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Arconic Inc. (NYSE:ARNC)
Q3 2019 Earnings Call
Nov 5, 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 the Arconic's third Quarter 2019 Earnings Conference Call. My name is Dennis and I will be your operator for today. As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Paul Luther, Vice President of Investor Relations. Please proceed.

Paul Luther -- Director of Investor Relations

Thank you, Dennis. Good morning and welcome to Arconic's third 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 and earnings press release in our most recent SEC filings. In addition, we've 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 Of The Board, Chief Executive Officer

Good morning, everyone and thank you for joining the call this morning. We have a lot of content to get through so let me start unpacking some of the items.

Let's move to slide 4. Starting this quarter, we will be reporting the results into two new segments. This is to provide increased visibility

into the two successor companies post separation. On slide 4, you will see our previous three segments of EP&S, TCS and GRP will now be reported as Engineered Points and Forgings, and Global Rolled Products,GRP. EP&S contains four business units of engine products, fastening systems, engineered structures and forged wheels. EP&F will be part of the new company, Howmet Aerospace and will be remained co [Phonetic]

.

Regarding Global Rolled Products, we will be adding our Building and Construction business to this segment. This entity will be SpinCo and named Arconic Corporation. Throughout the presentation today we will refer to EP&F and GRP at the new segments. Then move to slide 5 and I'll comment on highlights for the third quarter. The third quarter was strong. Revenue was 3.6 billion, organic revenue which adjusts for currency, aluminum price and portfolio changes was up 6% as we continue to grow in many of our key markets. EP&S organic revenue was up 8% year-over-year and GRP, up 5%. Operating income excluding special items, was up 36% and margin was up 340 basis points year-over-year and 20 basis points sequentially from Q2.

I would like to comment on each segment's year-over-year margin profit expansion. Engineered Products and Forgings segment operating margin expanded by 330 basis points. Global Rolled Products segment operating margin also expanded by 330 basis points. Earnings per share, excluding special items was $0.58 and up 81%. Q3 earnings per share was the best Q3 earnings per share performance for Arconic. Adjusted free cash flow excluding separation costs was 142 million in Q3 year-to-date and up 155 million from last year.

We continue to return money to shareholders with the completion of 200 million of common stock share repurchases. Year-to-date, we have completed 1.1 billion of stock share repurchases at a weighted average acquisition price of $20.67, for a total of 53.2 million shares. After-tax return on net assets was 13.8%, up 550 basis points year-over-year. Later in the call, I will comment on the regular items that I stated in the February earnings call, namely, cost reduction, pricing and capital allocation, divestitures and portfolio separation. I will then provide an update to our guidance.Earnings per share guidance will be raised for the third time in 2019.

Let me take over to Ken to give a deeper view of Q3 performance.

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Thank you, John. Now let's move to slide 6 in the key financial results for the quarter. Organic revenue was strong for the third quarter, up 220 million year-over-year with EP&F, up 8% and GRP, up 5%. EP&F had growth in all of its markets, it's highest growth market was aerospace which represents over 70% of its revenue. GRP, was up 5% and delivered double-digit revenue growth in aerospace, industrial products and packaging with softness in automotive as the Ford-F150 is transitioning to the next-generation model in order to give you increased visibility into revenue for the two new segments, we have added organic revenue by market along with revenue distribution for each new segment in the appendix.

Operating income excluding special items for the third quarter was 475 million, up 36% year-over-year. We delivered the third consecutive quarter of price increases with a $36 million favorable impact year-over-year. Price increase in span across both segments driven by aerospace, industrial and commercial transportation. We expect favorable pricing to continue as demand for our products remain strong. Higher volumes in the 3rd quarter also favorably impacted operating income by 22 million, mainly driven by aerospace. Lower raw material costs including aluminum price was favorable to operating income, 39 million in the quarter.

Net cost reductions were led by our cost-out program which generated approximately $70 million of year-over-year savings in the quarter. This was partially offset by three items. First, the transition of our Tennessee plant out of North American packaging to more profitable industrial products. The Tennessee plant continues to improve each quarter; we expect Q4 to be the inflection point with year-over-year profit improvement. The second item was performance at one of our aluminum extrusion plants. We are addressing the issues with operational improvements and pricing actions, however, we have additional opportunities for improvement.

Lastly , we had higher compensation cost driven by improved performance in profit, cash and equity value. We have included the reconciliation of operating income excluding special items on Slide 32 of the Appendix. Adjusted free cash flow in the third quarter was a 175 million or 60 million more than the third quarter of last year. Please note that consistent with our guidance, we have excluded 21 million of unfavorable cash flow in the quarter related to the planned separation.

Pension contributions and OPEB payments were 96 million in the quarter, which was 26 million more than the third quarter of 2018. Year-to-date pension contributions and OPEB payments are $276 million, which is on track with our annual estimate of 350 million detailed on slide 17 in the Appendix. Capital expenditures in the quarter or $108 million, which is down approximately $100 million year-over-year. On a year-to-date basis, free cash flow excluding separation costs is 155 million higher than the prior year.

Year-to-date, the improved free cash flow generation was driven primarily by four favorable items higher net income, lower pension contributions, lower capital expenditures, 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 $0.58 per share and 81% higher than the comparable period.The higher diluted earnings per share primarily was driven by operational improvements of $0.15 lower raw material costs of $0.06 and lower share count of $0.03.

Now let's move to the pre-tax special items on Slide 7. In the third quarter, our reported results included 149 million of pre-tax special items approximately 90% of the charges related to two items. First $110 million non-cash charge primarily associated with the divestiture of the Forgings business in the UK and then Aluminum rolling mill in Brazil. Net proceeds associated with the divestitures are estimated to be approximately 110 million.

The second special item is the cash charge of $25 million associated with the planned separation. More details concerning special items for the quarter can be found on Slide 18 in the appendix. For the year, the majority of the special items incurred to date have been consistent with the stated plan of divesting of assets or businesses that do not fit with our focus. Businesses that require significant capital investment with unacceptable returns or businesses that are not material to our bottom line. As you would expect approximately 80% of the charges to date are non-cash.

Now let's move to slide 8. In the third quarter, EP&S' revenue was $1.8 billion,organic revenue was up 8%, segment operating profit was a record at 363 million, up 28%. The increase in segment operating profit was driven by several favorable items including volume growth in aerospace engines, aerospace defense and commercial transportation. Additionally, we had lower raw material cost, higher pricing and net cost reductions. The resulting segment operating margin expanded by 330 basis points year-over-year to 20.2%.

In the third quarter year GRP's revenue was also 1.8 billion, organic revenue was up 5%. Segment operating profit was 161 million, up 50% year-over-year. The favorable year-over-year improvement in segment operating profit was driven by growth in our packaging, industrial and aerospace markets. Also, we had favorable pricing in industrial and commercial transportation, lower aluminum prices and net cost reductions, including improvements in our internal scrap utilization. Despite the challenges in aluminum extrusions and the Tennessee transition, GRP segment operating margin increased 330 basis points to 9.1%.

Now let's move to slide 9 with the key achievements. Our EP&S business had record quarterly revenue for Aerospace engines and Aerospace defense. On a year-over-year basis, organic revenue was up as follows. Aerospace engines 11%, aerospace defense 18% and commercial transportation 6%. Favorable pricing improvements in the EP&F continued in the third quarter as we achieved an $18 million year-over-year increase in prices. GRP's commercial airframe revenue was up 12% organically year-over-year. Price improvements in the industrial products and commercial transportation markets resulted in an 18 million of year-over-year price increases.

Improvements in internal scrap utilization resulted in more than a 20% increase in internal scrap consumption versus the same quarter of last year. Arconic's return on net assets was 13.8%, which was up 550 basis points year-over-year. Year-to-date, capex is 412 million, down 85 million year-over-year.

Approximately 70% of the capex has been spent on return seeking projects as we expand aerospace airfoils, aerospace rings, industrial products and forged wheels capacity.

Lastly, a comment on our US pension asset returns. As of September 30, our year-to-date asset returns from approximately 17%. At the end of the year we will remeasure our net pension and OPEB liability, taking into account the full year 2019 asset returns and end of year discount rates. Through September, interest rates have declined substantially since 2018. If the remeasurement had occurred at the end of Q3, the strong asset returns would have partially offset the lower discount rate.

Before turning it back to John, let me briefly provide an update on our capital structure on slide 19 in the appendix. We finished the quarter with approximately 1.3 billion of cash after executing approximately $1.1 billion of share repurchases year-to-date. 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 flow associated with the share repurchases. Net debt to EBITDA stands at 2.25 times, which is an improvement of 7% compared to the third quarter of 2018. We expect that based on our current guidance fourth quarter, net debt to EBITDA will be less than the year ago quarter despite executing approximately 1.1 billion of share repurchases.

With that let me turn it back to John.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Thanks, Ken. And let's move to slide 10 on our key focus areas for all items. we are either ahead or on track with our commitments.Third quarter year-to-date operating cost reductions were 137 million. The 2019 annual cost reduction target is being increased to 180 million, up from our prior commitment of $140 million. Run rate operating costs are projected to be reduced by 280 million, up from our prior commitment of 260 million. Regarding pricing, we have three consecutive quarters of year-over-year price increases.

Third quarter year-to-date price increases are 111 million and as commented upon in the prior earnings call, price increases are not just a 2019 phenomenon. Now part of our rolling LTA renewal process with the future Howmet Aerospace business 2020 and 2021 price increases are already planned.

Moving on to capital allocation. Year-to-date we completed three common stock share repurchases totaling 1.1 billion. The weighted average purchase price was $20.67 for 53.2 million shares. Management has a total of 400 million of remaining common stock repurchase authority approved by the Arconic board in May of this year. In addition, our convertible notes settled in cash for $403 million on October the 15th and no new shares of common stock were issued. This retirement, which further reduces diluted share count by 15 million shares. This is additive to the 1.1 billion shares already disbursed on stock repurchases in 2019 and it also has the benefit of reducing both gross debt burden and share count.

Absence other activity, year end diluted share count is reduced to approximately 440 million shares, a 13% reduction year-on-year. capex continues to be on track with the year-to-date spend of 412 million, which is done what down 17% year-to-date. 70% of our capex is for return seeking projects and sustaining capital 30%.

Moving on to divestitures, we are on track. Year-to-date we have signed or closed five transactions with approximately 180 million of net proceeds including the transaction last week, which is the sale of our Chang one Korean extrusions plans for approximately $60 million. Our target proceeds were between $100 and $200 million. These five transactions upon completion will reduce annual sales by approximately $350 million with a limited operating income impact as they were close to break even in aggregate. We have a further two planned disposals.

Lastly, we have an update on the separation, we continue to be on track for our stated Q2 2020 implementation with the Form 10 filing expected to be available during this quarter. Appointment and recruitment of two boards and management teams are on track. Estimated one-time operating cost of separation and capex costs remain unchanged.

Having Howmet Aerospace, remain Co[Phonetic] results in debt breakage costs being a maximum of only $38 million. By stating this you can reduce a substantial part of the future capital structure.

Moving up slide 11 before updating guidance, I mentioned in Q2 that I intended to provide another example profit improvement as part of my statement that I saw price and mix making significant further contributions beyond the cost reduction program. This is further to the BCS example I provided in Q2. This time, I'll focus on Global Rolled Products. This segment improved operating income by 330 basis points in Q3 compared to the prior year.

As we look forward to 2020, a key driver of margin expansion will be the completion of the Tennessee Rolling Mill Profit Improvement Plan. At the end of 2018, we exited the North American packaging business and repurpose assets including making a $100 million investment to expand our Industrial Rolled Products business. The project is on track to be completed by the fourth quarter of 2020. The plan has been to transition from North American packaging and marginal business to Industrial Products, which is supported by the China common alloy trade case implemented by the International Trade Commission.

The trade cases enacted anti-dumping duties and countervailing duties on Chinese imports ranging from 96% to 176% effective December 2018 and we expect them to last for at least five years. These duties were applied to approximately GBP800 million of Chinese Industrial Rolled Products that were being imported into North America annually. Our transition to Industrial Products began in Q1 of this year and resulted in an unfavorable year-over-year impact in Q1 of $22 million. The second quarter improved, but we're still unfavorable year-over-year and an impact of $60 million.

As we discussed earlier, Q3 has improved once again to an unfavorable $5 million hit year-over-year, which is in line with our expectations. Q4 is expected to be our inflection point where we will see year-over-year profit. We expect this transition when complete, to more than double the profitability of our Tennessee Rolling Mill by the end of next year. Tennessee is our second largest rolling mill in terms of revenue. As you can model, eliminating low margin Packaging business in North America and substituting an increasingly profitable industrial roll coil business and sheet significantly adds to our margin expansion.

The second item that I would like to discuss is earnings volatility in the GRP segment, which results from changes in aluminum prices. We continue to improve our commercial agreements with pass through arrangements. Additionally, this year our aluminum hedging program no longer requires quarter end mark to market. This combination of pass-through contracts on our hedging program mitigates over 90% of our aluminum exposure in our Rolled Products segment. We expect reduced earnings volatility from aluminum prices going forward and so our business is essentially the conversion of aluminum ingot into [Indecipherable] in place and the dependency upon metal and hence volatility reduced.

Moving to slide 12. Finally, an update on our 2019 annual guidance. In the light of current performance, we are updating and raising our earnings per share guidance for the year. This reflects our performance expectations in the 4th quarter and the fact that year-to-date, we have already earned an adjusted earnings per share of $1.58.The adjusted earnings per share forecast for the year increases to $2.7 to $2.11. At midpoint, this would be an increase of approximately 54% year-over-year and if at the higher end would be in the 60% plus.

Annual revenue will be revised to $14.15 billion to $14.35 billion. This change is mainly attributed to the lower assumed aluminum prices for both LME and Midwest premium, which are mostly passed on to our customers and also to the divestitures, which are closed and planned to be closed by the during the fourth quarter.

Organic year-over-year annual revenue growth for the year is expected to be between 6 and 7%. Adjusted free cash flow guidance excluding separation costs for the year remains at between 700 million and 800 million. Further to the free cash flow guidance, capital expenditures are projected to be 625 million, excluding capex associated with separation. 2019 capex at the percentage of revenue is expected to be 4.4%. The capex guide for 2020 and going forward is less than 4% of revenue. Regarding free cash flow conversion, these are projected to be approximately 80% of net income in 2019.

The EBITDA guidance has been increased and narrowed to 2.3 to 5 million [Phonetic] plus or minus 25 million. At midpoint, this is an increase of approximately $350 million year-over-year, but the execution of our fundamental improvement profit improvement program including pricing. The updated guidance assumes that the Q4 737 MAX will remain at current levels, pending the outcome of regulatory release of the aircraft.

Let me provide context for the full year guidance. Earnings per share at mid midpoint to been raised again and by more than the from Q3. The savings program results, as noted earlier, have been raised by a further $40 million and have more than offset the effects of three items. Firstly, the increase in estimated cost to cover compensation due to the higher profit performance and the higher share price estimates for the fourth quarter. Second, slightly lower rolled products aluminum coil sales due to a quarter of inventory correction by distributors following the overly importing products from Europe to cover the market shortfall emanating from the Chinese tariffs and thirdly, the effect of the GM strike, which has now been settled. The midpoint of the EBITDA guidance range has been raised and tightened.

Moving to slide 13. You will see that's a new segment historical performance. This segment information, shows the EBITDA performance of what will become part of the future Howmet. This shows that Howmet, it is in the top quartile of aerospace companies, and it shows it is a truly differentiated company also of note is the improvement in rolling asset returns and for [Indecipherable] also a truly unique set of rolling assets.

Improvements in volume, price and the cost that program are improving revenue segment operating profit and margin year-over-year and we expect continued year-over-year margin expansion in both segments in Q4. As we look to 2020, we will be providing revenue and profit guidance on the next earnings call as we get place greater clarity on aerospace build rates which impact both segments.

Regarding 2020 corporate costs and free cash flow conversion, projections are as follows. Annual corporate costs, including corporate depreciation and amortization for Howmet Aerospace are expected between to be between 80 million and 90 million. Arconic Co [Phonetic] will be similar, but between $75 million and $85 million as previously mentioned, the total corporate costs of the combined two new businesses will be less than the corporate costs of today's Arconic Inc.

Regarding free cash flow conversion. For Arconic Inc, it is a projected to be approximately 80% in 2019. In 2020 we estimate that Howmet Aerospace free cash flow conversion will be higher than 80% and Arconic Corporation to be less than 80.%. Two final items before I turn it over to Q&A. First regarding Grenfell Tower last quarter, I mentioned that in addition to funding replacement cladding for relevant high-rise public building and sector housing, the UK government has established a fund to refurbish private high-rise buildings which have aluminum composite cladding systems and which are unlikely to meet future UK building regulations. This fund will cover buildings which owners architect and structural engineers specified the ACM from a AAP, SAS our French subsidiary. This cladding was then fabricated and fitted by contractors as one component of the cladding and insulation system. This potential cladding remediation will be beneficial regarding contribution of these systems to the future fire risk in UK high-rise buildings. The details of the refurbishment process and fund still continue to be developed.

Secondly, the first UK public inquiry has now been completed and its report was issued last week. This is available for your reading. You will recall that the first inquiry and report has the objective of examining the events that took place on the night of the fire and how the fire spread and the response to it. The second public inquiry will commence in 2020 and is expected to most likely report out in 2021. This inquiry will examine why the events unfolded as they did and why certain choices were made with regards to the refurbishment of the tower.

Lastly, our next quarter updates will be the Form 10 filing, which will be available later this quarter the Q4 results at the end of January, which will include guidance for 2020 and finally, assuming everything continues to be on track to separation investor days will be held later in February for Howmet Aerospace and Arconic Corp, which the guidance and outlook, will provide for each of the separated companies. A save the date note will be issued.

And with that, 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 David Strauss with Barclays. Please go ahead.

David Strauss -- Barclays -- Analyst

Thanks, good morning.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Hi David.

David Strauss -- Barclays -- Analyst

John, you previously talked about I think 300 basis points of margin upside BCS. Can you give us an update as to where that stands in terms of your progression toward that target?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

I think we've already exceeded it, can't remember the exact number. Ken is just going to pull it up, but I think we will do that. But, Ken, if you can?

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Yeah, so Good morning David. The 8-K filing we did last we can -- they have the former segment structure and then you can look at the adders for each of the businesses but if you looked at BCS from 2018 to the second quarter of 2019, looking at about 190 basis points of improvement so that's accelerated from end of '18 to Q2, so to John's point already there; but if you look through the 8-K filing you could see that the former segments have accelerated from 2018 to the current state and then you can also see that BCS has accelerated and wheels has accelerated as well.

David Strauss -- Barclays -- Analyst

Okay. As a follow-up on the, on the free cash flow guide for the full year. It looks like working capital days were up a little bit in Q3. Where working capital days have to get to 10 in Q4 to to hit the free cash flow target for the full year?

I think it looks like 6 to 700 million in free cash flow that's implied in Q4. Thanks.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah, I'll go in first and time to cross the Ken. First of all, inventory days improved in the quarter, we were slightly off on the receivable days but Ken, if you can comment?

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

So you're exactly right. So we missed about one day. On the DSO primarily a lot of our customers have been pushing our terms, however, inventory payables offset, I don't expect a material change David, in terms of working capital contribution for the inventory side of the house, but in aggregate, our working capital will be contributed to free cash flow as we exit the year.

David Strauss -- Barclays -- Analyst

Okay, thank you.

Unidentified Speaker

Thank you.

Operator

Your next question is from the line of Gautam Khanna with Cowen and Company. Please go ahead.

Gautam Khanna -- Cowen and Company -- Analyst

Hey, good morning guys.

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Hey, Gowtham.

Gautam Khanna -- Cowen and Company -- Analyst

Couple of questions, first, I was hoping you could talk about the 737 rate you guys actually experienced in Q3 and what you expect in Q4 and maybe just categorize that by engine and airframe. And then I have a follow-up.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah. The aircraft we understand is being built out at 42, spirits [Phonetic] on the fuselage has been building at close to 52. And in engine, I must say it's around about 48 engine build and maybe a little bit of, I'm going to say inventories come out of on that side in favor of the CFM where CFM space have been prioritized in our supply.

Gautam Khanna -- Cowen and Company -- Analyst

That's your expectation for Q4 as well?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah, exactly, I think,just stay in line with -- I think the next events is is the recertification, which everybody is waiting for and hopefully that will occur at the end of the year and that will help us when we give revenue guidance at the end of January and chose not to do anything further at this stage until we know what the position is regarding that aircraft.

Gautam Khanna -- Cowen and Company -- Analyst

Okay, and as a follow-up. May I ask if some how do you have this all about the capital structure in the pension allocation I don't might split between the two new entities and maybe, Ken, if you could just talk a little bit also about where the pension resides right now, Pension OPEB deficit the older proportion to the two companies?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

[Indecipherable] Basically the majority of the, the pension and its allocation are set by the plan. the allocation of the corporate costs into the two future corporate headquarters in total is probably about 20% discretionary, which is the remaining corporate, what was the allocated for retirees. We have a plan and let's say we are going through that and to finalize that at December Board meeting to get that one of the capital structure nailed down.

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

And the only thing I'd add to that document is , Gautam We'll line up the pensions. On January 1, you should have a view of the capital structure in Q1 as we're targeting separation in Q2. So you'll see the capital structure in Q1.

Gautam Khanna -- Cowen and Company -- Analyst

Okay. May just ask one last one, John, are you actually considering staying on as part of the management structure for Howmet...

John C. Plant -- Chairman Of The Board, Chief Executive Officer

I think I don't want [Phonetic] to pre-empt the search committee of the Board which is is active been moving through that and first-round I think interviews that have been completed. I will engage with the search committee as they say shortlist during the latter part of November and then see where we are. I mean, the way that we've left it is that I have agreed to provide continuity through the piece and beyond as necessary and meanwhile, the search committee is trying to find the the right candidates to go forward and then it remains for a dialog between myself and the Board, should that process come to fruition and then what engagement with they like to see and what engagement shareholders would like to see for me going forward.

Operator

Our next question is from the line of Carter Copeland with a Melius Research. Please go ahead.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning. Question on the, on the capex for you stated for 2020 the expectations around the less than 4% of revenue for the aggregated entity, should we think about capex

for the two pieces being materially different than that or having different investment profiles 2020 and beyond?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

They first of all, the 4% was not meant just for 2020 actually said 2020 and beyond Carter.

Carter Copeland -- Melius Research -- Analyst

Okay

John C. Plant -- Chairman Of The Board, Chief Executive Officer

That was trying to give like a view of how I think capital should be deployed in the business on a long-term basis. And so I was trying to get more meaning into those words, which may or may not been spotted. Inevitably, there will be a difference between the two companies. But in my current thought, which will be amplified in those Investor Day's going forward, is that both entities will be billing for.

Carter Copeland -- Melius Research -- Analyst

Should we consider that there, I guess at the heart of the question is, are there different investment profiles and opportunities in the two entities, I would assume that some of the, the rate upside for Howmet will point to different opportunities but I'm not sure how you consider that comparing?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah, I mean if you look at the underlying, I'll say, growth and growth opportunity with what I think I tried to seize a truly differentiated business then I think the prospects for the percentage growth over that [Indecipherable] the next phase of the aerospace cycle inevitably are greater and it's particularly not only when I look at the future aircraft build but when I, when, really importantly for me is that when I look at the last decade and beyond, then we've had Aerospace bills above 6%, maybe 6% or 7% and of course, what that's been doing is to put a huge amount of aircraft, which will be in the aircraft Park and and I'd be particularly focused on what is the increase in Aircraft Park like over the next decade and therefore the solidity of the future order book and things like just take the CFM engine, which is, I mean, I'm not going to peak in service visits just back to shop until 2025. So when you look at the superb Aerospace, I'll say production over the last decade or so those air crafts, were going to be in the park and requiring future servicing which is really important for our engine airfoils business and I'll talk more to that in February.

There are also growth opportunities on the the Rolled Products side but in, I mean these are huge similar asset investments and I'm only intending that we would add capacity breaking for bottlenecks, where we see and I do see the opportunity of increasing substantially the throughput from our mills with very little capital.

Carter Copeland -- Melius Research -- Analyst

Great, thank you for the color and then Ken, just a quick follow-up, can you help us maybe with the sensitivity around pension and OPEB funding as you look out now, given the change in the discount rate?

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Yeah. Carter, would what I would look at is the 10-K from 2018, we gave a two-year look in there in terms of the cash contributions. Our view that two-year average based on where we are right now, if we had to strike it today and remeasure at those asset returns, it's 17% or about better the 90% of our peer set if you push all that together, I don't see a material change from the contributions that are listed in the 10-K from 2018.

Carter Copeland -- Melius Research -- Analyst

Great, thank you very much.

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Thank you.

Operator

Our next question is from the line of Seth Seifman with JP Morgan. Please go ahead.

Seth Seifman -- JP Morgan -- Analyst

Thanks very much and good morning. John, I wonder if you could talk a little bit about the 787 rate decrease that Boeing announced and the impact that that might have?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah, I mean I seen the announcement of 14 aircraft coming out of 12 at the end of 2020 inevitably, because some of our products, for example, our the business which will LTE impacted before that, from the supply chain and as I think everybody knows that. In fact, our total content, full Howmet is actually greater on a composite aircraft compared to a -- it's a new aluminum aircraft, which is obviously good news in terms of the overall direction for the company, If there were more composite aircraft builds in particular for fasteners. So when we look through the whole piece for next year at the moment we see the impact of that rate reduction probably around about $0.02 impact, which within the context of our 2020 guidance, when we give it, really just lost in the noise.

Seth Seifman -- JP Morgan -- Analyst

Okay, thanks and then maybe, following up on the capex discussion, you were just having I mean 70% of the is this year's capex, I guess return seeking. I mean the implication there, should we think about that kind of the maintenance capex level is 200-ish million or a little below and the gap between that and for a little bit sub 4% of sales that you talk about is expectations of future return seeking projects?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah, I mean I think it's probably a little bit below the 200 million and I'm going to probably try to narrow that for you a little bit more accurately the end of the year and we've completed the year and the future percentage will obviously vary by the compression of the top line of the total capital expenditure but as you can imagine when you adjust for the underlying growth of our business, those are going to be up in 2020, you would just obviously negatively for the disposal and then apply a sub 4% number, then you can see it's going to be less than this year's number for sure and maybe the percentage, which will be maintenance will flex, according to the total number is and that we intend to give you at the end of January.

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

And Seth, yes, the only thing I'd add to that is there's core major projects this year on the capex that we're in that return seeking number, it was that aerospace airfoils expansion in Whitehall Michigan, the aerospace rings and rental KUKA Manga [Phonetic] in California and the forged aluminum wheels in Hungary. Those projects those growth projects pretty much complete this year fully operational in Q1 of next year might have only about a $50 million capex tail in 2020 for the Howmet Aerospace business.

Then if you look on the GRP side, it's the industrial expansion that John talked about probably have about a 40 million to $50 million tail next year there. So the growth capex major projects are done to John's earlier point if there will be growth, it will be the debottleneck some plants at some smaller amounts. That's why we feel so comfortable in the sub-percent capex spend.

Seth Seifman -- JP Morgan -- Analyst

Great, thanks very much.

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Thank you.

Operator

Your next question is from the line of Martin [Indecipherable] with Jefferies. Please go ahead.

Martin Englert -- Jefferies LLC -- Analyst

Hi, good morning everyone. In the GRP, you noted strength and Packaging volumes. Can you remind us again of your packaging exposure, how much volume growth you saw there for the quarter versus the prior year? And also if any contracts reopening soon and anticipated pricing on that?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Yeah, I'll give you the overall context, I'm going to give a push across the Ken for the specific percentages, so let's 50 [Phonetic] by region, North America Packaging zero. We pulled out of it and that's the transition to Industrial, which had been talking about. In Russia, we have something like a 95% plus market share of the packaging business in Russia and indeed export a little bit into Europe with and examining further opportunities there given what I think is an emerging market for additional packaging in that region.

And we also -- that exhibited strong growth in the in the third quarter, and this year. In China, we also have packaging. It also grew and I mean that we don't have the market share that I talked about can be coming out of Russia, but again, good growth in the quarter, and those are the two regions of the world where we still do packaging and as you know we will have withdrawn from Brazil by next year, so that I choose not to comment on [Indecipherable] Ken specific [Indecipherable]?

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Yeah, hey, Martin. So for third quarter. Slide 22 the appendix, it's up about 17% year-over-year for the region that John mentioned, and again, we've taken our traditional organic revenue by market chart for total Arconic Inc and split it out into the two new segments because you have visibility there in terms of what the growth rates are as well as the distribution of revenue. So for example, as I mentioned earlier at Howmet Aerospace, you can see that 70% plus of the revenue is tied to [Indecipherable].

Martin Englert -- Jefferies LLC -- Analyst

Okay, thanks for all the color there. I appreciate it. And maybe just circling back, I know you're expanding the Tennessee or repurposing the Tennessee GRP operations away from Packaging but have you given any thought about reengaging the North American packaging market after your non-compete concludes like 2020?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

We haven't decided anything at the moment. That's not been our focus. As you say, we have a non-compete and and therefore for us, it's not, it's been a move to point. I think the only thing I do note is that I'm going to call it the anti-plastic environmental movement seems to be gathering speed probably led more from Europe and Asia, but there are clear examples where major of beverage companies moving to aluminum can and what that produces over the next few years, I don't think any of us truly know at this point, I don't think it's a point yet where we can say is even is a clear case or market capacity shortage and maybe we'll just watch that and see what opportunities if any come of it and to see what response the-- I'll say in the plastics industry makes to this because they've been particularly innovative over the years. So I see currently no case with jumping back into something and I think a wait and see is probably more appropriate at this stage and we see how it develops.

Martin Englert -- Jefferies LLC -- Analyst

Okay. Again, I appreciate the color and nice job with the results.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Josh Sullivan with Seaport Global. Please go ahead.

Josh Sullivan -- Seaport Global -- Analyst

Hey, good morning.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Hey, Josh.

Josh Sullivan -- Seaport Global -- Analyst

Can you just expand on the overall pricing improvements are you getting price on the growth capex, you're investing in here and then what products or markets are you really having traction with on the pricing front?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

It's going to normally reversal. It's a normal. I mean on GRP, it's a function of the industrial pricing year-on-year because of the international Trade Agreement and combine that with shortage in the market in terms of shortage of capacity, so there is that, and that combined with the mix opportunity is pulling out of North America Packaging.

On Aerospace -- on Howmet Aerospace, it's really examining each of the contracts as they come up for renewal and I'm going to call it as an average cycle of LTAs there's a some in every year, but on a roughly a three-year cycle, so that we have now clear line of sight those which in 2020 and 2021 and so on, and really examining the competitive dynamic in those segments and also making sure that Howmet really has the value for what I think is some truly unique capabilities, especially in the hot end of the aircraft engine and the most, the best example I'd like to give an is the engine temperatures, which are there on the latest military jet so for example, the Joint Strike Fighter those operated very much higher temperatures in the commercial engine markets. But, and we have the unique capabilities to meet those requirements with not only the sophistication of the calls to go inside these foils to provide the air flow, but also the coatings that go with them and until operate substantially above the melt temperatures of those, and those are up well into the well above 3,000 degrees Fahrenheit.

What happens afterwards of course is that with the emissions requirements for commercial aviation, the -- so lower, I'll say, lower emissions higher fuel efficiency. What that does is, basically it's more pressure at higher temps and so that unique capability that we have enables us to flow that down into successive generations of the commercial aerospace market and so that would be the, also the prime example but it's not confined just to that I would look at other commodities as well but that would be the best example, just to give you one on the telephone here and so I just want to make sure that unique differentiated technology that we have is truly valued in the industry.

Josh Sullivan -- Seaport Global -- Analyst

That's helpful and then just on the divestiture front, do you feel you mostly have the portfolios of the two entities, where you want them at this point or could we see some additional portfolio shaping that hasn't been announced so far?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

I think in terms of disposals when we've completed the next to, that will probably be it in terms of, I'll say, disposal of assets, which I saw as fundamentally under-performing and contributing in fact dragging on the overall portfolio and choose that rather than trying to -- I'll say -- I think the view that we can fix everything. The answer is no, there certain things we can't and shouldn't bother with. Just play our energies to where we see more opportunities and so getting rid of things, which I think we are structurally disadvantaged is the best approach to focus our energies on where we had true differentiated advantage for the future and to see where we can expand those both but organically, but also if there are opportunities, we look at those as well so. So if you're asking [Technical Issues] to sell more stuff, the answer is fundamentally no.

Josh Sullivan -- Seaport Global -- Analyst

Thank you.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Rajeev Lalwani with Morgan Stanley. Please go ahead.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Good morning, John. Morning, Ken. A question on the revenue side, given all the moving parts coming into the end of the year. Can you give us some puts and takes as we look into next year around the impact from aluminum, any end market noise like the 787 or commercial transport? And then the impact of asset sales there too essentially, I'm trying to see if we shouldn't be thinking of next year is being a mid single-digit plus type year organic revenues or overall revenues for that matter, given all the moving pieces?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Let me deal with metal first, because again, I'd like to blow away if I could blow away once and for all the confusion we sometimes come around that. Inevitably, I mean a Howmet Aerospace low volatility company top quartile performance. That's the way to think about it. In terms of GRP, inevitably, there is metal volatility associated with essentially with the pack in your business two of those entities, but we've been working hard to reduce the volatility on earnings because of the pass-through aspect of it. We are a conversion business of course, at the top line on what will be Arconic, inevitably if LME drops as its dropped let's say $150 per ton in the last few months. After that a dropping Midwest premium inevitably it's a revenue fall so that's why the large reason why we've trimmed our guidance for the year, it's irrelevant for the bottom line and so in the quarter, Yeah, revenue, we are probably 30 million light funds [Phonetic] metals was like almost 70 million and so we're over performed on an organic basis.

When you look forward, what I expect is fundamentally low volatility from Howmet, aircraft milled increases, we'll get the max out the way and so, I see that we should be adding value over and above whatever aircraft build-to-date is the way I think about Howmet. In terms of GRP, there you've got a little bit of volatility on the say top line of Causeway this LME [Phonetic]

go and Midwest premium less dampen volatility in the future. On the bottom line, but inevitably, you've got fundamentally a little bit of a fraction more volatile business that exposed obviously a much wider mix of end markets so industrial, commercial, transportation plus Aerospace and Packaging outside of North America.

And whereas it those markets go I'm thinking again Aerospace up, industrial steadily, commercial transportation is probably be on a downward thing at the moment in 2020. But when you look at the opportunities from the shortage, which was in capacity in the North American aluminum market. I just think it ends up as a wash and with our ability to bring further throughput from our assets. I mean, I am encouraged f by our GRP business. So more to be done, but that's the way I think about the top line.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Okay. And then as a follow-up. Looking at the Engineered Products business, previously you talked a lot about operational headwinds where are we in that overall any parts of the business where there is some weakness and then relating to that as we do start to get the maximum ramping again. How confident are you that we will start to see some of those prior headwinds start to show up again?

John C. Plant -- Chairman Of The Board, Chief Executive Officer

MAX being where it is, has been obviously has been a steadying influence for us it's enabled us to further improve down the learning curves on the LEAP engine in particular. So on that side, I'll say everything is smooth as the way I see the engine build developing into 2020, I would imagine it will stay where it is for the time being and may begins to inflect upwards toward the back end of the year should Boeing increase the production rate to the 57 that they've talked about.

So with the additional capacities coming on stream from both Whitehall for the casting operations and Morristown from the core operations, that's going to take a lot of stress out of our system and with the revenue opportunity is delivering more. So I don't expect headwinds going forward in terms of production issues and we trying to address those this year including where we've had capacity shortage in our structural castings business.

Rajeev Lalwani -- Morgan Stanley -- Analyst

Thanks, John.

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Paul Luther -- Director of Investor Relations

John C. Plant -- Chairman Of The Board, Chief Executive Officer

Kenneth J. Giacobbe -- Chief Financial Officer, Executive Vice President

Unidentified Speaker

David Strauss -- Barclays -- Analyst

Gautam Khanna -- Cowen and Company -- Analyst

Carter Copeland -- Melius Research -- Analyst

Seth Seifman -- JP Morgan -- Analyst

Martin Englert -- Jefferies LLC -- Analyst

Josh Sullivan -- Seaport Global -- Analyst

Rajeev Lalwani -- Morgan Stanley -- Analyst

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