Q4 2021 Arconic Corp (PITTSBURGH) Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Arco Corporation fourth quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
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It is now my pleasure to introduce <unk> director of Investor Relations Shane Rourke.
Thank you Andrew.
And welcome to the <unk> Corporation fourth 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.
Those of you who would like to follow along with the presentation. The slides are posted under the investors tab on our website I.
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.
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.
I'd like to turn the call over to Tim.
Thank you Shane and good morning, everyone. Thank you for joining us again.
I'll start on slide four with some highlights from our very strong first year.
Despite the challenges of a variety of headwinds in 2021, we grew adjusted EBITDA by 15% over 2020 and set the table for another year of double digit growth in 2022.
One favorable long term business in key end markets and we deployed hundreds of millions of dollars to reduce liabilities and repurchase shares our EBIT growth in 2021 was primarily driven by double digit organic revenue increases in ground transportation industrial and packaging.
This more than offset a 30% year on year decline in our organic aerospace sales.
Throughout the year, we optimized our product mix to account for changes in automotive demand related to semiconductor shortages and changes in staffing availability due to the pandemic.
Early in the year, we announced $2 billion in contract extensions with key aerospace customers and another $1 $5 billion in agreement with the can makers and secured a return to the north American packaging market.
We also won content 23, new automotive or light commercial programs, including seven full electric vehicles.
And we executed on our capital allocation strategy that reduced our gross liabilities by roughly $2 billion.
And net liabilities by approximately $700 million.
Through a combination of accelerated pension funding exceptional management of our environmental liabilities and a $1 billion pension utilization.
These actions significantly reduced our risk profile and positioned us for much higher cash generation moving forward, we also repurchased about $160 million of our stock and initiated two organic capital projects that will help drive EBIT growth starting in 2023.
All of these actions and wins in 2021 are setting us up for a second year of double digit adjusted EBITDA growth in 2022.
Big step up in free cash flow generation, and a continuation of our momentum into 2023 and beyond.
Moving to slide five I'll provide some details on the fourth quarter.
Our fourth quarter 2021, adjusted EBITDA of $175 million increased $24 million or 16% year over year and was up 2% sequentially.
Profitability increased despite labor shortages related to employee quarantine levels that reached new pandemic highs by the end of the year.
We also had a brief equipment fire at one of our North American rolling facilities that reduced our total volumes for the quarter versus expectations.
These challenges caused us to deliver fourth quarter results at the low end of the guided range.
We continue to take action to offset inflation in alloy materials energy prices and freight costs by increasing prices and driving productivity measures.
Most importantly, the markets we serve remain strong.
We had year over year organic growth across the business in the fourth quarter and continue to expect all of our markets to grow at a multiple of GDP over the next several years.
Thanks to the actions that we took throughout 2021, we have significantly strengthened our balance sheet and created a strong platform for capital allocation options heading into 2022.
As an example in the fourth quarter, we repurchased another one 8 million shares for approximately $55 million, bringing our buyback total to nearly 5 million shares for approximately $160 million in the first eight months of our two year $300 million authorization.
And as Eric will soon share just yesterday, we upsized, our ABL by $400 million.
As we've been saying for a while now free cash flow is stepping up in a big way. This year that will open the door to more return seeking capital allocation opportunities.
That includes the organic investments, we've already announced and the potential for additional share repurchases as well as other capital allocation options.
And as always we will continue to rank those opportunities by the rate of return and work our way down the list.
Moving to slide six I'll provide more detail on how we performed across our markets.
Let's start on the bottom right corner of the slide.
In the fourth quarter, we grew organic revenue year over year in every single end market.
Ground transportation sales increased 12% organically from the fourth quarter 2020, due to growth in both automotive and commercial transportation. Despite the impact of the semiconductor chip shortage.
Our share gain in this segment allowed us to grow our automotive sales, which swim against the current growing.
Growing 18% year on year, while automotive production builds were actually down 15%.
Coming back to this part of the business later in the call when we start to talk about the future.
Led by our continued share gain outpacing vehicle builds depleted inventory levels.
Pent up consumer demand, we expect to see continued growth in ground transportation for the next several years.
Fourth quarter sales in the industrial market increased 17% organically year over year.
The industrial segment was strong for us all year, and we expect to see this momentum continue into 2022.
And the building construction market, our sales increased 9% organically year over year and 2% sequentially.
Broader trends in the building construction markets are solid despite supply chain and labor challenges that our customers are facing in meeting that demand.
Our packaging sales in our packaging segment surged, 54% organically year over year in the fourth quarter due to the accelerating ramp up of volumes at our Tennessee facility as well as continued strength in Russia and China.
And finally aerospace sales were up 19% year over year on an organic basis and 11% sequentially.
As we've stated previously our aerospace sales reached a bottom in the fourth quarter of 2020.
And we expect to see continued growth until our revenues reached pre pandemic levels sometime in the 2024 timeframe.
The 11% sequential improvement in the fourth quarter is an acceleration of the sales improvement that we saw in prior quarters, a clear sign that destocking in the supply chain has improved significantly.
The fourth quarter showed just how strong the markets are that we serve in the face of supply chain and labor constraints and as those constraints ease our profitability and our growth will continue to improve.
I'm now going to turn it over to Eric to discuss the fourth quarter results in more detail.
Thanks, Tim I'll start on slide seven with our fourth quarter financial highlights.
Revenue in the fourth quarter was $2 1 billion up 13% from the park were up 19% organically year over year.
Net loss for the quarter was 38 million. This included an after tax noncash goodwill impairment charge of $65 million related to work extrusion segment. This impairment was primarily driven by a combination of market based factors, including delays in aerospace market improvement and significant cost inflation.
Adjusted EBITDA was $175 million, which was an increase of 16% year over year and 2% from the prior quarter free.
Free cash flow for the quarter was $35 million, which was lower than we expected. This was impacted by higher inventories at year end, resulting from three main factors.
First we again had a pivot from automotive to industrial and this takes time.
Second as Tim mentioned, we had a production disruption from a small fire at our Tennessee location.
And lastly, we again saw an increase in employee quarantines related to the pandemic, which I will discuss more on the coming slides.
Capital expenditures were $61 million in the quarter approximately two 9% of sales and we would expect a similar range or approximately 3% with lesser revenue for 2022.
Tim mentioned, we repurchased approximately one 8 million shares for the quarter.
Approximately $55 million and ended the quarter with a cash balance of $335 million in total liquidity of approximately $1 1 billion.
Also as we just announced we executed a $400 million increase to our existing asset base lending facility expanding it to $1 2 billion.
This reflects the increase in collateral base due to our volume growth higher loan to values and expected growth in packaging working capital this coming year.
This increase position us well for future capital allocation opportunities turning to slide eight I'll discuss one of the key factors that influenced our performance.
Our results in the fourth quarter were impacted by labor issues that limited our ability to produce it shifts across several of our production facilities. This.
This was driven by a rise in COVID-19 infections that spiked in December than have been declining over the past few weeks as you can see in the bottom right of the slide our employee warranties exceeded peak levels seen in late 2020.
As a result of these quarantines, we were forced to idle entire shifts that reduced revenue and adjusted EBITDA compared with our expectations coming into the quarter.
We continue to make progress on hiring and retention and as you'll see in the top right of the slide we added a net 243 employees in the fourth quarter turning to slide nine I'll discuss our financial performance in more detail.
Revenue increased $676 million year over year, primarily due to the impacts of higher aluminum prices and the improvements we're seeing in volume and mix adjusted EBITDA was $175 million up $24 million or 16% year over year, primarily due to improved pricing volume.
Mix, partially offset by inflation.
We are experiencing high inflation, which can no longer be offset by normal productivity initiatives savings net of inflation was a negative $35 million as our $35 million in shop floor productivity measures could not offset $71 million of inflation in the quarter, primarily from energy transportation and alloying materials are pricing.
Initiatives are expected to offset this inflation, but I have a lagging effect.
The unfavorable aluminum price impact of $50 million in the quarter as it related to the impact of rising metal prices aluminum to the building and construction systems segment, which was offset by pricing in the near.
Turning to slide 10, I'll review, our segment performance in more detail.
Starting with our rolled product segment.
Revenue was approximately $1 8 billion up 24% organically year over year, driven by growth across all our end markets. Adjusted EBITDA was $162 million up $23 million or 17% year over year, reflecting stronger prices volumes, which were offset by cost inflation and the end of temporary share.
The measures from 2020.
Revenue in our building and construction segment for the fourth quarter was $261 million up 25 million year over year up 7% organically adjusted EBITDA was $33 million up $3 million year over year, driven by increased price, partially offset by higher aluminum cost and inflation.
Revenue in our extrusion segment was $87 million down.
Down 12% organically year over year, adjusted EBITDA was a loss of nine versus a loss of four last year as aerospace weakness, which has historically been 50% of this segment sales continues to impact this segment's performance as.
As we've mentioned before we believe the combination of structural cost actions and aerospace market improvement will drive improvement in the financial performance of this segment.
Now moving to slide 11.
Review of the impacts of aluminum price and manufacturing challenges on our balance sheet and cash flow.
As you can see on the chart on the left side of the slide after a short decline in October the price of alumina has returned to record levels and our outlook for the year, which Tim will discuss shortly is based on the combined <unk> plus Midwest premium of 3700 per metric ton.
Our adjusted free cash flow for 2021 was impacted by the rise of aluminum prices, which drove increases to our working capital throughout the year as we've mentioned before aluminum is our largest input cost and while we passed these changes through to our customers price changes do impact our networking capital on our balance sheet and our free cash flow.
And when prices move in either direction.
For the year net working capital increased $364 million as you can see on this slide we estimate approximately $250 million of the net working capital increase was related to the precipitous rise of aluminum throughout the year.
The balance of networking capital increase for the year was comprised of $40 million related to growth in packaging and industrial markets and approximately $60 million of excess inventory built in the fourth quarter.
This fourth quarter buildup of inventory was due to a combination of lower order calls increased pivot to industrial markets. The very brief fire that disrupted production at our Tennessee facility and the impacts.
<unk> employee quarantines related to the Covid burnt that we experienced in December .
Working capital management remains a top priority as you can see on the slide we had challenges in 2021 for 2022, we plan to deplete the inventory build related to the pivotal memorial to industrial we plan to continue to increase production levels. As this latest wave of the pandemic subsides.
And we will be driving broker management rigor on inventory throughout our production locations now I'll hand, it back over to Tim.
Thank you Eric.
Starting on slide 12, I want to talk about why we're so excited and confident in our expected performance in 2022.
First the core of our business. The rolled product segment has already reached adjusted EBITDA levels greater than where we were in 2019 prior to any and then make impact.
In fact 2021 adjusted EBIT in the segment improved 24% year on year, Despite aerospace revenue being down 30%.
In the North American automotive production being essentially flat with 2020.
2022 volumes are set to benefit from the ongoing ramp up of the packaging in Tennessee continued improvement in aerospace and automotive growth semiconductor availability should ease throughout the year.
And looking into 2023 and beyond we've already announced the capital investment in our Lancaster Hotmail that'll deliver more than 100 million pounds of incremental capacity on a run rate basis to build on the 2021 and 2022 growth that's coupled with the other investment we announced and davenport's casting capacity that will both reduce our <unk>.
And lower our greenhouse gas emissions intensity by allowing us to consume more scrap.
Two combined should add $75 million of annual EBITDA to our results and we're continuing to evaluate additional under the roof top investments to creep capacity in markets that are showing strong demand.
Moving to slide 13, let's.
Look at some of the end markets driving our future starting with ground transportation, where we continue to win in automotive.
We all know that the global automotive production was hindered throughout 2021 by the semiconductor shortage.
Automotive volumes were below our expectations.
We still managed to significantly outperform north American light vehicle production on a year over year basis.
You can see in the table on the left.
Rolled products automotive volumes were up 18% in 2021 compared to 2020 and in that same time period towards intelligence reports that North American light vehicle production was flat.
This is a clear indicator of the share that we're gaining in the segment as we went throughout the year.
As semiconductor shortages are expected to ease in 2022, we stand to benefit from a higher level of year over year production rates at the Oems.
As dealers seek to replenish their inventories at year end, North American dealer inventories were conservatively at least a million and a half vehicles short of <unk>.
Typical levels and.
And we continue to outpace total light vehicle build moving forward as light weighting drives aluminum adoption and vehicles, where we have greater content outpaced the rest of the market.
We expect this trend to continue and accelerate as aluminum intensive electric vehicles continue to gain share.
Turning to slide 14, let's look a little more closely at the automotive wins I mentioned earlier.
In 2021, we captured content on 23, automotive or light commercial vehicle programs more than double the 11 programs. We won the year before.
They include eight pickup trucks, nine Suvs or crossovers.
And two electric last mile delivery vehicles.
23 programs seven are fully electric.
On the slide you can see just a handful of programs, where we want content last year.
Popular Toyota Tacoma is one of the eight pickup truck programs. We added we're also excited to support GM on the launch of the all electric Hummer.
Pick up.
And we look forward to continue working closely with forward, providing typical content and more.
All new all electric F 150 lightning pickup trucks.
We also added flagship SUV programs, including the Wagoneer and the Ford Bronco.
And one of the areas earlier highlighted is our participation in the electric last mile delivery vehicle market.
Virtually all of the major commerce and delivery companies are exploring electric vehicles.
To improve their environmental footprint.
We're proud to announce our participation on the GM break drop even 600. This is an all electric commercial cargo van purpose built for the delivery of goods and services.
We were part of the development process with the OEM and we're very excited about what this early entrant means for the rest of the commercial electric vehicle market.
This is only the beginning as we have content on or exploring additional opportunity.
On similar vehicles at different phases of development with multiple existing and potential customers.
Across our whole portfolio revenue associated with Evs is expected to increase approximately 80% year over year in 2022 to over $250 million.
Moving to slide 15, I'll discuss the strength, we're seeing in the industrial markets.
Starting on the left hand of the slide you can see that 2021 aluminum sheet and plate shipments from all U S and Canadian producers not only exceeded pre pandemic levels, which were at an all time high in 2019 2021 shipments also increased 11% year over year, creating a new one.
All time high.
And while North American demand has largely recovered production capacity hasnt expanded significantly in our region.
So you can see how pricing has responded and the chart on the right hand side of the slide.
Of course, $50 52 is an alloy predominantly used in the industrial segment.
And prices are responding quicker in that segment of our business.
Because contracts are generally shorter in nature.
In the domestic market is also benefiting from a level playing field due to trade actions against China as well as 16 other countries on common alloy sheet.
The chart on the right also shows Cru's benchmark common alloy conversion fees by quarter. Our 2021 volumes were mostly booked in the third quarter 2020.
Pricing levels.
While our 2022 volumes were booked at the pricing levels seen in the third quarter of 2021.
You'll notice that there was an increase of over 50% in pricing between those two timeframes.
Now that's not to say that we will see a 50% year over year revenue increase across the entire industrial portfolio.
First you have to remember the pricing only applies to the conversion fee, which is roughly a third of the total price.
Shipped pound of aluminum.
Secondly, this is only for our U S business, which is about 65% of our total industrial sales.
Some of those sales are on a two year contract and last Youll remember that we pivoted some of our automotive capacity to industrial in 2021, which is likely to move back to automotive later in 2022 is the semiconductor shortages ease. This could result in our north American industrial volumes being relatively <unk>.
Flat or modestly declining year over year in 2022, depending on how quickly the automotive production recovers.
Turning now to slide 16, let's take a look at that surging packaging opportunity I mentioned earlier.
We previously previously mentioned the strong global packaging demand growth and what that means for can sheet production.
Since we announced our North American packaging sales agreements last year, the market has only gotten stronger.
The domestic packaging industry is short on can sheet and cans, which has resulted in greater greater imports. Both in fact in 2021 through November the U S imported over 13 billion cans, which is up more than 500% from the same period in 2019.
Over the next three years to five years six different can makers have announced their intention to install about 30, new can lines in the U S alone.
The incremental capacity associated with those new can lines.
It's going to require another $1 2 billion pounds of can sheet per year.
Roughly the annual output of an entire rolling mill.
By the way packaging growth is not only a U S phenomenon.
In fact in Russia, where we have a very strong can sheet position can making capacity is expected to grow at least 50% from 2021% to 2025 and that doesn't include several other can making investments happening in some of Russia's neighboring states.
As a result, we are continuing to evaluate expanding our seat capacity in Russia to serve this rapid growth.
Of course that will be somewhat dependent on the situation involving the Ukraine, the escalating and as you'll see later today, we've heightened the related disclosures regarding Russia in our 10-K.
Now, let's take a look at the organic revenue outlook for 2022 on slide 17.
This slide really underpins the basis for our confidence in delivering another year of double digit earnings growth multiple indicators indicate to expected growth in organic revenue across all of the markets, which we serve.
Starting in ground transportation, we expect to deliver organic revenue growth.
Of 10% to 15% increase year over year.
Following a 24% year over year increase in 2021.
Our automotive customers are telling us they expect semi conductor shortages to east throughout 2022, allowing them to meaningfully increase production from 2021 commercial transportation sales will also remain strong but are not expected to grow at the same place pace that they did in 2021.
Following what I discussed a moment ago, we expect industrial organic revenue to grow 5% to 10% in the full year after a 27% year over year increase in 2021.
While demand and pricing are both strong in the market our year over year growth may be constrained by the need to pivot what was industrial capacity in 2021.
Ground transportation later this year.
Building and construction organic growth is expected to pick up modestly to a range of 5% to 10% from 5% in 2021 non.
Nonresidential construction activity is increasing but supply chain constraints pricing and labor issues are creating uncertainty for our customers in the near term.
We expect packaging organic revenue to increase 40% to 45% North American can sheet ramps up to full capacity throughout the first half of this year.
And the facilities in Russia, and China continue to serve very strong global markets. This is on top of the 25% year on year organic growth we achieved in 2021.
And finally aerospace organic revenue is expected to grow 25% to 35% year over year as the supply chain is expected to be destocking. This year and OEM build rates are increasing as we speak we expect our aerospace revenues to reach pre pandemic levels in the 2024 timeframe.
Turning to slide 18, I will discuss our profitability and free cash flow growth.
You'll remember last quarter, we increased the total EBIT uplift target to $375 million from pre pandemic levels.
This is driven by the investments in Lancaster in Davenport to increase volumes and reduce costs. Both of those projects are already underway and on schedule.
With the completion of the packaging ramp up in the first half of this year. We will have delivered the 600 million pounds of volume growth that we anticipated.
The permanent cost out initiatives are complete and our overhead costs relative to sales remained more than 100 basis points below pre pandemic levels.
We've realized $80 million and productivity gains on the shop floor, but as we stated last quarter the impact is being tempered by inflation and pandemic related truing challenges.
As we overcome the staffing challenges and realize the benefit of the pricing actions, we've taken to offset the cost increases.
Such as seen in energy and magnesium, we will see those productivity savings start to hit the bottom line.
I'm looking at the bottom half of the slide you can see the impact of the disciplined capital allocation decisions. We've made over the last two years.
Since we became a Standalone company, we changed the capital structure.
Funded and Derisked, the pension reduced <unk> spending and paid down environmental liabilities as a result annual cash outlays have declined by over $300 million from 2020 levels.
Our balance sheet is stronger adjusted EBITDA and free cash flow are growing and.
And the returns associated with redeploying cash are driving opportunities for additional value creation.
Moving to slide 19, let's take a look at a few sustainability highlights.
As an aluminum manufacturer, we advanced sustainability in everything we do from the way we operate to the products. We design, we continually seek ways to improve our production processes to reduce energy consumption and emissions, while creating materials used in products that are more sustainable the competing materials you.
You can see on the chart on the left hand side of the slide that externally sourced scrap in our rolled products segment is up 9% from pre pandemic levels.
We're particularly proud of this fact, considering that our volumes are only up 1% over the same period.
And scrap utilization is expected to pick up substantially in 2022, as we increased can sheet production, which evolves for much greater scrap consumption some of the other products in our portfolio.
As we increased scrap used in the rolled products segment.
You can also see two major examples.
Of how our products drive sustainability.
First in the area of automotive applications, our aluminum sheet is enabling fuel efficiency and range extension by providing light high strength solutions.
It bears repeating the revenue associated with electric vehicles is expected to increase 80% year over year in 2022, and we're well positioned to help customers advanced in this space.
Secondly, can sheet is comprised of up to 90% scrap which makes aluminum packaging a much more sustainable option compared to other alternatives.
With packaging revenue expected to grow nearly 50% this year.
We're helping our can sheet customers meet the surging demand for the infinitely recyclable aluminum can.
Now, let's turn to slide.
20% to take a look at our outlook for 2022.
Our full year outlook for 2022 revenue is expected to be in the range of $9 nine to $10 3 billion.
Adjusted EBIT is expected to be in the range of $800 million to $850 million.
And we forecast free cash flow to be approximately $250 million in 2022.
You'll notice that the midpoint of the adjusted EBIT guidance range implies a second consecutive year of 15% growth is 19% at the top of the range.
Largely driven by the organic growth I discussed and is supported by our North American packaging ramp up the <unk>.
<unk> recovery in automotive and the expecting ramping of aerospace build rates.
We continue to experience challenges from inflation freight energy and staffing, but we believe these temp. These headwinds are temporary and we've put multiple countermeasures in place to mitigate them.
Looking beyond 2022, we're excited about the capital projects that we've announced to drive organic growth in 2023.
We continue to evaluate similar projects to set up the next phase of growth.
Wrapping up here's what I think you should take away from today's call.
Looking forward.
Our end market trends in organic investment strategy continued to support sustainable double digit earnings growth.
We're experiencing a step change in free cash flow, which has created new opportunities for return focused deployment.
And we grew adjusted EBITDA, 15% year over year in 2021, and we fully expect to do it again 2022.
So at this point I'd like to open it up for questions and I'll turn it over to Andrew to help us facilitate those.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
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First question comes from the line of Curt Woodworth with credit Suisse.
Yes, Thanks, good morning, Tim and Eric.
Good morning, Kurt Good morning.
So just with respect to the guidance I was hoping you could kind of talk about.
Some of the drivers between how you see the high end and low end materializing. This year I know last quarter you discussed.
I could give you price cost positive for the year.
But could you just frame that in terms of the magnitude of what you think that price could look like this year relative to what it was.
'twenty one.
I think the key drivers that are going to underpin the uplift in EBITDA.
Price is probably net price increases I think would be our <unk>.
A larger driver pretty pretty close to the.
Margin that we expect to get from the can sheet ramp up.
And then we're expecting to see some modest improvement in our aerospace <unk>.
<unk>.
As it recovers.
Nice nice recovery on a percentage basis, but coming off a small base.
And in the automotive.
Out of recovery and then.
The reason for the wide range.
If you think about the headwinds.
In terms of uncertainty I'd, probably put the semiconductors at the top of the list. We continue to hear it's getting better, but we still see a lot of instability there.
Labor inefficiency has been something that we can kind of thought through in the second half of last year.
We saw the.
Impact to our population I think peaked in the.
The third week of January it's been coming down nicely and we're down about 40% off of that peak already.
So I'm, hoping that we're putting some of that behind us here as we work our way through the quarter, but we are still ramping up at several facilities. So there's a lot of training costs that will be with us I think particularly in the first half of the year.
As we get to full capacity in Tennessee, and we ramp up our plate mill in Davenport, specifically, some areas, where we've got a lot of staffing going on.
I think we've done a good job of pricing up for the inflation, but.
We're certainly keeping an eye on that.
Hopefully we don't have any other.
Unpleasant surprises like we had with magnesium last year, the big Spike in energy prices that we've seen in Europe .
And then the last thing is we do have.
Our contract with the Steelworkers, our master contract comes up in May.
So we've got some.
Costs associated with getting ready for that and.
Building, a buffer stocks and things like that.
To make sure we're in good shape to protect our customers. So those are some of the things that we're managing through that would help you think about the difference between the top and bottom of our range.
Okay.
Okay, and then I guess just on packaging the 40% 45%.
Growth could you talk a little bit about.
How much of that would be volume versus maybe conversion pricing uplift some of the beverage can companies have been pretty vocal about.
Significant can feed price increase thats certainly in Europe , and we know that thats going on in the U S. So if you could just help us maybe understand a little bit about.
Maybe your non U S countries kind of pricing and how much of that is we're doing this year versus how much maybe it's on a reset.
The road would be helpful.
Yes, sure so first of all.
The revenue increases.
Conversion revenue and in pounds.
Predominantly.
Because a lot of that incremental growth is coming in North America.
This is our first year of the contracts we signed.
We were happy with the pricing that we got in those contracts.
Our contracts in.
China are more annual in nature.
We're certainly seeing pricing.
Increase in that region as well.
And the export opportunity for that facility has been very good.
The us isn't the only.
Country, Thats importing metal and so we've got lots of options there and.
Our contracts in the Russian facility.
Our generally.
Two years in nature and.
I would anticipate that pricing is going to be improving in.
In that part of our business as well.
Okay.
Just lastly, I know.
It's been a little while but I think previously you've talked about normalized EBITDA power company I think closer to like $1 1 billion for recovering in Aero, but.
Then you have now planned costs for Davenport, which another 75 million when we looked at the conversion chart for $50 52 alloy.
It seems like from the low point, that's up almost $650 per metric ton.
I know theres been some cost increases, but thats pretty incremental to EBITDA and then you also had comments on.
The packaging market has only gotten stronger since you initially priced some of those contracts I guess call. It a year ago. So do you have any updated thoughts on that.
And it seems like the auto thing continue.
To develop positively as well.
Just so we can kind of maybe reframe longer term potential.
I still have a very very consistent an optimistic view of the potential of the business I mean.
The markets are there.
We're hitting we are hitting the mark on getting the capacity up.
Do you see the question Marci you have it okay.
Well aerospace fully recover by 2024.
Let's see.
It's making good move now.
Well automotive get back to pre pandemic levels in the same timeframe, that's something we got to look at.
And the pricing environment is good.
If this inflation continues on at the rate that it does as you know there's always a lag of trying to catch up with it right because.
You pass it through in <unk>.
You've got to wait for.
Different commercial relationships.
Arrangements to time out in some of those contracts are longer than others, but.
Yes, I still feel like.
The path, we're on is going to.
Have the type of improvement that we've been advertising and our profitability.
Great. Thank you very much.
Thank you.
Next question comes from the line of Josh Sullivan with the benchmark company.
Hey, good morning.
Hey, Josh.
Just a question on the capital allocation options.
You rank the rate of returns here how are the growth capital project booking that pipeline I think you've said in the past.
We've hit the 25% IRR hurdle or customers coming closer to meeting that hurdle or further away things like packaging and automotive.
No I mean, the two that we announced we're well over 25% IRR.
I think.
We have a similar opportunity certainly in the international packaging market.
We've got to make sure there is enough stability in the region that we can put a capital project in and get people in and out so that timing is.
Something that we're thinking through there.
Still see I think really good opportunity to.
Put some high return seeking capital into.
The North American market I think right now the best return profile, probably looking like the industrial segment.
But the other the other markets are are catching up so.
But I think the opportunities there and we've got to continue to identify the projects due to capital work gaming lineup customer commitments and.
There's more to follow.
Got it.
And then just.
More of a clarification question on the free cash guidance in the slides for the third quarter, you referenced adjusted free cash, but the slides here for the fourth quarter leave out that adjusted note you didn't do that for EBITDA. Just curious if there's any dynamics driving that reporting change.
Yes, we had so much so so much of that obligation. When you have a couple of hundred million dollars debt.
Are you using to pay down our pension and environmental liability.
We adjusted that out so that you would get a better view of what the business could do without those those let's say constraints and now that they've become so much lower.
We don't feel there's a need to pull them out of our free cash flow guidance anymore.
And so is there a pension contribution element to the free cash.
Sure.
We put.
We put us the slide will last line in the earnings deck, we will give you pension and OPEC.
Cash costs. So you can start to parameter.
Got it thank you for your time.
<unk>.
Thank you.
Question comes from the line of Corrine Blanchard with Deutsche Bank.
Good morning, Tim and Eric.
Good morning, good morning.
Okay.
Clarify I'm sorry on the previous question I mean, I have to take open but from a free cash flow guidance the pension outflow.
Indeed drive.
One time event for 2021 way you took it out.
The free cash flow guidance includes pension OPEC environmental as a normal free cash flow guidance in 2012.
Okay, great. Thank you.
I mean, most of my question has been answered profile, but just maybe she can give you more color.
Quarter on the call Trichion Tradeshow that Youre seeing for 2022, and maybe on the timing I mean, you mentioned the labor inefficiency.
Koby.
How do we think about do you think that's more like a <unk> into Q and then anything else that you can maybe give some clarity.
Sure I'll start.
With the labor.
As I said it was about the third week of.
January is when we had the biggest impact in terms of employees under quarantine that we've had from the very beginning of the pandemic.
That has come down.
Significantly about 40% over the last three weeks.
So I'm thinking that that is going to start to dissipate.
Now we're still we're ramping up the can sheet opportunity I think we got to about 40% of our targeted capacity in the fourth quarter.
So we're still bringing in.
We're still bringing in people and metal through the first quarter into the second quarter on that and then we're seeing a very nice trend developing in place for our facility in Davenport. So.
That is a relatively people intensive part of our plant in plate mill has a lot of.
A lot of Standalone assets that we have to crew up so I would think that.
The first quarter will be the highest of the year and then it will taper down through the second quarter, and we should be getting to pretty full run rates as we go into the second half so.
That's how I would think about that in terms of the inflation.
We first of all we're seeing and you'll start seeing the pricing role in that we initiated in the fourth quarter. So that's going to help.
<unk>.
The two that I would say kind of standout right now is.
Energy in Europe has continued to be elevated because of the issues between Russia, and Ukraine and all the concern around that.
And then transportation costs here in North America were relatively high as we opened up the year as well so in freight market continues to be pretty tight.
But I don't think anything else jumps out as being anything different than we talked about last quarter.
Alright, Thank you and maybe one more question from me.
On the Russia.
Crane.
You had mentioned looking at some.
And therefore for packaging.
Are you considering depending maybe on the I'll call them all is that right now.
A priority for you.
We're very interested in it again.
You've got to be able to execute and right now because of some of the issues that are going on it's really hard to get visas.
Not just for ourselves, but most of the equipment that.
That we're looking at a lot of it is in western Europe and so.
We've got we've got to be confident that we can execute on getting the capital put in the ground and I think we just got to keep an eye on it and see how this thing resolves itself.
Alright, Thank you Tony.
Thank you.
Our next question comes from the line of Timna Tanners with Wolfe Research.
Hey, good morning, everyone Happy Friday.
Hey, Timna good morning.
To ask a little bit more to understand the cadence of 2022, EBITDA guidance and what's included and it sounds like Youre definitely plan to.
Cost inflation in the first quarter from labor issues, but.
But how much of releasing costs in general is contemplated in your guidance are you assuming it doesn't sound like you are assuming continued absenteeism or are you assuming continued elevated energy costs and transportation and can you just talk a little bit about the cadence and whats assumed cost wise in your outlook.
Yes, I think that.
I think that were planned.
Planning on the cost levels being relatively flat through the year. There are elevated as we opened the year.
And so I think.
If you are.
Thinking through our our guidance, we're ramping up packaging.
As we go through the first half and so packaging profitability should be better in the second quarter than the first quarter and should be to its full utilization when we get to the second half and Thats one of the big drivers in our uplift.
I would say the same thing with the.
Aerospace volume right. So we're ramping up I'm, putting the labor and already so I think that labor spend is going to be relatively flat, but im not getting that.
Utilization because we're training a lot of employees right. Now so you can think of that as kind of a.
A negative labor variance.
And then I also think that this time.
My conductor chips. So clearly there is still a problem right.
It's more concentrated now its not across all of our customers, but we still have significant.
Significant customers that are having issues.
I'm, hoping that that continues to improve as we go through the year and so.
I think from a cost perspective, not a big ramp.
It's really catching the volume associated with <unk>.
Getting crewed up.
But if for example, if we think that energy costs are going to rollover and we think that like.
Great challenges are going to ease that also in your guidance are you assuming kind of steady state.
Steady state Gotcha.
Question was just I know you've talked in the past about possible dividend.
Going to have with less pension contribution and with the free cash flow guidance Optionality.
I know, it's kind of an asset I'm just wondering like how do you think about buybacks and dividends within that discussion of grosses. How do you think about the party.
Well.
I tend to look at it through the rate of return lens.
So we talked about <unk>, 25%, we're going to go after or.
Organic capital.
When we think about share repurchases, we're thinking about them the same way.
And so if we think that the shares arent reflecting.
What management is going to deliver then we're going to continue to look at buying our shares back.
On the dividend I think.
Also represents an opportunity to drive shareholder value I don't know that it has a 25% IRR attached to it.
And.
We also as we're chasing the growth in working capital a lot of it being driven by metal.
<unk>.
We wanted to make sure that we're throwing off good cash flows when we decided to make a decision like that.
Okay. Thank you.
Thank you.
Ladies and gentlemen, if you have a question. Please press star one.
Our next question comes from the line of Emily Chang with Goldman Sachs.
Good morning, Tim and Eric and thanks for the update today.
First question is just a follow up around the free cash flow guidance into 2000 $20 million to $215 million are you able to share what locking cap assumptions embedded into that given the Ali price outlook that you're expecting.
So we're looking at that we based it on the 3700 per metric ton. So you can imagine that's going to be it's been a wildcard all throughout 2021 and it will be the same.
Our rule of thumb is about for every $100 move is about $20 million, depending on whether it goes up or down. So I believe that's going to be the biggest wildcard in cash flows.
As far as other assumptions on working capital and we have assumed a working capital build at that 3700 right for the packaging ramp. So you can imagine what Jim just described is the packaging ramp we'll see from Q1 to Q3.
Is going to be a use of inventory alright.
Our build of working capital, we will have the offset to some extent with a $60 million that we built in Q4. So we still expect there'll be a net working capital increase and that's built into our cash flow guidance.
Okay, that's very clear.
And then my second question is just around.
Can you remind us.
One is sort of the clauses on mechanisms in your pricing contracts that don't allow you to pass explicitly recover high alloy metal prices labor and energy costs.
Or is it more of a broad based and play doh.
It very it really varies by market.
There typically is going to be a pp PPI indicators.
We'll start with the industrial they have the shortest contracts.
We typically do annual contracts and then backfill available capacity was spot.
And there we generally.
Bake it into the annual price.
And.
We also as Youll recall.
We had a problem with magnesium so we put a surcharge in place. So if we see something that.
It really goes sideways throughout the year, that's how we would think about that market.
Motive contracts.
All of the automakers allow for some sort of an index.
The index is going to be different customer by customer, but typically you know.
Energy.
They are paying for the transportation in most cases.
It's going to be in there just general inflation, some kind of PPE PPI index.
It's going to be there I would say the aerospace contracts behave very much the same way.
In a market like that we do have more alloying elements. So it's going to be more typical that those are called out separately.
As part of the index as well.
So.
It's not.
What a one size fits all but we do have protection with all of our.
And market.
Great appreciate the color that was helpful. Thank you.
Thank you.
Thank you and I'm showing no further questions.
I'll now turn the call back over to Tim Myers for any closing remarks.
Okay, well again.
You very much for joining us today.
Enjoyed the opportunity to.
<unk> the business.
As you think about us in closing just a few thoughts again first of all we delivered 15% year on year EBIT growth in 2021.
We're guiding to another 15% year of EBIT growth in 2022, and we are setting the table for some sort of similar performance in 2023.
We've been very very focused and disciplined on strengthening our balance sheet and with the free cash flow that we intend to generate.
We're looking forward to.
Continuing to create value for all of our shareholders.
Back to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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Ladies and gentlemen, thank you for standing by and welcome to the Arcana Corporation fourth quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
It is now my pleasure to introduce <unk> director of Investor Relations Shane Rourke.
Thank you Andrew.
And welcome to the <unk> Corporation fourth 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.
So 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.
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-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.
I'd like to turn the call over to Tim.
Thank you Shane and good morning, everyone. Thank you for joining us again.
I'll start on slide four with some highlights from our very strong first year.
Despite the challenges of a variety of headwinds in 2021, we grew adjusted EBITDA by 15% over 2020 and set the table for another year of double digit growth in 2022.
One favorable long term business in key end markets and we deployed hundreds of millions of dollars to reduce liabilities and repurchase shares our EBIT growth in 2021 was primarily driven by double digit organic revenue increases in ground transportation industrial and packaging.
This more than offset a 30% year on year decline in our organic aerospace sales.
Throughout the year, we optimized our product mix to account for changes in automotive demand related to semiconductor shortages and changes in staffing availability due to the pandemic.
Early in the year, we announced $2 billion in contract extensions with key aerospace customers and another $1 $5 billion in agreement with the can makers and secured a return to the north American packaging market.
We also won content 23, new automotive or light commercial programs, including seven full electric vehicles.
And we executed on our capital allocation strategy that reduced our gross liabilities by roughly $2 billion and net liabilities by approximately $700 million through a combination.
A nation of accelerated pension funding exceptional management of our environmental liabilities and a $1 billion pension utilization.
These actions significantly reduced our risk profile and positioned us for much higher cash generation moving forward, we also repurchased about $160 million of our stock and initiated two organic capital projects that will help drive EBIT growth starting in 2023.
All of these actions and wins in 2021 are setting us up for a second year of double digit adjusted EBITDA growth in 2022.
Big step up in free cash flow generation, and a continuation of our momentum into 2023 and beyond.
Moving to slide five I'll provide some details on the fourth quarter.
Our fourth quarter 2021, adjusted EBITDA of $175 million increased $24 million or 16% year over year and was up 2% sequentially.
Profitability increased despite labor shortages related to employee warranty levels that reached new pandemic highs by the end of the year.
We also had a brief equipment fire at one of our North American rolling facilities that reduced our total volumes for the quarter versus expectations.
These challenges caused us to deliver fourth quarter results at the low end of the guided range.
We continue to take action to offset inflation in erlang materials energy prices and freight cost by increasing prices and driving productivity measures.
Most importantly, the markets we serve remain strong.
We had year over year organic growth across the business in the fourth quarter and continue to expect all of our markets to grow at a multiple of GDP over the next several years.
Thanks to the actions that we took throughout 2021, we have significantly strengthened our balance sheet and created a strong platform for capital allocation options heading into 2022.
As an example in the fourth quarter, we repurchased another one 8 million shares for approximately $55 million, bringing our buyback total to nearly 5 million shares for approximately $160 million in the first eight months of our two year $300 million authorization.
And as Eric will soon share just yesterday, we upsized, our ABL by $400 million.
As we've been saying for a while now free cash flow is stepping up in a big way. This year that we will open the door to more return seeking capital allocation opportunities.
That includes the organic investments, we've already announced and the potential for additional share repurchases as well as other capital allocation options.
And as always we'll continue to rank those opportunities by the rate of return and work our way down the list.
Moving to slide six I'll provide more detail on how we performed across our markets.
Let's start on the bottom right corner of the slide in the fourth quarter, we grew organic revenue year over year in every single end market.
Ground transportation sales increased 12% organically from the fourth quarter 2020, due to growth in both automotive and commercial transportation. Despite the impact of the semiconductor chip shortage.
Our share gain in this segment allowed us to grow our automotive sales, which slam against the parent.
Growing 18% year on year, while automotive production builds were actually down 15%.
Will be coming back to this part of the business later in the call when we start to talk about the future.
Led by our continued share gain outpacing vehicle builds depleted inventory levels.
Pent up consumer demand, we expect to see continued growth in ground transportation for the next several years.
Fourth quarter sales in the industrial market increased 17% organically year over year.
The industrial segment was strong for us all year, and we expect to see this momentum continue into 2022.
And the building and construction market, our sales increased 9% organically year over year and 2% sequentially.
Broader trends in the building construction markets are solid despite supply chain and labor challenges that our customers are facing in meeting that demand.
Our packaging sales in our packaging segment serves 54% organically year over year in the fourth quarter due to the accelerating ramp up of volumes at our Tennessee facility as well as continued strength in Russia and China.
And finally aerospace sales were up 19% year over year on an organic basis and 11% sequentially. As we've stated previously our aerospace sales reached a bottom in the fourth quarter of 2020.
And we expect to see continued growth until our revenues reached pre pandemic levels sometime in the 2024 timeframe.
The 11% sequential improvement in the fourth quarter is an acceleration of the sales improvement that we saw in prior quarters, a clear sign that destocking in the supply chain has improved significantly.
The fourth quarter showed just how strong the markets are that we serve in the face of supply chain and labor constraints and as those constraints ease our profitability and our growth will continue to improve.
I'm now going to turn it over to Eric to discuss the fourth quarter results in more detail.
Tim I'll start on slide seven with our fourth quarter financial highlights.
Revenue in the fourth quarter was $2 1 billion up 13% from the prior quarter and up 19% organically year over year.
Net loss for the quarter was 38 million. This included an after tax noncash goodwill impairment charge of $65 million related to our extrusion segment. This impairment was primarily driven by a combination of market based factors, including delays in aerospace market improvement and significant cost inflation.
Adjusted EBITDA was $175 million, which was an increase of 16% year over year and 2% from the prior quarter free.
Free cash flow for the quarter was $35 million, which was lower than we expected. This was impacted by higher inventories at year end, resulting from three main factors.
First we again had a pivot from automotive to industrial and this takes time.
Second as Tim mentioned, we had a production disruption from a small fire at our Tennessee location.
And lastly, we again saw an increase in employee quarantines related to the pandemic, which I will discuss more on the coming slides.
Capital expenditures were $61 million in the quarter approximately two 9% of sales and we would expect a similar range or approximately 3% were lesser revenue for 2022.
Tim mentioned, we repurchased approximately $1 8 million of shares for the quarter or approximately $55 million and ended the quarter with a cash balance of $335 million in total liquidity of approximately $1 1 billion.
Also as we just announced we executed a $400 million increase to our existing asset base lending facility expanding it to $1 2 billion.
This reflects the increase in collateral base due to our volume growth higher loan to values and expected growth in packaging working capital this coming year.
This increase position us well for future capital allocation opportunities turning to slide eight I'll discuss one of the key factors that influenced our performance.
Our results in the fourth quarter were impacted by labor issues that limited our ability to produce it shifts across several of our production facilities. This.
This was driven by a rise in COVID-19 infections that spiked in December than have been declining over the past few weeks as you can see in the bottom right of the slide our employee warranties exceeded deep level seen in late 2020.
As a result of these quarantines, we were forced to idle entire shifts that reduced revenue and adjusted EBITDA compared with our expectations coming into the quarter.
We continue to make progress on hiring and retention and as Youll see in the top right of the slide we added a net 243 employees in the fourth quarter turning to slide nine I'll discuss our financial performance in more detail.
Revenue increased $676 million year over year, primarily due to the impact of higher aluminum prices and the improvements we're seeing in volume and mix.
Adjusted EBITDA was $175 million up $24 million or 16% year over year, primarily due to improved pricing volume mix, partially offset by inflation.
We are experiencing high inflation, which can no longer be offset by normal productivity initiatives.
Savings net of inflation was a negative $35 million as our $35 million in shop floor productivity measures could not offset $71 million in inflation in the quarter, primarily from energy transportation and alloy materials are pricing initiatives are expected to offset this inflation, but I have a lagging effect.
Unfavorable aluminum price impact of $50 million in the quarter as it related to the impact of rising metal prices of aluminum to the building and construction systems segment, which was offset by pricing in the year.
Turning to slide 10, I'll review, our segment performance in more detail.
Starting with our rolled products segment.
Revenue was approximately $1 8 billion up 24% organically year over year, driven by growth across all our end markets. Adjusted EBITDA was $162 million up $23 million or 17% year over year, reflecting stronger prices volumes, which were offset by cost inflation and the end of temporary safe.
The measures from 2020.
Revenue in our building and construction segments for the fourth quarter was 261 million up 25 million year over year up 7% organically adjusted EBITDA was $33 million up $3 million year over year, driven by increased price, partially offset by higher aluminum cost and inflation rare.
Revenue in our extrusion segment was $87 million.
12% organically year over year, adjusted EBITDA was a loss of nine versus a loss of four last year as aerospace weakness, which has historically been 50% of this segment sales continues to impact this segment's performance as.
As we mentioned before we believe the combination of structural cost actions and aerospace market improvement will drive improvement in the financial performance of this segment.
Now moving to slide 11.
Review of the impacts of aluminum price and manufacturing challenges on our balance sheet and cash flow.
As you can see on the chart on the left side of the slide after a short decline in October the price of alumina has returned to record levels and our outlook for the year, which Tim will discuss shortly is based on the combined <unk> plus Midwest premium of 3700 per metric ton.
Our adjusted free cash flow for 2021 was impacted by the rise of aluminum prices, which drove increases to our working capital throughout the year as we've mentioned before aluminum is our largest input cost and while we passed these changes through to our customers price changes do impact our net working capital on our balance sheet and our free cash flow.
And when prices move in either direction.
For the year net working capital increased $364 million as you can see on this slide we estimate approximately $250 million of the net working capital increase was related to the precipitous rise of aluminum throughout the year.
The balance of networking capital increase for the year was comprised of $40 million related to growth in packaging and industrial markets and approximately 60 million of excess inventory built in the fourth quarter.
This fourth quarter buildup of inventory was due to a combination of lower articles increased pivot to industrial markets. The very brief fire that disrupted production at our Tennessee facility and the impacts.
<unk> employee quarantines related to the Covid variant that we experienced in December .
Working capital management remains a top priority as you can see on this line we had challenges in 2021 for 2022, we plan to deplete the inventory build related to the pivotal tomorrow to industrial we plan to continue to increase production levels. As this latest wave of the pandemic subsides.
And we will be driving broker management rigor on inventory throughout our production locations now I'll hand, it back over to Jeff.
Thank you Eric.
Starting on slide 12, I want to talk about why we're so excited and confident in our expected performance in 2022.
First the core of our business. The rolled products segment has already reached adjusted EBIT levels greater than where we were in 2019 prior to any and then make impact.
In fact 2021 adjusted EBITDA in the segment improved 24% year on year, Despite aerospace revenue being down 30%.
In the North American automotive production being essentially flat with 2020.
2022 volumes are set to benefit from the ongoing ramp up of the packaging in Tennessee continued improvement in aerospace and automotive growth semiconductor availability should ease throughout the year.
And looking into 2023 and beyond we've already announced the capital investment in our Lancaster Hotmail that'll deliver more than 100 million pounds of incremental capacity on a run rate basis to build on the 2021 and 2022 growth that's coupled with the other investment we announced and davenport's casting capacity that will both reduce our <unk>.
And lower our greenhouse gas emissions intensity by allowing us to consume more scrap.
The two combined should add $75 million of annual EBITDA to our results and we're continuing to evaluate additional under the roof top investments to creep capacity in markets that are showing strong demand.
Moving to slide 13.
Let's look at some of the end markets driving our future starting with ground transportation, where we continue to win in automotive.
We all know that the global automotive production was hindered throughout 2021 by the semiconductor shortage.
While automotive volumes were below our expectations.
We still managed to significantly outperform north American light vehicle production on a year over year basis as you can see in the table on the left our rolled product automotive volumes were up 18% in 2021 compared to 2020 and in that same time period towards intelligence reports that north.
<unk> light vehicle production was flat.
This is a clear indicator of the share that we're gaining in the segment as we went throughout the year.
As semiconductor shortages are expected to ease in 2022, we stand to benefit from a higher level of year over year production rates at the Oems.
As dealers seek to replenish their inventories at year end, North American dealer inventories were conservatively at least a million and a half vehicles short.
Typical levels.
And we continue to outpace total light vehicle build moving forward as light weighting drives aluminum adoption and vehicles, where we have greater content outpaced the rest of the market.
We expect this trend to continue and accelerate as aluminum intensive electric vehicles continue to gain share.
Turning to slide 14, let's look a little more closely at the automotive wins I mentioned earlier.
Yes.
In 2021, we captured content on 23, automotive or light commercial vehicle programs more than double the 11 programs. We won the year before.
They include eight pickup trucks, nine Suvs or crossovers.
And two electric last mile delivery vehicles.
The 23 programs seven are fully electric on.
In the slide you can see just a handful of programs, where we won content last year. The popular Toyota Tacoma is one of the eight pickup truck programs. We added. We're also excited to support GM on the launch of their all electric Hummer EV.
<unk> pick up.
And we look forward to continue working closely with forward, providing typical content and more.
And the all new all electric F 150 lightning pickup truck.
We also added flagship SUV programs, including the Wagoneer and the Ford Bronco and one of the areas earlier highlighted is our participation in the electric last mile delivery vehicle market.
Virtually all of the major commerce and delivery companies are exploring electric vehicles to.
To improve their environmental footprint.
We're proud to announce our participation on the GM break drop even 600. This is an all electric commercial cargo van purpose built for the delivery of goods and services.
We were part of the development process with the OEM and we're very excited about what this early entrant means for the rest of the commercial electric vehicle market.
The only the beginning as we have content on or exploring additional opportunity on.
Similar vehicles at different phases of development with multiple existing and potential customers.
Across our whole portfolio revenue associated with Evs is expected to increase approximately 80% year over year in 2022 to over $250 million.
Moving to slide 15, I'll discuss the strength, we're seeing in the industrial markets.
Starting on the left hand of the slide you can see the 2021 aluminum sheet and plate shipments from all U S and Canadian producers not only exceeded pre pandemic levels.
Which were at an all time high in 2019 2021 shipments also increased 11% year over year, creating a new all time high.
And while North American demand has largely recovered production capacity hasnt expanded significantly in our region.
So you can see how pricing has responded and the chart on the right hand side of the slide.
Of course, $50 52 is an alloy predominantly used in the industrial segment.
And prices and responding quicker in that segment of our business.
Because contracts are generally shorter in nature.
In the domestic market is also benefiting from a level playing field due to trade actions against China as well as 16 other countries on common alloy sheet.
The chart on the right also shows Cru's benchmark common alloy conversion fees by quarter. Our 2021 volumes were mostly booked in the third quarter of 2020.
Pricing levels.
While our 2022 volumes were booked at the pricing levels seen in the third quarter of 2021.
You'll notice that there was an increase of over 50% in pricing between those two timeframes.
Now that's not to say that we will see a 50% year over year revenue increase across the entire industrial portfolio.
First you have to remember the pricing only applies to the conversion fee, which is roughly a third of the total price.
Shipped pound of aluminum.
Secondly, this is only for our U S business, which is about 65% of our total industrial sales and some of those sales are on a two year contract and last you will remember that we pivoted some of our automotive capacity to industrial in 2021, which is likely to move back to automotive later in 2020.
Two is the semiconductor shortages ease this could result in our north American industrial volumes being relatively flat or modestly declining year over year in 2022, depending on how quickly the automotive production recovers.
Turning now to slide 16, let's take a look at that surging packaging opportunity I mentioned earlier.
We've previously previously mentioned the strong global packaging demand growth and what that means for can sheet production.
Since we announced our North American packaging sales agreements last year, the market has only gotten stronger.
The domestic packaging industry is short on can sheet and cans, which has resulted in greater greater imports in both in fact in 2021 through November the U S imported over 13 billion cans, which is up more than 500% from the same period in 2019.
Over the next three years to five years six different can makers have announced their intention to install about 30, new can lines in the U S alone.
Filling the incremental capacity associated with those new can lines.
It's going to require another $1 2 billion pounds of can sheet per year.
Roughly the annual output of an entire rolling mill.
By the way packaging growth is not only a U S phenomenon in fact in Russia, where we have a very strong can sheet position can making capacity is expected to grow at least 50% from 2021% to 2025 and that doesn't include several other can making investments happening in some of Russia's neighboring states as a.
Result, we're continuing to evaluate expanding our seat capacity in Russia to serve this rapid growth.
Of course that will be somewhat dependent on the situation involving the Ukraine, the escalating and as you'll see later today, we've heightened the related disclosures regarding Russia in our 10-K.
Now, let's take a look at the organic revenue outlook for 2022 on slide 17.
This slide really underpins the basis for our confidence in delivering another year of double digit earnings growth multiple indicators indicate to expected growth in organic revenue across all of the markets, which we serve.
Starting in ground transportation, we expect to deliver organic revenue growth.
Of 10% to 15% increase year over year.
Following a 24% year over year increase in 2021.
Our automotive customers are telling us they expect semi conductor shortages to east throughout 2022, allowing them to meaningfully increase production from 2021 commercial transportation sales will also remain strong but are not expected to grow at the same place pace that they did in 2021.
Following what I discussed a moment ago, we expect industrial organic revenue to grow 5% to 10% in the full year after a 27% year over year increase in 2021.
While demand and pricing are both strong in the market our year over year growth may be constrained by the need to pivot what was industrial capacity in 2021.
Ground transportation later this year.
Building and construction organic growth is expected to pick up modestly to a range of 5% to 10% from 5% in 2021.
Nonresidential construction activity is increasing but supply chain constraints pricing and labor issues are creating uncertainty for our customers in the near term.
We expect packaging organic revenue to increase 40% to 45% as north American can sheet ramps up to full capacity throughout the first half of this year.
And the facilities in Russia, and China continue to serve very strong global markets. This is on top of the 25% year on year organic growth we achieved in 2021.
And finally aerospace organic revenue is expected to grow 25% to 35% year over year as the supply chain is expected to be destock. This year and OEM build rates are increasing as we speak we expect our aerospace revenues to reach pre pandemic levels in the 2024 timeframe.
Turning to slide 18, I will discuss our profitability and free cash flow growth.
You'll remember last quarter, we increased the total EBIT uplift target to $375 million from pre pandemic levels.
This is driven by the investments in Lancaster in Davenport to increase volumes and reduce cost both of those projects are already underway and on schedule.
With the completion of the packaging ramp up in the first half of this year. We will have delivered the 600 million pounds of volume growth that we anticipated.
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've realized $80 million and productivity gains on the shop floor, but as we stated last quarter the impact is being tempered by inflation and pandemic related crewing challenges.
As we overcome the staffing challenges and realize the benefit of the pricing actions, we've taken to offset the cost increases.
Such as seen in energy and magnesium, we'll see those productivity savings start to hit the bottom line.
And looking at the bottom half of the slide you can see the impact of the disciplined capital allocation decisions. We've made over the last two years.
Since we became a Standalone company, we've changed the capital structure.
Funded and Derisked the pension.
Reduced <unk> spending and paid down environmental liabilities as a result annual cash outlays have declined by over $300 million from 2020 levels.
Our balance sheet is stronger adjusted EBITDA and free cash flow are growing.
And the returns associated with redeploying cash are driving opportunities for additional value creation.
Moving to slide 19, let's take a look at a few sustainability highlights.
As an aluminum manufacturer, we advanced sustainability in everything we do from the way we operate to the products. We design, we continually seek ways to improve our production processes to reduce energy consumption.
And emissions, while creating materials used in products that are more sustainable than competing materials.
You can see on the chart on the left hand side of the slide that externally sourced scrap in our rolled products segment is up 9% from pre pandemic levels.
We're particularly proud of this fact, considering that our volumes are only up 1% over the same period.
And scrap utilization is expected to pick up substantially in 2022, as we increase can sheet production, which allows for much greater scrap consumption and some of the other products in our portfolio.
As we increased scrap used in the rolled products segment.
You can also see two major examples.
Of how our products drive sustainability.
First in the area of automotive applications, our aluminum sheet is enabling fuel efficiency and range extension by providing light high strength solutions.
It bears repeating the revenue associated with electric vehicles is expected to increase 80% year over year in 2022, and we're well positioned to help customers advanced in this space.
Secondly, can sheet is comprised of up to 90% scrap which makes aluminum packaging a much more sustainable option compared to other alternatives.
With packaging revenue expected to grow nearly 50% this year.
We're helping our can sheet customers meet the surging demand for the infinitely recyclable aluminum can.
Now, let's turn to slide.
20 to take a look at our outlook for 2022.
Our full year outlook for 2022 revenue is expected to be in the range of $9 nine to $10 3 billion.
Adjusted EBIT is expected to be in the range of $800 million to $850 million.
And we forecast free cash flow to be approximately $250 million in 2022.
You'll notice that the midpoint of the adjusted EBIT guidance range implies a second consecutive year of 15% growth is 19% at the top of the range.
Is largely driven by the organic growth I discussed and is supported by our North American packaging ramp up the expected recovery in automotive and the expecting ramping of aerospace build rates.
We continue to experience challenges from inflation freight energy and staffing, but we believe these temp. These headwinds are temporary and we've put multiple countermeasures in place to mitigate them.
Looking beyond 2022, we're excited about the capital projects that we've announced to drive organic growth in 2023.
We continue to evaluate similar projects to set up the next phase of growth.
Wrapping up here's what I think you should take away from today's call.
Looking forward.
Our end market trends in organic investment strategy continue to support sustainable double digit earnings growth.
We're experiencing a step change in free cash flow, which has created new opportunities for return focused deployment.
And we grew adjusted EBITDA up 15% year over year in 2021, and we fully expect to do it again 2022.
So at this point I'd like to open it up for questions and I'll turn it over to Andrew to help us facilitate those.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
First question comes from the line of Curt Woodworth with credit Suisse.
Yes, Thanks, good morning, Tim and Eric.
Good morning, Kurt Good morning.
So just.
Back to the guidance.
If you could kind of talk about.
Some of the drivers between how you see the high end and low end materializing this year and I know last quarter you discussed.
Likely to be price cost positive for the year.
But could you just frame that in terms of the magnitude of what you think that price could look like this year relative to what it was.
'twenty one.
I think the key drivers that are going to underpin the uplift in EBITDA.
Price is probably net price increases I think would be our <unk>.
Larger driver pretty pretty close to the.
The margin that we expect to get from the can sheet ramp up.
And then we're expecting to see some modest improvement in our aerospace <unk>.
<unk>.
As it recovers.
Nice nice recovery on a percentage basis, but coming off a small base.
And in the automotive.
Out of recovery and then.
The reason for the wide range.
If you think about the headwinds.
In terms of uncertainty I'd, probably put the semiconductors at the top of the list. We continue to hear it's getting better, but but we still see a lot of instability there.
Labor inefficiency has been something that we can kind of thought through in the second half of last year.
We saw the.
Impact to our population I think peaked in the.
The third week of January it's been coming down nicely and we're down about 40% off of that peak already.
So I'm, hoping that we're putting some of that behind us here as we work our way through the quarter, but we are still ramping up at several facilities. So there's a lot of training costs that will be with us I think particularly in the first half of the year.
As we get to full capacity in Tennessee, and we ramp up our plate mill in Davenport, specifically, some areas, where we've got a lot of staffing going on.
I think we've done a good job of pricing up for the inflation, but.
We're certainly keeping an eye on that.
Hopefully we don't have any other.
Unpleasant surprises like we had with magnesium last year, the big Spike in energy prices that we've seen in Europe .
And then the last thing is we do have.
Our contract with the Steelworkers, our master contract comes up in May.
So we've got some.
Costs associated with getting ready for that.
Building, a buffer stocks and things like that.
To make sure we're in good shape to protect our customers. So those are some of the things that we're managing through that would help you think about the difference between the top and bottom of our range.
Okay.
Okay, and then I guess just on packaging the 40, 45%.
Growth could you talk a little bit about.
How much of that would be volume versus maybe conversion pricing up where some of the beverage can companies have been pretty vocal about pretty significant can't see price increase thats certainly in Europe .
Like what's going on in the U S. So if you could just help us maybe understand a little bit about.
Maybe your non U S clean sheet kind of pricing and how much of that is we're doing this year versus how much maybe a reset down the road would be helpful.
Yes sure so.
First of all.
The revenue increases in <unk>.
Conversion revenue and in pound.
Predominantly.
Because a lot of that incremental growth is coming in North America.
This is our first year of the contracts we sign.
We were happy with the pricing that we got in those contracts.
Our contracts in.
China are more annual in nature.
We're certainly seeing pricing.
Increase in that region as well.
And the export opportunity for that facility has been very good.
Isn't the only cut.
Country, because thats importing metal and so we've got lots of options there and.
Our contracts in the Russian facility.
Generally.
Two years in nature and.
I would anticipate that pricing is going to be improving in.
In that part of our business as well.
Okay.
And then just lastly, I know.
Ben it's been a little while but I think previously you've talked about normalized EBITDA power of the company I think closer to like $1 1 billion, while recovering in Aero, but.
Then even our planned cost her Davenport, which is under 75 million when we looked at the conversion chart for $50 52 alloy.
It seems like from the low point, that's up almost $650 per metric ton.
I know theres been some cost increases, but thats pretty incremental to EBITDA and then you also had comments on.
The packaging market has only gotten stronger since you initially price some of those contracts I guess call. It a year ago. So do.
Do you have any updated thoughts on that.
Okay. It seems like the auto thank you.
Continues to develop positively as well just so we can kind of maybe reframe longer term potential.
I still have a very very consistent an optimistic view of the potential of the business I mean.
The markets are there.
We're hitting we're hitting the mark on getting the capacity up.
You see the question Marci you have it okay.
Well aerospace fully recover by 2024.
Let's see.
It's making good move now.
Well automotive get back to pre pandemic levels in the same timeframe, that's something we got to look at.
And the pricing environment is good.
If this inflation continues on at the rate that it does as you know there's always a lag of trying to catch up with it right because.
You pass it through and you've got to wafers.
Different commercial relationships.
Arrangements to time out in some of those contracts are longer than others, but.
Yes, I still feel like.
The path, we're on is going to.
Have the type of improvement that we have been advertising and our profitability.
Great. Thank you very much.
Thank you.
Next question comes from the line of Josh Sullivan with the benchmark company.
Hey, good morning.
Hey, Josh.
Just a question on the capital allocation option.
Rank the rate of returns here, how are the growth capital project bookings that pipeline I think you've said in the past.
The 25% IRR hurdle or customers coming closer to meeting that hurdle or further away things like packaging and automotive.
No I mean the.
Two that we announced we're well over 25% IRR.
I think.
We have a similar opportunity certainly in the international packaging market.
We've got to make sure there's enough stability in the region that we can put a capital project in and get people in and out so that timing is.
Something that we're thinking through there.
Still see I think really good opportunity to.
Put some high return seeking capital into.
The North American market I think right now the best return profile, probably looking like the industrial segment.
But the other the other markets are are catching up so.
I think the opportunities there and we've got to continue to identify the projects due to capital work lineup customer commitments and.
There's more to follow.
Got it.
And then just more of a clarification.
Clarification question, but on the free cash guidance in the slides for the third quarter, you referenced adjusted free cash, but the slides here for the fourth quarter leave out that adjusted note you didn't do that for EBITDA. Just curious if there's any dynamics driving that reporting change.
We had so much so so much of that obligation. When you have a couple of hundred million dollars that you have.
Using to pay down our pension and environmental liability.
We adjusted that out so that you would get a better view of.
What the business could do without those those let's say constraints and now that they've become so much lower.
We don't feel there's a need to pull them out of our free cash flow guidance anymore.
Yes.
So is there a pension contribution element to the free cash that you could share.
There is that we put.
Put us the slide will last line in the earnings deck, we'll give you pension and OPEC cash cost. So you can start to parameter.
Got it thank you for your time.
Thank you.
Thank you and our next question comes from the line of Corrine Blanchard with Deutsche Bank.
Good morning, Tim and Eric.
Good morning, good morning.
Alright.
Just to clarify I'm sorry on the previous question I ask would take up on that on the free cash flow guidance the pension outflow.
Right.
The one time event for 2021 way you took it out.
The free cash flow guidance includes pension OPEC environmental as a normal free cash flow guidance in 2020.
Okay, great. Thank you.
Most of my question has been answered profile, but just maybe if you can give you more quota.
Trichion pressure that Youre seeing for 2022, and maybe on the timing I mean, you mentioned the labor inefficiency.
Koby.
How do we think about do you think that's more like a <unk> into Q and then anything that you can maybe give some color.
Sure I'll start with the labor.
As I said it was about the third week of.
January is when we had the biggest impact in terms of employees under quarantine that we've had from the very beginning of the pandemic.
That has come down.
Significantly about 40% over the last three weeks.
So I'm thinking that that is going to start to dissipate.
Now we're still we're ramping up the can sheet opportunity I think we got to about 40% of our targeted capacity in the fourth quarter.
So we're still bringing in.
We're still bringing in people and metal through the first quarter into the second quarter on that and then we're seeing a very nice trend developing in place for our facility in Davenport. So.
That is a relatively people intensive part of our plant in plate mill has a lot of.
A lot of Standalone assets that we have to crew up so I would think that.
The first quarter will be the highest of the year and then it will taper down through the second quarter, and we should be getting to pretty full run rates as we go into the second half so.
That's how I would think about that in terms of the inflation.
We first of all we're seeing and you'll start seeing the pricing role in that we initiated in the fourth quarter. So that's going to help.
<unk>.
The two that I would say kind of standout right now is.
Energy in Europe has continued to be elevated because of the issues between Russia, and Ukraine and all the concern around that.
And then transportation costs here in North America were relatively high as we opened up the year as well so in freight market continues to be pretty tight.
But I don't think anything else jumps out as being anything different than we talked about last quarter.
Alright, Thank you and maybe one more question from me.
On the Russia.
At Crane.
You had mentioned looking at some.
And therefore for packaging.
Are you considering depending maybe on the I'll call them all is that right now.
Top priority for you.
We're very interested in it again.
You've got to be able to execute and right now because of some of the issues that are going on it's really hard to get visas.
Not just for ourselves, but most of the equipment that.
That we're looking at a lot of it is in western Europe and so.
We've got we've got to be confident that we can execute on getting the capital put in the ground and I think we just got to keep an eye on it and see how this thing resolves itself.
Alright, Thank you most of what's coming.
Thank you.
Our next question comes from the line of Timna Tanners with Wolfe Research.
Hey, good morning, everyone Happy Friday.
Hey, Timna good morning.
To ask a little bit more to understand the cadence of 2022 EBITDA guidance and what's included in that sounds like Youre definitely plan to.
Cost inflation in the first quarter from labor issues, but.
But how much of releasing costs in general is contemplated in your guidance are you assuming it doesn't sound like you are assuming continued absenteeism or are you assuming continued elevated energy costs and transportation and can you just talk a little bit about the cadence and whats the same cost wise in your outlook.
Yes, I think that I.
I think that we're.
Planning on the cost level being relatively flat through the year. There are elevated as we opened the year.
And so I think.
If you are.
Thinking through our our guidance, we're ramping up packaging.
As we go through the first half and so packaging profitability should be better in the second quarter than the first quarter and should be to its full utilization when we get to the second half and Thats one of the big drivers in our uplift.
I would say the same thing with the.
Aerospace volume right. So we're ramping up I'm, putting the labor and already so I think that labor spend is going to be relatively flat, but im not getting that.
Utilization because we're training a lot of employees right. Now so you can think of that as kind of a.
A negative labor variance.
And then I also think that the semiconductor chip so clearly it's still a problem right in.
It's more concentrated now its not across all of our customers, but we still have a significant.
Significant customers that are having issues.
And.
I'm, hoping that.
<unk> continues to improve as we go through the year and so I think from a cost perspective, not a big ramp.
It's really catching the volume associated with.
Getting crude out.
But for example, if we think that energy costs are going to rollover and we think that like free challenge.
Challenges are going to ease that also in your guidance are you assuming kind of steady state.
Yes steady state got you and then my other question was just I know you've talked in the past about possible dividend than you.
We're going to have with less pension contribution and with the free cash flow guidance Optionality. So I know, it's kind of an asset I'm just wondering like how do you think about buybacks and dividends within that discussion of grosses. How do you think about the party.
Well.
I tend to look at it.
Through the rate of return lens.
So we talked about <unk>, 25%, if we're going to go after or.
<unk> capital.
When we think about share repurchases, we're thinking about them the same way right.
Alright, and so if we think that the shares arent reflecting.
What management is going to deliver then we're going to continue to look at buying our shares back.
On the dividend I think.
Also represents an opportunity to drive shareholder value I don't know that it has a 25% IRR attached to it.
And.
We also as we're chasing the growth in working capital a lot of it being driven by metal.
We want to make sure that we're throwing off good cash flows when we decided to make a decision like that.
Okay. Thank you.
Thank you.
Ladies and gentlemen, if you have a question. Please press star one.
Our next question comes from the line of Emily <unk> with Goldman Sachs.
Good morning, Tim and Eric and thanks for the update today.
Last question is just a follow up around the free cash flow guidance for 2000 $20 million to $215 million are you able to share what locking cap assumption you have embedded into that given the price outlook that you're expecting.
So we're looking at that we based it on the 3700 per metric ton. So you can imagine that's going to be it's been a wildcard all throughout 2021 and it will be the same.
Our rule of thumb is about for every $100 move is about $20 million, depending on whether it goes up or down so I believe thats going to be the biggest wildcard in cash flows.
As far as other assumptions on working capital and we have assumed a working capital build at that 3700 right for the packaging ramp. So you can imagine what Jim just described is the packaging ramp we'll see through Q1 to Q3.
He is going to be a use of inventory or.
Build of working capital, we will have the offset to some extent with a $60 million that we built in Q4.
We still expect there'll be a net working capital increase and that's built into our cash flow guidance.
That's very clear.
And then my second question just around.
Can you remind us.
One is the clauses on mechanisms in your pricing contracts that don't allow you to pass explicitly recover high alloy metal prices or labor or energy cost.
Or is it more of a broad based and play doh.
It it really varies by market.
There typically is going to be a pp PPI indicators.
We'll start with the industrial they have the shortest contracts.
We typically do annual contracts and then backfill available capacity was spot.
In there we generally.
Bake it into the annual price.
And.
We also as Youll recall.
We had a problem with magnesium so we put a surcharge in place. So if we see something that.
It really goes sideways throughout the year, that's how we would think about that market.
Automotive contracts.
All the automakers allow for some sort of an index.
The index is going to be different customer by customer, but typically.
Energy.
They are paying for the transportation in most cases.
It's going to be in there just general inflation, some kind of PPE PPI index.
It's going to be there I would say the aerospace contracts behave very much the same way.
In a market like that we do have more alloying elements. So it's going to be more typical that those are called out separately.
As part of the index as well.
So.
It's not.
What a one size fits all but we do have protection with all of our.
And market.
Great appreciate the color that was helpful. Thank you.
Thank you.
Thank you and I'm showing no further questions I'll now turn the call back over to Tim Myers for any closing remarks.
Okay, well again.
Thank you very much for joining us today.
Enjoyed the opportunity to.
<unk> the business.
As you think about us in closing just a few thoughts again first of all we delivered 15% year on year EBIT growth in 2021.
We're guiding to another 15% year of EBIT growth in 2022.
And we're setting the table for some sort of similar performance in 2023.
We've been very very focused and disciplined on strengthening our balance sheet and with the free cash flow that we intend to generate.
We're looking forward to.
Continuing to create value for our for all of our shareholders. We'll talk to you next quarter.
This concludes today's conference call.
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