Arconic Corp (PITTSBURGH) (ARNC) 2021 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Arconic Corporation Third Quarter 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speakertoday, Shane Rourke, Director of Investor Relations.

Thank you, Daniel. Good morning, and welcome to the Arconic Corporation Third Quarter 2021 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 3 major takeaways for today's call. First, we continue to grow profitably year-over-year in the face of several external headwinds. Second, those headwinds, while substantial, are fluid and the overriding fact is demand in our key markets is still very strong. And third, we are well positioned to leverage our strong balance sheet and cash flow to both return capital to shareholders and invest in high-return organic growth. I'm looking forward to sharing 2 of those projects with you later in the presentation.

Summarized in the quarter, sales were $1.9 billion, an increase of 34% and 10% organically year-over-year. Net income was $16 million or $0.15 a share. Adjusted EBITDA was $171 million, up 4% over the last year, but down 9% sequentially. The ongoing semiconductor chip shortage in automotive, hiring challenges in our U.S. operations and a spike in COVID-related quarantines over the last few months, limited our ability to pivot capacity to serve the industrial segment. The impact of not being able to pivot that capacity was a $15 million reduction in third quarter adjusted EBITDA.

To resolve staffing issues, we undertook a number of initiatives including backfilling our workforce with salaried employees, recalling retirees, offering overtime incentives, launching an enhanced employee referral program, and we continue to pursue many other site-specific initiatives. During the quarter, we hired 759 new employees, resulting in addition of 191 net new employees. The result is we've already seen improved availability of staffing at our operations in the early weeks of this quarter.

Cost inflation, of course, is an issue across many industries and our businesses are not exempt. In this quarter, we experienced an impact of approximately $8 million related to energy and the additional employees, I just mentioned, increased labor costs by another $8 million. In addition, energy curtailments in China triggered a sudden rise in magnesium prices, which will be an issue in future quarters. We've responded with price increases, including magnesium surcharge in the U.S. to protect our margins. Of course, there's a short lag between when we will realize the price inflation and when we capture the benefit of higher prices, but they will essentially offset each other as we enter 2022.

As we've talked about before, we are a converter, and we actively manage the impacts of aluminum to our margins, but the sustained price increases throughout this year have put pressure on our cash flows. While this is challenging in the near term, the working capital investment will increase cash flows when aluminum prices stabilize and eventually return to historic levels.

As I look beyond those headwinds, demand in our key markets remain strong and we will continue to grow adjusted EBITDA by double digits going into 2022. Furthermore, as we've discussed, our declining legacy cash obligations will create a step change in our generation of free cash flow. This means we'll have more opportunities to invest in high-return organic growth and continue returning capital to shareholders in the form of share repurchases. In fact, during the third quarter, we repurchased almost $100 million of our shares.

Now let's move to Slide 5 to discuss our end markets. As you can see on the bottom right of the slide, in the third quarter, we grew organic revenue year-on-year in all end markets other than aerospace, which only declined modestly. Ground transportation sales increased 6% organically from third quarter 2020, primarily due to strength in commercial transportation, while the automotive segment continued to be challenged by semiconductor shortages. Our automotive volumes were down 10% year-over-year in the quarter, but North American light vehicle production declined 25% in the same period.

Through the first 9 months of 2021, our automotive volumes have increased 18% over last year while the North American light vehicle production is up only 7%. So clearly, we continue to gain share in this market segment. Consumer demand for light vehicles remains very strong and dealer inventory levels are near historical lows. This bodes well for the recovery in automotive as semiconductor supply chain issues are resolved.

Sales in the industrial market increased 20% organically year-over-year but declined 14% sequentially. As I mentioned on the previous slide, demand for industrial goods remains very strong, but staffing limited our ability to service orders in the quarter. In the Building and Construction market, sales increased 7% organically year-over-year. While we are seeing modest growth, the construction market continues to be challenged by supply chain and cost issues.

Sales in the packaging market increased 23% year-over-year, driven by continued strength in our Russia and China packaging sales and a small impact from the early beginnings of the ramp-up of packaging operations at our Tennessee facility.

Finally, aerospace sales were down 5% year-over-year on an organic basis. As you can see in the pie chart, aerospace sales continue to make up roughly half the percentage of our total sales compared to what they were in 2019. Our aerospace sales reached a bottom in the fourth quarter of last year, and we are experiencing the beginning of a long, steady recovery in our aerospace sales over the next several years. We continue to be excited about the ramping production rates of single-aisle aircraft as Boeing is making progress on the recertification of the 737 MAX in China, and Airbus has recently announced additional production rate increases.

So bottom line, our end markets are very strong. And with the exception of the temporary semiconductor constraint, all are growing well above GDP. With that, I'll turn it over to Erick to discuss third quarter results in more detail.

Thanks, Tim. I'll start on Slide 6 with highlights. Revenue in the first quarter was $1.9 billion, up 5% from the prior quarter and up 10% organically year-over-year. Net income for the quarter was $16 million or $0.15 per share compared to $5 million or $0.05 per share in the third quarter last year.

Adjusted EBITDA was $171 million, which was an increase of $6 million or 4% year-over-year, but a decline from the prior quarter. The sequential decline was primarily a result of the challenges related to continued semiconductor impacts and our ability to service industrial orders due to labor shortages and cost pressures related to energy as well as international freight availability issues.

Free cash flow for the quarter was a use of $93 million and was largely due to the higher cost of aluminum held in working capital, which I will summarize in more detail on the following slides. Capital expenditures were $51 million in the quarter, or approximately 2.7% of sales. And as Tim mentioned, we repurchased approximately $100 million of shares in the quarter, and we ended the quarter with a cash balance of $349 million and total liquidity and availability of approximately $1.1 billion.

Turning to Slide 7, I'll review our performance in more detail. Revenue was almost $1.9 billion in the quarter and increased $475 million year-over-year, primarily due to the impacts of higher aluminum prices as well as greater volume and mix compared to the third quarter of last year. Adjusted EBITDA was $171 million, up $6 million year-over-year due to favorable pricing, volume, mix and net savings. This was primarily offset by inflation, foreign exchange and other nonrecurring year-over-year impacts. While adjusted EBITDA grew 4% year-over-year, we could have delivered $15 million more had it not been for the supply chain constraints and labor shortages that impacted our production and sales.

As you can imagine, in a complex manufacturing company like ours, it takes about 6 weeks to get new employees up to speed so the impacts of the new hires that Tim mentioned will not be apparent until the fourth quarter. You can see on the slide, the third quarter of last year benefited from $34 million of temporary cash conservation actions that have since ended which was an offset of our net savings of $24 million in the quarter.

The unfavorable aluminum price of $11 million in the quarter is related to the impacts of rising prices on aluminum to our Building and Construction segment. As you will see on the next slide in more detail, we pass through the vast majority of our aluminum costs in our businesses, but for the BCI segment, which we passed through aluminum through pricing as aluminum is only a portion of the contract price for projects in this business.

Turning to Slide 8. I'll review our segment detail more. Slide 8. Starting with our Rolled Products segment. Revenue was approximately $1.6 billion, up 14% organically year-over-year, primarily as a result of ongoing growth in ground transportation, industrial and packaging markets. EBITDA was $155 million, up $17 million or 12% year-over-year, reflecting strong price, volume and net savings.

Revenue in our Building & Construction segment in the third quarter was $257 million, up $6 million year-over-year, up 2% organically. Adjusted EBITDA was $34 million, down $6 million year-over-year as net savings did not offset prior year temporary actions in the quarter.

Revenue in our Extrusion segment was $74 million, down 23% organically year-over-year. Adjusted EBITDA was a loss of $7 million versus a loss of $6 million last year as aerospace weakness, which was historically 50% of this segment's sales continues to impact this segment's performance. Over the last year, we have restructured the operating footprint of this segment. And as you can see on the slide, we generated $6 million of net savings in the quarter. We believe the combination of structural actions and aerospace market recovery will drive meaningful improvement in the financial performance of this segment.

Now moving to Slide 9, I'll review the updated revenue outlook for each of our end markets. We expect ground transportation organic revenue to increase 20% to 25% year-over-year compared to our prior expectation of 25% to 30%. The reduction in our expectations is a result of the continuing issues in semiconductor supply chain impacting automotive production at our customers. We continue to expect industrial organic growth to grow at 25% to 30% for the full year. While industrial production was impacted by our labor issues in the third quarter, we expect to work through the backlog by the end of this year. Demand in these markets remain very strong to the combination of the U.S. trade case and the economic recovery.

Building and Construction, organic growth expectations remain in the range of 0% to 5%. Growth in this market continues to be hampered by global supply chain and labor issues. In the Packaging market, we now expect full year growth of 20% to 25% compared to our prior view of 15% to 20%. The increase in expectation is driven by continued strength in the Russian and Chinese packaging markets as well as the future acceleration of the North American packaging ramp into the latter part of this year.

Our aerospace revenue outlook remains unchanged at a decline of 25% to 30% year-over-year due to ongoing destocking in the supply chain and the slow ramp of production at OEMs. As we stated, we believe the supply chain is destocking. And when the destocking reaches end, we would expect growth to pick up substantially as OEMs increase build rates in the medium term.

Turning to Slide 10, I'll discuss some of the labor pressures we experienced in the quarter in more detail. Our third quarter results were significantly impacted by the labor issues that limited our ability to produce for the industrial end markets. We were already seeing tightness in our staffing prior to the spike of COVID cases that happened late this summer. When employee quarantine rates increased, it forced us to idle entire shifts that would otherwise been dedicated to fulfillment of industrial orders.

We have worked very hard and continue to focus on addressing staffing issues. As Tim mentioned, we have conducted widespread hiring campaigns and other initiatives. We hired 759 employees in the quarter and a net of 191 in the quarter, and we are working hard to get these new hires trained. As I mentioned, it takes about 6 weeks to train new employees, and we are already seeing the increase in our productivity. We expect to clear the $60 million industrial backlog in the quarter.

Turning to Slide 11, I'll discuss some of the cash flow pressures we continue to experience from the unprecedented rise in aluminum prices throughout the year. As you can see on the left side, the price of aluminum has continued to escalate throughout the year and reached record highs in October. Aluminum is our largest input cost. We passed through changes to our customers, which mitigates the impact to our profitability. However, price changes do have an impact to the net working capital on our balance sheet and our free cash flow when prices move in either direction.

Since separation, we have taken efforts to reduce and manage our cash conversion days. While our working capital days have remained relatively stable, working capital on the balance sheet increased substantially during the year due to rising price of aluminum. In the third quarter, our working capital increased $122 million and this is primarily a result of higher aluminum prices.

A $100 per metric ton change in aluminum price results in approximately $20 million of net working capital change. And from last year's ending to the third quarter ending, aluminum price is up $1,300 per metric ton or on an impact of approximately $250 million to $300 million to our net working capital. After reaching nearly $4,000 per metric ton in mid-October, aluminum prices have recently started declining. While this is favorable for our working capital, the timing of the impact will not be seen in a meaningful way until the first quarter of next year.

Working capital management remains a priority. In the company, we continue to drive improvement in this area. It's important to note that aluminum prices, when they return to normal historic levels, we would expect to see some -- the same pattern of working capital impact, but in reverse. If aluminum prices remain at the current spot level, this would result in a source of cash as we enter the new year.

Now I'll turn the call back over to Tim to talk about our growth path forward.

Thank you, Erick. Now that we've covered the quarter, let's transition to talk about the trajectory of this business moving forward, including a couple of exciting organic investments we'd like to share.

Starting on Slide 13, the fundamentals of our 5 markets haven't changed. Favorable fundamentals should provide growth rates well above GDP across all of them for the next several years. What's great about our strategic position is that we're relatively balanced. So we don't have to worry if one of them takes a pause. I suppose that's a great segue into our largest market segment. While the automotive and commercial transportation industry is managing through supply chain issues, particularly availability of semiconductor chips, aluminum is winning as lightweighting lower fuel consumption and greenhouse gas emissions on traditional vehicles, and it extends the range for electric vehicles in a faster-growing segment of that market.

And in the short term, there is pent-up demand at the consumer level driven by the chip shortage and a shallow dealership inventory pipeline that needs to be rebuilt. September's inventory level is close to 24 days in North America which is much less than half of historical levels. Just bringing the channel's inventory back to 50 days will require more than 1.5 million vehicles above consumer demand.

In industrial, as we've discussed, we're benefiting from the U.S. trade case and the general economic recovery. Import levels have remained low and demand has remained strong. It's created the opportunity for growth in demand and higher prices, which is a great combination. We believe the nonresidential building and construction market bottomed out this year, and experts expect nonresidential construction to accelerate more significantly starting in 2023 and reach 6% compounded annual growth rate through at least 2025.

In the Packaging market, can makers continue to increase capacity to support growing beverage can demand. That means demand for can sheet will need to continue to grow to keep pace, creating strong volume and pricing opportunities for our products. We began the ramp-up of our packaging at Tennessee operations last month. We'll achieve roughly 50% of our targeted capacity in the fourth quarter of this year and will essentially be at full production in the first half of 2022.

Lastly, in aerospace, we are in the early beginnings of a long sustained recovery. The third quarter was our third consecutive quarter of modest sequential growth in aerospace shipments. We expect the fourth quarter to be more of the same. And in 2022, we should see a more significant step-up in volumes as the supply chain becomes fully destocked and we realize the full benefit of the aerospace OEMs ramp up, particularly on single-aisle aircraft.

The top takeaway for this slide is that all of our end markets are expected to grow at a multiple of GDP over the next few years, and we have the ability to allocate capacity where we see the greatest return. This is why we believe we can continue to grow adjusted EBITDA year-over-year by double digits into the future.

Now let's talk about those investments I mentioned earlier on Slide 14. The buoyancy in our markets is creating a great opportunity to invest in high-return, short payback, organic growth projects, expanding our capacity to keep pace with our growing markets. We are increasing the capacity of the hot mill at our Lancaster, Pennsylvania facility by over 100 million pounds. The main component of this project is a new mill stand that reduces the number of passes required by the hot mill, and therefore, it increases capacity. This equipment will be installed in 2022, qualifications will occur late next year, and it will be at full capacity sometime in the first half of 2023.

At our Davenport, Iowa facility, we're adding 130 million pounds of melting and casting capacity. This will increase our ability to recycle scrap, improve our environmental footprint, shorten our supply chain by lowering our ingot purchases and generate a great cost savings opportunity for the plant. We expect that asset to be running at full capacity by the second half of next year.

Both projects are underway as we speak, and the combined investment is less than $100 million. We expect them to generate roughly $75 million of incremental run rate EBITDA starting in 2023. A $75 million annual return on less than $100 million in investments generates a rate of return well in excess of our 25% threshold. And even better, these are being funded within the capital guidance that we've communicated for Arconic of 3% or less of annual revenue.

Slide 15 provides an update on the EBITDA uplift trajectory we've previously committed to. We expect to achieve the $300 million uplift despite the short-term issues we experienced this quarter around semiconductor shortages and staffing, which impacted our net productivity. With the debottlenecking projects in Lancaster and Davenport that I just discussed, we're upsizing our program to include an additional $75 million of EBITDA on a run rate basis by the end of 2023.

The organic EBITDA growth from 600 million pounds of capacity, primarily from packaging, industrial and automotive is on track, and we are starting to ramp up of packaging actions in Tennessee in the fourth quarter, and this will continue through the first half of 2022. 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 have fully realized the targeted productivity gains as we -- and as we overcome the staffing challenges and realize the benefit of the pricing actions we have already taken to offset increases in input costs such as energy and magnesium, we will see this drop to the bottom line of our results.

Moving to Slide 16, I'd like to review the coming step change in free cash flow. This is a slide that we've shared before and it serves to continue to highlight the coming step change in free cash flow resulting from lower cash obligations moving forward. As a reminder, our gross pension and OPEB liability has declined by 37% since separation, while our net after-tax pension and OPEB liability is down 40% in that same time frame. Combining this with the wind down of our largest environmental project in Grasse River, New York, our annual cash needs will be lower by $250 million in 2022 and beyond for these types of issues.

Moving to Slide 17. We have updated our full year 2021 outlook to reflect the impact of increasing aluminum price, the cost pressures relating to staffing, energy and freight and the continuing shortage of semiconductor chips impacting automotive demand. Our revenue guidance has been revised to a range of $7.5 billion to $7.7 billion from the previous $7.3 billion to $7.6 billion, and we've tightened expected adjusted EBITDA to be in the range of $710 million to $730 million, a 16% improvement year-on-year at the center of the range, reflecting the impact of lower industrial shipments in the third quarter and ongoing cost pressures associated with staffing and energy that we expect will continue through the remainder of the year.

Adjusted free cash flow is now expected to be approximately $50 million for the full year compared to our previous view of approximately $250 million. The change in our outlook for free cash flow reflects the significant impact of continued aluminum price increases on our net working capital, as Erick mentioned, as well as the increase we anticipate in accounts receivable as we work down the industrial backlog during the quarter. As a reminder, adjusted free cash flow excludes a total of approximately $600 million in pension, environmental and OPEB payments, which were made in 2021. These requirements dropped to less than $100 million in 2022, representing $0.5 billion less in obligations going into next year.

Wrapping up on Slide 18. We have meaningfully improved adjusted EBITDA this year, up 15% through the first 9 months of the year. While we are certainly experiencing the challenges from inflation, freight, energy and staffing, these headwinds are temporary, and we have multiple countermeasures being putting in place to mitigate them, particularly in procurement, pricing and staffing.

The opportunity is in the underlying market demand that will continue to drive double-digit EBITDA growth over the next few years. That profitability, combined with declining legacy cash obligations, will drive significant free cash flow growth, and we have a disciplined capitalization allocation strategy that we are already executing on. We repurchased nearly $100 million of shares in the quarter, and we've continued that program into the fourth quarter.

So wrapping up here is what's important to remember. We've delivered significant year-over-year EBITDA growth throughout the year despite a number of challenges. Our end market trends continue to support sustainable double-digit earnings growth, and we are poised to deliver meaningful free cash flow and are already returning capital back to our shareholders in the form of smart investments and share repurchases. At this time, I'd like to open it up for questions, and I'll turn it back over to Daniel to help us facilitate those.

(Operator Instructions) Our first question comes from Curt Woodworth with Credit Suisse.

First question is with respect to magnesium and silica. You mentioned that you're implementing alloy surcharge mechanisms. I just want to confirm, did you say that you would be price cost neutral with respect to that entering the year? And can you give us a sense will there be any significant headwind that you would look to face in the fourth quarter on that issue? And then secondarily, on availability, do you feel like your procurement needs are well stocked for next year?

Yes, I'll start with the end. We have our needs covered for this year and 2022. So we're feeling comfortable with the supply line. I don't think we'll see a significant impact from magnesium in the fourth quarter. We had already secured our needs for the year. So it's really something that we're looking at on the forward. I do expect that the surcharge and other pricing actions we've taken will not only offset the increase that we're seeing in the alloying materials. The market has been rather buoyant, and I think that our pricing actions will actually be a benefit as we turn into the first quarter of next year.

Okay. Great. And then with respect to aerospace, just looking at Slide 13, where you've got the delivery rate up close to 40% this year and then basically almost doubling the following year relative to 2020, but you're obviously down 25% to 30% this year. So clearly, a big mismatch between delivery rate versus production because they're selling out of inventory. But how should we think about kind of the cadence of that business going into next year based on say, Slide 13?

Would there be significant kind of reuptake in inventory? Have you had any discussions around aerospace nominations for next year? And also, can you just give us a sense today for what the latent, say, EBITDA potential in that business is kind of what your current run rate would look like today versus, say, where it was in '19?

So well, let's start with -- we've kind of seen modest sequential improvement in our aerospace shipments every quarter this year, let's say, mid-single digits kind of numbers. We've been having discussions for a long time about when destocking is going to happen. We've always kind of been in the mindset, I'll believe it when I see the orders start to show up. We're starting to see orders show up, I would think that we are going to see an acceleration in that mid-single-digit growth as we go through the end of the year and into next year.

So I think that -- I don't think the supply chain is fully destocked, but we're starting to see signs that not only the OEMs but the distributors are starting to reload. So now let's take Boeing as a proxy because we're most exposed to single-aisle aircraft. And if you go back to the first quarter of this year, they were, I think, around 10 aircraft a month. And as we enter this part of the year, I think there's somewhere between 15 and 20 in different months through the third quarter. And they've said that they're going to be at 31 in the early part of 2022.

So if you use that as a proxy, once the supply chain clears, we should be seeing double-digit recovery in our aerospace shipments in 2022 at some point. That would be my expectation. And as we shared, I think it was in the first quarter call, we secured about $2 billion in forward contracts with 3 customers, that take us all the way out towards the end of the decade. So we're feeling good about our position in aerospace.

Okay. And then just last one on the growth projects. I mean, pretty incredible payback on those 2 projects. I guess we were somewhat surprised that there wasn't any incremental capacity kind of coming for can sheet given the announcements we've seen upstream on the can side. So do you expect any potential debottlenecking there? Or is there a potential to, say, expand some of the plants in Russia or Hungary, which you know generally are very well positioned on the cost curve or how should we think about that?

Yes. So we're shaping up a number of potential investments. We announced 2 today. If you think about where those projects are positioned, they're really servicing aerospace, automotive. The Davenport facility has aerospace, automotive, industrial, casting capacity is going to serve all 3. Lancaster is predominantly industrial. The pricing and margins in those markets, it kind of justifies those investments. We've got several others that were shaping up. And as you can imagine, before we come out with them, we want to have the engineering work done to the extent that we're confident in the estimate.

And if they're, let's say, more market-concentrated, we probably would line up customers -- customer contracts and government incentives and so on and so forth. But we see opportunities across the network. We go after them based on their return profile. You mentioned the continued ramp-up in North American packaging. We're not quite seeing the pricing and margin profile there where we could make a significant bet on bringing up that packaging capacity. But if the market continues to grow the way that it has, and the can makers continue importing cans from all over the world, the backfill eventually, I think, the conditions for investment could materialize.

Our next question comes from Emily Chieng with Goldman Sachs.

My first one is just around some of the comments you made around the energy price inflation. Perhaps could you provide us some color exactly where in the portfolio are you seeing the greatest pressure points here? And perhaps how do you think about your power contracting strategy in those regions?

Yes. So first of all, I would say, the energy issue was predominantly outside of the U.S. You've probably have seen there's been a lot of pressure on natural gas in Europe, in particular, it's driving up natural gas and electric prices. We had a similar issue in China. And we do have a hedging program that involves energy, but it's not a commodity that we had fully covered.

When you think of energy costs in totality, I think it's probably around 4% of our costs, so it's significant. In terms of dollars, $8 million -- is $8 million, if you look at it relative to our whole cost structure, not as much. But I will tell you that the surprise and the volatility that we're seeing in input costs in general have caused us to take a pause and think about probably increasing our hedging activities on that particular commodity moving forward.

Got it. That's very clear. And then maybe a follow-up is just around an early rate on 2022 CapEx. I know you mentioned that even with the 2 investments that you've announced today that the CapEx should largely remain within that 3% of total revenues. Should we take that assuming 2021 revenue as a guide that, that could imply sort of $220 million to $230 million type of CapEx range for next year?

I don't think we've guided 2022 revenue yet. But I would say, as the business grows it will provide the opportunity for us to increase our investment profile. And particularly, if we continue to find very high-return projects like the 2 that I just described, we don't want to stunt the growth of the company. And if we decide at any point that we're going to go above the 3% guideline to harvest some of those opportunities, we would communicate that.

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

How large do you envision your recycling efforts eventually getting? How much of your internal needs for scrap or raws do you think you can replace with this? And then as you look longer term, is there a percentage goal you're targeting or anything?

Well, we've continued to target improving our scrap utilization. The project down in Davenport, 130 million pounds of casting capacity, I think that our North American network is running around 60% scrap utilization, plus or minus. So that could give you a good feel for what that one project is going to do to improving our environmental footprint and our cost profile. But probably the bigger opportunity in the short term is we're reentering packaging down in Tennessee as we speak. And if you're doing a good job in that industry, you're consuming 85%, 90% UBCs and other scrap streams to continue driving that.

So it's a great business sense for us because we're buying scrap at a nice discount to having to consume prime and it's definitely helping our environmental footprint. I was looking the other day, I think since 2019, pre-COVID, which was already a pretty good year for scrap utilization. We've increased our scrap consumption by about 60 million pounds a quarter here in North America to give that some scale and I think that, that's going to continue.

Got it. And then on the increased hot mill capacity at Lancaster, how does this impact the overall ecosystem between Tennessee and Davenport? Can you move any capacity in general engineering from one facility to another, maybe to open up can sheet capacity? Just curious how the ecosystem between the plants works as you layer in these investments?

Absolutely. And absolutely increasing gross industrial capacity, combined with what we've done in Tennessee, where we've essentially balanced that facility across 3 markets, it just gives us that much more flexibility. If we saw that, for instance, packaging opportunities started to become more exciting for us than industrial. We could pivot some volume from Tennessee up to Lancaster, slide some across to Davenport. So as we continue to expand our footprint, we can continue to improve our optionality.

Okay. And then just one last one on automotive. What are your inventories look like heading into '22? Just given the fits and starts on the auto side and the semiconductor issues throughout the year, are you holding a substantial amount of auto inventory that's ready to go once demand starts to pull through?

Yes, absolutely. I mean let's say the shelves are stocked, unfortunately. And we have a requirements contract in automotive, and you can't afford to be wrong. And in many cases, we're not getting a lot of visibility when they run into a constraint primarily with the chips. And with the lead times that we have, oftentimes by the time we find out that they're not going to take the order, the cools are already -- the coils are already cooling in one of our plants waiting to go on a truck. So we've got to put them in inventory.

(Operator Instructions) Our next question comes from Corinne Blanchard with Deutsche Bank.

I just have a follow-up question on magnesium. You mentioned you can secure magnesium for next year. However, I think we have heard the industry only having visibility for about 1 to 2 quarters ahead, especially in Europe. Can you just remind me how do you position yourself in Europe? And if you also have secured 2022 volume there for magnesium or was it more specifically for the U.S.?

So yes, the issue that you run into with magnesium, of course, is it oxidizes, right? So it has a shelf life. That said, we have put annual supply contracts in place to cover our needs in North America, Russia, Europe and China. And in fact, yes, we're in good shape. We actually had a little bit of buffer stock strategically here in North America. So as I said, that material oxidizes, so we could only buy forward so much. But we have some material that we're going to be able to roll into the first quarter at 2020 prices.

Okay. So even in Europe, I'm just trying to figure out because we obviously hear lot of different comments in the industry. But even in Europe, you don't -- you are not overly confirming or running into any volume issue or capacity issue for next year for magnesium?

No. No, we feel comfortable. And as we follow the market, the other thing you've seen is some of the provinces in China have relaxed the restrictions and you've got some of the mag suppliers back up to 80%. So we're feeling comfortable.

Okay. Great. And just maybe one other for me. Could you just walk us through operating cash flow and then the working capital expectation for 4Q?

So for operating cash flow, you'll see in the quarter, we had a sizable use of cash primarily coming from working capital. So as you walk through the operating cash flow, that's in our press release, you'll see the operating cash flow. You'll see the $120-or-so million use of cash coming from the AR and inventory offset by payables. That would be the sort of the bulk.

I think on a forward basis, a lot of it is going to depend on that movement on the spot price. I don't think we're going to see a lot of benefit from the recent ramp down in aluminum and working capital in Q4, but it will clearly have a benefit in Q1 as aluminum goes down. Corinne, that'll help you with sort of the how to size the metal that's where we put the guidance. And for every $100 million, it's about a $20 million move to help you parameter the movements of working capital as you try to forecast aluminum price in the future.

Thank you. I'm showing no further questions at this time. I would now like to turn the conference back over to Tim Myers.

Thank you, Daniel. In closing, I'd like to thank everyone for your continued interest in Arconic. As a reminder, we will deliver double-digit earnings growth in 2021. We're well positioned to deliver double-digit earnings growth in 2022, driven by, amongst other things, the ramp-up of packaging in North America, a good pricing environment across our markets, particularly the industrial market and the continued gradual recovery of our aerospace business. And today, we highlighted 2 additional investments that will be tailwinds to extend that journey into 2023.

Finally, we're well positioned to invest in additional opportunities like those we announced today as well as consider a variety of additional options to provide returns to our shareholders. Thank you, and I look forward to talking to you again next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.