Elliott Management’s presentation on Arconic Inc (ARNC).

ALso see 2017 Hedge Fund Letters

Arconic Inc. (NYSE: ARNC) Snapshot

Elliott Management Arconic Arconic is a supplier of multi-material sub-components and fabricated aluminum to the aerospace, automotive, commercial transportation, building and construction and industrial end-markets

The Company is organized into three segments each consisting of multiple business units

  • Engineered Products & Solutions (EPS) – 46% of revenue, 58% of profits, 99 facilities, ~24k employees Multi-material fasteners, rolled rings, investment castings, forged sub-components (such as jet engine disks) and titanium mill products into aerospace (75% of segment revenue) and industrial end-markets
  • Global Rolled Products (GRP) – 39% of revenue, 28% of profits, 12 facilities, ~11k employees Rolled aluminum sheet and plate products serving automotive, aerospace and industrial end-markets
  • Transportation & Construction Solutions (TCS) – 15% of revenue, 14% of profits, 46 facilities, ~6k employees Wheel & Transportation Products – cast aluminum wheels for trucks (~38% of TCS); Building & Construction Solutions – aluminum architectural products (~56% of TCS) and Latin American Extrusions (~6% of TCS)

 

Elliott Management Arconic

About Elliott Management

Elliott is an investment firm founded in 1977 that today manages approximately $33 billion of capital for both institutional and individual investors. Elliott’s staff of over 400 employees combine a culture of thoroughness, hard work and creativity, with a focus on long-term value creation

Elliott’s Research and Perspectives on Arconic

Over the last two years, Elliott has performed exhaustive research on the prospects, competitive positioning and valuation of Arconic, a process which included spending tens of millions of dollars, enlisting legal counsel, external consultants and investment banks to advise us, as well as speaking with customers, opinion leaders, engineers, metallurgists, competitors, former employees, senior executives within the various industries that the Company competes, sell-side analysts, corporate governance experts and other investors

Elliott Is a Long-Term Investor in Arconic

We have a 13.2% economic ownership in Arconic, valued at over $1.6 billion. Our commitment to Arconic is demonstrated by the substantial investment we have made in the Company

Our conclusion from our analysis is clear: Arconic’s assets are dramatically undervalued and managerial change is needed to unlock the Company’s full potential for the benefit of all stakeholders

Executive Summary

Why Are We Here?

A company is a collection of people and assets organized by a set of processes to enable the production of goods and services which earn profits sufficient to deliver the requisite compensation to employees and the necessary returns to the providers of capital

It is the role of management to:

  1. Achieve Operational Excellence: Get the most out of employees and assets in the organization while delivering top quality to customers;
  2. Manage Talent: Ensure the organization has the right people; and
  3. Prudently Reinvest: Deploy the profits earned in a manner that produces returns to the providers of capital

It Is The Role Of A Board To Ensure That Management Is Held Accountable

Weare here today because we believe Arconic’s management isn’t succeeding at any of these tasks and yet the Board has failed to act

For more than a year, Elliott has engaged in private discussions with the Company regarding the numerous ways in which Arconic could improve long-term performance. While we have appreciated the dialogue and remain excited about the Arconic opportunity, we believe a change in management and Board leadership is needed to enable the Company to sustainably create value

Elliott Management Arconic

Shareholders deserve new leadership capable of generating sustainable long-term value

What Is Wrong at Arconic?

Under the current CEO and under much of the current board:

Abysmal TSR

  • Shareholders’ investments were decimated, losing nearly 70% of their value
  • The Company has performed poorly against any peer set over any time period

Poor Operational and Financial Results

  • Billions in dollars of capital has been invested but has generated little or no return
  • Management’s largest acquisition ($3 billion) has been an abject failure
  • Targets have been missed repeatedly, including all targets in all three businesses for FY 2016

Broken Company Culture

  • A CEO-centric, consultant-driven, image-obsessed culture has taken hold
  • Consistent with that imperial culture, a value-creating split (which shareholders and analysts had long demanded) was delayed for almost a decade until Elliott’s stake building had begun

Poor Governance and Lack of Accountability

  • Shareholder rights have been deliberately frustrated by poor corporate governance practices
  • $128 million in compensation was lavished upon the CEO by the Board
  • Company assets were used to secure favorable proxy votes

Worst of all, neither the current CEO nor the Board acknowledges a problem, they suggest that:

  • The CEO saved the Company
  • Performance has been outstanding
  • Targets have been achieved
  • Good governance is valued
  • Using Company assets to buy proxy votes is acceptable

Arconic’s problems are profound

Elliott Management Arconic

Total Shareholder Return: Poor Performance Against Any Peer Set

Dr. Kleinfeld is unambiguously one of the worst performing continuously tenured CEO’s in the U.S.

Elliott Management Arconic

The Company’s broken culture and incoherent strategy led to both poor asset utilization as well as poor operating performance, ultimately resulting in abysmal TSR

See the full presentation below.