Q3 2020 Arconic Corp (PITTSBURGH) Earnings Call
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I don't know what kind of comfort so to speak today, Shane Rourke Pelican Investor Relations. Thank you. Please go ahead Sir.
Thank you Shannon.
Good morning, and welcome to the Arconic Corporation third quarter 2020 results Conference call I'm joined today by Tim Myers, Chief Executive Officer, and Eric asked missing Executive Vice President and Chief Financial Officer After comments by Tim and Eric We will have a question and answer session.
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 and 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 earnings press release and in the appendix in today's presentation.
With that I'd like to turn the call over to Tim.
Thank you Shane and good morning, everyone welcome to our third quarter 2020 in earnings call.
Those of you would like to follow along with the presentation slides are posted under the investors tab on our website.
Our third quarter performance supports an optimistic outlook for our future. Despite the current challenges of the pandemic.
Fundamentals of our business remains strong our cash conservation efforts are continuing to offset macro headwinds and we are well positioned to take advantage of the demand recovery. We are seeing in several of the markets we serve.
Our highly variable cost structure provides us with the flexibility to adjust to the current demand volatility across the economy and we're already seeing recovery in some of our most significant markets, which I will cover later in the call.
Let's begin on slide four the financial highlights for the quarter.
Revenue in the third quarter was $1.4 billion up 19% from the prior quarter and down 22% or 16% organically year over year, reflecting an.
An improving demand environment for some of our markets.
The company reported net income of $5 million or five cents per share compared to a net loss of $24 million or 22 cents per share in the third quarter 2018.
During the slide five I'd like to provide a little more detail on how we performed across the market's we serve.
Ground transportation revenue surged, 102% over the prior quarter as our automotive customers return to full operations and increase their demand to keep up with strong consumer sales and backfill depleted dealership inventories.
Our automotive sales in the quarter were up 5% year on year.
As a result of ground transportation or Jaenicke revenue in the quarter represented 37% of sales that's the typical historical levels.
Within ground transportation automotive sales increased 158% sequentially.
However demand for heavy duty trucks continues to depress commercial transportation sales, which were down 37% year over year, resulting in ground transportation organic revenue being down 10% year over year in total.
Our aerospace organic sales do celebrated in the quarter as previously communicated to a decline of 50% year on year.
Press large commercial aircraft filled rates continue to implement tax suppliers throughout our industry. The.
The decline in the quarter was driven in large part by Destocking through the supply chain and anemic build rates in large commercial aircrafts.
Sales in the building and construction market were down 13% organically year over year, but increased 8% from the prior quarter.
Sales and our packaging segments declined 3% year over year, largely driven by a decline in sales in our facility in China, but increased 2% from the prior quarter.
Pennsylvania, we're particularly excited for the opportunity to secure some of this demand to support the $100 million investment. We are currently ramping up at our facility in Tennessee.
I'd like to now turn it over to Eric talked about third quarter results in more detail.
Jim on slide seven you'll see a summary of our third quarter performance revenue in the third quarter was one $4 billion down 22% from the third quarter of 2019 or 16% organically as a global pandemic continue to disrupt most of our end markets, except for automotive, which rebounded well of the.
<unk>, 22% revenue decline, 14% was due to volume and mix and a balance of the decline was primarily related to aluminum price foreign exchange price and divestitures.
As you will note only adjusted EBITDA work during the third quarter, we changed our inventory cost to average cost for all U S. Inventories previously Carrie at last in first out where LIFO.
The company is heritage on LIFO extends back to 1955 is that aluminum producer as the company has changed as a result of the separations. The use of LIFO does not fully aligned with our operations is aluminum converter.
The impact of this change will not have a current tax effect on and the change in the counting methodology for the LIFO to average cost has been retrospectively applied to all periods presented in the company's financial statements.
Option from the pandemic impacted sales in every segment.
Starting with a roll product segment sales were 1.1 billion reflected disruptions in every market accept automotive and we're down $305 million or 22% or 15% organic basis year over year, which is essentially all volume in mixed related.
Adjusted EBITDA was $138 million down 14% year over year, and adjusted EBITDA EBITDA margin was 12.6% up 110 basis points from the same period last year as our cost actions, partially offset the adverse impact from lower volume and weaker mix.
Sales in our building and construction segment in the third quarter of $241 million down $41 million or 15% year over year, primarily due to pandemic related disruptions to land construction projects ajar.
Adjusted EBITDA and the segment was $40 million up $1 million or 3% year over year as volume declines were offset by cost actions in the quarter, adjusted EBITDA margins, where $16, 6% up 280 basis points year over year as a result of structural changes we've made to improve our mix in the segment and the cost actions, we announced in the second call.
Porter.
Sales in our extrusion segment of the third quarter of $82 million.
Down $44 million or 35% year over year and down 25% on organic basis. The decline was driven primarily by aerospace weakness ajar.
But just it EBITDA in the segment was a loss of 6 million versatile loss of $8 million last year and during the quarter. We continued to implement structural action improving financial performance has oestrogens segment remains a priority.
Now turning to slide nine I'll provide an update on our balance sheet.
As Tim mentioned, we had strong casual performance in the third quarter.
And we ended the period with cash of 802 million and total debt of approximately 1.3 billion, resulting in total net debt of $480 million.
Our ABL is undrawn and we have total liquidity of approximately 1.5 billion.
It is worth noting we took advantage of the cares act. So of 2020 U S pension contributions have been deferred until the fourth quarter. We expect to make these contribution in the fourth quarter and they are in the range of 220 million, putting pressure on our cash flow and the upcoming quarter.
With that I will now turn the call back over attempt to talk about our expectations for the end markets. We serve for the balance of the year.
Thank you Eric.
Let's take a look at our expected fourthquarter market demand compared to the third quarter and slide 10.
While significant uncertainty remains in the macro environment because of the pandemic. We do have a good line of sight for the remainder of this year due to our lead times with our key customers.
First and around transportation, we expect automotive sales to be roughly flat sequentially in the fourth quarter, which would represent a decline in about 5% to 10% year over year.
The modest year on year to decrease is driven by the model year changeover of the Ford F 150 platform, which is a significant resonate new generator for us.
We expect the automotive declined to be offset by a modest recovery in the commercial transportation segment as heavy duty truck production is anticipated to increase in the quarter.
We expect our aerospace sales to decline, 10% to 15% from the third quarter are about 60% year on year.
This decline is driven by the continued destocking, particularly in the production of single aisle aircraft.
We expect Destocking to continued pressuring our aerospace demand beyond the impact and lower build rates for several quarters to come.
Our billing construction sales are expected to be flat modestly down on a sequential basis in the fourth quarter global macro uncertainty continues to pressure nonresidential construction, which makes up the vast majority of our sales in this segment.
We expect packaging sales to be roughly flat quarter over quarter as mentioned earlier the non-compete expired at the end of October, allowing us to re enter the packaging market in several regions previously unavailable to us.
While there is a qualification period involved we have idle packaging capacity that can be put into service with minimal capital expenditure.
That said, we would not expect to see meaningful revenue contribution from new packaging production until the second half of next year or later.
Our industrial sales are anticipated to be a bright spot for the fourth quarter as we anticipate sequential sales growth of approximately 10% to 15% due to expanding volumes running on our newly installed capacity in Tennessee as well as continued tailwind from the international trade case.
Let's move to slide 11 for clothes in Canada.
First and this should go without saying.
We will continue to keep our employee safe and keep our operations running smoothly through this period of uncertainty.
It couldn't be more proud for more appreciative of how all of our employees stepped up to manage through the pandemic we've.
We remained well positioned to produce the essential products that our customers needs.
Second the costs out actions and productivity measures that we put in place are on track and are expected to continue to improve margins and keep us nimble, while the economy and our customers recover.
As Eric mentioned previously a cash conservation efforts delivered approximately $55 million of the net savings in the quarter and we will continue to deliver additional savings through a range of productivity initiatives.
Including increased scrap utilization physical and digital automation and the debottlenecking of critical assets.
Next we will continue to manage working capital capital expenditures to maximize free cash flow and to continue to Delever legacy liabilities.
From a growth perspective, we are excited about re entering the packaging market in North America in other regions.
Capturing additional sales in the industrial market now that there is a level playing field.
And continuing to expand our ground transportation sales as those markets recover.
We will also continue to position ourselves in the aerospace and building constructions segments as we adjust to navigate through the challenges that both of these market space in the near term.
We're providing a full year outlook to help frame up our expectations for the remainder of the year.
We expect full year 2020 revenue to be in the range of five 6% to five $7 billion.
Adjusted EBITDA for the year is expected to be in the range of $610 million to $630 million.
Cumulative free cash flow for the second quarter of 2024th quarter of 2020 is expected to be in the range of $150 million to $200 million.
In closing our clinic was very productive in our second standalone quarter or.
A swift action to conserve cash drove improved EBIT margin flexibility and liquidity within the quarter. Additionally, our freedom working capital management low capital spending delivered positive free cash flow, improving our cats, our cash balance throughout the quarter.
Finally, we've identified several opportunities that will drive volume growth and increased market penetration, which will continue to improve our results.
Actively pursuing those opportunities while our other markets recover.
I appreciate you joining us today and at this time, let's take questions I'd like to turn it back over to Shannon. Thank you.
Thank you as a reminder to ask a question you would need to pass Taiwanese telecom towards dry your question.
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Our first question comes from Kirkwood one.
Please.
Open.
Good morning.
Good morning, Kurt.
My first question is when you when you look at the World products Division in terms of net EBITDA per ton this quarter was.
Ah my calculation above your full year number for 19, despite the fact that.
There is significant Cobra relate that had a right and a lot of that.
$54 million cost out that you identified so I just wanted to if you could give us a kind of a view or a sense of how you think.
<unk> counter margins, Oregon, the trend next year I totally understand that.
<unk> remains the headline but I'm not sure it get that much worse from where we set today.
And you do have some incremental costs down an auto recovering et cetera. So any comments on that directionally in the next year would be appreciated.
Sure I think I think you hit the nail on the head with your first comment in work, we're controlling the things we can control and predominantly that is executing on the costs out program and making sure that we take advantage of what I think is a very highly highly variable cost structure.
So I would I would anticipate that we're going to be able to.
Maintain this kind of.
Let's say margin profile.
And then as some of our other markets, particularly the aerospace market, where we have.
We enjoy it some higher margins recover.
We should benefit from that in the future.
Okay and then.
Respect to Optionality with the late and capacity I think you identified roughly 270000 tons.
Capacity, you can get into the market with relatively little capital in a sort of spread between packaging industrial an auto.
How do you think about how.
How you want to allocate that capacity and.
Clearly historically packaging has been a much lower margin business, but it's getting better. So just curious kind of how you think.
You would look too.
Accelerate into any particular and market and maybe the timeline I know you said packaging is more second half but.
How you kind of think about allocation.
Sure.
Start by saying, we we've worked very hard to get our margins to where they are.
I don't think we have a high interest and pursuing commercial opportunities that are going to.
Diminish our margins.
The good news is we do have a lot of Optionality, we've got flexibility across the three primary plants that represent at 600 million pounds of incremental capacity that we can bring to bear.
The three markets that you mentioned, they all kind of working.
They move in different rhythms.
So the suggest station periods for picking up automotive sales is a little bit longer than the qualification periods for.
Getting back into the packaging market and then of course, we've got the industrial segment, which.
In many cases has very very short time to market and so.
As we move forward occurred I think the profile of what we do with that 600 million pounds is just going to develop based on.
How we secure those positions and qualified products with different customers.
We're actively ramping up the $100 million investment that we had industrial so I think you are going to you should anticipate seeing growth in that segment first.
And then we'll balance between the other two market opportunities present themselves.
Well, let me ask a question maybe in another way of the 600 million pounds what.
Would be your hope or expectation of our helmets about volume it would be kind of into the market by the end of next year.
Ooh.
I would say my my hope would be to unleash as much of it as we can.
Everything starts with an order.
Non-compete and packaging just ended on Saturday.
So we've had.
Lots of expression of interest from from that segment.
From current customers former customers and customers we've never heard from.
Certainly we are seeing lots of good activity in the industrial segments.
And we're still ramping up our sales and automotive based on the eight platforms that.
Secured last year of the new platforms.
So at this point, we're not providing guidance for 2021.
The market does seem to be showing some stability now, but there's still a lot of uncertainty associated with the.
With the pandemic and as our Crystal ball becomes a little clearer will will give you a better view of that.
Okay, and then just one final word for me when when you look at it I guess the outlook and things clearly.
You have greater visibility than you did three months ago and pre Covid. The company had kind of articulated we'd be able to have a dividend policy can you update your thoughts on that and on when or what you would need to see within your business I mean, obviously the free cash flow this year is pretty.
Pretty proof positive that the business could support some level of dividend. So just curious to get your thoughts on that and not congrats on a good quarter.
Well first of all thank you very much for the.
Congrats on the quarter.
In regards to.
Cash allocation here in the short term, we did take advantage of the care of that so we have a fairly significant obligation to the pension this quarter.
And then right behind that.
There are really two things on on our radar screen one.
As the markets recover.
That is going to require working capital right. So working capital has been a source of cash here.
In recent months.
It may become.
A consumer of cash going into next year, and we still have some uncertainty.
What's going to happen with the pandemic in the recovery of our various and market. So I think it's a little maybe a little premature for us to think about capital allocation beyond that.
But it's certainly.
A discussion that we have is a management team will along with with our board.
Great. Thanks for your time.
Thank you. Our next question comes from Chris Terry with Deutsche Bank. Your line is open.
Hi, I'm Eric.
On a solid quarter.
A few questions I want to run through.
On slide 10, just on the on the end markets before can.
Just running through some of the segments.
Maybe the aerospace you talk to them on the previous with a previous questions but.
Wondering if you could give indications of when you think the border March form in that market sort of hearing like one 221 from some other companies just to some views there if you could please.
I would.
My opinion is we're we're kind of at the bottom now.
The build rates are are pretty low.
Different.
Different suppliers at different spots in the supply chain and so.
Whether it's going to be at this level four.
Three quarters.
Two quarters three quarters four quarters, it's a little hard to ascertain at this point.
Because.
Our customers are still waiting to see when.
Passengers, we're going to get back into airplanes, which will.
Allow some of the airlines to start taking aircraft and of course.
The certification was 737 Max's.
Showing promise, but it's not done yet so.
I think that we're probably at the bottom of the cycle as we come out of the second half of this year I don't expect to see much change in the first half and we'll see how that market recovers going into the second half of next year.
Okay. Thank you and then just for the ground transportation business can you remind us what the mix is there with commercial transportation how much of the mix that is just thinking about your comments on how.
How the full two stripes up yeah, I would say typically about 70% of our sales and ground transportation or automotive, 30% commercial transportation.
Yes.
You see those markets evolving well I mean, the projection for.
Automotive and were predominantly North American going into 2021 is continuing to improve.
If you follow what IHS market in words are saying.
And also you know the commercial transportation segment class eight trucks. They declined I think the projection is just over 40% year on year in 2019.
And the projection the external projections right now for 40% recovery going into 2021 so.
Hopefully those projections hold true.
Okay. Thanks from the last one was just on slow I can use.
Use the word tepid relating to building and construction.
You said non raised construction European is that correct.
So in the building construction segment when you think about us about 70% of our sales are in North America, the balance or in Europe.
So we've.
We're more impacted by what's happening in North America.
Again, if you look at firms like IHS market.
And the order activity that we've seen in nonresidential, you've seen 810% kind of a decline in the market in 2019, and it's projected to have a similar profile going.
2020 into 2021.
Okay. Thank you.
A couple of final one survey just coming back to the tendency of questioning.
I appreciate the the mix some of your qualification period, and you're going to work out exactly which end markets, you're going to shove it into but when do you think mark by roughly that you get your first sales is the second quarter 21 or is it just too early to tell.
So are you being specific to the packaging opportunity because.
Awesome.
Quarters, and automotive and industrial against that capacity.
No I was just talking about the whole whole picture.
Any any of the end markets.
Yeah.
Well we.
We saw 2019 types of volumes in the third quarter of.
In these results.
Already and we picked up sure there. So I think you would start to see the incremental growth in automotive flowing through in 2021.
The capacity that we're bringing online in Tennessee is ramping up through this quarter and we're securing orders against it.
2021 so.
So we don't see a pandemic related disruption that I think we should see some growth there on the packaging opportunity.
There is a qualification period. So first we have to lineup commercial commitments.
And then typically you are looking at about a six month kind of a period to go through the qualifications cycles.
To get to.
What I would call ramp up volume so.
That's y alluded to probably in the second half revenue next year, but not full up.
Okay, and then the law.
Also in for me just thinking about the business.
Having gone through the worst of two two and shaping up you've obviously given 2020 guidance would you expect with your full year 2020 numbers. Early next year to then provide go back to regular sort of annual garden. So how are you thinking about the sort of.
Shorter term and medium term estimates you provide to the market.
We're not going to commit in this call to providing 2021 guidance.
But I think there's still some uncertainty.
Particularly with the pandemic in cases rising.
But if we have a good line of sight as to what's happening with the economy than our intention certainly would be too.
Provide guidance as soon as we feel confident that we can provide valid guidance.
Okay, Great. That's that's it for me thank you.
Thank you.
Thank you and our next question comes from just Sullivan the benchmark companies on line is open.
Hello, Good morning.
Good morning.
With regard to your approach to the camp Street market in the interest you seen.
Do you feel you're going to want to go up to market share.
Plan to be disruptive.
Cousins or what are you thinking about how you guys are gonna go to market.
I mean first of all I think.
We've had a lot of interests from the market. So I think the market is.
Going to welcome us back.
But certainly as I stated earlier and we've worked very hard to improve the margin profile of this business and that market is growing so I think that.
We're going to make sure that we find the right opportunities.
It's not that.
Is that that we have a tremendous amount of capacity visa visa size of that market. So I don't know why us entering back into it would be disruptive.
I mean, just just along that same line I mean, I know you are not giving guidance on the working capital for next year required to sparkles loading those lines is that going to be material or do you do conference versus the automotive opportunity or.
It's forms capacity there.
What do you think about working capital as it relates mechanic shop for clothing.
Well I think I think it will be a ramp up we're coming from a standing start.
And we do have to go through that qualification faith.
Phase and at this point, it's hard to say, how many different customers will be balancing through that because we haven't.
Really gotten that far into the conversation so.
Thank you.
It'll be a balance between the ramp up in the terms that we have with our customers in the terms that we secure with suppliers, which is all kind of a white sheet of paper at the moment.
Well.
From the interest that you've seen.
An indication command so there's a lot of talk about water converting to aluminum cans are you seeing interest from our customers with that level at this point.
Absolutely.
Absolutely I mean, it appears to us to be.
Boy at market.
Okay.
And we'll just Wanna on the Truckee market, how can we talk about our products exposure the difference between kind of cabin trailer and any dynamics I need one of those markets.
Interesting.
I think I might want to do a little bit of research on that I have an impression.
That were were relatively balance between the two but let let us do a little homework on that and we'll all have Shane get back to you on it.
And then just one last one did not any updates on ground call at this point.
So I'm going to say along those lines.
I guess the big.
The Big News last quarter was the fact that the.
The brands case in the U S.
Got dismissed.
The court here rule the proper venue was back in the UK.
So from a litigation point of view I would say that was.
Of relevance.
On the on the other side of the inquiry is continuing to move forward.
I think as as we listened to the testimony and assess what's happening there. It validates a lot of the things that we've communicated in the past.
Which are first of all we are very deep in a relatively complicated supply chain.
I think a lot of what's happened in the inquiry shows.
That we don't really control the specifications.
The regulatory regime or the testing of those products.
And and that some of the.
Players that have been involved in Grenfell may have lacked the qualifications of the expertise to to make the decisions that were made.
So we're continuing to support the inquiry.
Again.
Had mentioned the fact that we do feel that were adequately insured for a company of our scope and size and.
We're going to continue on and the processes.
Working through the second phase of the inquiry, which at this point looks like it could stretch out into 2022.
Thank you for your call.
Thank you.
Thank you you are and now like to turn the call back over to to Myers for any closing remarks.
Okay, well again I would like to thank everybody for joining us for a second.
Quarterly analysts call.
You're very excited about our journey as a new company and the bright future in front of US. So we'll look forward to providing you an update next quarter.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating in N out disconnect.
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