Alcoa’s (AA) Engineered Products and Solutions (or EPS) segment supplies to the aerospace sector. It’s expected to be Arconic’s crown jewel after it’s listed as a separate company on November 1, 2016. The segment will compete with companies such as Constellium (CSTM), Precision Castparts (BRK-B), and Woodward (WWD) in the aerospace component space (ITA).
During its 3Q16 earnings call, Alcoa reduced the EPS segment’s fiscal 2016 revenue guidance to $5.6 billion–$5.8 billion from the previous guidance of $5.9 billion–$6.1 billion. The company also slightly lowered the EBITDA (earnings before interest, tax, depreciation, and amortization) margin guidance to 21% from 21%–22%. Alcoa also lowered the EBITDA margin guidance for Firth Rixson to 14%–15% from 14%–16%.
It’s worth noting that Alcoa also lowered the EPS segment’s revenue goal and EBITDA margin goal during its 1Q16 earnings call. Alcoa’s 1Q16 earnings were met with sharp negative reactions, mainly due to lower guidance for the EPS segment.
Alcoa cited inventory destocking, lower aircraft build rates, and model transitions as the near-term headwinds for its EPS segment. It tried to allay some of the fears related to the slowdown in aircraft build rates as a short-term headwind.
The company expects the aerospace demand to gain traction in the medium to long term, given the historically high orderbook and lower cancellation rates. You can read Why Investors Might Have to Be Patient with the Post-Split Arconic to explore the key drivers of the EPS segment’s performance.
You can also read Alcoa’s Split: Do the Benefits Outweigh Short-Term Challenges? to find out how Alcoa’s split could play out in the short and long term.