Q2 2021 Arconic Corp (PITTSBURGH) Earnings Call
Yeah.
Good day, and welcome to Darko and NEC Corporation second quarter 2021.
<unk> conference call.
At this time all participants are in a listen only mode.
Later, well conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference.
Press Star then zero on your Touchstone telephone.
And that's a reminder, this conference call is being recorded.
And I'll like to turn the conference over to your host Mr.
And Theyre, Shane Rourke director of Investor Relations.
Thank you Ren.
Good morning, and welcome to the Arcos <unk> Corporation second quarter 2021 earnings Conference call I'm joined today by Tim Myers, Chief Executive Officer, and Eric asked Ms and 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.
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 may cause the company's actual results to differ materially from the projections presented in today's presentation and earnings press release and our most recent SEC filings. In addition, we've included some non.
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.
We'll discuss our second quarter earnings and a moment.
But first I would like to share a brief moment of silence and memory of our colleague.
Robust and it was fatally injured while working at our facility and Samara, Russia and June 25th.
All of them was 56 years old and I worked at that location for 30 years, our thoughts and prayers remain with all of his family friends and coworkers.
Yes.
Yeah.
As a company we are proud and diligent about our commitment to keep our employees safe and continuous improvement and safeguarding our employees that we continue to pursue.
This incident, and however highlights the fact that our operations remain exposed to the ultimate unacceptable outcome and have to continue to improve.
And to reinforce our individual and collective commitment to safety, we held the company wide safety stand down earlier this month.
We all have a role to play and making sure that we're 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 standard as possible at all time.
I'll now turn to the results for the quarter beginning on slide 4 what I hope you'll take away today, a free headline.
We delivered another strong quarter.
And market 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're excited by the progress we've made year over year or 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 annuity nation, we completed and the quarter that Eric will address.
Meanwhile, adjusted EBITDA of $187 million increased 89% year on year and 4% from prior quarter.
All 5 of our core and market is projected and upward trajectory.
But our second quarter sales grew the most and industrial packaging and aerospace.
And packaging and does not yet include any growth in North America, which is expected to start generating revenue later this year. While it is true that the aerospace growth is from a reduced base and the first quarter, the modest rebound and points to an important fast and recovery for that industry standard.
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 and the strong industrial market.
Due to the strength across all our end markets, we are positioned to deliver double digit adjusted EBITDA growth for at least the next several years.
Substantial and sustained EBITDA growth in conjunction with significantly lower legacy cash obligations should drive meaningfully higher free cash flow generation and.
And we discussed last quarter, we reduced annual cash payments by approximately $245 million, starting in 2020.2 and beyond.
With this additional free cash flow, we have a wide range of opportunities to deliver rich.
Returns to our shareholders, we've already begun repurchasing shares and according with the program, we announced earlier and further free cash flow deployment will be done and in accordance with our disciplined capital allocation framework that ranks opportunities based on returns on capital.
Yes.
Moving to slide 5 we provide more detail on how we performed across our end markets.
And you see on the bottom right and the slide and Q2, we grew our revenue sequentially across all end markets aside from ground transportation.
Ground transportation sales declined 4% from prior quarter due to ongoing challenges and the semiconductor market, but increased a 100% organically year over year.
The semi can doctor issue was a temporary 1 as demand for ground transportation and strong and dealer inventories are at a historic low.
The semi conductor shortage created approximately $20 million and EBITDA headwind and the quarter, but we were able to offset approximately $15 million of that headwind with our quick pivot to industrial on capacity that we've previously targeted at the automotive market.
Sales and the industrial market increased 17% from the prior quarter and 61% organically year over year.
The increase was driven by the ongoing influence the U S trade actions and on demand for domestically produced common alloy sheet.
This is in addition to our ongoing efforts offset semiconductor impacts on shipment volumes by rapidly switching automate motive capacity to industrial.
And the building and construction market, we increased 7% sequentially and 10% organically year over year and modest improvement we were seeing at the end of the first quarter carried into the second quarter. However that market does continue to remain below pre pandemic prepay endemic levels.
Sales and the packaging market increased 26% sequentially and 4% organically year over year ex.
Lucidly as a result of growing demand in our China, and Russia packaging facilities.
And our reentry and packaging and North America will create additional growth as we head into 2020.2.
Finally, aerospace sales increased 9% sequentially, but were still down 43% year over year and on organic basis.
As you can see and the Pie chart aerospace sales make up roughly half the percentage of our total sales in 2021, so they did compared to full year 2019.
Second quarter growth was a modest acceleration from the first quarter as we previously discussed we bottomed out and aerospace and the fourth quarter 2020 and we are still very early in the aerospace recovery.
TSA traveler throughput and the second quarter of 2021 reached 67% of 2019 pre pandemic levels, which we believe is a positive indicator of the ongoing recovery and aerospace demand.
In summary, our team's agility and our network's flexibility allowed us to aim our capacity at the most attractive market.
I'll now turn it over to Eric to discuss our second quarter results.
Thanks, Tim and I'll start on slide 6 with highlights.
As Tim mentioned revenue and 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've previously announced the loss includes an after tax noncash settlement charge of $423 million related to the $1 billion U S pension and <unk>, we completed and 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 and the first quarter of 2020.
This came at a time on 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 new acquisition transaction and the higher cost of aluminum as an explanation of the aluminum impact the Midwest transaction price of aluminum was approximately 2300 per metric ton at year end and was.
Almost 2700 per metric ton at the end of the first quarter and was nearly 3200 per metric ton at the end of the second quarter.
<unk> is our largest input cost and why.
And we passed the chart and the changes and prices through to our customer customers mitigating the impact from a profitability. It does have an impact on our net working capital and our balance sheet and our free cash flow.
This increase and metal price and the quarter increased our net working capital on the balance sheet by approximately $100 million.
Lastly, capital expenditures were $44 million on the quarter and 72 million year to date, and we're roughly 60% sustaining and 40% return seeking and year to date represent approximately 2% of revenue and a profit approximately 60% of depreciation we.
We ended the quarter with a cash balance of $540 million and total liquidity of approximately $1.3 billion.
Turning to slide 7 and I'll drill down on our performance.
Revenue increased $614 million year over year due to a combination of significantly greater volume and mix compared to the pandemic impacted second quarter of 2020 as well as the impacts of higher aluminum prices adjusted EBITDA was $187 million up $88 million year over year, primarily due to the volte.
And the benefits from our net savings programs.
The benefit of $18 million and the quarter and other is primarily related to certain charges and the second quarter of 2020 non occurring this year.
Turning to slide 8 and review our segment performance in more detail.
Starting with our rolled products segment revenue was approximately $1.5 billion up 38% organically year over year, primarily as a result of strength and ground transportation industrial and packaging markets EBITDA was $173 million up $88 million or 104% year over year and up $8 million from the.
Prior quarter, reflecting strong volumes price and net savings benefits.
Revenue and our building and construction systems segment, and the second quarter was $257 million up $27 million year over year and up 4%.
Organically adjusted EBITDA was $35 million down $2 million year over year as price benefits and higher volumes were offset by lower net savings and higher material costs.
Revenue and our extrusion segment was $70 million down 23% organically year over year. Adjusted EBITDA was a loss of $8 million versus a loss of $14 million last year as aerospace market declines continue to affect this market. This segment's performance.
The aerospace weakness continues to impact profitability of this segment, we believe that the market has bottomed and we expect to see improvement as we exit this year and the meantime, we continue to take structural action to address the cross and this segment during the quarter, we began idling our Chandler, Arizona extrusion production facility, which is the second facility we have on.
Idled and the last year.
Our extrusion business is highly dependent on aerospace volume recovery and as this market continues to recover this should further complement our structural actions to improve the financial performance of this segment now moving to slide 9 I'd like to review our revenue outlook for the full year of 2021.
We expect ground transportation organic revenue increased 25% to 30% year over year compared to our prior expectation of 25% to 35% the tightening of our expectation to the lower and as a result of the ongoing issues and the semiconductor supply chain impacting automotive production and our customers.
Some of the impact is being offset by strength and heavy duty truck and trailer as well as our ability to pivot production capacity from our automotive to industrial end markets.
As a result of the continued switching of automotive to industrial capacity, we've increased the outlook of our industrial organic revenue from 25% to 30% compared to our prior outlook of 20% to 25% the industrial market and the U S continues to benefit from the trade actions and strong demand.
We've also raised our expectation for the building and construction and Mark from flat in 2021 to modest growth and a range of zero to 5%, reflecting improvement that we've seen year to date that is expected to continue throughout the end of the year.
Our packaging outlook continues to improve as Russia, and China demand remains strong and we expect to see some modest growth and North America late this year as we ramp production and at our Tennessee facility. We now expect full year organic growth of 15% to 20% compared to our prior view of 10% to 15%.
Our aerospace revenue outlook remains unchanged and the decline of 25% to 30% year over year due to the ongoing destocking and the supply chain and the slow ramp on production at Oems. While there is much talk about recovery, we have yet to see it and our order book, we believe the supply chain is still destocking as previous as previously discussed we believe the market impact.
<unk> reached the bottom at the end of the fourth quarter of 2020, and we expect sequential growth going forward now I'll turn the call back over to Tim to discuss the opportunities in front of us.
Thank you Eric and <unk>.
Combination of sustained end market growth and the capital allocation opportunities before us and position us to grow for the foreseeable future over the next few slides I'll explain how we expect that growth and those returns to materialize.
Turning now to slide 11, and all 5 of our end markets are expected to consistently grow over the next few years supported by a number of favorable macroeconomic drivers.
Ground transportation, which includes automotive and heavy duty truck and trailer is supported by light weighting and growth in electric vehicles, and improving cyclical demand from end users across both markets net.
And that momentum is expected to carry for several years and light vehicles and commercial vehicles contained increasing aluminum as a percentage of content via.
<unk> is projecting north American demand for automotive body sheet too experienced sustained 8% growth rate through 2024.
Demand for industrial aluminum and supported by domestic supported domestically by the anti dumping and countervailing duties that went into effect and the first quarter.
The trade case dramatically reduce imports of common alloy sheet to the U S and is helping to improve pricing and that market.
And protection associated with the cases and place for 5 years and and the vast majority of instances and instituted for an additional 6 years.
At the same time the supply base is shrinking because of the trade case the market continues to grow.
<unk> is projecting a growth rate and industrial rolled products demand of 6% through 2024.
Building and construction markets and the U S. While still challenged in 2021 are expected to return to year over year growth and 2022.
Industry experts are now forecasting a modest recovery versus prior predictions of a contraction in the U S. Nonresidential construction segment in 2022, and then accelerating starting in 2023 for a sustained growth rate of 6% through 2024.
The strength of the aluminum global packaging market has been a hot topic and our industry are.
Our facilities, and Russia, and China, and then essentially sold out for several quarters and demand for our upcoming North American capacity was extremely strong when we went to market.
This is clearly our biggest growth opportunity for 2022, and we've already qualified all 6 customers from the contracts, we announced last quarter. Meanwhile, North American can sheet is expected to grow at 5% annually through 2025.
And finally aerospace.
While at <unk>.
<unk> the biggest question Mark on our portfolio. We believe that question really just boils down to timing.
And we fully expect the industry and return to pre pandemic levels and are encouraged by indicators and the market today.
We believe we are headed for full recovery and the 2023 to 2024 timeframe and to that and combined Boeing and Airbus aircraft build rates are expected to grow at a rate between 10 and 20% from 2021 through 2025.
So bottom line all 5 of our core markets are growing at a multiple of GDP.
It's always good to have choices.
And clearly we have some pretty good ones.
On slide 12, let's talk about electric vehicles.
We stand the benefit from the growing wave of electric vehicle adoption around the world.
While electric vehicles only represent a small percentage of the market today industry experts forecast and to make up a quarter of global light vehicle sales by 2027.
As the automotive industry transitions to alternative energy vehicles as shown in the chart and the lower left corner of the slide fully.
<unk> fully electric vehicles are projected to be the big winners.
Electric vehicles are roughly 25% to 35% more aluminum intensive and comparable internal combustion engine vehicles.
And as we gain content on electric vehicles, and they gain and larger share of the total automotive market. We would fully expect growth and this segment of vehicles to further outperform automotive build rate.
And on electrical vehicle platforms, and we produce many of the same components, such as aluminum doors foods and deck lids and body structures as for conventional vehicles, but we also provide materials that are more prominent on electric vehicles, such as brazing sheet for advanced cooling systems, and compressors and sheet products make aluminum battery cases.
We are helping to develop advanced brazing technologies for us primarily and electric vehicles that are more environmentally friendly and improve battery life.
And 2021, we expect our total revenue related to electric vehicles to be well over $100 million.
Across 11, full electric or hybrid nameplates, and North America, and a wide range of applications and the rest of the world.
While this is not a major driver for us yet and we fully expect that number to grow it faster in absolute terms and growth and ground transportation sales on conventional internal combustion vehicles we.
We are also working on a number of last mile delivery fleet applications to help delivery companies get products to customers and and energy efficient and sustainable fashion.
We continue working with a growing number of Oems and new platforms and hope to announce some exciting new additions over the next few quarters.
While we're excited about the opportunity to electric vehicles represents for our profitability and the long term. We're equally excited about the impact of growth will have on our contribution to sustainability globally.
Now I'll turn to slide 13, and review some of the other ways that we continue to prioritize the environmental social and governance aspects of our organization.
As I mentioned previously we initiated a company wide safety stand down on last month and remain committed to safety as our top priority and continuously improving and our practices and performance.
During the quarter, we continued our efforts to advance our environmental social and governance goals.
In June we published our 2020 sustainability and ESG report then we updated our company code of conduct and supplier standards all of which are available on our website.
In addition, we completed our CDP climate and water disclosures and made significant.
Progress on developing our long term GHT Eagle, which we target announcing before the end of this year.
We're also engaging and empowering our nearly 14000 employees worldwide through programs like our first engagement survey or grow together inclusion and diversity initiatives as well as our giving together charitable donation campaign.
Finally, we are also participating in the UN global compact and target gender quality program, which helps to achieve female representation participation and leadership that are kind of globally.
Now moving to slide 14 the.
The combination of end market strength, driving profitable growth and significantly lowering pension and environmental cash obligations has left us well positioned to generate substantial free cash flow.
So now I'd like to talk about what we're going to do with all that cash.
First of all all capital and capital allocation options are thoroughly evaluated on a rate of return basis, whether we are considering returning capital through share repurchases or dividends or investing in organic or inorganic growth. The goal is always and same.
To maximize the highest return for our shareholders.
We have already instituted and begun executing on a 2 year $300 million share repurchase program as we saw the benefit that that would have for our shareholders through friday's market close we've repurchased over $27 million of our share.
We continue to evaluate and instituting a dividend as we intended to prior to the onset of the pandemic last year at the right time when the company has demonstrated the ability to generate sustainable free cash flow this will be under consideration.
We're also consistently evaluating M&A opportunities. We believe there are good deals to be made and we take each projects seriously. However, M&A transactions are going to need to be very attractive to compete with low risk high return organic debottlenecking options.
To that and we are currently evaluating a range of organic debottlenecking investment options and our portfolio and.
<unk> tended to take advantage and strong market conditions, and the packaging industrial and ground transportation market.
The current assessment suggests that projects in the industrial and international packaging markets.
Only present, the most attractive returns.
First and packaging, we are focused on ramping up the 6 contracts that we announced earlier.
Excuse me announced last quarter and North America.
Additionally, we are exploring adding to our Russian packaging capacity and are evaluating the best path forward there we.
We also continue to explore the capital efficient opportunities to access the remaining 500 to 600 million pounds of late and capacity on our Tennessee packaging Cold mill, but meeting our return expectation expectations, there would be very challenging and the current environment.
Next on the industrial market is expected to grow and the U S and abroad, and we believe there is opportunity to expand capacity to service that growth.
We're currently evaluating opportunities to expand and industrial capacity at our facilities and Lancaster, Davenport, Tennessee and Hungary.
Finally, despite the near term headwinds and ground transportation the longer term outlook and then industry remains very strong and we continue to look for ways to increase our output and the U S and some of our international Rolling Mills.
While we have many opportunities to create value for our shareholders the option of expanding under the roof top capacity and markets, we lead and with facilities. We already know how to run and people. We already know is very high on our agenda.
We have a disciplined and disciplined capital allocation process.
And we believe that we can access significant earnings growth, while maintaining total capital expenditures below 3% of total revenue going forward.
Slide 15 is 1 we've shown previously but we think it is important to provide and update on the incremental $300 million EBITDA opportunity compared to 2019 level.
And we remain on track to deliver all 3 tranches of our EBIT growth program.
And as part of $100 million to $120 million and incremental organic EBITDA, we've been ramping up new industrial capacity and we are working towards full scale packaging production at our Tennessee facility.
Packaging agreements, we secured last quarter were secured with favorable pricing and combined with an attractive pricing environment and the industrial market support.
Performance at the high end of this range.
The $100 million of permanent cost out and additional $70 million to $80 million and productivity savings are both expected to reach that run rate by the end of this year.
We will achieve the full benefit of the program on a run rate basis, and the second half of next year.
Slide 16 recaps the progress we've made on legacy cash free cash flow obligations.
And the implications for fast and free cash flow to step up starting in 2022 as a reminder, our growth pension and <unk> liabilities declined 37% since separation, while our net tax after tax pension and <unk> liability is down 40% over the same timeframe combining this with the wind down of our <unk>.
Largest environmental project and grass River, and New York, our cash needs are going to be lower by $245 million and 2022 with an additional step down and 2023.
And.
Slide 17 summarizes the path, we're on and the opportunities that have positioned us for long term growth.
And the second quarter, we grew adjusted EBITDA by 4% sequentially. Despite a decline and our largest end market ground transportation, although it is obvious and issues and ground transportation are temporary and underlying demand conditions and the industry are very strong.
We were able to offset most of the automotive impact with industrial volume.
We also completed a transformative $1 billion pension and <unk> that greatly reduces volatility and legacy liabilities and the overhang associated with them altogether and free cash flow is expected to step up by $245 million and 2022 based on legacy reductions alone with another small step up to 2023.
On top of the structural change and our cash generation profile. We also expect to growth adjusted EBITDA meaningfully each year for several years.
This is based on the combination of broad based and market strength and organic investments and capacity expansions.
That said, we will be disciplined and we will make investments where the markets can support them and the returns are well in excess of our thresholds for beyond.
As profitability and free cash flow growth, we will continuously evaluate the best uses of cash while we believe that a substantial opportunity to invest and growth organically M&A share repurchases and dividends will all have their place as well.
We have a robust tool kit for generating returns to shareholders and we are very.
It very much and the early innings of our growth story.
We've updated our full year 2021 outlook to reflect the impact of increasing metal price revenue guidance has been revised to a range of 7.3% to 7.6 billion.
From 7.1% to 7.4 billion.
We continue to expect adjusted EBITDA, B, and B and the range of $710 million to $750 million a year on year improvement of 18% at the center of the range.
Third quarter relatively flat sequentially as we have seasonality in Europe, and the semi conductor issue is not yet behind us.
Adjusted free cash flow is now expected to be approximately $250 million for the full year.
Compared to our previous view of $300 million to $400 million the.
And the change in outlook reflects roughly $100 million and the impact from rising metal prices on net working capital as Eric previously mentioned.
As a reminder, adjusted free cash flow ex excludes a total of approximately $600 million.
And pension environmental and <unk> payments and the year.
Wrapping up here's what I hope you remember first we delivered another strong quarter.
Second.
Our end markets support sustainable double digit earnings growth.
And third we are well positioned for free cash flow generation supported by disciplined capital allocation strategy.
At this time, we'd like to open it up for questions and I'll turn it over to <unk> to help us facilitate those.
Thank you.
Ladies and gentlemen, if you have a question at this time.
Congrats on this far and then the number 1 key on your thoughts on telephone.
If your question has been answered Paul.
Interest you remove yourself from the queue. Please press the balance sheet.
We have our first question from the line of Curt Woodworth from Credit Suisse. Your line is now open.
Yes, Thanks, good morning, Tim and Eric.
Good morning, good morning.
First question is.
Yes.
Sorry, with respect to some of the growth potential I mean, when we look at what's going on and the beverage and the beverage can industry, they're obviously mobilizing.
<unk> resources to expand.
Ken capacity over the next several years, but when you look at the can sheet industry, there's really been very limited.
Major capital investments to kind of deploy to go in line with that I know youre restarting some idle capacity and theres been some.
<unk> decreased from other players but.
And you talked about.
Further growth there or 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 and Russia, and China would that primarily be driven to support the European market or more of the.
Pacific based and Asian strategy.
So great question 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.
On.
Firing up idle capacity that we had and Tennessee, where we didn't have to make any.
Investment other than some sustaining.
Capital to kind of fire that equipment back up and that's pretty straightforward.
I think that and all.
Order to get a return on our more significant capital commitment.
And we're gonna have to continue to see.
Market conditions improve here.
And here in the U S I think the.
You can kind of look at.
And what industry returns are and in that market and when you start thinking about first of all greenfield that might be it.
And 1 to $1.5 billion type of investment.
Those kinds of margins you'd be looking at paybacks that are measured in decades not years.
So we're going to continue to look for ways to debottleneck, because we could probably on lease capacity.
And of Tennessee facility for a fraction of what it would cost to put it.
Put a new mill in place, but we still need to have an acceptable return profile on those decisions when we look at.
And our facilities overseas, particularly the facility and Russia.
Has a very very strong.
<unk> and the Russian market itself, which is growing at double digits and it's also very well positioned to export into northern Europe.
There's also very strong growth and tightness and the packaging market. So.
We see better pricing conditions, there and then it does look like we can get a reasonable return on and expansion is something that.
We're very deeply studying right now.
Okay and then.
You talked about M&A and opportunity set there I'm just curious when.
And you talked about normalized EBITDA potential $1.1 billion or slightly higher your stock trading at about 5 times EBITDA on that basis.
And historically a lot of M&A transactions are done at multiple significantly higher than that so I'm just kind of curious how UA.
Reinvesting and your own equity at this point.
Relative to whatever the external opportunities that could be and and that opportunities that would it be tangential to what you're currently doing or are there other markets or products that you'd like to get into.
So.
I kind of mentioned and this in the script that.
And we really feel that we have some very strong organic options.
And with very nice rates of return and.
And I think that when it comes to M&A.
Certainly we are listening and we're taking it seriously, but we need to be opportunistic and find really good value.
And if those kinds of opportunities are going to compete with.
Growing plant that.
And that we already run and markets that we already have a very strong position in.
And it gives us a very high confidence level and the return profiles of the projects that were evaluating and.
I think they are the lowest risk on the board so.
Hopefully that helps helps with how we might think about it.
Yeah, and then just 1 quick 1 on I guess sequential EBITDA progression going into the third quarter and it seems like the chip shortage is still.
And overhang, but most most parts of your business are doing better I know theres, some seasonality and packaging, but could you just kind of speak to.
Sequentially. Some other moving pieces as you see and at the third quarter relative to the second quarter, and then with respect to working capital on the free cash flow guidance.
What do you think working capital usage could look like this year.
So.
Yes, let's start with the sequential I think there'll be 3 things I'd highlight.
A lot of seasonality and packaging per se Q2 to Q3, while we do have as all 3 of our segments have mean.
Meaningful positions in Europe, right. So we lose a couple of weeks and in August.
Whether we're 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 cap.
Our sustaining capital work and those plants, where we've got the window.
And then.
We continue to.
See some drag obviously from the semiconductor chips.
We've seen about $5 million a quarter of net impact.
And the first 2 quarters of the year.
When we provided our increased guidance outlook last quarter.
The largest risk factor that we thought the time was the recovery of the semiconductors and so when you kind of think about from the top of the range to the 2.
The bottom.
$5 million per quarter kind of covers that.
And we think that we're going to see another $5 million impact and the third quarter based on on what we're seeing and the pulls from our automotive customers.
So.
That would be the next 1 and then the third 1 is.
And the stimulus is still present and a lot of states here in the U S and in those states, we're continuing to see some modest staffing challenges and with that comes some overtime.
And so those are the 3 headwinds that were kind of juggling as we go into Q3 and.
And I think it's probably going to be relatively flat.
Great. Thanks for all the color tussle line.
Thank you the next 1 we have.
Corinne John.
From both your bank.
Please go ahead.
Hey, good morning, Tim.
Thank you for taking my question.
And most of them are already come up but just.
To follow up on the captured on occasion priority.
And if you want to to a ranking it would you would you think like you.
Within priority to organic growth and then maybe.
David then as number 2 and then my second question would be.
Your line Tam.
Aerospace recovery and ECS and Amy.
And let me say, we know what we have seen the industry picking up and Tim will air traffic and mix et cetera, but just you should ask and any impact yet on <unk>.
On the book and how do you see second half on the yes, the first half of the FRE.
Great well, thank you for the questions and thanks for joining on.
First of all on the organic and the dividend.
As I mentioned earlier, and we really focus on and the rates of return and what we're going to do with.
And the use of capital.
And then payback period as well.
So when we are looking at these organic opportunities were looking at a hurdle rates and.
More than double our weighted cost of capital.
So, let's let's say rates of return and the neighborhood of 25% being the low watermark and then above and.
And so when we think about the dividend, we're competing with whether or not it creates an equivalent return for our shareholders to that.
And this the same way that we think quite frankly about too.
The share repurchase program, which we're being very I think disciplined around as well.
And regards to aerospace and we did bottom out and the fourth quarter.
We're seeing modest improvement.
Over the last couple of quarters, So I wouldn't call it a V shaped recovery.
But.
Clearly our order books filling and we are we.
We bottomed out and our extrusion business this quarter and we're already seeing a rebound in Q3 and we're seeing activity in.
Q4, that's better than Q3 in terms of order load so.
I would say that were seeing its first and the extrusion business and in terms of the <unk>.
Quicker.
Once up and I would also say that.
We're starting to get some more activity with certain parts of the distribution network in.
And the sheet and plate part of the business, which are stronger than what we're seeing from the Oems, which I view that as a very good sign that the destocking is starting to happen in the supply chain.
Alright, Thank you and if I may maybe and just 1 last question on and on free cash flow guidance, obviously I think.
Working capital need and is 1 assumption and what that would have made that a price.
But I view also included are keen on maybe that gets stronger and ramp ups from packaging and and the IRR that improvement that you just talk about is that on baby wipes off on the walk and touched on need and obviously, if anybody that does on free cash flow guidance.
So the short answer to that question is yes, we are anticipating growth and our free cash flow outlook.
If you think about our guidance for revenue, it's up about $150 million.
Center of the range, that's all metal and so when I think about it and real simple terms.
Metal is clearly the largest part of our working capital.
And you and you can see it actually and the Q, but.
You will see that inventory and payables essentially grow dollar per dollar and so they are offsetting each other and so at the end of the day, you've got payables offsetting inventory and the impact on the pass through of that metal on a revenue is kind of what has become a use of cash.
And.
It's really to a degree timing.
<unk> doesn't have any impact on our EBITDA performance, because we pass it through and we've got a hedge program on that.
But as the cost of metal goes up it does consume some cash and side of working capital.
Sure and makes sense and.
The problem is it's part of their last 1 John and Jim lost EBITDA guidance.
It was on change and I think.
And maybe maybe and if they so maybe ex maybe on this topic, but like what and and I know this is a range.
What's you take a view on how likely you ought to watch and the top of the guidance. So I know that we do put Tvs.
What do you think on maybe.
The driver to reach the statement on that 50 million help growth for the full year.
So if you annualize the first half it puts you roughly and the center of the range.
Sequentially and the third quarter looking like the first half and so it really comes down to how much will the chips recovery and the fourth quarter and how much can we drive some.
Some ramp up benefit.
And things like like packaging and and this additional industrial.
Okay. Thank you.
Thank you.
Ladies and gentlemen, if you have a question at this time.
Please press the Star and then the number 1 key on your touch tone telephone.
We have our next question from the line of Josh Sullivan from benchmark.
Please go ahead.
Hey, good morning.
Good morning, Josh.
And you just follow up on that last question I mean, so should we think about the investments.
On the industrial side.
The incremental Capex investments were talking about kind of gated by the return of the automotive markets.
And just trying to get an idea of the pivot back to the automotive exposure versus these industrial opportunities and.
Is that a 1 for 1 or do we have some transition that may need to take into account here.
So no I think the only thing.
And as timing when we can see it Josh.
<unk>.
We're basically trading off pounds across our cold mills were okay.
We're not going to make automotive, we can flip that over and.
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 and the short term.
Because they're not making automotive pounds.
The other thing I would say as you know our inventories are a little bit inflated and thats, because we did have orders and we've got requirements contracts for automotive so our buffer stocks for automotive sheet are very high.
And that that will eventually be and opportunity for us.
Because when the chip shortage starts to resolve itself.
And it should right because consumer demand is high and 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 thats going to happen.
The discussion around the semi conductor chips and it seems.
Seems like it keeps getting pushed out a couple of quarters every time somebody talks about it.
Got it.
And then just on I know you said on the total number of can sheet qualifications that you had 6 from last quarter that you got on here what is the total number for 'twenty, 1 and 'twenty..2 so we should be thinking about just as far as qualifications that needs to be done.
So we.
We were oversubscribed with.
Interest and the can sheet. So we were only able to take on and 6 customers.
And those 6 customers actually currently.
Qualifying on 12 lines, and North America, and we've gotten through.
The preliminary qualification and successfully antenna on the 12 and word.
Shipping some.
Some qualification trials as we go through the third quarter, but we're in really good shape.
So and then.
And just on the advanced raising solutions, you're pushing for electric vehicles and some of those last mile solutions. You mentioned can you just detail what some of those opportunities are and.
If you kind of any any timing around any of those.
Yeah.
It's kind of ongoing with the with the major brazing sheet customers.
And so it's predominantly a lot of alloy development and to temper.
Work that we're doing through our technical center.
And to really tuned on our alloys to be let's say higher performing materials inside of the brazing sheet market.
So.
As we continue.
And 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.
Okay. Thank you.
Thank you.
Im showing no further questions at this time.
And I would like to turn the conference back to Mr. Tim Myers.
Very good well again, thank you to everybody for joining us today in closing I'd just like to.
Reaffirm that first of all we delivered another very strong quarter and we're on track to deliver the 18% profit uplift projected and our 2021 guidance.
We're also well on track to deliver the $300 million profitability improvement program that we announced last year, which will also support additional meaningful growth and 2022.
Our core markets are all growing at a multiple of GDP and we are developing a pipeline of organic debottlenecking options to upsize, the EBIT growth commitment and extend it beyond 2023 and 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 options.
And we look forward to updating you next quarter and thank you again for joining us.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day.
You may all disconnect.
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John.
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