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spk03: Good day and welcome to the Arconic Corporation second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchstone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Shane Rourke, Director of Investor Relations.
spk04: Thank you, Ren. Good morning, and welcome to the Arconic Corporation Second Quarter 2021 Earnings Conference Call. I'm joined today by Tim Myers, Chief Executive Officer, and Eric Asmussen, 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, the slides are posted under the Investors tab on our website. I would like to remind you that today's discussion will contain forward-looking statements relating to future events and expectations. You can find factors that may cause the company's actual results to differ materially from the projections presented in today's presentation and earnings press release in 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. With that, I'd like to turn the call over to Tim.
spk07: Thank you, Shane, and good morning, everyone. We'll discuss our second quarter earnings in a moment, but first I would like to share a brief moment of silence. in memory of our colleague, Oleg Rybushkin, who was fatally injured while working at our facility in Samara, Russia, on June 25th. Oleg was 56 years old and had worked at that location for 30 years. Our thoughts and prayers remain with Oleg's family, friends, and coworkers. As a company, we are proud and diligent about our commitment to keep our employees safe and continuous improvement in safeguarding our employees that we continue to pursue. This incident, however, highlights the fact that our operations remain exposed to the ultimate unacceptable outcome and have to continue to improve. To reinforce our individual and collective commitment to safety, we held a company-wide safety stand down earlier this month We all have a role to play in making sure that we're laser focused on following our safety protocols, using our human performance tools, and looking out for each other. We will continue following our safety processes to ensure that we are achieving the highest safety standards possible at all times. I'll now turn to the results of the quarter beginning on slide four. What I hope you'll take away today are three headlines. We delivered another strong quarter. Our end markets support sustainable double-digit earnings growth, and we are well-positioned for free cash flow and have a disciplined capital allocation strategy. As you know, the second quarter of last year was the most severely impacted by the pandemic, with all end markets other than packaging recording double-digit declines. So while we're excited by the progress we've made year over year, our sequential performance provides increasing evidence of the strength of our business moving forward. Sales of $1.8 billion increased 52% over last year and 8% from the first quarter of this year. As expected, the company generated a net loss of $427 million, which included the impact of the pension annuitization we completed in the quarter that Eric will address. Meanwhile, adjusted EBITDA of $187 million increased 89% year-on-year and 4% from prior quarters. All five of our core end markets project an upward trajectory, but our second quarter sales grew the most in industrial, packaging, and aerospace. Packaging does not yet include any growth in North America, which is expected to start generating revenue later this year. While it's true that aerospace growth is from a reduced base in the first quarter, the modest rebound points to an important path of recovery for that industry. Semiconductor shortages continue to impact ground transportation growth, but we were and expect to continue to be able to offset most of the impact by pivoting our capacity to capture sheet demand in the strong industrial market. Due to the strength across all our end markets, we are positioned to deliver double-digit adjusted EBITDA growth for at least the next several years. Substantial and sustained EBITDA growth, in conjunction with significantly lower legacy cash obligations, should drive meaningfully higher free cash flow generation. As we discussed last quarter, we've reduced annual cash payments by approximately $245 million starting in 2022 and beyond. With this additional free cash flow, we have a wide range of opportunities to deliver returns to our shareholders. We've already begun repurchasing shares in according with the program we announced earlier. The further free cash flow deployment will be done in accordance with our discipline capital allocation framework that ranks opportunities based on returns on capital. Moving to slide five, we provide more detail on how we performed across our end markets. As you see on the bottom right of the slide, in Q2, we grew our revenue sequentially across all end markets aside from ground transportation. Ground transportation sales declined 4 percent from prior quarter due to ongoing challenges in the semiconductor market, but increased 100 percent organically year over year. The semiconductor issue is a temporary one, as demand for ground transportation is strong and dealer inventories are at a historic low. The semiconductor shortage created approximately $20 million in EBITDA headwind in the quarter, but we were able to offset approximately $15 million of that headwind with our quick pivot to industrial on capacity that we previously targeted the automotive market. Sales in the industrial market increased 17 percent from the prior quarter and 61 percent organically year over year. The increase was driven by the ongoing influence that U.S. trade actions had on demand for domestically produced common alloy sheet. This is in addition to our ongoing efforts to offset semiconductor impacts on shipment volumes by rapidly switching automotive capacity to industrial. In the building and construction market, we increased 7 percent sequentially, and 10% organically year over year. The modest improvement we were seeing at the end of the first quarter carried into the second quarter. However, that market does continue to remain below pre-pandemic levels. Sales in the packaging market increased 26% sequentially and 4% organically year over year, exclusively as a result of growing demand in our China and Russia packaging facilities. And our reentry into packaging in North America will create additional growth as we head into 2022. Finally, aerospace sales increased 9% sequentially, but we're still down 43% year over year on an organic basis. As you can see in the pie chart, aerospace sales make up roughly half the percentage of our total sales in 2021 as they did compared to full year 2019. Second quarter growth was a modest acceleration from the first quarter. As we previously discussed, we bottomed out in aerospace in the fourth quarter of 2020, and we are still very early in the aerospace recovery. TSA traveler throughput in the second quarter of 2021 reached 67% of 2019 pre-pandemic levels, which we believe is a positive indicator of the ongoing recovery in aerospace demand. In summary, Our team's agility and our network's flexibility allowed us to aim our capacity at the most attractive markets. I'll now turn it over to Eric to discuss the second quarter results.
spk01: Thanks, Tim. I'll start on slide six with highlights. As Tim mentioned, revenue in the first quarter was $1.8 billion, up 8% from the prior quarter and up 28% organically year over year. Net loss for the quarter was $427 million. As we've previously announced, The loss includes an after-tax non-cash settlement charge of $423 million related to the billion-dollar U.S. pension annuitization we completed in the quarter. Adjusted EBITDA was $187 million, which was an increase of $8 million, or 4% from the prior quarter. These results show the versatility and growth potential of our business as the second quarter adjusted EBITDA is just shy of our pre-pandemic performance in the first quarter of 2020. This came at a time when aerospace is down significantly year over year and the semiconductor shortage is impacting our ground transportation sales. Free cash flow for the quarter was the use of $211 million. This was due to a combination of the $250 million of U.S. pension contributions related to the annuitization transaction and the higher cost of aluminum. As an explanation of the aluminum impact, the Midwest transaction price of aluminum was approximately $2,300 per metric ton at year end. and was almost 2,700 per metric ton at the end of the first quarter, and was nearly 3,200 per metric ton at the end of the second quarter. Aluminum is our largest input cost, and when we pass the changes in prices through to our customers, mitigating the impact from our profitability, it does have an impact on our net working capital on our balance sheet and our free cash flow. This increase in metal price in the quarter increased our net working capital on the balance sheet by approximately $100 million. Lastly, capital expenditures were $44 million in the quarter and $72 million year-to-date, and were roughly 60% sustaining and 40% return-seeking, and year-to-date represent approximately 2% of revenue and approximately 60% of depreciation. We ended the quarter with a cash balance of $540 million and total liquidity of approximately $1.3 billion. Turning to slide 7, we'll drill down on our performance. Revenue increased $614 million year over year due to a combination of significantly greater volume and mix compared to the pandemic-impacted second quarter of 2020, as well as the impacts of higher aluminum prices. Adjusted EBITDA was $187 million, up $88 million year over year, primarily due to the volume and the benefits from our net savings programs. The benefit of $18 million in the quarter and other is primarily related to certain charges in the second quarter of 2020, not occurring this year. Turning to slide 8, I'll review our segment performance in more detail. Starting with our rolled product segment, revenue was approximately $1.5 billion, up 38% organically year-over-year, primarily as a result of strength in ground transportation, industrial, and packaging markets. EBITDA was $173 million, up $88 million, or 104% year-over-year, and up $8 million from the prior quarter, reflecting strong volumes price and net savings benefits. Revenue in our building and construction system segment in the second quarter was $257 million, up $27 million year-over-year and up 7% organically. Adjusted EBITDA was $35 million, down $2 million year-over-year as price benefits and higher volumes were offset by lower net savings and higher material costs. Revenue in our extrusion segment was $70 million, down 23% organically year-over-year, Adjusted EBITDA was a loss of $8 million versus a loss of $14 million last year as aerospace market declines continue to affect this segment's performance. The aerospace weakness continues to impact profitability of this segment. We believe that the market is now bottomed, and we expect to see improvement as we exit this year. In the meantime, we continue to take structural action to address the cost in this segment. During the quarter, We began idling our Chandler, Arizona, extrusions production facility, which is the second facility we've idled in the last year. Our extrusions business is highly dependent on aerospace volume recovery, and as this market continues to recover, this should further complement our structural actions to improve the financial performance of this segment. Now moving to slide nine, I'd like to review our revenue outlook for the full year of 2021. We expect ground transportation organic revenue to increase 25% to 30% year-over-year compared to our prior expectation of 25% to 35%. The tightening of our expectation to the lower end is a result of the ongoing issues in the semiconductor supply chain impacting automotive production and our customers. Some of the impact is being offset by strength in heavy-duty truck and trailer, as well as our ability to pivot production capacity from our automotive to industrial markets. As a result of the continued switching of automotive to industrial capacity, we have increased the outlook of our industrial organic revenue from 25% to 30% compared to our prior outlook of 20% to 25%. The industrial market in the U.S. continues to benefit from the trade actions and strong demand. We've also raised our expectation for the building and construction end mark from flat in 2021 to a modest growth in the range of 0% to 5%, reflecting improvement that we've seen year-to-date that is expected to continue throughout the end of the year. Our packaging outlook continues to improve as Russia and China demand remains strong, and we expect to see some modest growth in North America late this year as we ramp production at our Tennessee facility. We now expect full-year organic growth of 15% to 20% compared to our prior view of 10% to 15%. Our aerospace revenue outlook remains unchanged at a decline of 25% to 30% year over year due to the ongoing destocking in the supply chain and the slow ramp of production at OEMs. While there's much talk about recovery, we have yet to see it in our order book. We believe the supply chain is still the stocking. As previously discussed, we believe the market impact to us reached the bottom at the end of the fourth quarter of 2020, and we expect sequential growth going forward. Now I'll turn the call back over to Tim to discuss the opportunities in front of us.
spk07: Thank you, Eric. The combination of sustained end market growth and the capital allocation opportunities before us have positioned us to grow for the foreseeable future. Over the next few slides, I'll explain how we expect that growth and those returns to materialize. Turning now to slide 11, all five of our end markets are expected to consistently grow over the next few years as supported by a number of favorable macroeconomic drivers. First, ground transportation, which includes automotive and heavy-duty truck and trailer, is supported by lightweighting, growth in electric vehicles, and improving cyclical demand from end users across both markets. That momentum is expected to carry for several years as light vehicles and commercial vehicles contain increasing aluminum as a percentage of content. CRU is projecting North American demand for automotive body sheet to experience a sustained 8% growth rate through 2024. Demand for industrial aluminum is supported by domestic supported domestically by the anti-dumping and countervailing duties that went into effect in the first quarter. The trade case dramatically reduced imports of common alloy sheet to the U.S. and is helping to improve pricing in that market. The protection associated with the case is in place for five years and in the vast majority of instances is instituted for an additional six years. At the same time the supply base is shrinking because of the trade case, the market continues to grow. CRU is projecting a growth rate in industrial road products demand of 6% through 2024. Building and construction markets in the US, while still challenged in 2021, are expected to return to year-over-year growth in 2022. Industry experts are now forecasting a modest recovery versus prior predictions of a contraction in the US non-residential construction segment in 2022 and then accelerating starting in 2023 for a sustained growth rate of 6% through 2024. The strength of the aluminum global packaging market has been a hot topic in our industry. Our facilities in Russia and China have been essentially sold out for several quarters, and demand for our upcoming North American capacity was extremely strong when we went to market. This is clearly our biggest growth opportunity for 2022, and we have already qualified all six customers from the contracts we announced last quarter. Meanwhile, North American can sheet is expected to grow at 5% annually through 2025. And finally, aerospace. While it remains the biggest question mark in our portfolio, we believe that question really just boils down to timing. We fully expect the industry to return to pre-pandemic levels and are encouraged by indicators in the market today. We believe we are headed for full recovery in the 2023 to 2024 timeframe. And to that end, combined Boeing and Airbus aircraft build rates are expected to grow at a rate between 10 and 20% from 2021 through 2025. So bottom line, all five of our core markets are growing at a multiple of GDP. It's always good to have choices, and clearly we have some pretty good ones. On slide 12, let's talk about electric vehicles. We stand to benefit from the growing wave of electric vehicle adoption around the world. While electric vehicles only represent a small percentage of the market today, industry experts forecast them to make up a quarter of global light vehicle sales by 2027. As the automotive industry transitions to alternative energy vehicles, As shown in the chart in the lower left corner of the slide, fully electric vehicles are projected to be the big winners. Electric vehicles are roughly 25% to 35% more aluminum-intensive than comparable internal combustion engine vehicles. As we gain content on electric vehicles and they gain a larger share of the total automotive market, we would fully expect growth in this segment of vehicles to further outperform automotive build rates. On electrical vehicle platforms, we produce many of the same components, such as aluminum doors, hoods, deck lids, and body structures, as for conventional vehicles. But we also provide material that are more prominent on electric vehicles, such as brazing sheets for advanced cooling systems and compressors, and sheet products to make aluminum battery cases. We are helping to develop advanced brazing technologies for use primarily in electric vehicles that are more environmentally friendly and improve battery life. In 2021, we expect our total revenue related to electric vehicles to be well over $100 million across 11 full electric or hybrid nameplates in North America and a wide range of applications in the rest of the world. While this is not a major driver for us yet, we fully expect that number to grow faster in absolute terms than growth in ground transportation sales on conventional internal combustion vehicles. We are also working on a number of last mile delivery fleet applications to help delivery companies get products to customers in an energy efficient and sustainable fashion. We continue working with a growing number of OEMs on new platforms and hope to announce some exciting new additions over the next few quarters. While we're excited about the opportunity that electric vehicles represents for our profitability in the long term, we're equally excited about the impact their growth will have and our contributions to sustainability globally. Now I'll turn to slide 13 to review some of the other ways that we continue to prioritize the environmental, social, and governance aspects of our organization. As I mentioned previously, we initiated a company-wide safety stand-down last month and remain committed to safety as our top priority in continuously improving our practices and performance. During the quarter, we continued our efforts to advance our environmental, social, and governance goals. In June, we published our 2020 sustainability and ESG report. Then we updated our company code of conduct and supplier standards, all of which are available on our website. In addition, we completed our CDP climate and water disclosures and made significant progress on developing our long-term GHG goals, which we target announcing before the end of this year. We're also engaging and empowering our nearly 14,000 employees worldwide through programs like our first engagement survey, our Grow Together Inclusion and Diversity Initiative, as well as our Giving Together Charitable Donation campaign. Finally, we are also participating in the UN Global Compact Target Gender Equality Program, which helps to achieve female representation, participation, and leadership that are iconic globally. Now moving to slide 14. The combination of end market strength driving profitable growth and significantly lowering pension and environmental cash obligations has left us well positioned to generate substantial free cash flow. So now I'd like to talk about what we're going to do with all that cash. First of all, all capital allocation options are thoroughly evaluated on a rate of return basis, whether we are considering returning capital through share repurchases or dividends, or investing in organic or inorganic growth, the goal is always the same, to maximize the highest return for our shareholders. We've already instituted and begun executing on a two-year $300 million share repurchase program as we saw the benefit that that would have for our shareholders. Through Friday's market close, we've repurchased over $27 million of our shares. We continue to evaluate instituting a dividend as we intended to prior to the onset of the pandemic last year. At the right time, when the company has demonstrated the ability to generate sustainable free cash flow, this will be under consideration. We are also consistently evaluating M&A opportunities. We believe there are good deals to be made, and we take each project seriously. However, M&A transactions are going to need to be very attractive to compete with, low-risk, high-return organic de-bottlenecking options. To that end, we are currently evaluating a range of organic de-bottlenecking investment options in our portfolio intended to take advantage of strong market conditions in the packaging, industrial, and ground transportation markets. The current assessment suggests that projects in the industrial and international packaging markets currently present the most attractive returns. First, in packaging, we are focused on ramping up the six contracts that we announced earlier, excuse me, announced last quarter in North America. Additionally, we are exploring adding to our Russian packaging capacity and are evaluating the best path forward there. We also continue to explore the capital efficient opportunities to access the remaining 500 to 600 million pounds of latent capacity on our Tennessee packaging cold mill. but meeting our return expectations there would be very challenging in the current environment. Next, the industrial market is expected to grow in the U.S. and abroad, and we believe there is opportunity to expand capacity to service that growth. We're currently evaluating opportunities to expand industrial capacity at our facilities in Lancaster, Davenport, Tennessee, and Hungary. Despite the near-term headwinds in ground transportation, the longer-term outlook in that industry remains very strong, and we continue to look for ways to increase our output in the U.S. and some of our international rolling mills. While we have many opportunities to create value for our shareholders, the option of expanding under the rooftop capacity in markets we lead in with facilities we already know how to run and people we already know is very high on our agendas. We have a disciplined capital allocation process, and we believe that we can access significant earnings growth while maintaining total capital expenditures below 3% of total revenue going forward. Slide 15 is one we've shown previously, but we think it's important to provide an update on the incremental $300 million EBITDA opportunity compared to 2019 levels. We remain on track to deliver all three tranches of our EBITDA growth program As part of $100 to $120 million of incremental organic EBITDA, we've been ramping up new industrial capacity, and we are working toward full-scale packaging production at our Tennessee facility. The packaging agreements we secured last quarter were secured with favorable pricing and combined with an attractive pricing environment in the industrial market support performance at the high end of this range. The $100 million of permanent cost out and additional $70 to $80 million of productivity savings are both expected to reach their run rate by the end of this year. We will achieve the full benefit of the program on a run rate basis in the second half of next year. Slide 16 recaps the progress we've made on legacy free cash flow obligations and the implications for free cash flow to step up starting in 2022. As a reminder, our growth pension and OPEB liability has declined 37% since separation, while our net tax after-tax pension and OPEB liability is down 40% over the same timeframe. Combining this with the wind down of our largest environmental project in Grass River, New York, our cash needs are going to be lower by $245 million in 2022, with an additional step down in 2023. Slide 17 summarizes the path we're on and the opportunities that have positioned us for long-term growth. In the second quarter, we grew adjusted EBITDA by 4% sequentially despite a decline in our largest end market, ground transportation. Although it's obvious that issues in ground transportation are temporary and underlying demand conditions in the industry are very strong, we were able to offset most of the automotive impact with industrial volumes. We also completed a transformative $1 billion pension annuitization that greatly reduces volatility in legacy liabilities and the overhang associated with them. Altogether, free cash flow is expected to step up by $245 million in 2022 based on legacy reductions alone, with another small step up to 2023. On top of the structural change in our cash generation profile, we also expect to grow adjusted EBITDA meaningfully each year for several years. This is based on the combination of broad-based and market strength and organic investments and capacity expansion. That said, we will be disciplined and we will make investments where the markets can support them and the returns are well in excess of our thresholds or beyond. As profitability and free cash flow grow, we will continuously evaluate the best uses of cash. While we believe there is substantial opportunity to invest in growth organically, M&A, share repurchases, and dividends will all have their place as well. We have a robust toolkit for generating returns to shareholders, and we are very much in the early innings of our growth story. We've updated our full year 2021 outlook to reflect the impact of increasing metal price. Revenue guidance has been revised to a range of $7.3 to $7.6 billion from $7.1 to $7.4 billion. We continue to expect adjusted EBIT to be in the range of $710 to $750 million, a year-on-year improvement of 18% at the center of the range, with the third quarter relatively flat sequentially as we have seasonality in Europe and the semiconductor issue is not yet behind us. Adjusted free cash flow is now expected to be approximately $250 million for the full year compared to our previous view of $300 to $400 million. The change in outlook reflects roughly $100 million in impact from rising metal prices on net working capital, as Eric previously mentioned. As a reminder, adjusted free cash flow excludes a total of approximately $600 million in pension, environmental, and OPEB payments in the year. Wrapping up, here's what I hope you remember. First, we delivered another strong quarter. Second, Our end markets support sustainable, double-digit earnings growth. And third, we're well-positioned for free cash flow generation, supported by disciplined capital allocation strategy. At this time, we'd like you to open it up for questions, and I'll turn it over to Renz to help us facilitate those.
spk03: Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We have our first question from the line of Kurt Woodworth from Credit Suisse. Your line is open.
spk05: Yeah, thanks. Good morning, Tim and Eric. Good morning. Good morning. First question is, I guess, with respect to some of the growth potential. I mean, when we look at what's going on in the beverage and the beverage can industry, they're obviously mobilizing significant resources to expand can capacity over the next several years. But when you look at the can sheet industry, there's really been very limited major capital investments to kind of deploy to go in line with that. I know you're restarting some vital capacity, and there's been some you know, capacity creep from other players. But, you know, when you talk about, uh, further growth there, potential, you know, MNA, can, can you comment on, you know, how big you think you can grow your can sheet market? And then with respect to, you know, your assets, um, in Russia and China, would that primarily be driven to support the European market or more of a, um, you know, Pacific basin Asian strategy?
spk07: So, um, First of all, we're very excited about the growth with the can makers, and clearly it looks like the can makers are getting value for the aluminum can. Firing up idle capacity that we had in Tennessee where we didn't have to make any investment other than some sustaining capital to kind of fire that equipment back up, that's pretty straightforward. I think that in order to get a return on a more significant capital commitment, we're going to have to continue to see market conditions improve here in the U.S. I think the, you know, you can kind of look at what industry returns are in that market. And when you start thinking about, first of all, you know, a green field that might be a, you know, one to one and a half billion dollar type of investment, At those kinds of margins, you'd be looking at paybacks that are measured in decades, not years. So we're going to continue to look for ways to bottleneck because we could probably unleash capacity at the Tennessee facility for a fraction of what it would cost to put a new mill in place, but we still need to have an acceptable return profile on those decisions. When we look at our facilities overseas, particularly the facility in Russia, It has a very, very strong position in the Russian market itself, which is growing at double digits, and it's also very well positioned to export into northern Europe, where there's also very strong growth and tightness in the packaging market. So, you know, we see better pricing conditions there, and it does look like we can get a reasonable return on an expansion. It's something that we're very deeply studying right now.
spk05: Okay, and then you talked about M&A and some opportunities set there. I'm just curious when, you know, previously we talked about normalized EBITDA potential of $1.1 billion or slightly higher. You know, your stock's trading about five times EBITDA on that basis. And historically, a lot of M&A transactions are done at multiples significantly higher than that. So I'm just kind of curious how you weigh, you know, reinvesting in your own equity at this point, you know, you know, relative to whatever the external opportunity set could be. And that opportunity set, would it be tangential to what you're currently doing, or are there other markets or products that you'd like to get into? Thanks.
spk07: So, you know, I kind of mentioned in the script that we really feel that we have some very strong organic options, you know, with very nice rates of return. I think that when it comes to M&A, certainly we're listening and we're taking it seriously, but we need to be opportunistic and find really good value if those kinds of opportunities are going to compete with growing plants that we already run in markets that we already have a very strong position in. It gives us a very high confidence level in the return profiles of the projects that we're evaluating, and I think they're the lowest risk on the board. So hopefully that helps with how we might think about it.
spk05: Yeah. And then just one quick one on, I guess, sequential EBITDA progression going into the third quarter. You know, it seems like the chip shortage is still – an overhang. But most parts of your business are doing better. I know there's some seasonality and packaging. But could you just kind of speak to, you know, sequentially some of the moving pieces you see in the third quarter relative to the second quarter? And then with respect to working capital and the free cash flow guide, what do you think working capital usage could look like this year?
spk07: So, yeah, let's start with the sequential. I think there'd be three things I'd highlight. There's not a lot of seasonality in packaging per se, Q2 to Q3. What we do have is all three of our segments have meaningful positions in Europe, right? So we lose a couple of weeks in August. You know, whether we're running or not, our customers aren't there to take product. And we also then are going to take that opportunity when we have to, you know, take a bit of a rest to do a little bit more capitalization sustaining capital work in those plants where we've got the window. Then we continue to see some drag, obviously, from the semiconductor chips. We've seen about $5 million a quarter of net impact in the first two quarters of the year. When we provided our increased guidance outlook last quarter, you know, the largest risk factor that we saw at the time was the recovery of the semiconductors. And so, you know, when you kind of think about from the top of the range to the bottom, you know, $5 million a quarter kind of covers that. I certainly think that we're going to see another $5 million impact in the third quarter based on what we're seeing in the pulls from our automotive customers. So, yeah. You know, that would be the next one. And then the third one is, you know, the stimulus is still present in a lot of states here in the U.S., and in those states, you know, we're continuing to see some modest staffing challenges, and with that comes some overtime. And so those are the three headwinds that we're kind of juggling as we go into Q3, and I think it's probably going to be relatively flat.
spk05: Great. Thanks for all the color. That's the one.
spk03: Thank you. The next one we have Corrine Dijonard from Deutsche Bank. Please go ahead.
spk02: Hey, good morning, Tim. Thank you for taking my question. Most of them were already covered up, but just a few follow-up on the capital allocation priority. If you had to rank it, would you think that you are putting priority into the organic growth And then maybe, you know, dividend as number two. And then, you know, my second question would be more in terms of aerospace recovery. And if you have seen any sign, obviously, you know, we have seen the industry picking up in terms of air traffic and et cetera. But just if you have seen any impact yet on other book, and how do you see the second half of the year versus the first half of the year for aerospace?
spk07: Great. Well, thank you for the questions, and thanks for joining. First of all, on the organic and the dividend, as I mentioned earlier, we really focus on the rates of return and what we're going to do with the use of capital, and then payback period as well. So when we are looking at these organic opportunities, we're looking at a hurdle rate that's more than double our weighted cost of capital rate. So let's say rates of return in the neighborhood of 25% being the low watermark and then above. And so when we think about the dividend, we're competing with whether or not it creates an equivalent return for our shareholders to that. And it's the same way that we think, quite frankly, about the share repurchase program, which we're being very, I think, disciplined around as well. In regards to aerospace, we did bottom out in the fourth quarter. We're seeing modest improvement over the last couple of quarters, so I wouldn't call it a V-shaped recovery, but clearly our order book's filling. We bottomed out in our extrusions business this quarter, and we're already seeing a rebound in Q3, and we're seeing activity in Q4 that's better than Q3 in terms of order load. So I would say that we're seeing it first in the extrusions business in terms of a quicker bounce up. And I would also say that we're starting to get some more activity with certain parts of the distribution network in the sheet and plate part of the business, which are stronger than what we're seeing from the OEMs, which I view that as a very good sign that the stocking is, you know, starting to happen in the supply chain.
spk02: Great. Thank you. And if I may, maybe, you know, just one last question on the free cash flow guidance. Obviously, I think, you know, working capital needs is one assumption with the metal price. But have you also included, like, you know, maybe like a stronger rainfall from packaging and, And the aerospace improvement that you just talked about, is that embedded as well for the work and capital need and obviously the impact that has on free cash flow guidance?
spk07: So the short answer to that question is yes, we are anticipating growth in our free cash flow outlook. You know, if you think about our guidance for revenue, it's up about $150 million. It's the center of the range. You know, that's all metal. And so when I think about it in real simple terms, metal is clearly the largest part of our working capital. And you can see it actually in the queue, but you'll see that inventory and payables essentially grow dollar for dollar. And so they're offsetting each other. And so at the end of the day, you've got payables offsetting inventory and the impact on the pass-through of that metal on our revenue is kind of what has become a use of cash. It's really, to a degree, timing. Metal doesn't have any impact on our EBITDA performance because we pass it through and we've got a hedge program on that. But as the cost of metal goes up, it does consume some cash inside of working capital.
spk02: Sure, makes sense. I promise this is probably the last one, but just in terms of EBITDA guidance, you know, it was unchanged. And I think, you know, maybe investors were maybe expecting maybe a lift up. And I know this is a range. What's your take or view on how likely you are to achieve the top of the guidance? Another way to put it is what do you think are maybe, you know, the drivers to reach the $750 million or plus for the full year?
spk07: So, you know, if you annualize the first half, it puts you roughly in the center of the range. Sequentially in the third quarter, you know, looking like the first half. And so it really comes down to how much will the chips recover in the fourth quarter and how much can we drive some ramp-up benefit on things like packaging and additional industrial.
spk02: Okay, thank you.
spk03: Thank you. Again, ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchstone telephone. We have our next question from the line of Josh Sullivan from Benchmark. Please go ahead.
spk06: Hey, good morning. Good morning, Josh. Yeah, just to follow up on that last question, I mean, so should we think about the investments on the industrial side? You know, those incremental CapEx investments we're talking about kind of gated by the return of the automotive markets. I mean, just trying to get an idea of the pivot back to the automotive exposure versus these industrial opportunities. And is that a one for one or do we have some transition that we need to take into account here?
spk07: So, no, I think the only thing is, you know, there's timing when we can see it, Josh. You know, we're basically trading off pounds across our cold mills where, okay, you know, if we're not going to make automotive, we can flip that over and make industrial products for some period of time. Some of the industrial products we make don't use the continuous heat treat lines, so we You know, we have some, let's say, idle capacity and continuous heat treat in the short term because they're, you know, not making automotive pounds. The other thing I would say is, you know, our inventories are a little bit inflated, and that's because we did have orders, you know, and we've got requirements contracts for automotive. So our buffer stocks for automotive sheet are very high, and that – That will eventually be an opportunity for us because when the chip shortage starts to resolve itself, and it should, right, because consumer demand is high and inventory levels are very low at the dealers, we'll be shipping automotive products out of inventory, which still allows us then, we'll be shipping out of inventory and continuing to make industrial that would be constrained out for a period of time. Right now, it's just hard for our crystal ball to determine exactly when that's going to happen. The discussion around the semiconductor chips, it seems like it keeps getting pushed out a couple of quarters every time somebody talks about it.
spk06: Got it. I know you said on the total number of canned sheet qualifications, I think you had six from last quarter that you got done here. What is the total number for 21 and 22 that we should be thinking about just as far as qualifications that need to be done?
spk07: We were oversubscribed with interest in the canned sheet, so we were only able to take on six customers. Those six customers actually currently have us qualifying on 12 lines in North America, and we've gotten through the preliminary qualifications successfully on 10 of the 12, and we're still shipping some qualification trials as we go through the third quarter. But we're in really good shape.
spk06: And then just on the advanced brazing solutions, your question for electric vehicles and some of those last mile EV solutions you mentioned, Can you just detail what some of those opportunities are and, you know, if you can, any timing around any of those?
spk07: You know, it's kind of ongoing with the major brazing sheet customers. And so it's predominantly a lot of alloy development and temper work that we're doing through our technical center to really tune our alloys to be, let's say, higher performing materials inside of the brazing sheet market. So as we continue to expand that part of our portfolio, we'll be comfortable sharing that, and certainly when they're in development, customers would be sensitive about us being too specific.
spk06: Okay. Thank you.
spk03: Thank you. I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Tim Myers.
spk07: Very good. Well, again, thank you to everybody for joining us today. In closing, I'd just like to reaffirm that, first of all, we delivered another very strong quarter, and we're on track to deliver the 18% profit uplift projected in our 2021 guidance. We're also well on track to deliver the $300 million profitability improvement program that we announced last year, which will also support additional meaningful growth in 2022. Our core markets are all growing at a multiple of GDP, and we are developing a pipeline of organic de-bottlenecking options to upsize the EBITDA growth commitment and extend it beyond 2023 in pursuit of sustainable double-digit earnings growth. And finally, our steadily growing returns and improved balance sheet will easily fund this growth while also enabling the full range of capital allocation options. We look forward to updating you next quarter, and thank you again for joining us.
spk03: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.
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