Arconic Inc. (ARNC) Q1 2021 Earnings Call Transcript

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Arconic Inc. (ARNC)
Q1 2021 Earnings Call
May 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Arconic Corporation's First Quarter 2021 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to your host, Mr. Shane Rourke, Director of Investor Relations. Sir, the floor is yours.

Shane Andrew Rourke -- Director of Investor Relations

Thank you, Lara. Good morning, and welcome to the Arconic Corporation First Quarter 2021 Results 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 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 could cause the company's actual results to differ materially from the projections listed 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.

Timothy D. Myers -- Chief Executive Officer

Thank you, Shane, and good morning, everyone. Again, welcome to our first quarter 2021 earnings call. We had a strong start to the year, and Eric and I are excited to update you. So let's start on slide four to discuss the highlights of our first quarter performance. The markets we serve are recovering and revenue increased meaningfully in several markets during the quarter. Industrial revenue grew 18% year-over-year or 15% on an organic basis. This was due to a combination of the effects of the U.S. trade case and the ramping up of the investment we made in Tennessee. Ground transportation revenue grew 25% or 17% organically year-over-year, driven by recent platforms we were awarded, easily overcoming the semiconductor chip shortage and North American light vehicle production being down 4%. Additionally, our packaging sales were up 23% or 16% organically at our Russia and China facilities. Net income was $52 million, and adjusted EBITDA in the quarter was $179 million, an increase of 19% or $28 million, sequentially benefiting from rebounding markets and the $100 million in structural cost-outs we implemented last year. In the quarter, we secured agreements totaling $3.5 billion of expected long-term revenue with multiple customers across packaging and aerospace. In packaging, we negotiated agreements with six customers including blue-chip companies such as Ball Corporation, AB InBev, totaling $1.5 billion of expected revenue from 2022 through 2024 and filling the remainder of the 600 million pounds of incremental annual capacity that we've been discussing. We easily could have booked more than 2 times this volume at attractive prices if we had more incremental capacity available to sell. In aerospace, three customers awarded us new multiyear contracts totaling more than $2 billion in combined future sales and extending our position as a premier supplier through nearly the end of the decade.

Looking forward, we expect our results to be supported by favorable sustainability trends, such as light weighting of ground transportation and the shift to electric vehicles as well as the continued flight from plastic to aluminum packaging as consumers remain concerned about microplastics entering our water and food sources. We anticipate our results will continue to improve, and cash generation will benefit from a more than $230 million year-over-year decline in legacy obligation payments starting next year. In the last year, we've reduced legacy gross pension and OPEB liabilities by $1.8 billion. And today, we are announcing the authorization of a $300 million share repurchase program. We're very confident of our forward view of the business, and we believe buying shares that may create a great return opportunity for our shareholders. Turning to slide five. I'll provide more detail on how we performed across our end markets. As you see in the bottom right of the slide, in Q1, we grew our revenue sequentially across all of our market segments. Ground transportation sales increased 21% from the prior quarter and 17% organically year-over-year, largely driven by continued growth in commercial transportation, which is benefiting from increasing heavy-duty truck and trailer builds. Automotive organic revenue grew year-over-year despite the challenge of the semiconductor chip shortage.

We also increased our market share with 11 new or greatly expanded platforms versus a year ago. Sales in the industrial market increased 22% from the prior quarter and 15% organically year-over-year. This improvement was driven by the continued ramp-up of industrial products at our Tennessee facility as well as the influence that the U.S. trade actions against 16 countries had on demand for domestically produced common alloy sheet. In the building and construction market, we increased 3% sequentially, but were down 6% organically year-over-year. This market remains depressed as pandemic pressures are still affecting nonresidential construction builds in North America. We did, however, see an improvement in bidding activity in our North American Conair Architectural Systems business as the quarter progressed. Sales in the packaging market increased 8% sequentially and 16% organically year-over-year, largely as a result of growing demand in our China and Russia packaging facilities. Finally, aerospace increased 5% sequentially but was down 55% year-on-year on an organic basis. The first quarter of 2020 was an extremely strong aerospace quarter for us, and we expect the aerospace market to enter a steady, gradual recovery moving forward.

Now I'll turn it over to Eric to review the financials.

Erick R. Asmussen -- Executive Vice President, Chief Financial Officer

Thanks, Jim. I'll start on Slide six with highlights. Revenue in the first quarter was $1.7 billion, up 15% from the prior quarter and down just 1% organically year-over-year. Net income for the quarter was $52 million or $0.46 a share compared with $46 million or $0.42 a share in the first quarter of 2020. Adjusted EBITDA was $179 million, which was an increase of $28 million or 19% from the prior quarter. Free cash flow for the quarter was a use of $322 million, primarily due to the acceleration of $200 million of U.S. pension contributions to January of this year and increasing working capital from revenue growth and metal price increases to our inventories. As previously announced, we issued an add-on of $300 million to our senior secured notes due in 2028 to fund the $250 million pension contributions associated with the annuitization transaction that was completed last week. We ended the quarter with a cash balance of $763 million and total liquidity of approximately $1.6 billion. Before I move on to discussing our performance in more detail, I want to highlight that our Q1 adjusted EBITDA of $179 million is roughly 90% of our pre-pandemic Q1 2020 adjusted EBITDA, even though aerospace revenue was down 55% organically year-over-year. Turning to slide seven. Revenue increased to $64 million year-over-year, primarily as a result of metal price, offset by volume mix and divestiture impacts. Adjusted EBITDA for the quarter was $179 million, down $25 million year-over-year, largely because of volume and mix resulting from lower aerospace revenues, which was partially offset by strength in ground transportation, industrial and packaging markets. We achieved net savings of $23 million primarily related to our $100 million structural cash conservation initiative from last year. And other EBITDA impacts in the quarter was a negative $10 million, primarily due to allocation of cost differences from carve-out accounting from the first quarter of 2020.

Turning to slide eight. I'll provide more detail on our segment performance. Starting with our Rolled Products segment. Revenue was approximately $1.4 billion, up 6% organically year-over-year, primarily as a result of strength in ground transportation, industrial and packaging markets. Adjusted EBITDA was $165 million, flat with last year as price benefits and cost actions fully offset the impacts of lower volume and mix driven by declines in aerospace. Revenue in our Building and Construction Systems in the first quarter was $236 million, down $20 million year-over-year because of pandemic-related disruptions continued to affect construction projects. And adjusted EBITDA was $28 million, only down $2 million year-over-year as cost actions nearly offset volume, mix and price declines in the quarter. Revenue in our Extrusion segment was $75 million, down 42% organically. And adjusted EBITDA was a loss of $4 million versus positive $8 million last year as the aerospace market decline continues to affect this segment's performance. The decline in aerospace revenue makes up nearly all of the year-over-year decline and the entire revenue decline from the prior quarter. As we mentioned in the past, we continue to implement structural actions in this segment, and improving the financial performance of the Extrusion segment remains a priority. Moving to slide nine, I'd like to review our revenue outlook in each end market for 2021. We continue to expect ground transportation organic revenue to increase 25% to 35% year-over-year. We remain bullish on the ground transportation market as indicators for light vehicles are strong and North American heavy-duty truck and trailer production is forecast to increase by approximately 40% this year. This growth, combined with increasing content we have secured on the 11 new or greatly expanded automotive platforms are expected to more than offset the headwinds created by the semiconductor chip shortage.

We have increased our outlook for industrial organic revenue growth to 20% to 25% compared with our prior outlook of 15% to 20% growth. Key factors for this increase are the favorable conclusion of the U.S. trade case reached at the end of March and the continued positive trend for sales and pricing. This market strength enables us to capitalize the investments we made at our Tennessee facility, which creates additional flexibility to pivot production to the industrial market to help offset the impact of the semiconductor shortage in automotive. We expect the building and construction market to be flat in 2021 as the North American nonresidential construction market recovers. And packaging revenue continues to be strong, especially in Russia and China, and we now look to anticipate year-over-year growth of 10% to 15%, up from our prior outlook of flat to modest growth. We expect the revenues to begin benefiting from access to new markets that previously were unavailable because of the non-compete that expired at the end of last year. Our aerospace revenue outlook is unchanged at a decline of 25% to 30% year-over-year due to slow OEM production growth and ongoing de-stocking across the aerospace supply chain. We believe we experienced our tough quarter in the aerospace market in Q4 of 2020, and we look forward to a long, steady recovery bolstered by new and extended contracts.

Now I'll turn it back over to Tim to discuss our path forward.

Timothy D. Myers -- Chief Executive Officer

Thanks, Eric. Now I'd like to turn our attention to the future. The favorable macro trends we see in the markets we serve, the incremental capacity we've unlocked, the new contracts we've secured and the strong momentum we are delivering on our productivity initiatives position the company very well for substantial and sustainable growth. In terms of new agreements in the packaging market, as you see on Slide 11, we continue to requalify with major customers in North America following the expiration of our non-compete. Today, we announced that we've negotiated agreements with six can makers totaling approximately $1.5 billion in expected revenue from 2020 through 2024. These agreements should enable us to fill the remainder of the 600 million pounds of capacity in our North American production network during 2022. The agreed-upon pricing, combined with strength in the industrial and automotive markets, should allow us to deliver at the higher end of our previous EBITDA growth guidance for the incremental 600 million pounds of capacity. As I mentioned earlier, we received expressed interest for more than double, actually nearly triple, our available capacity. In the aerospace market, on slide 12, we've signed contracts with Boeing, Spirit AeroSystems and Gulfstream that combined make up roughly $2 billion in expected future revenue over the terms of the contracts. Taken as a whole, the new contracts improves our aerospace pricing, mix, share, volume and duration. Through these contracts, we've maintained our position as a premier supplier in aluminum components across the entire airframe, including fuselage sheet and wing skins throughout the expected recovery and beyond. As you can see on the slide, we believe that our revenue reached a trough in the fourth quarter of last year and we are looking forward to a steady, sustained recovery. Longer term, we expect aerospace to recover to pre-pandemic levels in 2023 or 2024. Another reason we have confidence in our long-term growth is that many of our products contribute to environmental sustainability, as shown on Slide 13. As you know, consumer demand for environmentally responsible products and components continues to grow. Automotive light-weighting, particularly in large SUVs and pickups, continues to drive aluminum penetration.

Overall, aluminum was 11% of vehicle weight in 2018 and is expected to grow to 15% by 2030, a 36% increase. With the content we delivered on the 11 new or greatly expanded automotive programs in the first quarter, we're now on a total of 68 nameplates, serving 20 different customers. We also stand to benefit from the growth of electric vehicles which were approximately 25% to 35% more aluminum-intensive than internal combustion engine vehicles. Global electric vehicle sales are expected to grow at a 29% compound annual growth rate from 2020 to 2030, at which point electric vehicles are expected to represent 32% of the market. We currently supply products on 11 all-electric or hybrid nameplates with applications ranging from body panel, body structure, raising sheets for heat exchangers and cooling systems and battery cases, and are actively developing a range of last-mile delivery fleet electric vehicle opportunities with multiple customers. Can sheet demand is expected to grow at a 5% compound annual growth rate from 2021 to at least 2025 due to continued consumer preference shifting away from plastics. Aluminum packaging is much easier to recycle than plastic and far less damaging to the environment. Lastly, our building and construction products provide architectural designs and solutions to meet ever-increasing energy efficiency standards and stand up to severe weather, which has become more pronounced due to climate change. On Slide 14, I'd like to go over the steps we've been taking to advance our environmental, social and governance goals. First and foremost, we continue to prioritize the safety of our employees. Our total recordable incident rate is less than one compared to an industry average of three to 6. And we are focused on continuously improving our safety practices and performance. This clearly leads our industry. Scrap utilization is a critical metric for all of our operations. And over the last several years, we've gone from being a relatively large net seller to a relatively large net buyer of scrap.

Last year, we achieved a scrap utilization rate of approximately 58%, up 280 basis points since 2017. That's not only good for the environment, but it's good for our profitability, too, as recycling scrap is less expensive than buying prime. We're committed to continuing to increase scrap utilization, and the future expansion of our package -- packaging production will only further improve our recycling rates. In the middle of last year, we launched an initiative to support inclusion, diversity and social justice. We also expanded the mission of the Arconic Foundation to increase our focus on this very important topic. We badged this initiative Grow Together, and over the last five months of 2020, our employees recorded more than 2,200 actions of charitable contribution, volunteering and personal development. Combined with the Arconic Foundation, we contributed more than $460,000 to organizations supporting inclusion, diversity and social justice. And that's just a start for us. We're also a recent signatory to the United Nations Global Compact, and we're targeting the UN's 2030 sustainable development goals. ESG initiatives are a key priority for us, and we're looking forward to making more progress on them this year, our first full year as a stand-alone company. We'll be sharing more on our efforts and our progress in coming months. Turning to Slide 15, I'd like to update you on where we stand against our $300 million EBITDA growth program first introduced last August. The program represents a 50% uplift over last year's profitability, and we expect additional EBITDA growth on top of this as the aerospace and building construction markets continue recovering to pre-pandemic levels. As I mentioned earlier, with industrial demand strength, increased automotive volumes and the recently secured $1.5 billion of can sheet agreements, we will fill the 600 million pounds of incremental North American system capacity we identified on a run rate basis in the second half of 2022.

Roughly half of this capacity will produce can sheet, while the remaining half will be filled with automotive and industrial products. We expect to achieve the high end of the $100 million to $120 million EBITDA growth guidance range for this opportunity. We expect to have the $100 million of structural cost out, which we initiated in the second quarter of 2020, to be fully achieved by the end of this quarter. We recognized $60 million of the reductions in last year's exit run rate and delivered another $22 million in the first quarter of this year. Lastly, our productivity initiatives remain on track to save an additional $70 million to $80 million on a run rate basis by the end of this year as well. These represent a range of efforts from higher casting throughput, increased scrap utilization and increased asset utilization. Approximately $40 million of the $70 million to $80 million originally identified was recognized and realized in 2020. Assuming our markets continue to be strong, execution on these three initiatives should enable us to deliver $1 billion in annual adjusted EBITDA when the aerospace market returns to pre-pandemic 2019 levels. Turning to Slide 16. We continue to make great progress in reducing our liabilities. Last week, we announced the conclusion of a $1 billion annuitization transaction that brings the total reduction in our gross pension and OPEB liabilities to approximately $1.8 billion or 35% since separation. Our net after-tax pension and OPEB liability has now decreased by $700 million or 47% since the separation. Additionally, the majority of our environmental payments are related to one discrete project in Massena, New York, which will near completion at year-end, lowering our expected environmental remediation payments by over $60 million next year.

When we combine the reductions in pension and OPEB obligations with recently enacted pension funding relief legislation and the significant step down in environmental spending, it combines for more than $234 million less cash being required next year and almost $300 million less per annum than when the company started just a year ago. When we combine this with the increased earnings power that I described on the previous chart, it's exciting to think about all the cash that we're going to be generating and what we'll be able to do with it to continue growing the business and identifying other means to create returns for our shareholders. Throughout this presentation, we've outlined a variety of ways that the company has executed on its growth opportunities and continues to do so. I'd like to boil it down to a couple of key points presented on Slide 17. First, we continue to benefit from the hard choices and actions we took in 2020 to reduce costs and pay down our liabilities. As you've seen, these actions are combining with significantly improved future profitability and free cash flow conversion. Although the automotive industry is experiencing issues with semiconductor chip shortages, demand is strong across ground transportation and our share gains in automotive are supporting growth. Additionally, our strategy to invest in more industrial capacity in Tennessee has greatly enhanced our flexibility.

The first quarter was a proof case for the tremendous agility and optionality we now have to quickly pivot our capacity to whichever market is most attractive. We've outlined in detail the drivers behind the industrial and packaging growth that is already happening. Both of these markets are experiencing secular tailwinds that should provide profitable growth for the foreseeable future. Finally, we're in the process of studying additional affordable opportunities to create incremental capacity without large-scale capital expenditures. I'll close with our updated 2021 outlook. We're increasing our full year 2021 revenue guidance to be in the range of $7.1 billion to $7.4 billion from our prior guidance of $6.6 to $6.9 billion, reflecting the effects of higher aluminum prices, combined with the growth in our packaging and industrial sales. We're also increasing our adjusted EBITDA guidance for the year to be in the range of $710 million to $750 million compared with prior guidance of $675 million to $725 million, primarily driven by better-than-expected volume and pricing in the packaging and industrial markets. This guidance includes the challenges that we see in the automotive industry due to the chip shortage that will continue to be a headwind, particularly in the second quarter. We expect this will begin to modestly recover in the second half of 2021 as consumer demand remains strong for the automotive OEMs. Adjusted free cash flow for the full year 2021, excluding the $250 million contribution to U.S. pension plans in connection with April's $1 billion annuitization as well as approximately $350 million of additional funding of legacy pension, OPEB and environmental liabilities, is expected to be in the range of $300 million to $400 million.

At this time, we'd like to open up the call for questions, and I'll turn it over to Lara to help facilitate those.

Questions and Answers:

Operator

[Operator Instructions] Your first question will come from the line of Curt Woodworth from Credit Suisse. The line is now live. Go ahead please.

Curt Woodworth -- Credit Suisse -- Analyst

Great. Thanks. Good morning, Tim and Erick, congrats on a great start to the year. I was wondering if you could provide a little bit more color with respect to the near-term outlook, right? Like, I mean, Ford's discussing some pretty material production in 2Q. It seems like thus far order entry in aero has been relatively stagnant. So I'm just curious, sequentially as we move into the second quarter, how you see things shaping up?

Timothy D. Myers -- Chief Executive Officer

Sure, Curt. And thank you, we were pleased with the quarter. I think the team did a very good job of bringing down the opportunities in front of us. The semiconductor issue, on its surface, probably had an impact of maybe $10 million of EBITDA in the quarter. But we were able to pivot quite a bit of that capacity into the industrial segment, which is relatively strong. We probably forecast the impact to be greater in terms of automotive this quarter. But also we had a little more visibility. So we've already pivoted quite a bit of our supply chain over and gotten the materials we need to make more industrial products this quarter. And so my hope is that our commercial team is able to sell-through the semiconductor chip shortage, and we're going to continue on.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. And with respect to some of the new, I guess, contract extensions or agreements in aero and then also in packaging, can you give us any sense for the profitability of the packaging deals you were able to secure? And then on aero, you talked about improving mix, volume share. Can you give us any sense of what that could imply for mid-cycle profitability increase in that business?

Timothy D. Myers -- Chief Executive Officer

Sure. So I mean, first of all, 600 million pounds, upper end of the range on the 100 million to 120 million. I think you can kind of back into what the profitability per metric ton is for the combined opportunity there. With the level of interest that we had in -- from the can makers, we were able to, I think, do a fair job of capturing value in terms of terms and pricing and also picking lanes that were good for us and also getting the specifications that we were excited about. So I was pretty pleased with how that came out. In regards to aerospace, the contracts, they vary in terms of their longevity across the three customers. I can't really get into specifics there. But what I can say is, if we see 2019 build rates, we would see an uplift in price and volume collectively across those three customers and mix.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. And then just last one on pension. Can you quantify what the impact of the pension reform in the stimulus bill was in terms of the amortization schedule doubling and I think they raised the interest rate before. And then with the pre-funding, I know you have Slide 22 in the deck. How would that -- would those numbers look similar for '23 in terms of your cash outflow?

Erick R. Asmussen -- Executive Vice President, Chief Financial Officer

So to answer your question on the impacts of the legislation reform, it essentially smooths -- it doubled the rate of smoothing. So to some extent, our $50 million that you have on Slide 16, it had a dramatic reduction of that because it spreads it over double the years. As far as the impacts on '23 and beyond, you're starting off a base of 50. So volatility of interest rates and mortality have -- are starting with a much smaller base. So Curt, the way to look at it is it will have impact but on a very, very small base. So you should expect '23 and beyond to be in a similar level.

Curt Woodworth -- Credit Suisse -- Analyst

Got it. Okay. Thanks very much. Appreciate it.

Operator

Thank you, sir. Your next question will come from the line of Josh Sullivan from the Benchmark Company. The line is now live. Go ahead please.

Josh Sullivan -- Benchmark Company -- Analyst

Hey. Good morning.

Timothy D. Myers -- Chief Executive Officer

Hey, Josh.

Erick R. Asmussen -- Executive Vice President, Chief Financial Officer

Morning, Josh.

Josh Sullivan -- Benchmark Company -- Analyst

Yes. I mean, it's really great you guys are filling the announced capacity so quickly. I think compared to what you said you had tripled the request rather, maybe you had available. But what are your thoughts on industry capacity? Historically, the rolling market faced some overcapacity cycles. Just what are your thoughts on balancing gross versus capacity discipline? You obviously have a pretty attractive cash profile building up here. Just curious on your thoughts about that.

Timothy D. Myers -- Chief Executive Officer

I think that we're going to continue to focus on the types of opportunities that we have in the past. The pricing levels that you have in this industry in terms of thinking about greenfield capacity probably don't support that. And so what we need to do is continue looking for affordable opportunities to invest in our footprint so that we can continue creeping the capacity in the assets that we have. And the market is there, certainly. And we're going to maintain our discipline in terms of how we capitalize on those opportunities

Josh Sullivan -- Benchmark Company -- Analyst

Got it. And then just on the Extrusions. What do you think the cadence recovery looks like? Is there anything in the infrastructure bills or environmental regulation that you see that's suggesting an uptick in any particular products?

Timothy D. Myers -- Chief Executive Officer

I think fundamentally for that business to recover, we need to see the aerospace volumes come back. We're already qualified with those customers on those products. We have some pretty unique assets to service that market, particularly in one of our facilities. So we're continuing -- we've taken a tremendous amount of cost out of that business already with almost 55% of its pre-pandemic sales in aerospace. And the entire decline in our revenue in that business was all aerospace sequentially and approximately 90% of the decline we saw year-on-year. So that's kind of our focus, is continuing to get it to lean and mean. And when that volume comes back, we'll expect to see the margins uplift.

Josh Sullivan -- Benchmark Company -- Analyst

Got it. And then just one last one. On the North America packaging qualifications, can you talk about how many you have in process or how maybe those have moved forward from Q1 or Q2?

Timothy D. Myers -- Chief Executive Officer

So we started shipping our first trial coils last week, in fact. I think we've got -- and I may have missed this, but I think we've got 13 trials scheduled this quarter. So we're making really good progress on getting ready for the new contract.

Josh Sullivan -- Benchmark Company -- Analyst

Got it. Thank you for taking my questions.

Timothy D. Myers -- Chief Executive Officer

Thank you.

Operator

Thank you, sir. Your next question will come from the line of Karina [Phonetic] from Deutsche Bank. The line is now live. Go ahead please.

Karina -- Deutsche Bank -- Analyst

Hey. Good morning, guys.Well done on the first quarter, that was quite impressive result. I mean a lot of my questions have already been answered. So I just have a couple more. Was just thinking, like what do you expect for the rest of the year in terms of working capital assumption? And like how much have you taken into account into the free cash flow guidance?

Timothy D. Myers -- Chief Executive Officer

So we've -- I think we've seen quite a bit of the ramp-up. So I think it should level out. I expect that -- well, if you look at our guidance, we were negative $300 million free cash flow plus in the first quarter. To essentially get back to 0, we're expecting to generate over $300 million as we go through the rest of the year. I guess one thing that we have to keep our eye on is the LME has continued to rise unabated. And that does have an impact on our cash as we ramp up inventory in AR. But I would describe it as steady state moving into the second half of the year.

Karina -- Deutsche Bank -- Analyst

So working capital steady for the second half of the year, that's what you said?

Timothy D. Myers -- Chief Executive Officer

Yes. And then again we'll probably -- obviously, we'll have some ramp-up as we turn the corner into next year as we get into the packaging contracts.

Karina -- Deutsche Bank -- Analyst

Yes, that makes sense. And just -- I mean, the other question is more again on the financial aspect. What do you expect for the like SG&A and corporate expenses for the rest of the year?

Erick R. Asmussen -- Executive Vice President, Chief Financial Officer

Should be relatively flat. I mean, the restructuring efforts that we announced last year have been implemented. So you should see it relatively flat.

Karina -- Deutsche Bank -- Analyst

Okay. And if I may, just one last. And just to try to understand, I mean, obviously, on the packaging contracts, as everyone has mentioned, it's pretty good news. You have like 50% of the incremental volume from Tennessee already committed. I don't think anyone asked the question, but do you expect to allocate more volume from the 600 million pounds toward packaging or do you -- given it was a very successful process for you? Or would you still continue to focus on having roughly half packaging and half industrial?

Timothy D. Myers -- Chief Executive Officer

So the makeup is 50% packaging and 50% industrial and automotive. We're already recognizing a significant amount of the other 300 million pounds. That was a big part of the growth that we saw in the first quarter. If you look at our industrial sales and annualize them for the first quarter, they would equate to $1.4 billion. If you look at the last four years, we've averaged about $1 billion of industrial sales. So now inside of that, you had the metal uplift, but we had 25% kind of growth. And a lot of that is ramp-up of Tennessee. And then some of the automotive sales that we didn't experience in the first quarter, I mean, we were planning on. So we booked volume in automotive and industrial to absorb that other 300 million pounds, and we're well on our way toward ramping it up.

Karina -- Deutsche Bank -- Analyst

Okay. Okay. I mean, another question I have is -- and I know it has been touched at the beginning of the call, but want to understand the impact of the semiconductor. So you said it was maybe about $10 million EBITDA impact for 1Q. And you said you expect it could be greater in 2Q. You have taken that into account for the revised guidance? Which kind of impact have you taken into account into the guidance?

Timothy D. Myers -- Chief Executive Officer

Yes. Let me dimension that a little further, too. I would say the -- if we wouldn't have been able to backfill in the first quarter, it would have been $10 million. I'd say that we probably cut that in half as we pivoted over and backfilled some of that missing volume with industrial. I think that the overall impact of automotive stand-alone will be a little bit greater this quarter, maybe $15 million. But I think that we're going to be able to keep the overall impact around that $5 million this quarter, and that is what we assume in our guidance. And then we're planning on seeing a modest recovery second half versus first half in the semiconductors, but not fully recovered until next year. So that's built into our guidance.

Karina -- Deutsche Bank -- Analyst

Okay. Okay, great. That's it for me. Thank you.

Timothy D. Myers -- Chief Executive Officer

Yes, thank you.

Operator

[Indecipherable]. Your next question will come from the line of Michael Glick from JPMorgan. The line is now live. Go ahead please.

Michael Glick -- JPMorgan -- Analyst

Hey, good morning. Just a quick one for me on capital allocation. How do you think about using your free cash flow for buybacks versus dividends? And then do you view the buyback as more opportunistic or systematic in nature?

Timothy D. Myers -- Chief Executive Officer

Yes. I mean, certainly, we're looking at our projection for the future and where our share price is. And we thought, yes, there's a great opportunity for our shareholders. Clearly, we also think about dividend policy moving forward. At this point, we thought the share repurchase represented a good opportunity for our shareholder. If the stock runs away from us, then we'll keep our powder dry and think through what we want to do with capital allocation as we move through the year and into next.

Michael Glick -- JPMorgan -- Analyst

Thank you.

Operator

Thank you, sir. Your next question will come from the line of Karl Blunden from Goldman Sachs. The line is now live. Go ahead please.

Karl Blunden -- Goldman Sachs -- Analyst

Hey, good morning. Congrats on the strong results and the outlook. I think you already answered part of my capital allocation question, but I was also wondering if there's scope for M&A in your plans and how you think about that at this point given the flexibility you've created on your balance sheet right now?

Timothy D. Myers -- Chief Executive Officer

I would say that the Board is wide open for us. We should start generating quite a bit of cash from this quarter forward. So we will certainly consider opportunities in M&A if they represent a good return for our shareholders. And we'll continue to compare those with the options of investing in our own footprint, looking at initiation of a dividend and whether or not it makes sense to repurchase shares.

Karl Blunden -- Goldman Sachs -- Analyst

Just following up on some of the end markets, the aerospace segment has been weaker, and it's across the industry, it's not specific to yourselves. When you think about your long-term investment plans in that area, have those changed at all based on what you've seen over the last year? Or do you fully expect a rebound and similar plans for investment there as when you split off from the broader enterprise?

Timothy D. Myers -- Chief Executive Officer

Yes. Prior to the separation, our rolling business was really at the end of a pretty significant investment cycle. The last big investment we made was that $100 million investment that we made in Tennessee. That essentially has ramped up. Just before that, we made a couple of sizable investments to support the aerospace market. One of them was a very thick plate stretcher, which, by the way, was one of the assets that allowed us to pick up some new share in the contracts that I just mentioned, the unique capabilities of the structure. And we also expanded our heat treat capacity. So we're fully ready to take on the recovery in aerospace with zero capital investment required.

Karl Blunden -- Goldman Sachs -- Analyst

That's helpful. In packaging, you've spoken about packaging and the ramp in revenues and activity starting next year. I was just curious how that looks mechanically. As you ramp that up, is there a period of lower utilization and some fixed costs that you struggle to spread at that point in time? So basically looking for some kind of -- what's the EBITDA headwind as you go from not fully ramped to getting that business fully up and running?

Timothy D. Myers -- Chief Executive Officer

Well, first of all, our cost structure is 85% variable. We've got a cold mill that's sitting there, waiting for a crew. So we start ramping up the crew as we're bringing the volume in. I wouldn't see a lot of friction there. We will have a ramp-up quarter at the beginning of 2021. And if you think about that $1.5 billion in contracts over the three years, kind of think 25% next year and 35% in 2022 and 40% -- in 2023 and 40% in 2024. But we'll be flexing our labor up and we've already got the management team on the floor down in Tennessee. So there won't be a lot of additional fixed costs going into the plant.

Karl Blunden -- Goldman Sachs -- Analyst

That's helpful. Thanks very much.

Operator

Thank you, sir. And I am showing no further questions at this time. I would now like to turn the conference back to Mr. Tim Myers for your closing remarks.

Timothy D. Myers -- Chief Executive Officer

Okay. Well, in closing, I'd like to summarize. First of all, thank you again for joining us today. We appreciate your interest. In closing, we delivered a strong financial start to the year. We've increased our outlook for 2021 with adjusted EBITDA up 18% year-over-year, at the center of the range. We secured $3.5 billion in new business. We announced a $300 million share repurchase program. We reduced $1 billion in legacy liabilities, opening the door to strong free cash flow conversion. And we have our eyes on $1 billion in adjusted EBITDA in the not-too-distant future. We're excited to tell you about our prospects, and I look forward to updating you all again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Shane Andrew Rourke -- Director of Investor Relations

Timothy D. Myers -- Chief Executive Officer

Erick R. Asmussen -- Executive Vice President, Chief Financial Officer

Curt Woodworth -- Credit Suisse -- Analyst

Josh Sullivan -- Benchmark Company -- Analyst

Karina -- Deutsche Bank -- Analyst

Michael Glick -- JPMorgan -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

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