Q3 2022 Arconic Corp (PITTSBURGH) Earnings Call

November 1, 2022

Okay.

Yeah.

Thank you for standing by and welcome to the <unk> Corporation third quarter 2022 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on new telephone as a reminder, today's.

Graham is being recorded and now I'd like to introduce your host for today's program Shane Rosen Director of Investor Relations. Please go ahead Sir.

Thank you Jonathan Good morning, and welcome to the iconic Corporation third quarter 2022 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.

For those of you who would like to follow along with the presentation slides are posted under the investors tab on our website.

I would like to remind you that today's discussion will contain forward looking statements relating to future events and expectations. You can find factors that may cause the company's actual results to differ materially from the projections presented in today's presentation and earnings press release and our most recent SEC filings. In addition, we've included some non-GAAP .

GAAP financial measures in our discussion reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release.

In the appendix in today's presentation with that I'd like to turn the call over to Tim.

Thank you Jane and Hello, everyone.

I'll start on slide four with some key takeaways for the quarter, we generated $2 $3 billion in sales up 13% organically year over year.

We've resolved the equivalent related operational issues in Tennessee in Davenport that impacted production volumes in the third quarter, and we completed the $300 million share repurchase authorization adjusted.

EBITDA in the quarter was $143 million in the center of the expected range of 135 to 150.

In North America, our end markets remain strong as we grew organic revenue year on year, and four or five end markets.

Despite the production challenges we had in the quarter.

Going forward, we believe we are well positioned given the recovery in aerospace and automotive as well as our expansion into packaging and industrial and building and construction has been and continues to be strong.

As you know in Europe , Hyperinflationary energy prices are driving up costs and reducing demand across sectors.

We are feeling pressure across all our operations in Europe , but we are being especially impacted in our Hungarian facility, which primarily services the industrial market.

But here is our biggest problem.

The operational challenges we discussed in September came as production was ramping to record levels in North America, and we were executing a higher level of capital investment.

That greatly limits our ability to recover the lost sales where our assets are now operating at expected rates.

Moving now to slide five I'll provide some additional detail on the challenges we faced in the third quarter.

Yes.

Starting with operations. The previously identified issues that impacted our Tennessee in Davenport facilities in the third quarter have been resolved and both facilities are now running at expected rates.

At the same time, we are enhancing everything from maintenance practices to outage planning to better assure stability moving forward.

The biggest disruptor in the third quarter was the electrical issues in Tennessee that caused the hot melt failed multiple times.

The failed cable was identified as the root cause and has been repaired the assets has been running at expected rates since September six.

In normal times, we could accommodate a casting pit outage at a facility or two without dramatically impacting shipments.

However.

The rapid ramp up at our Tennessee facility involves increasing hotmail rates and a new product mix this rapidly changing and increasing order load exposed the <unk> furnace and electrical cable vulnerabilities. The combination of these four issues simultaneously impacting production over the span of a few weeks.

<unk>, our entire North American Rolling system.

Altogether, we estimate the challenge is that as important Tennessee reduced our estimated adjusted EBITDA outlook by approximately $70 million for the full year 2022, compared to our expectations coming out of the first quarter.

Just as we were getting those issues behind US we were further impacted by issues related to our initial planned outage to increase capacity at our Lancaster facility.

The Lancaster Hot mill was taken offline as part of our phase III growth initiative with a planned outage of three weeks.

This included upgrading three key pieces of equipment.

Two of the three are operating as expected.

While challenges to reach.

Outage run rates on one of them are hampering us on the third.

This is causing the hotmail.

Run at reduced rates impacting shipment volumes.

We are continuously making progress in restoring production to more normal levels and expect operations to return to normal rates by the end of the fourth quarter.

But we anticipate them impacting earnings by $25 million this quarter.

Our Lancaster facility had been running at record rates, starting in 2021 and continuing into 2022 as such we don't have the ability to recover the lost sales and production.

So what are we doing to address these issues moving forward.

We had already increased sustaining capex over the last two years, we intend to maintain this level of spend as we grow the business really foreseeable future. So we don't lose gains we make in growth investments to leakage in our core capacity.

Secondly, we've enhanced our maintenance and monitoring practices.

And we are enhancing multi site peer reviews of all outages over seven days as well as securing engineering procurement and construction management contract at our major capital projects moving forward.

We have been and will continue to increase staffing in operations and reliability engineering roles from senior to entry level positions with.

With regard to the potential impact to future results. We are also building in greater contingency the operating plan and we will be being a bit more conservative about outage timing for maintenance and capital projects.

We also called out Europe demand in energy cost as a driver of $35 million in estimated adjusted EBIT headwinds for our 2022 outlook compared to our expectations coming out of the first quarter.

Energy spot prices in Europe have since improved moderately in the near term and we have revise that view by a favorable $5 million.

European demand has fallen off significantly in the second half of the year as Hyperinflationary energy class curtail industrial activity and demand for end products.

The drop in industrial and commercial transportation demand in the region has the greatest impact on our Hungarian facility.

We are also seeing slowdowns in our European building and construction systems business, which make up about 30% of the Vcs segment total.

If demand continues to be impacted at these levels in 2023 European facilities profitability could be reduced breakeven similar to what we experienced during the pandemic compared to our current run rate of roughly $100 million.

Annually.

We have taken a range of countermeasures and we also expect some regulatory relief similar to the early days of the pandemic, which should help to mitigate the impact of the European weakness.

Moving now to slide six I'll provide some detail on how we performed across our end markets.

So what stands out here.

First we had double digit year on year growth revenue growth in every market, but industrial which was significantly impacted by the operational issues in Tennessee.

Aerospace packaging and building and construction have led and will continue to lead our growth all year as ground transportation recovery has been a little bit slower than anticipated and industrial has faced challenges on the companys level.

Now lets move down to the bottom right corner of the slide in total organic revenue was up 13% over last year.

Ground transportation sales increased 11% organically from third quarter 2021 building on 10% growth in the second quarter.

Automotive demand continues its ramp to recovery listen fits and starts.

This growth was partially offset by commercial transportation volumes, which were impacted by the production issues, we discussed earlier.

Sales in the packaging market were up 28% year on year due to the ongoing ramp up at our Tennessee facility.

Year on year growth slowed from the second quarter, primarily due to lower export shipments of packaging from China and Russia.

The Tennessee packaging business net is can sheet requirements. Despite production challenges in the last two quarters.

Following a 29% organic increase in the second quarter third quarter building and construction sales increased 17% organically year on year.

The strength continues to be driven by pricing actions as well as strength in North America, now, partially offset by weakness in Europe .

Third quarter sales in the industrial market declined 19% organically year on year demand and pricing in the market remained strong, but our sales were reduced substantially by the challenges in Tennessee.

We ended the quarter with a significant backlog in our industrial order book that we are working to clear through the fourth quarter and early into this.

Into 2023.

Finally third quarter aerospace sales were up 49% on an organic basis year on year. This compares to 50% organic growth in the second quarter, but against a much stronger year over year comparisons.

The comparisons get stronger heading into the fourth quarter, we may see lower year on year growth, but the ramp up continues.

Also <unk> point to ongoing demand recovery, including large commercial aircraft production rates.

Consumer demand for air travel.

I'll now turn it over to Eric to discuss third quarter results in more detail.

Thanks, Tim I'll start on slide seven with our third quarter financial highlights.

Revenue was $2 3 billion up 13% organically year over year in.

In the quarter, we had a net loss of $65 million or 64 per share compared to net income of $60 million or <unk> 15 per share in the third quarter of 2021, our third quarter net loss includes a $70 million after tax noncash impairment charge related to our business review, we executed in the extrusion segment.

The long lived asset impairment was triggered by a revised long term outlook that came out of our regular financial planning process.

Adjusted EBITDA was $143 million, which was a decline of 16% year over year.

Free cash flow for the quarter was $44 million and was impacted by lower than expected profitability as well as working capital challenges related to our operational issues.

Lower aluminum prices are favorable to working capital, but are being offset by inventory congestion in the quarter related to our operational issues.

In the quarter, we repurchased approximately 3 million shares and completed the initial 300 million authorization that we announced in may of last year. Since the inception of this program we have reduced the number of shares outstanding by approximately 9%.

Lastly, our balance sheet remains strong as we ended the quarter with cash and available liquidity of approximately $1 4 billion.

Now I'll turn to slide eight and I will discuss our quarterly financial performance in more detail.

Revenue in the third quarter increased $390 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 in the quarter was $143 million down $28 million or 16% year over year due to the impacts of the operational challenges on volume and fixed cost absorption and the European energy impacts through volume and Cros.

We continue to push to offset inflation with pricing actions as we continue to experience high inflation.

Our savings net of inflation was a negative $187 million and was impacted by the operational issues and European energy inflation and includes approximately $128 million of inflation in the quarter, primarily from energy transportation and alloy materials.

Turning to slide nine I will review our segment performance.

Starting with our rolled product segment revenue in the third quarter was approximately $1 9 billion up 9% organically year over year.

Sales volume and net savings were significantly impacted by the operational challenges in the quarter and adjusted EBITDA was $111 million down $44 million or 28% year over year.

Revenue in our building and construction segment in the third quarter was $321 million up $64 million year over year and up 26% organically adjusted EBITDA was $49 million up $15 million or 44% year over year, driven driven by better pricing that continue to offset inflation.

And higher aluminum costs.

This segment is performing at a high level and as we discussed in the past, we had significant investor interest and enthusiasm early in the year, which drove us to consider a transaction to enhance shareholder value. However, the speed of deterioration in the debt markets caused by surprise and we terminated the process as we determined that pushing for a sale without available debt.

Financing would likely undervalue of the business and destroy shareholder value as you can see the quarterly performance of this business continues to perform very well.

Revenue in our extrusion segment for the quarter was $98 million up 32% year over year. Adjusted EBITDA was a loss of $13 million versus a loss of $7 million last year as pricing actions and volume growth could not offset the high inflation. We are experiencing we continue to work on structural changes in volume loading to improve profitability in this segment.

Now I'll turn it back over to Tim to review our outlook by market.

Thanks, Eric.

You'll notice here that we've reduced our revenue growth expectations in every market other than building and construction.

It's important to note. However that this is nearly all driven by operational challenges reduced our shipments for the year rather than demand decline.

We have backlogs in industrial and aerospace orders that will be addressed in the fourth quarter and into early 2023.

Around transportation organic revenue is now expected to be in the range of up zero to 5% year on year compared to the prior view of 5% to 10% growth.

The automotive ramp continues but orders continue to be uneven as Oems work through broader supply chain challenges. We're also keeping a close eye on commercial transportation demand going into 2023, as we know fleets are very sensitive to higher interest rates.

Our industrial organic revenue expectations fall to flat.

To down 10% year on year from 5% to 10% growth due to the issues at Tennessee and Lancaster, while the end markets remained strong.

In fact, we have a backlog entering the fourth quarter of nearly $50 million in that segment.

We continue to perform well on building construction sales in.

In any of our view of 15% to 20% year on year organic revenue growth.

North American nonresidential construction remained strong while activity in Europe is slow.

Our packaging organic growth outlook has been reduced to 20% to 30% from 20% to 40% due to lower export sales out of our China and Russia operation.

The North American ramp continues as expected.

Aerospace organic revenue outlook has been reduced modestly to 30% to 40% from 35% to 45% predominantly reflecting the production challenges at Davenport in the third quarter.

Our view of market recovery is unchanged.

Turning to slide 11, I'll provide an update on Russia.

We announced in May that we were initiating a process to sell our Russian operations and we are continuing to pursue the sale.

The company has had several interested parties and the process and is ultimately working towards the completion of the sale of the operations to a third party pursuant to a framework agreement.

The process for obtaining government approvals as unusually complex given currency and political factors and ongoing proceedings involving the company's operations in Russia.

This creates uncertainty with respect to our ability to ultimately estimate the timing or likelihood of this transaction.

We continue to support our 3000 employees through this difficult and transformational time.

Despite challenges our operations in Russia continued to run very well <unk>.

Adjusted EBIT in the second quarter was $20 million third quarter was $20 million, which is down modestly from $22 million from the same quarter last year.

We are increasing our guidance for our Russian operation to 75% to $85 million from $50 million to $80 million as the team. There has been able to address challenges around input supply and offset lost export sales in the second half of the year.

Cash at the end of the quarter was $174 million up from $79 million at year end 2021.

This is primarily a result of it.

Strong earnings.

Aaron currency fluctuations.

Let's move now to slide 12.

Our outlook for the year.

We now expect full year 2022, adjusted EBIT to be in the range of $700 million to $730 million compared to our prior expectation of $7 15 to 765.

The reduction is primarily due to the challenges in ramping up our Lancaster facility. After our scheduled outage to increase capacity on our hot mill.

We expect full year revenue to be in the range of nine to $9 3 billion compared to our prior view of $9 2 million to $9 5 billion and free cash flow is expected to be approximately $150 million for 2022 compared to our prior view of approximately $200 million due to a re.

Reduced earnings and higher working capital outlook.

While we are not satisfied with the adjusted EBIT performance in 2022, there are several reasons to remain excited for the iconic story and our opportunities moving forward.

First we've resolved the operational issues at Tennessee in Davenport with repairs last quarter and those facilities are running well.

We also have organic capital investment plans that support our long term path to EBIT growth our phase II project in Davenport is complete and contributing to EBIT at now in the Lancaster Hot Mill stand project is underway and is targeted to reach its run rate EBIT impact in the second half of next year.

We also project, our additional future cost and growth projects.

We will be able to contribute another $200 million of incremental EBITDA.

That said, we are revisiting the scope and timing of these investments to consider several factors.

First we are prioritizing the cost out return seeking capital projects to avoid market risk.

In simple terms that means we are going to prioritize the melting and casting projects that will improve our cost position as well as enhance our ESG characteristics.

Second we are targeting offline capacity additions that don't involve existing assets that are operating at peak rates.

Based on our experience this quarter derisking, our profit gains versus potential losses, and our core earnings.

Capacity.

Third we are delaying the projects in Europe until we see sustainable improvement in general economic conditions, there and.

And finally, we are spreading the investment period to assure that we can appropriately derisked capital installations, and the associated ramp up and qualification period.

Associated with the next growth project at Lancaster.

Altogether. These changes will move the realization of the $200 million EBIT uplift on a run rate basis.

One year to year end 2026 versus our prior estimate of year end 2025.

We believe now is the time to be very intentional in our capital allocation execution.

Given global macro uncertainty and inflationary pressures.

Wrapping up this was obviously a very tough quarter.

But looking to the future of the issues, we experienced are transitory and we are quickly addressing them.

Our opportunity is still wanted to be optimistic about.

Our end markets are strong, particularly in North America.

Aluminum continues to win in the markets we serve.

And we have multiple levers available to drive earnings growth and strong returns for our shareholders moving forward.

Thank you very much for your time and your interest today and now I'd like to turn it back over to Jonathan to open the call for questions.

Certainly once again as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one one on your telephone and our first question comes from the line of Timna Tanners from Wolfe Research. Your question. Please.

Hey, good morning, and thanks for the update.

Good morning.

Morning, I wanted to dive in a little bit more on the five year strategic plan review and any implications for the exclusions business. We saw a further write down and just can you elaborate a bit more on your plans there to turn that around.

Yeah, Tim noted so we're continuing on with some of the.

Structural.

Cost reductions that we've put into that business.

Still phasing out of certain parts of the manufacturing.

Particularly in North America.

We do have.

Some long term contracts and segments that.

We eventually wanted to exit that are going to be running out in 2020.

Four in 2025.

Really the biggest driver for the recovery will be aerospace and particularly our large press operations here in North America as that ramps up it should help us improve the profitability. So we're going to continue on with turning that business around.

So if I understood you properly you are looking to exit parts of the business on the other parts, you're hoping will be benefiting from the aerospace recoveries and getting fixed kind of with the cycle recovery.

Yes, so sometimes you have to get smaller to get better and.

This happens to be one of those situations.

And then on the packaging side.

Quarter I think it was we've heard some cautious comments from ball and producers, we spoke with where.

A bit dismissive or less concern this quarter, we're hearing cautious comments from crown like can you just address the risk on the packaging side typically been more stable business, but is there something that could be different this time.

So.

Any other comment I'm going to answer that from a north American perspective, because.

Okay.

We participate in in Russia, and in China as well.

Here in North America, and we're ramping up.

I think.

We represent about 4% of that market.

We contracted that out amongst the.

<unk> customers, we have not seen a falloff in our demand.

And given our relative size and the attractiveness of where Tennessee is located vis V can lines.

Don't have a lot of concern with with the packaging market.

Okay I'll leave it there thanks very much.

Okay. Thank you.

Thank you one moment for our next question.

And our next question comes from the line of Korean Blood chart from Deutsche Bank. Your question. Please.

Hey, good morning, Tim and Eric.

Thanks for taking my question I'm, just trying to understand based on the path to 2023.

Obviously, a lot of challenges.

Oh parish and I said by vertical.

The demand the end market and my card FRE, but if I look on.

You.

I think you had 2023, implying a roughly about 15% growth 2022.

Just wanted to get your thought on how comfortable you would be with those numbers or if you have a different view.

So.

Again start with.

We've had about $100 million now of operational headwinds in the second half and so.

I would certainly not plan on carrying that kind of performance through 2023.

So I'll start with that.

When I look at external estimates.

<unk> always clear to me how people are thinking about Russia.

But if you assume that we're successful in that transaction.

That will be an $80 million deduct so.

The recovery should allow us to fully offset that if if that happens.

We also have the two growth projects that are coming in.

Kevin Port project is already generating EBITDA, we plan on getting half year, the EBITDA from the Lancaster project.

So the headwinds that we had to handicap against that.

What may have changed as Europe .

How is Europe going to recover coming into 2023, we kind of dimension that.

$100 million EBIT for us.

Hopefully.

2023 sometime in the first half of the year and we start to see some some signs of improvement.

And then you've got the inflationary environment here in North America.

We will be passing that through in price.

The industrial contracts and spot, but we will have some lag on our long term contracts that.

We'll come off of that and then any other positive factor is aerospace should be a tailwind for us in 2023 and 2024.

As we move forward so.

I think we will have a much better view of the two.

Risk factors that.

You mentioned in Europe , and inflation in North America, as we come into.

The new year and start talking about 2023 guidance on our next call.

Great. Thank you.

Alright. Thank.

Thank you.

Good morning, good morning.

Okay.

Aerospace demand Paul what do you do.

Lead times look like at this point and then any meaningful change over the last quarter.

So we continue just to see strong demand for aerospace our lead times are going to vary a little bit.

The plant.

Our extrusion lead times are probably a little bit shorter than our rolled product lead times, but.

Lead times are out through the end of the year.

So we're booking 2023 windows now and as I said, we've got a backlog that will be clearing as well so.

We're going to continue to see growth.

Continuing to.

Enjoy the ramp on aerospace really see any significant change there versus our discussions in prior quarters.

Okay got it.

And then as far as North American packaging markets looking at your own new view kind of on the long term Capex investments have you seen any signals of others doing the same yet got it.

<unk> large aluminum projects announced.

Do you think or have you seen any signals of others thinking about delaying projects as well.

I have not.

Avnet views I think the latest announcement of significance was the SDI announcement last quarter and I haven't seen any updates on that.

Okay.

And then just on the automotive side some of the larger Oems have been benefiting from as you mentioned shipping almost completed vehicles.

<unk>.

So if we look at our relative to that inventory.

Does that impact the auto pull through.

Should we eventually expect some sort of catch up trade are the Oems kind of managing the would be a little bit of pull at this point.

So.

As I think about 2022 I'll answer there first.

We've seen continued improvement in the automotive demand.

<unk> had some fits and starts as I call them earlier.

But it's more concentrated so if we're thinking about this last year almost all of our customers were.

Intermittently taking outages because they were having supply chain problems.

That's gotten more concentrated so we still have a couple of customers that are struggling with that.

All right.

Thank you Brad.

There are some some Oems that have talked about the backlog of vehicles that they're carrying into this quarter I think.

Right.

One of the Ford.

Releases that they had about 40000 vehicles still left to clear that they were trying to clear this quarter.

But when you look at.

IHS and their view of next year, they've still got an uplift I think the.

The last numbers I saw they were gone from about $14 6 million to $15 for next year, which is roughly 6% growth.

So I think we'll continue to see recovery in automotive.

But still not approaching that 17 million vehicles Saar that we were enjoying prior to COVID-19.

Okay. Thank you for the time.

Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Tim Myers for any further remarks.

Thank you Jonathan and thanks to all of you for joining US today, we continue to be excited about the path forward for our content and we are confident in our ability to deliver long term adjusted EBITDA growth and returns of capital to our shareholders and I'll look forward to talking to you next quarter with another update.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.

The conference will begin shortly.

To raise your hand during Q&A you can dial star one one.

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Thank you for standing by and welcome to the <unk> Corporation's third quarter 2022 earnings Conference call. At this time all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone as a reminder, today's program is being.

We recorded and now I'd like to introduce your host for today's program Shane <unk> Director of Investor Relations. Please go ahead Sir.

For those of you who would like to follow along with the presentation slides are posted under the investors tab on our website I.

GAAP financial measures in our discussion reconciliations to the most directly comparable GAAP financial measures can be found in today's earnings press release.

In the appendix in today's presentation with that I'd like to turn the call over to Tim.

Thank you Jane and Hello, everyone.

I'll start on slide four with some key takeaways for the quarter, we generated $2 $3 billion in sales up 13% organically year over year.

EBITDA in the quarter was $143 million in the center of the expected range of 135 to 150.

In North America, our end markets remain strong as we grew organic revenue year on year, and four or five end markets.

This despite the production challenges we had in the quarter.

As you know in Europe , Hyperinflationary energy prices are driving up costs and reducing demand across sectors.

We are feeling pressure across all our operations in Europe , but we are being especially impacted in our Hungarian facility, which primarily services the industrial market.

But here is our biggest problem.

The operational challenges we discussed in September came as production was ramping to record levels in North America, and we were executing a higher level of capital investment.

That greatly limits our ability to recover the lost sales, where our assets are not operating at expected rates.

Moving now to slide five I'll provide some additional detail on the challenges we faced in the third quarter.

Yes.

At the same time, we are enhancing everything from maintenance practices to outage planning to better assure stability moving forward.

The biggest disruptor in the third quarter was the electrical issues in Tennessee that caused the hot melt failed multiple <unk>.

The failed cable was identified as the root cause that has been repaired the asset has been running at expected rates since September six.

In normal times, we could accommodate a casting pit outage at a facility or two without dramatically impacting shipments.

However.

<unk>, our entire North American Rolling system.

Altogether, we estimate the challenges that are important Tennessee reduced our estimated adjusted EBITDA outlook by approximately $70 million for the full year 2022, compared to our expectations coming out of the first quarter.

Just as we were getting those issues behind US we were further impacted by issues related to our initial planned outage to increase capacity at our Lancaster facility.

The Lancaster Hot mill was taken offline as part of our phase III growth initiative with a planned outage of three weeks. This included upgrading three key pieces of equipment.

Two of the three are operating as expected.

While challenges to reach.

Outage run rates on one of them are hampering us on the third.

This is causing the hotmail.

Run at reduced rates impacting shipment volumes.

We are continuously making progress in restoring production to more normal levels and expect operations to return to normal rates by the end of the fourth quarter.

But we anticipate them impacting earnings by $25 million this quarter.

Our Lancaster facility had been running at record rates, starting in 2021 and continuing into 2022 as such we don't have the ability to recover the lost sales and production.

So what are we doing to address these issues moving forward.

We had already increased sustaining capex over the last two years, we intend to maintain this level of spend as we grow the business for the foreseeable future. So we don't lose gains we make in growth investments to leakage in our core capacity.

Secondly, we've enhanced our maintenance and monitoring practices and we're enhancing multi site peer reviews of all outages over seven days as well as securing engineering procurement and construction management contract at our major capital projects moving forward.

We have been and will continue to increase staffing in operations and reliability engineering roles from senior to entry level positions.

With regard to the potential impacts of future result, we are also building in greater contingency the operating plan and we will be being a bit more conservative about outage timing for maintenance and capital projects.

We also called out Europe demand in energy cost as a driver of $35 million in estimated adjusted EBIT headwinds for our 2022 outlook compared to our expectations coming out of the first quarter.

Energy spot prices in Europe have since improved moderately in the near term and we've revised that view by a favorable $5 million.

European demand has fallen off significantly in the second half of the year as Hyperinflationary energy costs could curtail industrial activity and demand for end products.

The drop in industrial and commercial transportation demand in the region has the greatest impact on our Hungarian facility.

We are also seeing slowdowns in our European building and construction systems business, which make up about 30% of the Vcs segment total.

Annually.

We have taken a range of countermeasures and we also expect some regulatory relief.

Similar to the early days of the pandemic, which should help to mitigate the impact of the European weakness.