Apr 25, 2017
Executives
Patricia Figueroa - Vice President, Investor Relations David Hess - Interim Chief Executive Officer Ken Giacobbe - Executive Vice President and Chief Financial Officer
Analysts
Carter Copeland - Barclays Capital, Inc. Gautam Khanna - Cowen and Company Seth Seifman - JPMorgan Curt Woodworth - Credit Suisse Josh Sullivan - Seaport Global Securities Sam Pearlstein - Wells Fargo Securities Rob Norwood - Goldman Sachs Howard Rubel - Jefferies LLC
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2017 Arconic Earnings Conference Call. My name is Doris and I will be your conference operator for today.
As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Patricia Figueroa, Vice President, Investor Relations.
Please proceed.
Patricia Figueroa
Thank you, Doris. Good afternoon and welcome to Arconic’s first quarter 2017 earnings conference call.
I’m joined by David Hess, Interim Chief Executive Officer; and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by David and Ken, we will take your questions.
As a reminder, today’s call is about our quarterly results and not the proxy context. During the Q&A session, we ask that you please focus on the quarterly results and business performance.
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 presentations and earnings press release and in our most recent SEC filings.
In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today’s press release and in the appendix to today’s presentation.
Any reference in our discussion today to historical EBITDA means adjusted EBITDA, for which we have provided calculations and reconciliations in the appendix. With that, I’d like to turn the call over to David.
David Hess
Thank you, Patricia. Good evening, everyone.
One additional disclaimer. I have a bit of a cold, but I’ll try to make myself clearly heard.
Before Ken and I take you through the numbers, I want to briefly address last week’s leadership announcement. As you know, on April 17, I was named Interim CEO, while I continue to serve as a Member of the Board of Directors.
Pat Russo who has been Arconic’s lead director has agreed to serve as the Board’s Interim Chair. I joined the Arconic Board in March, and I’m honored that I have been asked by my fellow directors to serve in this role, where the Board conducts a search for a permanent CEO.
I expect to be able to leverage my 38-plus-years of executive leadership roles at UTC’s Aerospace and Industrial businesses, including serving as President of both Pratt & Whitney and Hamilton Sundstrand at different points in my career. In a short time that I’ve been a member of Arconic’s Board, I have come to be extremely impressed by the Board’s level of expertise and knowledge there, heavy level of engagement, and strong commitment to meeting the expectations of our shareholders, customers and employees.
And I’m looking forward to continuing to work closely with the Board, the senior leadership team, and Arconic’s dedicated and hard working employees to deliver on the plan it was created by the Arconic’s senior leadership team in concert with the Board. Arconic is a great company, built for the future, and built to create shareholder value and I’m excited to be able to lead it through a challenging period as we conduct a permanent CEO search.
Now, as you can imagine, selecting the company’s CEO is one of the most important responsibilities of the Board, and the Board has committed to taking whatever time is needed to select the perfect candidate with the right experience and capabilities to lead Arconic into the future. In the meantime, my focus will be on continuing to meet, or exceed the expectations of our customers and shareholders, and seamlessly deliver on our targets.
So enough about the future, let’s talk about Q1 and full-year. Compared to prior year, revenue was up 4.5%, driven by volume and 8% when you normalize for the Tennessee packaging business.
Arconic EBITDA was up 8% and a 11% on an adjusted basis, excluding special items. We had 90 basis points of margin expansion with help from strong net cost reduction of 1.9% of revenues, and we ended the quarter with a cash balance of $2.6 billion.
In summary, we had a great quarter, even stronger they have anticipated as we benefited from a number of items that we do not expect or repeat going forward in 2017. These items include a higher royalty payment in our GRP segment of $7 million, which will recur in the first quarter of 2018 and 2019 as well, and higher than anticipated contribution from Tennessee packaging.
And as you know, we’re ramping down our Tennessee packaging operations and we will start to see that effect in Q2. Now, I’m going to turn it over to Ken, so he can take you through the numbers in more detail.
Ken Giacobbe
Thank you, David. Similar to last quarter, I will move rather quickly through the financial slides in order to leave more time for questions.
We have several slides in the appendix, which will provide additional details if you need them. Now, let’s move to Slide 6 for the financial overview.
As David mentioned, revenue for the first quarter came in at $3.2 billion, up 4.5% year-over-year, driven by volume gains across all segments. The impact of higher metal prices in the quarter of $82 million was more than offset by the ramp down of our less profitable Tennessee packaging business of $96 million.
Excluding Tennessee packaging, revenue would have been up 8% year-over-year. We have previously announced our plan to exit the low margin North American packaging business in Tennessee by the end of 2018.
Combined segment EBITDA margin was 17.2%, up 10 basis points year-over-year, as combined segment EBITDA increased 5% year-over-year. Arconic’s EBITDA margin, excluding special items was 15.2%, up 90 basis points, as Arconic’s EBITDA increased 11% on a year-over-year basis.
Our capital efficiency measure RONA, which is return on net assets was 8.9% on an annualized basis for the first quarter. This result puts us on track for a full-year target of 9%.
Gross debt was flat at $8.1 billion and cash ended the year with a strong – ended the quarter with a strong balance of $2.6 billion, as we monetized approximately 64% of our Alcoa Corporation stake for $888 million. Net debt to adjusted EBITDA finished at 3.2 times, excluding the favorable impact of our remaining Alcoa Corporation stake valued at approximately $400 million.
Free cash flow was negative $403 million, driven by our normal working capital build in Q1 and semiannual interest payments. Now, let’s take a look – closer look into the financial starting with the income statement on Slide 7.
We’ve talked about revenue, so let me cover a couple of other key areas. As discussed, overhead spending is a key focus area for Arconic.
In the first quarter, SG&A was impacted for the last time by separation costs of $18 million pre-tax, that was also impacted by proxy, advisory and government – governance-related costs of $16 million pre-tax. Excluding these impacts, our SG&A as a percentage of sales was 5.9% for the quarter.
EBITDA for the first quarter was $451 million. If we exclude separation cost and proxy, advisory, and governance-related costs, as mentioned above, EBITDA was $485 million.
The other income line includes $351 million pre-tax gain on our several of the Alcoa Corporation shares, as previously discussed. The restructuring line includes $60 million charge related to the sale of the Fusina rolling mill, as well as additional headcount reductions across all segments, including corporate.
These reductions are part of our plan to reduce corporate overhead by $45 million in 2017. Approximately, 74% of these costs are non-cash.
The effective tax rate for the quarter was 33.5% was – which was right in the midpoint of our guidance of 32% to 35%. The operational tax rate for the quarter was 29.9%.
Net income was $322 million, or $0.65 a share. If we exclude special items, income was $169 million, or $0.33 per share.
On the right-hand side of the slide, you can see the special items for the quarter were a $153 million after-tax. I’ve already discussed the first four special items listed, and I will note the amounts listed are pre-tax.
The last item associated with taxes includes not only the impact of the tax for the first four special items, but also includes a $7 million favorable discrete tax item for the quarter. Now, let’s turn to the cash flow statement.
Cash used for operations was negative $300 million in the first quarter. This result was driven by the normal first quarter working capital build in semi-annual interest payments.
Cash used for finance activity was negative $43 million, primarily due to dividends. Cash from investing activities was more than $1 billion positive for the first quarter, driven by the $888 million proceeds from the monetization of our 64% share in Alcoa Corporation, as well as $238 million in proceeds from the sale of Alcoa Corporation’s Yadkin North Carolina Hydroelectric plant.
Free cash flow was negative $403 million, as capital expenditures were $103 million in the first quarter. Finally, as I mentioned before, we ended the quarter with $2.6 billion in cash on hand, which puts us in a good position as we look to reduce debt by $1 billion by the end of the second quarter of this year.
Now, let’s move to segment performance starting with EP&S. To avoid any confusion with earnings per share, I will refer to engineered products and solutions as EP&S.
Revenue increased 2% versus the prior year quarter. Strong growth in aero engines up 9% and aero frames up 3% was primarily offset by IGT, which was down 5% and commercial transportation down a 11%.
EBITDA of $306 million for the quarter was flat on a year-over-year basis. EBITDA margin decreased by 40 basis points to 20.6%.
Volume was strong for the quarter and net cost savings excluding a ramp-up costs more than offset price declines. Mix was unfavorable with an aerospace and we had increases in our aerospace ramp-up costs.
I said previously, we have detailed bridges in the appendix to help with the bridging for you. Now, let’s take a look at the GRP segment.
In the first quarter, GRP improved its EBITDA by 10% and its EBITDA margin by 60 basis points, driven by automotive growth and net cost savings, which included strong Tennessee packaging performance. Revenue was up 5% to the first quarter of 2016, as higher automotive shipments of 43% and higher royalty revenues that David mentioned of $7 million are partially offset by the ramp down of the Tennessee packaging business, airframe destocking, lower aero wide build rates, and the North America heavy duty truck demand.
And lastly, some pricing pressures in our regional specialty markets. Excluding the impact of Tennessee packaging, revenue would have been up 16% in the GRP business.
EBITDA of $171 million for the quarter was up 10%, while EBITDA margin improved by 60 basis points to 13.7%. The year-over-year improvements by volume growth and automotive shipments, net cost savings of 2.9%, including the strong performance of the packaging business more than offset the pricing pressures in our regional specialty markets and our unfavorable mix in aerospace and commercial transportation.
As noted earlier, we completed a divestiture of our rolling mill in Fusina, Italy this quarter. Finally, let’s move to the TCS segment.
In the first quarter, TCS improved EBITDA by 13% and its EBITDA margin by a 110 basis points, driven by volume and net cost savings. Revenue was up 5% versus prior year quarter, driven by strength in global non-residential construction.
We also saw a growth in European and Asian heavy duty truck markets though this was tempered by continued softness in the North America heavy duty truck market. EBITDA of $72 million for the quarter was up 13%.
EBITDA margin improved to 110 basis points year-over-year to 16%. Volumes were stronger and net cost savings of 2.7% more than offset pricing pressures in the heavy duty truck market.
Now, let’s take a look at SG&A in a little bit more detail. As I’ve mentioned previously, we remain committed to reducing our overhead spend.
Excluding special items, SG&A as a percentage of revenue was 5.9% for the quarter. This level of spend compares favorably to our peer groups, namely the S&P 500 Industrial Index of 12% and the S&P 500 Aerospace and Defense Index of 10%.
Despite the favorable comparison to external benchmarks, we’re constantly looking for ways to reduce overhead and have taken additional steps in the quarter, as I’ve mentioned above. We’re targeting to reduce SG&A to 5.6% of revenue for the full-year of 2017.
Moreover, we are accelerating corporate overhead reductions to be at 1% of revenue by the end of 2017. Now, let’s take a moment to quickly review the sale of a portion of our retained interest in Alcoa Corporation.
On February 14, we monetized approximately 64% of our retained interest in Alcoa Corp. for more than 23 million shares.
The shares were sold at 38.03 per share, which resulted in $888 million in proceeds. The sale generated a pre-tax gain of $351 million than after-tax gain of $238 million.
This transaction was the biggest driver of the increasing cash for the quarter and provided the financial flexibility to pursue debt reduction in the second quarter. We still hold approximately 13 million shares worth around $400 million.
We will continue to evaluate the best option to responsibly monetize our remaining stake in Alcoa Corporation. Now, let me turn it back over to David to wrap thing ups – things up and then we’ll take your questions.
David Hess
Thank you, Ken. So we had a very strong Q1 and we are on track to deliver the full-year guidance.
Looking forward at the full-year, we’re expecting to see continued full year-over-year growth in commercial aero engines, auto sheets, and North American non-residential construction and strong net cost reduction savings more than offsetting pricing pressures. Going the other way, we expect headwinds from continued destocking in airframes, continued wide body build rate declines, tire aero engine ramp up cost that should decrease on a relative basis in the back-half of the year, and weaker demand in IGT.
So looking at all the puts and takes, we are confident in delivering on the full-year targets and are reaffirming full-year guidance for Arconic of revenues in the range of a $11.8 billion to $12.4 billion, with EBITDA margin of approximately 15%, resulting in an adjusted EBITDA year-over-year growth in the range of mid to high single digits. Thank you.
And now Ken and I are happy to take your questions.
Operator
[Operator Instructions] Our first question is from the line of Carter Copeland with Barclays.
Carter Copeland
Hey, good morning, guys. Good evening, I should say.
David Hess
Hello, Carter.
Carter Copeland
Just one quick one Dave. I wonder what feedback you may have had in the short amount of time since the announcement you’ve had from customers – OEM customers on the aerospace side.
And I wondered, the second question, if you might share with us, when you got a bit of a different perspective on the destock as a customer than as a supplier, when does that find a bottom? What do you see in terms of the trends there?
Clearly, it’s something being talked about in the supply chain so far in the quarterly results. Can you help us with some color on thinking through how much of that is truly non-recurring, and when we find that sort of bottom and get the underlying demand?
Thanks.
David Hess
Sure. Let me take the first question first on what the reaction has been from our OEM customers?
I mean, quite honestly, it’s been extremely supportive. I’ve gotten wonderful notes, phone calls, text messages, et cetera, from a lot of the people that I’m used to dealing with in the aerospace and defense industry.
So it’s all been very positive and very, very highly appreciated by me. Support has been great from all the big airframers and from all the engine companies, including one engine company particularly they used to compete with.
So that I think that the support has been great and overwhelming and very highly appreciated. With respect to your second question on the destocking, clearly, we’re seeing the effects already.
We’re in close discussions with our customers on destocking largely Boeing has been talked about, I think, publicly. And as we talked to and look at it and understand and communicate with Boeing, we kind of see the impacts kind of lasting through the end of 2017.
Carter Copeland
Okay. great.
Thank you.
David Hess
You’re welcome.
Operator
Our next question is from the line of Gautam Khanna with Cowen and Company.
Gautam Khanna
Yes, thanks. Good evening.
To follow-up on Carter’s question. Can you talk about where the destocking is by product categories in aluminum sheets and fasteners, or is it broader than that?
David Hess
Let me ask Ken to give you a little bit of additional more detail in that.
Ken Giacobbe
Hey, Gautam, how are you? Yes, you hit, and it’s primarily fasteners business and/or sheet and plate business in the GRP segment, exactly the right.
Gautam Khanna
Okay. You mentioned ramp costs – engine ramp costs at EP&S and I just wondered, if you could maybe unpack what the drivers are there and what program specifically and mindful that we’re early in the leap ramp, as well as the PW1000.
It’s just something that becomes a – an incremental margin pressure as we move through the year, or where are you on that learning curve, if you could just talk about that?
David Hess
I mean, these are – when we talk about ramp up costs, these are normal costs associated with new product introductions. So the good news is, we’ve got a lot of new product introduction going on right now.
But of course, along with that, there’s the normal things that you experience when your all-time and learning curve with a new program, direct labor variation, and slower manufacturing yields then you’ll see as we start to move down the learning curve. But as we look in the back-half of the year, we expect to see those costs increasing on an absolute basis, but diminishing on a revenue relative basis, compared to volume, as we continue to work down the learning curve and improve our productivity and efficiency and continue to improve manufacturing yields.
I don’t know, Ken, if you would like to add anymore color there.
Ken Giacobbe
I think, exactly as David said, we try to put a definition for people that are new to the ramp-up cost conversation on Slide 16, at the bottom of the EPS bridge. But David is exactly right.
We will have these costs continue to put as a relative percent of the revenue, they will decline over time, as we get better utilization through our plans and our scrap rates reduce. But we’re very fortunate to be on these next-generation platforms and introducing the new products.
David Hess
I think what you’ll – what you see if you look at it some of the waterfalls that we’ve included in the deck here is the good news is, we’re getting net cost reduction and net cost reduction in excess of some of the pricing pressure, we’re seeing. If you exclude these ramp-up costs, which we know, will diminish over time.
So I think, it’s a good new story.
Gautam Khanna
Yes. And just two others, if I may, David.
First, I was wondering, is Arconic sort of a bottleneck in the supply chain right now on either the leap, or the PW1000. And secondly, as we kind of look at the portfolio and the portfolio of R&D investment that’s been underway, are there any things that you think – do you think, it will actually reduce the net R&D as we kind of are the Interim CEO, or do you think that most of these projects actually make a lot of sense?
Thank you.
David Hess
Let me talk to the R&D. I mean, we’ve given you the number for the year.
Quite honestly, compared to where I came from a world, where R&D investments are typically 6% to 7%. Our revenue – the number here, I think, as you know, is somewhere along the lines of 1.2% of revenue.
I mean that’s a fairly modest number. As always, I’m going to dig into that number make sure that I understand, where we’re spending our money and making sure that we’re getting good returns on whatever investments we’re making.
But I mean, at this point, I have no plans to take down R&D and nor is that contemplated in the plans this year.
Ken Giacobbe
And we were a little like Gautam in the first quarter on R&D, we spent about $28 million. But we’re – we will for the year still projecting about 1.2% of revenue.
As we’ve talked about in the R&D process, we believe we have an efficient process on R&D and there’s a stage gate process. As we work projects through all the different stages of R&D development and they are co-funded by the businesses as well.
So we’ll continue to look at that with, David, based on his experience and evaluate the R&D budget.
David Hess
Gautam, I forgot the first part of your question. And I guess, your question…
Gautam Khanna
You guys are [Multiple Speakers] Yes probably possible. And then the – is Arconic a bottleneck in either the leap production ramp, or the PW1000?
David Hess
I don’t believe so, but I would encourage you to go talk to our customers.
Gautam Khanna
But as far as, you are on time and to spec?
David Hess
We are supporting the delivery of our customers.
Gautam Khanna
Terrific. Thank you very much.
Operator
Our next question is from the line of Seth Seifman with JPMorgan.
Seth Seifman
Thanks very much and good afternoon. Dave, you mentioned supporting the plan that senior management and the Board has put into place.
From the Board’s perspective, is it a precondition for the next CEO to sign on to the financial targets longer-term that the company has already given?
David Hess
Well, look, I would expect, as they look at CEO, they’re going to when someone who’s going to commit themselves to deliver on the targets that we’ve committed to use for our shareholders. So I would say probably the answer is yes to that.
I mean, my focus right now is on executing the plan making sure that we have a fair line of sight for Q2 2017. And then as I dig into start look more closely at 2018 and 2019 and make sure that we have adequate plans and actions in place to deliver on what we’ve told you guys, we’re going to do over the next three years.
And I would expect the – whoever the permanent CEO is, is going to have that same approach. The actual details of the plan could evolve over time to make sure that we have again sufficient actions in place to mitigate all risks and deliver the numbers.
But I think, the plan is a plan for right for.
Seth Seifman
Great, thanks. And then, Ken, when you look at the margin progression through the year for GRP, I think you guys had initially talked about being up 30 to 80 basis points, you had a strong performance in the first quarter.
But if we look at the trajectory of last year, the first quarter was the high point, and it kind of came down during the year. How do we think about the margin progression in GRP through the remainder of 2017?
David Hess
I’m going to ask Ken to answer that one.
Ken Giacobbe
Yes, I think, a lot of it has to do with the margins. We’ll have pressures primarily related to pricing, and then we’ve got the destocking that we’ve talked about.
And recently wide body build rates some recent announcements there, that’s our high margin area in aerospace. So there could be pressures in the back-half of the year.
As David mentioned, we had a higher royalty payment in the first quarter of $7 million, that helped out the margins. But we were happy with the performance of the GRP team in Q1.
Seth Seifman
Okay, great. Thank you.
Operator
Our next question is from the line of Curt Woodworth with Credit Suisse.
Curt Woodworth
Yes. Hi, good evening.
Ken Giacobbe
Good evening.
David Hess
Hi, Curt.
Curt Woodworth
Hi. Just I guess a follow-up to the comment you made with regards to the wide body cuts.
And what’s the lead time that that you would have in the GRP business to when a cut comes down to the system then when you would see? And how much, I guess, how much visibility do you think you have in that business?
David Hess
Hey, Curt, it depends by business. But for the GRP business somewhere between six to nine months lead time.
Curt Woodworth
Okay. And have you seen any evidence of lead times starting to extend for either later sheet in aero?
David Hess
No, we haven’t really Curt, we have not.
Curt Woodworth
Okay. Thank you.
Operator
Our next question is from the line of Josh Sullivan with Seaport Capital.
Josh Sullivan
Good afternoon.
David Hess
Hey, Josh.
Josh Sullivan
Just one on the automotive sheet side. Can you talk, at least, directionally how pricing is looking for auto sheet?
I know you said aero has some pricing pressures. But are you seeing incremental interest, or is there any hesitancy around where CAFE standards might go?
Ken Giacobbe
Fortunately on the auto, you saw from our detail here that we’re up around 43% year-over-year. We’re seeing that continuing to grow.
We just won a recent contract with Toyota to be the exclusive supplier on the Lexus SUV. So we’re confident there.
We believe we have a differentiated product, a great delivery model for automotive. And on the CAFE standards, I don’t think that that’s going to be an impact, especially I would say in 2018 – all the way out to 2018, because about 95% of our volume from 2018 is already backed by contract.
And we just think the global trend with light-weighting and aluminum is going to continue, because we think it’s value add for end customers. They get the better fuel efficiency, more towing and payload capacity.
The safety scores are better on those vehicles. We have shorter braking distance and better performance.
So we think that this trend is going to continue and we’ve been fortunate enough to win some recent contracts there as well. So, at least, out to 2018, I – we feel really confident about our volume.
Josh Sullivan
Okay, thanks. And then just one on with regard to the $500 million corporate trust.
Have you made a determination, what constitutes the change in control?
Ken Giacobbe
I mean, given the litigation, I think that you’re aware of its ongoing. We can’t comment on that.
Josh Sullivan
Okay. Thank you.
Operator
Our next question is from the line of Sam Pearlstein with Wells Fargo.
Sam Pearlstein
Good evening. Welcome back, Dave.
David Hess
Hi, Sam, good to hear your familiar voice.
Sam Pearlstein
Can I just – so, Ken, first question is, just you talked about the $295 million in debt. So is there another roughly $700 million that’s going to go in the second quarter?
So in terms of the $1 billion reduction?
Ken Giacobbe
Yes. So the $1 billion reduction rate in the second quarter, we – that’s what our debt reduction target is for the second quarter $1 billion.
So we – yesterday, we purchased $295 million. We’ve also tendered through the banks another $500 million.
So that’s roughly $800 million. We’re in the middle of our process.
We still have a couple of weeks left. I think, we’ll be settling in early May.
We’re in our second week right now, which ends – our second tranche, which ends on May 2. So we feel optimistic that we’ll be in that $1 billion range for Q2.
Sam Pearlstein
Okay. And then help me understand on the engineered product side, just in terms of revenues looked like they were off, call it, $35 million or so in sales, but profits are flat.
Is this all related to the engine ramp-up costs?
Ken Giacobbe
Yes. So, Sam, we put a bridge in the back on Slide 16, and you can see the ramp-up costs.
A couple of things on the chart, you’re right. The volume is up, which flows through about $22 million of EBITDA.
We had a little bit of unfavorable mix of about $9 million and some pricing – the normal pricing pressures that we expected of $25 million. As David talked about though that the net cost savings of $33 million more than offset those price declines.
But the ramp-up cost that was worth $20 million. So you’re exactly right.
We will have those as we move forward, because we’re on these new platforms. But that’s what impacted the 40 basis points.
If you back out to $20 million, right, we’d be at about a 22% EBITDA margin.
Sam Pearlstein
Right. Well, I mean, but there are a lot of new platforms.
I know the leap and the GTF are in service now. But there are still a lot of new platforms coming over the next several years.
So is this ramp-up cost going to continue beyond this year, as new platform – every time the new platform comes out, we should expect to see it?
Ken Giacobbe
Yes, I think you’re going to see the absolute dollars to grow, Sam. But we should be getting incremental volume that would more than offset that.
So on a relative basis, they should be declining.
Sam Pearlstein
Okay. And one last question is, GE had made some comments last week, they kind of implied, they may be short of the 500 leap deliveries issued.
Does that affect your production rates at all? Have you seen anything back in terms of your ramp-up rates changing?
Ken Giacobbe
No, we haven’t, Sam.
Sam Pearlstein
Okay. Thank you.
David Hess
Thank you.
Operator
Our next question is from the line of Andrew Quail with Goldman Sachs.
Rob Norwood
Yes. This is Rob Norwood on for Andrew.
Just a couple of questions for you here. First of all, you mentioned some additional tailwinds in the release.
And then during the call, you mentioned royalty payments and then the Tennessee packaging business. Was there anything else in addition to that, or were those the two main tailwinds that help with the quarter?
Ken Giacobbe
Yes, those were the two main ones. So David talked about the royalty payment was higher of $7 million of EBITDA, it hits revenue and it flows right to bottom line.
So $7 million there, that will recur though. That royalty revenue will repeat in Q1 of 2017 and Q1 of, excuse me, Q1 of 2018 and Q1 of 2019.
The second is the Tennessee packaging business. The benefit of higher cost savings in the plans, as well as higher scrap value based on the price of LME and that was about $8 million of EBITDA benefit.
So the combination of the two is about 15.
Rob Norwood
Okay great, thank you. And kind of shifting gears back into the aerospace business, what kind of visibility you’re seeing now?
How far can you see either on the EPS side, or GRP, just – are you starting to see any pricing from it all there, or is it still kind of weak to the wide body pressure?
Ken Giacobbe
Well, fortunately, we’re seeing a lot of volume come through, which is helping out. But on the aero pricing for EP&S, the competition is increasing for more of the less differentiated product – products that we have out there.
But our offset is a new programs right, where we’ve got some higher pricing through innovation. So it’s a mix.
We’ve talked about the higher ramp-up cost in the new technologies. But it’s a give and take with our customers.
We think we have strong partnerships with our customers, and we have a good long-term view on the industry.
Rob Norwood
Okay. Great, guys.
Thanks.
Operator
Our next question is from the line of Howard Rubel with Jefferies.
Howard Rubel
Thank you very much. Just a couple of small items.
First, Ken, to go back to capital allocation, at what point do you become satisfied with your debt balances and either look at pension, or go back for a ratings change?
Ken Giacobbe
Yes, we’re fortunate with the cash balance that we have right now and we’ve been very happy with our net debt to EBITDA performance right now worried about 3.2. We ended last year at 3.7, roughly in that range.
So what we’re going to do, Howard, is based on our balance and what we see going forward, we’ll prioritize, right, the first is going to be our CapEx. We, as you know, we put in new approval processes, new levels of approval, new hurdle rates.
So on our all of our growth CapEx, we have a 15% IRR requirements and a payback of less than five years. So our first priority is CapEx.
As we talked about in Investor Day, we’ll also look at opportunistic perhaps tuck-in acquisitions out there. They would be small.
They would be in aerospace, if anywhere nothing on the horizon right now, but we will always continue to evaluate that. And then we’re also taking a look at three other areas.
One is, perhaps additional debt pay down, potentially some share repurchases, or to your point, Howard, on the pension side, maybe we make some more pension contributions. But we’re going to have to sit down with the Board and our new finance committee and David and look at the relative returns of each one of those actions.
But I think, we’re firmly on track. We talked about a 2019 net debt to EBITDA target of anywhere between 2 to 2.5.
So we’re firmly on track of delivering on that.
Howard Rubel
I mean, without being without getting ahead, it looks like some of these things have played out a little bit faster than you might have first anticipated?
Ken Giacobbe
Yes, we were fortunate on the retained interest stake rate. We sold at a historical high on Valentine’s Day, that was very nice.
And then we’ve been really, really fortunate there. And the team has delivered as well in the cash and the business as we looked at Q1, we normally have a working capital build in Q1.
But we were three days less than Q1 of last year. Our target was between three and seven days for the full-year, so we’re on track there.
The business is doing a nice job.
Howard Rubel
And then one last thing, the $91 million you show in corporate expense when we look at that we should exclude the – with the proxy and the final disengagement from Alcoa from those reported numbers. So look at what your run rate is, so that would…?
Ken Giacobbe
Yes, I’m sorry, Howard. Yes, I would – on page 30 in the deck, I would take the $91 million.
I would subtract out if you want to get a true view of the corporate expense, I would take out the impact of LIFO in metal lag and then we’ve got the other category down at the bottom of negative 10, starting to give you so much detail here, and then I would do what you said take out the two specials. The separation cost of 18 and then the proxy, defense and governance costs of 16, so that lets you get down about 64.
Howard Rubel
Thank you very much.
Operator
We do have a follow-up question from the line of Carter Copeland.
Carter Copeland
Yes, I wondered if I could – there are a couple more in here, Dave. Just to kind of explore a little bit, given your 35-plus years experience at UTX, it is – do you have any interest in staying on beyond the interim tag here, or any – anything you can share there?
David Hess
Look, I haven’t made that decision yet as to whether I want to be the candidate for the permanent CEO job, as you might expect, I get that question quite a bit.
Carter Copeland
I would have…
David Hess
I told the Board that I’m going to stay as long as they need me to stay to conduct a thorough permanent CEO search to make sure that we have adequate time to find the perfect CEO to learn, to lead Arconic into the future. And what I’ve told the team here, my colleagues and employees that Arconic is that for every day that I’m here, I’m going to behave as if I’m here for the rest of my life and all by the way, you would treat me accordingly.
So short answer is, I haven’t made that decision yet. But again, I’m approaching this job as if I’m here for ever.
Carter Copeland
All right. Thanks for the color and good luck.
David Hess
Thank you.
Operator
We also have a follow-up from the line of Seth Seifman.
Seth Seifman
Thanks very much. So just to follow-up, you guys have spoken a little bit earlier about the headwind from engine start-up costs increasing in dollars, but declining as a percentage of sales.
I just wanted to verify if that was through the year, and if so, if that means you expect increasing sequential sales in EP&S through the year?
David Hess
That that’s a fair assessment, Seth.
Seth Seifman
Okay. So then it looks like your versus your guidance for low single digits, you’re on track to maybe come out a little bit ahead of that?
Ken Giacobbe
Well, we’ve been fortunate. If you look at pretty much all of the markets and we have a slide I think gets really good in the deck Slide 21 that talks about the revenue for market year-over-year.
You can see those aero engines up 9%, but we’re fortunate as well that, defense is up 5%, automotive is up 33%, building and construction is up 8%, and commercial transportation is up 3% and industrial is up 13%. So, the only – the pain points that we’re seeing in the markets, the markets are healthy.
We’ve got airframes, which is pretty much flat year-over-year, it’s down 1% in the slide. IGT something about 5%, that that market has been weak for us and we’ll see that probably continue through the year.
And then the packaging business are the way we’re doing the tolling agreement in packaging as well as the ramp down, that’s down about 24%. So we’re fortunate that where we’re positioned in these markets, it help this out.
Seth Seifman
All right. Okay.
And then just as a follow-up there, just looking at the price headline, or the deflation in EP&S, it’s about 170 basis points of headwind from a margin standpoint. And that that’s more than we see in the other segments.
But the revenue is driven by the engine ramp up, so maybe can you just square for us a little bit why we see such a big pricing headwind when the driver of the growth has kind of more of the proprietary differentiated technology that you have?
David Hess
Yes, I think on that, Seth, it comes down to with the revenue stream, that’s in line exactly with our expectations for the price downs, and that’s why we have put – been pushing with the team around the net cost savings in the business. So we’ve got – we got on the platforms.
You can see it from some of our previous decks around our positions on the next-generation platforms, there were some price that we gave to get that incremental volume.
Seth Seifman
All right. Okay, great.
David Hess
And then, the nice thing is those volumes, Seth, as you know, the platform staying in service for 20, 20-plus years in some instances right. So it’s good to be on those platforms.
Seth Seifman
Thanks very much.
Operator
We do have a follow-up from the line of Gautam Khanna.
Gautam Khanna
Yes, thanks, again. I was wondering, if you could comment on how Firth Rixson fared in the quarter.
I know it’s hard to trace it maybe, but was there any improvement both on the top line and margins? And where are we on the isothermal qualification process?
Ken Giacobbe
Hey, Gautam, yes, for the first quarter, we had some good revenue roll through. Firth Rixson worried about $254 million of revenue for the first quarter.
We had given guidance of anywhere for the full-year of around 970 to $1 billion. So we’re firmly on track to deliver the full-year.
From a margin basis, we’re pretty much flat year-over-year, as we’re bringing on the new parts. We were at about 14.2% on the EBITDA margin side.
But as you mentioned, the isothermal 78% – almost 80% of our parts on the isothermal that we’ve got for 2017 are currently undergoing customer qualification. So we expect the revenue on the isothermal to hit late 2017, which is right in line with our expectations.
Gautam Khanna
And can you remind us on how large a revenue contribution that will be in 2017 and 2018, if things go according to plan?
Ken Giacobbe
We haven’t disclosed that yet, but it will be small in 2017, because it’ll be at the latter part of the year. 2018, it’s just going to be dependent on the volumes that we ship through the plant.
But we, Gautam, we haven’t given any guidance on how much that’s going to be.
Gautam Khanna
Okay. And can you give us an update on how RTI has performed in Q1?
And I don’t know if you have that visibility. But if and also if there has been any plate destocking on the titanium side at airbus or elsewhere in the supply chain on the titanium side?
Ken Giacobbe
Yes, in terms of RTI, just give me one second here, Gautam. We delivered and let’s see here 19.8% margin for the first quarter of 2017 that compares to 19.3% of Q1 in the prior year, so up around 50 basis points.
And you’ll recall when we acquired RTI, they were in the 14.5% EBITDA margin range. So a substantial improvement and we had with them in 2016 and that’s carrying forward into 2017.
Gautam Khanna
And on the plate side shipments, are they sheet and plate at Airbus, or is there any destocking going on in that channel? And maybe also on the F-35, are you starting to see the big ramp there?
Ken Giacobbe
Yes, Gautam, I don’t know the answer to that question. I can try to find out and get back to you, okay, I don’t know the answer to that one.
Gautam Khanna
All right. Thank you, guys.
Operator
And that is all the time we have for questions. I’d like to turn the call back to Mr.
David Hess.
David Hess
Thank you very much. Thank you all for joining us on the call today.
I appreciate your time and attention. And I look forward to talking with you again in the future.
Thank you. Bye now.
Operator
Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation.
You may now disconnect.