Jul 24, 2017
Executives
Patricia Figueroa - Vice President, Investor Relations David Hess - Interim Chief Executive Officer Ken Giacobbe - Executive Vice President and Chief Financial Officer
Analysts
Sam Pearlstein - Wells Fargo Josh Sullivan - Seaport Seth Seifman - JPMorgan Gautam Khanna - Cowen and Company Howard Rubel - Jefferies Chris Olin - Longbow Research
Operator
Good day ladies and gentlemen, and welcome to the Second Quarter 2017 Arconic Earnings Conference Call. My name is Shelby and I’ll 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, Vice President of Investor Relations.
Please proceed.
Patricia Figueroa
Thank you, Shelby. Good morning and welcome to Arconic’s second 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.
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 discussions. 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
Good morning everyone and thank you for joining the call. Before we move to the details of our second quarter earnings results, I’d like to first address the tragedy at Grenfell Tower that I know remains on the minds of many of you on this call, and certainly those at this company and around this table.
The Grenfell Tower fire has been a terrible tragedy. The leadership and the board of this company in addition to myself have spent a lot of time working to understand how our product was involved.
And Arconic has offered its full support to the authorities as they conduct their investigations. Many of you have had questions about our involvement in the development of the cladding system, and given the importance of this issue, I wanted to address several aspects upfront.
First, I want to clarify the way the supply chain here works. Let me give in the reports from investigators that something on the order of 60 different organizations were involved in the construction, management, and or refurbishment of the building.
Reynobond panels were just one component in this complex supply system, which also included a number of components we did not manufacture. We supplied one of our products Reynobond PE to our customers, a cladding system fabricator, which used the product as one component of the overall cladding system on Grenfell Tower.
The fabricators supplied its portions of cladding system to the [indiscernible], who then delivered it to the general contractor. Arconic was not involved in design or installation of the system used at the Tower, nor did we have a roll in any other aspect of the buildings refurbishment or original design.
Second, it’s important to understand the regulatory framework. Our Reynobond products, including the Reynobond PE are permitted to be used in accordance with local building codes and regulations in the United States, in the UK, and other countries around the world.
Cladding systems contain various components selected and put together by architects, contractors, fabricators, and building owners and those parties are responsible for ensuring that the cladding systems are compliant under the appropriate codes and regulations. For our portion in the supply chain we believe we’ve been compliant in the sale of our product.
Importantly, it has been reported through a number of recent public references to other buildings that a cladding system with aluminum cladding material and the building it is on can be considered safe given proper cladding system and overall building design and installation. Finally I want to address our decision to discontinue global sales to Reynobond PE for high-rise building applications.
As I noted, our products are sold for use in cladding systems that comply with local codes and regulations. Given the tragedy at Grenfell Tower and abundance of caution as we do not control the ultimate design and installation of the final cladding system, we announced on June 26 that we would no longer sell PE products for use in high-rise construction regardless of the local codes and regulations.
Many of you have had questions about the market for this product, and the financial impact of our decision to discontinue Reynobond PE for high-rise applications. So, I want to address that as well.
We are a one supplier of many in the fragmented global market. We understand there could be at least 18 suppliers of aluminum composite material or ACM, which is a generic name for our Reynobond material.
Of those suppliers, we believe most of them are of a manufacture of PE version of ACM. For Arconic's part, our total 2016 Reynobond PE global revenue for building applications was less than $60 million and a fraction of that ends up in high-rise applications.
And of the $60 million in revenue, approximately 3 million was Reynobond PE sales into the UK. So to close, I want to reiterate we extend our deepest sympathy to those who have lost so much.
Everyone at Arconic continues to keep them in our thoughts, and importantly, we remain committed to supporting the investigations that are seeking an outcome that makes an unlikely hit of similar tragedy will ever occur again. Now given the investigations and where we are there isn’t much more I can say at this time on that matter.
Now, I’ll turn to our discussion of the second quarter results. In Q2 Arconic delivered our second consecutive quarter of year-over-year revenue and earnings growth, margin expansion, and net cost reduction.
For Q2, revenue was up 1% and 5% year-over-year adjusting for the Tennessee packaging business. Revenues were driven by volume increases in all three business groups and the pass-through on higher aluminum prices.
We had 1% revenue growth in our aerospace and defense businesses with lift from next-generation engine and narrow-body ramp up and defense, partially offset by continuing headwinds from destocking and selected wide-body ramp down, 27% revenue growth in the auto segment driven by continued aluminization trends, and 9% growth in our commercial transportation business. Revenue growth in the quarter was partially offset by 7% year-over-year decline in our industrial gas turbine segment due to continued softening in those markets.
EBITDA was up 3% driven by volume and continued net cost reduction of 1.8% of revenue through the first half of 2017. EBITDA margin, excluding special items, expanded by 20 basis points year-over-year in the second quarter, resulting at an EPS of $0.32 a share.
Year-to-date annualized RONA of 8.7% is on track to deliver our full-year target of 9%. Also in the quarter we monetized the remainder of the Alcoa stake and exchanged it for debt for a total debt reduction of $1.25 billion.
And finally we generated $91 million of free cash flow in the quarter to bring our quarter ending cash balance to $1.8 billion. Now, I'm going to turn it over to Ken, so we can take you to the numbers in a little bit more detail.
Ken.
Ken Giacobbe
Thank you, David. Similar to the last quarter, I will move rather quickly through the financial slides in order to leave more time for questions.
We have added several slides in the appendix, which provides additional details if needed. On Slide 6, you can see David mentioned that revenue for the second quarter came in at $3.3 billion, up almost 1% year-over-year, driven by volume gains in all segments.
The impact of higher aluminum prices in the quarter of $124 million was more than offset by lower revenue from our Tennessee packaging business of $138 million. Adjusting for Tennessee packaging, revenue was up 5.4% year-over-year.
We have previously announced our plan to exit the low margin North American packaging business by the end of 2018. Combined segment's EBITDA margin was 17.1%, down 40 basis points year-over-year as combined segment EBITDA decreased 2%.
For the first half, combined segment EBITDA margin was 17.2%, which is in-line with our annual guidance of approximately 17%. I will cover segment performance in the segment slides that follow.
Arconic’s EBITDA margin, excluding special items was 14.9%, up 20 basis points, as Arconic’s EBITDA increased 2% to $486 million on a year-over-year basis. Excluding LME impacts, EBITDA margin would have been 15.7%, versus the 14.9% reported.
For the first half, Arconic’s EBITDA margin, excluding special items was 15%, versus the prior year, which is in-line with our annual guidance of approximately 15%. EBITDA dollars, excluding special items were up 6% versus the prior year.
Our capital efficiency measure RONA, which is a return on net assets was 8.6% on an annualized basis for the second quarter, and 8.7% on an annualized basis for the first half. This result puts us on track for the full-year target of approximately 9%.
Gross debt was down $1.25 billion in the quarter from $8.1 billion at the end of the first quarter to $6.8 billion at the end of the second quarter, which is consistent with our guidance of reducing debt by $1 billion in the first half of 2017. Cash ended the quarter with a strong balance of $1.8 billion, which is approximately $1 billion more than our operating cash target of $750 million.
Net debt-to-adjusted EBITDA is now below three times as we finished the second quarter at 2.87. Second quarter of free cash flow was $91 million.
Now let’s take a closer look at the financials, starting with the income statement on Slide 7. We’ve talked about revenue, so let me cover a couple of other key areas.
Overhead reduction continues to be a key focus area for Arconic. In the second quarter, SG&A was impacted by proxy, advisory, and governance-related cost of $42 million pre-tax.
Excluding special items, our SG&A as a percentage of sales was 5% for the quarter with SG&A being down $32 million year-over-year, and $25 million sequentially. EBITDA for the second quarter was $444 million.
If we exclude proxy, advisory, and governance-related costs as mentioned above, EBITDA was $486 million, up 2% year-over-year. The interest expense line of the income statement includes $76 million of pre-tax cost associated with the early redemption of the $1.25 billion in debt.
Excluding the impact of the early redemption cost, our annual interest expense going forward will be lower due to the debt pay down and closer to $400 million. So this is going to be approximately $100 million reduction in interest expense compared to 2016.
The other income line includes $167 million pretax gain on the debt for equity exchange of the remaining shares of Alcoa Corporation. This transaction is intended to qualify generally tax-free to Arconic for US federal income tax purposes.
Restructuring charges of $26 million includes $16 million, primarily related to headcount reductions across all segments, including corporate. These reductions are part of our plan to reduce corporate overhead by $45 million in 2017.
We’ve achieved approximately the half of our corporate overhead reductions for the first half of the year. The remaining $10 million of restructuring charges relates to costs associated with exiting certain locations and facilities.
Approximately 85% of these costs were cash. The effective tax rate for the quarter was 21.2%, which reflects the non-taxable gain on the debt for equity exchange of the remaining shares of Alcoa Corporation.
The operational tax rate for the quarter was 32.9%. We expect our 2017 annual tax rate to be closer to 32% versus our previous guidance of 32% to 35%.
Net income was $212 million or $0.43 a share. Excluding special items income was $165 million or $0.32 a share.
On the right-hand of the slide, you can see that special items for the quarter were $47 million after tax in total. I’ve already discussed the first four special items listed and I will just note that the amounts listed are pre-tax.
The last item associated with taxes include not only the tax impact of the first four special items, but also includes a $26 million favorable discrete tax item in the quarter. Now, let’s turn to the cash flow statement.
Cash from operations was $217 million in the second quarter. Cash used for financial activities was $860 million, primarily due to payments of $820 million to retire long-term debt and dividends.
Cash used for investing activities was $125 million in the second quarter, driven by capital expenditures of $126 million and the receipt of the remaining $5 million in proceeds from the sale of our Alcoa Corps, Yadkin, North Carolina, Hydroelectric plant. Finally, as I’ve mentioned before, free cash flow was $91 million in the second quarter and we ended the quarter with $1.8 billion of cash-on-hand.
Now let’s move to the segment performance starting with EP&S. In the second quarter, EP&S’ EBITDA declined 6% versus prior year, and it's EBITDA margin dropped 160 basis points, driven by unfavorable mix, price, and ramp up cost.
Revenue increased 1% versus the prior year quarter. Although aero revenue increased by 1% let me provide more transparency into the components of EP&S’ aero revenue.
For the second quarter, commercial aero engines were up 8%, and aero defense was up 9%.However, commercial aero airframes were down 4%, driven by destocking and declines in wide-body build rates on select platforms. Moving to EP&S' other major markets, IGT was down 7%, and was up partially offset by commercial transportation, which was up 6%.
Looking ahead, commercial aero engine revenue is expected to increase in the second half, compared to the first half by another 4%. That increase translates into an increase of 16% if we compare the second half of 2017 to the second half of 2016.
Commercial aero engine revenue is expected to reach more than $2 billion annually. In total, we expect 200 million in aero engine revenue growth this year.
Aero defense will continue its positive trend. Aero airframes will continue to be weak in the second half as wide-body build rates on select platforms decline in the near term.
However, we expect destocking to stabilize for EP&S segment. Regarding EP&S' other major markets, we expect weaker demand in IGT, partially offset by strength in commercial transportation.
EBITDA of $310 million for the quarter was down 6% year-over-year. EBITDA margin as we have discussed has been down 160 basis points to 20.9%, primarily driven by product mix of $29 million, which was driven by lower shipments of our higher margin products impacted by destocking and lower build rates of select aero platforms.
Additionally, mix was impacted by lower shipments in our industrial gas turbine business, and a higher contribution of Firth Rixson, which is at a lower margin. Ramp up cost were $9 million year-over-year unfavorable and pricing was unfavorable $19 million.
Pricing pressures and ramp up cost were more than offset by net cost savings of 2% or $29 million. Volume was favorable $13 million.
Regarding EBITDA margin, EP&S’ second quarter was up sequentially 30 basis points. We expect stronger second half compared to the first half, driven by better mix, higher net cost savings, and lower ramp up cost.
Full-year annual EBITDA margin will increase 30 basis points to 60 basis points versus the prior year to 21.2% to 21.5%. Before leaving the EP&S segment, I wanted to provide details on the ramp up cost.
As I mentioned, ramp up cost in the quarter were $9 million year-over-year unfavorable. Sequentially, ramp up costs are down in both absolute dollars and as a percent of aero engine revenue.
Ramp up cost in the second half of 2017 are expected to continue to stabilize and decline as a percentage of aero revenues as we continue to work down the learning curve on a large number of new product introductions in the phase of this unprecedented ramp up in next generation aero engine deliveries. Put the magnitude of this ramp up into perspective, deliveries of our structural casting in aero Alcoa’s business in the new commercial engine platforms for the GTF, the XWB [ph], the GE 9x and the Leap grew nearly 75% for the first half of 2017 versus first half of 2016.
Also included in ramp up cost, our costs associated with transition and portions of fasteners and rings businesses from high-cost to new low cost operations. Our facility in Acuna, Mexico which we are still ramping up nearly tripled its manufacturing of engine rings year-over-year.
These include typical learning curve costs such as higher direct labor cost variations; lower manufacturing yields, new process development, and employee training. Lastly, while we are on this topic of engine ramp-up, despite what you may have read we have not encountered manufacturing issues that would prevent us from delivering our financial targets for the year.
GE and Safran are and will remain a large and very important customer base for Arconic. Now let’s take a look at the GRP segment.
In the second quarter, GRP improved its EBITDA by 1% versus the prior year, and its EBITDA margin by 50 basis points, driven by automotive growth and net cost savings of 2.1% of revenues. We did have an increase in LME in the second quarter, compared to the second quarter 2016.
If we normalize for this impact of LME, GRP's EBITDA margin for Q2 would have been 14.4%, rather than 12.9% as reported. We have included a reconciliation in the appendix for your review.
Second quarter revenue was down 4%, compared to second quarter of 2016 and up 8% when excluding Tennessee packaging. Auto sheet revenue was up 37%, despite a US passenger vehicle and light truck sales being down 2% through June as the aluminization trend continues to drive our business.
In the quarter, revenue was impacted by destocking and airframes where the impact of the supply chain optimization is stabilizing and volumes are expected to rebound next year, lower aero wide-body build rates on select platforms, and pricing pressures in our regional specialty markets. Looking forward to the second half, we expect to continue to see year-on-year growth in auto sheet, destocking and airframes, and continued declines in wide-body build rates for select platforms.
EBITDA of $164 million for the quarter was up 1%, while EBITDA margin improved 50 basis points to 12.9%. Year-over-year volume growth in automotive shipments of 10 million was more than offset by unfavorable mix of $22 million.
While net cost savings of 2.1% or $26 million more than offset the pricing pressures in our regional specialty markets in an aerospace of approximately $15 million. GRP’s first half EBITDA margin is 13.3% with an annual estimate for around 12.2% to 12.4%.
Higher metal unfavorability impacted the EBITDA margin. However, annual EBITDA dollars are expected to improve over our prior guidance.
Finally, let me move our performance to the TCS segment. In the second quarter, TCS improved its EBITDA by 8% versus prior year and its EBITDA margin by 10 basis points, driven by volume and net cost savings of 2%.
Revenue was up 7% versus the prior year quarter driven by strength in commercial transportation in North American and European non-residential construction. We saw a recovery in the North American heavy duty truck market, comparing the second half of 2017 to the first half we expect full-year growth in North American non-residential construction and a recovery in the North American heavy duty truck market.
EBITDA of $82 million for the quarter was up 8% year-over-year and EBITDA margin improved 10 basis points to 16.4%. Volumes were strong and net cost savings of 2% more than offset pricing pressures and heavy duty trucks in our mix.
TCS’ first half EBITDA margin is 16.2% with an annual estimate of 16.1% to 16.3%. Now let’s take a look at our SG&A in a little bit more detail.
As I have mentioned previously, we remain committed to reducing our overhead spend. Excluding special items, our SG&A as a percentage of revenue was 5% in the second quarter.
This level of spend compares favorably to our peer groups mainly the S&P 500 industrial index and the S&P 500 aerospace and defense index. Given the progress to date we are reducing the SG&A target from 5.6% of revenue to 5.4% of revenue for the full-year 2017.
At the same time, we continue to accelerate plans to lower corporate overheads to be 1% of revenue for 2017. Now let’s take a moment to review the transaction associated with our retained interest in Alcoa Corporation.
In the first quarter, we monetized approximately 64% of our retained interest in Alcoa Corporation or more than 23 million shares. The shares were sold at $38.03 per share, which resulted in 888 million in proceeds.
The sale generated pre-tax gain of $351 million and an after-tax gain of $238 million. In the second quarter, we completed the debt-for-equity exchange on the remaining Alcoa Corporation shares or approximately 13 million shares.
The shares were exchanged at $35.91 a share, which resulted in the retirement of $429 million of debt and $36 million of accrued interest in early tender premiums. The exchange generated pre-tax gain of $167 million this transaction is intended to qualify is generally tax-free to Arconic for US Federal Income Tax purposes.
As you can see, the Alcoa Corporation State yielded $1.35 billion, which was more than $500 million above our target at the time of separation. Now, let me turn it back to David to wrap things up and then we will be happy to take your questions.
David Hess
Thank you, Ken. So we’ve had a solid start to 2017.
Through the first half of the year, organic revenue was up 7%, adjusted for Tennessee packaging and adjusted EBITDA, excluding special items is up 6% year-over-year. And looking forward to the back half of the year, we expect to see continued strength in aero engines, auto sheet, North American non-residential construction, and heavy duty trucks.
In all our relevant markets, except for industrial gas turbines, bookings are running at or above plan. Based on solid first half performance, we’re adjusting our full-year guidance raising the high end of revenue guidance by $300 million and narrowing the range by $200 million, due to higher alumina prices, higher volume, and our increased confidence in the full-year.
Similarly, given our increased confidence, we have narrowed our EBITDA guidance range by 40 million with higher volumes and higher net cost savings offset by higher aluminum prices. This results in an updated earnings per share range of $1.15 to $1.20.
Thank you, and now we’ll open the line to taking your questions.
Operator
[Operator Instructions] Our first question comes from Sam Pearlstein from Wells Fargo.
Sam Pearlstein
Good morning.
David Hess
Good morning, Sam.
Ken Giacobbe
Good morning.
Sam Pearlstein
I wanted to just go back at your - you made a comment that despite what we’ve read about manufacturing issues on some of the engine parts and I guess you were referring to the leap, can you just talk a little bit more about why there seems to be a disconnect? Because I know a lot of parts are dual source, so it is relatively easy for the OEM to shift between suppliers.
David Hess
I am not sure what you mean by disconnect Sam.
Sam Pearlstein
I thought Ken made a comment that despite what we have read, you have not had any manufacturing issues in terms of parts on the leap.
David Hess
I think what Ken said is that, despite what you may have read that we don’t expect any financial impact either this year or the three year plan as a result of any issues that we may or may not have had. And I know there has been some speculation in the media, but I’m not aware of any statements that have been made by any of our customers about this issue, and I’m hesitant to get out in front of our customers on any issues.
I mean the only statement that I can direct you to is, Keith Leverkuhn’s statement, who is VP of the 737 MAX program who commented I think the issue that that’s the media attention he considered a hiccup. I think that kind of puts it into perspective.
Sam Pearlstein
Okay. And then when I look at your adjusted earnings so far in the first half of the year and I just compare to, given the raised guidance in terms of the EPS, it does imply that the second half’s earnings are going to be modestly below the first half, so is there a seasonality, is there any reason to see that, is that a more normal seasonality, anything you can help with that?
Ken Giacobbe
Yes, traditionally Sam we have some seasonality as we go into the second half, specifically on the GRP business. We anticipate strength in the EP&S business and the TCS business, but the GRP business does have seasonality in the second half.
Sam Pearlstein
And is that auto related?
Ken Giacobbe
Some of it is auto related and some of it is packaging and then we’ve also guide as we’ve talked about some destocking and lower build rates on the wide-bodies on some of the select platforms.
Sam Pearlstein
Okay. Alright, that’s great.
Thank you.
David Hess
Thank you.
Operator
Your next question comes from Josh Sullivan of Seaport.
Josh Sullivan
Hi, good morning. I think you might have just answered the question, but can you clarify comments on aerospace plate destocking, is the channel assumed anymore wide-body cuts or is it matching OEM production needs on narrow-body and wide-body, maybe in 2017 or 2018?
David Hess
I think there is two things going on. We are seeing both of effects.
We are seeing the ramp down in selected wide-bodies that certainly has an impact and at the same time we are seeing some destocking in sheet as it kind of works its way to the supply chain. I mean, keep in mind a lot of the material that we deliver doesn't go directly to our airframe customers and not necessarily to airbus or Boeing.
In some cases it goes to an intermediate person who is fabricating parts of the airplane and so there is some destocking that is going on and that element of the supply chain as well. So there is really two affects going on.
We’re seeing both of them now.
Josh Sullivan
Okay, but you still expected it to stabilize in late 2017 or has there been any change to that timeline?
David Hess
Well I think the destocking, we expect to stabilize in the back half of the year and then start to resume growth, start to pick up again in early 2018. You know the ramp downs are kind of airframe by airframe, I think you are as familiar with the airbus and Boeing announcement as we are in terms of which ones are going down, but that continues, I think some of those build rate reductions continues through next year.
Josh Sullivan
Okay thanks. And then just one question on Grenfell, can you quantify any liability insurance policies you guys may hold, which could offset any potential impact?
David Hess
I mean as you’d expect for a company of our size and complexity we have, I’d say appropriate insurance coverage. I can't say anything more than that.
Josh Sullivan
Okay, thank you.
Operator
And your next question comes from Seth Seifman of JPMorgan.
Seth Seifman
Thanks very much and good morning. Dave, with regard to engine execution, maybe instead of talking about the financial impact, can you address it in terms of share and talk about maybe your share on some of the major engine that are ramping up, how it’s developing and how it’s developing compared to your expectations?
Not necessarily with one part, but overall?
David Hess
Overall, I think we’re on track or even better. We see our share in the marketplace growing and certainly our volumes are growing, I mean if you look at our content I think we have shared some of this in some of the briefings that we have had with our shareholders analysts, but if you look at our content on next generation engines as compared to the earlier vintage, our content is way up.
So, we’re gaining share in the marketplace, and I don't see that changing.
Seth Seifman
Right. And with regard to stuff where, you may have gained some opportunity to sell a part of an engine, but maybe it is dual or triple sourced.
The way that your share is evolving as the ramp up foresee, is that in-line with your expectations?
David Hess
Yes it is.
Seth Seifman
Great. Thanks.
And then Maybe Ken, just if you could talk a little bit about getting to you the cash flow guidance and the kind of components of working capital or lease that you're looking at in the second half of the year.
Ken Giacobbe
The guidance that we gave on cash was $350 million plus for the year, right. That 350 number is our floor.
So we have had a little bit of uptick here in the guidance on EBITDA that’s going to help. We’re on track for our working capital for the year.
We do as you know have some seasonality in the second half to deliver on that cash. And then lastly, CapEx as we go through the year is looking favorable, which is probably going to help with the plus portion of that $350 million, and I think the process that David and I have put in around capital efficiency is working for CapEx.
Now if you look at the first half of the year, we have spent about $229 million of CapEx. We said, that if we would have not to exceed CapEx number of around $650 million for the year, so my you can't really take your first half CapEx and annualize it because historically we have CapEx in the second half of the year as you have some seasonal shutdowns in the second half, but I think we will be probably below our $650 million CapEx number, which will also help cash for the year.
But we feel strongly in the 350 plus, again that is a floor. So we think we will have some upside to that.
Seth Seifman
Great. Thank you.
Operator
[Operator Instructions] We do have a question from Gautam Khanna from Cowen and Company.
Gautam Khanna
Yes, thanks good morning. First question I was hoping to get an answer to is, what do you anticipate the timing of when a CEO, a permanent CEO will be named and David have you made a decision on whether to throw your hat into the ring for that position.
David Hess
Sure. I mean we respect the timing, I mean it’s hard to give you a fixed timeframe.
I can't tell you that the CEO search is well underway and as you can imagine it is a top priority for our board. Search committee was formed back in May, they have since selected an executive recruiting firm, and they are working and evaluating through the list of candidates now.
So we're making good progress and again it’s a very heavy focus of the board and the selection committee right now. Given where we are in the selection process and given with respect to the confidentiality I think that is required here, I think it would be inappropriate for me to kind of comment as to who the candidates are or are not including myself, but again that right now, that process and decision stands with the selection committee and the Board and I think they are working very hard on it.
In the meantime, I continue to be focused on driving the business and improving our operations, delivering on our commitments and working to meet or exceed the expectations of our shareholders and customers. And they are working on the CEO.
Gautam Khanna
Alright, thank you. Earlier in the call you made a comment about the contents figures you provided, I was thinking of the November Investor Day of last year where you had revenue per shifts on a number of aircraft programs, have those actually expanded on a net basis or have they declined given pricing and maybe yield improvement downstream?
Just curious if you could give us some update on with those numbers.
David Hess
I don't think anything has changed since we have shared that information with your last year. We are basically on those marks.
Gautam Khanna
Okay. And on the - last quarter, I asked you guys about any problems on the GTF or PW1000, are you suggesting that the problems where overcome and it has been a nonissue or that there weren't any problems in manufacturing at around that time?
David Hess
On the GTF?
Gautam Khanna
GTF or Leap Engine.
David Hess
Again, I mean you need to talk with our customers on that. We don't like to get ahead of our customers, and I think, I would refer you to Pratt or CFM.
Gautam Khanna
Okay. But as it stands today there are no operational issues that are holding back your throughput on those programs.
David Hess
No. Correct.
We have lots of parts on both engines and we continue to manufacture and deliver parts including discs.
Gautam Khanna
One other one, you know Boeing has talked a lot about moving into the aftermarket and I’m just curious how if at all would that impact Arconic's business, do you get better pricing on any aftermarket sales or is it mostly just volume as opposed to giving a better price on some of the aftermarket oriented products? [Indiscernible] yes, go ahead.
David Hess
The pricing is the same. It is basically incremental volume.
Gautam Khanna
Okay. Have they indicated any interest in pursuing the fastener aftermarket in your mind?
David Hess
Not that I am aware of?
Gautam Khanna
Alright thank you guys.
Operator
And your next question comes from Howard Rubel of Jefferies.
Howard Rubel
Thank you very much. David a number of your customers have continued to pursue all sorts of cost reduction strategies, and some of them, obviously put lots of pressure on your pricing, what are you doing to work with them so that you create some value, but also leave something to shareholders.
David Hess
Well I think there is three elements to it that I see Howard. One is, and you have heard us talk about [indiscernible] and that is kind of the innovation angle that we continue to push.
And I think through innovation we have been able to develop parts that create a value proposition for our customers and as you can expect, we like to share and add value proposition. So it creates value for them.
It also creates value for us. I mean one good example why I can talk about it, because I have some knowledge of it from my UTC days perhaps, and that is the mid-term in frame that Arconic's supplies to Pratt.
I mean formally this was a part that was fabricated from 16 individual parts, very difficult to manufacture, very expensive, very difficult for Pratt to hold tolerances and we are able to develop a single piece [indiscernible] that dramatically improves their assembly process, gives them better yields and tolerances and things of that sort, and at least Pratt has told us that, they think we are the only one in the world that could do that part. I think it is just one example of kind of the innovation we use to create value that allows us to quite honestly offset some of the pricing structure there.
It is the reality the markets that we are in today both aero and auto. So that is one element.
The other element obviously when they ask us for cost reduction, we tried to work with them on not just margin transfer from Arconic to our customers, but work on joint cost reduction. We are actually collectively work on a part to take cost out of the part and we both share in the margin gain that comes with it.
And then often we try to work in exchange that we do have to concede on price, which is not unusual, when we do we would like to get additional new business volume, we do that. And then at the end of the day, we continue to do, to be relentless on cost reduction.
I think we make good progress on cost reduction for the first half of the year. We're going to see the benefit of the back half of the year across our product.
I think particularly in our EP&S business, but it is really those kind of three elements that we used to deal with the pricing pressure, which is, it is a reality in aero, it is a reality in auto and just about every market that we serve.
Howard Rubel
Just two follow-ups on that; one, could you talk for a moment about where you are with 3-D manufacturing? And then, I think Ken referred to some improvements in Firth Rixson, how would you characterize the progress there versus where you would like to be?
David Hess
Let me take the second one first because it is a shorter answer, but I think we are, through Q2 of this year we are on track with the ramp up of what used to be Firth Rixson. I think that business is growing nicely.
We expect high single digit revenue growth and that business this year would somewhere around 16% EBITDA margins. So, good progress for the Firth business.
I visited a number of the former Firth sites myself recently and as you can imagine given the amount of the tension and focus on those sites, and given the fact that those sites are going to be of big growth engine for Arconic in the next three years, we are paying a lot of attention to them. With respect to 3-D, quite honestly I like our position there.
You know there is a lot of people that obviously are spending a lot of money and making investments and working hard on building 3-D and additive manufacturing capability, and in some cases to some of our customers. I think what’s unique about Arconic that I see and that I like is that we have the capability to formulate powders that are used by all 3-D manufacturers, both nickel alloys, aluminum alloys, and titanium that can be used in the supply chain.
So there is an opportunity in terms of formulating new powder alloys for our customers or anyone who does 3-D manufacturing can use. So it’s the market opportunity in that respect.
But what’s unique about Arconic, I mean there is other people that make powder in the marketplace, obviously and anybody can go buy a machine and start manufacturing 3-D parts. What’s unique about Arconic is really the combined expertise we have in the two.
The fact that we have such deep knowledge of the powders and we are developing proprietary powders today to be used in manufacturing, and we have expertise in terms of how that process works at the machine level, and are able to characterize the part that’s made so that we can assure that if a part is manufactured you get consistent performance characteristics of that part. We have expertise in how to characterize both the process and the part when you 3-D manufacturer.
Not all of our - not everyone who is trying to manufacture 3-D parts have those capabilities. And beyond that, if you look at our capability in forging and some of the other operations we have actually got some very innovative technology.
We have developed kind of combining 3-D or additive manufacturing with forging to give you kind of the benefits of both worlds and some of these large structural parts where we are able to forge the part and then add additional material using 3-D, which saves you a lot when you look at your buy to fly cost ratios. So, we’ve made some significant investments.
It’s a large area of focus for our Arconic technology centre in Pittsburgh. We have invested quite a bit, roughly $60 million in recent years in both capabilities to manufacture powders, as well as some of the manufacturing capability that goes along with it.
So, I kind of like our position in the marketplace. A lot of work to do.
We need to be quick, but I like our position in the marketplace Howard.
Howard Rubel
Thank you very much David.
Operator
And your next question comes from Josh Sullivan of Seaport.
Josh Sullivan
Yes, just a follow up on the EPS segment, you just provided some updates on Firth, are you able to provide any updates on RTI?
Ken Giacobbe
Regarding RTI, we are right in line with our expectations for the first half of the year. They delivered EBITDA margins of 20.6% through the first half, right in line with where we see them.
There will be some additional net cost savings for the RTI business in the second half and also some favorable mix. So right on track.
Josh Sullivan
Great, thank you.
Operator
[Operator Instructions] Your next question comes from Seth Seifman of JPMorgan.
Seth Seifman
Just two quick follow-ups, first of all on Reynobond maybe outside of the Grenfell Tower there is no thought about any exposure with regard to replacing material in other buildings, you know given that the architects and designers of those buildings were the ones who made decisions to put the product on those buildings and if they want to do that that would be basically their decision that they would pay for, but you don’t see an exposure to Arconic in that regard, is that a fair characterization at this time?
David Hess
I mean, I really can’t speculate on our exposure Seth. What I can tell you is that more often than not when we sell that material just like anyone selling any other building material or construction material, more often than not we don't know where that material is headed when it is sold.
So, we can tell you which buildings it is on or not on or it has been applied or how it has been applied. We supply the building material and that’s our only role in the supply chain.
Seth Seifman
Okay, thank you. And then one follow-up, of all the end markets you talked about, I guess the one that stood about as a little bit weaker was IGT and just wanted to follow-up, for the business as a whole IGT we are talking about kind of a low-to-mid single-digit percentage of sales, you know a, is that correct?
And b, how much worse have things gotten in IGT maybe relative to what you expected at the start of the year?
Ken Giacobbe
Yes, you are right. The IGT business just to give you a perspective is about 4% of our total revenue base, and we see it being down probably for the year about high single digits and now a lot of that is driven by the 60 Hz platforms or just seeing that erode a bit through the remainder of this year.
Seth Seifman
Great, thanks very much.
Operator
And your next question comes from Gautam Khanna of Cowen and Company.
Gautam Khanna
Yes, I was wondering if you could give us the Firth Rixson revenues and EBITDA margin in the quarter.
Ken Giacobbe
Hi Gautam this is Ken. Yes, the revenue was $250 million for the second quarter.
If you compare that to last year same time we are about 8%, and the EBITDA margin was 14.4% for the second quarter. If you fast forward to the first half, revenues was $504 million and that compares to about $468 million from last year.
So that’s up still around 8% and the EBITDA margin is at 14.3%. But we are seeing a lift in the second half as we talked about the ramp up cost coming down the productivity and we have invested some CapEx in the first half of the year in the Firth Rixson facility, which we will also drive some more net cost savings.
So to David’s point we’re more towards the high end of the revenue guidance on Firth Rixson. We had given a range of $0.972 billion to $1 billion, so we are on the high end there and we will probably be about 16% EBITDA margin, for the full year.
Gautam Khanna
Okay, that’s very helpful. Very helpful, thank you.
And then you made some comments about it earlier, about the isothermal parts that you are getting qualified now, when should we expect to see revenue contributions from those parts, will it be in 2017 Q4 still or is that moving to the right?
David Hess
Hi Gautam, we are probably looking at some of the isothermal revenue in the late part of 2017 in the low single digits from millions of dollars perspective. We have approximately 78% of the part qualified for 2017.
They have been forged, they are undergoing customer qualifications right now. So again, latter part of 2017.
Gautam Khanna
Okay, and one last one. At this point, is the bill of materials and the opportunity for market share pretty much fixed i.e.
there is not a whole lot of opportunity on the leap, the PW1000 and the other existing engine programs, are these pretty fixed at this point or do you anticipate your could in fact expand over time?
David Hess
I would say they are relatively fixed, but there is always discretion at our customers in terms of how they split to share. And it’s our objective to perform at a high level, both on quality and delivered performance when the competitive price to win more than our fair share of those.
It is always a little bit of flat in the way the contracts are established.
Gautam Khanna
And to that point, can you give us some sense for how much flex, how much opportunity is there?
David Hess
I don't know if I can quantify that.
Gautam Khanna
Is it 5% more or 10% more or?
David Hess
I would say it is probably on the order of 10%.
Gautam Khanna
Okay. All right, thank you very much.
David Hess
You bet.
Operator
And your last question comes from Chris Olin of Longbow Research.
Chris Olin
Hi thanks for taking my call. Just wondering if you could provide a little bit of color or thoughts on this current Section 232 investigation into aluminum, just wondering what the potential impact, say a 20% duty could have on the Arconic segments or do you see this as a potential supply risk going forward?
Thanks.
David Hess
I mean it’s hard to quantify, it’s still not clear what’s going to work its way through Congress and come out in terms of legislation. As you can imagine our Washington operations are following very closely and trying to contribute to the process, so that there is a clear understanding as potential financial jobs impact of some of these decisions.
So, we are working in very closely with the administration.
Chris Olin
Is there a way you can tell us in terms of how much aluminum is sourced from outside the US right now?
David Hess
Well, I think most of our aluminum comes in through Canada. Very little from outside of North America, I believe.
Chris Olin
Thanks.
Operator
Since there are no other questions in queue, we will now close the call.
David Hess
Thank you very much. Appreciate everybody joining us today.
Look forward to speaking with you again after the third quarter.
Operator
Thank you for your participation. You may now disconnect.