Feb 1, 2017
Executives
Patricia Figueroa - IR Klaus Kleinfeld - CEO Ken Giacobbe - CFO
Analysts
Jorge Beristain - Deutsche Bank Josh Sullivan - Seaport Global Securities Rajeev Lalwani - Morgan Stanley Andrew Quail - Goldman Sachs Howard Rubel - Jefferies Curt Woodworth - Credit Suisse Gautam Khanna - Cowen and Company John Tumazos - Very Independent Research
Operator
Good day, ladies and gentlemen and welcome to the fourth-quarter 2016 Arconic earnings conference call. My name is Victoria and I will be your operator for today.
As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Patricia Figueroa, Director Investor Relations.
Please proceed.
Patricia Figueroa
Thank you. Good afternoon and welcome to Arconic's fourth-quarter and full-year 2016 earnings conference call.
I'm joined by Klaus Kleinfeld, Chairman and Chief Executive Officer and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by Klaus and Ken, we will take your questions.
Before we begin, I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the Company's actual results to differ materially from these projections listed in today's presentation and earnings press release and in our most recent SEC filings.
In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix to today's presentation.
Any reference in our discussion today to historical EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix. A note about our recent separation from Alcoa Corporation on November 1.
This is Arconic's first quarter reporting earnings following the separation. The historical results for the businesses that are now part of Alcoa Corporation, the former Alcoa Inc, alumina and primary metal segments and their rolling mill operations at Warrick, Indiana and in Saudi Arabia, which were previously part of our Global Rolled Product segment are presented as discontinued operations in Arconic's financial results for all periods.
With that, I'd like to turn the call over to Klaus.
Klaus Kleinfeld
Thank you very much, Patricia. Good afternoon.
Thanks for joining Arconic's first earnings report. On November 1, 2016, we successfully concluded the separation and launched Arconic.
Arconic is focused on aerospace and transportation as reflected in our gigs [ph] code. This increased focus on a more streamlined business generates unique value creation opportunities.
We are excited about it and we're going after it. During the launch, we engaged with many investors to share our direction and hear your feedback.
We have adopted state-of-the-art governance practice with our Board reaching out to shareholders. They have visited with some of you and received constructive feedback.
Lastly, we have benchmarked other aerospace and industrial peers to understand their best practices and invest on communication. Our priorities are clear.
First, we are squarely concentrating on improving our operating performance through cost reduction, margin enhancement and profitable revenue generation. Second, we have intensified our focus on capital efficiency with an owner's mind-set.
With respect to capital allocation, our scrutiny is greater, our hurdles are higher and our payback periods are shorter. We believe that these priorities are essential to drive shareholder returns.
They have all of our attention. We have laid out our short and mid-term targets and our action plans during Investor Day.
We will continue to update you on the status. Now that we are a more focused Company, we are taking several steps to further strengthen operating management, Board oversight of capital allocation and profit improvement progress.
Third, to give you a deeper insight, we are and will continue to provide quarterly and annual guidance on revenue and EBITDA for Arconic as well as annual guidance for the segments. Fourth, from a communications standpoint, we will spend less time on prepared remarks and allow more time for Q&A.
Our review will focus on operating results and its drivers. We know that those are the things that are of interest for you.
Before I get into the detail, I should add that the timing of earnings has been pushed back. Our reporting date is now after most of our customers have reported and provided their outlook.
So let me now turn to the results. So the revenues are roughly flat in the quarter as well as in the full year.
Combined segment EBITDA is up 7% for the quarter and 9% for 2016 for the full year. We expanded margins in every segment and this was very strongly driven by productivity, which resulted in net savings of 2.5% of revenue.
We have strengthened the balance sheet. We paid down $700 million of debt in December.
We ended the year with $1.9 billion of cash. Our priorities are clear.
We are focused on margin and RONA improvement. In 2016, we faced unexpected challenges from destocking, lower build rates and ramp-up issues to the drop off of North American heavy duty truck market as well as the underperformance of Firth Rixson.
These challenges led us to change our guidance twice last year. I know and we've heard from some of you that this has been very frustrating and painful for you and also for us.
Given what happened in 2016, we've pressure tested our target setting process and built-in additional robustness going forward. In general, for 2017 we are assuming that the destocking and the aero engine ramp-up issues will continue throughout the year.
We are expecting a decline in North American heavy duty truck, not quite however at the same level than 2016. We also believe that mining and oil and gas markets are not foreseen to come back in 2017.
So let's talk about the groups. On engineered products and solutions, we expect the revenues to be up low single-digits driven by share gains of new aero platforms as well as new aero engine platform ramp-ups, at the same time, also pressured from market mix and comparative pricing and the negative impact of the aero supply chain risks.
The growth here will be roughly in line with the market as we have intensely discussed at the Investor Day. The margin is expected to be up 30 to 60 basis points, driven by strong productivity volume growth as well as -- the negative factors is pressure from market mix and competitive pricing and the industry engine ramp-up challenges.
As we told you during Investor Day, we believe the earnings potential to be around 400 basis points improvement compared to 2016 in a three to five-year range. Let me also specifically address Firth Rixson.
The 2016 results were in line with what we last told you, however, disappointing. Overall, we got it wrong on the non-aero side and our outlook substantially reduced for this market.
On the aero side, we are delayed but we will get there. We could have executed better and we recognize it and we own it.
We are working diligently to improve the performance of this important asset. In terms of outlook for Firth Rixson, for 2017, we expect revenues to be $970 million to $1 billion range with margin improvement of 100 to 200 basis points over 2016.
For 2019, we expect revenues to reach around $1.2 billion to $1.3 billion, with additional EBITDA margin improvement of 100 to 300 basis points compared to 2017. In regards to the three to five-year outlook, we expect the EBITDA margin potential to be roughly 600 basis points up from 2016.
The aero business is delayed three years in revenue and closer to four years on the EBITDA side. The equipment reliability in Firth Rixson has improved.
The idles done, the forge is operating, over 78% of the parts required for the 2017 revenue have now been produced and are undergoing customer qualification. The idle film Enforce is expected to generate revenue in late 2017.
We recognize the importance of improving the performance of Firth Rixson. We see the value of these assets having and still will continue to have to transform Arconic into a full range aero-engine component supplier which is critical to the success of Arconic.
Our other substantial acquisition RTI is performing above our expectation. We acquired the business in July 2015 and at that time it had a 14.5% EBITDA margin.
Within 18 months under our ownership, we have improved it by 500 basis points. The full year margin was 19.5%.
Let's move to our Global Rolled Products business. Revenues are expected to be down high single-digits driven by number one, strong auto sheet growth positively, negative impact of the 400 million from the North American packaging ramp down in Tennessee and continuous decline of North American truck build rates.
The growth in the airframe auto sheet is expected to be below market and above market in brazing sheet and commercial transportation. We talked about that also during Investor Day.
The margin is expected to be up 30 to 80 basis points driven by strong productivity, strong auto sheet growth as well as on a negative side airframe restocking, wide body build rates coming down and pricing pressure in regional specialties. As we told you during investor day, we believe the earnings potential for Global Rolled Products will be around 200 basis points improvement compared to 2016 in a three to five-year range.
On our transportation and construction systems business, revenues are expected to be up low single digits driven by building infrastructure construction market growth as well as product innovation and distribution expansion. On the negative side, headwinds continue decline of North American truck build rates.
The growth will be above market for building and construction as well as Phobias [ph]. We expect the margin to be up between zero to 20 basis points driven by strong productivity and headwinds from competitive pricing as well as inflationary pressures.
As we told you during Investor Day, we believe the earnings potential to be around 250 basis points improvement compared to 2016 and in the three to five-year range. Overall, we are targeting gross productivity for Arconic in total between 4.5% to 5.5% of the revenue and net savings of around 2% of revenue.
This includes reducing the corporate overhead in 2017 to a 1.1% level of revenue. Our focus is clearly on margin expansion and capital efficiency.
So let's also talk about capital efficiency. For 2017, we are targeting to increase our RONA to 9% and for 2019 to 11% to 12%, a 400 to 500 basis points improvement from today.
We will get there through margin expansion, working capital reduction, stringent CapEx management and overhead reduction. To be clear, these targets do not include the potential benefit from monetizing the retained interest of Alcoa Corporation.
So with this, let me now turn it over to Ken for more in depth discussion of the 2016 results.
Ken Giacobbe
Thank you, Klaus. In order to get to all of your questions as soon as possible, I'll move rather quickly through the financial slides.
We have added several slides in the appendix which give you additional information. Now let's move to Slide 8 for the financial overview.
You'll notice that as a result of the separation on November 1, 2016, Arconic has reported Alcoa Corporation's operational results as discontinued operations for both quarter and the year. I will focus my comments on continuing operations of Arconic with one exception.
The cash flow statement including free cash flow represents both continuing and discontinued operations. Q4 and full year revenue were flat year-over-year.
Revenue growth was impacted by our decision to ramp down our less profitable Tennessee packaging business which is detailed in the footnotes. Combined segment EBITDA margin was 15.5% and 16.6% respectively for Q4 and the full year.
All segments improved Q4 and full year EBITDA margins on a year-over-year basis. Our capital efficiency measure RONA, which is return on net assets was 4% for Q4, driven by lower Q4 seasonal profitability and it was 7.1% for the full year which was in line with our guidance.
Cash ended the year at $1.9 billion which was approximately $100 million better than guidance. Gross debt of $8.1 billion was reduced by $750 million resulting from the debt pay-down that we did in December of 2016.
Net debt to adjusted EBITDA finished at 3.7 times. Free cash flow was positive $354 million for Q1, and negative $252 million in the full year including both continuing and discontinued operations.
These numbers include approximately $135 million of separation of cash costs in Q4 and $375 million for the full year. Now let's move to the income statement.
We've talked about revenue, so let me cover some other key areas. Overhead spending continues to be an area of focus for Arconic.
Our SG&A was higher in the fourth quarter as our separation spending reached its peak. Excluding the impact of separation costs, our SG&A as a percent of sales was 6.5% in Q4 and 6.1% for the full year.
The impact of separation costs on EBITDA was $76 million in Q4 and $193 million for the full year. The loss from continuing operations was $1.3 billion or $2.95 a share for Q4 and a loss of $1.1 billion or $2.56 a share for the full year.
Excluding special items income from continuing operations was $71 million or $0.12 a share for Q4 and $505 million or $0.98 a share for the full year. Special items for the quarter were $1.352 billion, which included four major items.
First, we took $1.244 billion of discrete and other tax items primarily related to the separation. This was all non-cash.
As highlighted during Investor Day, we recorded valuation allowances for U.S. deferred tax asset that we transferred to Alcoa Corporation as well as certain foreign tax credits that no longer are considered realizable due to the separation.
Although, we have taken a valuation allowance for the former tax credits, we retained the tax attributes for a period of time, usually 10 years when it occurs. The second charge was $92 million after tax for restructuring, which has three subcomponents.
The first are costs associated with our Tennessee packaging business. As I mentioned earlier, we will be exiting that business by the end of 2018.
There will be additional charges through the end of 2018 as we ramp down production. The second is a write-off of our Firth Rixson ultra large extrusion forging press in the UK.
The write-off is the result of substantial decline in off-highway and mining markets as wells as our projections for those future markets. Third is a headcount reduction primarily impacting engineered products and solutions and our corporate business.
These reductions are part of our plan to reduce corporate overhead by $45 million in 2017, which will result in overhead at 1.1% of revenue. The third item was a $72 million after tax charge associated with separation cost, which impacted SG&A.
These were cash costs. Finally, $56 million of non-cash after-tax income due to the adjustment of the projected earn-out of our Firth Rixson acquisition.
You can see the impact in the other income line of the income statement. Now let's shift to the cash flow.
As I mentioned earlier, the cash flow statement includes the impact of both continuing and discontinued operations. Cash from operations was $665 million for Q4, and $873 million for the full year.
This reflects the majority of the charges included in the net loss were non-cash. Cash used in financing activities was $407 million for Q4 and $757 million for the full year.
The main activity in Q4 was the pay-down of $750 million of notes in December, as well as our net cash settlement with Alcoa Corporation for positive $400 million. Cash used in investing activities was $244 million for Q4 and $165 million for the full year, as capital expenditures on a full year basis were largely offset by nonessential asset sales throughout the year.
Free cash flow was positive $354 million for Q4 and negative of $252 million for the full year. Excluding cash separation costs, free cash flow for the year would have been positive by more than $100 million.
Again, we ended the year with $1.9 billion of cash after the debt pay-down of $750 million in December. Now let's move to the segments.
EPS had strong margin expansion of 150 basis points in the quarter driven by net savings. Net saving was introduced at Investor Day and it's defined as productivity less cost increases divided by revenue.
In EPS, revenue was flat versus the prior year quarter, benefits of the strength in the aero engine and IGT demand were offset by continuing destocking in airframes. EBITDA of $265 million for the quarter was up 9%.
The year-over-year improvement was largely driven by net savings in ATEP which is the RTI acquisition. EBITDA margin improvement 150 basis points to 18.8% driven by net savings of 3.2%, partially offset by pricing in aero engine ramp-up costs.
For the year, EP&S' revenue was up 7% driven by the RTI acquisition. Revenue growth was primarily in commercial aero engines, aero airframes and industrial gas turbines.
EBITDA was 8% for the year, again driven by RTI acquisition as wells as strong net savings. EBITDA margin was up 10 basis points to 20.9% driven by net savings of 2.2%, partially offset by pricing and aero engine ramp-up cost.
Let's move to GRP. GRP also had a good Q4 in terms of margin improvement.
They expanded EBITDA margin by 100 basis points driven by their net saving. Revenue was down 9% compared to 2015 as record auto sheet shipments of 56% were more than offset by the ramp-down of the Tennessee packaging business.
Airframe destocking North America heavy duty truck, the EBITDA was flat year-over-year. EBITDA margin improved by 100 basis points as we said earlier to 10.8%.
Again, this was driven by continuous net savings improvement of 1.5% and favorable price mix. For the full year, revenue was down 7% as our continuing growth in automotive was offset by the ramp-down of the Tennessee packaging business and metal price declines.
Despite the lower revenue, EBITDA was up 13%, driven by growth in automotive as well as strong productivity. EBITDA margin improved 220 basis points to 11.9% as net savings of 2.8% were partially offset by unfavorable price and mix.
Now let's move to TCS. TCS as well delivered a strong fourth quarter.
Revenue increased 3% driven by solid results in our building and construction business, partially offset by continued weakness in the North America heavy duty truck market as well as more general weakness in the bill Brazilian market. EBITDA was up 15% driven by strong productivity and that was offset by pricing pressures and commercial transportation volume.
EBITDA margin improvement in the quarter was 180 basis points to 16.4%, which was a record fourth quarter for TCS. If we look at the full year, revenue was down 4% mainly driven by the North America heavy duty truck build rates, which were down 29% in North America.
We also had overall market weakness in Brazil, which offset the growth in nonresidential construction business. EBITDA was up 7%.
Our TCS team did an excellent job of overcoming this top line market weakness with net savings. EBITDA margin improved 170 basis points to an annual record of 16.1% driven by net savings of 2.8% and partially offset by pricing in North America heavy duty truck.
Now let's take a look at the outlook for 2017. Our guidance has not changed for 2017 from our Investor Day presentation last month.
Revenue will be in the range of 11.8 billion to 12.4 billion. This includes the unfavorable impact of Tennessee packaging ramp down of approximately 400 million.
EBITDA will improve approximately 130 basis points to 15%. Free cash flow will be 350 million plus.
As we focus on deleveraging, we tend to pay down 1 billion of debt in the first half of 2017. RONA is forecast to be 9% or 190 basis points above prior year.
Earnings per share will be in the range of $1.10 to $1.120 per share, based on a share count of 470 million. The increase in share count is driven by our Firth Rixson mandatory convertible preferred stock, which converts in October of 2017.
As a reminder, the 2017 targets mentioned above exclude the positive impact of monetizing our retained interest in Alcoa Corporation. For Q1, consolidated revenue will be 2.8 billion to 3 billion driven by increases in aero engines and automotive offset by airframe and our Tennessee packaging ramp down.
EBITDA is forecast to be 420 million to 450 million. Our diluted share count at the end of Q1 is expected to be 460 million shares.
Now let's take a look at our capital allocation priorities for 2017. Consistent with our Investor Day presentation last month, we're going to cap our CapEx expenditures in 2017 to 650 million with reinvestment rate on our sustaining capital of between 40% to 60% of depreciation and amortization.
We'll be paying down $1 billion of debt in the first half. That's on top of the 750 million that we did in December of 2016.
We are targeting three to seven-day reduction in days working capital from our current level of 49 days. We're targeting a quarterly dividend of $0.06 per share.
This is consistent with the intent to pay out a dividend equal to approximately 10% of our operating cash flows. We'll also look at potential share repurchases.
The criteria for the repurchase will be based on the attractiveness of the share purchase relative to returns of other capital deployment options. Now I'll move to the last financial slide.
We're confirming our 2017 and 2019 targets as discussed at last month's Investor Day as we close out 2016 and 2017 we're clear. As Klaus has mentioned, we're first concentrating on improving our operational performance through cost reduction, margin enhancement, profitable revenue generation.
Second, we've intensified our focus on the capital efficiency with an owner's mindset with respect to capital allocation our scrutiny is greater. Our hurdle rates are higher and our payback periods are shorter.
We believe these two priorities are essential to drive shareholder returns. They all have our attention.
Third, to give you deeper insight as Klaus mentioned we will continue to provide quarterly and annual guidance on revenue and EBITDA for Arconic as well as annual guidance for the segments. Fourth, from a communication standpoint, we'll spend less time on prepared remarks and now more time on Q&A.
So let me turn it back to Klaus.
Klaus Kleinfeld
Thank you very much. Before we go into Q&A, let me quickly reiterate.
We had flat revenues but we were able to expand our margin for each group and our profits are up. We strengthened the balance sheet at the same time, going forward we have actions underway and will continue to do so and we are squarely focused on margin and RONA improvement.
With this, let's get the Q&A session started.
Operator
[Operator Instructions] And your first question comes from the line of Jorge Beristain with Deutsche Bank.
Jorge Beristain
In the spirit of cost cutting, I just thought I'd give you guys the opportunity to maybe state some more explicit SG&A targets. You mentioned about 1.1% of revenue.
So at about $12 billion run rate I guess that comes to about $135 million odd for SG&A. But could you just kind of give us those big buckets that we talked about at Investor Day?
What you're looking at doing in terms of corporate SG&A, the change year on year, R&D, and then some of those legacy costs as well that we had talked about?
Ken Giacobbe
Sure, Jorge. This is Ken.
So as we communicated at Investor Day, as we exit 2016, we have some dis-synergy as part of the separation, about $18 million. Our run rate exiting 2016 is about 1.5% of revenues.
As we move forward into 2017, we've committed that on a corporate side we would get that number down to 1.1% of revenues. That's a $45 million reduction in one year.
Klaus and I have gone through all of the corporate overhead items line by line, from the finance organization all the way through HR, communications no lights [ph] came up with a very detailed plan on how to action it. You've seen the restructuring charge in Q4 associated with these moves.
They'll have a payback of less than a year. But we've gone through a very detailed plan and we monitor that on a monthly basis.
So we feel confident that we'll be able to do that 1.1%. That puts us in good stead compared to our competition, about roughly half the rate of a PCC and others.
We're also looking, Jorge, I know you talked a lot about R&D. We feel we have a very efficient model on R&D in terms of theirs work done at our technology center as well as a joint funding model and a stage gate process with our businesses.
We can see a large percentage of our revenue has been generated through our R&D projects across the business. I'll give you one example.
Our new wheel which is the lightest wheel in the market, 47% lighter than steel, it's stronger than steel. We get our customers to get 5% more payload and 3% better fuel economy.
That all comes through the joint work of the R&D and businesses teams together. So we'll be bringing those costs down in the R&D as well which is a very strict stage gate process that comes back down to that.
We've actually cut some of the R&D cost in 2016. Jorge, when you see our detailed schedules we have taken some costs out of R&D already in 2016.
We'll continue to do that in 2017 as well.
Jorge Beristain
Do you have just like an explicit goal for R&D spending for 2017 at the corporate level?
Ken Giacobbe
I believe it will be somewhere in the $130 million to $140 million level, Jorge, across the entire business, right. Because again, it's a joint funding model with the businesses; if a project doesn't make it and get endorsement from the business with associated revenue returns, the project gets killed.
Klaus Kleinfeld
Jorge, you were there at the ATC and you saw it with your own eyes and others did too. There was a lot of examples, a lot of critical examples that contribute substantially to the profitability as well as the revenues.
Just to pick out a few, this very unique fly type fastener, the 787-mission critical fastener that allows for lightning strike protection. The A951, which really is the bonding, this is the bonding for the Ford F Series, which really allowed, enabled Ford to go all aluminum allowing for the benefits that we're already seeing here in GRP, the automotive ramp-up would not have been possible.
The 3D core blades on the F-135 engine, this is the engine that goes into the Joint Strike Fighter and the list is long. If you look at the 90% of the alloys that ever have flown that the west that's invented, buy what's today Arconic and past Alcoa, this all would not have been possible without the investments in R&D.
Jorge Beristain
If I could just get another one in quickly. Your monetization of the stake in Alcoa, any thought as to how that would happen?
Is it aimed to be sort of a private placement maybe to a sovereign wealth fund? Or are you looking at a pulverizing that, at the market types of offers?
How would you see kind of bleeding that stock out into the market?
Klaus Kleinfeld
I think, look, I mean, we will look at all options and to have in mind that the monetization will happen in a responsible fashion and will be based on market conditions. The dynamics are such that if it happens in the first 18 months, there is a tax benefit if exchanged against debt.
The maximum time that you have is five years. The market value today that the retained interest of 19.9% has is $1.3 billion.
We already said in Investor Day that we use the proceeds and/or for debt pay-down and/or share repurchases. The rest of the details is pure speculation at this point, Jorge.
Operator
Your next question comes from the line of Josh Sullivan with Seaport Global Securities.
Josh Sullivan
Just looking at the two destocking trends in aluminum plate and titanium fasteners, can you talk about how we should think about the cadence of the destocking cycles through 2017?
Klaus Kleinfeld
The destocking is a phenomenon that applies to the airframe side. This hits most strongly our GRP business and also affects the structural parts in our EPS business, right?
We have assumed that the destocking will continue to last throughout 2017. So our assumption in the numbers that Ken and I have just disclosed to you for 2017 is that we believe it's going to continue to go through 2017, the full year.
Josh Sullivan
Do you think we're at the depths of it in the first quarter or do you think it eases its way out through the end?
Klaus Kleinfeld
Josh, we have assumed that they will go through the whole year. We have turned, taken a cautious approach after we probably the whole industry was too optimistic in regards to the destocking last year.
Josh Sullivan
Okay. Great.
Then just one on the automotive sheet market. Can you give us any idea of a body and white pricing or any comments on how the automotive market is approaching the transition to BIW, given the new administration's posturing on CAFE standards?
Klaus Kleinfeld
Yes, Happy to talk about that. We will not disclose the pricing on the automotive side.
I think you understand that. That's not in the interest of the shareholder.
On the CAFE side, we do not believe that there is a near term impact because the way these automotive contracts are tailored, they are specific to a certain platform. When we look at the contract that we have locked in, we basically have 95% of all the volume that we have, which is Tennessee, as well as Davenport backed by contracts today until 2018.
Then the question comes, what is going to happen longer term? That's obviously speculation and there's a discussion around this.
I mean, I think there are three points that I would think one has to consider here. The first one is, light weighting it's creating a value for customers and customers are seeing it and are appreciating it, always relative in their respective category.
So, they will not buy a Prius but they will buy the lighter truck. Secondly, this is all related to North America, which is the relevant market for us here.
I assume that's your question. The state of California has made very, very clear that they will keep demanding better fuel efficiency in spite of what happens on the federal side.
The third thing is the auto industry in North America has a strong interest in being internationally competitive and one thing is absolutely clear. If you just look at the Chinese market, fuel efficiency is essential, absolutely essential there given the environmental issues that exist there.
We will obviously be watching the developments more closely and also touch with down with the White House, the President on that matter.
Operator
And your next question comes from the line of Rajeev Lalwani with Morgan Stanley.
Rajeev Lalwani
Klaus, actually just picking up on that last question, can you just talk about any opportunities for you around tax reform as well as any opportunities around infrastructure spending opportunities as you look forward?
Klaus Kleinfeld
On the tax reform side, I have been always supporting a reform on the U.S. business tax side and lower tax, lower corporate tax rate to make it more competitive on an international scale.
The rest as I think pure speculation where this will go. And what was your second point?
Rajeev Lalwani
I guess just any infrastructure spending opportunities that you can --.
Klaus Kleinfeld
Infrastructure spend would affect us most strongly in the aspects of heavy duty trucks and trailer. As I told you, our assumption for 2017 is that the market will continue to be down, right, roughly around I would say 10% or so.
So that's what hit. It would also hit on the general industry demand, right?
So I assume -- that's mainly affecting our Global Rolled Products business. That's where that would hit.
The other question is what happens on the defense spending side? Also, what happens to consumer confidence in general that can have a bigger impact on consumer confidence as we saw has been going up in the US.
Also on the building and construction side obviously where this will have an impact, direct impact.
Rajeev Lalwani
Got it. Just one last question.
In terms of more of a high level strategic question. As relates to the GRP segment, can you just talk about the strategic fit there within Arconic and whether or not -- that business is sort of playing a role in suppressing your overall margins and cash flow.
Klaus Kleinfeld
Well, first of all, we have been very good in bringing it up to this level. This has been a major work of shedding off those parts of the businesses that have been exposed to a stronger commoditization.
The last big thing that we have done there is to basically ramp-down now the packaging, North American packaging. We will always look at opportunities here, how to further improve this business as we have done in the past.
Operator
Your next question comes from the line of Andrew Quail with Goldman Sachs.
Andrew Quail
Hi Klaus and Ken, I've got a couple of questions. First one's on aero, just wanted to know how much of your aero related business is priced at spot versus contract.
Klaus Kleinfeld
This depends on which segment you go into. If you go into the aero engine segment, I would say the majority, probably 80%, 90% or so is contract business.
Same thing is true for the specific structural parts. If you for instance do a bulkhead for the F-35, the Joint Strike Fighter, that's obviously long-term contract and very few people can make it.
On the GRP side, on the global rolling side, there are sometimes opportunities here to have spot sales. We saw the last big one of this in I think it was 2012, end of 2012 when particularly Airbus had under-bought and was in great need to buy more.
At this point in time, Andrew, I don't expect that because as I told you before the market is in a destocking mode, particularly in regards to those type of components.
Andrew Quail
Okay. I suppose you'd go with flagged about unfavorable sort of price and product mix in EPS.
Is that the impact of destocking and the price weakness that you guys have flagged?
Klaus Kleinfeld
It is that and the -- on the EPS side, the destocking hits as I said earlier on, all the structural parts and particularly fasteners is very strongly affected, very strongly affected by this. Great effort also from our customers to further consolidate their supply chain, Right?
So that's the biggest impact there really.
Andrew Quail
Last one is on TCS. It looks like the data in North American truck market is starting to improve.
Are you guys seeing any signs of that?
Klaus Kleinfeld
Well, we are not, to be honest. That's why we are expecting a further decline in the North American heavy duty truck market, trailer market.
Not as I said at the same level of minus -- more than minus 30 in last year, it was really like a cliff fall. But rather in the range of roughly minus 10% or so.
But for us, the good thing is, will continue to build out our market share, not just in North America. We're a worldwide presence and we have great products and we will continue to expand in Europe as well as in emerging markets like China.
The Chinese market is a very good growth market for us because they are now enforcement rules for weight restrictions on trucks, this will allow us to grow there and that's also built into our assumptions.
Operator
Your next question comes from the line of Howard Rubel with Jefferies.
Howard Rubel
A couple questions. Maybe Ken, just first, interest expense seemed quite low and yet we've not gotten the full benefit of the refinancing or some of the other item.
Could you just provide a general guide as to what you think that's going to be for the upcoming year?
Ken Giacobbe
Yes. If you take a look at our actuals, Howard, we committed that we would pay-down another $1 billion over the first half.
If you look at our debt towers that we've got coming due, we've got $1 billion in 2018, about $1.130 billion in 2019, and another $1 billion in 2020. All different rates, anywhere from -- we've got some notes at around 5.7% to 6.6%.
So I think if you do the math and you choose the blended rate there that will give you some idea in terms of what the interest expense will be going forward.
Howard Rubel
So I mean, it's going to -- if we just look at where you ended the third -- the fourth quarter, you could conceivably be reasonably well under a run rate of well under $300 million.
Ken Giacobbe
$300 million, I think it would be north of that, Howard.
Howard Rubel
Just two other things. From what we've seen from Pratt, they made a lot of progress with the GTF.
I think you contributed to that, Klaus. Could you address a little bit of where you are on that?
How you feel the ramp is going now?
Klaus Kleinfeld
Howard, first of all, I'm glad you're joining this call. I can obviously not comment on specific customers here.
You know fair well, you have to ask Pratt. The thing that I can say is that all the OEMs in the engine side know that the supply chain -- the engine supply chain needs to be very, very stringently managed to live up to the expectations of these enormously ambitious ramp-ups.
We are seeing as you just indicated good progress. At the same time, we also have to be clear that the ramp-up expectations are of historic proportion.
Howard Rubel
Is there any way for you to comment on where your yield is today versus what your plan is? Or how far you've come?
[Multiple Speakers]
Klaus Kleinfeld
Howard, the yields wouldn't help you much because we are one component in a longer chain. So you would really, to get to this you would really have to understand what is the yield of the component once it leaves us, goes to other suppliers and then gets finished and build in at Pratt RG [ph].
Howard Rubel
No, I understand that. Then last, you talked about destocking.
If we think about it largely being attributable to wide body aircraft, would that, and maybe some efficiencies in other places. Would that be equivalent to what you'd see as about a 5% headwind to revenues in those business units?
Klaus Kleinfeld
Ken, I think this really depends how our, I mean, on what you're looking at, because the effects here are different. I mentioned before, the destocking impact on fasteners.
I think what you had in mind, in the fastener, it was very strongly driven by an optimization in the supply chain. This is different from the effect that you are referring to, which is simply a mix change or a reduction of the wide body build rate.
So I would say you really have to look at it component by component, different for plate than for fasteners.
Howard Rubel
But that's an important, I mean, it is also wide body volume in addition to just optimization.
Klaus Kleinfeld
Sure. No, you are absolutely right.
But on fasteners the impact is larger, is really much larger to what I just said, through the consolidation of the internal consolidation of long supply, internal long supply chain.
Howard Rubel
Okay. Thank you very much.
[Multiple Speakers]
Klaus Kleinfeld
Howard, just one other thing. This is Ken again.
You mentioned $324 million. I was wondering where you're getting that number from.
That's on an after-tax basis, right? So our interest expense on a pretax would be about $500 million.
Again, if you do the math that I talk about there, you're in the low $400 million. Okay?
You were looking at after-tax, right?
Howard Rubel
Yes, that's correct.
Klaus Kleinfeld
Okay.
Howard Rubel
I'm sorry about that. Thank you very much.
Operator
Your next question comes from the line of Curt Woodworth with Credit Suisse.
Curt Woodworth
How should we be thinking about incremental margins in the EPS segment as volume starts to come back, if you I guess assume pricing is constant?
Klaus Kleinfeld
We've given you a good outlook here in regards to what we believe. I mean, first of all, in our plans, we have not built in volume to go substantially up in 2017.
So that's the first important thing. We assume that volume in 2017 will go up low to single, up to low single-digits, right?
That's the first thing. That is underpinned by our assumption that destocking will continue through 2017 and the ramp-up will have issues, right?
We believe that in 2017 in spite of all of this, the streamlining actions as well as the productivity and the net we will be able to get out of this allows us to expand the margin by another 30 to 60 basis points from the level of 2016, where EPS is at 20.9% EBITDA margin. Then we also have said that in the longer run or the mid-term in the three to five years we believe that we will be able to get a 400-basis point expansion based off the 2016 level.
So get into the mid-20s. To get there, you would need to see the ramp-up of the volume happening.
We do believe and you know that, Curt, that we have the contracts. We have been signing more than $40 billion of aerospace contracts --.
Ken Giacobbe
$14 billion.
Klaus Kleinfeld
$14 billion of aerospace contracts. We have gained substantial share on the engine as wells as on the platform side.
So the moment these issues are worked through, the market will lift up and that's what's built in there. I don't know, Curt, whether you had a chance to attend our -- or remember what Karl showed at our Investor Day.
Karl Tragl showed a very, very nice graph where he indicated what our assumptions are in terms of the growth. The growth basically -- our assumption is the growth will start to lift up in 2018.
The volume is there. This is all a question of getting the technical solution done and getting through the destocking.
Curt Woodworth
Right. But I guess with respect to trying to close the margin gap with precision cast parts.
I've just seen the presentation for the Elliott. I guess if you think that -- do you think incremental margins to be up to 40% in EPS, i.e., if you -- would you need, say, a 10% volume environment to really close the gap with PCC?
Klaus Kleinfeld
The gap with PCC is a bit of a different question, because the biggest difference to keep it simple here is that PCC has the luxury of having a business of titanium and nickel large structural casts. They had almost a virtual monopoly in this business.
The last time they published numbers, it had a size of around $1.4 billion and they had a profitability in the segment of over 40%. So this is the biggest difference because we actually have just started to build up that business by building out our LaPorte facility.
This has been ramping up and this facility even when it's in full swing will probably produce roughly around $300 million of revenue, at a nice margin, a very, very nice margin. But this is a structural gap that will take quite some time.
We will be working it. We will be gaining share in this.
We will continue to close the gap. But that's the biggest point there in terms of the PCC comparison.
Ken Giacobbe
The last few that we had on PCC, it was their Q4 was about an 18% margin business. For the full year, you can get to somewhere around the 20.
But as you talked about with the volume increase in our business and the innovation and the richer mix, that's what will improve our margins. We also have the LaPorte facility, which does the large structural castings.
Curt Woodworth
Okay, that's helpful. Then on Firth Rixson, the revenue growth target to 2019 is potentially up $300 million to $400 million.
How much of that target is based on ISO thermal?
Klaus Kleinfeld
Off the 2017 target?
Curt Woodworth
The 2019 target.
Klaus Kleinfeld
The 2019 target. Look, we have in the appendix of the presentation, we have put an extra chart in here that pretty much shows the Firth Rixson details.
I don't want to go through all of this; happy for the IR team to do this offline. On ISO thermal, it is clearly that we are happy that the machinery is working, the forge is working.
All of as I just said, all of the components that we need to get to the revenues in 2017 are currently -- have been produced and are undergoing customer qualification.
Operator
Your next question comes from the line of Gautam Khanna with Cowen and Company.
Gautam Khanna
I had a couple questions. First, just wanted to understand why the IGT business was up so much in what was a relatively flat OE shipment market?
Then looking forward, what do you anticipate the growth rate will be when you have guys like GE and others basically guiding flat to down?
Klaus Kleinfeld
Yes, that's correct. What happened here in IGT are really two phenomenon.
One is there were a couple of large contracts worldwide that were tendered. The biggest one was probably the Egypt contract and then there was I think in Peru another big one.
Also bear in mind, we are really supplying everybody who's in the IGT business. So we benefit from those.
Then the biggest driver however was the very intelligent approach that GE had to put into the market by doing a revamping of the existing -- of their existing machinery and that has been a big success over the last, I would say, 18 months. But you're absolutely correct.
GE has taken their forward projections down. We do also not expect for the market to grow in 2017.
Gautam Khanna
By products you mean the H Class? Or are you talking about the [Multiple Speakers].
Klaus Kleinfeld
Yes, exactly, H Class. Talking about H Class exactly.
Gautam Khanna
Just another question. I'm curious how you guys think about whether -- you're an innovative Company.
You have a lot of proprietary products. Do you actually get paid for it?
I just wonder, in terms of when we think of PCC because somebody brought it up on the call, when we think of them, they're a build to print manufacturer -- the name of the game is get cost out as opposed to any pricing power. How do you view that?
Just innovation and what the returns on it are as you look out?
Klaus Kleinfeld
Yes. The question on innovation and what returns are I think I answered previously, but specifically in regards to the comparison to PCC and, therefore, the aero engine side.
I think that on the aero engine side the market has undergone quite a dramatic shift in the last year. As you see, the new types of engines that are coming into the market now allow for basically 20% -- 15 percentage points out of the 20% improvement of the new planes, right?
To get there, there's a lot of new technology in those. This is one of the reasons also why you see these ramp-up issues currently in the aero engine supply chain.
Also look at how much market share we have been able to win in the last years, also particularly on the engine side. So we believe that speaks for itself, or let our customers speak.
They wouldn't have given this to us if they wouldn't be convinced that we are the right partner and have unique things to offer.
Gautam Khanna
Okay. That actually makes sense.
One last one. I was just wondering if you could quantify how much on a percentage basis the fastening systems business was down in 2016?
If you could help us size it? I think your last disclosure was $1.5 billion or so.
So how much was it down? If you could just give us some context.
Ken Giacobbe
Historically, I don't know if we've gone, we've given the revenue, I believe.
Klaus Kleinfeld
I don't think we have.
Ken Giacobbe
But each of the business units, I don't think we've done that.
Gautam Khanna
I think in prior presentations the old Alcoa used to give $1.3 billion, $1.2 billion, then it was $1.5 billion. I'm just wondering where does it stand now?
Because it seems like a big [Multiple Speakers].
Klaus Kleinfeld
So the total of, so, what's the fastener business in 2016? I think we can do that.
Ken Giacobbe
It was about $1.5 billion and that's the.
Gautam Khanna
How much was that down?
Ken Giacobbe
I'm sorry, Gautam?
Klaus Kleinfeld
How much was that down, was his question.
Gautam Khanna
How much was that down?
Ken Giacobbe
Okay. If you looked at it as a percentage basis, we're down approximately 5% year-over-year.
Now, that's the pure fasteners like for like business. That doesn't include the rings business that we have with Firth Rixson.
So that's an apples-to-apples comparison, about 5%.
Gautam Khanna
Okay. Your earlier point was that this related to kind of the supply chain min/max changes as opposed to a 777 cut or so.
So that's still.
Klaus Kleinfeld
No.
Gautam Khanna
Something that will [Multiple Speakers].
Klaus Kleinfeld
Howard, said it right. My point was the mix issue most substantially affects our global rolling business.
Right. Whereas the mix issue is also, and in the global rolling business, you didn't really have a destocking effect through a consolidation of the supply chain.
Whereas in the fastener business you had that as a very, very strong effect but the mix change also affects it. It's clear.
Operator
Your last question comes from the line of John Tumazos with Very Independent Research.
John Tumazos
With the conversion to --.
Klaus Kleinfeld
I think, John, you have to speak up a little bit if possible, please.
John Tumazos
With the conversion of Knoxville into an automotive product, you'll have about 1.7 million tons of auto cold rolling. Knoxville was something like 40 or 50 billion cans worth of sheet, maybe 3 million autos worth of sheet.
Do you expect to have the automotive programs in hand to run that full out automotive when you make the transition? Or might there be a lull while you wait?
Klaus Kleinfeld
No. First, two things, John.
One is we are contractually obligated to supply Alcoa Corporation until they have qualified to deliver to their can sheet customers here in the U.S. from the rolling mill in Saudi Arabia.
And the contractual obligation runs out in 2018. So they obviously have an interest to get this moved over as quickly as possible because that's beneficial to their profitability.
But that's the first fact. Second fact is, we do not intend to build-out the or change the packaging side of the Tennessee mill into an automotive line.
We have -- because we have unique technology with the Micro-mill, you've seen it, John, so one of the things that we will most likely do, modify it and use it for some other value-add good but it will not go into automotive.
John Tumazos
So we shouldn't be waiting for five more F-150 announcements in the next few months?
Klaus Kleinfeld
Would be good.
John Tumazos
We're rooting for you, Klaus. We're rooting for you.
Klaus Kleinfeld
Thank you very much, John. Thank you.
Operator
There are no more questions at this time. I will now turn the call back over to Klaus Kleinfeld for closing remarks.
Klaus Kleinfeld
Okay. Thank you very much for listening in and our focus I hope has become very, very clear.
It's on margin and RONA improvement. We are executing on the plans that we laid out during Investor Day and also showed more of it today.
Thank you very much for listening. Looking forward to engage with you all soon.
Operator
This concludes today's conference call. You may now disconnect.
Thank you for your participation.