Q3 2021 Arconic Corp (PITTSBURGH) Earnings Call
Good day, and thank you for standing by.
Welcome to the Arcana Corporation third quarter 2021 earnings Conference call.
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Or of Investor Relations.
Thank you Daniel.
Morning, and welcome to the <unk> Corporation third quarter 2021 earnings Conference call I'm joined today by Tim Myers, Chief Executive Officer, and Eric <unk> Executive Vice President and Chief Financial Officer After comments by Tim and Eric We will have a question and answer session, but those of you who would like to follow along with the.
Patient 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 include.
At 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.
I'll start on slide four with three major takeaways for today's call first we continue to grow profitable year over year in the face of several external headwinds.
Those headwinds while substantial are fluid and the overriding fact as demand in our key markets is still very strong and third we are well positioned to leverage our strong balance sheet and cash flow to both return capital to shareholders and invest in high return organic growth I'm looking forward to sharing two of those projects with you later in the.
A presentation.
Summarizing the quarter sales were $1 9 billion, an increase of 34% and 10% organically year over year net income was $16 million 15, a share adjusted EBITDA was $7 $171 million up 4% over last year, but down 9% sequentially.
The ongoing semiconductor chip shortage in automotive hiring challenges in our U S operations and a spike in Covid related quarantine is over the last few months limited our ability to pivot capacity to serve the industrial segment the.
The impact of not being able to pivot that capacity was a $15 million reduction in.
Third quarter adjusted EBITDA.
To resolve staffing issues, we undertook a number of initiatives, including back filling our workforce with salaried employees, recalling retirees offering overtime incentives launching an enhanced employee referral program and we continue to pursue many other site specific initiatives.
During the quarter, we hired 759, new employees, resulting in the addition of 191 net new employees.
The result is we've already seen improved availability of staffing at our operations in the early weeks of this quarter.
Cost inflation of course is an issue across many industries and our businesses are not event in this quarter, we experienced an impact of approximately $8 million related to energy and the additional employees I just mentioned increased labor costs by another $8 million.
In addition, energy curtailments in China triggered a sudden rise in magnesium prices, which will be an issue in future quarters.
We've responded with price increases, including a magnesium surcharge in the U S to protect our margins.
Of course, there's a short lag between when we will realize the price inflation and when we capture the benefit of higher prices, but they will essentially offset each other as we enter 2022.
As we've talked about before we are a converter and we actively manage the impacts of aluminum to our margin.
But the sustained price increases throughout this year it put pressure on our cash flows. While this is challenging in the near term the working capital investment will increase cash flows when aluminum prices stabilize and eventually return to historic levels.
As I look beyond those headwinds demand in our key markets remain strong and.
And we will continue to grow adjusted EBITDA by double digits going into 2022.
Furthermore, as we've discussed our declining legacy cash obligations will create a step change in our generation of free cash flow.
This means we will have more opportunities to invest in high return organic growth.
And continue returning capital to shareholders in the form of share repurchases.
In fact during the third quarter, we repurchased almost $100 million of our shares.
Now, let's move to slide five to discuss our end markets.
You can see on the bottom right of the slide in the third quarter. We grew organic revenue year on year in all end markets other than aerospace, which only declined modestly.
Transportation sales increased 6% organically from third quarter 2020, primarily due to strength in commercial transportation, while the automotive segment continued to be challenged by semiconductor shortages.
Our automotive volumes were down 10%.
Year over year in the quarter, but north American light vehicle production declined 25% in the same period.
Through the first nine months of 2021, our automotive volumes have increased 18% over last year, while the North American light vehicle production is up only step.
So clearly we continue to gain share in this market segment.
Consumer demand for light vehicles remains very strong and dealer inventory levels are near historical lows. This bodes well for the recovery in automotive semiconductor supply chain issues are resolved.
Sales in the industrial market increased 20% organically year over year, but declined 14% sequentially as I mentioned on the previous slide demand for industrial goods remains very strong with staffing limited our ability to service orders in the quarter.
In the building and construction market sales increased 7% organically year over year.
While we are seeing modest growth construction market continues to be challenged by supply chain and cost issues.
Sales in the packaging market increased 23% year over year, driven by continued strength in our Russia, and China packaging sales and a small impact from the early beginnings of the ramp up of packaging operations at our Tennessee facility.
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Aerospace sales were down 5% year over year on an organic basis.
You can see in the Pie chart aerospace sales continue to make up roughly half the percentage of our total sales compared to what they were in 2019.
Our aerospace sales reached a bottom in the fourth quarter of last year, and we are experiencing at the beginning of a long steady recovery in our aerospace sales over the next several years, we continue to be excited about the ramping production rates of single aisle aircrafts as Boeing is making progress on the recertification of the 737 Max.
And China and Airbus has recently announced additional production rate increases.
So bottom line our end markets are very strong and with the exception of the temporary semiconductor constrained all are growing well above GDP.
With that I'll turn it over to Eric to discuss third quarter results in more detail.
Thanks, Tim I'll start on slide six with highlights.
Revenue in the first quarter was $1 9 billion.
Up 5% from the prior quarter and up 10% organically year over year net income for the quarter was $16 million or <unk> 15 per share compared to $5 million or <unk> <unk> per share in the third quarter last year, adjusted EBITDA was $171 million, which was an increase of $6 million or 4% year over year.
The decline from the prior quarter. The sequential decline was primarily a result of the challenges related to continued semiconductor impacts and our ability to service industrial orders due to labor shortages and cost pressures related to energy as well as international freight availability issues.
Free cash flow for the quarter was a use of $93 million and is largely due to the higher cost aluminum held in working capital, which I will summarize in more detail on the following slides.
Capital expenditures were $51 million in the quarter or approximately two 7% of sales and as Tim mentioned, we repurchased approximately 100 million of shares in the quarter and we ended the quarter with a cash balance of $349 million and total liquidity with liquidity and availability of approximately $1 1 billion.
Turning to slide seven I'll review, our performance in more detail.
Revenue was almost $1 9 billion in the quarter and increased 475 million year over year, primarily due to the impacts of higher aluminum prices as well as greater volume and mix compared to the third quarter of last year.
Adjusted EBITDA was $171 million up 6 million year over year due to favorable pricing volume mix and net savings. This was primarily offset by inflation foreign exchange and other non recurring year over year impacts.
While adjusted EBITDA grew 4% year over year, we could have delivered $15 million more had it not been for the supply chain constraints and labor shortages that impacted our production and sales.
As you can imagine in a complex manufacturing company like ours. It takes about six weeks to get new employees up to speed. So the impacts of the new hires that Tim mentioned will not be apparent until the fourth quarter.
You can see on the slide the third quarter of last year benefited from $34 million of temporary cash conservation actions that have since ended which was offset which was an offset of a net savings of $24 million in the quarter.
The unfavorable aluminum price of $11 million in the quarter is related to the impacts of rising prices on aluminum to our building and construction segment.
As you will see on the next slide in more detail, we pass through the vast majority of our aluminum cost in our business is bought for the BCS segment, which we pass through of aluminum through pricing as alumina is only a portion of the contract price for projects in this business.
Turning to slide eight I'll review our segment detail more.
Slide eight starting with our rolled products segment revenue was approximately $1 6 billion up 14% organically year over year, primarily as a result of ongoing growth in ground transportation industrial and packaging markets EBITDA was $155 million up $17 million or 12%.
Year over year, reflecting strong price volume in that savings.
Revenue in our building and construction segment in the third quarter was $257 million up $16 million year over year up 2% organically adjusted EBITDA was $34 million down 6 million year over year as net savings did not offset prior year temporary actions in the quarter.
Revenue in our extrusion segment was $74 million down 23% organically year over year. Adjusted EBITDA was a loss of $7 million versus a loss of $6 million last year as aerospace weakness, which was historically, 50% of this segment sales continues to impact this segment's performance.
Over the last year, we have restructured the operating footprint of this segment and as you can see on this slide we generated $6 million of net savings in the quarter. We believe the combination of structural actions and aerospace market recovery will drive meaningful improvement in the financial performance of this segment now.
Now moving to slide Sinal reviewed the updated revenue outlook for each of our end markets.
We expect ground transportation organic revenue to increase 20% to 25% year over year compared to our prior expectation of 25% to 30%.
The reduction in our expectations as a result of the continuing issues in semiconductor supply chain impacting automotive production at our customers.
We continue to expect industrial organic growth to grow at 25% to 30% for the full year, while industrial industrial production was impacted by our labor issues in the third quarter, we expect to work through the backlog by the end of this year.
And these markets remain very strong through the combination of the U S trade case and the economic recovery.
Building and construction organic growth expectations remain in the range of zero to 5% growth in this market continues to be hampered by global supply chain and labor issues.
In the packaging market, we now expect full year growth of 20% to 25% compared to our prior view of 15% to 20%. The increase in expectation is driven by continued strength in the Russian and Chinese packaging markets as well as the future acceleration of the North American packaging ramp into the latter part of this year.
Our aerospace revenue outlook remains unchanged at a decline of 25% to 30% year over year due to ongoing destocking in the supply chain and the slow ramp of production at Oems as we stated we believe the supply chain is destocking and when the Destocking reaches and we would expect growth to pick up substantially as Oems increased build rates in the medium term.
Turning to slide 10, I'll discuss some of the labor pressures, we experienced in the quarter in more detail.
Our third quarter results were significantly impacted by labor issues that limited our ability to produce for the industrial end markets.
We were already seeing a tightness in our staffing prior to the spike of Covid cases that happened late this summer.
When employee quarantine rates increased it forced us to idle entire shifts that would otherwise have been dedicated to fulfillment of industrial orders. We have worked very hard and continue to focus on addressing staffing issues as Tim mentioned, we have conducted widespread hiring campaigns and other initiatives. We hired 759 employees in the quarter and a net of 109.
Andy one in the quarter and we are working hard to get these new hires trained as I mentioned it takes about six weeks to train new employees and we are already seeing the increasing our productivity, we expect to clear the $60 million industrial backlog in the quarter.
Turning to slide 11, I'll discuss some of the cash flow pressures, we continue to experience from the unprecedented rise in aluminum prices throughout the year.
As you can see on the left side the price of alumina has continued to escalate throughout the year and reached record highs in October.
Aluminum is our largest input cost.
We pass through changes to our customers, which mitigates the impact to our profitability. However price changes do have an impact of the networking capital and our balance sheet and our free cash flow and when prices move in either direction.
Since separation, we have taken efforts to reduce and manage our cash conversion days, while our working capital days have remained relatively stable working capital on our balance sheet has increased substantially.
During the year due to rising price of aluminum in the third quarter, our working capital increased $122 million and this is primarily a result of higher aluminum prices.
$100 per metric ton change in aluminum price results in approximately $20 million of net working capital change.
From last year's ending through the third quarter, ending aluminum price is up 1300 per metric ton.
We're in an impact of approximately $250 million to $300 million to our net working capital.
After reaching nearly 4000 per metric ton in mid October aluminum prices have recently started declining.
While this is favorable for our working capital the timing of the impact will not be seen in a meaningful way until the first quarter of next year.
Working capital management remains a priority.
And the company, we continue to drive improvement in this area is important to note that aluminum prices when they returned to normal historic levels. We would expect to see some the same pattern of working capital impact but in reverse.
Aluminum prices remain at the current spot level. This would result in a source of cash as we enter the new year now I'll turn the call back over to Tim to talk about our growth path forward.
Thank you Eric.
Now that we've covered the quarter, let's let's transition to talk about the trajectory of this business moving forward, including a couple of exciting organic investments we'd like to share.
Starting on slide 13, the fundamentals of our five markets Havent changed favorable fundamentals should provide growth rates well above GDP across all of them for the next several years, what's great about our strategic position is that we're relatively bandwidth. So we don't have to worry if one of them takes a pause.
That's a great segue into our largest market segment.
While the automotive and commercial transportation industry is managing through supply chain issues, particularly availability of semiconductor chips aluminum is winning as light weighting lowers fuel consumption and greenhouse gas emissions than traditional vehicles and it extends the range for electric vehicles, and a faster growing segment of that market.
And in the short term there is pent up demand at the consumer level, driven by the chip shortage and a shallow dealership inventory pipeline that needs to be rebuilt.
September is inventory levels close to 24 days in North America, which is much less than half of historical levels.
Bringing the channels inventory back to 50 days will require more than $1 5 million vehicles above consumer demands.
In industrial as we've discussed we're benefiting from the U S trade case, and the general economic recovery.
<unk> levels have remained low and demand has remained strong.
Created the opportunity for growth in demand and higher prices, which is a great combination.
We believe the nonresidential building and construction market bottomed out this year and experts expect nonresidential construction to accelerate more significantly starting in 2023 reached six.
6% compound annual growth rate through at least 2025.
In the packaging market can makers continue to increase capacity to support growing beverage can demand.
And that means demand for can sheet will need to continue to grow to keep pace, creating strong volume and pricing opportunities for our products.
We began the ramp up of our packaging tenants at Tennessee operations last month.
We will achieve roughly 50% of our targeted capacity in the fourth quarter of this year and will essentially be at full production in the first half of 2022.
Lastly in aerospace we are in the early beginnings of a long sustained recovery.
Third quarter was our third consecutive quarter of modest sequential growth in aerospace shipments, we expect the fourth quarter to be more of the same and in 2022, we should see a more significant step up in volumes as a supply chain becomes fully destock and we realize the full benefit of the aerospace Oems ramp up particularly.
As a single aisle aircrafts.
The cop takeaway from this slide is that all of our end markets are expected to grow at a multiple of GDP over the next few years and we have the ability to allocate capacity, where we see the greatest return.
This is why we believe we can continue to grow adjusted EBITDA year over year by double digits into the future.
Now, let's talk about those investments I mentioned earlier on slide 14.
The buoyancy in our markets is creating a great opportunity to invest in high return short payback organic growth projects spanning our capacity to keep pace with our growing markets.
We are increasingly capacity of the hot mill at our Lancaster, Pennsylvania facility by over 100 million pounds. The main component of this project is a new mill stand that reduces the number of paas as required by the hot mill and therefore, it increases capacity.
This equipment will be installed in 2022 qualifications will occur late next year and it'll be at full capacity sometime in the first half of 2023.
And our Davenport, Iowa facility, we're adding 130 million pounds of melting and casting capacity.
This will increase our ability to recycle scrap improve our environmental footprint shorten our supply chain by lowering our ingot purchases and generate a great cost savings opportunity for the plant.
We expect that asset to be running at full capacity by the second half of next year.
Both projects are underway as we speak and the combined investment is less than $100 million.
We expect them to generate roughly $75 million of incremental run rate EBITDA starting in 2023.
$75 million annual return and less than $100 million in investments generates a rate of return well in excess of our 25% threshold.
And even better these are being funded within the capital guidance that we've communicated for our kind of a 3% or less of annual revenue.
Slide 15 provides an update on the EBITDA uplift trajectory, we've previously committed to.
We expect to achieve the $300 million uplift. Despite the short term issues, we experienced this quarter around semiconductor shortages in staffing, which impacted our net productivity.
With the Debottlenecking projects in Lancaster in Davenport that I just discussed we're upsizing. Our program to include an additional $75 million of EBITDA on a run rate basis by the end of 2023.
The organic EBIT growth from 600 million pounds of capacity, primarily from packaging industrial and automotive is on track and we are starting to ramp up the packaging operations in Tennessee in the fourth quarter and this will continue through the first half of 2022.
The permanent cost out initiatives are complete and our overhead costs relative to sales remained more than a 100 basis points below pre pandemic levels.
We have fully realize the targeted productivity gains as we.
And as we overcome the staffing challenges and realize the benefit of the pricing actions, we have already taken to offset increases in input costs, such as energy and magnesium we will see this drop to the bottom line of our results.
Moving to slide 16, I'd like to review the coming step change in free cash flow.
This is a slide that we've shared before that serves to continue to highlight coming step change in free cash flow, resulting from lower cash obligations moving forward.
As a reminder, our gross pension and <unk> liability.
Liability has declined by 37% since separation, while our net after tax pension and <unk> liability is down 40% in that same timeframe.
Combining this with the wind down of our largest environmental project in grass River in New York, Our annual cash needs will be lower by $250 million in 2022 and beyond for these types of issues.
Moving to slide 17, we have updated our full year 2021 outlook to reflect the impact of increasing aluminum price.
Cost pressures relating to staffing energy and freight and the continuous short continuing shortage of semiconductor chips impacting automotive demand.
Our revenue guidance has been revised to a range of seven 5% to $7 7 billion from the previous seven 3% to seven $6 billion and we've tightened expected adjusted EBITDA to be in the range of $710 million to $730 million.
16% improvement year on year at the center of the range.
Selecting the impact of lower industrial shipments in the third quarter.
And the ongoing cost pressures associated with staffing and energy that we expect will continue through the remainder of the year.
Adjusted free cash flow is now expected to be approximately $50 million for the full year compared to our previous view of approximately $250 million.
The change in our outlook for free cash flow reflects the significant impact of continued aluminum.
Price increases on our networking capital as Eric mentioned.
As well as the increase we anticipate in accounts receivable as we worked down the industrial backlog over the quarter.
As a reminder, adjusted free cash flow excludes a total of approximately $600 million in pension environmental and OPEC payments, which were made in 2021. These requirements drop to less than $100 million in 2022, representing a half of $1 billion less in <unk>.
Obligations.
Going into next year.
Wrapping up on slide 18, we have meaningfully improved adjusted EBIT. This year up 15% through the first nine months of the year.
While we are certainly experiencing the challenges from inflation freight energy and staffing. These headwinds are temporary and we have multiple countermeasures being putting in place to mitigate them, particularly in procurement pricing and staffing.
The opportunity is in the underlying market demand that will continue to drive double digit EBIT growth over the next few years.
That profitability combined with declining legacy cash obligations will drive significant free cash flow growth and we have a disciplined capital allocation strategy that we're already executing on.
We repurchased nearly $100 million of shares in the quarter and we've continued that program into the fourth quarter.
So wrapping up here's what's important to remember we.
We have delivered significant year over year EBIT growth throughout the year, despite a number of challenges.
Our end market trends continue to support sustainable double digit earnings growth.
And we are poised to deliver meaningful free cash flow and are already returning capital back to our shareholders in the form of smart investments and share repurchases.
At this time I would like to open it up for questions and I'll turn it back over to Daniel to help us facilitate those.
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Withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from Curt Woodworth with Credit Suisse. Your line is now open.
Thanks, Good morning, Tim and Eric.
<unk> character.
First question is with respect to.
Magnesium and silica you've mentioned that you are implementing alloy surcharge mechanism. So I just wanted to confirm did you say that you.
You would be price cost neutral with respect to that entering the year and can you give us a sense what.
Will there be any any significant headwind that you would look to face in the fourth quarter on that issue and then secondarily on availability do you feel like your procurement needs are well stocked for next year.
Yes, I'll start with the end.
We have our needs covered for this year and 2022.
So we're feeling comfortable with the supply line.
I don't think we'll see a significant impact from magnesium in the fourth quarter, we had already secured our needs for for the year.
So it's really something that we're looking at on the forward.
I do expect that the surcharge and other pricing actions, we've taken will not only offset the increase that we're seeing in the alloy materials.
The market has been rather buoyant and I think that our pricing actions will actually.
Be a benefit as we turn into the first quarter of next year.
Okay great.
And then with respect to aerospace.
Just looking at slide 13, where you've got the the delivery rate up.
Close to 40% this year.
And then basically almost doubling the following year relative to 2020, but you're obviously down 25% to 30%. This.
This year, so clearly a big mismatch between delivery rate versus production, because they're selling out of inventory, but how should we think about kind of the cadence of that business going into next year.
Based on say slide 13 would there be.
Significant.
Uptake in inventory have you had any discussions around aerospace nominations for next year.
And also can you just give us a sense today for what the late say EBITDA potential in that business is kind of what your current run rate would look like today versus say, where it wasn't 19.
So.
Well, let's start with.
We've kind of seen modest sequential improvement in our aerospace shipments.
Every quarter this year, let's say mid single digits kind of numbers.
We've been having discussions for a long time about.
When destocking is going to happen.
I've always kind of been in the mindset I'll believe it when I see the orders start to show up we're starting to see orders show up.
I would think that we are going to see an acceleration in that.
Mid mid single digit growth.
We go through the end of the year and into next year.
So I think that I don't think the supply chain is fully destock, but we're starting to see signs that not only the Oems with the distributors are starting to reload.
So now let's take Boeing as a proxy because we're we're most exposed to single aisle aircraft and if you go back to the.
First quarter of this year.
They were I think around 10 aircraft a month.
And.
As we enter this part of the year I think there is somewhere between 15% and 20.
And then different months through the third quarter.
And they've said that they're going to be at 31.
Early parts of 2022 so.
If you use that as a proxy once the supply chain clears, we should be seeing double digit recovery in our aerospace shipments in.
<unk> 2022 at some point.
That would be my expectation.
And as we shared I think it was in the first quarter call, we secured about $2 billion $2 billion in forward contracts with three customers.
Take us all the way out towards the end of the decade. So we're feeling good about our position in aerospace.
Okay, and then just last one.
On the growth projects, I mean pretty incredible payback on those two projects I guess, we were somewhat surprised that.
There wasn't any incremental capacity coming for can sheet given.
Since we are seeing upstream on the can side. So do you expect any potential debottlenecking.
There are there is there potential to say.
Expand some of the plants in Russia are hungry, which I know John we are very well positioned on the cost curve or.
How should we think about that thank you.
Yes, so we're shaping up.
A number of potential investments.
We announced to today, if you think about.
Where those projects are positioned there really servicing aerospace automotive and while the Davenport that Davenport facility has aerospace automotive industrial casting capacity is going to serve all three.
Lancaster is predominantly industrial.
Sure.
The pricing and margins in those markets.
Kind of justifies those investments.
We've got several others that we're shaping up and as you can imagine before we come out with whom we want to have the engineering work done to the extent that we're confident in the estimate.
And let's.
Let's say more market concentrated we probably would lineup customers.
Customer contracts and government incentives and so on and so forth but.
We see opportunities across the network.
We go after them based on their return profile.
You mentioned the continued ramp up in North American packaging, we're not quite seeing.
The pricing and margin profile, there, where we could make a significant debt and bringing up the packaging capacity, but.
If the if the market continues to grow the way that it has in.
The can makers continue importing cans from all over the world. The backfill eventually I think.
The conditions for an investment could materialize.
Great really appreciate your thoughts thank you.
Thank you Kurt.
Thank you. Our next question comes from Emily Chang with Goldman Sachs. Your line is now open.
Good morning, Tim and Eric and Thanks for taking my questions.
My first one is just around some of the comments you made around the energy price inflation could.
Could you provide us some color exactly where in the portfolio are you seeing the greatest pressure points herein.
Do you think about your contracting strategy in those regions.
Yes so.
First of all I would say.
The energy issue was predominantly outside of the U S.
You've probably.
There's been a lot of pressure on natural gas in Europe.
In particular, that's driving up natural gas and electric prices.
We had a similar.
The issue in China.
And we do.
Have a hedging program that involves energy, but it's not it's not a commodity that we had fully covered.
When you think of energy costs in totality, I think its probably around 4% of our costs.
So it's significant.
In terms of $1 $8 million was $8 million. If you look at it relative to our whole cost structure.
Not as much but I will tell you that.
The surprise in the volatility that we're seeing in input cost in general have caused us to take a pause and think about probably increasing our hedging activities on that particular commodity moving forward.
Got it that's very clear.
And then maybe a follow up is just around an early read on 2022, Capex I know you mentioned that even with the two investments that you've announced today that.
Capex should largely remain within that 3%.
Revenues should we take that assuming 2021 revenue guide that that could imply sort of a 220 to 230 mile type of Capex range for next year.
I don't think we've guided 2022 revenue yet.
But I would say as the business grows.
As the business grows it will provide the opportunity for us to increase our investment profile.
And particularly if we continue to find very high return projects like the two that I just described.
We don't want to stop the growth of the company.
And if we decide at any point that we're going to go above the 3% guideline to harvest some of those opportunities we would communicate that.
Got it.
Thank you.
Thank you.
Our next question comes from Josh Sullivan with the Benchmark Company. Your line is now open.
Hey, good morning.
Good morning, good morning.
How large do you envision your recycling efforts eventually getting.
How much of your internal needs for scrap or Roz do you think you can replace with this.
And then as you look longer term is there a percentage goal you're targeting or anything.
Well, we've continued to target improving our scrap utilization.
The project down in Davenport 130 million pounds of casting capacity I think that our north American network is running around 60% scrap utilization plus or minus.
So that could give you a good feel for what that one project is going to do to.
Improving our environmental footprint and our cost profile.
But probably the bigger the bigger opportunity in the short term is we are reentering packaging.
Down in Tennessee, as we speak.
And.
If youre if youre doing a good job in that industry, you're you're consuming $85, 90% <unk> in other scrap streams.
To continue driving that.
So.
It's great business.
Sense for us because we're buying scrap.
Nice discount to having to consume prime.
And.
Definitely helping our environmental footprint.
I was looking the other the other day I think since 2019 pre COVID-19, which was already a pretty good year for scrap utilization.
We've increased our scrap consumption by about 60 million pounds.
Order here in North America.
To give that some some scale and I think that that's going to continue.
Got it.
And then on the increased hot mill capacity of lung cancer, how does this impact the overall ecosystem between Tennessee in Davenport can you move any capacity in general engineering from one facility to another maybe to open up can sheet capacity just curious how the ecosystem between the plants. It works as you layer in these investments okay.
Absolutely.
Slowly.
Increasing gross industrial capacity.
Combined with what we've done in Tennessee, where we've essentially balanced debt facility across three markets. It just gives us that much more flexibility.
If we saw that for instance.
Packaging opportunity is starting to become more.
Exciting for us than than industrial we can pivot some some volume from Tennessee to Lancaster.
Slide some across the Davenport, so as we continue to expand our footprint.
We can continue to improve our optionality.
Okay, and then just one last one on automotive.
What are your inventories look like heading into 'twenty, two just given the fits and starts on the auto side and semiconductor issues throughout the year or are you holding a substantial amount of auto inventory that's ready to go once once demand starts to pull through.
Yeah, absolutely I mean, let's say that the shelves are stocked.
Unfortunately.
We have a requirements contract in automotive and you can't afford to be wrong and.
In many cases, we're not getting a lot of visibility when they run into a <unk>.
Strength.
Primarily with the chips.
<unk>.
With the lead times that we have oftentimes by the time, we find out that they're not going to take the order the tools are already.
The coils are already cooling in one of our plants waiting to go on a truck so we.
We've got to put them in inventory.
Thank you for the time.
Thank you.
Thank you again, if you have a question at this time. Please press the Star then the number one key on your Touchtone telephone.
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Our next question comes from Colin Blanchard with Deutsche Bank. Your line is now.
Hey, good morning, and thank you for taking my question.
Just a follow up question on money is young you mention I didn't think your money is in for Mike.
And then I think we'll have had the industry only I think visibility for about one to two quad CIO and head.
Cause you any narrow up can you just remind me.
How do you position your taking a rock.
Sure. So I'll take your 2022 volume, therefore, ammonia yen or was it more specifically for the U S.
So yes, the issue that you run into with.
With magnesium of course is it oxidizes right. So it has a shelf life.
That said, we have put annual supply contracts in place to cover our needs in North America, Russia, Europe and China.
And in fact.
Yes.
We're in good shape, we actually had a little bit of buffer stock strategically here in North America.
So as I said that material oxidizes, so we could only buy forward. So much but we have some materials that we're going to be able to roll into the first quarter at 2020 prices.
Okay. So so even in a Rob I'm just trying to figure out because we obviously are volatile.
Brian.
In the industry, but even in Iraq, Don on that.
Sam you know.
We're running into any volume Nishu I'll I'll come back to teach your profile next year.
No no we feel comfortable.
<unk>.
We followed the market. The other thing you've seen is some of the provinces in China have.
Relaxed the restrictions and you've got some of the Mag suppliers back.
Back up to two.
To 80%.
So we're feeling comfortable.
Okay, great. Thank you.
Maybe.
One other from me could you just walk us through.
Operating cash flow and then the walking capital expectation for Q.
So for for operating cash flow you will see in the quarter, we had sizable.
Use of cash primarily coming from working capital and so as you as you walk through the operating cash flow. That's in our press release Youll see that the operating cash flow Youll see the.
120, or so million use of cash coming from.
And inventory offset by payables.
That would be the sort of the bulk I think they are on a forward basis, a lot of it's going to depend on that movement on the spot price I don't think were going to see a lot of benefit from that.
<unk> ramped down in aluminum in working capital in Q4, but it will clearly have a benefit in Q1.
As aluminum goes down that <unk> help you with the sort of the kind of signs of metal that's where we've put the guidance for every hundred it's about a $20 million move to help your parameter the movements of working capital as you try to forecast an aluminum price in the future.
Alright, Thank you Tom.
Tom.
Thank you I'm showing no further questions at this time I would now like to turn the conference back over to Tim Myers.
Thank you Daniel.
In closing I'd like to thank everyone for your continued interest in our <unk> as a reminder.
We will deliver double digit earnings growth in 2021.
We're well positioned to deliver double digit earnings growth in 2022, driven by amongst other things the ramp up of packaging in North America, a good pricing environment across our markets, particularly the industrial market and the continued gradual recovery of our aerospace business and.
And today, we highlighted two additional investments that will be tailwind to extend that journey into 2023.
Finally, we are well positioned to invest in additional opportunities like those we announced today as well as consider a variety of additional options to provide returns to our shareholders. Thank you and I look forward to talking to you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
Good morning.
Yeah.
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