Q2 2022 Arconic Corp (PITTSBURGH) Earnings Call
Good day and welcome to the our sort of corporations second quarter 2022 earnings conference call.
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I would now like turn the conference over let's say Laurie director of Investor Relations. Please go ahead Sir.
Thank you Rocco good morning, and welcome to the Arcana Corporation second quarter 2022 earnings Conference call I'm joined today by Tim Myers, Chief Executive Officer, and Eric Asleson, Executive Vice President and Chief Financial Officer.
After comments by Tim and Eric We will have a question and answer session for those of you who would like to follow along with the presentation slides are posted under the investors tab on our website.
We'd 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 in our most recent SEC filings. In addition, we've incurred.
<unk>, some non-GAAP financial measures in our discussion.
Conciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release and in the appendix in today's presentation with that I'd like to turn the call over to Tim. Thank you Shane and good morning, everyone.
I'll start on slide four with some key highlights for the quarter.
In the second quarter, we grew adjusted EBITDA by 9% over last year, which would have been better absent some ramp up issues in our Tennessee facility.
We remain on pace to deliver another year of solid double digit growth in 2022.
Demand across our end markets remain strong and our operations generated $162 million in cash in the quarter.
It will be fundamental to growing is growing free cash flow is supporting high return organic investment.
Cancel returns to our shareholders.
In June we held an investor day, and announced long term adjusted EBIT targets, along with our phase III organic investment program I enjoyed the opportunity to tell our story and meet many of you live for the first time.
While we're just starting off on that journey. The demand we saw in the second quarter. It gives us continued confidence in meeting those targets.
<unk> demand continues to grow as can makers to add capacity and consumer preferences shift to aluminum.
Industrial pricing and orders are strong as trade actions have leveled the playing field in that market.
Might that shrunk to meet demand our industrial performance suffered in the second quarter due to equipment related issues hindering our production ramp up of Tennessee.
We are working to resolve those issues within this quarter and expect to reach full production rates at the facility in the fourth quarter.
Ground transportation is improving modestly.
Conductor supply it stabilized, but production still remains depressed versus historic levels.
The aerospace recovery is accelerating and the strong building construction growth supported by North American nonresidential demand.
Our long term plan is expected to deliver adjusted EBITDA at a roughly 10% CAGR through year end 2025 to an approximate $1 $2 billion run rate.
At our Investor Day in June we also announced that we were evaluating the sale of our <unk> business, we have decided to pause that process due to.
The current uncertainty in the debt markets.
<unk> is a very valuable and highly performing business and we do not believe we receive proper value for it on the current economic and market conditions.
Moving to slide five I'll provide some more detail on how we performed across our key markets.
So what should you take away first organic revenue growth in the quarter was again led by aerospace packaging and building and construction.
Aerospace grew at the highest relative rate for our <unk> for the first time since separation as the market recovery continues to accelerate and the channel continues to destock packaging.
Packaging continued to ramp up in Tennessee through the quarter and remained strong internationally.
Building construction was very strong again.
Due to the combination of pricing and sustained demand.
Now, let's go around the horn on the bottom right corner of the slot in total our organic revenue was up 17% over last year.
Ground transportation sales increased 10% organically year on year, reversing course from a 10% year on year decline in the first quarter.
We're beginning to see some stability in the automotive and heavy duty truck demand, but production levels remain soundly below historical levels.
Following a 22% organic increase in the first quarter second quarter building construction sales increased 29% organically year on year.
This is again, a result of pricing actions as well as strength in North American nonresidential construction spending.
Sales in the packaging market grew 47% organically year on year due to the ongoing ramp up at our Tennessee facility.
<unk> grew 30% sequentially as the ramp accelerated substantially in the second quarter.
Russian packaging organic revenue was flat year on year.
Second quarter sales in the industrial market declined 11% organically year on year, the market and pricing remains strong for industrial, but we had some facility specific issues in Tennessee.
Limited our ability to meet available industrial demand as we ramp the facility to full capacity across the automotive industrial and packaging.
Had equipment problems that disrupted the efficiency of the flow path.
We will address these issues this quarter, but it will require an outage in Tennessee that will create a similar headwind in the third quarter, we expect to be back at full capacity in the fourth quarter.
Finally second quarter Aerospace sales were up 50% year on year on an organic basis. If you look back at the last several quarters year on year organic growth continues to accelerate.
Our aerospace shipments declined by double digits in the first half of last year. They were down 4% organically in the third quarter of 2021 before returning to organic growth of 19% in the fourth quarter, 32% in the first quarter and now up to 50% in the second quarter.
We're encouraged by consumer demand for air travel and the ramp up of orders and production in large commercial aircraft.
Now I'll turn it over to Eric to discuss our second quarter results in more detail. Thanks.
Thanks, Tim I'll start on slide six with our second quarter financial highlights.
Revenue was $2 5 billion up 17% organically year over year net income for the quarter was $114 million or dollar five per share compared with a net loss of $427 million in the second quarter of 2021, our second quarter. Net income included an after tax net foreign currency gain of approximately $48 million.
Primarily related to foreign exchange fluctuations in Russia in the second quarter of last year included an after tax noncash pension settlement charge of $423 million.
Adjusted EBITDA was $204 million, which was an.
Increase of 9% year over year free cash flow for the quarter was $129 million and is improving as a result of declining aluminum prices on.
Also in the quarter, we further improved our days working capital by approximately five days as we continue to focus on smart sizing our system working capital as Tim mentioned, we are increasing our free cash flow guidance for the year to approximately 300 million to reflect the now lower aluminum prices in the quarter, we repurchased approximately $1 3 million.
Shares since we announced this program in May of last year and through the end of the second quarter, we repurchased approximately $6 7 million shares or approximately 5% of our outstanding shares for $214 million against our 300 million program. Lastly, we ended the quarter with strong liquidity with cash and available liquidity of approximately one.
One 4 billion.
Turning to slide seven I'll discuss our financial performance in more detail.
Revenue in the second quarter increased $747 million year over year, primarily due to the impact of higher aluminum prices as well as realization of pricing actions and improved volume and mix adjusted EBITDA for the quarter was $204 million up $17 million or 9% year over year due to improved pricing volume.
And mix, partially offset by inflation.
As Tim mentioned, we experienced ramp up issues in Tennessee, and this impacted earnings and we expect to have equivalent shares completed in the quarter.
We continue to push to offset inflation with pricing actions and we've experienced high inflation or savings net of inflation was a negative $154 million our shop floor productivity impacts were limited due to production issues and could not offset the approximately $150 million of inflation in the quarter, primarily from energy transportation and <unk>.
<unk> materials.
Turning to slide nine I'll review, our segment performance in more detail.
Starting with our rolled products segment.
Revenue in the second quarter was approximately $2 1 billion up 14% organically year over year, driven by the growth in every market, except industrial which was impacted by the operational issues in Tennessee.
Just the EBITDA in the quarter was $174 million up $1 million or 1% year over year, reflecting stronger price volumes and mix, which were offset by operational inefficiencies and cost inflation.
Revenue in our building and construction systems segment in the second quarter was $329 million up $72 million year over year and up 26% organically adjusted EBITDA was $53 million up $18 million or 51% year over year, driven by increased prices, which offset the inflation and higher aluminum costs, we're experiencing.
Revenue in our extrusion segment in the second quarter was $105 million up 43% organically year over year. Adjusted EBITDA was a loss of $12 million versus loss of $8 million last year's pricing actions and volume growth were offset by inflation and operational issues. This segment continues to underperform due to productivity declines driven by equipped.
And labor issues compounded by legacy contracts now moving to slide nine I'll review review our outlook by market.
Ground transportation organic revenue remains in the range of 5% to 10% year on year, while automotive production is improving we continue to see uneven order patterns from our customers. We are also seeing similar trends in commercial transportation markets.
We are reducing our industrial organic revenue growth expectation to 5% to 10% year over year from 10% to 15% due to the issues in Tennessee in the second quarter, we are working to get things back on track and we now expect to be at full run rates and our Tennessee operations in the fourth quarter, which will allow us to be able to better serve the industrial markets.
Non residential construction activity remains solid with growth in pricing improvements supporting our ongoing view of 15% to 20% year on year.
Packaging growth outlook for North America, and China remains strong and our expectations remain want in a wide range of 20% to 40% year on year and it's due to uncertainty in the supply chain and Russia.
Aerospace organic revenue is now expected to grow 35% to 45% year on year, our expectations for aerospace group had been improving throughout the year as Oems continue to increase their production rates now I'll turn it back over to Jim to discuss our capital growth projects.
Thank you Eric.
Slide 10 provides an overview of our phase II and phase III organic growth programs.
The casting pit expansion of Davenport was completed on budget and is now undergoing trials, we will see some benefit to EBIT from the project in 2022 with full run rate occurring in 2023.
The Lancaster Hot Mill project is on time and on budget as well we plan to install the hotmail stand in September begin qualification trials in the fourth quarter and start ramping up production through the first quarter of next year. As a reminder, this project expands Lancaster output by about 100 million pounds per annum.
In total these two projects should drive about $75 million of run rate EBIT by the end of 2023 and had a total budget of $100 million.
The bottom part of the slide you can see the seven projects that we announced in June that comprise phase III of our organic growth program.
All of these projects are in various stages of planning they are advancing well and we are committed to bringing them to completion on time and budget.
There's additional detail on these projects in our June Investor Day presentation.
In total these projects have a capital budget of approximately $550 million and have targeted returns on investment over 35%.
As we mentioned previously we are currently evaluating additional high return under the roof top internal projects for a phase <unk> program.
Now, let's turn to Russia on slide 11.
We announced in May that we intend to sell our Russian facility and we're currently having talks with several potential buyers. As a reminder, we are subject to certain legal conditions on our operations that impact our ability to change production levels or sell the facility. This makes it difficult to predict the timing and to some degree.
Ultimate probability of the sale.
We continue to comply with all legal obligations and support our 3000 employees, while we pursue our options.
Our operations continue to run at near full capacity adjusted EBITDA in the second quarter in Russia was $24 million, which is flat with $24 million in the same quarter of last year.
Increased export restrictions started in July and will be impacting sales in the third quarter. There is still a great deal of uncertainty in the rest of the year, but we are increasing our guidance slightly to $50 million to $80 million from $40 million to $80 million to reflect the strong second quarter performance.
Cash at quarter end was $120 million up from $79 million at the year end 2021. This is primarily a result of declining aluminum prices and foreign currency fluctuations.
Let's now move to slide 12, where I'll review our outlook for the rest of the year.
Our full year 2022 revenue is now expected to be in the range of nine 6% to $10 billion, that's down from our prior view of 10, 1% to 10 $25 billion due to the impact of lower aluminum prices, which will also benefit free cash flow.
We now expect full year 2022, adjusted EBITDA to be at the low end of the previously guided range of $820 to $870 million. This is a result of the ramp up issues in Tennessee, as well as cost to replace high purity aluminum associated with centuries force majeure announcement and transportation.
Patient issues associated with the North American railcar labor dispute.
We are currently seeing a slowdown in railcar deliveries, which is driving inefficiencies at our Davenport operation as well as additional cost to trans load material to truck to support production.
Additionally, we continue to see high energy and alloy material prices. While these are in our current forecast the situation still remains fluid and we plan to execute on additional pricing actions to address these pressures in our contracting season for 2023.
Looking at the third quarter adjusted EBITDA is expected to decline sequentially due to managing through these issues as.
As well as seasonality in Europe .
We are rapidly addressing the production issues at our Tennessee operation that occurred in the second quarter and have action plans underway to get to full production rates in the fourth quarter. The primary issue is an equipment failure in our beverage can recycling facility as we ramped it up to full production the failure disrupted overall production and also incur.
The amount of higher cost aluminum scrap inputs, which diluted can sheet margins that depend on substantial amount of lower cost used beverage can come to.
While the can sheet ramp was able to meet full volumes. The disruptions had a knock on effect of reducing our industrial production at the facility.
The outage to repair this asset is scheduled for the beginning of September .
After we resolve these issues in the third quarter, we expect a significant ramp in adjusted EBIT in the fourth quarter as the North American rolled products network reaches full production rates.
We now forecast free cash flow to be approximately $300 million, an increase compared to prior expectations of approximately $250 million.
The increase was predominantly driven by the impact of lower aluminum prices on working capital for the year Theres, an updated free cash flow walk included in the appendix for your reference.
Since we announced the program in May of last year through July 29, we have repurchased eight 7 million shares for approximately $269 million of the $300 million authorization.
We expect to complete the program before year end.
Wrapping up here's what I'd like is what I'd like you to take away from today's call.
We continue to grow adjusted EBITDA and have line of sight to consecutive years of double digit compounded.
Earnings growth.
Our diverse set of end markets are all expected to grow in the medium term and we are well positioned to weather any downturns.
Our growing free cash flow is opening doors to new organic growth projects. So substantial returns for our shareholders.
I'd like to now open up the call for questions and I'll turn it back over to Rocco to facilitate those thank you.
Thank you we will now be.
During the question and answer session.
I'd like to ask a question. Please post <unk> wanted to touch on phone.
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Today's first question comes from Timna Tanners with Wolfe Research. Please go ahead.
Thanks for the detail hope everyone's doing well I wanted to ask a bit more about any signs of weakness in demand.
And on the <unk> sale, what do you think that you need to see to get more confident that you'd find the right price for that asset is it just a question of where interest rates are or is there something else that we shouldn't understand with that.
Thanks, Tim Let me start with the second question first I think it's really two primary factors or why.
Why we decided to take a pause as the first one is the debt markets, particularly high yield debt has been.
It's been very let's say constrained over the last seven weeks compared to when we made the announcement.
And that I think was impacting a number of the parties that showed interest in the asset I mean, our initial conversations.
And then kind of a growing uncertainty being expressed by.
Both sponsors and strategics as to what the economy was going to look like in 2023, which was leading us to believe that they were going to be maybe discounting projections and so we decided to take a pause until those two.
Two facts are.
But let's say get to a different place.
And you know and continue to.
You know operate the asset and its performing well.
I think that it will continue to to have a great value when we have better market conditions, you would contemplate.
A transaction.
You know in regards to demand as Eric kind of walk through.
Continuing to see the aerospace ramp come through.
You are seeing more stability in the ground transportation segment, which is our largest market.
Clearly ramping up and the beverage can and that's all secured as well.
Construction segment continued to accelerate and we continue to see.
Okay.
Good opportunity in terms of our order book in quoting activity in that business.
In the industrial market is certainly holding up so far in the U S. We have seen some softening in industrial.
In Europe in recent months.
I think a lot of that associated with some of the disruptions caused by the Ukrainian conflict and will have some seasonality here as you know with the normal.
European shutdowns in the month of August .
Okay. That's helpful. If I could ask one more and I'll hand off.
Jayson side I think you were pretty candid about how that continues to disappoint and I was hopeful that you could clarify that comment in the presentation about reassessing the product portfolio or any give us any color on further actions you might take to.
Drive that turnaround you've been talking about thanks.
Sure I think.
You know as we look at that business the volumes have a.
Started to restore.
We've taken a lot of structural actions.
In that business, we took out a couple of rooftops isn't it in the last 24 months.
We've restructured and simplified the facilities in terms of converting from running.
Running our own internal casting units, which.
Are quite old facilities, and so they weren't laid out as efficiently as some of the new investment that's in the industry.
But as we look at.
The volumes restoring the profitability not flowing through.
Certainly looking at additional opportunities to restructure that business and simplify it.
We do have.
Particularly in one of the facilities of the majority of the volume is under long term contracts.
So we're.
It's going to be thoughtful about how we are too.
<unk> transitioned through that and we should have an update on that next quarter.
Great. Thanks, a lot.
And our next question comes from Josh Sullivan, a bunch more and company. Please go ahead.
Hi, good morning.
Good morning, Josh.
Just you know the increase in the aerospace outlook was that driven by a top down look from what youre seeing on build rate assumptions are more of a bottom look up from what youre seeing demand pull through the supply chain.
It's the latter I mean, you know the nature of aerospace for US It does have longer lead times, Josh and so.
We can see our order book pretty much almost all the way out through the end of the year at most of our aerospace products. So you know.
The build rate is.
<unk> Hasnt changed significantly for 2022, yeah, you've seen some announcements where single aisle might ramp up a little slower in 2023 with the two large Oems, but in regards to our outlook for 2022, it's really what we're seeing coming in through our through our orders.
And I guess, a similar question on the automotive side.
Are you layered risk here are you looking at the pull rates from the other Oems as they are coming through.
Well.
We look at the pull rates.
Pull rates.
Or releases have been unpredictable.
Four.
You know almost two years now.
What I would say, though as you know we are most exposed to Ford and as you probably saw in their earnings release, they they had a better quarter than the second quarter.
So what we've seen more stability in.
The releases versus what actually goes out the door in the second quarter and we're hoping that that continues on in the second half.
Thank you for the time.
Yes.
And our next question comes from Glenn will answer.
Please go ahead.
Good morning, Tim and Eric. Thank you for the time when most of my questions have down.
I wanted to ask on the magnesium supply we have had some off.
P F a competitor having some issues so I think like any insight.
Supply security would be airport and then the second question would be around inflation and the cost management going into the second half.
On the 20th suite.
Thanks, Karen.
First of all on the magnesium.
We continue to be in good shape on supply and that is a comment that I would say for 2020.
Two and 2023.
We did it.
And in regards to the rapid increase that we saw in magnesium prices and put a surcharge mechanism into the marketplace last year.
That has been accepted we have been let's say socializing with our customers. The fact that we are seeing other materials.
Scalade.
At levels that we haven't seen in the past and in the intention will be to expand our basket of.
What what's going to be indexed or surcharge to make sure that we're passing those those costs through.
Because you know they are at.
Records that we haven't seen any levels, we havent seen in recent history.
And while I'm on the Mag supply at Midas, while also touch high purity aluminum.
Because the announcement and century with their curtailment was a primary supplier of high purity.
We had to go out into the marketplace and secure has high purity.
The good news is I think we're very adequately covered on supply through 2022 and 2023.
That's going to put a bit of a headwind into 2022, because we're already contracted but we'll we'll be looking to also.
Cover some of that inflation as we go into the 2023 contracting season.
Thank you.
Yes.
The inflation call it alright.
So in any of your pricing.
Like how can we think about it for next year.
Well, we you know we've been able to pass it through I think.
The new elevated first of all you know we did secure our.
Steelworker labor contract.
You know we have a four year deal there and so now we have a very predictable.
Set of inflation around wages, which you know as you know.
One of our largest cost buckets and I think the the new ones that we have to really focus on for next year, certainly energy both here and in Europe .
You know with the.
Energy shock that's come from the Ukrainian conflict.
And the high purity aluminum again as it is a relatively new one for us.
A lot of a lot of the other inflationary pressures that we have are already in our indexes and in many cases, our customers are paying for the transportation. So we continue to look at our inflation pressure and make sure that our commercial team is it's passing it through.
Thank you.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.
Next question comes from Emily <unk>.
Goldman Sachs. Please go ahead.
Good morning, Tim and Eric My first question is just around the small sustaining capex increase.
Could you sort of highlight exactly what that is including now versus the prior guidance and how likely would that be sort of carried forward into 2023.
Yes, I think the.
The small sustaining you can look at Tennessee is going to be one of the big drivers and that's going to be a driver to sustaining pressure. This year and so a lot of that is going to be done in the year.
Great. That's clear and then maybe on that same vein I know you're starting to put some money to work in face and Youll phase III current projects, but again what level of confidence do you have that the budgets are those projects are likely to remain in line with prior expectations have you started.
Ordering and some longer lead time items required for those projects.
So Emily the projects are in various phases of engineering, we typically do.
Secure the long lead items until we get to what we call <unk>, which is a third phase of engineering. So we've got.
Several of those projects if you look at it.
The slide Thats in the presentation. The ones that are year, ending 2024 are getting to the point, where we can secure.
The long lead items are the ones that are in 2025 still need a little bit more work before we can make that make those commitments.
So.
Youre going to see some spending in the fourth quarter, that's going to be going towards securing those contracts we did inflate.
Our contingency on these projects because we are in an inflationary environment.
So so far in the first two projects that we deliver we haven't had any surprises.
And we haven't had any significant surprises on the ones that were queuing up for 2024.
Great. Thank you.
And our next question is a follow up from Timna Tanners with Wolfe Research. Please go ahead.
Yeah, Hey, guys I thought I'd hop back and then ask a little bit more about the second half, Russia, sorry, if I misunderstood, but how does the sanctions hit hard if that's mostly domestic what am I missing on that falloff in the second half and then along those same lines you guide the low end of the guidance range, but.
Is there a reason why you didn't catch it.
And kind of put a range around that lower end or is there still is there something I'm missing on the potential for still meeting the high end I just want to understand the reasoning there and a little more.
Sure So we'll start with Russia.
The majority of the sales from our Russian facility are in packaging the vast majority.
And approximately 80% to 85% of those are domestic so the issue that we have as you.
You can't export can sheet into Europe .
As part of the sanctions I think it was sanctioned packaged five and.
There was.
A phase in period for that which ended in the middle of July So that's where the impact is to the Russian sales you know of course you can.
<unk> to work around the other side of those sanctions, which as you know in any equipment needs in certain chemicals coming in from the.
Western companies are also facing restrictions and putting some some pressure on the supply chain that will show up in the second half.
And in regards to not reducing guidance I mean, we're halfway through the year, we still see the aerospace ramp in front of US we still have I hope to see some improvement in automotive we don't have a lot of that in the forecast as you know that.
But I think there could be some upside there you know as I mentioned.
We have the casting pit in Davenport coming online.
<unk> should have a financial benefit as we get to the to the end of the year. So you know what.
You know ramping up labor and if we can flow that through effectively.
I think there are opportunities for us to continue to improve our outlook throughout the year and we're going to charge hard in.
It will give you an update as to where we're at.
On our next call.
Okay I appreciate the color. Thanks again guys.
This concludes the question and answer session.
Conference back over to Martin for closing remarks.
Okay, well. Thank you everyone again for joining us today in closing I'd like to thank you for your continued interest in our tenant as we set the path for multiple years of double digit earnings growth and I'm looking forward to giving you an update next quarter.
Yes.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.