Arconic Corporation
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Arconic Corporation Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in listen-only mode. . After the presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I'd now like to hand the conference over to your host today, Mr. Shane Rourke, Director of Investor Relations. Please go ahead.

[Shane Rourke:]

Thank you, Liz. Good morning, and welcome to the Arconic Corporation Fourth Quarter and Full Year 2020 Results Conference Call. I'm joined today by Tim Myers, Chief Executive Officer; and Erick Asmussen, Executive Vice President and Chief Financial Officer. After comments by Tim and Erick, we will have a question-and-answer session.

[Tim Myers:]

Thank you, Shane, and good morning, everyone. Welcome to our fourth quarter and full-year 2020 earnings call. For those of you who would like to follow along with the presentation, the slides are posted under the Investors tab on our website. The fourth quarter capped off a challenging year that demonstrated the company's agility and solid performance in the face of pandemic-driven lower demand and uncertainty. In April of last year, we completed the launch of Arconic as a standalone company and focused on becoming a stronger and more dynamic organization. As we look forward to 2020 and beyond, we see multiple paths to growth on both the top and bottom line through driving asset utilization, debottlenecking operations, maintaining permanent cost-outs and capturing productivity-driven cost savings. Let's begin with a review of the financial highlights for the quarter. Revenue in the fourth quarter was $1.5 billion, up 3% from prior quarter and down 14% or 12% organically year-over-year. The decline in revenue was primarily a result of continued softness in aerospace and was partially offset by the strength in industrial and packaging sales. The company recorded a net loss of $64 million, primarily as a result of an after-tax charge of $108 million related to a partial annuitization of our U.S. pension plan, which we executed in the fourth quarter. This can be the case with accounting, no good deed goes unpunished. This annuitization derisks the balance sheet of the company by $240 million with no current cash cost to the company. Adjusted EBITDA was in the center of guidance provided in November of $151 million, and adjusted EBITDA margin was 10.3%. Free cash flow for the quarter also fell within guidance with the use of $49 million, primarily due to U.S. pension payments that were deferred during the year as permitted under the CARES Act. We ended the quarter with a cash balance of $787 million, net debt of $504 million and total liquidity of approximately $1.5 billion.

[Erick Asmussen:]

Thanks, Tim. On Slide 7, you'll see a summary of our fourth quarter performance. Revenue in the quarter was $1.5 billion, down 14% from the fourth quarter of 2019, or down 12% organically, primarily due to weakness in aerospace, partially offset by year-over-year growth in industrial and packaging sales. As a reminder, during the third quarter last year, we changed our inventory cost method to average cost for all U.S. inventories previously carried on LIFO. We also changed our definition of adjusted EBITDA to exclude the impact of metal price lag and included a reconciliation in the appendix of this presentation to provide more clarity on this change. The reconciliation in the appendix also highlights that our pre-separation carbon accounting included nonservice pension costs in adjusted EBITDA and after a separation of benefit plans from the foreign parent, these costs are in other income and expense as indicated in the reconciliation of net income to adjusted net EBITDA. Turning to the fourth quarter results, adjusted EBITDA was $151 million, driven by a combination of pandemic-related demand reduction, partially offset by our cost actions. Our net savings programs are on track and our cash conservation efforts delivered approximately $40 million of the $55 million of net savings in the quarter, and we implemented $260 million in cash conservation actions above the original target of $200 million. Turning to Slide 8 to provide more detail on our segment performance. Starting with our Rolled Products segment, revenue was $1.1 billion, reflecting continued weakness in aerospace and a modest decline in ground transportation due to model changeovers, partially offset by industrial and packaging sales. Segment revenue was down $174 million or 13% or 11% on an organic basis year-over-year and essentially all volume and mix related. Adjusted EBITDA was $139 million and adjusted EBITDA margin was 12.2% as our cost actions partially offset adverse impacts from lower volume and weaker mix. Revenues in our Building and Construction Systems segment in the fourth quarter were $236 million, down $27 million or 10% or 13% organically year-over-year, primarily due to disruptions continuing to delay construction projects. Adjusted EBITDA was $30 million, flat year-over-year as volume declines were offset by cost actions in the quarter. Adjusted EBITDA margins were 12.7%, up 130 basis points year-over-year as a result of structural changes we've made to improve the mix in this segment and other cost actions.

[Tim Myers:]

Thanks, Erick. Now let's discuss our full-year 2021 projected market demand on Slide 10. While uncertainty in the global economy remains, our 2021 outlook is based on current internal and external projections of build rates and leading indicators in the markets we serve. First, we expect ground transportation sales to increase 25% to 35% year-over-year. The range is a little wider, reflecting uncertainty on how quickly the automotive and commercial transportation supply chains recover from the shortage in semiconductor chips. Automotive sales are expected to increase due to a combination of recovery from soft 2020 levels and strong consumer demand, particularly for light trucks and SUVs as well as a continued increase in heavy-duty truck and trailer sales. Industrial sales continue to be a bright spot, and we expect revenue to increase 15% to 20% year-over-year. As we've said before, these sales are benefiting from the one-two punch of increased capabilities and capacity in Tennessee and stronger domestic pricing and volume demand due to the ongoing U.S. trade actions.

[Operator:]

. Our first question comes from the line of Chris Terry with Deutsche Bank.

[Tim Myers:]

Good morning, Chris.

[Chris Terry:]

Hi, good morning. Thanks for taking my questions. I had a couple. Thanks, Tim and Erick, just in terms of the guidance. You've obviously given the full-year number, and there's a lot of moving parts in that. Just wondered if you could comment a little bit on maybe sort of first-half versus second-half split or some of the quarterly progressions? Just trying to think about the timing of the aeros in the second-half, the near-term impact from autos in the first quarter. And then also, in that full-year number, what do you have included for Tennessee? Is there something in that for the last part of the year? Or is that excluded from 2021?

[Tim Myers:]

Okay. So thank you for the questions. I would say, first of all, I would expect the first-half of 2021 to outperform the second-half of 2020. So we'll see momentum as we go through the year. I think, additionally, I would anticipate that the second-half of 2021 will be stronger than the first-half. And furthermore, I would expect the first-half of 2022 to be stronger than the second-half of 2021 because we're seeing a continued ramp in several markets. Certainly, I would anticipate aerospace being at the trough, fourth quarter, first quarter of this year, looking very similar. Hopefully, we'll start to see that lift off still down year-on-year in the second quarter. But sometime in the second-half, I would expect aerospace to start showing some year-on-year growth. Additionally, we did pick up a relatively significant amount of share in the automotive space. That's being impacted right now by the semiconductor issue. Most of what we've heard and read talking to other companies is that, that's going to sort itself out over several quarters. And obviously, there's pent-up demand out there. So as that recovers, I think that's probably one of the biggest uncertainties we have in our outlook is how much -- how quickly does that recover. And does it have any impact on the calendar year. But I would expect that, that will get better moving forward. And then we continue to ramp up the industrial volume in Tennessee. So as we continue to qualify more customers, we still have the tolling arrangement with Ta Chen associated with our divestiture of the facility that we had in Texarkana. That's going to run through in the first-half, and then we'll start to see more third-party products going into the Industrial segment in Tennessee. And then I think your final question was on packaging. I don't think that there's going to be a significant amount of revenue or margin in 2021 associated with packaging. We're currently going through multiple requalifications with packaging customers. We've got more than a dozen trials lined up in the second quarter. That is typically a three-phase kind of a qualification, Chris, so typically, we'll deliver a couple of coils. The second phase, they want to see a couple of hundred thousand pounds; and the third trial, they want to see about 0.5 million. So it's not going to be meaningful volume as we kind of queue up and get ready for the contracting season for 2022, and then we would expect to see that incremental margin in Tennessee next year.

[Chris Terry:]

Okay. Okay, thanks. And then just on the free cash flow guide, are you able to say what you've allowed in there as a range for working capital? And maybe just when through the year that's likely to impact cash flow the most?

[Erick Asmussen:]

So, Chris, the -- as you're ramping revenue, which is we'll say, the first quarter, first-half will be the largest part of working capital hit. As you can see, the revenue growth year-on-year is clearly going to put pressure. We rightsized the working capital in 2020. So I think the working capital pressure will be a use that's in the guidance, and the pressure is going to be in the first two quarters as you really ramp-up - that you see the ramp-up that Tim just described.

[Tim Myers:]

Yes.

[Erick Asmussen:]

And then it's important to note we'll have a back-end for packaging, depending on the timing of packaging ramp.

[Tim Myers:]

Yes, Chris, as Erick…

[Chris Terry:]

Okay.

[Tim Myers:]

…as Erick pointed out, we rightsized working capital. It was a generator, a source of cash this year. We took $300 million of working capital out of the business over three quarters. So I think we've got our inventory stores in the right place, but we are going to see a ramp-up in AR, and that's going to consume cash.

[Chris Terry:]

Okay. And then the last one for me, just on the pension. So if I understand this correctly, you've already paid the $200 million, which is what you've guided for the contribution for 2021. So for the rest of the year, it really comes down to whether you do the annuitization or another annuitization in the first-half that you may be mentioned. Is that correct?

[Erick Asmussen:]

Yes, but for non-U.S. and OPEB. So -- and we put a schedule on Page 23 of the earnings presentation, which gives you that full picture of the global view. But essentially, you're correct. We'll say, the details on OPEB would spread throughout the year, $37 million and other non-U.S. pension, about $17 million that'll spread through the year.

[Chris Terry:]

Okay. That’s it for me. Thanks, guys.

[Tim Myers:]

Thank you.

[Operator:]

Our next question comes from Curt Woodworth with Crédit Suisse.

[Tim Myers:]

Hey, Curt.

[Curtis Woodworth:]

Hey, how are you.

[Tim Myers:]

Good.

[Curtis Woodworth:]

Yes. Look, I think your performance in the fourth quarter was pretty remarkable, given your aerospace business is down 60% year-on-year, and you had the Ford F-150 changeover, so to keep. EBITDA relatively flat year-on-year, I think, is a pretty good accomplishment. And obviously, a lot of the OpEx reduction contributed to that. So, my first question is in terms of the $260 million of cash conservation and some of the ongoing cost reduction targets, can you comment on what the kind of incremental cost down for the business on a net basis looks like this year? Because I assume some of the variable components will come back as the business experiences recovery?

[Tim Myers:]

Yes. So let me hit it. I think in 2020, we captured $210 million from the program. $50 million of that was the capital expenditure, which -- that won't recur. We will go back to between 2% and 3% of revenue in 2021. And, in fact, probably be closer to the high side, closer to 3% than 2% on CapEx. So that one was a one-timer. It's behind us. And then that left $160 million in cost savings. About $60 million of that was structural. So the balance of that was temporary. As we wind into 2021, we'll capture the additional $40 million. Most of that, if you think about it, we started the program in May of last year. So we'll get -- by the time we get to the middle of the second quarter, we should see that $40 million come through. And then there will be about another $10 million because our aerospace facilities, in particular, we've still got 6 facilities that are impacted by aerospace, and they're in various degrees of still having some temporary cost savings until we see demand come back.

[Curtis Woodworth:]

Okay. That's great. And then for aero, in terms of the guide, is it fair to say that the first-half of the year is, looking down, more like 50% to 60% and then back half of the year, you're thinking it's going to comp up moderately to get the full-year at the down 25% to 30%?

[Tim Myers:]

So if you're comparing year-on-year, this will end up being the trough, the first quarter. And the reason for that is the first quarter of last year was still very strong for us for aerospace. It was -- we had a backlog coming into the year. So even at that time, we were just looking at the 737 MAX impact. And we started to see the impact of the pandemic at the end of the quarter. So our sales will be down year-on-year more in the first quarter than they were in the fourth quarter. And I would think about it maybe being relatively flat sequentially, and then we should start to see some improvement sequentially in Q2.

[Curtis Woodworth:]

Okay. And then last one for me is the latent capacity of the 600 million pounds. I mean, it seems like at least on the industrial side, you're going to see some good leverage here and then packaging more in '22 and then potentially auto, I would think, late '22 or '23. Could you just maybe dissect how you see the cadence of that? And then in terms of your initial discussions around packaging contracts for '22, can you give any color on kind of the margin profile you're seeing?

[Tim Myers:]

Sure. So let me start with the 600 million pounds. We have automotive, which it's being impacted by the semiconductor issue. And the reason I bring that up is I could probably take more industrial on, but we have requirement contracts for automotive. They come back. And so we'll be taking some spot opportunity, but the automotive and industrial volumes that sit inside of that 600 million pounds, we're going to be at the run rate to capture our target of that before we exit this year. And I think as soon as the semiconductor issue sorts itself out, we should see the kind of full benefit of that sometime in the second-half of the year. Regarding packaging, yes, we are seeing a lot of interest. As I said, we've got more than a dozen trials lined up. You know the way that, that works is they qualify can line by can line. And as you've probably read, the packaging market is just white hot for the can makers. And for them to make the commitment to interrupt those lines 3x each, shows you the level of interest that they have in warming us back into the market. We are seeing pricing consistent with what we thought it would be. So the pricing environment in packaging looks to be what we hoped it was going to be. And we're looking forward to being back in the segment.

[Operator:]

Our next question comes from Josh Sullivan with The Benchmark Company.

[Josh Sullivan:]

Just on the aerospace outlook, is there any defense contribution in that expectation? Is that a strong leg in the outlook? You mentioned your expectation for kind of a second-half recovery on the commercial side hasn't moved that much. Just curious if the aero OEM announcements about a month ago changed that outlook at all? Or if we were already just at a point in destocking where it just doesn't change your outlook?

[Tim Myers:]

So from a defense perspective, we have some presence on the Joint Strike Fighter and a lot of the land-based vehicles, good content and great differentiation. The problem is those land-based vehicles, you got to build an awful lot of them before you get the same content that we get out of the single-aisle aircraft. So it doesn't really offset what's happening with the single-aisle aircraft segment. We've also been picking up content in business jet. Nice business, but again, those aircraft are much smaller and they don't build as many of them. So we're still very much wed to both Boeing and Airbus' supply chain. And as they start to deliver aircraft and start to produce, we're looking forward to them starting to pull again. But I think it's going to be a few years before we see pre-pandemic levels in our aerospace segment again.

[Josh Sullivan:]

Got it. And then just on the environmental expense this year and the free cash flow outlook. What should that step down to in 2022 at this point?

[Erick Asmussen:]

You should see a meaningful step down so...

[Tim Myers:]

$70 million?

[Erick Asmussen:]

Yes. Somewhere in that...

[Tim Myers:]

It should.

[Erick Asmussen:]

We are -- you can see the derisking on the balance sheet, the K will be out tonight. But essentially, you should see the $60 million or $70 million step down year-over-year depending on the timing, as you can imagine. It's all related to that one project, which finishes up early- to mid-next year. So it will essentially be a big step down from year-over-year as we look. Because at 2020 and 2021, we're 80% of that funding.

[Operator:]

We're showing no further questions in queue at this time. I'd like to turn the call back to Tim Myers for closing remarks.

[Tim Myers:]

Okay. Thank you, Liz, and thanks, again, to all, for joining us on the call today. We'll look forward to giving you another update next quarter. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.