Boeing uncertainty dampens Arconic guidance

Pittsburgh — Arconic provided conservative 2020 sales and production guidance to investors Monday due to uncertainty regarding Boeing's future production of the 737 MAX airline series, with the aluminum product manufacturer warning specifically of the downside potential.

"Given the uncertainty to which Boeing will exactly announce any future increases in production plans, this causes me to provide a wider bandwidth of guidance than would be normal," Arconic CEO John Plant said.

Boeing suspended production of 737 MAX aircraft in December after they were grounded following two crashes. Boeing is one of Arconic's top end-product consumers.

Arconic provided full-year revenue guidance of between $13.9 billion and $14.2 billion, with the top of the range matching its 2019 revenue of $14.2 billion.

Plant said revenue in the company's aerospace segment is expected to increase year-over-year if the negative outcome of the 737 MAX situation was discounted.

"If we were to include the impacts of the 737 MAX, aerospace revenue is expected to be flat year-over-year," he added.

Plant said Boeing's updates for 737 MAX production would guide Arconic's decisions regarding production and labor cuts.

"We're flexing and clearly deleting over time," Plant said, in reference to workforce management. "When Boeing themselves have greater clarity regarding production, because we have seen a lot of noise and different assumptions, that is critical to that decision of how much we're going to flex labor and cost structure."

Plant said the company's capacity was still supported by production for other aircraft models. However, there were still challenges should the company need to transition production capacity away from the 737 MAX and towards other aircraft.

"The constraint around tooling and specific specialty alloy requirements is such that you don't say, 'Well, we're making less of these, so we can flip it up and make more of those,'" Plant said.

"We do see Airbus trying to make more engines, and that will be great, but we know some of the issues there," Plant added. "It isn't as though that capacity is fungible. You can't move it to somewhere else. It really doesn't work like that."

COMMERCIAL TRANSPORTATION PRESENTS HEADWINDS

Plant said Arconic would have to adjust its production strategy due to headwinds in the commercial transportation market in 2020.

"Commercial transportation is expected to experience headwinds in 2020, driven by slowing manufacturing and freight growth, lower new truck orders and the increased current inventory levels," Plant said.

Arconic plans to counter the headwinds with expansions in its forged wheel production segment to compete with steel producers.

"We continue to penetrate the steel wheel market with aluminum wheels," Plant said, adding: "Our low-cost manufacturing wheels expansion in Hungary is now fully operational, and we will leverage our global footprint, so the global rolled products business will mitigate commercial transportation headwinds with cost reduction actions."

Arconic Chief Financial Officer Kenneth Giacobbe said the plant expansion in Hungary will take advantage of a growing end-market opportunity for aluminum.

"If you look at all the wheels right now across the globe, only 19% of them approximately are aluminum, so there's an opportunity there," Giacobbe said.

Q4 SALES FALL 2%

Arconic's total sales slipped in the fourth quarter of 2019, dipping 2% year over year to $3.4 billion.

For full-year 2019, Arconic reported $14.2 billion in sales, up from $14 billion in 2018.

The Pittsburgh-based company's sales were supported by slight increases in shipments from its engineered products and forgings segment. The segment had shipments totaling $1.73 billion in Q4 and $7.1 billion in full-year 2019, up from $1.72 billion in Q4 2018 and $6.80 billion in 2018.

Arconic's shipments decreased in its global rolled products business. The segment's Q4 shipments fell 5% year over year to $1.67 billion. Full-year GRP sales in 2019 dropped 2% year on year to $7.1 billion.

Arconic's Q4 net income totaled $309 million, compared with $218 million in the same quarter last year. The company reported full-year net income of $470 million, down sharply from $642 million in 2018.