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Arconic Inc. (HWM 0.06%)
Q2Â 2019 Earnings Call
Aug 2, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to Arconic's Second Quarter 2019 Earnings Conference Call. My name is Jason and I will be your operator today. [Operator Instructions].
I would now like to turn the conference over to your host for today, Paul Luther, Director of Investor Relations. Please proceed.
Paul T. Luther -- Director of Investor Relations
Thank you, Jason. Good morning and welcome to Arconic's Second Quarter 2019 Earnings Conference Call. I'm joined by John Plant, Chairman and Chief Executive Officer and Ken Giacobbe, Executive Vice President and Chief Financial Officer. After comments by John and Ken, we will take your questions.
I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that could cause the company's actual results to differ materially from these projections listed in today's presentation in earnings press release and in our most recent SEC filings. In addition, we have included some non-GAAP financial measures in our discussion. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release and in the appendix in today's presentation.
With that I'd like to turn the call over to John.
John C. Plant -- Chairman and Chief Executive Officer
Good morning everyone and thank you for joining the call today. Let's move to Slide 4. You can see that for the second quarter revenue was up 3% year-on-year to $3.7 billion, which is a quarterly record since separation. Organic revenue which adjusts for currency, aluminum, and portfolio changes, was up 10% as we continue to grow in all of our key markets. Adjusted operating income was up 27% year-on-year and operating margin was up 240 basis points. I would like to comment on each segments year-over-year margin expansion.
Engineered Products and Solutions operating margin expanded by 310 basis points. Global Rolled Products margins expanded by 210 basis points. Transportation and Construction margins expanded by 220 basis points. Moreover, all segments had operating margin expansion sequentially. In addition to revenue, operating income, operating margin, and adjusted earnings were quarterly records. Adjusted free cash flow for the quarter was $227 million, and year-to-date cash flow has improved approximately $89 million from the prior year.
We continue to return money to shareholders with the completion of 900 million shares, dollars of shares of repurchases this year to date. The weighted average acquisition price was $19.80 per share for 45.4 million shares. Our return on net assets improved 450 basis points to 14.1%. Later in the call, I will comment on the regular items that I stated in the February earnings call, namely operating performance, cost reduction capital allocation, and portfolio separation.
I'm also going to talk to our five-year planning process, asset impairments, union negotiations, divestitures, and the recruitment unemployment at the two boards and two management teams before I review our updated annual guidance. Adjusted earnings per share and free cash flow guidance will be raised for the second time in 2019 and will also provide EBITDA guidance for the first time.
Let me turn it over to Ken to give a deeper review of Q2 performance.
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Great, thank you, John. Now let's move to Slide 5 in the key financial results for the quarter. Revenue for the second quarter came in at $3.7 billion, up 3% year-over-year. Revenue was at our highest level since separation. Organic revenue which adjusts for currency, aluminum prices and portfolio changes was up $344 million or 10% for the quarter on a year-over-year basis. Revenue growth was driven by volume gains across all of our segments. The reconciliation for organic revenue can be found on Slide 22 in the appendix.
All of our key markets continue to be healthy and demand for our products continues to be strong. We've included our organic revenue growth rates by market on Slide 23 in the appendix, and I'll touch on just a few. Organically year-over-year revenue for the total aerospace business was up 11%, with defense aerospace delivering growth of 25%. Additionally, industrial products was up 12%.
Double-digit growth in these markets was supported by solid year-over-year organic revenue growth of 7% in Commercial Transportation and 5% in Automotive. Operating income excluding special items for the second quarter at the highest level since separation of $484 million, up 27% year-over-year. EPS and TCS delivered record segment operating profit. Higher pricing resulted in $41 million of favorable year-over-year impacts to operating income, driven by EP&S and GRP. Year-to-date, prices increased $75 million over the prior year. As we mentioned on the first quarter earnings call, we expect favorable pricing to continue throughout the year as demand for our products continues to be strong.
Higher volumes in the second quarter also favorably impacted operating income by $39 million, mainly driven by aerospace, but also in Automotive and Commercial Transportation. Aluminum price was favorable to operating income $19 million in the quarter. The incremental cost out program that was launched in the first quarter was the main driver of our net cost reductions. On a year-to-date basis, the program has resulted in approximately $66 million of savings on a year-over-year basis. John will talk more about this per gram later in the presentation. In terms of opportunity we continue with the transition of our Tennessee plant out of the North American Packaging business to more profitable industrial products. The transition negatively impacted operating income in the second quarter. However, this was an improvement from the first quarter and we expect to be a positive operating income in the fourth quarter.
At a consolidated level, operating margin excluding special items, was up 240 basis points year-over-year. As John mentioned in his opening comments, all three segments attributed margin expansion both year-over-year and sequentially. We have included the reconciliation of operating income excluding special items, on Slide 34 in the appendix.
Adjusted free cash flow in the second quarter was $227 million or $62 million less than the second quarter of last year. For the second quarter, we continued to focus on days working capital with an improvement of two days year-over-year to 52 days. Lower inventory of four days was the main driver of the improvement. The greatest improvement in days of inventory was in our EP&S segment with a seven-day improvement year-over-year.
Pension contributions and OPEB payments were $104 million, which was $21 million more than the second quarter of 2018. Capital expenditures, decreased $35 million year-over-year, $236 million, approximately 70% of the capital spent in the quarter was for return seeking projects as we expand aerospace air foils aerospace rings industrial products and forged aluminum wheel capacity we continue to expect capital expenditures to the year for the year to be approximately $650 million or 4% of revenue.
On a year-to-date basis, adjusted free cash flow is $89 million higher than the prior year. Year-to-date. The improved free cash flow was driven primarily by three favorable items. Higher net income, lower pension contributions and lower interest payments. These favorable items were somewhat offset by working capital to support our revenue growth.
Diluted earnings per share, excluding special items, was at a new high of $0.58 per share. This is $0.21 or 57% higher than the comparable period. The diluted earnings per share was primarily driven by operational improvements of $0.13, aluminum prices of $0.03 and lower share count of $0.03. One final comment on earnings per share. The second quarter is historically our highest earning quarter with lower levels expected in the third and fourth quarters due to our typical seasonality. Although the third and fourth quarter earnings per share, expect to be lower than the second quarter, we expect to see robust year-over-year growth in the second half if you use our midpoint of our Q3 earnings per share guidance this forecast to be an increase of 56% year-over-year.
Now let's move to the segment results on Slide 6. In the second quarter EP&S's revenue was a record $1.6 billion, an increase of 6% year-over-year. Organic revenue was up 8%. Segment operating profit was a record at $286 million, up 28%. The increase in segment operating profit was driven by double-digit growth in aerospace engines, aerospace defense, higher pricing in net cost reductions. The resulting segment operating margin expanded by 310 basis points to 18.3%. In the second quarter GRPs revenue was $1.6 billion flat year-over-year, but organic revenue was up 11%. Segment operating profit was $145 million, up 31% year-over-year. The favorable year-over-year improvement in segment operating profit was driven by markets including aerospace, automotive and Commercial Transportation.
Also, we had favorable pricing and industrial products and commercial transportation markets, lower aluminum prices and net cost reductions. The 31% growth in the segment operating profit included a $16 million unfavorable impact from transitioning our Tennessee assets that of North American Packaging to more profitable industrial products. The impact in the second quarter was less than the first quarter and we expect year-over-year impact to improve as we move forward.
The second quarter also included challenges in our aluminum extrusions business, which is isolated to one plant. The team is making progress and we expect to see improved performance in the third quarter. Despite the Tennessee transition and transition and challenges in the aluminum extrusions business, the GRP segment operating margin increased 210 basis points to 9.2%. We've had three consecutive quarters of sequential margin expansion in the GRP segment.
In the second quarter, TCS delivered revenue of $548 million, which was down 2% year-over-year. But organically, revenue was up 3%. Segment operating profit was a record -- separation at $107 million, up 10%. The increase in segment operating profit was driven by higher volumes in both commercial transportation, and building and construction markets, as well as net cost reductions. Segment operating profit increased 220 basis points to 19.5%.
Now let's move to the second quarter key achievements on Slide 7. Our EPS business had record quarterly revenue and segment operating profit for the second consecutive quarter. On a year-over-year basis, aerospace engines organic revenue was up 10% and aerospace defense organic revenue was up 26%. Favorable pricing improvements in EPS continued in the second quarter as we achieved $24 million of year-over-year price increases. In GRP, commercial airframe revenue was up 19% organically year-over-year. Price improvements in the Industrial Products and commercial transportation markets resulted in $18 million of year-over-year price increases.
Moving to TCS. The TCS segment, as well as each business included in the segment, had record segment operating profit and record segment operating margin in the second quarter. The expansion of our Wheels facility in Hungary remains on track for completion by the end of the year. And finally, the Wheels team delivered record quality performance year-to-date. For Arconic, in addition to the highest quarterly revenue, adjusted operating income, adjusted operating income margin, and earnings per share, we achieved the highest quarterly return on net assets and separation at 14.1%. Return on net assets was up 450 basis points year-over-year. Excluding the impairment impact return on net assets was up 410 basis points year-over-year.
Finally, we increased our cash balance sequentially by $38 million, including the use of $200 million for share repurchases. Our cash balance at the end of the second quarter is approximately $1.4 billion compared to $1.5 billion last year. However, this year we completed $900 million of share repurchases, as we continue to return cash to our shareholders.
Before turning it back to John, let me briefly cover two items that can be found in the appendix. The first is on Slide 28 in the appendix, where we've summarized the special items for the quarter. In the second quarter, our results included $565 million of pre-tax special items. More than 80% of the pre-tax special items were $466 million, are related to non-cash, asset impairment, and charges related to divestitures. Non-cash asset impairments, resulted in a charge of $444 million in the second quarter. The majority of the impairment, or $428 million related to the discs operation and asset group in the engines business unit, which is within the EP&S segment.
As John will discuss shortly, we have updated our five year plan in the second quarter. The updated five-year plan and expected future cash flows of the disk asset Group resulted in an impairment. We also recorded a charge of $22 million in the quarter, related to the divestiture of a small and additive manufacturing facility that closed in the second quarter, and a small energy business that is expected to close in the third quarter. Both of these entities were included in the engine and engineered structures business within the EP&S segment. There are a number of other pre-tax special items in the quarter that are detailed on Slide 20. We're planning to file the 10-Q later today and these items will be discussed in more detail in that document.
For now let me highlight two items. First, we recorded a pre-tax charge of $15 million in the quarter for lease termination and other costs. The majority of the costs related to exiting our corporate aircraft operations. Second, we experienced a fire at our fastener plant in [indecipherable] France that resulted in a $4 million unfavorable impact in the quarter related to equipment and inventory damage, as well as higher operating cost. Fortunately, there were no injuries. We still continue to assess the impact of the fire. Current estimates are that we will have approximately $5 million to $10 million unfavorable impact in the third quarter and it will take multiple quarters for us to recover from the fire. We will update you on the situation in the third quarter. We do have insurance, which is expected to cover the fire with a deductible of $10 million.
Finally, the impact of discrete and special tax items for the quarter was a credit of $61 million. It included a benefit related to prior year foreign taxes and a benefit associated with foreign tax rate change. The second item I wanted to cover was on Slide 21 in the appendix, where we've provided an update on our capital structure, as we continue to manage our debt and reduce our liabilities. Gross debt is $6.3 billion and net debt stands at $5 billion. Net debt to EBITDA continues to improve year-over-year despite the cash outflow associated with our $900 million of share repurchases year-to-date. Net debt to EBITDA stands at 2.35 times, which is an improvement of 6% compared to the second quarter of 2018.
With that let me turn it back over to John.
John C. Plant -- Chairman and Chief Executive Officer
Thank you, Ken. Moving to Slide 8. I'll now comment on the four focus areas that I discussed in the February earnings call, namely operating performance, cost reduction, capital allocation and portfolio separation.
On Slide 9, regarding operating performance, we continue to complete detailed quarterly operating reviews and monthly forecast reviews by segment, as part of our profit improvement program. The reviews are robust and the quarterly reviews cover 25 key areas to drive current and future profit improvement. The review content continues to improve and underlying progress is being made. However, there is still a long way to go regarding performance improvements.
On Slide 10, and referred to cost reductions, actions are under way to reduce operating costs by $260 million on a run rate basis. Our commitment has increased by $30 million from the previous commitment of $230 million. $140 million of savings are expected to be captured now in 2019, which is an increase of $20 million from the previous $120 million commitment. The increase in savings this quarter resulted in a severance charge of $27 million.
On Slide 11, you can see that year-to-date we have completed two share repurchases totaling $900 million. The weighted average purchase price was $19.80. Management has a total of $600 million of remaining ship repurchase authority. This is comprised of $100 million of the repurchase authority from the prior 2018 authorization and an additional authority of $500 million, which is approved by the iconic Board in May of this year.
Lastly, on Slide 12, we have an update on the separation. We continue to track that our Q2 2020 implementation date with a targeted filing of the Form 10 in the fourth quarter of this year. You can see the critical closing conditions, as well as financial implications on this slide.
Moving to Slide 13. The names of the two companies will be Howmet Aerospace, an Arconic corporation. We plan to announce which company will be SpinCo the next quarter's earnings call. We also plan to provide 2019 year-to-date financial information for the two future companies at that time. Consistent with the second quarter earnings call, we have identified non-core businesses for say with an estimated value of $100 million and $100 million in proceeds with limited earnings impact. We also expect corporate costs to be in line with industry leading peers and in aggregates for the two new companies. They will be below the current iconic corporate costs.
I'd now like to comment on five additional actions on Slide 14. Firstly in the second quarter, we completed the five-year business plans for each of our units let me clarify. This is not a review of the portfolio. But more a granular level examination of market share competitive position cost base and formulation of clear plans to execute within each business and to secure each business is teacher during the next year, three-year and five-year time periods. This is consistent with the plans that we are now executing on. The reviews focus on volume growth and price while building on a more competitive cost structure.
In terms of calibration for our shareholders, I see the benefit of these plans regarding product, price, and mix to exceed the aggregates of the current cost reduction commitments made earlier in my notes today. Today, I'll just call out one example of this. Further clarity on other business units will be provided in our third quarter earnings call when we outline the two future segments for the new company is going forward.
Back to BCS. I referred to the 200 basis points of adjusted operating income margin improvements on the prior earnings call. We now see this opportunity is larger moving from 2018 through 2019 and into 2020, margins will increase by approximately 300 basis points. Cost is a feature, but more importantly we will rationalize product lines and repurpose assets to better markets which allow us to increase revenues and profits, resulting from the benefits of this price and mix of products sold and I'll cover this in more detail in the next quarter for other businesses.
Second, we took a charge for asset impairment. As part of the five-year planning activity, we reviewed the asset base to to assess future cash flows. This review resulted a non-cash impairment charge of $444 million of this charge $428 million relates to the business of what was formerly referred to as Firth Rixson.
Before moving on to other items, I think that it is appropriate to update you on Firth Rixson before eliminating the name from future use. Firstly rings, it's a business of approximately $700 million in annual revenue. It is fundamentally a good business. And we saw Arconic has the largest market share globally. Profitability is not showing signs of improvement and from the 2018 base will show improvement in 2019 into 2020 and beyond. Improvement is driven by a combination of differentiated products, a more competitive cost structure, and bringing new, more efficient capital online. But this business, by comparison is fundamentally flawed. In total, it is just in excess of $300 million in annual revenue. A portion of that this business will be disposed off and the smaller retain part has been right sized on the asset carrying value will be impaired to allow for future competitiveness and improve profitability in 2020. Remaining portion of this business will be a small part of our chronic and the significant losses of 2018 and 2019 will be eliminated.
Third, in the second quarter, we have come to a mutual agreement with the US steelworkers to successfully conclude negotiations of the USW Master Agreement. Additionally, we concluded negotiations with the steel workers at titanium structures business in Niles, Ohio, which had been operating without a contract for the last 18 months. Fourth, regarding divestitures, we've closed on a small transaction and signed the share purchase agreement for another transaction with the close currently pending. We are making satisfactory progress on the remaining divestitures. As you can see, it's been a busy quarter. Finally, the process is under way to recruit and conclude appointments of the two boards and two management teams. Search committees have been defined and recruitment firms appointed to help form the future leadership teams of rolled products and the aerospace companies.
Regarding the management team, I want to announce the departure of Elmer Doty. Elmer decided not to participate in the future CEO selection process and to allow for a smooth transition, Elmer has agreed to step aside and will continue to be a Board member, and I want to give a personal thank you to Elmer for being my business partner in recent months.In addition and to further solidify and clarify leadership, I have agreed to extend my term beyond the 5th of February 2020. I will continue to serve as CEO through separation and beyond as required to ensure continuity and performance of Arconic.
Finally, an update to 2019 annual guidance in light of current performance coming off a healthy Q2 and considering our typical seasonality, we are updating and raising guidance for the year. This reflects both our performance expectations in the second half and the fact that year-to-date, we've already earned an adjusted dollars earnings per share. Annual revenue is unchanged at $14.3 billion to $14.6 billion despite the fall in assumed aluminum prices.
The adjusted earnings per share range forecast for Q3 is $0.47 to $0.53 earnings per share. Adjusted earnings per share forecast for the year increases to $1.95 to $2.05 per share. Free cash flow for the year, increases $700 million to $800 million. EBITDA guidance is provided for the first time and is approximately $2.3 billion plus or minus $50 million. Our updated guidance assumes that the Boeing 737 MAX will remain at 42 aircraft builds per month on air frames and 48 barrels per month on aircraft engines for the remainder of 2019.
One final item before I turn it over to Q&A regarding Grenfell Tower, there is an update this quarter, which is considered helpful. In addition to funding replacement planning for relevant high rise public sector housing, the UK government has established a new fund to refurbish private high-rise buildings which have aluminum Composite Material cladding systems and which are unlikely to meet UK building regulations. This fund will cover buildings which architects specified the aluminum cladding polyurethane from AAP, our France subsidiary, which was then fabricated and fitted by contractors as one component at the planning and insulation system. This potential clotting remediation will be beneficial regarding the potential contribution of these systems to future fire risk in UK, high-rise buildings. The details of the refurbishment process and fund continues to be developed. I plan to provide a further update on these topics noted today on our next earnings call.
And with us. I'd like to open the line for your questions.
Questions and Answers:
Operator
Thank you. And we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Carter Copeland. Your line is open.
Carter Copeland -- Melius Research -- Analyst
Hey, good morning gentlemen, and great progress. Congrats.
John C. Plant -- Chairman and Chief Executive Officer
Thank you.
Carter Copeland -- Melius Research -- Analyst
Just a two-parter, John. I noticed you guys made some comments around quality, record quality in wheels. But I wondered if you might speak to what sort of trends you've seen in EP&S and there on quality and yields. I know that was a particular point of focus. I wondered if you could just give us some insight on to that? And to the extent it impacts your capex, longer-term capex a planning, I wondered if you could touch on that as well. Thank you.
John C. Plant -- Chairman and Chief Executive Officer
Yeah. First of all, quality within our EP&S business. It really across the board has continued to improve. In particular, I'd like to note the quality improvements as we've started to come down as an improved rate on the learning curves and some of the engine airfoils, and that's obviously very welcome. Of course, we are bringing into commission two new manufacturing plants over the next really five months. That's the new plants for the molding process in Morristown, Tennessee, for the inserts in our airfoil business, and the new plant in Whitehall, Michigan for the casting of the airfoils. Both of those are on track. In fact, if anything, a little bit ahead, and we are hopeful we may get some modest production out in the fourth quarter, which would be about a quarter earlier than previously anticipated. Everything appears to be on track, obviously we are monitoring that to make sure that our future quality is also continues to improve.
On the second part of the question on capex, we've maintained the guidance given. The critical investments that we need for the expansion, particularly in our engine business has been, again, everything is on track. Same for Hungary for the wheels business, and same for Tennessee, which allows that transition into the more into the industrial market, which occurs in the second half of 2020. So at the moment, I'll say everything is in order and I think the expectation is that we planning to further trim our capex requirements going forward.
Carter Copeland -- Melius Research -- Analyst
Great, thank you for the color.
John C. Plant -- Chairman and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Seth Seifman from JPMorgan. Your line is open.
Seth Seifman -- JPMorgan -- Analyst
Thanks very much. Good morning and good quarter. I wonder if we think about how cash flow kind of progresses from here, and we think about some top-line growth next year, dropping through the lack of severance costs, an incremental $120 million or so from the cost savings that didn't drop through this year, it would seem that there is a path to some nice cash flow growth next year with the one kind of question mark remaining about the pension. So I guess is it, can you speak a little bit to the potential for cash flow growth next year?
John C. Plant -- Chairman and Chief Executive Officer
I think all the elements that you've highlighted this indeed are true. Next year, clearly, we're not going to have the level of cash restructuring. I tried to provide a little bit of color future capex on -- in my response back to the Carter Copeland. And certainly, the results of the cost reductions and some of those things, I've talked about in terms of margin improvement. Really are all positive. I think vectors for for future cash flow. Clearly, we shall conclude negotiations at some point on separation with the PBGC on the pension matter, but outside of that the underlying theme with what you said is correct.
Seth Seifman -- JPMorgan -- Analyst
Okay. And then I apologize if I missed this, but you talked about staying on for kind of, I guess, and an undetermined period of time. Did you specify which company you plan to stay with?
John C. Plant -- Chairman and Chief Executive Officer
No, I did not.
Seth Seifman -- JPMorgan -- Analyst
Okay. And I guess perhaps when you give us more information next quarter about a split and whose RemainCo and stuff, but at that point, we'll learn that?
John C. Plant -- Chairman and Chief Executive Officer
Well, I'm sure you're going to press me and ask me in the future about that very question. But the important thing is, it was to make sure we had continuity through to separation. And I think that's just as fundamental to making sure that everything is really smooth and performance continues.
Seth Seifman -- JPMorgan -- Analyst
Excellent. Thank you very much.
John C. Plant -- Chairman and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Rajeev Lalwani from Morgan Stanley. Your line is open. Once again, your next question comes from the line of Rajeev Lalwani from Morgan Stanley. Your line is open. Your next question comes from the line of Gautam Khanna from Cowen and Corporation. Your line is open.
Gautam Khanna -- Cowen and Corporation -- Analyst
Hey, thank you. Good morning, guys.
John C. Plant -- Chairman and Chief Executive Officer
Hi Gautam.
Gautam Khanna -- Cowen and Corporation -- Analyst
Hey, I heard you say your guidance implies 48 a month on the LEAP 1B, I just wanted to have you actually seen a step down yet? Or is it just advanced caution?
John C. Plant -- Chairman and Chief Executive Officer
We saw a modest step-down of I think two engines. I think in the bill that's the information I have. But it's just us being cautious as well.
Gautam Khanna -- Cowen and Corporation -- Analyst
Okay. Two engines from 52, just to clarify?
John C. Plant -- Chairman and Chief Executive Officer
Yeah.
Gautam Khanna -- Cowen and Corporation -- Analyst
Okay. Secondly, maybe Ken, I was wondering, discount rates have moved down obviously pensions, a bit of a recurring theme. But I'm just curious, given asset returns any preliminary color on where the plan with the deficit would look like if you snap the line today on the pension and OPEB?
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Yeah, Gautam. So a couple of comments. First, when we look at pension and OPEB, we are down about or we were improved $322 million year-over-year.
And then on top of that, I wouldn't say that -- on the pension side 90% of the gross liability is frozen to future service accruals and about 75% on the OPEB side. We will restrike or remeasure at the end of the year, but a couple of things that I can tell you, last year we were the discount rate was it about 4 to 4.35. We're seeing a number more around 3.5 right now. We do have for you in Slide 19 of the appendix, the sensitivities. So that's about an 85%. It's moved on the liability side. But also I would note that on the asset return side, we've been doing a lot of work over the last 12 months. Last year, our asset returns were negative 3%. If we look through June of this year, we're in the low double digits.
We've moved our investment strategy more to the equity side. So we've also benchmarked those returns against our peer group and we're at about, better than about 85% of our peers. So we will have an adverse impact to your points around the liability side, driven by the discount rate. There will be an offset on the asset side based on our returns, most likely. But we will restrike that at the end of the year. And the sensitivities are on Slide 19.
Gautam Khanna -- Cowen and Corporation -- Analyst
Thank you. And one last one if I may. I was just curious, John, if you could speak about the pricing progress we've made on the EP&S side and sort of what opportunities still lie ahead? How receptive, how difficult to those conversations and how -- what's your confidence on unrestricted contract buyer?
John C. Plant -- Chairman and Chief Executive Officer
I think we have really tried to ensure that we have a future line of sight for all of these long-term contract renewals. So I can see that several years out. And it's very much been a process we've spend even more time during our five-year plan reviews, trying to understand the fundamental competitive advantage and where we had true excellence. And so for example, in the very or the first, second and third blade in the hot end of the engine where we think we have some unique capabilities. And so we think we should be paid appropriately for that level of skill set and value we bring to the capabilities of those aircraft engines, and that's just one example. I mean, I don't really want to spend a lot of time talking about it, apart from the discipline has previously been I'd say very deep in the organization, and now it's something that I expect each business unit head to be able to sit and talk to me about, because if I have the information then I expect them to, and I mean it's a healthy dialogue trying to maintain both good relations with our customers but at the same time trying to make sure that we do get paid appropriately for the level of value we bring to the engine into the whole aircraft.
Operator
Your next question comes from the line of Matt Korn from Goldman Sachs. Your line is open.
Matthew Korn -- Goldman Sachs -- Analyst
Hey, good morning everyone. Just a couple from me. First, we've heard from one of your competitors at a certain jet engine customer has become a more aggressive with inventory management, are you seeing anything similar and then second, having completed all these five-year plans for each segment. Could this turn into more clarity on medium term targets for all the segments in the year-end , is that something we could see and understand a bit better before the split. Thanks.
John C. Plant -- Chairman and Chief Executive Officer
Okay. So let me give with this the second one first. I'm not decided yet. But I'm thinking about possibly giving some 2020 revenue guidance at the next earnings call and obviously we'll be giving 2020 guidance when we announced the fourth quarter in the early part of 2020. Personally, I'm not particularly a fan of giving out future hostages to fortune in terms of giving growth and margin profiles, it assumes the level of knowledge which inevitably is in perfect, I prefer to achievement and they say the directional vectors give guidance to that. And I can't imagine maybe breaking out of pattern it need to do that in, during my leadership of the company.
So I think that deals with that one. The first question, I'm just trying to remember what it was now. Oh, inventory management. No change I've seen.
Operator
Your next question comes from the line of David Strauss from Barclays. Your line is open.
David Strauss -- Barclays -- Analyst
Thanks, good morning. I wanted to ask you about the EBITDA guidance that you gave the margin I think implied in that in the back half of the year is lower than obviously what we saw in Q2 and I know you have normal seasonality in the back half of the year, but what you're talking about with Tennessee and BCS improvement, can you just, can you just give a little bit more detail on the margin outlook in the second half?
John C. Plant -- Chairman and Chief Executive Officer
I necessarily -- I didn't know if it gave that impression. So rather than me grapple for numbers as we speak here, David, I'll say I don't recognize it. So maybe I'll get you to recheck your math or we'll do it and we'll have a separate conversation with you. But that's not something that it was in tune with my thinking.
David Strauss -- Barclays -- Analyst
Okay, all right. And then I think in Q4, you have this convert that's coming due. How do you -- what's the plan for that at this point?
John C. Plant -- Chairman and Chief Executive Officer
So, I'm going to pass across to Ken but is essentially will be my expectation is, we'll pay that off and redeem them.
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Yeah, the only thing I'd add to that, David is on Slide 18 in the appendix, you can see the share count by quarter, and to John's point included in that is for us to settle the RTIs in cash.
David Strauss -- Barclays -- Analyst
Okay. So I thought, I just want to confirm. Thanks a lot.
John C. Plant -- Chairman and Chief Executive Officer
It's going to take both our gross and get our gross debt down.
David Strauss -- Barclays -- Analyst
Right, right. Got it. Thank you.
John C. Plant -- Chairman and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Josh Sullivan from Seaport Global. Your line is open.
Josh Sullivan -- Seaport Global -- Analyst
Good morning. Nice quarter.
John C. Plant -- Chairman and Chief Executive Officer
Thanks, Josh.
Josh Sullivan -- Seaport Global -- Analyst
Just within GRP on the automotive body and light vertical, Acronic was a pioneer in that market. I know you've been able to sweat the assets in, now you've got the five-year review. Curious on what your capacity needs in the auto sheet are at this point? And then just as a follow-up, can you talk about growth expectations for auto sheet over the next 12 months or so?
John C. Plant -- Chairman and Chief Executive Officer
I think the underlying secular trend of lightweighting is certainly going to be a feature in the automotive market for the next decade. And if I look at that I could an average for the last year is somewhere between 6% and 9% conversion on an annual basis. And I'm going to say on the normal order cycle should be enough to overcome, I'll say auto cyclicality. Obviously quarter-to-quarter, you can't say that, but roughly a year-to-year you can. We intend that, if you want to look at the GRP segment, I mean, it really falls into three in the future, which is aerospace, where we are just over 20% of our revenues, which is very solid and healthy, automotive, which is obviously contracted as well in terms of volumes with the vehicle manufacturers. There we have good margins and expect that to continue and in fact one of the features of our plan has been diversification of our customer base. And indeed, while we have not announced which vehicle manufacturer, we have succeeded in in signing up another very major US platform in the second quarter, which obviously is going to be good for the future order book and we will see some of that materialize in 2020 and then obviously if the full-year effect in 2021 and beyond.
So we pretty pleased about that, not only for the inherent profitability but also the security of the of supply and for us, we actually need to achieve more throughput and more volume out of our rolling mills and [indecipherable]. So it gives us a very good base load. And then finally, the industrial segment where we've seen obviously significant and healthy price improvements, according with the comment [indecipherable], which has given us that protection for the probably the next few years, it could be five years and beyond. And obviously with the, well, I'll say publicized investment in Tennessee that we've talked about, that additional capacity and additional finishing and mill capacities planned to come on in the second half of 2020.
Again we see that as a healthy future margins for the business and us being totally out of packaging in the US or being, we'll still be in production for packaging in Russia and China. So I tried to give you a bit of a sweep-through GRP, and obviously we've be making progress, and you've seen the sequential margin improvement that Ken talked to, from really Q3 of last year through Q4, so it's about 5% quarters to 7 through to 9 and obviously we pleased with that progress.
Josh Sullivan -- Seaport Global -- Analyst
Great, thank you.
Unidentified Speaker
Thank you.
Operator
Your next question comes from the line of Chris Olin from Longbow Research. Your line is open.
Chris Olin -- Longbow Research -- Analyst
Hey, good morning.
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Hi, Chris.
Chris Olin -- Longbow Research -- Analyst
Just you might have touched on a little bit on an earlier question, but I just want to maybe zero in a little bit here on maybe your confidence level in keeping the market share on the next Airbus titanium contract. Seems like all four companies are submitting bids in the past, or have been some reliability issues with the old RTI. I'm just wondering if, are you going to keep it and would pricing hold? Anything there would help.
John C. Plant -- Chairman and Chief Executive Officer
So, of course, I mean nobody knows at this point whether we keep that contract. There is one specific, of course, there are multiple contracts for titanium and with the increased use of titanium in future aircraft, we're confident of the future revenues and an order book for our business. I have been paying particular attention to our titanium business, and indeed it was actually the -- the major site, which is Niles in Ohio in was the very first site that I visited in Arconic, and during the last few months have tried hard to to dedicate resources to that plant to have fundamental improvements in terms of quality, in terms of OEE and throughput, and in terms of customer compliance. And combined also with the significant inventory reduction, which I think is a fundamental part of quality improvement as well.
So, I think very positively about our titanium business. It's an area, which I think we need to continue to focus on. I was really pleased that we were able to conclude agreement with the steelworkers on contract, and I'm really trying to reset, and I think have to logically reset, at least attempted to reset the relationship between management and the steelworks in that site, because I think it's a really important site for us. I see plans, and expect plans and achievements to improve the future profitability of it. But having said that, which I can say a very positive [indecipherable] of the business. On the Aribus contract, were all in a bit of a situation where incumbent, we are hopeful to retain our share, but I'm sure that's -- and I've read the same stuff that you've read about other people think that they're going to win it. I'm never so bold as to make those predictions, when we looking at bidding against other people. I don't see why I need to beat my chest and say that sort of stuff.
Chris Olin -- Longbow Research -- Analyst
Okay, helpful. And then, I just want to make sure I understand your comments about Boeing and the Max. I think you said 42 on the frame and 40 in the engine. I had always been under the impression that Arconic's lead times on some of these products are out were pretty far out there. Are you shipping at those levels? Are you shipping it where Boeing is going to be in like the fourth quarter in 2020?
John C. Plant -- Chairman and Chief Executive Officer
We will ship whatever Boeing, Spirit, and GE want us to ship out. I'm just trying to give you guidance to what we've assumed in our plans financially going forward. So if people were to build fuselage at a higher rate, then obviously that's good for us, or engine at a higher rate, that's good for us. Clearly, if the engine rate was lower than we be moving some of that capacity to clear some of the other areas and meets demand on other engines that we have. And in particular for the military requirements of those engines as well. And so we're sort of trying to balance everything out at the moment, but I was just trying to give you the best guidance I could in terms of our financial assumptions.
Chris Olin -- Longbow Research -- Analyst
Okay that makes sense. Thanks a lot and congrats on the success you have.
John C. Plant -- Chairman and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Rajeev Lalwani from Morgan Stanley. Your line is open. Once again, your next question comes from the line of Rajeev Lalwani from Morgan Stanley.
John C. Plant -- Chairman and Chief Executive Officer
Okay, can we move on. I don't think Rajeev's coming through.
Operator
[Operator Instructions] Your next question comes from the line of Seth Seifman from JPMorgan. Your line is open.
Seth Seifman -- JPMorgan -- Analyst
Thanks guys. Just one follow-up here in terms of understanding the cost-cutting plan and it was sort of my understanding that it was directed kind of primarily at overhead. If I look back as, like the run rate, corporate cost in the back half of last year, it looks like annualized that was about $200 million. So when we think about where the cost cutting is directed, clearly the corporate costs are not going to zero, obviously, so do you consider that there was a fair amount of overhead in the segments, that's also where the cost cutting is kind of directed? Or maybe I was sort of overestimating the degree to which overhead was playing a role here.
John C. Plant -- Chairman and Chief Executive Officer
I'm going to pass the majority of that question to Ken. is essentially there was significant cost cutting at the corporate level, but we also planned that's a reduced percentage cost cutting at the businesses. And in particular, something which we did which -- I guess maybe we haven't publicized enough is that between corporate and the six individual businesses, there were three sub HQ levels,. One for the each of those reporting segments. So, one for the rural products, one for EP&S and it will be an asset rather and one for TCS those have been eliminated altogether. So there has been cost cutting at every level.
One of the reasons why you may not see full effect of the issue to mark SG&A is that we've also had a good problem to deal with is the share prices improved is that we've needed to remark and put through the P&L additional charge for that if the share compensation. So I wanted to make sure we got that fact out there as well. It's all taken care off in the results year-to-date and Ken, I'll pass the rest to you.
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Just a couple of other things, Seth, to build on John's comments. You'll see in the queue that we file later on today that there is multiple pieces that come out of this cost restructuring program. The biggest part is labor, and you'll see in there that about 40% of the labor reduction is coming out of corporate. But it's not just limited to labor. We're looking at other items like indirect cost savings which relate to energy, maintenance transportation. We've also exited the aircraft that I talked about earlier on there, but we've also looked at the balance sheet. So on the retiree side, retiree life we eliminated, we reduce some of the Medicare subsidy programs as well, so it's an all-encompassing program and you'll see some more detail of that in the queue.
Seth Seifman -- JPMorgan -- Analyst
Excellent. Thank you very much.
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
[Operator Closing Remarks]
Duration: 58 minutes
Call participants:
Paul T. Luther -- Director of Investor Relations
John C. Plant -- Chairman and Chief Executive Officer
Ken Giacobbe -- Executive Vice President and Chief Financial Officer
Unidentified Speaker
Carter Copeland -- Melius Research -- Analyst
Seth Seifman -- JPMorgan -- Analyst
Gautam Khanna -- Cowen and Corporation -- Analyst
Matthew Korn -- Goldman Sachs -- Analyst
David Strauss -- Barclays -- Analyst
Josh Sullivan -- Seaport Global -- Analyst
Chris Olin -- Longbow Research -- Analyst
