Arconic Corporation (ARNC) on Q1 2021 Results - Earnings Call Transcript

Operator: Good day and welcome to the Arconic Corporation’s First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Shane Rourke, Director of Investor Relations. Sir, the floor is yours. Shane Rourke: Thank you, Lara. Good morning, and welcome to the Arconic Corporation first quarter 2021 results conference call. I’m joined today by Tim Myers, Chief Executive Officer; and Erick Asmussen, Executive Vice President and Chief Financial Officer. After comments by Tim and Eric, we will have a question-and-answer session. For those of you who would like to follow along with the presentation, the slides are posted under the Investors tab on our website. Tim Myers: Thank you, Shane. Good morning, everyone. Again, welcome to our first quarter 2021 earnings call. We had a strong start to the year, and Erick and I are excited to update you. So, let’s start on slide 4 to discuss the highlights of our first quarter performance. The markets we serve are recovering and revenue increased meaningfully in several markets during the quarter. Industrial revenue grew 18% year-over-year, 15% on an organic basis. This was due to a combination of the effects of the U.S. trade case and the ramping up of the investment we made in Tennessee. Ground transportation revenue grew 25% or 17% organically year-over-year, driven by recent platforms we were awarded, easily overcoming the semiconductor chip shortage and North American light vehicle production being down 4%. Additionally, our packaging sales were up 23% or 16% organically at our Russia and China facilities. Net income was $52 million, and adjusted EBITDA in the quarter was $179 million, an increase of 19% or $28 million, sequentially benefiting from rebounding markets and the $100 million in structural cost-outs we implemented last year. In the quarter, we secured agreements totaling $3.5 billion of expected long-term revenue with multiple customers across packaging and aerospace. In packaging, we negotiated agreements with six customers including blue-chip companies such as Ball Corporation, AB InBev, totaling $1.5 billion of expected revenue from 2022 through 2024, filling the remainder of the 600 million pounds of incremental annual capacity that we’ve been discussing. We easily could have booked more than 2 times this volume at attractive prices if we had more incremental capacity available to sell. In aerospace, three customers awarded us new multiyear contracts totaling more than $2 billion in combined future sales and extending our position as a premier supplier through nearly the end of the decade. Erick Asmussen: Thanks, Tim. I’ll start on slide 6 with highlights. Revenue in the first quarter was $1.7 billion, up 15% from the prior quarter and down just 1% organically year-over-year. Net income for the quarter was $52 million or $0.46 a share compared with $46 million or $0.42 a share in the first quarter of 2020. Adjusted EBITDA was $179 million, which was an increase of $28 million, or 19% from the prior quarter. Free cash flow for the quarter was a use of $322 million, primarily due to the acceleration of $200 million of U.S. pension contributions to January of this year, and increasing working capital for revenue growth and metal price to our inventories. As previously announced, we issued an add-on $300 million to our senior secured notes due in 2028 to fund the $250 million pension contribution associated with the annuitization transaction that was completed last week. We ended the quarter with the cash balance of $763 million and total liquidity of approximately $1.6 billion. Before I move on to discussing our performance in more detail, I want to highlight that our Q1 adjusted EBITDA of $179 million is roughly 90% of our pre-pandemic Q1 2020 adjusted EBITDA, even though aerospace revenue was down 55% organically year-over-year. Turning to slide 7. Revenue increased $64 million year-over-year, primarily as a result of metal price, offset by volume, mix and divestiture impacts. Adjusted EBITDA for the quarter was $179 million, down $25 million year-over-year, largely because of volume and mix resulting from lower aerospace revenues, which was partially offset by strength in ground transportation, industrial and packaging markets. We achieved net savings of $23 million, primarily related to our $100 million structural cash conservation initiative from last year. And other EBITDA impacts in the quarter was a negative $10 million, primarily due to allocation of cost differences from carve-out accounting from the first quarter of 2020. Turning to slide 8, I’ll provide more detail on our segment performance. Starting with our Rolled Products segment. Revenue was approximately $1.4 billion, up 6% organically year-over-year, primarily as a result of strength in ground transportation, industrial and packaging markets. Adjusted EBITDA was $165 million, flat with last year as price benefits and cost actions fully offset the impacts of lower volume and mix, driven by declines in aerospace. Revenue in our Building and Construction Systems in the first quarter was $236 million, down $20 million year-over-year because of pandemic-related disruptions continued to affect construction projects. And adjusted EBITDA was $28 million, only down $2 million year-over-year as cost actions nearly offset volume, mix and price declines in the quarter. Tim Myers: Thanks, Erick. Now, I’d like to turn our attention to the future. The favorable macro trends we see in the markets we serve, the incremental capacity we’ve unlocked, the new contracts we’ve secured and the strong momentum we are delivering on our productivity initiatives position the Company very well for substantial and sustainable growth. In terms of new agreements in the packaging market, as you see on slide 11, we continue to requalify with major customers in North America following the expiration of our non-compete. Today, we announced that we’ve negotiated agreements with six can makers totaling approximately $1.5 billion in expected revenue from 2020 through 2024. These agreements should enable us to fill the remainder of the 600 million pounds of capacity in our North American production network during 2022. The agreed-upon pricing, combined with strength in the industrial and automotive markets, should allow us to deliver at the higher end of our previous EBITDA growth guidance for the incremental 600 million pounds of capacity. As I mentioned earlier, we received expressed interest for more than double, actually nearly triple, our available capacity. In the aerospace market, on slide 12, we’ve signed contracts with Boeing, Spirit AeroSystems and Gulfstream that combined make up roughly $2 billion in expected future revenue over the terms of the contracts. Taken as a whole, the new contracts improve our aerospace pricing, mix, share, volume and duration. Through these contracts, we’ve maintained our position as a premier supplier in aluminum components across the entire airframe, including fuselage sheet and wing skins throughout the expected recovery and beyond. As you can see on the slide, we believe that our revenue reached a trough in the fourth quarter of last year and we are looking forward to a steady, sustained recovery. Longer term, we expect aerospace to recover to pre-pandemic levels in 2023 and 2024. Another reason we have confidence in our long-term growth is that many of our products contribute to environmental sustainability, as shown on slide 13. As you know, consumer demand for environmentally responsible products and components continues to grow. Automotive light-weighting, particularly in large SUVs and pickups, continues to drive aluminum penetration. Overall, aluminum was 11% of vehicle weight in 2018 and is expected to grow to 15% by 2030, a 36% increase. With the content we delivered on the 11 new or greatly expanded automotive programs in the first quarter, we’re now on a total of 68 nameplates, serving 20 different customers. Operator: Thank you, sir. Your first question will come from the line of Curt Woodworth from Credit Suisse. Curt Woodworth: Great. Thanks. Good morning, Tim and Erick. Congrats on a great start to the year. I was wondering if you could provide a little bit more color with respect to the near-term outlook, right? Like, I mean, Ford is discussing some pretty material production cuts in Q2. It seems like thus far order entry in aero has been relatively stagnant. So, I’m just curious, sequentially as we move into the second quarter, how you see things shaping up? Tim Myers: Sure, Curt. And thank you, we were pleased with the quarter. I think, the team did a very good job of bringing down the opportunities in front of us. The semiconductor issue, on its surface, probably had an impact of maybe $10 million of EBITDA in the quarter. But, we were able to pivot quite a bit of that capacity into the industrial segment, which is relatively strong. We probably forecast the impact to be greater in terms of automotive this quarter. But also, we had a little more visibility. So, we’ve already pivoted quite a bit of our supply chain over and gotten the materials we need to make more industrial products this quarter. And so, my hope is that our commercial team is able to sail through the semiconductor chip shortage, and we’re going to continue on. Curt Woodworth: Okay. And with respect to some of the new, I guess, contract extensions or agreements in aero and also in packaging, can you give us any sense for the profitability of the packaging deals you were able to secure? And then, on aero, you talked about improving mix, volume share. Can you give us any sense of what that could imply for mid-cycle profitability increase in that business? Tim Myers: Sure. So, I mean, first of all, 600 million pounds, upper end of the range on the 100 million to 120 million. I think, you can kind of back into what the profitability per metric ton is for the combined opportunity there. With the level of interest that we had in -- from the can makers, we were able to, I think, do a fair job of capturing value in terms of terms and pricing and also picking lanes that were good for us and also getting the specifications that we were excited about. So, I was pretty pleased with how that came out. In regards to aerospace, the contracts, they vary in terms of their longevity across the three customers. I can’t really get into specifics there. But what I can say is, if we see 2019 build rates, we would see an uplift in price and volume collectively across those three customers, and mix. Curt Woodworth: Okay. And then, just last one on pension. Can you quantify what the impact of the pension reform in the stimulus bill was in terms of the amortization schedule doubling, and I think they raised the interest rates for? And then with the prefunding, I know you have slide 22 in the deck. How would that -- would those numbers look similar for ‘23 in terms of your cash outflow? Erick Asmussen: So, to answer your question on the impacts of the legislation reform, it essentially smoothes -- it doubles the rate of smoothing. So, to some extent, our $50 million that you have on slide 16, it had a dramatic reduction of that because it spreads it over double the years. As far as the impacts on ‘23 and beyond, you’re starting off a base of 50. So, volatility of interest rates and mortality have -- are starting with a much smaller base. So Curt, the way to look at it is it will have impact but on a very, very small base. So, you should expect ‘23 and beyond to be in a similar level. Operator: Your next question will come from the line of Josh Sullivan from The Benchmark Company. Josh Sullivan: Yes. I mean, it’s really great you guys are filling the announced capacity so quickly that I think Erick already said you had tripled the request that maybe you had available. But, what are your thoughts on industry capacity? Historically, the rolling market faced some overcapacity cycles. Just what are your thoughts on balancing gross versus capacity discipline? You obviously have a pretty attractive cash profile building up here. Just curious on your thoughts about that. Tim Myers: I think that we’re going to continue to focus on the types of opportunities that we have in the past. The pricing levels that you have in this industry in terms of thinking about greenfield capacity probably don’t support that. And so, what we need to do is continue looking for affordable opportunities to invest in our footprint, so that we can continue keeping the capacity in the assets that we have. And the market is there, certainly. And we’re going to maintain our discipline in terms of how we capitalize on those opportunities. Josh Sullivan: Got it. And then, just on the Extrusions. What do you think the cadence recovery looks like? Is there anything in the infrastructure bills or environmental regulation that you see that’s suggesting an uptick in any particular products? Tim Myers: I think fundamentally for that business to recover, we need to see the aerospace volumes come back. We’re already qualified with those customers on those products. We have some pretty unique assets to service that market, particularly in one of our facilities. So, we’re continuing -- we’ve taken a tremendous amount of cost out of that business already with almost 55% of its pre-pandemic sales in aerospace. And the entire decline in our revenue in that business was all aerospace sequentially, and approximately 90% of the decline we saw year-on-year. So, that’s kind of our focus, is continuing to get it to lean and mean. And when that volume comes back, we’ll expect to see the margins uplift. Josh Sullivan: Got it. And then, just one last one. On the North America packaging qualifications, can you talk about how many you have in process or how maybe those would move forward from Q1 or Q2? Tim Myers: So, we started shipping our first trial coils last week, in fact. I think, we’ve got -- and I may have missed this, but I think we’ve got 13 trials scheduled this quarter. So, we’re making really good progress on getting ready for the new contracts. Operator: Your next question will come from the line of from Deutsche Bank. Unidentified Analyst: Hey. Good morning, guys. And well done on the first quarter. It was quite impressive result. I mean most of my questions have already been answered. So I just have a couple more. I was just thinking, like what do you expect for the rest of the year in terms of working capital assumption? And like how much have you taken into account into the free cash flow guidance? Tim Myers: So, we’ve -- I think we’ve seen quite a bit of the ramp-up. So, I think it should level out. I expect that -- well, if you look at our guidance, we were negative $300 million free cash flow plus in the first quarter. To essentially get back to zero, we’re expecting to generate over $300 million as we go through the rest of the year. I guess, one thing that we have to keep our eye on is the LME has continued to rise unabated. And that does have an impact on our cash as we ramp up inventory in AR. But I would describe it as steady state moving into the second half of the year. Unidentified Analyst: So, working capital steady for the second half of the year. That’s what you said? Tim Myers: Yes. And then, again we’ll probably -- obviously, we’ll have some ramp-up as we turn the corner into next year as we get into the packaging contracts. Unidentified Analyst: Yes. That makes sense. And just -- I mean, the other question is more again on the financial aspect. What do you expect for the like SG&A and corporate expenses for the rest of the year? Erick Asmussen: Should be relatively flat. I mean, the restructuring efforts that we announced last year have been implemented. So you should see a relatively flat. Unidentified Analyst: Okay. And if I may, just one last. And just to try to understand, I mean, obviously, on the packaging contracts, as everyone has mentioned, it’s pretty good news. You have like 50% of the incremental volume from Tennessee already committed. I don’t think anyone asked the question, but do you expect to allocate more volume from the 600 million pounds towards packaging or do you -- given it was a very successful process for you, or would you still continue to focus on having roughly half packaging and half industrial? Tim Myers: So, the makeup is 50% packaging and 50% industrial and automotive. We’re already recognizing a significant amount of the other 300 million pounds. That was a big part of the growth that we saw in the first quarter. If you look at our industrial sales and annualize them for the first quarter, they would equate to $1.4 billion. If you look at the last four years, we’ve averaged about $1 billion of industrial sales. So, now, inside of that, you had the metal uplift, but we had 25% kind of growth. And a lot of that is ramp-up of Tennessee. And then, some of the automotive sales that we didn’t experience in the first quarter, I mean, we were planning on. So, we booked volume in automotive and industrial to absorb that other 300 million pounds, and we’re well on our way towards ramping it up. Unidentified Analyst: Okay. I mean, another question I have is -- and I know it has been touched at the beginning of the call, but want to understand the impact of the semiconductor. So, you said it was maybe about $10 million EBITDA impact for 1Q. And you said you expect it could be greater in 2Q. You have taken that into account for the revised guidance? Which kind of impact have you taken into account into the guidance? Tim Myers: Yes. Let me dimension that a little further, too. I would say the -- if we wouldn’t have been able to backfill in the first quarter, it would have been $10 million. I’d say that we probably cut that in half as we pivoted over and backfilled some of that missing volume with industrial. I think that the overall impact of automotive standalone will be a little bit greater this quarter, maybe $15 million. But, I think that we’re going to be able to keep the overall impact around that $5 million this quarter, and that is what we assume in our guidance. And then, we’re planning on seeing a modest recovery second half versus first half in the semiconductors, but not fully recovered until next year. So, that’s built into our guidance. Operator: Your next question will come from the line of Michael Glick from JP Morgan. Michael Glick: Just a quick one for me on capital allocation. How do you think about using your free cash flow for buybacks versus dividends? And then, do you view the buyback as more opportunistic or systematic in nature? Tim Myers: Yes. I mean, certainly, we’re looking at our projection for the future and where our share price is. And we thought, yes, there’s a great opportunity for our shareholders. Clearly, we also think about dividend policy moving forward. At this point, we thought the share repurchase represented a good opportunity for our shareholder. If the stock runs away from us, then we’ll keep our powder dry and think through what we want to do with capital allocation as we move through the year and into next. Operator: Your next question will come from the line of Karl Blunden from Goldman Sachs. Unidentified Analyst: Hey. Good morning. Congrats on the strong results and the outlook. I think, you already answered part of my capital allocation question, but I was also wondering if there’s scope for M&A in your plans and how you think about that at this point, given the flexibility you’ve created on your balance sheet right now. Tim Myers: I would say that the Board is wide open for us. We should start generating quite a bit of cash from this quarter forward. So, we will certainly consider opportunities in M&A if they represent a good return for our shareholders. And we’ll continue to compare those with the options of investing in our own footprint, looking at initiation of a dividend and whether or not it makes sense to repurchase shares. Unidentified Analyst: Just following up on some of the end markets, the aerospace segment has been weaker, and it’s across the industry, it’s not specific to yourselves. When you think about your long-term investment plans in that area, have those changed at all based on what you’ve seen over the last year, or do you fully expect a rebound and similar plans for investment there as when you split off from the broader enterprise? Tim Myers: Yes. Prior to the separation, our rolling business was really at the end of a pretty significant investment cycle. The last big investment we made was that $100 million investment that we made in Tennessee that essentially has ramped up. Just before that, we made a couple of sizable investments to support the aerospace market. One of them was a very thick plate stretcher, which by the way, was one of the assets that allowed us to pick up some new share in the contracts that I just mentioned, the unique capabilities of the structure. And we also expanded our heat treat capacity. So, we’re fully ready to take on the recovery in aerospace with zero capital investment required. Unidentified Analyst: That’s helpful. In packaging, you’ve spoken about packaging and the ramp in revenues and activity starting next year. I was just curious how that looks mechanically. As you ramp that up, is there a period of lower utilization and some fixed costs that you struggle to spread at that point in time? So, basically looking for some kind of -- what’s the EBITDA headwind as you go from not fully ramped to getting that business fully up and running? Tim Myers: Well, first of all, our cost structure is 85% variable. We’ve got a cold mill that’s sitting there, waiting for a crew. So, we start ramping up the crew as we’re bringing the volume in. I wouldn’t see a lot of friction there. We will have a ramp-up quarter at the beginning of 2021. And if you think about that $1.5 billion in contracts over the three years, kind of think 25% next year, 35% in 2022 and 40% -- or 2023 and 40% in 2024. But, we’ll be flexing our labor up, and we’ve already got the management team on the floor down in Tennessee. So, there won’t be a lot of additional fixed costs going into the plant. Operator: And I am showing no further questions at this time. I would now like to turn the conference back to Mr. Tim Myers for your closing remarks. Tim Myers: Okay. Well, in closing, I’d like to summarize. First of all, thank you again for joining us today. We appreciate your interest. In closing, we delivered a strong financial start to the year. We’ve increased our outlook for 2021 with adjusted EBITDA up 18% year-over-year, at the center of the range. We secured $3.5 billion in new business. We announced a $300 million share repurchase program. We reduced $1 billion in legacy liabilities, opening the door to strong free cash flow conversion. And we have our eyes on $1 billion in adjusted EBITDA in the not-too-distant future. We’re excited to tell you about our prospects, and I look forward to updating you all again next quarter. Thank you. End of Q&A: Operator: Thank you, sir. Thank you so much, presenters. And again, thank you, everyone, for participating. This concludes today’s conference. You may now disconnect. Stay safe. And have a lovely day.
ARNC Ratings Summary
ARNC Quant Ranking
Related Analysis

Arconic Corporation’s Upcoming Q3 Earnings Preview

Deutsche Bank analysts provided their outlook on Arconic Corporation (NYSE:ARNC) ahead of the upcoming Q3 earnings announcement, lowering its price target to $23 from $29 while maintaining its buy rating.

The analyst's Q3 estimate of $139 million is 10% below the Street estimates on soft volumes and increased costs. The company released a pre Q3 guidance a few weeks ago, cutting numbers by approximately $100 million for full-year EBITDA, down to $715-765 million, and Q3 EBITDA between $135-150 million (vs. Deutsche Bank’s $135 million).

About half of the guidance cut was related to company specifics and operation setbacks at the US facilities (TN and Davenport), around $30 million direct impact from softer demand in Europe on Industrial Products and the remaining $15-20 million on energy costs in Europe.

Arconic Corporation’s Upcoming Q3 Earnings Preview

Deutsche Bank analysts provided their outlook on Arconic Corporation (NYSE:ARNC) ahead of the upcoming Q3 earnings announcement, lowering its price target to $23 from $29 while maintaining its buy rating.

The analyst's Q3 estimate of $139 million is 10% below the Street estimates on soft volumes and increased costs. The company released a pre Q3 guidance a few weeks ago, cutting numbers by approximately $100 million for full-year EBITDA, down to $715-765 million, and Q3 EBITDA between $135-150 million (vs. Deutsche Bank’s $135 million).

About half of the guidance cut was related to company specifics and operation setbacks at the US facilities (TN and Davenport), around $30 million direct impact from softer demand in Europe on Industrial Products and the remaining $15-20 million on energy costs in Europe.

Arconic Corporation Q1 Earnings Preview

Analysts at Deutsche Bank provided their outlook on Arconic Corporation (NYSE:ARNC) ahead of the company’s Q1 earnings report.

The analysts expect investors to focus on the company’s exposure to Russia (around 12% EBITDA) in the context of the ongoing conflict with Ukraine, and how the company intends to navigate the situation over the coming months. The analysts said they want to understand the management's view and strategy going forward. The recent stock pullback let them think that investors likely have already priced in the geopolitical risks.

Arconic Corporation Q1 Earnings Preview

Analysts at Deutsche Bank provided their outlook on Arconic Corporation (NYSE:ARNC) ahead of the company’s Q1 earnings report.

The analysts expect investors to focus on the company’s exposure to Russia (around 12% EBITDA) in the context of the ongoing conflict with Ukraine, and how the company intends to navigate the situation over the coming months. The analysts said they want to understand the management's view and strategy going forward. The recent stock pullback let them think that investors likely have already priced in the geopolitical risks.