Arconic Corporation (ARNC) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and welcome to the Arconic Corporation Second Quarter 2021 Earnings Conference Call. 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. Shane Rourke: Thank you, Renz. Good morning and welcome to the Arconic Corporation second quarter 2021 earnings conference call. I am joined today by Tim Myers, Chief Executive Officer and Erick Asmussen, Executive Vice President and Chief Financial Officer. After comments by Tim and Erick, 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 and good morning everyone. We will discuss our second quarter earnings in a moment. But first, I would like to share a brief moment of silence in memory of our colleague, Oleg Rabushkin, who was fatally injured while working at our facility in Samara, Russia on June 25. Oleg was 56 years old and have worked at that location for 30 years. Our thoughts and prayers remain with Oleg’s family, friends and coworkers. As a company, we are proud and diligent about our commitment to keep our employees safe and continuous improvement in safeguarding our employees that we continue to pursue. This incident however highlights the fact that our operations remain exposed to the ultimate unacceptable outcome and have to continue to improve. To reinforce our individual and collective commitment to safety, we held a company-wide safety stand-downs earlier this month. We all have a role to play in making sure that we are laser focused on following our safety protocols, using our human performance tools and looking out for each other. We will continue following our safety processes to ensure that we are achieving the highest safety standards possible at all time. I will now turn to the results of the quarter, beginning on Slide 4. What I hope you’ll take away today are three headlines? We delivered another strong quarter. Our end markets support sustainable double-digit earnings growth and we are well positioned for free cash flow and have a disciplined capital allocation strategy. As you know, the second quarter of last year was the most severely impacted by the pandemic, with all end markets other than packaging recording double-digit decline. So while we are excited by the progress we have made year-over-year, our sequential performance provides increasing evidence of the strength of our business moving forward. Sales of $1.8 billion increased 52% over last year and 8% from the first quarter of this year. As expected, the company generated a net loss of $427 million, which included the impact of the pension annuitization we completed in the quarter that Erick will address. Meanwhile, adjusted EBITDA of $187 million increased 89% year-on-year and 4% from prior quarter. All 5 of our core end markets project an upward trajectory, but our second quarter sales grew the most in industrial, packaging and aerospace. And packaging does not yet include any growth in North America, which is expected to start generating revenue later this year. While it’s true that aerospace growth is from a reduced base in the first quarter, the modest rebound points to an important path in recovery for that industry. Semiconductor changes shortages continued to impact ground transportation growth, but we were and expect to continue to be able to offset most of the impact by pivoting our capacity to capture sheet demand in the strong industrial market. Erick Asmussen: Thanks, Tim. I will start on Slide 6 with highlights. As Tim mentioned, revenue in the first quarter was $1.8 billion, up 8% from the prior quarter and up 28% organically year-over-year. Net loss for the quarter was $427 million. As we previously announced, the loss includes an after-tax non-cash settlement charge of $423 million related to the $1 billion U.S. pension annuitization we completed in the quarter. Adjusted EBITDA was $187 million, which was an increase of $8 million or 4% from the prior quarter. These results show the versatility and growth potential of our business as the second quarter adjusted EBITDA is just shy of our pre-pandemic performance in the first quarter of 2020. This came at a time when aerospace is down significantly year-over-year and the semiconductor shortages impacting our ground transportation sales. Free cash flow for the quarter was a use of $211 million. This was due to a combination of the $250 million of U.S. pension contributions related to the annuitization transaction and the higher cost of aluminum. As an explanation of the aluminum impact, the Midwest transaction price of aluminum was approximately $2,300 per metric ton at year end and was almost $2,700 per metric ton at the end of the first quarter and was nearly $3,200 per metric ton at the end of the second quarter. Aluminum is our largest input cost. And when we pass the changes in prices through to our customers mitigating the impact from our profitability, it does have an impact on our net working capital on our balance sheet and our free cash flow. This increase in metal price in the quarter increased our net working capital on the balance sheet by approximately $100 million. Tim Myers: Thank you, Erick. The combination of sustained end market growth and the capital allocation opportunities before us have positioned us to grow for the foreseeable future. Over the next few slides, I will explain how we expect that growth and those returns to materialize. Turning now to Slide 11, all 5 of our end markets are expected to consistently grow over the next few years, as supported by a number of favorable macroeconomic drivers. First, ground transportation, which includes automotive and heavy-duty truck and trailer, is supported by lightweighting, growth in electric vehicles and improving cyclical demand from end users across both markets. That momentum is expected to carry for several years as light vehicles and commercial vehicles contain increasing aluminum as a percentage of content. CRU is projecting North American demand for automotive body sheet to experience a sustained 8% growth rate through 2024. Operator: Thank you, sir. We have our first question from the line of Curt Woodworth from Credit Suisse. Your line is open. Curt Woodworth: Yes. Thanks. Good morning, Tim and Erick. Tim Myers: Good morning. Erick Asmussen: Good morning. Curt Woodworth: First question is, I guess, with – sorry, with respect to some of the growth potential. I mean, when we look at what’s going on in the beverage and the beverage can industry, they are obviously mobilizing significant resources to expand can capacity over the next several years. But when you look at the can sheet industry, there is really been very limited major capital investments to kind of deploy to go in line with that. I know you’re restarting some idle capacity and there is been some capacity creep from other players. But when you talk about further growth there, potential M&A, can you comment on how big you think you can grow your can sheet market? And then with respect to your assets in Russia and China, would that primarily be driven to support the European market or more of a Pacific Basin Asian strategy? Tim Myers: Great. First of all, yes, we’re very excited about the growth with the can makers. And clearly, it looks like the can makers are getting value for the aluminum can, firing up idle capacity that we had in Tennessee, where we didn’t have to make any investment other than some sustaining capital to kind of fire that equipment back up. That’s pretty straightforward. I think that in order to get a return on a more significant capital commitment, we’re going to have to continue to see market conditions improve. Here in the U.S., I think the – you can kind of look at what industry returns are in that market. And when you start thinking about, first of all, a greenfield that might be a $1 billion to $1.5 billion type of investment at those kinds of margins you’d be looking at paybacks that are measured in decades, not years. So, we are going to continue to look for ways to debottleneck because we could probably unleash capacity at the Tennessee facility for a fraction of what it would cost to put a new mill in place, but we still need to have an acceptable return profile on those decisions. When we look at our facilities overseas, particularly the facility in Russia has a very, very strong position in the Russian market itself, which is growing at double-digits. And it’s also very well positioned to export into Northern Europe, where there is also very strong growth and tightness in the packaging market. So, we see better pricing conditions there. And then it does look like we can get a reasonable return on an expansion. That’s something that we are very deeply studying right now. Curt Woodworth: Okay. And then you talked about M&A and some opportunities set there. I am just curious when – previously, you talked about normalized EBITDA potential of $1.1 billion or slightly higher. Your stock is trading at about 5x EBITDA on that basis. And historically, a lot of M&A transactions were done at multiples significantly higher than that. So, I am just kind of curious how you weigh reinvesting in your own equity at this point relative to whatever the external opportunity set could be. And that opportunity set, would it be tangential to what you are currently doing or are there other markets or products that you would like to get into? Thanks. Tim Myers: So, I kind of mentioned in the script that we really feel that we have some very strong organic options with very nice rates of return. And I think that when it comes to M&A, certainly, we are listening and we are taking it seriously. But we need to be opportunistic and find really good value. If those kinds of opportunities are going to compete with growing plants that we already run and markets that we already have a very strong position in, it gives us a very high confidence level in the return profiles of the projects that we are evaluating. And I think they are the lowest risk on the board. So hopefully, that helps with how we might think about it. Curt Woodworth: Yes. And then just one quick one on, I guess, sequential EBITDA progression going into the third quarter. It seems like the chip shortage is still an overhang. But most parts of your business are doing better. I know there is some seasonality in packaging. But can you just kind of speak to, sequentially, some of the moving pieces you see in the third quarter relative to the second quarter? And then with respect to working capital and the free cash flow guide, what do you think working capital usage could look like this year? Tim Myers: So yes, let’s start with the sequential. I think there would be three things I would highlight. There is not a lot of seasonality in packaging per se, Q2 to Q3. What we do have is all three of our segments have meaningful positions in Europe, right. So, we lose a couple of weeks in August. Whether we are running or not, our customers aren’t there to take product. And we also then are going to take that opportunity when we have to take a bit of a rest to do a little bit more sustaining capital work in those plants where we have got the window. Then we continue to see some drag, obviously, from the semiconductor chips. We have seen about $5 million a quarter of net impact in the first two quarters of the year. When we provided our increased guidance outlook last quarter, the largest risk factor that we saw at the time was the recovery of the semiconductors. And so when you kind of think about from the top of the range to the bottom, $5 million a quarter kind of covers that. I certainly think that we are going to see another $5 million impact in the third quarter based on what we are seeing in the pulls from our automotive customers. So, that would be the next one. And then the third one is, the stimulus is still present in a lot of states here in the U.S. And in those states, we are continuing to see some modest staffing challenges, and with that comes some overtime. And so those are the three headwinds that we are kind of juggling as we go into Q3 and why I think it’s probably going to be relatively flat. Curt Woodworth: Great. Thanks for all the color. Best of luck. Operator: Thank you. The next one, we have Corrine Blanchard from Deutsche Bank. Please go ahead. Corrine Blanchard: Hi. Good morning Tim. Thank you for taking my questions. I mean, most of them were already cover up. But just a few follow-up on the capital allocation priority, if you had to rank it, would you think like you are putting priority into the organic growth and then maybe dividend as #2? And then my second question would be more in terms of aerospace recovery and if you have seen any sign. Obviously, we know we have seen the industry picking up in terms of air traffic and etcetera. But just if you have seen any impacts yet on order book and how do you see second half of the year versus the first half of the year for aerospace? Tim Myers: Great. Well, thank you for the questions and thanks for joining. First of all, on the organic and the dividend, as I mentioned, we really focus on the rates of return and what we are going to do with the use of capital and then payback period as well. So, when we are looking at these organic opportunities, we are looking at a hurdle rate that’s more than double our weighted cost of capital. So, let’s say, rates of return in the neighborhood of 25% being the low watermark and then above. And so when we think about the dividend, we are competing with whether or not it creates an equivalent return for our shareholders to that. And it’s the same way that we think, quite frankly, about the share repurchase program, which we were being very, I think, disciplined around as well. In regards to aerospace, we did bottom out in the fourth quarter. We are seeing modest improvement over the last couple of quarters. So, I wouldn’t call it a V-shaped recovery. But clearly, our order books are filling. We are – we bottomed out in our extrusions business this quarter. And we are already seeing a rebound in Q3. And we are seeing activity in Q4 that’s better than Q3 in terms of order load. So, I would say that we are seeing it, first, in the extrusions business, in terms of a quicker bounce up. And I would also say that we are starting to get some more activity with certain parts of the distribution network in the sheet and plate part of the business, which are stronger than what we are seeing from the OEMs, which I view that as a very good sign that the destocking is starting to happen in the supply chain. Corrine Blanchard: Great. Thank you. And if I may, maybe just one last question on the free cash flow guidance. Obviously, I think working capital need is one assumption with the metal price. But are you also in credit, maybe like a stronger ramp up from packaging and the aerospace improvement that you just talked about? Is that embedded as well for the working capital need, and obviously, the impact that has on free cash flow guidance? Tim Myers: So, the short answer to that question is yes. We are anticipating growth in our free cash flow outlook. If you think about our guidance for revenue, it’s up about $150 million. At the center of the range, that’s all metal. And so when I think about it in real simple terms, metal is clearly the largest part of our working capital. And you can see it actually in the Q, but you will see that inventory and payables essentially grow dollar for dollar. And so they are offsetting each other. And so at the end of the day, you have got payables offsetting inventory. And the impact on the pass-through of that metal on our revenue is kind of what has become a use of cash. And it’s really to a degree, timing. Metal doesn’t have any impact on our EBITDA performance because we pass it through, and we have got a hedge program on that. But as the cost of metal goes up, it does consume some cash inside of working capital. Corrine Blanchard: Sure. It makes sense. And I promise it’s probably the last one. But just in terms of EBITDA guidance, you – it was unchanged. And I think maybe investor or maybe expecting maybe a lift up. But I – and I know this is a range. What’s your take or view on how likely you are to achieve the top of the guidance? So another way to put it is, what do you think are maybe the driver to reach the $750 million approved for the full year? Tim Myers: So, if you annualize the first half, it puts you roughly in the center of the range. Sequentially, in the third quarter, looking like the first half. And so it really comes down to how much will the chips recover in the fourth quarter and how much can we drive some ramp-up benefit on things like packaging and additional industrial. Corrine Blanchard: Okay. Thank you. Operator: We have our next question from the line of Josh Sullivan from Benchmark. Please go ahead. Josh Sullivan: Hi, good morning. Tim Myers: Good morning Josh. Josh Sullivan: Yes. Just a follow-up on that last question. I mean, so should we think about the investments on the industrial side, those incremental CapEx investments you are talking about kind of gated by the return of the automotive markets? I mean is – just trying to get an idea of the pivot back to the automotive exposure versus these industrial opportunities. And is that a one-for-one, or do we have some transition that we need to take into account here? Tim Myers: So, no. I think the only thing – there is timing when we can see it, Josh. They – we are basically trading off pounds across our cold mills where, okay, if we are not going to make automotive, we can flip that over and make industrial products for some period of time. Some of the industrial products we make don’t use the continuous heat treat line, so we have some, let’s say, idle capacity and continuous heat treat in the short-term, because they are not making automotive pounds. The other thing I would say is our inventories are a little bit inflated. And that’s because we did have orders and we have got requirements contracts for automotive. So, our buffer stocks for automotive sheets are very high. And that will eventually be an opportunity for us, because when the chip shortage starts to resolve itself, and it should, right, because consumer demand is high and the inventory levels are very low at the dealers. We will be shipping automotive products out of inventory, which still allows us then we will be shipping out of inventory and continuing to make industrial that would be constrained out for a period of time. So, right now, it’s just hard for our crystal ball to determine exactly when that’s going to happen. The discussion around the semiconductor chips, it seems like it keeps getting pushed out a couple of quarters every time somebody talks about it. Josh Sullivan: Got it. And then just on – I know you said on the total number of can sheet qualifications. I think you had six from last quarter that you got done here. What is the total number for ‘21 and ‘22 that we should be thinking about just as far as qualifications that need to be done? Tim Myers: So, we were oversubscribed with interest in the can sheet. So, we were only able to take on six customers. Those six customers actually currently have us qualifying on 12 lines in North America. And we have gotten through the preliminary qualification successfully on 10 of the 12. And we are still shipping some qualification trials as we go through the third quarter. But we are in really good shape. Josh Sullivan: Got it. And then just on the advanced brazing solutions, you are pushing for electric vehicles and some of the last mile EV solutions you mentioned. Can you just detail what some of those opportunities are? And if you can, any timing around any of those? Tim Myers: It’s kind of ongoing with the major brazing sheet customer. And so it’s predominantly a lot of alloy development in temper work that we are doing through our technical center to really tune our alloys to be, let’s say, higher performing materials inside of the brazing sheet market. So, as we continue to expand that part of our portfolio, we will be comfortable sharing that. And certainly, when they are in development, customers would be sensitive about us being too specific. Josh Sullivan: Okay. Thank you, Tim. Operator: Thank you. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Tim Myers. Tim Myers: Very good. Well, again, thank you to everybody for joining us today. In closing, I would just like to reaffirm that, first of all, we delivered another very strong quarter. And we are on track to deliver the 18% profit uplift projected in our 2021 guidance. We are also well on track to deliver the $300 million profitability improvement program that we announced last year, which will also support additional meaningful growth in 2022. Our core markets are all growing at a multiple GDP. And we are developing a pipeline of organic debottlenecking options to upsize the EBITDA growth commitment and extend it beyond 2023 in pursuit of sustainable double-digit earnings growth. And finally, our steadily growing returns and improved balance sheet will easily fund this growth while also enabling the full range of capital allocation option. We look forward to updating you next quarter, and thank you again for joining us. Operator: Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day. You may all disconnect.ARNC Ratings Summary
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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.
