Arconic Corporation (ARNC) CEO Tim Myers on Q1 2022 Results - Earnings Call Transcript | Seeking Alpha

2022-05-06 06:55:21 By : Ms. sales xinyue

Arconic Corporation (NYSE:ARNC ) Q1 2022 Results Conference Call May 3, 2022 10:00 AM ET

Shane Rourke - Director, IR

Erick Asmussen - EVP and CFO

Curt Woodworth - Credit Suisse

Josh Sullivan - Benchmark Company

Corinne Blanchard - Deutsche Bank

Timna Tanners - Wolfe Research

Michael Glick - JP Morgan

Emily Chieng - Goldman Sachs

Good day, and thank you for standing by. Welcome to the Arconic Corporation Q1 2022 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Shane Rourke, Director of Investor Relations. Please go ahead.

Thank you, Laurie. Good morning, and welcome to the Arconic Corporation First Quarter 2022 Earnings Conference Call.

I’m joined today by Tim Myers, Chief Executive Officer; and Erick Asmussen, Executive Vice President and Chief Financial Officer.

After comments by Tim and Erick, we will have a question-and-answer session. 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 good morning, everyone. I’ll start on Slide 4 with some key takeaways. In the first quarter, we grew adjusted EBITDA by 15% over last year and 17% sequentially, which is our best quarter as a company since separation. We are well on pace to deliver a second consecutive year of double-digit growth, and we are raising our full year adjusted EBITDA outlook. I am incredibly proud of our team delivering these strong results despite several headwinds, once again demonstrating our resilience and agility in challenging times.

Most notably, steep inflation across a range of our inputs, lingering semiconductor issues, temporarily shutting down some of our automotive customers and managing the complex effects of the conflict in Ukraine vis-à-vis our operations in Russia. Against those headwinds, we are successfully countering inflation through a combination of price increases and cost savings initiatives. And we continue adapting to weakness in automotive build rates by pivoting capacity to other markets wherever possible.

Moving to Slide 5, I’ll provide some more details on how we performed across our key markets. So what stands up? Organic revenue in the quarter. Growth was led by packaging, aerospace and building and construction, but all for different reasons. Building and construction was a very strong segment for us in the quarter and a very pleasant surprise as we start up the year driven by a series of pricing actions and growing construction activity, particularly in North America.

Packaging was driven by a ramp-up in Tennessee, which continues to be right on track and how about our Aerospace segment. It’s clear that destocking in the supply chain has occurred and order activity is continuing to accelerate. Now let’s go around the horn on the bottom right corner of the slide.

In total, organic revenue was up 9% over last year. Sales in the quarter grew 2% sequentially following 13% sequential growth in the fourth quarter of last year. Ground transportation declined 10% organically from first quarter 2021 due to the ongoing impact of the semiconductor shortage. In the first quarter, some of our key automotive customers continued to have temporary shutdowns related to semiconductor availability. Despite the ongoing challenges, we remain excited for the outlook for automotive production in the near to medium term due to depleted dealership inventory levels and pent-up consumer demand.

First quarter sales in the industrial market increased 10% organically year-over-year. As we’ve discussed, Organic revenue growth in the industrial market is driven predominantly by the strong pricing environment, particularly here in the United States. In the Building and Construction market, sales increased 22% organically year-over-year. This very strong growth is a result of pricing actions to offset inflation as well as a return to growth in North American nonresidential construction spending, and this was well above our expectations.

Sales in the packaging market grew 37% organically year-over-year due to the ongoing ramp-up at our Tennessee facility. However, sales were flat sequentially as increased production in Tennessee was offset by the impacts of the conflict in Ukraine on our operations in Russia. Finally, as I mentioned above, first quarter aerospace sales were up 32% year-on-year on an organic basis. If you look back at the last several quarters, year-on-year organic growth is accelerating.

Our aerospace shipments declined by double digits in the first half of last year. They were down 4% organically in the third quarter of 2021 before returning to organic growth of 19% in the fourth quarter, now up 32% year-on-year in Q1 and our outlook for Q2 year-on-year is even better. As a result, we believe we have reached the end of destocking, and we continue to expect Aerospace revenues to reach pre-pandemic levels sometime in 2024.

We continue to believe that our well-balanced portfolio is a competitive advantage. While semiconductor issues reduced sales in our largest key market, we were able to grow organic sales 9% because of very strong volume and pricing across the rest of them. I’ll now turn it over to Erick to discuss the first quarter results in more detail.

Thanks, Tim. I’ll start on Slide 6 with first quarter financial highlights. Revenue was $2.2 billion, up 9% organically year-over-year. Net income for the quarter was $42 million compared to $52 million in the first quarter of 2021. Net income in the first quarter was impacted by higher year-over-year metal lag, which was driven by delays or underpulls in planned orders as well as fixed rate pricing of aluminum in Russia initiated in March.

EBITDA was $205 million, which was an increase of 15% year-over-year and up 17% sequentially and our best since we have been a stand-alone public company. Free cash flow for the quarter was a use of $198 million, impacted by high aluminum prices, the working capital ramp related to our packaging restart in Tennessee and our expansion project in Davenport.

Capital expenditures were $95 million in the quarter. And in the quarter, we purchased approximately 0.5 million shares. And since we announced this program a year ago, we have purchased approximately 5.4 million shares for $177 million against our $300 million program. As we previously announced, we executed a $400 million increase to our existing asset-based lending facility to $1.2 billion in the quarter, and we ended the quarter with total liquidity of approximately $1.3 billion.

Now turning to Slide 7, I’ll discuss our financial performance in more detail. Revenue in the first quarter increased $516 million year-over-year, primarily due to the impact of higher aluminum prices as well as the realization of pricing actions and improved volume and mix. Adjusted EBITDA in the quarter was $205 million, up $26 million or 15% year-over-year, primarily due to improving price, volume and mix, partially offset by inflation.

As Tim mentioned, we continue to experience high inflation. Savings net of inflation was a negative $87 million as our $25 million of shop floor productivity measures could not offset $112 million of inflation in the quarter, primarily from energy, transportation and alloying materials. You do see though on the table to the right that our pricing initiatives have offset the inflation impact.

The unfavorable aluminum price impact of $16 million in the quarter is related to the impact of rapidly rising aluminum in the Building and Construction Systems segment, which as you’ll see on the next slide, is more than offset by pricing actions in the quarter.

Turning to Slide 8. I’ll review our segment detail in more. Starting with our Rolled Products segment. Revenue in the first quarter was approximately $1.8 billion, up 7% organically year-over-year driven by growth in every market except ground transportation, which continues to be impacted by supply chain issues related to chip availability. Adjusted EBITDA in the quarter was $176 million, up $11 million or 7% year-over-year, reflecting stronger price, volumes and mix, which were partially offset by inflation.

Revenue in our Building and Construction Systems segment in the first quarter was $291 million, up $55 million year-over-year and up 21% organically. Adjusted EBITDA was $44 million, up $16 million or 57% year-over-year, driven by increases in price, mix and volume, which offset the inflation and higher aluminum costs we are experiencing.

Revenue in our Extrusion segment for the first quarter was $97 million, up 21% organically year-over-year and adjusted EBITDA was a loss of $5 million versus a loss of $4 million last year as pricing actions and volume growth were offset by inflation in the quarter.

Now moving to Slide 9. I’ll again review the impact of aluminum price on our balance sheet as aluminum pricing continues to increase in the first quarter. As you’ll see on the chart on the left side of the slide, the price for aluminum spiked to new record levels in March. While prices may have come down modestly since then, they remain at very elevated levels. Aluminum pricing continues to be very volatile, and we have increased the price assumed in our cash flow guidance by $500 per metric ton, and there could be upside on cash flow based on current aluminum pricing. As a result, our full year free cash flow guidance is now approximately $125 million as compared with the prior expectation of approximately $250 million, and we have provided an EBITDA walk to cash in the appendix of this presentation.

Now let me give you a quick pension update on Slide 10. As you know, reducing pension liability has been a focus for us. We have accelerated contributions and we have done several annuitizations to that end. A rising interest rate environment is favorable to the company’s gross pension and OPEB liability. For every 25 basis point increase in discount rate, the combined gross pension and OPEB liability should be reduced by approximately $100 million. We are now getting help from the U.S. Federal Reserve on our gross pension liability reduction journey, and if the Fed continues to raise interest rates as expected, gross pension and OPEB liability should meaningfully decline as discount rates rise.

Now I’ll turn it back over to Tim.

Thank you, Erick. Let’s turn to Russia on Slide 11. First, let me stress that we continue to be horrified by the conflict in Ukraine. It is an unnecessary human tragedy, outrageous in its nature, and we support efforts for a peaceful resolution. In March, we announced a pause on new contracts in Russia, but we are looking for ways to do more. As such, we are actively pursuing additional deliberate and responsible options for our business in Russia.

There are 3 things that we need to be really thoughtful about when it comes to our business there. First, we, like many other companies, are a supplier of essential goods. We are the primary provider of aluminum packaging material for the food and beverage industry in the country. We remain highly concerned about safety and well-being of our 3,000 loyal employees, many having tenure with us of nearly 20 years. And any abrupt or unapproved changes to our operating patterns at the Samara facility could expose our employees to criminal charges or other actions based on existing legal conditions on our operations. Our Samara facility represented 16% of Arconic’s revenue last year and 12% of our adjusted EBITDA, which is obviously not insignificant to our company. Currently, our operations are running near full capacity. Adjusted EBITDA in the quarter was $18 million, which is roughly in line with the $19 million in the same quarter of last year.

We expect second quarter EBITDA to be similar, and we expect adjusted EBITDA from the Samara facility to be $40 million to $80 million in 2022. Samara’s EBITDA performance in the balance of the year is subject to significant uncertainty driven by sanctions and other governmental actions, customer orders and the availability of certain inputs. We are aware that some other companies have announced that they would donate profits from Russian operations to the Ukraine relief efforts, and some might suggest we should do the same. However, this is not a practical option for us as our cash in Russia is trapped there as a condition of our litigation with the Russian government.

While the cash can’t be used for the benefit of the company in total, it is available to support local operations and pay our employees there. As mentioned in earlier communications, we are providing funds to Ukraine relief organizations through direct grant making activity from the Arconic Foundation and employee donations, which are being matched dollar for dollar.

Let’s move now to Slide 12 where I’ll review our outlook for the rest of the year. We’ve revised our end market outlook for 2022 to reflect our stronger-than-expected performance across most of the portfolio as well as ongoing supply chain issues in automotive and in Russia. Starting with Ground Transportation, we are lowering our organic revenue outlook to 5% to 10% growth year-on-year from our prior view of 10% to 15%. This is a result of lingering semiconductor supply issues that reduced production in the first quarter and lowered expectations for the full year.

IHS recently cut its North American light vehicle production forecast by roughly 0.5 million vehicles and cautioned there could be more downside to its estimates. We now expect Industrial organic revenue to grow 10% to 15% in the year, an improvement from our prior view of 5% to 10%. This is driven by improved pricing and pivoting some of the unused automotive capacity to industrial.

Building and Construction organic growth is now expected to be 15% to 20%, which is a substantial increase from our prior expectation of 5% to 10%. Nonresidential construction activity in North America is growing, and we are capturing meaningful price increases along with some mix benefits. We are lowering expected organic revenue growth in our packaging business from an increase of 40% to 45% to 20% to 40% as the North American can sheet ramp-up will be partially offset by lower year-on-year sales in Russia.

Finally, Aerospace organic revenue is now expected to grow 30% to 40% year-over-year, another improvement over our prior view of 25% to 35% as OEM build rates continue to increase. We still expect our aerospace revenues to reach pre-pandemic levels in the 2024 time frame.

Turning to Slide 13, I’ll discuss our profitability and free cash flow growth. There are 3 major takeaways on this slide. First, we’ve outlined 2 different phases of EBITDA growth, which we are executing on now. The initial $300 million of growth related to latent capacity and cost initiatives is largely being realized. As we see aerospace continue to recover and inflation impacts normalize, we should see the full impact of that $300 million on our bottom line. The next phase of growth was announced 2 quarters ago and included projects at Lancaster and Davenport that account for roughly $75 million in run rate EBITDA starting in 2023.

Those projects continue to be on track. And in fact, the Davenport project is producing qualification product as I speak. Both projects are projected to reach full run rate impact next year. The second takeaway is a reminder of the dramatic step-down in our cash obligations compared with 2020. Lower year-on-year pension and environmental obligations drive greater free cash flow more than $300 million less per annum than when we launched the company. This opens the door to additional investment capital return opportunities. Finally, we plan to share details on our longer-term plans at our Investor Day to be held on Monday, June 6, in New York. I will close by saying this update will include additional high-return organic under the rooftop investments as we remain bullish on the opportunities in our key markets.

Moving to Slide 14. I’ll discuss our revised outlook for next year. Our full year 2022 revenue is now expected to be in the range of $10.1 billion to $10.5 billion. This is up from our prior view of $9.9 billion to $10.3 billion due to the impact of higher aluminum prices. We are also increasing our adjusted EBITDA to be in the range of $820 million to $870 million versus our prior view of $800 million to $850 million.

This increase is driven by strength in Building and Construction, cost reductions, the ongoing realization of pricing actions and our strong first quarter performance. We now forecast free cash flow to be approximately $125 million, a decrease compared to prior expectations of approximately $250 million. The decline is predominantly driven by the impact of higher aluminum prices on working capital for the year.

As Erick mentioned, there is a free cash flow walk included in the appendix for your reference. Looking at the second quarter, we believe adjusted EBITDA should grow sequentially, but there is considerable uncertainty due to macro issues, predominantly due to recent COVID lockdowns in China and trade restrictions and supply chain headwinds in Russia. Our revised adjusted EBITDA range implies growth of 15% to 22% on top of the 15% growth we delivered in 2021. The 2022 growth is driven mostly by the packaging, aerospace and building and construction strength I discussed.

Our balanced portfolio is a significant advantage, particularly at a time when supply chain issues call for agility and flexibility. Looking beyond 2022, we are seeing progress on the 2 capital projects we’ve announced to drive organic growth starting in 2023, and we plan to update you on further plans at our Investor Day on June 6.

Wrapping up here is what I’d like for you to take away from today’s call. Our diverse portfolio has positioned us to grow organic revenue across a variety of end markets, depending on where that growth is. We delivered 15% year-over-year adjusted EBITDA growth and our first quarter results suggest we are well on our way to delivering double-digit growth in 2022. We have line of sight to double-digit growth in 2023 and look forward to sharing some additional high-return organic under the rooftop investments in June to continue that trajectory even further.

I’d like to now open the call up for questions, and I’ll turn it over to Laurie to facilitate those.

[Operator Instructions] And our first question comes from the line of Curt Woodworth from Credit Suisse.

The first question is just with respect to the guidance. Can you give any more granularity on kind of what drove the change? Because you seem to outline a potential shortfall on the Russian operation of potentially $40 million in the back half of the year. So I’m just curious, what are you assuming for Russia and volumetrically, can you give us a sense for how you think volume will grow over the next several quarters?

Yes. So let me -- I mean, great question. I think there are really 3 key drivers for the decision to raise our guidance. The first one is the first quarter was strong, right? It was -- exceeded our expectations. If you remember in the last call, we were still quite concerned with things like the coronavirus impact. I think when we talked last, I had over 400 people out on quarantine through last week, that’s dropped to 35.

So the stability of our operations is better. The Building and Construction market, particularly North America, where we have our strongest position is performing better than we expected. We saw aerospace sales come in strong, sequential growth; Building a little better than we thought. We continue to see our cost savings initiatives rolling through. The Davenport project is going to be a helper in the second half. We got some great things going on in our facility in Tennessee that we’re just executing well.

We got a little ahead on a couple of capital projects. So we think that outweighs the issue that we have in Russia. If you think about the range that I provided, the $50 million, $820 million to $870 million and our concern is Samara could be $40 million to $80 million. So the majority of the uncertainty that we have in the second half is really there are a lot of things that could continue to go outside of our control. The location in Russia, along with the organization has done a great job of managing through some significant complexity in the supply chain. But the impact of the sanctions, I would imagine, is going to get more significant as we go through the year, and so we have concerns as to what that might do to end market demand there in the domestic market in addition to some of the other things that we’ve been dealing with. In regards to volume, we expect to see absent Russia, so we’ll just take that off to the side. The reason that we dimensioned it as we did is so that everybody could think about that as we move forward.

We’re continuing to ramp up packaging, which should be essentially complete as we exit this quarter. And we are continuing to see the opportunity for aerospace volumes to grow. We see a ramp into the second quarter. Hopefully, that will continue. And we’re not banking on a lot of recovery in the automotive market, but it is our largest market. And as the supply chain recovers there, that should take up a little bit of latent capacity that we’re not able to entirely pivot over to industrial as we go through the year.

And so I mean, if we think about margins on, say, a per ton or per pound basis. Is it fair to assume -- I mean, you discussed that aerospace, you were up 32% this quarter, and you said that will accelerate into 2Q, that’s your highest incremental margin business. And it seems like automotive is going to get a little bit better. So should we think that, that, coupled with maybe further pricing actions that your EBITDA per ton or if you want to think about it on a par basis would be getting better over the course of the year? Or how do we think about sort of margin trends going forward?

Well, I mentioned in the script that we do see sequential growth in EBITDA in the second quarter. There is a pricing lag as you can appreciate when you have this kind of inflation and some of the markets, the pricing lag is shorter than others, Building and Construction. We quote that quarter by quarter, project by project. So we’re seeing the pricing benefits manifest themselves there quicker, followed by Industrial.

And then when you think about our other markets, where we have longer-term contracts, a lot of them have PPI indexes in them, and we get adjustments as we go throughout the year, and so we should see some of that lag go into the rearview mirror as we go forward. So yes, I think predominantly, as we look at the year, absent Russia, second quarter better than the first, second half better than the first half through a combination of continued cost outs, pricing actions and the benefit of mix with aerospace starting to recover and eventually automotive.

And our next question is from Josh Sullivan from the Benchmark Company.

Just on the Russian assets in a unique situation and you communicated a view that might get worse before it gets better. I mean is there any thought on reporting the assets and their contribution separately just as this unique situation evolves?

I don’t see us deconsolidating our reporting. I do think that we will continue to highlight it uniquely each quarter as a stand-alone slide, so we have a discussion and provide the transparency to what’s transpiring there.

And then just on the automotive side, on the restocking cycle that the potential to see here as production catches back up eventually. Do you think auto customers are going to change any aluminum inventory practices going forward?

I think there’s some unique characteristics in and around automotive product that preclude that from happening. When you think about the body panels themselves, they use a heat-treated alloy and that heat treated alloy can actually artificially age once it -- so it has a bit of a shelf-life because as it ages, it gets stronger, which is actually the material is designed to do that. So it has better dent performance. But as it gets stronger, it can also get harder for them to stamp. And so typically, it varies a little bit by OEM, but they’re going to have a shelf life that they’re dealing with, and that pretty much defines the buffer stock that they’re going to have.

Got it. And then just one last one on the building construction strength on the nonresidential side. What product forms are you seeing the increased demand from? Are you getting utilization out of any equipment that maybe was underutilized for the last 2 years? Or is it just higher volume?

Well, the business where we’re seeing the strength is in our systems business. And so we’re actually making curtain wall, which is the size of the buildings; industrial grade doors; windows; and storefronts. And so it is a manufacturing business, but it’s also an assembly business and a design business. And so we continue to see good asset utilization and our primary manufacturing processes are going to be extruding and anodizing before we do the machining and the assembly. But we have always been in a position in that supply chain where when the market peaks, we’re buying on those products externally as well. So we’re benefiting from the utilization but we also have to buy externally. And that’s why it’s so important that we stay on top of inflation with pricing. And we really don’t have the choice because we’re securing that incremental capacity outside of our own manufacturing network.

And our next question is from Corinne Blanchard from Deutsche Bank.

I mean most of my questions been answered. I just want to maybe talk about the CapEx. Since you’ve already invested close to $100 million in 1Q, can you just walk me through the timing for the remaining of the CapEx growth for the year throughout 2Q and 4Q?

So we’ve provided the guidance in the back. So we think of it as $290 million for the year, you had $95 in the first quarter. And then you should see the balance of that $200 million spread. I would say you’re probably going to see typically -- it peaks in the Q4 as you have some maintenance. So I would smooth it over the 3 quarters and then put a little bit higher in the fourth quarter, just similar to when you typically would invest.

Okay. That’s helpful. And another one on just kind of seasonality in the business. Can you remind me -- do you expect more seasonality in 2Q and 3Q driven by the packaging in terms of EBITDA, or is it more linear progression throughout the year?

I think that you’ll see -- yes, I think you’ll see ramp in both quarters because we’re going to come out of the second quarter, let’s say, pretty close to full capacity utilization of what we booked. So we’re not getting the full benefit in the second quarter, and we’ll pick up the rest of it in the third quarter. So we should see a sequential EBITDA growth in each of those 2 quarters associated with the packaging ramp-up.

And maybe one last question, if I can squeeze. I know you started to talk about the auto and that you based it in some of the expectation. We have heard on the street from OEM, they expect the supply chain disruption to ease throughout the year. Is that the same? Do you share that view? And do you expect further recovery in the second half of this year from auto?

It feels to me like a repeat of 2021. We read going into ‘21 about the auto market recovering and the first quarter would be the worst and then we would see it climb out. And then it was supposed to be better this year and the first quarter, clearly, disappointment. I mean we had multiple customers take outages that weren’t planned. So if you read what they’re saying, you would believe that it’s going to get better throughout the year. But we lowered our expectations because we’re not seeing that hit our order book.

And our next question is from Timna Tanners from Wolfe Research.

A couple of questions from me. So just starting off on Russia. Can you just detail a little bit more the fixed rate pricing initiative and what that means for your operations. And then just simplistically, can you help us understand what it entails to try to unravel that ownership or acquisition? I feel like some people may be hoping or trying to understand how easy it might be to exit that, obviously, a big distraction. And I just want a little bit more color on your history there and how you think about it to the extent you can.

So for the fixed ruble rate pricing in Russia, that was a mid-March event effective for the beginning of March. So it was a retroactive effect where we were provided a fixed price in rubles and we were to pass that on to our -- think of the Russian or the domestic customers in Russia. And so that was clearly an advantaged price that was pushed on to the customers and that we had to implement that mid-quarter -- mid-month for the month of March in the quarter.

Yes. It was actually, I think it was based on more of a January pricing of aluminum. So it was giving relief in Russia for the Russian supply chain for the price of metal.

I would say it was margin neutral for us because it was intended, and we passed it through to our customers who passed it through to their customers. That was the intention of what was being done there.

Correct. It’s designed to be margin neutral for domestic in Russia.

So I’ll take the other one, and I’ll try and be as brief as possible, but still get the key points out. The primary complication that we have with thinking through our strategic options in Russia is we did have the litigation with the Federal Antimonopoly Service that predated the Ukraine conflict that actually started the month before we became a new company, and we’ve been working to resolve that. With what’s happening in the Ukraine, the Russian government seems to be a little bit busy on other topics right now. So it’s been paused. We actually had a hearing date on the 22nd of April, and it got stayed out into July. So we’re kind of in a holding pattern on resolving that. But as part of that litigation, there are really several key things that the constraints have come into place. The first one is we clearly are not allowed to dividend out or remove cash from the country which would have been problematic in the current state anyway.

Second, we’re not allowed to make any changes to our local senior management Board, so the officers stay in place. And the third is we can’t disposition the asset without pre-agreement with the Russian government. And then there are also some unique issues that come with the sanctions that also we need to preclear a few things with our governments as we consider that.

So we’re working through a fairly complicated environment. We clearly would desire to be at a minimum, geared down to being a producer of only essential goods but we would also consider options to sell the asset entirely. So in addition to being in between 2 governments, we have to work through what that process would look like. So I might be a little long winded there. But hopefully, the point gets across that we’re being very thoughtful, we’re being very responsible, and I don’t think anything is going to happen abruptly with the asset.

Okay. That’s super helpful. It’s a lot of context, but I think it is necessary. My other question was just about cash flows and uses of cash. So in the free cash flow guidance, which you took down by half, obviously, higher aluminum price. And then back to your point on aluminum volatility, it’s below that now a lot lower than that now. So could we now go back to your old cash flow guidance? What am I missing that is aside from the aluminum price and the Midwest premium, I guess it’s little higher. And then along those same lines, like I just wanted to ask for a little more color around the buyback and how you think about using that going forward.

Sure. So 2 things -- well, a few things. We did put in the appendix a free cash flow walk. And then to your point on aluminum prices, they’ve skyrocketed up. Erick shared the chart. They since pulled down. I think I looked this morning, they were down around $3,800 first time we’ve seen it there. For us, every $100 a metric ton is about $20 million of cash. And so yes, if they were to maintain at this level throughout the year, next quarter you’ll see that we’ll be raising free cash flow guidance because it won’t be such a use of working capital.

And then in regards to the share repurchase program, you see that our activities were a little lighter this quarter. That’s because aluminum was consuming so much working capital cash. But as we see availability of cash and particularly if we see a good return for our shareholders, we’ve still got room on that share repurchase program, and we announced it, and we intend to follow through with it.

And our next question is from Michael Glick from JP Morgan.

Yes. Just in Russia, are you seeing any challenges in terms of sourcing metal or raw materials?

So in terms of raw material defined as aluminum, we don’t have an issue. And we are a significant customer for Rusal, but as they manage their constraints, they are going to prioritize domestic customers first. And they will I think, get a lot of support from the Russian government to behave that way. We have not seen any signs of interruption of supply whatsoever on that front.

The 2 constraints that we are dealing with, one, and they’re both driven by sanctions, not the supply chain in Russia. But one, they have sanctioned Russian trucks crossing EU borders. So that’s having an influence on export activity. It’s still possible to do because essentially, what’s happening is the Russian trucks will take it to the border, and then they cross dock them to a European carrier. But there’s a lot of dislocation in terms of getting things out of Russia and there’s a scarcity trucks at the border. So that’s having some impact there.

And the second one that’s on the horizon is for us, coatings and chemicals. So those food and beverage cans, they have unique coatings on them. Our suppliers are Western suppliers. They have been sanctioned from sending those goods into Russia. So we’re working through local alternatives on that front. Other than that, we are kind of holding our own.

And I guess just the second one would be just on the inflation side, maybe just to speak to where you’re seeing the most pressure currently. And remind us how your contracts are structured in terms of PPI inflators for pass-throughs?

I think the 3 that I would point to. Clearly, transportation, whether it’s by road or by sea is continuing to be high. And there’s going to be a balance there, right, because inbound transportation sits into our cost structure. Outbound transportation typically gets passed through to the customers directly.

We talked a little bit about alloying elements last year, magnesium. We put the surcharge in place, it’s been passed through. I think you can see in our first quarter results, we’re doing a pretty good job of passing that inflation through to our customers. And then the last one, clearly, energy, right? Energy being exacerbated by the Ukrainian conflict. So we’re seeing energy prices, higher energy is about 3% of our cost structure. And it’s our fifth highest category of cost, I would say.

So 3% doesn’t sound like a lot, but it would be higher normally anyway in Europe because their energy prices tend to be higher and then the increase that we’ve seen in energy prices has impacted Europe more so than it has in North America. So that’s kind of how that works. And the nature of our contracts, I kind of mentioned earlier, we’re going to be having spot opportunities and shorter cycle opportunities in markets like BCF and industrial where you just kind of price work straight away.

And then in aerospace, automotive, we’re typically going to have those indexed into the contract. And each of the customers might be a little bit unique based on what they buy and which indexes we tie them to and then the frequency within which we adjust some of them are quarterly, some of them are annual. So they kind of wind through on a year-over-year basis in a holistic way.

And our next question is from Emily Chieng from Goldman Sachs.

Tim and Erick, I’ve just got 1 question, and that’s a follow-up around the 2022 outlook for the packaging business. Could you perhaps frame what is underpinning that 20% year-over-year guidance as it relates specifically to Russia? Or is it the assumption that contracts roll off, pricing collapses or in general, the ability to operate in Russia may not be as it was in the first quarter of the year.

Yes, so in simple terms, we were running pretty close to capacity in Russia last year. So our growth for this year was predominantly prior to the Ukrainian conflict associated with the ramp-up in Tennessee. And then we had some latent capacity in our facility in China in Bohai. So the entire drop is, we’re being cautious about the second half in Russia. So there is no change to our ramp-up in Tennessee. There’s no change to our opportunity set in China.

We are concerned that volumes could drop off in the second half. As I mentioned, we’re not running at full capacity. We’re running near capacity in Samara through the first quarter. We have good visibility through the end of May based on our order loads. We are hearing that there could be some softening in June. And it’s really the first sign that we’ve seen a softening in the domestic market. So we really don’t know what the second half is going to look like yet.

And our next question is from Josh Sullivan from the Benchmark Company.

Just a follow-up on aerospace restocking. Are you able to see any difference in pull from the different aircraft OEMs, direct OEMs versus distribution? And then just as far as getting the labor force back and actually on the aerospace side, just curious of some color there.

I’m glad you asked. First of all, I would say that -- we have seen strong response both from the OEMs and the distribution, I would say. And I think I mentioned this in an earlier call. The one kind of anomaly is when we talk about Boeing for us, it’s Boeing and Spirit, right? And Spirit had some fuselages between themselves and Boeing. So Boeing is pulling more quickly than Spirit, but we’re seeing the response in the supply chain from both. I talked last quarter about some of the training costs and ramp-up costs that we had, and there are really 2 facilities that impacted. It was Davenport for aerospace, it was Tennessee for packaging, right? So we got through quite a bit of that ramp-up in the first quarter.

So we should start seeing better flow through as we go through the year. We’re still hiring. We’re still training. Job market is still -- is what it is, but it’s diminishing versus what we had in the first quarter.

Got it. And then I guess kind of relatedly, are you able to tell any pull between narrow-body and wide-body at this point? You’ve had some announcements on the 787, international traffic coming back just a little bit slower but I know it could be hard with different product forms. But curious if you’re able to see differential in the pull.

We definitely can see single-aisle versus twin aisle because twin-aisle does take some unique products from us, some unique alloys. And so the recovery is being driven by twin aisle. But with both of the big OEMs, and I think it’s consistent with what you’re reading. Boeing going to 31 per month as quick as they can, and Airbus is targeting 65 and they’re talking about 70 or 75 as they go into ‘24, ‘25. So we’re seeing that signal come through the supply chain.

And there are no further questions on queue. Do you have any closing comments?

Yes. So again, thank you all for joining us on our call. We look forward to updating you not only at our next quarterly conference call. But I’m really looking forward to our Investor Day, June 6 in New York, seeing you live and probably seeing most of you live for the very first time. So I look forward to catching up soon.

Thank you. And this concludes today’s conference call. Thank you for participating. You may now disconnect.