be if we talk about rates on the narrowbodies that are $70 million are higher or investments in military, should we need to be higher? 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. I just -- as it pertains to capital structure, as it pertains to how much wiggle room you'll have in that, that's really just what I was looking for.

[John Plant, executive]

Yes. I mean, I just don't see that as a fundamental worry that I should have at this point. I'm hopeful that EP&S 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'm particularly focused on driving up OEE in the plants. And I mean, 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.

[Phillip Copeland, analyst]

Okay. And just for the follow-up on the new program EBIT impacts, can you -- you called that out in GRP. But excuse me if I missed it in EP&S. But where were EP&S new program impacts 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, executive]

I think that's more of a Ken question at this point in time. And so I'll ask Ken to respond to that. It's interplay between them.

[Ken Giacobbe, executive]

So the -- we think the widebodies and the jumbos from the GRP side with sheet and plate has pretty much stabilized, right? They've been coming down. We've taken the hit this year. But now we are seeing the single-aisle leapfrogging the widebody. So we've got to sell a heck of a lot more single-aisle planes to offset the widebody, 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 EP&S side, on the engines piece, we're about more -- a little over 50% is the new engine platforms. As we're going through that, we've got new products. Our learner cost on those new product 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, we're 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 '19 you'll see a tailwind and cost structure improving in EP&S along with the commercial effort to get more price.

[Phillip Copeland, analyst]

So, Ken, embedded in your plan, just to be specific in EP&S and in the guidance, do you envision that there will be new program EBIT headwinds '19 versus '18? Or will those flip to tailwinds since you're still going up significantly in volume?

[Ken Giacobbe, executive]

I think net-net, there'll be puts and takes here. But I think it will be a net tailwind as we go into next year, margin expansion.

[Operator]

[Operator Instructions] Your next question comes from Gautam Khanna of Cowen and Co.

[Gautam Khanna, analyst]

First question would be what do you envision the cost to actually do the breakup, to be, cash cost over what timeframe? And anything you can say there about cash cost into synergies?

[John Plant, executive]

I'd 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'll update you on that next quarter when we've got more detail.

[Gautam Khanna, analyst]

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 or improving profits on the next-gen engines. And yet we are at our fourth CEO in 4 years. I'm just curious if you can give any context around what's really going on.

[John Plant, executive]

Well, I think the most important thing is to look forward, not backwards. I don't see why my answering that question provides, I'll 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 are in the past, you can do nothing about. And what we're really about is managing, driving and mapping out the future. So that's the most important thing. And so I'd say my approach is I spend 95% of my time looking out the front windshield and maybe 5% of my time looking through the rearview mirror. And I think that's the most important aspect of leadership. So let me, first of all, take issue with, I'll say, the 4. I mean, certainly if I'm the fourth, I mean, 1 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're 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've talked to this morning, the board felt it appropriate to make not only, I'd say, a new direction in terms of the strategic intent of the company, but also it was appropriate to make a change in leadership. And it's that straightforward.

[Gautam Khanna, analyst]

I appreciate it. I had to ask.

[John Plant, executive]

Of course. I mean, I guess, I expected that someone. 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.

[Operator]

Your next question comes from Rajeev Lalwani of Morgan Stanley.

[Rajeev Lalwani, analyst]

I'm actually going to pick up after the last question. So I'll apologize in advance too. John, just from a board perspective, can you just provide some color as to what happened over the last couple 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 essentially a logical decision a couple years ago as opposed to today. So it'd be the first part of the question.

[John Plant, executive]

Let's just track back through time and -- I mean, I don't really know that much before 2016. I saw, I'm going to say, reports that maybe the first thoughts, particularly from the analyst community about spinning Alcoa. It was around about the 2010 or '11 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 it was really, I'd say, experiencing the full, I'll call it, tumult of trying to split a corporation that's over 100 years old and all that it entailed. And it wasn't an easy split by any means, given some of the, I'll say, legacy issues and some of the joint venture relationships that were occurring or had been put in place. And so we had to find the means of unwinding all of that. And so let's call it a new Alcoa was spun out and Arconic with a new name. But the historic company was RemainCo. You can argue about which was going to be better to have a clean, I'll say, future entity or not. But it is what it was. And we are sure at the 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'll say, what we've had in terms of trying to be together as a single Arconic and see management put in place to do that. Now when I look at, I'll 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 Rolled Products and 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've done that in '16. We've got to it in '19. And the most important thing is doing it now. So maybe you could critique us for timing, but I don't think you could critique us for intent. And so 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, analyst]

And then I have a follow-up for 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'm wrong, there was a sequential decline, and I'm referring specifically to EP&S from 3Q to 4Q. Can you just provide some comfort on the improvement going forward? Was it just a mix dynamic, the Cleveland press outage? Was that what was creating the weakness in 4Q, and so maybe the trend in 4Q isn't the right run rate to use, if you will?

[Ken Giacobbe, executive]

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's other things that are going on in the business. Again, as we're getting incremental volume going through the plants as we move into '19, we've got better absorption. There's been a lot of very good work in terms of operational improvements in, I'll 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 5 resources there. We've seen substantial improvement. They cut their past dues by around 28% in '18. 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're 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.

[Operator]

Your next question comes from Seth Seifman of JPMorgan.

[Seth Seifman, analyst]

So one question, I guess, a 2-parter about strategy and the portfolio. I guess, John, do you intend to preside over the split of your -- of the company during your time as CEO? And secondly, I noticed that the release mentioned potentially selling businesses, but not specifically the BCS business, which had previously been up for sale. I wonder if you can address that, including in the context of any potential Grenfell Tower exposure, which is an issue that came up frequently in the press in recent months.

[John Plant, executive]

Okay. I guess, I better make a note, because you wound about 3 or 4 things into that 1, Seth. So I didn't comment on BCS, because that's previously announced and the, I'll say, process 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 put a time expiry date on that. The plan is that, like starting next week, teams are going to be engaged and focused on the separation. And all of that required -- was required to do that, and it's obviously a major project when you do that. And that's probably in that, I'm going to guess, 9 to 15 months. So yes, the spin, I'm 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 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 those things are up for debate, and I will say the plans may be a little bit more advanced than you think. Regarding Grenfell, yes, it certainly got a lot of the press. And some of that, I think, is regrettable in terms of stuff that somehow got leaked into the press while we were examining whole company transaction and then maybe what may have been seen to be an impediment to that. My update for you on Grenfell is that there's a public inquiry. I think the Phase 1 is just about complete. I guess, a report is going to be produced. Maybe there'll be a second public inquiry developed from that, which comes out of the first one. And outside of the, I'll say, the derivative claims we may have had, there is currently no -- from the U.S, there is no current, I'll 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.

[Operator]

Your next question comes from David Strauss of Barclays.

[David Strauss, analyst]

John, the cost reduction program that you highlighted 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've seen the company undertake?

[John Plant, executive]

Yes. Well, first of all, I'm not that familiar, apart from seeing the numbers, in terms of the approach. So where I look at it right now is that, I say, I'm 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'm going to be reviewing over Saturday and Sunday in Pittsburgh, and with a view that we're going to implement sooner rather than later. There's nothing magic about cost reduction programs. It's always the same stuff in terms of, I'm going to say, both what semi-fixed cost, and that's obviously staffing levels. It's all by a matter of efficiencies. If you look at discretionary spend, it will look at things like indirect spend. The only thing I haven't put on the agenda for the first wave of this is any direct material cost focus beyond those, just the normal things which are going on. So it will just be the traditional, looking at fundamental benchmarking compared to competitive sets. And in particular, I do like to see efficiency and productivity developments each quarter of each year. So am I 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's nothing magical about cost reduction. It just is. And I'm 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 the shareholders haven't seen sufficient returns. And it would be -- I mean, maybe the word is inappropriate, it'd be nice to see them improved. That's about it really.

[David Strauss, analyst]

As a follow-up. So I know that you have this ongoing sale process for Building and Construction. What is left of TC&S (sic) [ TCS ]? Is that -- 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?

[John Plant, executive]

I mean, the words I've given you today around the 2 fundamental businesses give me enough, I'll say, room to decide whether the commercial wheel business is part of the first segment I've talked about. It's not part of the rolling assets for sure. And we'll 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's your second one again?

[David Strauss, analyst]

Pension. Obviously, the large pension liability, yes. How that might be allocated among the go-forward companies?

[John Plant, executive]

Well, the first part is straightforward in terms of what naturally belongs there. And then in a company with the, I'll say, size and legacy of Arconic, we 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 intertwined with, I'll call it, RemainCo versus SpinCo and what's the best profile and ability to have, I'd say, the liabilities attached to which entity, which makes it a good -- has a good future for both of them. Because there's only good intent to have 2 strong businesses emerge, which hopefully, I will say, trade at I think multiples that they could hope for. So I just don't think I can give you a number, nor should I, if I was even able to, to say to you 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 benefit, I will say, the outcome in terms of the, I'll call, shareholder value.

[Operator]

Your next question comes from Matthew Korn of Goldman Sachs.

[Matthew Korn, analyst]

John, a question for you on autos. The auto OEMs globally have offered a pretty dour outlook into '19. How are you qualifying the risk as you see it to your Automotive business, in particular on weak demand and production outlooks overall?

[John Plant, executive]

Okay. So I guess, I have some perspective, having come from the auto industry. But -- and I get peripheral understanding, some segments of various, I say, boards I'm 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 start of it. In terms of outlook, my guess is that we are into a level of auto sales and production, which has 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'll 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 obviously, aluminum is right in the -- at the forefront of doing that and it's much cheaper, I think, than, for example, putting in magnesium sheet into body panels and structures. So I think the, I'll say, tensile strength, lightweight characteristics of aluminum are right in that sweet spot of the light-weighting 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's 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'll say, points of the auto cycle and what a demand profile might be by way of production of just underlying quantity versus that secular growth. That's something I'm just not at that level of knowledge about yet. But it's something I'll be interested in looking at.

[Matthew Korn, analyst]

I appreciate that. It sounds and it's a matter of penetration, it's a matter of platform. And I believe I heard you earlier, I think you mentioned potential expansion there in Tennessee for ABS. If I'm 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, executive]

Yes. I'm not sure whether we have made any announcement on the Tennessee investment. But I can tell you, we've had a lot of scrutiny in December. And we've looked at, I'm going to say -- like 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, the, I will say, path of investment, which starts off slow, but we can use, I'll say, a lot of leverage to get the benefits from that investment as we go through, it's something which -- and the returns that are envisaged with a contingency against those returns in terms of can we come in at a lot lighter level of capital than we authorized. But the answer is it's been agreed. So there, it's going ahead. I think it's great for the future revenue stream for the Rolled Products 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, analyst]

Appreciate it, John. Good luck to you.

[John Plant, executive]

Yes, I appreciate the last comment.

[Operator]

Your next question comes from Chris Olin of Longbow Research.

[Christopher Olin, analyst]

Yes. I was wondering if we could get a progress report on the restructuring efforts that were going on with the aerospace rings and disks business. And I got the sense that Chip was personally leading the efforts to basically restructure that -- those 2 operations. And I guess, now what, would be my question.

[John Plant, executive]

Well, I'm certainly familiar with the issues, which emanated from the 2015 decision to buy Firth Rixson. In fact, that was my first exposure in February of '16 to, I'll say, something which was -- looked a little bit different to what I thought was the case. Rings and disks, my understanding is that it's showing some improvement. There's still a long way to go. It's receiving a lot -- it is 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 don't -- I'm not sure that Elmer and I are going to get through it this weekend. But with inside the engine business, we will be spending time looking at that for sure. Ken, is there anything else you'd like to add at this point or...

[Ken Giacobbe, executive]

Yes, I think you hit on it, John. As we look at the revenue of that business, it was good. We're up about 8% year-over-year. We are seeing the impacts of the debottlenecking. I mentioned the rings comments earlier in terms of what they're doing there. The disk business as well. Volume growth, we invested some CapEx down there as well in the disk business to insource some of the material. But we're 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.

[Christopher Olin, analyst]

Okay, thanks. And then just quickly, when you look at the 2 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?

[John Plant, executive]

No, I can't give you that analysis between the 2 at this point in time. That will be the, I guess, one of the things we'll talk about in the future. In terms of trying to make Rolled Products as good as it could possibly be, I think that's just normal stuff that management should do. And I think the -- it's a solid business. Again, I'm looking for further throughputs and yields and uptime in terms of those mills and being very selective on any investment going forward. And I mean, it should be a good cash generative business.

[Operator]

Your next question comes from Martin Englert of Jefferies.

[Martin Englert, analyst]

Wondered if you could touch on these scrap spreads that still remain 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 '19? And then will the company remain scrap long as they exit the year?

[Ken Giacobbe, executive]

Yes, so scrap spreads right now we're up still 40% on a year-over-year basis. We'll 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 go into next year.

[Martin Englert, analyst]

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 nonaluminum base metals and inputs?

[Ken Giacobbe, executive]

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

[Operator]

Seth Seifman has another question.

[Seth Seifman, analyst]

Ken, you mentioned that you're taking some share in fasteners. You also talked about declining prices. But can you talk a little bit about the state of the market there? How much price competition is intensifying? And kind of what -- the trade-off between price and/or share gain and earnings?

[Ken Giacobbe, executive]

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

[John Plant, executive]

I'm going to come in and give a comment as well is that one thing that I've been introducing and now say from a board perspective was getting reported out in the second half of last year, and obviously, now we're 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. It's an important discipline in the company. And so philosophically, I don't believe in buying business. You have to earn the right technologically. And so it's one where I believe rigor in pricing is important. So I just wanted to make sure that attitudinally, you know where I come from.

[Operator]

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

[John Plant, executive]

Thank you.