Oct 23, 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 - Melius Research Gautam Khanna - Cowen and Company Josh Sullivan - Seaport Seth Seifman - JPMorgan Rajeev Lalwani - Morgan Stanley Jorge Beristain - Deutsche Bank Sam Pearlstein - Wells Fargo Karl Blunden - Goldman Sachs
Operator
Good day ladies and gentlemen, and welcome to the Third Quarter 2017 Arconic Earnings Conference Call. My name is Tanya 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, Investor Relations.
Please proceed.
Patricia Figueroa
Thank you. Good morning and welcome to Arconic's third 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.
We 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 thanks for joining the call. You've seen our announcement this morning.
I've been promising in prior calls that the board was taking the time and appropriate due diligence needed to select an exceptional CEO to lead Arconic into the future. Well, I'm very pleased to report this morning that we have achieved that objective.
Chip Blankenship, is both a collogue and someone I know well and respect. We had the opportunity to work together on a JV.
We get to know each other when we were both in our aero engine days, so I can personally attest to Chip's excellent fit for Arconic. He brings significant aerospace and other industry operating experience, the right academic and technical prudential's, strong leadership qualities and a strong track record of delivering results, all of which making well equipped to help Arconic deliver on its full potential for shareholders and for customers.
I couldn't be happier with the board's selection and looking forward to Chip's arrival on January 15 and working with him on the transition, as I continue to serve on the Arconic board. Until then I'll continue to lead Arconic.
I also wish to thank Pat Russo for her service as the Interim Chair. Pat stepped into the Chair role on a temporary basis at the board's request to help steer the company through the transition period.
I also welcome and congratulate John Plant, on his new role as the incoming Chair of Arconic. John has had a distinguished career in the automotive industry and many years' experience of service both leading a public company and serving on public company boards.
In the short time that I've had the opportunity to work with John, I've quickly learnt him to be a superlative executive and I look forward to working with him on the board. We also announced business management changes to streamline and strengthen our operational leadership.
Both Eric Roegner and Tim Myers are proven operational executives with deep commercial expertise and market knowledge and a track record of driving profitable growth in beating or exceeding the expectations of our customers and our shareholders. Now, moving to the third quarter results, in 3Q, Arconic delivered its third consecutive quarter of year-over-year revenue and EBITDA growth.
We're demonstrating consistent improvements in operating performance on the back of healthy organic revenue growth, coupled with better than planned progress on streamlining, restructuring and head cost reduction. Uniquely in this quarter, our results were negatively impacted by a non-cash LIFO charge resulting from the spike in aluminum prices.
Reported revenue was up 3%. Organic revenue growth was up 5% with the year-over-year volume increases in all three segments.
Reported third quarter year-to-date revenue growth for Arconic is 3%, with 5% organic growth. Looking at revenue growth by market, we have 3% revenue growth in our aerospace businesses, driven by 9% growth in engines and 12% growth in defense, partially offset by the continuing headwinds from destocking and select wide-body build rates, 16% growth in our auto segment driven by continued aluminization and 31% growth in our commercial transportation business, largely driven by a recovery North American heavy duty truck market, but also our growth in China and the rest of Asia.
Revenue growth in the quarter was partially offset by 12% year-over-year decline in our industrial gas turbine segment, due to continued weakness in that market. Reported EBITDA was up 14% with a favorable compare resulting 3Q 2016, separation spending.
EBITDA excluding special items and including the unfavorable impact of higher aluminum prices was up 2% in the quarter and 5% year-to-date. Higher aluminum prices in 2017 have resulted in an unfavorable LIFO and metal lag non-cash accounting charges at corporate of 49 million in the third quarter and 19 million year-to-date.
And year-over-year negative impact to EBITDA in the segments of 11 million in the third quarter and 23 million year-to-date. EBITDA margin excluding special items was down 20 basis points year-over-year, but up 3 basis points year-to-date.
Aluminum prices and LIFO and metal lag negatively impacted the quarter by 250 basis points and 90 points year-to-date. We continue to make significant progress on restructuring and cost reduction in corporate SG&A and other overhead accounts.
Our SG&A forecast for the year has improved by 25 million from our original guidance and its favorable by 100 million, compared to last year with additional run rate savings going forward into 2018. Net cost savings were 1.5% of revenue in the third quarter and 1.7 of revenue year-to-date.
All these resulted in an adjusted EPS of $0.25 a share. Year-to-date annualized RONA of 8.1% was negatively impacted by our working capital as we got them inventory to support the aerospace engine ramp.
And finally we generated 41 million of free cash flow in the quarter to bring our quarter ending cash balance to 1.8 billion. I'll now turn it over to Ken, so he can take you through the numbers in more detail.
Ken Giacobbe Thank you, David. 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 needed. As we look at Slide 7, revenue for the third quarter came in at 3.2 billion, up 3% year-over-year driven by volume gains in all segments.
Year-over-year the favorable impact of higher aluminum prices of 150 million and foreign currency of 17 million were more than offset by lower revenue from our Tennessee packaging business and divestitures of 170 million. Organic revenue was up 5% year-over-year.
Details of organic revenue growth for Q3 and year-to-date are in the appendix Slide 21. Combined segments EBITDA margin was 16.6%, up 20 basis point year-over-year as combined segments EBITDA increased to 4%.
Year-to-date combined segment EBITDA margin is 17%, which is in line with our annual guidance of approximately 17%. I will cover segment performance in the segment slides that will follow.
Arconic's EBITDA margin excluding special items was 13.5% down 20 basis points, as Arconic's EBITDA increased 2% to 437 million on a year-over-year basis. Year-to-date Arconic's EBITDA margin excluding special items was 14.5%, up 30 basis points versus prior year, which is in line with our annual guidance of approximately 14.5%, despite the higher aluminum prices.
EBITDA dollars excluding special items were up 5% versus prior year. As David mentioned, versus the prior year EBITDA results were negatively impacted $60 million by a higher aluminum prices in the third quarter and 42 million on a year-to-date basis.
Higher aluminum prices also impacted our EBITDA margins, excluding special items by 240 basis points in the third quarter and 90 basis points year-to-date. The unfavorable impact is driven by three items, the LIFO method of inventory evaluation accounting, metal lag and processing cost in the segments.
Under the LIFO method of inventory accounting, the higher aluminum cost are charged to expense as opposed to inventory and resulted in an unfavorable $47 million charge versus the prior year. LIFO was a non-cash expense.
The metal lag component was $2 million unfavorable versus the prior and includes our ability to generally pass through aluminum price increases to customers or mitigate price increases through hedging. Finally, higher aluminum prices resulted in higher processing cost such as melt loss and regional premiums that reside in the segments.
Segment costs were $11 million higher versus the prior year quarter, the details of these impacts are provided on slide 20 in the appendix for both the third quarter in the year-to-date. Since the rise in Q3 aluminum prices were significant I wanted to provide our estimated impact for Q4.
At current aluminum prices, we expect Q4 LIFO and metal lag impact on corporate to have a negative EBITDA impact of approximately $10 million to $15 million versus Q3's negative impact of 46 million. Regarding the Q4 segment impact of higher aluminum prices, we expect Q4 impact to be similar to Q3, with a year-over-year negative impact of $13 million.
On an annual basis, we expect the year-over-year negative impact from LIFO and metal lag of approximately 55 million at corporate and approximately 35 million negative in the segments for a total year-over-year impact of approximately $90 million. Our capital efficiency RONA was 6.8 on an annualized basis for the third quarter and 8.1% on an annual basis year-to-date.
RONA has been negatively impacted by higher working capital levels as we grow volumes and increase our aerospace rate readiness to meet customer demand, particularly in the EP&S business. Gross debt is at 6.9 billion and cash is at 1.8 billion and we are approximately the same as the second quarter as free cash flow was $46 million in the quarter.
Now let's take a closer look at the financials starting with the income statement on Slide 8. We've talked about revenue, so let me cover a couple of other areas.
Overhead reduction continues to be a key focus area for Arconic. In the third quarter SG&A was impacted by external legal and other advisory cost related to Grenfell Tower of $7 million pre-tax.
Excluding special items our SG&A as a percentage of sales was 4.6% for the quarter, with SG&A being down $27 million year-over-year and $14 million sequentially. EBITDA for the third quarter was 430 million, if we exclude the external legal and advisory cost related to the Grenfell Tower, as mentioned earlier; EBITDA was 437 million up 2% year-over-year.
Restructuring charges of $19 million include 11 million related to headcount reductions in the EP&S segment and incorporate, as we continue to focus on reducing corporate overhead. Year-to-date we've reduced approximately 600 positions which will result in approximately 70 million in cost savings on a run rate basis.
The remaining 8 million of restructuring charges related primarily to cost associated with decisions made prior quarters to exit certain facilities in 2017 and 2018. Approximately 60% of these costs were cash.
The effective tax rate for the quarter was 30.8% and the operational tax rate was 33.3%. We continue to expect 2017 annual operational tax rate to be close to 32%.
Net income was 119 million at $0.22 per share. Excluding special items net income was 132 million or $0.25 per share.
As David mentioned, net income was impacted by higher aluminum prices, which drove an unfavorable $30 million in net income from LIFO and metal lag in the quarter. This compares to a favorable $2 million net income impact in the same quarter last year.
On the right hand side of the slide, you can see the special items for the quarter, sort of $13 million after tax. I've already discussed the first two special items listed, now just note the amounts listed of pretax.
The last item associated with taxes includes not only the tax impact for the first two items, but also $5 million of favorable discreet tax items in the quarter. Now let's turn to the cash flow statement on Slide 9.
As I mentioned before, free cash flow was 41 million for the quarter and we ended the quarter with $1.8 billion of cash on hand. CapEx spending year-to-date is 360 million, as we managed cash particularly in light of our higher working capital requirements; we continue to rigorously manage capital expenditures.
As a result, we expect to come in approximately $50 million to $75 million below our full year CapEx target of $650 million. Net debt to adjusted EBITDA continued to be below three times, as we finish the third quarter at 2.85 times.
Now let's move to our segment performance starting with EP&S, on Slide 10. EP&S' third quarter revenue increased 5% versus the prior year quarter.
Aerospace revenue increased 5% as commercial aero engines were up 9%, commercial aero airframes up 2% and aero defense up 6%. In the EP&S' other major markets commercial transportation was up 13% and IGT was down 14%.
Year-to-date commercial aero engines were up 8% year-on-year and we expect to be up in Q4, 5% from Q3. For the full year commercial aero engine revenue is expected to increase approximately 9% or $150 million.
Aero defense is expected to continue its positive trend, while aero airframes are expected to be down sequentially as wide-body build rates on select platforms to decline in the near term. The effect on fasteners of destocking is stabilizing as expected.
Regarding EP&S' other major markets we continue to expect weaker demand in IGT, particularly offset by strength in the commercial transportation market. Turning to EBITDA, I will note that EP&S' EBITDA as well as its EBITDA margin are up for the third consecutive quarter.
In the third quarter EP&S' EBITDA of 312 million was up 5% versus prior year quarter, as EBITDA margin was up 20 basis points sequentially and flat on a year-over-year basis at 21.1%. Volume was favorable 21 million due to growing aero demand and net cost savings of 1.4% or 20 million including the higher impact of aero ramp up cost.
The positive impacts were offset by unfavorable pricing of 16 million, which has been declining as a percentage of revenue. Regarding cost, our aero engine ramp up cost are not coming down at the arte that we had projected, and are creating a headwind for EBITDA growth and EBITDA margin expansion.
During the second quarter conference call, I outlined the challenges associated with transitioning a large number of new product introductions into high volume production, in the face of this unprecedented ramp up in the next generation aero engine deliveries. These costs includes impacts from customer driven configuration changes, lowered implant manufacturing yields, direct labor variation and premium and expediting fees associated with shipping and capacity constraints, outsourced operations like our heat treat, non-destructive testing and machining.
Ramp up cost will down over time as we work down the variation levels it can bring in, internal capacity online to reduce outsourcing and expedite cost. Before moving on from EP&S, I wanted to provide an update on Firth Rixson and RTI.
Firth Rixson revenue for the quarter was 235 million or an increase of 7% versus the prior year quarter, which leaves us on track to meet or exceed the target range of $970 million to $1 billion for the year. Third quarter EBITDA was flat to prior year quarter at $31 million.
EBITDA margin was 13% versus 14.2% prior year quarter for all the reasons that I outlined above, including the hurricane Irma impact on our Savannah, Georgia facility, which was approximately $2 million of EBITDA and about a 100 basis points of margin. As a result annual EBITDA margins are anticipated to be closer to 14% for the full year versus our prior guidance of 16%.
Regarding RTI, RTI continues to perform with revenue of 193 million in the third quarter, which is up 10% versus Q3 of 2016. EBITDA was 40 million in Q3, which is up 11% versus Q3 of 2016.
EBITDA margin was at 21.1%, which is flat to the prior year. Now, let's take a look at our GRP segment on Slide 11, revenue was down 4% compared to the third quarter of 2016 and up 1% when excluding Tennessee packaging, divestures as well as higher aluminum prices and foreign currency.
In the quarter higher aluminum prices, higher order sheet, commercial transportation revenue were more than offset by planned ramp down of our Tennessee packaging business, airframes supply chain optimization, lower aero wide-body build rate platforms and pricing pressures on regional specialty products. Looking forward we continue to see year-over-year growth in auto sheet, but still destocking in airframes which will stabilize by the end of the year.
We'll also see continued declines in wide-body build rates for select platform. In the third quarter, GRP's EBITDA of 140 million was down 2% versus the prior year, while its EBITDA margin increased 20 basis points to 11.3%, year-over-year lower volumes in packaging and aerospace and pricing pressures in regional specialties more than offset cost savings of 1.6% or $20 million.
The increase in aluminum prices impacted GRP's EBITDA margin in the quarter by 170 basis points. While higher aluminum prices continued the unfavorable impact, the EBITDA margins, GRP's EBITDA dollars are expected to meet the prior guidance.
Finally, let's move to the TCS segment on Slide 12. Revenue was up 15% versus the prior year quarter driven by strength in commercial transportation of 30% and North America and non-residential construction markets of 5%.
Looking forward, we continue to expect full year growth in North America non-residential constructions and recover in the North America heavy duty truck market. In the third quarter TCS's EBITDA of 83million was up 9% versus the prior year, while its EBITDA margin decreased 80 basis points to 16.1%.
Volumes were stronger and net cost savings of 1.4% more than offset pricing pressures and mix. The increase in aluminum prices impacted TCS's EBITDA margin in the quarter by 120 basis points.
Now let's take a look at SG&A in a little bit more detail. On Slide 13, you can see as I previously mentioned, we remain committed to reducing our overhead spend, excluding special items SG&A as a percent of revenue was 4.6 in the quarter.
This level of spend compares favorably to our key peer groups. Given progress to date we're further reducing our SG&A target from 5.4% of revenue to 5.1% of revenue for the full year.
The reduction would yield $100 million reduction in SG&A, full year 2016 versus 2017. At the same time, we continue to accelerate plans to lower corporate overheads to be 1% of revenue for 2017 versus our original guidance of 1.1%.
So in summary we are confident in our full year guides and we expect a strong Q4, year-over-year we expect double digit volume increases in aero commercial engines, automotive, commercial transportation as well as favorable mix. We expect continued improvement in net cost savings particularly in SG&A which should be lower by about approximately $40 million in the quarter.
Lastly, although the impact of our higher aluminum prices were unfavorably impact the year-over-year basis, it will be significantly less than Q3. Now let me turn it back to David to wrap things up and then we could take your questions.
David Hess
Thank you, Ken. So, we continue to make solid progress for delivering on our full year guidance for Arconic, with better than planned for performance in GRP and TCS and greater than planned cost reduction in SG&A and other overhead accounts, being offset by the negative impact of higher aluminum prices and higher than planned production cost in EP&S associated with the next generation engine ramp.
EP&S delivered 5% year-over-year revenue growth and 5.5% year-over-year EBITDA growth in the quarter and the third consecutive quarter of margin expansion with EBITDA margins now are 50 basis points over Q1 of 2017. For the full year in EP&S, margin expansion is now expected to be about flat, recognizing the impact of higher than planned production costs associated with transition in more than 600 new part numbers in the high volume production as the GTF and the LEAP engine deliveries more than doubled on an annual basis.
These parts include lower manufacturing yields, direct labor variation and expediting the premium fees for logistics and outside operations in our supply chain that's capacity constraint. We are not satisfied with our cost reduction progress here and are taking actions to ensure better performance and continued margin expansion going forward.
The reductions, in margin expansion guidance for GRP and TCS are a function of higher metal prices. After the increase in aluminum prices, both segments would be up over prior guidance.
Full year EBITDA dollar expectations for both these groups translated to better than planned performance. So for Arconic in total, we are raising our revenue guidance to the range of 12.6 billion to 12.8 billion, primarily to reflect the higher aluminum prices and we are reaffirming our EBITDA and margin expansion guidance for the full year.
This results in an earnings per share range of $1.15 to a $1.20, revenue guidance is now a 8% to 8.5% and we remain focused on a strong finish to 2017. So thank you and now we will open up the call to your questions.
Operator
[Operator Instructions] Your first question comes from the line of Carter Copeland with Melius Research.
Carter Copeland
Hi, good morning gentlemen.
David Hess
Good morning, Carter.
Carter Copeland
Dave, I hope this means we'll still see weather, you don't get too much beach time out of this?
David Hess
No, as I said I will be here completely focused on delivering on our commitment to our shareholders and customers until January 15 and even going forward after that. I'll be serving on the board and continue to stay involved, so you'll see me around.
Carter Copeland
That's great. I will stick to the one question, but hopefully I can have a sort of party and be here.
I just wanted to dig into the cost headwinds in EP&S that you called out and specifically the chart in the appendix, you had the 20 million two quarters ago and then 9 million around up in the last quarter and then you didn't specifically call out that number this quarter. I wondered if you might, from an apples to apples basis be able to give us a sense of what that is, presumably that's included in the cost headwind number that you've provided in that chart.
And then maybe just to give us a sense of what you are dealing with there, within that 9% engine growth that you've got in the quarter, I mean, how much of that is new engines, positive growth versus older generation engines, negative growth, anything you can help us with? Color on that, that 72 million bar would be helpful?
David Hess
I mean, on apples to apples basis, the ramp up costs roughly flat, but what we are talking about now, I guess, I characterized as a more comprehensive definition of ramp up cost. And, I mean you well understand the historical portions of the ramp that we are in the midst of now, with the next generation aero body engine delivery is more than doubling on an annual basis.
So, you're right in terms, we've got a number of things going on here, we got legacy engines ramping down along with the next generation engines ramping very steeply right now. And so, the cost that we are talking about are essentially various forms of variation, I mean there is the more traditional forms of variation in terms of direct labor variation, lower manufacturing yields and things like that sort, but as we continue to work - to climb up the ramp here, we are incurring expediting and premium fees, particularly where we got outsourced operations and machining and heat treat and things like non-destructive testing, where we are in the midst of adding capacity.
So, as we add capacity overtime, those operations will come back into house and those premium fees and expediting fees, for all those external operations as well as transportation will diminish over time, along with direct labor variation diminishing and improving manufacturing yields. So, we are not happy about it, we are taking actions to work harder on the cost side of the equation and make sure that those costs come down as we had committed to our shareholders.
And, we are working hard on that, and will be talking more about that in our guidance, as we deliver guidance early next year. But, it's basically variations of different types.
Carter Copeland
So, I totally understand the expedited fees and a lot of the stuff is pretty normal and it's temporary, but in terms of rough quantity here, are we talking, 5s of millions of dollars or 10s of millions of dollars in a quarter. How big of an impact was that on your cost performance and EP&S?
David Hess
On apples and apples basis, the way we were characterizing ramp up cost, I think we were at the order of about $10 million. But, what we are talking about now, this is a more comprehensive definition of ramp up cost.
Carter Copeland
Great thank you.
Operator
Your next question comes from the line of Gautam Khanna with Cowen and Company.
Gautam Khanna
Yes, thanks, good morning. I was wondering if you could comment on some of the management changes, not just to see your change, but the division changes, what precipitated that and what skill sets the new personnel bring, especially at EP&S.
And relatedly, do you anticipate, your new permanent CEO to update the 2019 targets that were laid out at the cost about a year ago? And if so, do you expect them to kind of affirm that, or do you expect any major changes operationally under his new guidance that will maybe change those numbers in a meaningful way?
Thank you.
David Hess
Well, with respect to the management changes, we made, we were down to a number of changes that are intended to accelerate our progress here. We've announced Eric Roegner to now be in EP&S, Eric's a veteran of that organization, so he's got I think more than 11 years of experience here at Alcoa and Arconic, with most of that in EP&S and he had other experiences in industry, operating experiences in industry prior to that.
So, he's a proven executive, he's got deep knowledge of the EP&S business and we know that he'll be able to hit the ground running and drive improvements in EP&S. I'd say the same thing about Tim Myer, he's a proven executive here, here in Arconic, he's demonstrated strong performance leading our TCS business and I think is ready to kind of take the next step with taking on the GRP business as well.
With respect to Chip, I don't want to presume to speak on behalf of the new CEO. I'm sure when Chip gets in here, he'll possess the plan the targets and do what he thinks is right for Arconic and for our shareholders.
Gautam Khanna
If I'm allowed one follow-up, I was wondering if you could talk a little bit about - last quarter we'd asked if you guys were a bottleneck in the LEAP or GTF production systems and if I am going to ask the same question again, you mentioned the external suppliers the cost tax right? Is Arconic a bottleneck in the production systems of either of those engines, and have you seen any share erosion perhaps resulting from it, if there has been?
Thanks.
David Hess
Well, I would encourage you to talk to our customers to get -
Operator
Ladies and gentlemen, this is the operator. I apologize, but there will be a slight delay in today's conference.
Please hold and the conference will resume momentarily. Thank you for your patience.
You are reconnected to the call.
Patricia Figueroa
Thank you.
David Hess
Hello, this is David Hess, we are back on the line, if there are additional questions.
Operator
Okay, your nest question comes from the line of Josh Sullivan with Seaport.
Josh Sullivan
Hey good morning. Just what on the GRP side, can you update us on the scope and timing of the ramp down on the Tennessee packaging facility?
And I guess relatedly, are you seeing any upside pressure to your automotive sheet needs, where you may need to add any capacity?
Ken Giacobbe
Hey, Josh, it's Ken. In Terms of the Tennessee ramp, as we have previously communicated, that will be completed by end of 2018.
That is going as planned. There is no issues there, so that is working out nicely.
In terms of capacity on auto, auto was strong for us in the quarter, both from a revenue and a shipment's perspective, we don't see any current issues with any kind of capacity constraints on the auto side.
Josh Sullivan
Okay, great. Thanks.
Operator
Your next question comes from the line of Gautam Khanna with Cowen and Company.
Gautam Khanna
Yes, I wanted to just follow up, a year ago, you guys had laid out some content figures at your investor day on each platform, and I was just wondering how those have evolved over the past year, if it still kind of anticipate a 3% or 4% step down in content across the platforms or how at all they have changed. Thank you.
Ken Giacobbe
Hi, Gautam, it's Ken. I think the driver is - there's - we got two things going on.
We have got the legacy platforms declining, and we have got the next generations increasing. Next generations of course are more profitable for us, but as we are working through the ramp-up costs, that's got a little bit of a hang on the margins until we can eliminate those ramp-up costs going forward, but we are starting to see the shift between the legacy and the next-generation platforms.
Gautam Khanna
But the actual revenue per ships on each of these platforms as you outline them has not changed or -
David Hess
No. It is up dramatically.
Ken Giacobbe
No. And we see the aero engines Gautam, this year being up, as I mentioned earlier, about 9% for the full year.
Our year-to-date performance is up about 8%, so we are seeing it on the engines, airframes are a little bit tighter just because of some of the supply chain optimizations that is going on right now. We are definitely seeing it on top-line revenue.
Gautam Khanna
Okay. And speaking to seasonality, since we are in a pretty steep ramp on the new engines, does this block normal seasonality on an aggregate basis as we look at EP&S in Q4 and into next year where normally you would have a softer Q3 and Q4, but - if you can talk about that a little bit.
Ken Giacobbe
Yeah. Absolutely, Gautam.
Normally we see a little bit of a depth in Q3 and then a decline in Q4, but as you can see from our current results, our Q3 was actually up sequentially versus Q2 and as we see that ramp in Q4, we anticipate positive performance in Q4 as well, so the historical seasonality specifically on the EP&S business doesn't carry going forward just because of the ramp on all the next generation platforms. So our biggest challenge is meeting the customer needs and getting those ramp up costs down.
Gautam Khanna
And I presume that would prevail as well in 2018 and 2019 just given the trajectory on those programs, normal seasonality would not apply in Q3 and Q4 of next year and the year after.
Ken Giacobbe
Yeah, we will be giving guidance in 2018 around the January timeframe, Gautam, but yes, the historical seasonality in this business really doesn't carry based on this unprecedented growth that we have got.
Gautam Khanna
Last one for me. You have heard a lot from Boeing about pursuing - getting a bigger share of the after-market and I know you guys supply the fastener market through distributors to address the after-market , I am just curious, what if any changes that you anticipate in any of your businesses, from Boeing's kind of reenergized focus on the after-market.
David Hess
We don't anticipate any impacts with respect to our kind of commuters [ph], we have a different model and Tier 1 or system or engine level suppliers with respect to the after-market. I mean, from our perspective, a part is a part, so we provide the part to our customers and they take the after-market for their parts, so we get the volume benefit, but it is not a differential in pricing as you would see in next year or up.
Gautam Khanna
Got it. Thanks a lot, guys.
Operator
Your next question comes from the line of Seth Seifman with JPMorgan. Your line is open.
Seth Seifman
Thanks, very much and good morning. I wanted to start off with a clarification on one of the prior question.
I think we had understood from before that the 2019 targets, were not really classed as targets, they were the board's target and not necessarily the function of who is the CEO, is that still the case?
David Hess
The basis for the targets were the management team and the board through extensive work put together the three year plan, so that is the basis for the targets and the three year plan.
Seth Seifman
Okay, and then may be to follow up on the engine side, definitely appreciate a lot of the challenges here with the ramp, but it is also fairly clear coming into the year that it was going to be a challenging ramp. Are there one or two things that you would point to that have surprised you on the engine side this year and then I guess how much of the added ramp-up cost would you associate with Firth Rixson and are you still planning to be shipping out of the isothermal forge in Q4 and if not, when?
David Hess
Well, let me talk to Firth Rixson in particular, the short answer to the question is, yes, we still expect to be generating in revenue out of Firth Rixson specifically Savannah in the isothermal press, so the answer to that is, clearly, yes. With respect to Firth in total again, we have been very clear, in the past about some of the challenges we have had with the Firth Rixson integration specifically with the ramp-up of Savannah and the isothermal press, we're making sure that we're taking appropriate actions now to ensure that we get that on track.
In fact, I will be visiting - spending a day in Savannah myself this Thursday to review operations and review their improvement plans, so we continue to focus very heavily there. With respect to the question on ramp-up cost in total, I don't think we have been surprised, obviously we're forecasting that our cost would come down at a faster rate than we're seeing.
I mean, this is a very challenging ramp. I understand the difficulty.
I think, as you appreciate, I mean, this is a historic ramp of the likes of which probably haven't been seen since literally World War II in terms of the steepness of the ramp and everybody in the supply chain, I think is challenged by the ramp-up in next-generation aero-body engine deliveries. And that's part of the issue that we have had as we are going into the supply chain to get heat treat machining and non-destructive testing, our supply chain is challenged as well.
So again, as we continue to push through there to make sure that we are supporting the ramp and meeting the needs of our customers, our engine customers and our airframe customers, again we are having to pay some premium and expediting fees to make sure that we get our spot in line and we get priority and we are able to deliver on time.
Seth Seifman
Great, thanks very much.
Operator
Your next question comes from the line of Rajeev Lalwani with Morgan Stanley. Your line is open.
Rajeev Lalwani
Good Morning. Just going back to the EP&S, what does it going to mean for working capital and capital expenditure going forward and just on CapEx, it seems like you are pulling in the number a bit this year, any forward implications there as you think of next couple of years.
Ken Giacobbe
In terms of the CapEx I think we are in very good shape. We've made the substantial investments already, particularly in the EP&S, the LaPorte facility which is up and running as per the large structural castings business and then the aluminum lithium forging operation in Lafayette which is now the world's largest aluminum lithium cast house and then lastly the titanium aluminide, so in terms of the CapEx spend in the business, that is done, that is taken care of.
There are always opportunities to optimizing the portfolio, but I don't see any spikes on the CapEx side. On the working capital, we are carrying more inventory as we get ready for rate readiness, so that is a bit higher than I initially anticipated for the year, but that is all around, making sure that we have enough products for our customers and we are working through some of the bottlenecks in the supply chain.
Rajeev Lalwani
And the working capital, is that going to be contained this year or should we think of it as carrying forward, may be the next year or so as the ramp continues?
Ken Giacobbe
I would say it wouldn't increase next year, probably at constant levels to this year.
Rajeev Lalwani
And then just real quick on the CapEx one, a follow up there, at 600 million or so this year, is that a good number to use going forward?
David Hess
Well, we said that 650 was our target this year, and we're seeing anywhere between 50 to 75 million less. I would look at it more as a percentage of revenue, as we move forward somewhere in the 4% to 5% range.
Rajeev Lalwani
Great, thank you gentlemen.
David Hess
Thank you.
Operator
Your next question comes from the line of Jorge Beristain with Deutsche Bank.
Jorge Beristain
Hi, good morning, I guess my question is for Ken. Sorry, Ken at the November investor day, you gave a guidance of working capital reduction of 3 to 7 business days for 2017 I believe.
Could you just update whether you are tracking on that, it might understand that because of this rate readiness that some of those calls have been put on the back burner?
Ken Giacobbe
Yes, Jorge, you are correct, we gave guidance of 3 to 7 days. I think, we are probably more in this 0 to 3 range right now and that's all driven by the EP&S additional inventory that we've got in the chain.
Jorge Beristain
Thanks. And then just in terms of when we could expect the next kind of mark to market update of your three year plan with the new CEO coming in until January 15, would we be looking at a March, April time frame for him to kind of roll up the sleeves and come up with this view of the three year plan update or are you still going to have your typical end-of-the-year update cycle?
Just trying to get a sense on what the next timing window would be?
David Hess
I expect we'll be giving you guidance for 2018 in the first quarter of next year.
Jorge Beristain
Following 1Q results, sorry, 4Q results, thank you.
David Hess
Yes. Right.
Jorge Beristain
Thanks.
Operator
Your next question comes from the line of Sam Pearlstein with Wells Fargo.
Sam Pearlstein
Good morning. So should I think about the $50 million to $75 million reduction in CapEx is roughly what the working capital build increases since net income doesn't change?
Ken Giacobbe
Now, the working capital, right, the day on the working capital Sam is worth about $15 million, excuse me $35 million, right. So, the offset of CapEx and working capital should be approximately in the same range.
Sam Pearlstein
And are these projects that you no longer have to do because you found other efficiencies on the CapEx or are they things that will be pushed out into subsequent years?
Ken Giacobbe
Well, as you know, Sam, one of the things we've done with CapEx is, David and I are now reviewing approximately 85% of all the CapEx that comes across. And, it's been good interactions with the businesses, these are not deferrals, these are not cancellations, it's more efficiency in the business, not only on the growth side, but on the sustaining CapEx or maintenance CapEx as well.
So, I believe our processes this year that we implemented early in the year is working very well for us.
David Hess
Yeah, let me just build on it Sam. I mean, why we've introduced some rigor into the process, I want to be very clear; we are not constraining growth capital and wherever we need, capital supports the ramp, we are approving it without hesitation.
Sam Pearlstein
Thanks, if I could just follow with one. The management changes that you announced putting both GRP and TCS under one person, is that a temporary change or is that how you envision things being run in the future?
David Hess
Everything is permanent until it changes.
Sam Pearlstein
Okay, thanks.
Operator
Your next question comes from the line of Josh Sullivan with Seaport.
Josh Sullivan
Just another follow-up on the jet engine ramp, is there a LEAP or a GTS production number, where we can look to get together side of the ramp up cost, any way to frame the learning curve at this point?
David Hess
Well, the production numbers have been communicated by the engine manufacturers, so I don't want to comment on their numbers. But, I mean it's clear what they've talked about publicly probably or engine build rates and deliver rates more than doubling on an annual basis, last year to this year and this year to next year and going forward.
Josh Sullivan
Okay, I mean is there any way to time it, maybe not a specific engine number, but just as we look into 18' maybe whenever we get on the other side of it, first half, second half?
David Hess
We are working through all that now. As we work toward our improvement plans and our cost reduction plans, we are accessing all that and you will hear about that and a lot more details when we give guidance for 2018.
Josh Sullivan
Okay, thank you.
Operator
Your next question comes from the line of Carter Copeland with Melius Research.
Carter Copeland
Dave I like that pearl of wisdom on the permanent that was a good one? I want to ask a question about the - I know you don't want to give 2018 guidance, but conceptually I just want to understand, in the growth rate that you guys are calling out for engines this year, that 9% that you mentioned Ken, is there an element of inventory stocking at your customer at the engine OEM's similar to the stocking - the working capital dynamic that you are seeing in your own facilities?
Meaning, are you are you ahead of what the underlying unit growth in production, I mean is there a de-risking affect that's making your 17' numbers in flayed some what? I just want to get a sense of it, if there's something that we should know about?
David Hess
I guess what I'd say Sam is that it's not unusual seeing a working capital build like this. Heading into a seep ramp, so, you know, that sounds.
I guess it's not surprising. But, we are making sure here that, we do what we'll need to do, to protect our customers and deliver on our commitments to our customers.
So that means caring a little bit more inventory, that means having to incur some higher expedite and premium fees to make sure that we are getting our fair share of capacity in our supplied chain. We are going to do what we have to do, to protect our customers.
Carter Copeland
Okay, thank you.
Operator
[Operator Instructions] You have a follow up question from Gautam Khanna with Cowen and Company
Gautam Khanna
Hey, just a follow-up, I was curious if you anticipate any changes to the incentive comp or kind of the operating philosophy at the company now, given the management changes at the segment levels.
David Hess
Well, I mean we review that every year as a board Gautam. I mean as you can imagine.
It will be something that gets discussed in our fourth quarter, December Arconic board meeting. As you know there's been considerable change in terms of the board composition and some of the experiences that our new directors have may at some point resolved and adjustments to the compensation plan going forward.
So, it's always something that we take a look at, we take a look at what the industry benchmarks are doing, what are peers are doing, what's proven to be successful in terms of motivating the right behavior with our employees here in Arconic and, give them the new board composition, I'm sure that something will revisit on an annual basis.
Gautam Khanna
As you stand here today, you've been in charge for a while now, would you say that there have been - that the company is in need of material operating philosophy change, which was something one of the major shareholders that made a point up in January. I'm just curious was that your impression as well or do you think a lot of the criticism has unwarranted or maybe overstated.
David Hess
The Arconic needs improvement in performance across the board. We need better - we need to do a better job in terms of meeting our commitments to our shareholders.
As you know there's been some disappointments in the past and we need to continue to deliver on our commitments to our customers. So I think, as I've said before, I think opportunity is at a bounce here in Arconic, to continue to improve operations to deliver higher levels of performance, both to our shareholders and to our customers.
And I think our new CEO, Chip Blankenship, is the perfect CEO to deliver on those commitments and to help Arconic to realize its full potential.
Gautam Khanna
Thanks a lot guys.
Operator
Your next question comes from the line of Seth Seifman with JPMorgan.
Seth Seifman
Thanks ma'am. One quick follow-up on the question of cash deployment, do you anticipate having the new CEO come in and participate in that decision with the board and maybe announced something about that later next year in terms of the excess cash that you talked about deploying or is that something the board might determine before Chip steps into the role?
David Hess
Chip will participate that, Chip will be obviously delivering 2018 guidance and as part of that guidance we'll talk about capital allocation, but we're not waiting for Chip, we're having serious discussions with the board and the finance committee around capital allocation now. It's brought in center on our agenda in December and we'll be in a position to make some recommendations to Chip when he arrives in January 15 of next year and then in position to discuss our plans when we give guidance for 2018.
Seth Seifman
Thank you.
Operator
Your next question comes from the line of Jorge Beristain with Deutsche Bank.
Jorge Beristain
Hey, guys. If I could get a follow up and I just was wondering if you could give us any color on how some of your non-aerospace segments are doing such us oil and gas related sales, energy, transport.
If you could just talk about, are you seeing any kind of demand fold for some of these heavier forgings in castings from some sectors that may have gone quite in the last few years and how you would kind of balance that against the paramount need to obviously focus your guidance on the aerospace ramp, but if you could just tell us, do you see some improved utilization coming from those other sectors as well.
Ken Giacobbe
Yeah. Hey, Jorge, hey, it's Ken.
Just a few items, on our commercial transportation business, as I mentioned earlier, we're seeing double digit growth in that market and that will continue as we move forward. I think there's two things going on there, one is just the market dynamics, but the second part is just related to our differentiated products, right.
Again, our aluminum wheel is, I believe the benchmark in the industry at 47% less weight than steel and it's a quick payback for our customers as we move forward there. Building a construction business as well continues to be on a nice trajectory as we move forward not only in North America, but in Europe.
So we're happy there. In terms of automotive, that will continue to aluminize, shipments are still strong on a year-over-year basis.
We have not seen any of the impacts or real significant impacts from hurricane demand yet based on what's happened there, but that's more - continues to be strong. So I would say across all of our major markets, with the exception of IGT, IGT is down, we feel very confident that we're in the right markets and we have differentiated products to help us grow profitably.
Jorge Beristain
Okay. Well, thanks very much.
Operator
Your next question comes from the line of Karl Blunden with Goldman Sachs.
Karl Blunden
Hi, good morning guys. Thanks for taking my question.
Lot of focus just on your operating goals, for the coming months, I do appreciate that. As you think about the balance sheet, is there anything you can do there to optimize to increase return on equity for the equity holders overtime or has that not really been in discussion.
I know you go back a year and you were thinking investment grade, that hasn't really happened, but is there more room to flex that in order to satisfy all stakeholders?
Ken Giacobbe
Yeah, in terms of the investment grade, that's important to us as we move forward. In terms of what we're doing with the balance sheet, we were fortunate as we monetized the - our corp state earlier this year that gave us more cash, but as David mentioned, we're continuously working with the board actively in terms of uses - of excess uses of that cash and that could span multiple areas.
Could be debt pay down, share repurchase, initiatives on our pension program, potentially dividends, but we're looking at all different aspects and the relative returns of each one of them, so that is actively working right now and we'll provide guidance with that in terms of January as we grow through Q4 earnings.
Karl Blunden
Yeah, thanks very much.
Operator
Your next question comes from the line of Rajeev Lalwani with Morgan Stanley.
Rajeev Lalwani
Hi, thanks for the follow up. So a relatively quick one on Grenfell, any update there may be we're going to hear on the various investigations and then enquires.
And then maybe just the extent to your involvement as you've been getting questions et cetera, that would be great.
David Hess
Nothing really new to communicate, obviously there's an ongoing investigation and we're absolutely supporting the investigation. So really there's not much new to say.
Rajeev Lalwani
Any color on timeline?
David Hess
On timing?
Rajeev Lalwani
Correct.
David Hess
I mean it's hard to predict briefly or speculate on that, but it is not unusual for these things to take a number of years to resolve.
Rajeev Lalwani
Thank you, David.
Operator
[Operator Instructions] Your next question comes from the line of Gautam Khanna with Cowen and Company.
Gautam Khanna
Hey guys, I apologize for asking all these questions, but I think I disconnected when you were answering, so I'm just going to ask it again. Is there any - are you guys - were you a bottleneck, are you a bottleneck in the production of GTF and Li, I seem to have disconnected when you were answering it.
And also, do you have any view on whether you've lost share on these programs. I'm just curious because again a lot of this models the business on the revenue per ships that disclosures you've given and I'm just curious if there has been any change either because of the share or anything else so that we don't overshoot on consensus.
Thank you.
David Hess
Yeah, I apologize for the line drop content. But with respect to bottleneck, what I said is, you've to go ask the engines manufacturers, but to my knowledge, no, we've not been a bottleneck or pacing or stopping engine deliveries to the airframers.
I speak very frequently with both senior level executives at the engine manufacturers at Safran, at GE and at Pratt and at Rolls Royce and to make sure that we're not getting in their way or pacing deliveries. But again, I would encourage you to talk with them.
With respect to share, there's always puts and takes, but I've seen no evidence that we've lost share, in fact I've seen evidence that in certain areas we picked up share.
Gautam Khanna
Okay, thanks a lot. I appreciate it.
Operator
There are no further questions at this time. I'll turn the call back over to Ken Giacobbe.
Ken Giacobbe
Yes, thank you. Before we turn it back to David to close here.
This will be David's final quarterly earnings. David has worked tirelessly with our team, spending a lot of time with employees on the plant floor, staying very close to our customers and calling out on investors, many of the people that are on this call.
We've no doubt that David will continue that pace right up to the day that the new CEO arrives, but on the sake of the entire management team and employees, David, we like to thank you for all your efforts.
David Hess
Thank you all and thank you again for joining the call today and I look forward to listening in for the fourth quarter earnings report with our new CEO. Thank you very much.
Operator
This concludes today's conference call. You may now disconnect.