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spk05: Ladies and gentlemen, thank you for standing by, and welcome to the Arconic Corporation fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. It is now my pleasure to introduce Director of Investor Relations, Shane Rourke.
spk01: Thank you, Andrew. Good morning, and welcome to the Arconic Corporation fourth 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 websites. 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.
spk02: Thank you, Shane, and good morning, everyone. Thank you for joining us again. I'll start on slide four with some highlights from a very strong first year, despite the challenges of a variety of headwinds. In 2021, we grew adjusted EBITDA by 15% over 2020 and set the table for another year of double-digit growth in 2022. We won favorable long-term business in key end markets, and we deployed hundreds of millions of dollars to reduce liabilities and repurchase shares. Our EBITDA growth in 2021 was primarily driven by double-digit organic revenue increases in ground transportation, industrial, and packaging. This more than offset a 30% year-on-year decline in our organic aerospace sales. Throughout the year, We optimized our product mix to account for changes in automotive demand related to semiconductor shortages and changes in staffing availability due to the pandemic. Early in the year, we announced $2 billion in contract extensions with key aerospace customers and another $1.5 billion in agreement with can makers that secured our return to the North American packaging market. We also won content on 23 new automotive or light commercial programs, including seven full electric vehicles. And we executed on a capital allocation strategy that reduced our gross liabilities by roughly $2 billion and net liabilities by approximately $700 million through a combination of accelerated pension funding, exceptional management of our environmental liabilities, and a $1 billion pension annuitization. These actions significantly reduced our risk profile and positioned us for much higher cash generation moving forward. We also repurchased about $160 million of our stock and initiated two organic capital projects that will help drive EBITDA growth starting in 2023. All of these actions and wins in 2021 are setting us up for a second year of double-digit adjusted EBITDA growth in 2022, a big step up in free cash flow generation. and a continuation of our momentum into 2023 and beyond. Moving to slide five, I'll provide some details on the fourth quarter. Our fourth quarter 2021 adjusted EBITDA of $175 million increased $24 million or 16% year over year and was up 2% sequentially. Profitability increased despite labor shortages related to employee quarantine levels that reached new pandemic highs by the end of the year. We also had a brief equipment fire at one of our North American rolling facilities that reduced our total volumes for the quarter versus expectations. These challenges caused us to deliver fourth quarter results at the low end of the guided range. We continue to take action to offset inflation in alloying materials, energy prices, and freight costs. by increasing prices and driving productivity measures. Most importantly, the markets we serve remain strong. We had year-over-year organic growth across the business in the fourth quarter and continue to expect all of our markets to grow at a multiple of GDP over the next several years. Thanks to the actions that we took throughout 2021, we have significantly strengthened our balance sheet, and created a strong platform for capital allocation options heading into 2022. As an example, in the fourth quarter, we repurchased another 1.8 million shares for approximately $55 million, bringing our buyback total to nearly 5 million shares for approximately $160 million in the first eight months of our two-year $300 million authorization. And as Eric will soon share, just yesterday, we upsized our ABL by $400 million. As we've been saying for a while now, free cash flow is stepping up in a big way this year. That will open the door to more return-seeking capital allocation opportunities. That includes the organic investments we've already announced and the potential for additional share repurchases, as well as other capital allocation options. And as always, we'll continue to rank those opportunities by the rate of return and work our way down the list. Moving to slide six, I'll provide more detail on how we performed across our markets. Let's start in the bottom right corner of the slide. In the fourth quarter, we grew organic revenue year over year in every single end market. Ground transportation sales increased 12 percent organically from the fourth quarter of 2020 due to growth in both automotive and commercial transportation, despite the impact of the semiconductor chip shortage. Our share gain in this segment allowed us to grow our automotive sales, which swam against the current, growing 18% year-on-year, while automotive production builds were actually down 15%. I'll be coming back to this part of the business later in the call when we start to talk about the future. Led by our continued share gain outpacing vehicle builds, depleted inventory levels, and pent-up consumer demand, we expect to see continued growth in ground transportation for the next several years, Four-quarter sales in the industrial market increased 17% organically year-over-year. The industrial segment was strong for us all year, and we expect to see this momentum continue into 2022. In the building and construction market, our sales increased 9% organically year-over-year and 2% sequentially. Broader trends in the building and construction markets are solid, despite supply chain and labor challenges that our customers are facing in meeting that demand. Sales in our packaging segment surged 54% organically year-over-year in the fourth quarter due to the accelerating ramp-up of volumes at our Tennessee facility, as well as continued strength in Russia and China. And finally, aerospace sales were up 19% year-over-year on an organic basis and 11% sequentially. As we've stated previously, our aerospace sales reached a bottom in the fourth quarter of 2020 and we expect to see continued growth until our revenues reach pre-pandemic levels sometime in the 2024 timeframe. The 11% sequential improvement in the fourth quarter is an acceleration of the sales improvement that we saw in prior quarters, a clear sign that destocking the supply chain has improved significantly. The fourth quarter showed just how strong the markets are that we serve in the face of supply chain and labor constraints. And as those constraints ease, our profitability and our growth will continue to improve. I'm now going to turn it over to Eric to discuss the fourth quarter results in more detail.
spk00: Thanks, Tim. I'll start on slide seven with our fourth quarter financial highlights. Revenue in the fourth quarter was $2.1 billion, up 13% from the prior quarter and up 19% organically year over year. Net loss for the quarter was $38 million. This included an after-tax non-cash goodwill impairment charge of $65 million related to our extrusion segment. This impairment was primarily driven by a combination of market-based factors, including delays in aerospace market improvement and significant cost inflation. Adjusted EBITDA was $175 million, which was an increase of 16% year-over-year and 2% from the prior quarter. Free cash flow for the quarter was $35 million, which was lower than we expected. This was impacted by higher inventories at year-end, resulting in three main factors. First, we again had to pivot from automotive to industrial, and this takes time. Second, as Tim mentioned, we had a production disruption from a small fire at our Tennessee location. And lastly, we again saw an increase in employee quarantines related to the pandemic, which I will discuss more in the coming slides. Capital expenditures were $61 million in the quarter, approximately 2.9% of sales. and we would expect a similar range or approximately 3% or less of revenue for 2022. As Tim mentioned, we repurchased approximately $1.8 million of shares for the quarter for approximately $55 million, and we ended the quarter with a cash balance of $335 million and total liquidity of approximately $1.1 billion. Also, as we just announced, we executed a $400 million increase to our existing asset-based lending facility, expanding it to $1.2 billion. This reflects the increase in collateral base due to our volume growth, higher loan revenues, and expected growth in packaging working capital this coming year. This increased positions as well for future capital allocation opportunities. Turning to slide eight, I'll discuss one of the key factors that influenced our performance. Our results in the fourth quarter were impacted by labor issues that limited our ability to produce at shifts across several of our production facilities. This was driven by a rise in COVID infections that spiked in December and have been declining over the past few weeks. As you can see in the bottom right of the slide, our employee quarantines have exceeded peak levels seen in late 2020. As a result of these quarantines, we were forced to idle entire shifts that reduced revenue and adjusted EBITDA compared with our expectations coming into the quarter. We continue to make progress on hiring and retention, and as you'll see in the top right of the slide, we added a net. 243 employees in the fourth quarter. Turning to slide 9, I'll discuss our financial performance in more detail. Revenue increased $676 million year-over-year, primarily due to the impacts of higher liminal prices and the improvements we are seeing in volume and mix. Adjusted EBITDA was $175 million, up $24 million, or 16% year-over-year, primarily due to improved pricing, volume, mix, partially offset by inflation. We are experiencing high inflation, which can no longer be offset by normal productivity initiatives. Savings net of inflation was a negative $35 million, as our $35 million in shop floor productivity measures could not offset $71 million in inflation in the quarter, primarily from energy, transportation, and alloying materials. Our pricing initiatives are expected to offset this inflation but have a lagging effect. The unfavorable aluminum price impact of $15 million in the quarter is related to the impact of rising metal prices of aluminum to the building and construction system segment, which was offset by pricing in the year. Turning to slide 10, I'll review our segment performance in more detail. Starting with our roll product segment, revenue was approximately $1.8 billion, up 24% organically year over year, driven by growth across all our end markets. Adjusted EBITDA was $162 million, up $23 million, or 17% year over year, reflecting stronger prices, volumes, which were offset by cost inflation, and the end of temporary saving measures from 2020. Revenue in our building and construction segment for the fourth quarter was $261 million, up $25 million year over year, up 7% organically. Adjusted EBITDA was $33 million, up $3 million year over year, driven by increased price partially offset by higher aluminum costs and inflation. Revenue in our extrusion segment was $87 million, down 12% organically year-over-year. Just the deep end was a loss of nine versus a loss of four last year as aerospace weakness, which has historically been 50% of the segment sales, continues to impact this segment's performance. As we mentioned before, we believe the combination of Structural cost actions and aerospace market improvement will drive improvement in the financial performance of this segment. Now moving to slide 11, I'll review the impacts of aluminum price and manufacturing challenges on our balance sheet and cash flow. As you can see on the chart on the left side of the slide, after a short decline in October, the price of aluminum has returned to record levels. And our outlook for the year, which Tim will discuss shortly, is based on the combined LME plus Midwest premium of $3,700 per metric ton. Our adjusted free cash flow for 2021 was impacted by the rise of aluminum prices, which drove increases to our working capital throughout the year. As we've mentioned before, aluminum is our largest input cost. And while we pass these changes through to our customers, Price changes do impact our net working capital on our balance sheet and our free cash flow when prices move in either direction. For the year, net working capital increased $364 million. As you can see on the slide, we estimate approximately $250 million of the net working capital increase was related to the precipitous rise of aluminum throughout the year. The balance of net working capital increase for the year was comprised of $40 million related to growth in packaging and industrial markets and approximately 60 million of excess inventory built in the fourth quarter. This fourth quarter buildup of inventory was due to a combination of lower auto polls, increased pivot to industrial markets, the very brief fire that disrupted production at our Tennessee facility, and the impacts of increased employee quarantines related to the COVID variant that we experienced in December. Working capital management remains a top priority. As you can see on the slide, we had challenges in 2021. For 2022, We plan to deplete the inventory built related to the pivot from auto to industrial. We plan to continue to increase production levels as this latest wave of the pandemic subsides, and we will be driving buffer management rigor on inventory throughout our production locations. Now I hand it back over to Tim.
spk02: Thank you, Eric. Starting on slide 12, I want to talk about why we're so excited and confident in our expected performance in 2022. First, the core of our business, the rolled product segment, has already reached adjusted EBITDA levels greater than where we were in 2019 prior to any pandemic impact. In fact, 2021 adjusted EBITDA in the segment improved 24% year-on-year despite aerospace revenue being down 30% and the North American automotive production being essentially flat with 2020. 2022 volumes are set to benefit from the ongoing ramp-up of the packaging in Tennessee Continued improvement in aerospace and automotive growth as semiconductor availability should ease throughout the year. And looking into 2023 and beyond, we've already announced a capital investment in our Lancaster Hot Mill that will deliver more than 100 million pounds of incremental capacity on a run rate basis to build on the 2021 and 2022 growth. That's coupled with the other investment we announced in Davenport's casting capacity that will both reduce our costs and lower our greenhouse gas emissions intensity by allowing us to consume more scrap. The two combined should add $75 million of annual EBITDA to our results, and we're continuing to evaluate additional under-the-roof-top investments to creep capacity in markets that are showing strong demand. Moving to slide 13, let's look at some of the end markets driving our future, starting with ground transportation, where we continue to win in automotive. We all know that the global automotive production was hindered throughout 2021 by the semiconductor shortage. While automotive volumes were below our expectations, we still managed to significantly outperform North American light vehicle production on a year-over-year basis. As you can see on the table on the left, our rolled product automotive volumes were up 18% in 2021 compared to 2020. And in that same time period, Wards Intelligence reports that North American light vehicle production was flat. This is a clear indicator of the share that we're gaining in the segment as we went throughout the year. As semiconductor shortages are expected to ease in 2022, we stand to benefit from a higher level of year-over-year production rates at the OEMs as dealers seek to replenish their inventories. At year end, North American dealer inventories were conservatively at least a million and a half vehicles short of typical levels. And we continue to outpace total light vehicle builds moving forward as light weighting drives aluminum adoption and vehicles where we have greater content outpace the rest of the market. We expect this trend to continue and accelerate as aluminum intensive electric vehicles continue to gain share. Turning to slide 14, let's look a little more closely at the automotive wins I mentioned earlier. In 2021, we captured content on 23 automotive or light commercial vehicle programs, more than double the 11 programs we won the year before. They include eight pickup trucks, nine SUVs or crossovers, and two electric last-mile delivery vehicles. And of the 23 programs, seven are fully electric. On the slide, you can see just a handful of the programs where we won content last year. The popular Toyota Tacoma is one of the eight pickup truck programs we added. We're also excited to support GM on the launch of their all-electric Hummer EV pickup. And we look forward to continue working closely with Ford, providing typical content and more on the all-new, all-electric F-150 Lightning pickup truck. We also added flagship SUV programs, including the Wagoneer and the Ford Bronco. And one of the areas earlier highlighted is our participation in the electric last mile delivery vehicle market. Virtually all of the major commerce and delivery companies are exploring electric vehicles to improve their environmental footprint. We're proud to announce our participation on the GM BrightDrop EV600. This is an all-electric commercial cargo van purpose-built for the delivery of goods and services. We were part of the development process with the OEM, and we're very excited about what this early entrant means for the rest of the commercial electric vehicle market. This is only the beginning as we have content on or are exploring additional opportunity on similar vehicles at different phases of development with multiple existing or potential customers. Across our whole portfolio, revenue associated with EVs is expected to increase approximately 80% year-over-year in 2022 to over $250 million. Moving to slide 15, I'll discuss the strength we're seeing in the industrial markets. Starting on the left hand of the slide, you can see that 2021 aluminum sheet and plate shipments from all U.S. and Canadian producers not only exceeded pre-pandemic levels, which were at an all-time high in 2019, 2021 shipments also increased 11% year-over-year, creating a new all-time high. And while North American demand has largely recovered, production capacity hasn't expanded significantly in our region. So you can see how pricing has responded in the chart on the right-hand side of the slide. Of course, 50-52 is an alloy predominantly used in the industrial segments. And prices are responding quicker in that segment of our business because contracts are generally shorter in nature, and the domestic market is also benefiting from a level playing field due to trade actions against China, as well as 16 other countries on common alloy sheet. The chart on the right also shows CRU's benchmark common alloy conversion fees by quarter. Our 2021 volumes were mostly booked in the third quarter of 2021. pricing levels, while our 2022 volumes were booked at the pricing levels seen in the third quarter of 2021. You'll notice that there was an increase of over 50% in pricing between those two timeframes. That's not to say that we will see a 50% year-over-year revenue increase across the entire industrial portfolio. First, you have to remember that the pricing only applies to the conversion fee, which is roughly a third of the total price of a shipped pound of aluminum. Secondly, this is only for our U.S. business, which is about 65% of our total industrial sales, and some of those sales are on a two-year contract. And last, you'll remember that we pivoted some of our automotive capacity to industrial in 2021, which is likely to move back to automotive later in 2022 as the semiconductor shortages ease. This could result in our North American industrial volumes being relatively flat or modestly declining year over year in 2022, depending on how quickly the automotive production recovers. Turning now to slide 16, let's take a look at that surging packaging opportunity I mentioned earlier. We previously mentioned the strong global packaging demand growth and what that means for can sheet productions. Since we announced our North American packaging sales agreements last year, the market's only gotten stronger. The domestic packaging industry is short on can sheet and cans, which has resulted in greater imports of both. In fact, in 2021 through November, the U.S. imported over 13 billion cans, which is up more than 500% from the same period in 2019. Over the next three to five years, six different can makers have announced their intention to install about 30 new can lines in the US alone. Filling the incremental capacity associated with those new can lines is going to require another 1.2 billion pounds of can sheet per year, or roughly the annual output of an entire rolling mill. By the way, packaging growth is not only a US phenomenon. In fact, in Russia, where we have a very strong can sheet position, Can-making capacity is expected to grow by at least 50% from 2021 to 2025, and that doesn't include several other can-making investments happening in some of Russia's neighboring states. As a result, we're continuing to evaluate expanding our sheet capacity in Russia to serve this rapid growth. Of course, that'll be somewhat dependent on the situation involving the Ukraine de-escalating, and as you'll see later today, we've heightened the related disclosures regarding Russia in our 10-K. Now let's take a look at the organic revenue outlook for 2022 on slide 17. This slide really underpins the basis for our confidence in delivering another year of double-digit earnings growth. Multiple indicators indicate to expected growth in organic revenue across all of the markets which we serve. Starting in ground transportation, we expect to deliver organic revenue growth of 10 to 15% increase year over year, following a 24% year over year increase in 2021. Our automotive customers are telling us they expect semiconductor shortages to ease throughout 2022, allowing them to meaningfully increase production from 2021. Commercial transportation sales will also remain strong, but are not expected to grow at the same pace that they did in 2021. Following what I discussed a moment ago, we expect industrial organic revenue to grow 5 to 10% in the full year after a 27% year-over-year increase in 2021. While demand and pricing are both strong in the market, our year-over-year growth may be constrained by the need to pivot what was industrial capacity in 2021 back to ground transportation later this year. Building and construction organic growth is expected to pick up modestly to a range of 5 to 10% from 5% in 2021. Non-residential construction activity is increasing, but supply chain constraints, pricing, and labor issues are creating uncertainty for our customers in the near term. We expect packaging organic revenue to increase 40% to 45% as North American can sheet ramps up to full capacity throughout the first half of this year, and the facilities in Russia and China continue to serve very strong global markets. This is on top of the 25% year-on-year organic growth we achieved in 2021. Finally, aerospace organic revenue is expected to grow 25% to 35% year-over-year as the supply chain is expected to be destocked this year and OEM build rates are increasing as we speak. We expect our aerospace revenues to reach pre-pandemic levels in the 2024 timeframe. Turning to slide 18, I'll discuss our profitability and free cash flow growth. You remember last quarter we increased the total EBITDA uplift target to $375 million from pre-pandemic levels. This is driven by the investments in Lancaster and Davenport to increase volumes and reduce costs. Both of those projects are already underway and on schedule. With the completion of the packaging ramp-up in the first half of this year, we will have delivered the 600 million pounds of volume growth that we anticipated. The permanent cost-out initiatives are complete and our overhead costs relative to sales remain more than 100 basis points below pre-pandemic levels. We've realized $80 million in productivity gains on the shop floor, but as we stated last quarter, the impact is being tempered by inflation and pandemic-related crewing challenges. As we overcome the staffing challenges and realize the benefit of the pricing actions we've taken to offset the cost increases, such as seen in energy and magnesium, we'll see those productivity savings start to hit the bottom line. And looking at the bottom half of the slide, you can see the impact of the disciplined capital allocation decisions we've made over the last two years. Since we became a standalone company, we've changed the capital structure, funded and de-risked the pension, reduced OPEB spending, and paid down environmental liabilities. As a result, annual cash outlays have declined by over $300 million from 2020 levels. Our balance sheet is stronger, adjusted EBITDA and free cash flow are growing, and the returns associated with redeploying cash are driving opportunities for additional value creation. Moving to slide 19, let's take a look at a few sustainability highlights. As an aluminum manufacturer, we advance sustainability in everything we do, from the way we operate to the products we design. We continually seek ways to improve our production processes to reduce energy consumption and emissions while creating materials used in products that are more sustainable than competing materials. You can see on the chart on the left-hand side of the slide that externally sourced scrap in our rolled product segment is up 9% from pre-pandemic levels. We're particularly proud of this fact considering that our volumes are only up 1% over the same period. And scrap utilization is expected to pick up substantially in 2022 as we increase can sheet production, which allows for much greater scrap consumption than some of the other products in our portfolio. As we increase scrap use in the rolled product segment, you can also see two major examples of how our products drive sustainability. First, in the area of automotive applications, our aluminum sheet is enabling fuel efficiency and range extension. by providing light, high-strength solutions. It bears repeating the revenue associated with electric vehicles is expected to increase 80% year-over-year in 2022, and we're well-positioned to help customers advance in this space. Secondly, can sheet is comprised of up to 90% scrap, which makes aluminum packaging a much more sustainable option compared to other alternatives. With packaging revenue expected to grow nearly 50% this year, We're helping our can sheet customers meet the surging demand for the infinitely recyclable aluminum can. Now let's turn to slide 20 to take a look at our outlook for 2022. Our full year outlook for 2022 revenue is expected to be in the range of $9.9 to $10.3 billion. Adjusted EBITDA is expected to be in the range of $800 to $850 million. and we forecast free cash flow to be approximately $250 million in 2022. You'll notice that the midpoint of the adjusted EBITDA guidance range implies a second consecutive year of 15% growth and is 19% at the top of the range. This is largely driven by the organic growth I discussed and is supported by our North American packaging ramp-up, the expected recovery in automotive, and the expecting ramping of aerospace build rates. We continue to experience challenges from inflation, freight, energy, and staffing, but we believe these headwinds are temporary, and we've put multiple countermeasures in place to mitigate them. Looking beyond 2022, we're excited about the capital projects that we've announced to drive organic growth in 2023, and we continue to evaluate similar projects to set up the next phase of growth. Wrapping up, here's what I think you should take away from today's call. Looking forward, our end market trends and organic investment strategy continue to support sustainable double-digit earnings growth. We're experiencing a step change in free cash flow, which has created new opportunities for return-focused deployment. And we grew adjusted EBITDA 15% year-over-year in 2021, and we fully expect to do it again in 2022. So at this point, I'd like to open it up for questions, and I'll turn it over to Andrew to help us facilitate those.
spk05: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Your question has been answered, or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Kurt Woodworth with Credit Suisse.
spk04: Yeah, thanks. Good morning, Tim and Eric. Good morning, Kurt. Good morning. So just with respect to the guidance, I was hoping you could kind of talk about, you know, some of the drivers between how you see the high end and the low end materializing this year. And I know last quarter you discussed you expected to be price-cost positive for the year. But could you just frame that in terms of, you know, the magnitude of what you think that price could look like this year relative to what it was in 21?
spk02: You know, I think the key drivers that are going to underpin the uplift in EBITDA, you know, price is probably net price increases, I think, would be our largest driver, pretty close to the margin that we expect to get from the can sheet ramp up. And then, you know, we're expecting to see some modest improvements in our aerospace segment, you know, as it recovers, as it You know, nice recovery on a percentage basis, but coming off a small base. And the automotive recovery. And then, you know, the reason for the wide range, I think if you think about the headwinds in terms of uncertainty, I probably put the semiconductors at the top of the list. You know, we continue to hear it's getting better, but we still see a lot of instability there. You know, labor inefficiency has been something that we kind of fought through in the second half of last year. You know, we saw the impact to our population, I think, peaked in the third week of January. It's been coming down nicely. We're down about 40% off of that peak already. So I'm hoping that we're putting some of that behind us here as we, you know, work our way through the quarter. But we are still, you know, ramping up at several facilities, so there's a lot of training costs that will be with us, I think, particularly in the first half of the year, you know, as we get to full capacity in Tennessee and we ramp up our plate mill in Davenport to specifically some areas where we've got a lot of staffing going on. You know, I think we've done a good job of pricing up for the inflation, but, you know, we're certainly keeping an eye on that. Hopefully we don't have any other, you know, unpleasant surprises like we had with magnesium last year, you know, the big spike in energy prices that we've seen in Europe. And then the last thing is, you know, we do have our contract with the steelworkers. Our master contract comes up in May. So, you know, we've got some, you know, costs associated with getting ready for that and, you know, building up buffer stocks and things like that to make sure we're in good shape to protect our customers. So those are some of the things that we're managing through that would help you think about the difference between the top and bottom of our range.
spk04: Okay. And then I guess just on packaging, the 40%, 45% growth, could you talk a little bit about how much of that would be volume versus maybe conversion pricing uplift? Some of the beverage hand companies have been pretty vocal about pretty significant can sheet price increases, certainly in Europe, and we know that that's going on in the U.S. So if you could just help us maybe understand a little bit about maybe your non-U.S. can sheet kind of pricing and how much of that is renewing this year versus how much maybe is going to reset down the road would be helpful.
spk02: Yeah, sure. So, you know, first of all, the revenue increases in, you know, conversion revenue and in pounds, predominantly because a lot of that incremental growth is coming in North America. You know, this is our first year of the contracts we signed. We were happy with the pricing that we got in those contracts. You know, our contracts in China are more annual in nature, and, you know, we're certainly seeing pricing changes. increase in that region as well. And the export opportunity for that facility has been very good. You know, the U.S. isn't the only country that's importing metal, and so we've got lots of options there. And, you know, our contracts in the Russian facility are generally, you know, two years in nature, and, you know, I would anticipate the pricing is going to be improving in that part of our business as well.
spk04: Okay. And maybe just lastly, I know it's been a little while, but I think previously you talked about normalized EBITDA power for the company. I think close to, like, $1.1 billion with full recovery and aero. But, you know, since then, even now with Lancaster and Davenport, which is another $75 million, you know, we looked at the conversion chart for 50, 52 alloys. It seems like from the low point, that's up almost $650 per metric ton. I know there's been some cost increases, but that's pretty incremental to EBITDA. And then you also had comments on the packaging market has only gotten stronger since you initially priced some of those contracts, I guess, call it a year ago. So do you have any updated thoughts on that? And it seems like the auto thing continues to develop positively as well. just so we can kind of maybe reframe longer-term potential?
spk02: You know, I still have a very consistent and optimistic view of the potential of the business. I mean, the markets are there. You know, we're hitting the mark on getting the capacity up. You know, you see the question marks that you have is, okay, will aerospace fully recover by 2024? You know, let's see. It's making a good move now. You know, will automotive get back to pre-pandemic levels in the same time frame? You know, that's something we've got to look at. And the pricing environment is good, but, you know, if this inflation, you know, continues on at the rate that it does, there's always a lag of trying to catch up with it, right, because you pass it through and, you know, you've got to wait for – different commercial relationships or arrangements to time out, and some of those contracts are longer than others. But I still feel like the path we're on is going to have the type of improvement that we've been advertising in our profitability.
spk05: Great. Thank you very much. Thank you. And our next question comes from the line of Josh Sullivan with the Benchmark Company.
spk03: Hey, good morning. Hey, Josh. Just a question on the capital allocation options. As you rank the rate of returns here, how are the growth capital projects looking? That pipeline, I think you've said in the past, needs to hit that 25% IRR hurdle. Are customers coming closer to meeting that hurdle or further away in things like packaging and automotive?
spk02: No. I mean, the two that we announced were well over 25% IRRs. You know, I think we have a similar opportunity certainly in the international packaging market. You know, we've got to make sure there's enough stability in the region that we can put a capital project in and get people in and out. So that timing is, you know, something that we're thinking through there. Still sees, you know, I think really good opportunity to put some high return seeking capital into, the North American market. I think right now, you know, the best return profile is probably looking like the industrial segment. But the other, you know, the other markets are catching up. So, you know, I think the opportunity is there. We've got to continue to identify the projects, do the capital work, you know, line up customer commitments, and there's more to follow. Got it.
spk03: And then just more of a clarification question, but on the free cash guidance, in the slides for the third quarter, you referenced adjusted free cash, but the slides here for the fourth quarter leave out that adjusted note. You didn't do that for EBITDA. Just curious if there's any dynamics driving that reporting change.
spk02: Yeah, you know, we had so much. So much of that obligation, you know, when you have a couple hundred million dollars that you're using to pay down pension and environmental liability, you know, we adjusted that out so that you'd get a better view of what the business could do without those, let's say, constraints. And now that they've become so much lower, we don't feel, you know, that there's a need to pull them out of our free cash flow guidance anymore.
spk03: And so is there a pension contribution element to the free cash that you could share?
spk00: There is. We put us the slide, the last slide in the earnings deck. We'll give you pension and OPEB cash costs so you can start to parameter it. Got it. Thank you for the time.
spk05: Thank you. Thank you. And our next question comes from the line of Corrine Blanchard with Deutsche Bank.
spk07: Hey, good morning, Tim and Eric.
spk05: Good morning. Good morning.
spk07: Hey. Just to clarify, actually, on the previous question, and I have the deck open, but for the free cash flow guidance, the pension outflow is included, right? It was just like a one-time event for 2021 where you took it out.
spk00: The free cash flow guidance includes pension, OPEB, environmental. It is a normal free cash flow guidance in 2022.
spk07: Okay, great.
spk00: Thank you.
spk07: I mean, most of my questions have been answered so far, but just maybe if you can give you a little bit more color on the cost structure, like cost pressure that you're seeing for 2022, and maybe around the timing. I mean, you mentioned labor inefficiency due to COVID. How do we think about it? Is that more like a 1Q and 2Q? And then anything else that you can maybe give some color on it?
spk02: Sure. You know, I'll start with the labor issue. As I said, it was about the third week of January is when we had the biggest impact in terms of employees under quarantine that we've had from the very beginning of the pandemic. That has come down significantly, about 40% over the last three weeks. So I'm thinking that that is going to start to dissipate. Now, we're ramping up the can sheet opportunity. I think we got to about 40% of our targeted capacity in the fourth quarter. So we're still bringing in people and metal through the first quarter into the second quarter on that. And then we're seeing, you know, a very nice trend developing in plate for our facility in Davenport. So that is a relatively people-intensive part of our plant. The plate mill has a lot of, you know, a lot of standalone assets in it that we have to crew up. So I would think that the first quarter, you know, will be the highest of the year, and then it will taper down through the second quarter and we should be getting to pretty full run rates as we go into the second half. So that's how I would think about that. In terms of the inflation, first of all, we're going to start seeing the pricing roll in that we initiated in the fourth quarter. So that's going to help. The two that I would say kind of stand out right now is, you know, Energy in Europe has continued to be elevated because of the issue between Russia and the Ukraine and all the concern around that. And then transportation costs here in North America were relatively high as we opened up the year as well. The freight market continues to be pretty tight. But I don't think anything else jumps out as being anything different than we talked about last quarter.
spk07: Great, thank you. And maybe one more question from me. On the Russia slash Ukraine, I know you had mentioned looking at some options there for packaging. Are you still considering it, depending maybe on the outcome, or is that right now, is that not like a top priority for you?
spk02: You know, we're very interested in it. Again, you know, you've got to be able to execute, and right now because of some of the you know, issues that are going on. It's really hard to get visas and not just for ourselves, but, you know, most of the equipment that we're looking at, a lot of it is in Western Europe. And so, you know, we've got to be confident that we can execute on getting the capital put in the ground. And I think we just got to, you know, keep an eye on it, see how this thing resolves itself.
spk07: Great. Thank you. That's it for me.
spk05: Thank you. And our next question comes from the line of Timna Tanners with Wolf Research.
spk08: Hey, good morning, everyone. Happy Friday.
spk05: Hey, Timna. Good morning.
spk08: Hey, I wanted to ask a little bit more to understand the cadence of 2022 EBITDA guidance and what's included in it. It sounds like you're definitely pointing to cost and inflation in the first quarter from labor issues. But how much of relief in cost in general is contemplated in your guidance? Like, are you assuming... It doesn't sound like you're assuming continued absenteeism. Are you assuming continued elevated energy costs and transportation? And can you just talk a little bit about the cadence and what's assumed cost-wise in your outlook?
spk02: Yeah, I think that we're planning on the cost levels being relatively flat through the year. They're elevated as we open the year. And so I think if you're thinking through our guidance, you know, we're ramping up packaging as we go through the first half. And so packaging profitability should, you know, be better in the second quarter than the first quarter and should be to its full utilization when we get to the second half. And that's one of the big drivers in our uplift. I would say the same thing with the aerospace volume, right? So we're ramping up. I'm putting the labor in already. So I think that labor spend is going to be relatively flat, but I'm not getting the utilization because we're training a lot of employees right now. So you can think of that as kind of a negative labor variance. And then I also think that the semiconductor chips clearly are still a problem, right? And it's more concentrated now. It's not across all of our customers, but we still have significant customers that are having issues. And I'm hoping that that continues to improve as we go through the year. And so I think from a cost perspective, not a big ramp. It's really catching the volume associated with getting crewed up.
spk08: But, for example, if we think that energy costs are going to roll over and we think that, like, freight challenges are going to ease, is that also in your guidance or are you assuming kind of steady state?
spk05: Yeah, steady state. Gotcha.
spk08: And then my other question was just I know you've talked in the past about possible dividend and, you know, you're going to have with less pension contribution and with the free cash flow guidance, you know, optionality. So I know it's kind of been asked, but I'm just wondering, like, how do you think about buybacks and, dividends within the discussion of growth? How do you think about the priorities there?
spk02: Well, you know, I tend to look at it, you know, through the rate of return lens. So we talk about, okay, you know, it's 25%. If we're going to go after, you know, organic capital, when we think about share repurchases, we're thinking about them the same way, right? And so, you know, if we think that the shares aren't reflecting – what management's going to deliver, then we're going to continue to look at buying our shares back. The dividend, I think, also represents an opportunity to drive shareholder value. I don't know that it has a 25% IRR attached to it. And we also, as we're chasing the growth in working capital, a lot of it being driven by metal, You know, we want to make sure that we're throwing off good cash flows when we decide to make a decision like that.
spk08: Okay. Thank you, guys.
spk05: Thank you. And as a reminder, ladies and gentlemen, if you have a question, please press star 1. Our next question comes from the line of Emily Chang with Goldman Sachs.
spk06: Good morning, Tim and Eric, and thanks for the update today. My first question is just a follow-up around the free cash flow guidance given for 2022. At $250 million, are you able to share what working cap assumption you've embedded into that, given the hourly price outlook that you're expecting?
spk00: So we're looking at the – we based it on the $3,700 per metric ton. So you can imagine that's going to be – it's been a wild card all throughout 2021, and it'll be the same – Our rule of thumb is about for every $100 move is about $20 million, depending on whether it goes up or down. So I believe that's going to be the biggest wild card in cash flows. As far as other assumptions on working capital, we have assumed a working capital build at that $3,700 rate for the packaging ramp. So you can imagine what Tim just described as the packaging ramp we'll see through Q1 to Q3 is going to be a use of inventory or build of working capital. We'll have the offset to some extent with the $60 million that we built in Q4. So we still expect there will be a net working capital increase, and that's built into our cash flow guidance.
spk06: That's very clear. And then my second question is just around pricing. Can you remind us, you know, what are sort of the causes or mechanisms in your pricing contracts that do allow you to perhaps explicitly recover higher alloying metal prices or labor or energy costs there, or is it more of a broad-based inflator?
spk02: It really varies by market. You know, there typically is going to be a PPI indicator. I mean, we'll start with, you know, the industrial, they have the shortest contracts. You know, we typically do annual contracts and then backfill, you know, available capacity with spot. In there, we generally, you know, just bake it into the annual price. And We also, as you'll recall, we had a problem with magnesium, so we put a surcharge in place. So if we see something that really goes sideways throughout the year, that's how we would think about that market. Our automotive contracts, all the automakers allow for some sort of an index. That index is going to be different customer by customer, but typically... Energy, they're paying for the transportation in most cases. It's going to be in there. Just general inflation, some kind of a PPI index is going to be there. I'd say the aerospace contracts behave very much the same way. In a market like that, we do have more alloying elements, so it's going to be more typical that those are called out separately as part of the index as well. So it's not a one-size-fits-all, but we do have protection in all of our end markets.
spk06: Great. I appreciate the call. That was helpful. Thank you.
spk05: Thank you. Thank you. And I'm shown no further questions. I'll now turn the call back over to Tim Myers for any closing remarks.
spk02: Okay. Well, again, thank you very much for joining us today. I enjoyed the opportunity to discuss the business. You know, as you think about us in closing, just a few thoughts. Again, first of all, we delivered 15% year-on-year EBITDA growth in 2021. We're guiding to another 15% year of EBITDA growth in 2022, and we're setting the table for some sort of similar performance in 2023. We've been very, very focused and disciplined on strengthening our balance sheet, and with the free cash flow that we intend to generate, we're looking forward to continuing to create value for all of our shareholders. We'll talk to you next quarter.
spk05: This concludes today's conference call. Thank you for participating, and you may now disconnect.
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