Arconic Corporation

Thank you for standing by and welcome to the Arconic Corporation's third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Shane Roark, Director of Investor Relations. Please go ahead, sir.

Thank you, Jonathan. Good morning and welcome to the Arconic Corporation Third Quarter 2022 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.

Thank you, Shane, and hello, everyone. I'll start on slide four with some key takeaways for the quarter. We generated $2.3 billion in sales, up 13% organically year over year. We've resolved the equipment-related operational issues in Tennessee and Davenport that impacted production volumes in the third quarter, and we completed the $300 million share repurchase authorizations. Adjusted EBITDA in the quarter was $143 million in the center of the expected range of 135 to 150. In North America, our end markets remain strong as we grew organic revenue year on year in four of five end markets. This despite production challenges we had in the quarter. Going forward, we believe we are well positioned given the recovery in aerospace and automotive as well as our expansions into packaging and industrial, and building and construction has been and continues to be strong. As you know, in Europe, hyperinflationary energy prices are driving up costs and reducing demand across sectors. We are feeling pressure across all our operations in Europe, but we are being especially impacted in our Hungarian facility, which primarily services the industrial market. But here's our biggest problem. The operational challenges we discussed in September came as production was ramping to record levels in North America and we were executing a higher level of capital investment. That greatly limits our ability to recover the lost sales when our assets are not operating at expected rates. Moving now to slide five, I'll provide some additional detail on the challenges we faced in the third quarter. Starting with operations, the previously identified issues that impacted our Tennessee and Davenport facilities in the third quarter have been resolved, and both facilities are now running at expected rates. At the same time, we are enhancing everything from maintenance practices to outage planning to better assure stability moving forward. The biggest disruptor in the third quarter was the electrical issues in Tennessee that caused the hot mill to fail multiple times. The failed cable was identified as the root cause and has been repaired. The asset has been running at expected rates since September 6th. In normal times, we could accommodate a casting pit outage at a facility or two without dramatically impacting shipments. However, the rapid ramp-up at our Tennessee facility involves increasing hot mill rates and a new product mix. This rapidly changing and increasing order load exposed the de-lacquering furnace and electrical cable vulnerabilities. The combination of these four issues simultaneously impacting production over the span of a few weeks disrupted our entire North American rolling system. Altogether, we estimate the challenges at Davenport in Tennessee reduced our estimated adjusted EBITDA outlook by approximately $70 million for the full year 2022 compared to our expectations coming out of the first quarter. Just as we were getting those issues behind us, we were further impacted by issues related to our initial planned outage to increase capacity at our Lancaster facility. The Lancaster hot mill was taken offline as part of our phase two growth initiative with a planned outage of three weeks. This included upgrading three key pieces of equipment. Two of the three are operating as expected while challenges to reach pre-outage run rates on one of them are hampering us on the third. This is causing the hot mill to be run at reduced rates, impacting shipment volumes. We are continuously making progress on restoring production to normal levels and expect operations to return to normal rates by the end of the fourth quarter, but we anticipate them impacting earnings by $25 million this quarter. Our Lancaster facility had been running at record rates starting in 2021 and continuing into 2022. As such, we don't have the ability to recover the lost sales and production. So what are we doing to address these issues moving forward? First, we had already increased sustaining CapEx over the last two years. We intend to maintain this level of spend as we grow the business for the foreseeable future. so we don't lose gains we make in growth investments to leakage in our core capacity. Secondly, we've enhanced our maintenance and monitoring practices, and we are enhancing multi-site peer reviews of all outages over seven days, as well as securing engineering procurement and construction management contracts on our major capital projects moving forward. We have been and will continue to increase staffing and operations and reliability engineering roles from senior to entry-level positions. With regard to the potential impact of future results, we are also building in greater contingency to operating plans, and we will be being a bit more conservative about outage timing for maintenance and capital projects. We also called out Europe demand and energy costs as a driver of $35 million in estimated adjusted EBITDA headwinds for our 2022 outlook compared to our expectations coming out of the first quarter. Energy spot prices in Europe have since improved moderately in the near term, and we have revised that view by a favorable $5 million. European demand has fallen off significantly in the second half of the year, as hyperinflationary energy costs curtail industrial activity and demand for end products. The drop in industrial and commercial transportation demand in the region has the greatest impact on our Hungarian facilities. We are also seeing slowdowns in our European building and construction systems business, which make up about 30% of the BCS segment total. If demand continues to be impacted at these levels in 2023, European facilities profitability could be reduced, break even, similar to what we experienced during the pandemic, compared to our current run rate of roughly $100 million annually. We are taking a range of countermeasures, and we also expect some regulatory relief, similar to the early days of the pandemic, which should help to mitigate the impact of the European weakness. Moving now to slide six, I'll provide some detail on how we performed across our end markets. So what stands out here? First, we had double-digit year-on-year growth, revenue growth in every market but industrial. which was significantly impacted by the operational issues in Tennessee. Aerospace, packaging, and building and construction have led and will continue to lead our growth all year as ground transportation's recovery has been a little bit slower than anticipated and industrial has faced challenges on the company's level. Now let's move down to the bottom right corner of the slide. In total, organic revenue was up 13% over last year. Ground transportation sales increased 11% organically from third quarter 2021, building on 10% growth in the second quarter. Automotive demand continues its ramp to recovery with some fits and starts. This growth was partially offset by commercial transportation volumes, which were impacted by the production issues we discussed earlier. Sales in the packaging market were up 28% year on year due to the ongoing ramp up at our Tennessee facility. Year-on-year growth slowed from the second quarter, primarily due to lower export shipments of packaging from China and Russia. The Tennessee packaging business met its can sheet requirements, despite production challenges in the last two quarters. Following a 29% organic increase in the second quarter, third quarter building and construction sales increased 17% organically year-on-year. The strength continues to be driven by pricing action, as well as strength in North America, now partially offset by weakness in Europe. Third quarter sales in the industrial market declined 19% organically year on year. Demand in pricing in the market remained strong, but our sales were reduced substantially by the challenges in Tennessee. We entered the quarter with a significant backlog in our industrial order book that we are working to clear through the fourth quarter and early into the into 2023. Finally, third quarter aerospace sales were up 49% on an organic basis year-on-year. This compares to 50% organic growth in the second quarter, but against a much stronger year-over-year comparison. As the comparisons get stronger heading into the fourth quarter, we may see lower year-on-year growth, but the ramp up continues. All signs point to ongoing demand recovery, including large commercial aircraft production rates and consumer demand for air travel. I'll now turn it over to Eric to discuss third quarter results in more detail.