Constellium Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2023

There are 11 speakers on the call.

Operator

Hello, and welcome to today's Constellium Second Quarter 2023 Results Call. My name is Bailey, and I'll be the moderator for today's call. All lines will be muted during the presentation portion with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Jason Hershiser, Director of Investor Relations. Jason, please go ahead.

Speaker 1

Thank you, Bailey. I would like to welcome everyone to our Q2 2023 earnings call. On the call today, we have our Chief Executive Officer, Jean Marc Germain and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q and A session. A copy of the slide presentation for today's call is available on our website atconcellium.com, and today's call is being recorded.

Speaker 1

Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events And expectations that may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed In the forward looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20 F. All information in this presentation is as of the date of the presentation.

Speaker 1

We undertake no obligation to update or revise any forward looking statement as a result of new information, In addition, today's presentation includes information regarding certain non GAAP financial measures. Please see the reconciliations of non GAAP financial measures attached in today's slide presentation, which supplement our IFRS disclosure. I would now like to hand the call over to John Marks.

Speaker 2

Thank you, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's begin on Slide 5 and discuss the highlights from our Q2 results. I would like to start with safety, our number one priority. After a strong Q1 performance, our recordable case rate climbed in the Q2, leading to a rate of 1.9 per 1000000 hours worked For the first half of the year, this is a humbling reminder that while we always strive to deliver best in class Safety performance, we need to constantly maintain our focus on safety to achieve the ambitious targets we have set.

Speaker 2

It is a never ending task for our company and one we take very seriously. Turning to our financial results. Shipments were 398,000 tonnes, down 6% compared to the Q2 of 2022 Due to lower shipments in PARP and AS and I, revenue of €2,000,000,000 decreased 14% Compared to last year, as improved price and mix was more than offset by lower shipments and lower metal prices. Remember, While our revenues are affected by changes in metal prices, we operate a pass through business model, which minimizes our exposure to metal price risk. Our value added revenue, which reflects our sales excluding the cost of metal, was €785,000,000 up 11% compared to the same period last year.

Speaker 2

Our net income of €32,000,000 in the quarter Compared to a net loss of €32,000,000 in the Q2 last year. As you can see in the bridge On the top right, adjusted EBITDA of €209,000,000 in the quarter was up 5% compared to last year And is a new quarterly record for the company. A and T adjusted EBITDA is a new quarterly record as well and increased €33,000,000 compared to last year. Parf adjusted EBITDA decreased €16,000,000 and AS and I adjusted EBITDA decreased €7,000,000 in the quarter compared to last year. Looking across our end markets, Aerospace demand remains very strong with shipments up 30% compared to last year.

Speaker 2

The recovery in automotive Continued with the higher shipments in both rolled and extruded products versus last year. Packaging shipments were down in the quarter As demand remained below prior year levels and we continue to experience weakness in most industrial markets. We continue to face significant inflationary pressures, which Jack will discuss in more detail. But thanks to our pricing power, contractual protections, improved mix and solid execution by our team, we are managing the current environment well. Moving now to free cash flow.

Speaker 2

Our free cash flow in the quarter was strong at €68,000,000 We remain Committed to generating positive free cash flows and deleveraging. As you can see on the bottom right of the slide, our leverage at the end of the second quarter was 2.7 times Or down 0.3 times from the end of the second quarter last year. Overall, I am very proud of our 2nd quarter performance. Looking forward, we like our end market positioning, and we are optimistic about our prospects for the remainder of this year and beyond. Based on our strong performance in the first half of this year and our current outlook for the second half, we are raising our guidance and expect adjusted EBITDA In the range of €700,000,000 to €720,000,000 and free cash flow in excess of €150,000,000 In 2023, our outlook assumes no major deterioration on the macroeconomic or geopolitical fronts.

Speaker 2

We also remain confident in our ability to deliver our long term target of adjusted EBITDA over €800,000,000 in 2025. Before I turn the call over to Jack, I wanted to comment quickly on our recently announced divestiture. Last week, we announced the sale of our soft alloy extrusion in Germany For a total cash consideration of €48,800,000 the 3 plants specialize in soft alloy extruded products for the building and construction, Transportation and Industry Markets in Europe. This transaction will allow us to further streamline our portfolio of strategic assets And strengthen our focus on our core end markets. We expect the transaction to close in the second half of this year.

Speaker 2

With that, I will now hand the call over to Jack for further detail on our financial performance. Jack?

Speaker 3

Thank you, Jean Marc, And thank you, everyone, for joining the call today. Please turn now to Slide 7. Value added revenue was €785,000,000 in the 2nd quarter, a new quarterly record for the company and up 11% compared to the same quarter last year. Looking at the 2nd quarter, €156,000,000 of this increase was due to Metal impact were a headwind of €22,000,000 compared to the same period last year. The balance of the change was largely due to unfavorable FX translation.

Speaker 3

There are 2 important takeaways from this slide. First, we grew our value added revenue by 11% compared to last year. And second, we continue to have pricing power. Price and mix and price specifically It's the biggest increment of our year over year variance and helped us offset inflationary pressures. Now turn to Slide 8.

Speaker 3

Let's focus on our Parp segment performance. Adjusted EBITDA of €79,000,000 decreased 17% compared to the Q2 last year. Volume was a headwind of €13,000,000 with higher shipments in automotive, more than offset by lower shipments in packaging and specialty roll products. Automotive shipments increased 16% in the quarter versus last year as new platforms continue to ramp up And demand generally appears stronger. Packaging shipments decreased 12% in the quarter versus last year Due to inventory adjustments across the supply chain in both North America and Europe and lower demand at the consumer level, Price and mix was a tailwind of €52,000,000 primarily on improved contract pricing, including inflation related past due.

Speaker 3

Costs were a headwind of €53,000,000 as a result of higher operating costs due to inflation, Operating challenges at Muscle Shoals and unfavorable metal costs. Now turn to Slide 9, and let's focus on the A and T segment. Adjusted EBITDA of €96,000,000 increased 53% compared to the Q2 last year. Volume was stable as higher aerospace shipments offset lower TID shipments in the quarter. Aerospace shipments were up 30% versus last year as the recovery in aerospace markets continues.

Speaker 3

Shipments in TID were down 15% versus Last year, reflecting a slowdown in most industrial markets, particularly in Europe, partially offset by Strong demand in other markets like Japan. Price and mix was a tailwind of €68,000,000 on improved contract pricing, Including inflation related past dues and a stronger mix with more Aerospace. Costs were a headwind €33,000,000 as a result of higher operating costs, mainly due to inflation and continued ramp up in activity levels. Now let's turn to Slide 10 and focus on the AS and I segment. Adjusted EBITDA of €39,000,000 decreased 15% compared to the Q2 last year.

Speaker 3

Volume was €9,000,000 headwind with higher shipments in automotive, more than offset by lower industry shipments. Automotive shipments increased 7% in the quarter versus last year as we continue to experience improvement in activity levels. Industry shipments were down 19% in the quarter versus last year as a result of weaker Market conditions in Europe. Price and mix was a €21,000,000 tailwind, primarily due to improved contract pricing, Including inflation related pass throughs, costs were a headwind of €19,000,000 Higher operating costs mainly due to inflation. Now turn to Slide 11, where I want to give an update on the current In the Q2 and as expected, we experienced broad based and significant inflationary pressures across our business.

Speaker 3

As you know, we operate a pass through business model, so we're not materially exposed to changes in the market price of aluminum, our largest cost input. That said, other metal and alloy supply remains tight today. And while we're confident about the security of supply, some of it does come at a higher cost. In addition, Labor and other nonmetal costs will also be higher this year, particularly European Energy. As previously noted, We purchased energy on a multiyear rolling forward basis, which has helped us to mitigate some of the energy cost pressures And helped us to smooth out some of the steep increases in costs.

Speaker 3

As a reminder, our 2023 energy costs are largely secured, But at higher average prices, both electricity and gas forward energy prices in Europe have come down from their 2022 peaks, but still remain well above historical averages. Given these cost pressures, We continue to work across a number of fronts to mitigate our impact on our results. We have demonstrated Strong cost performance in the past years, and we will continue our relentless focus in 2023, including Continued execution on our previously announced Vision 25 initiative. Across the company, we're working to increase our efficiency, Reduce our consumption of expensive input and lower our fixed costs. As we previously noted, Many of our existing contracts have inflationary protection, such as PPI inflators or surcharge mechanisms.

Speaker 3

And where they do not, We're working with our customers to include them. We have made very good progress across all of our end markets. As you can see in the bridge on the right, in the first half of this year, we were very successful with price and mix, The largest increment being price being offsetting inflationary pressures. As of today, we still expect Inflationary pressures to remain significant at least through the end of this year and at a comparable level to 2022. We continue to believe that we will be able to offset most of this cost pressure in 2023 And the rest in future periods with the combination of the tools we noted and our relentless focus on cost control.

Speaker 3

The net impact of inflation and other cost increases and the actions we're taking to offset them are included in our guidance for 20 Now let's turn to Slide 12 and discuss our free cash flow. We generated €68,000,000 of free cash flow in the 2nd quarter, bringing our year to date total to €34,000,000 As you can see on the bottom left of the slide, we have continued to deliver on our commitment to generate Consistent, strong free cash flow and enhance our financial flexibility. Looking at 2023, We now expect to generate free cash flow in excess of €150,000,000 for the full year. We expect CapEx to be between €340,000,000 €350,000,000 cash interest Approximately €120,000,000 and cash taxes of approximately €30,000,000 all in line with our previous guidance. Lastly, we now expect working capital to be a modest use of cash for the full year.

Speaker 3

Now let's turn to Slide 13 and discuss our balance sheet and liquidity position. At the end of the second quarter, Our net debt of €1,900,000,000 decreased slightly compared to the end of 2022 Given the €34,000,000 of free cash flow generated in the first half and favorable noncash FX translation of €21,000,000 With the weakening of the U. S. Dollar, our leverage reached a multiyear low of 2.7 times at the end of the second quarter We're down 0.3x versus the end of the second quarter last year. We remain committed To achieving our leverage target of 2.5x and maintaining our long term target leverage range of 1.5x to 2.5x.

Speaker 3

As you can see in our debt summary, we have no bond maturities until 2026, And our liquidity remains strong at €752,000,000 as of the end of the second quarter. Last week, we completed the redemption of $50,000,000 of our 5.875 U. S. Dollar bonds due in 2026, further strengthening our balance sheet. We're very proud of the progress we have made on our capital structure And of the financial flexibility we're building.

Speaker 3

I will now hand the call back to Jean Marc.

Speaker 2

Thank you, Jack. Let's turn to Slide 15 and discuss our current End market outlook. The majority of our portfolio today is serving end markets currently benefiting from durable, Sustainability driven secular growth. The important takeaway here is that aluminum is a catalyst behind this secular growth, Given its sustainable attributes, aluminum is infinitely recyclable and does not lose its properties when recycled. As a result, Aluminum will play a critical role in the circular economy and will be a driver of growth in lightweighting, Electrification and Sustainable Packaging.

Speaker 2

So turning first to packaging. During the quarter, the inventory adjustments Continued across the supply chain in both North America and Europe. We are also seeing demand weakness in both regions As a result of the current inflationary environment, the lack of promotional activity and following a multiyear period of rapid growth during COVID. Even in today's environment, where we are seeing weaker demand in packaging markets, aluminum cans continue to outperform Other substrates like plastic and glass. We are confident in the long term outlook for this end market, though, Given capacity growth plans from can makers in both regions, the greenfield investments ongoing here in North America And a growing consumer preference for the sustainable aluminum beverage can.

Speaker 2

Longer term, we expect packaging markets to grow low to mid single digits in both North America and Europe. We will participate in this growth in both regions As we announced at our Analyst Day last year, the company remains highly focused on stabilizing the operating challenges we have been experiencing at Muscle Shoals, so that we can take advantage of these end market dynamics here in North America. We're encouraged by the improved performance we have seen recently at Muscle Shoals And remain confident in our ability to restore the plant's profitability over the course of 2023. Turning now to Automotive. OEM sales and production numbers globally have increased the last several quarters, but remain well below pre COVID level.

Speaker 2

Automotive inventories are low, consumer demand remains high and vehicle electrification and sustainability trends We'll continue to drive the demand for lightweighting and use of aluminum products. As a result, we remain very positive in this market, And increased demand in both rolled and extruded products give us reason for optimism. Let's turn now to Aerospace. The recovery in aerospace continued in the quarter with shipments up 30% versus last year, though still well below pre COVID levels. Major OEMs have announced deal rate increases in the short term and the desire for further increases in the medium term.

Speaker 2

We remain confident that the long term fundamentals driving Aerospace demand remain intact, including growing passenger traffic and greater demand for new, More fuel efficient aircraft. In addition, demand is strong in the business and regional jet markets and the defense and space market. As the chart on the left side of this page highlights, these 3 core end markets represent 77% of our last 12 months revenue. We like the fundamentals in each. And as I have said in the past, we like our hand and the options it affords us.

Speaker 2

Turning lastly to specialties. We expect weakness to continue in most industrial markets. And in general, These markets are dependent upon the health of the industrial economies in each region. Overall, demand has been more stable in North America than in Europe. In TID Rolled Products, demand remains strong in markets like defense and in transportation in North America.

Speaker 2

In Industry Extrusions, while demand is strong in some sectors like solar, demand remains weak in most other markets. It is also of note that many of the sustainability trends supporting growth in our core markets are very much at play here in other specialties Constellium is well positioned today with our diverse and balanced portfolio to capture the secular growth fueled by sustainability. In summary, we continue to like the prospects for the end markets we serve, and we strongly believe that the diversification of our end markets Turning to Slide 16, we detail our key messages and financial guidance. Constellium delivered strong I am very proud of our entire team as we achieved solid operational performance and strong cost control Despite a number of challenges, including significant inflationary pressures, looking forward, 2023 continues to be a challenging year, Given the extraordinary inflationary pressures we are facing and the demand weakness in some of our end markets like packaging and other specialties. As Jack noted, we are still expecting significant inflationary pressures in 2023, but we remain confident in our ability to pass through most of these costs In 2023 and the rest in future period.

Speaker 2

Based on our strong performance in the first half of this year and on our current outlook for the second We are raising our guidance and expect adjusted EBITDA in the range of €700,000,000 to €720,000,000 And free cash flow in excess of €150,000,000 in 2023. As a reminder, Our outlook assumes no major deterioration on the macroeconomic or geopolitical front. I also want to reiterate our long term guidance of adjusted EBITDA in excess of EUR 800,000,000 by 2025 And our target leverage range of 1.5 times to 2.5 times. And let me add, this guidance is based on our current energy positions, Including higher forward energy prices as of today. As inflationary pressures subside, We believe we will emerge an even stronger company.

Speaker 2

Our business model provides a strong foundation for long term success, And we believe we have substantial opportunities to grow our business and enhance profitability and returns. We have a diversified portfolio, and our end market positioning will enable us to take advantage of sustainability driven secular growth trends, Such as consumer preference for infinitely recyclable aluminum cans, light weighting in transportation, the electrification of the automotive fleet And the increased focus on recycling. The Constellium team has demonstrated its resilience and ability to execute across a range of different market conditions, And I am confident we will continue to do so. We remain focused on executing our strategy, driving operational performance, generating free cash flow, Achieving our ESG objectives and shareholder value creation. In conclusion, I remain very optimistic about our future.

Speaker 2

Lastly, and it is not on the slide here, but before we open it up for Q and A, I wanted to congratulate Ingrid Jorg. I'm very pleased to announce that I have appointed Ingrid to Executive Vice President and Chief Operating Officer. This new and exciting role will allow us To continue to strengthen our organizational structure and focus and develop our people. In our new role, Ingrid will continue to work closely with me in the coming years to drive further value creation for the company. INGRID will operationally head Constellium's 3 business units, driving sustainable growth, operational efficiencies And world class safety performance.

Speaker 2

Ingrid has served very successfully, as you can see, as the President of Constellium's N and T Business Unit since June 2015. With that, operator, we will now open the Q and A session.

Speaker 4

Thank

Operator

you. Our first question today comes from the line of Katja Janik from BMO. Katja, please go ahead. Your line is now open.

Speaker 5

Hi. Thank you for taking my questions. The margin

Speaker 6

in the

Speaker 5

A and T hello. Margin in the A and T segment remains very strong. Previously, you said through the cycle margin in that Business should be somewhere between €800,000,000 to €900,000,000 per ton. Is it still does that still hold? Or Have margins structurally increased?

Speaker 3

Yes. Thank you for the question, Katya. A and T, you're right. In the Q1, we mentioned a margin a cycle average margin €800,000,000 to €900,000 per tonne, and it will stay high, in this upcycle environment. So that's certainly what we Saw in the Q2 with better price and mix and with more Aerospace as having a higher margin Compared to the TID business, but also in the Q2, we have a better mix within our aerospace product Portfolio towards some of the more technically demanding products, which obviously hold a premium.

Speaker 3

The business also had solid cost control in the Q2 relative to the increased levels of activity. With 2 quarters in, we believe we can maintain attractive margin for this business, certainly for this year, and that provides some Upside for margin throughout the cycle. So our view today is there's €100 per ton upside to the €800 to €900,000,000 to €900,000,000 euro per tonne guidance we gave to you last quarter.

Speaker 2

So yes, we think structurally margins are up around the €1,000 per tonne.

Speaker 5

And in the second half of the year, should we see some easing, I'm assuming, in margins?

Speaker 3

There could be some easing just given the seasonality of the business and the cost is continuing to catch up in this business unit. But we're optimistic about the margin profile for this business.

Speaker 2

But this year will be over the average of the cycle, and so on.

Speaker 5

Okay. That's fair. Now your leverage is approaching your target. Can you remind us once you reach that target How you're going to be thinking about the capital allocation?

Speaker 3

Yes. So, look, I mean, our Overall objective is to increase our financial flexibility because that will kind of help open up capital deployment options and allow us to maintain A balanced, I would say, a balanced capital allocation policy. So as we reach our leverage target, it certainly opens up more options, including returning cash to shareholders.

Speaker 5

Thank you very much.

Speaker 3

Thank you.

Operator

Thank you. Our next question today comes from the line of Bill Peterson from JPMorgan. Bill, please go ahead. Your line is now open.

Speaker 6

Yes. Hi. Good morning, and thanks for taking the questions. It's great to see the upward guidance revisions. Yes, good morning.

Speaker 6

It's great to see the upward guidance revisions. What is I guess, what has changed since the prior outlook that gives you confidence in the revisions? And I guess given the higher free cash flow guidance, can we expect accelerated debt pay down from here?

Speaker 2

Yes. So Bill, I'll get started and Jack will help me. So the visibility has improved as the year progresses. That's number 1. We are extremely pleased with our performance in Aerospace.

Speaker 2

And as I we mentioned in response to Katya's Question. It's not a flash in the pan. There is much more room to grow, and we that's why we're raising also our expected average margin For this segment, and we're seeing a very good mix within Aerospace, where, as you saw, customers like us, we get some Fantastic awards as best suppliers from them, and that means more business for us. So very strong fundamentals overall in aerospace and Even better for us as a supplier, as a preferred supplier to our customers. So that's definitely a Strong contributor to the increased guidance.

Speaker 2

In Packaging, the first half was rough with demand being down. We expect the second half To be less rough, and that's based on our order book and what we're seeing. So by contrast, H1 of 2022 to H1 of 2023, That was difficult. We expect H2 to H2 to be much better in terms of comparison. Still not where We like it to be in the long run, but making some progress.

Speaker 2

And automotive, as you saw, continues to be strong for us. It's a very good year. I think we're seeing both the strength in the underlying market, but also the continued penetration of aluminum and automotive. So all these are giving us good reasons for the increased guidance. Now at the same time, it is striking to See that our Specialty segment are suffering from a quasi or completely recessionary environment.

Speaker 2

Inflation continues to be strong and eating into our cost base. So it's we're extremely pleased with the outlook we're giving and sharing with you today because there are still quite a few Headwinds that we are faced with and despite this, we're increasing our guidance. So yes, the increased guidance translates into On the EBITDA side, translates into more cash flow that gives us more flexibility. And I don't know if Jack, you want to add anything to my comments. I think that's good.

Speaker 2

Okay. And as you saw, we'd like to pay down some debt, so we'll see what we do in the future.

Speaker 6

Okay, great. Thanks for that. And I guess You kind of mentioned some of the issues around inflations. And I know it's I know that a lot of the mitigation efforts and inflation is captured in your full year EBITDA view. But I guess if we think about some of the bigger items you mentioned like energy or metals, there's still, I guess, inflationary pressure at some of the sites.

Speaker 6

But I guess what specifically is the team doing to mitigate these? And I guess can you provide an initial view on how to think about these cost headwinds as we move into next year?

Speaker 2

Yes. So on Energy, we think we have crested. And actually, at the moment, given our hedge positions, we are paying a bit Higher than we're paying higher than the spot prices would be on average. So as those hedges roll off and hopefully the spot prices continue to be What happens in the future, we should see a decrease in energy cost. I'm hopeful that's what happens.

Speaker 2

But anyway, that's what we're expecting going into next year. On metals, I think we're seeing Inflation subside, but they are still much higher. I mean, magnesium is a multiple times more expensive today than it was back in 2020 or 2019, right, pre pandemic. So we see these elevated costs to continue. So in terms of mitigation measures, And I could go on and on about different pockets of costs that are going up with inflation.

Speaker 2

We all live that in our business and consumer life, I would say. So in terms of mitigation measures, the first one is making sure we are getting paid by our customers The reality of the new costs that we are faced with. And as I said, there's been a fantastic job done by the to reflect the increased cost into our pricing, but there is a lag to that. So you haven't seen yet the full impact of the price increases. The second item is we've got to be much more economical in our use of resources, which is a good thing actually.

Speaker 2

So it's forcing us to On the front burner, questions like how do we save energy? How do we better operate our plants? How do we improve our recovery so that every cost item, every use of resource is minimized? And there's a that's a lot of work grinding through every opportunity to minimize the use of resources within And then the third aspect is more strategic and longer run is we have to go And continue on our path towards more value added products. And a big element of that is making sure we have the right product mix, We focus on those products that have better margins, that are more constructive in the long term, so that The value of what we're making is more recognized in the market.

Speaker 2

And that's one of the reasons why we commented we announced the sale of the 3 Extrusion plants in Germany that were focused on lower margin products, we thought This is a kind of market where it may be a little bit more difficult in the future to face increased cost base, And we found a buyer that use them as a strategic asset. Well, the buyer found us actually. We were not auctioning off these assets. And that's part of the steps we take to continually make sure we got the right cost base and we participate in the right market.

Speaker 6

Great. Thanks for the insights, and nice job on the quarterly execution.

Speaker 2

Thank you, Bill.

Operator

Thank you. The next question today comes from the line of Curt Woodworth from Credit Suisse. Please go ahead, Kurt. Your line is now open.

Speaker 7

Yes, thanks. Good morning, John, Mark and Jack, Hope you're Well. I wanted to come at the sort of A and T margin profile maybe a little bit differently. I mean, as you think about Going forward the next couple of quarters and then next year, aerospace clearly is going to grow much faster than TID. So I would think that your mix, all else equal, would be improving, your fixed cost absorption would be Improving.

Speaker 7

And then at some point, I would think, given some of the increases potentially on the wide body side of the market, That would also be accretive to mix. So is that a fair characterization to think that your mix within that segment should be improving? And I know Airwear and some of the extremely high margin products you do can create a lot of quarter to quarter volatility. So was there anything that was kind of Extremely unique in this quarter that you could call out that, say, wouldn't repeat next quarter?

Speaker 2

Yes. So you're right that on a broad base, the more Aerospace we do in the mix compared to TID, that will drive up The average margin because the Aerospace margins are higher than TID. And on a go forward basis, as we're seeing The aerospace recovery is strengthening and strengthening, that's going to come into play. It's true that we've got some within aerospace, there is also a Micromix, so to say, with some products that are extremely profitable. But remember, they required quite significant investments in the past.

Speaker 2

So it's fair that they are much more profitable. And we've had strong demand in the Space in defense and the higher end of the products, we expect that to continue. But yes, there can be some fluctuation. So overall, I think Jack mentioned earlier, we're expecting for this year margins in the A and T segment That continue to be above the revised long term average that we mentioned, above the €1,000 per tonne, But they may come off a little bit from what we've seen in Q1 and Q2, which are seasonally strong quarters.

Speaker 3

Yes, Kurt. I would just add, I agree with everything Jean Marc mentioned. And certainly, more Aerospace will be helpful Contributive from a margin perspective. So remember, the TID business is down this year in the first Half compared to the first year first half of sorry, first half of this year versus the first half of last year, right? It's down somewhere around 15%.

Speaker 3

As that part of the A and T business rebounds, recovers, that will eat into the margin As well.

Speaker 7

Okay. Yes. And then on Packaging, are you seeing any evidence that some of the destocking is over? I mean, it seemed like you were intimating that the second half would be Better on a comp basis. And then with respect to the Phase 1 expansion plan, which I think was 200,000 tons by 2025 and that was So it will be layered in.

Speaker 7

Is that do you still feel confident that you can get that incremental volume by 2025? And just kind of update us on where you stand with that? Thanks very much.

Speaker 2

Yes. So in the short term, we're seeing some signs of improvement in packaging, pointing towards end of destocking. So that's why we're saying the comp will be we expect the comp to be better going into H2 than it was in With regards to the 200,000 tonnes of additional capacity that we I like it at the Analyst Day back in April of 2022. Remember, it's a 26% really Increase, right, by the end of 2025, that should be the increase we have in capacity. Given the fact that the market has taken Step back, maybe it's going to be a little bit more gradual.

Speaker 2

And we always want to maintain flexibility in our capital allocation so that we can accelerate some projects or So down some projects and within the same envelope of capital expenditures that we have mentioned. So we'll have to see how it goes. There is no fundamental reason to not meet that 200,000 tonnes of extra capacity. It may come a little bit more slowly than what we initially thought, but that's because The markets may not need it as quickly, and we've got other opportunities elsewhere. But we're really talking about tweaking at the edges here.

Speaker 2

The fundamentals are not changing.

Speaker 7

Okay, great. And maybe just a quick one on Part of the quarter, you outlined $53,000,000 of incremental costs, which, is a pretty substantial delta. You outlined 3 buckets between metal costs, muscle shoals and then just dermal inflation. Could you maybe Add a little bit more granularity in terms of the bucket breakout and then just update us on how you see cost progression in the back half of the year in part.

Speaker 3

So Kurt, I think you're right. The cost pressure continued to be high for our businesses, including Parp, I would say. And inflation, it really stayed high in this quarter, and it was broad based for Parib and for some of the other For the other 2 BUs as well, and that continued to be have an adverse impact across a number of categories that Jean Marc was mentioning. So I would say inflation is a big piece of that minus 53% that you mentioned. But at the same time, operating Costs outside of inflation, has increased as well with more labor, more maintenance, more subcontracting, if you will, and some of the other Operating cost categories, but they're generally, I would say, kind of more contained relative to the higher activity levels.

Speaker 3

So I think we're okay there. Muscle Shoals maintenance. It's while it's still high, It's more under control this quarter, and the team is working really hard to bring the plan back to normal. And the impact, as we mentioned, in

Operator

Thank you. The next question today comes from the line of Timna Tanners from Wolfe Research. Timna, please go ahead. Your line is now open.

Speaker 4

Yes. Hi. Hello, and thanks for the great detail. I wanted to dive a little bit in, not Away from the strength in auto and aerospace, but the packaging and building construction markets that have shown a bit more weakness. So starting with Packaging, on the Investor Day a little over a year ago, you talked about 4% to 5% growth.

Speaker 4

Now you're talking about low to mid single digit. Is that a change? And If so, like is there anything structural that should give us some pause in terms of the extent of upside to packaging? I know you talked about near term less destocking, but If we think out to the future, is the growth story a little more muted than we thought? If you can provide some more color there.

Speaker 2

Yes. Timna, I think it's I would qualify it as tweaking around the edges here because the 1% difference in growth rate doesn't impact so much, Certainly not a 2025 outlook nor even a 28 outlook. So no, and I think it's more a reflection of the fact that Because we have had that kind of setback with the reduction in volume this year, we think that The long term growth rate may be a little bit more muted because otherwise that would imply a very significant catch up very soon in packaging. So it's more kind of the arithmetic of how we look at the packaging market long term. We continue to think it's a Good market.

Speaker 2

The cans continue to win share, to gain share against other substrates, But the past may be a little bit more moderate, but still very attractive to us.

Speaker 4

Okay. Thanks. And the German sale that you detailed, what does that say about the building construction market outlook? Because It seemed to us that maybe that was near a bottom. So but you're also exiting it.

Speaker 4

And so I'm just wondering what we should take away from that in terms of your outlook for that segment.

Speaker 2

Well, there was an opportunity to take sales. So building and construction, as you know, is not a big market for us, right? It's Couple of percent of our total sales as a company. So it's certainly not an area of focus for us. What happened here is we got these 3 plants.

Speaker 2

We have actually improved performance of these 3 plants quite a Fair amount in the past 5 years. And we had somebody come to us and say we're interested in buying them. We want to expand in the German market. So you got a situation where we as a company don't view these plans as strategic, and we've made a nice Improvement in profitability, and we got a buyer who's interested in them and places a higher value And we do on this business. And then it's a matter of if we keep a business, we will have to put some capital expenditures in.

Speaker 2

Is it the best return for us? We don't think so. And therefore, the decision was relatively easy once it was clear that the buyer was Putting a higher value on the assets than we did, it made sense to tell them. So it wasn't so much about We're afraid of the outlook in Building and Construction. It's just that it was the right thing to do for us at the right time.

Speaker 3

Timna, I would just reemphasize what Jean Marc mentioned earlier. We didn't put this business On the market, this was not a far sell, if you will. It was really an optimistic transaction. It's been years in the Right. Just the timing kind of worked out the way it did.

Speaker 3

And the business is a better fit in the buyers' portfolio than in our portfolio.

Speaker 4

No, that's helpful color. Thank you. Makes a lot of sense. If I could squeeze one more in. I was interested in your talk about potentially pushing in the pushing out Some of the expansion to 2026, as you know, there's what, 3 new mills that are kind of targeting that same timeframe.

Speaker 4

So I just wanted to ask if you're seeing any evidence of them in the market starting to talk about contract extensions or if there's any influence on of the new mills in your

Speaker 2

No, there isn't. And as we said, we are fully contracted out And we are through 2026, and we've got contracts that go into 2027, 2028, 2029. So it's more a matter of us looking at What do we think the long term forecast is? And how quickly do we need the extra capacity? Because we need it.

Speaker 2

But the question is, Do we need it in January 24, 25, 26? And we don't want to spend the money Sooner than we need, and we certainly don't want to spend it later than we need because otherwise we'd be not meeting our contractual commitments. So it's really about Talking with our customers through their expectations and getting a sense of what do we need to do when. But again, those volumes are contracted.

Speaker 4

Got it. Okay. Thanks again.

Speaker 2

And as you know, there is a margin tolerance, right, typically within a contract. So it's not like it's Absolutely firm amount of tons, right? So there's a margin and we're talking of playing within that margin, that tolerance Around the contract and looking at the markets are served will delay it a bit. If the markets are strong, we'll put it forward.

Speaker 4

Got it.

Speaker 2

Thank you. Thank

Speaker 3

you.

Operator

Thank you. The next question today comes from the line of Corinne Blanchard from Deutsche Bank. Corinne, please go ahead. Your line is now open.

Speaker 8

Hey, good morning, everyone. I want to come back to the guidance, and I know there has been a

Speaker 5

lot of questions.

Speaker 8

But Was the guidance lift mostly driven by the performance of 1Q and 2Q Implying kind of relatively unchanged assumption for the second half of the year, is that a correct assumption of it?

Speaker 3

No, I wouldn't say that. I would say, yes, partially driven by the in the first half. And then when we look at the second half, we do expect some of the underlying strength that's strengthening the business to

Speaker 2

So Corinne, we expect Aerospace to continue to be strong. We expect packaging to close a bit of the gap. Our pricing is very good, and that should give us some lift. And we don't and we expect to continue to suffer pain in the specialties segment, and we continue to expect the Automotive to be strong. So Pretty much what you saw at play in the first half will continue in the second half, and we're raising our own internal expectations have been raised for the second

Speaker 8

Okay. That makes sense. So what would be the likelihood For you guys to potentially increase again next quarter, because if you assume you have Significant performance again from A and T and higher margin into the second half versus 900 or 1000 per tonne for the usual cycle. Very likely, you should see an annual number that is going to be toward the end or above the guidance, right?

Speaker 2

Well, at this stage, this is our best outlook, right? And obviously, there's plenty of hypotheses And you can have several of them turn better or several of them turn worse. And Depending on how many of them turn better or worse, you can be within the guidance or outside of the guidance. This is our best view of today's Conditions and outlook and what it means for the company. There's some negative some risks out there, right, which we Back into our guidance, like the there's lots of talk about a UAW strike at the automakers.

Speaker 2

I mean, if they stop their lines, We're not going to ship to them, right? So we try to factor that in our guidance as well. And other things, spot prices for energy, They are low, but remember, we're 90% hedged. And in some of our markets, we are actually producing 20%, 30% less than what we should. And therefore, we are in good positions in energy that we have to unwind in the market That we're making losses on.

Speaker 2

So you've got all these factors at play. And today, our best year of it is 700 And obviously, we're working hard to meet our targets and beat them if we can.

Speaker 3

Yes. And Corinne, just bear in mind, second half, there's seasonality Impact as well, so you can just look at the outperform in the first half and put on to the second half. So we got to take that into consideration.

Speaker 8

Got it. And then just quickly to come back on so cash flow free cash flow guidance was increased. And Again, you talk about the net debt target to be almost right where you want to be. So you're going to have Some cash flow there that you can invest. Is there any specific area or any specific end market that you would give priority for?

Speaker 3

So I think as we well, I mean over the short term, we want to maintain, as we mentioned, Balance capital allocation policy, we guided $340,000,000 to $350,000,000 of CapEx, so you can count That numbering for the full year and as we continue to generate free cash flow, and Jean Marc alluded to this, we'll look at other Opportunities to reduce our gross debt obligation because increasing financial flexibility is not just about the leverage target, it's also about reducing The gross debt obligation. I don't know if that's what you're asking, but

Speaker 8

Yes. That's it for Thanks. That's it for me.

Speaker 3

Thank you. Thank

Operator

you. Thank you. The next question today comes from the line of Josh Sullivan from The Benchmark Company. Please go ahead, Josh. Your line is now open.

Speaker 9

Hey, good morning.

Speaker 2

Good morning, Josh.

Speaker 9

Just regarding aerospace demand, Do you think you're shipping product in concert with the current build rates communicated by Aerospace OEMs?

Speaker 2

Well, there's a lag, obviously, Josh, as you know, between What they're building today and what they will need to build in the future years, and we tend to be 1 to 2 years ahead. So yes, I think we are another way to answer your question would be to Say that we think we've got sustained growth ahead of us that will take us higher than pre COVID levels Somewhere around 25 would be my guess. So we see continued strength because Anything that we can make is needed.

Speaker 9

So as far as the OEMs' inventories, You don't think you're you don't think that's a headwind anymore? You think you're shipping at rate with what they're communicating?

Speaker 2

Yes. I'm not even sure there's there are some parts of the supply chain where restocking is complete, Others where it isn't. And I think we yes, we Everything we can make, we can ship.

Speaker 9

Okay. And then as we look to later in the decade, there's some Aspirational build rate targets that some of the aerospace OEMs would like to get to, how should we think of Constellium's capacity maybe address some of those out year targets.

Speaker 2

Yes. That's going to require a lot of work from us, Josh, because As I mentioned, our strategy is focused on value added products. I mean, there are several pillars to our strategy, but that's the number one, Which means we are making more and more complex, complicated, high value products, which take more time. So If you look at the pre COVID shipments we're making, say, 2019 and you contrast that with what we could be making in 2025, The same tons, number of tons will require much more work and will command even more value added revenue and EBITDA. So we have challenges in terms of capacity, and the teams are working very hard to debottleneck our plants and make some smart investments, Not CapEx into the plant so that we build more flexibility, more capability, more capacity.

Speaker 2

So that's going to be A challenge that we're very excited about it. It's a good challenge to have. And it creates very nice opportunities for very high return on Capital expenditures.

Speaker 9

And then just as you look to refine the portfolio and I understand the divestiture was more But as you're talking about some of those higher value products in aerospace, do you think you'll move up the value chain at all? Are there To do more complex products for your aerospace or space customers?

Speaker 2

There is some, but it's at the margin. So I think it's a constant Gradual improvement and what you have seen is what you will continue to see. There's no it's an evolution. There's Revolution in terms of our product positioning or our manufacturing capabilities or footprint.

Speaker 9

Got it. Great. Thank you for the time.

Speaker 2

Thank you.

Operator

Thank you. The next question today comes from the line of Sean Wondrack from Deutsche Bank. Sean, please go ahead. Your line is now open.

Speaker 2

Good morning, Sean.

Speaker 10

Good morning. Thank you for taking my questions, and congratulations to Ingrid on the Promotion. Thank you. Just going back and sorry to beat the dead horse here with the packaging question. Last quarter when we spoke, you seemed a little bit down on the segment.

Speaker 10

You weren't quite sure if they were going to Getting into enough marketing and enough promotional activity, to kind of move the process along there. It does sound like your The year has improved a little bit with respect to that. Would you say that's fair to say that maybe you're kind of seeing what you needed to see there? Maybe we're in the early innings of the recovery. Can you just comment on that a little more, please?

Speaker 2

Yes. I think that's fair, Sean. The Q2 was not as bad from a comp basis as the Q1. And what we have in our books for the Q3 is making Some progress, but the comps also are getting easier because we started seeing some slowdown in the second half of last year as well. So we're getting to a more normal territory.

Speaker 2

So that's good. It's factored, obviously, in our forecast, in our guidance. And we believe, as we look at the data, that cans continue to be the preferred packager. And it was clear when they had the when cans had the upswing, it's also very clear in the downturn. And I think that's very reassuring for the long run.

Speaker 2

So that's why that's the long term view is It is a package that has a very good future, and that's good for us.

Speaker 10

That's good to hear. And then just Due to your own improvement here with leverage coming down so much and getting closer to that target, When you think about capital allocation, is there any chance that you would consider some form of M and A, whether it's North America or Europe, Do you have to either add another leg to the store or whatnot?

Speaker 2

Well, that's part of indeed of the capital allocation choices we've got to make. But the first thing about M and A is Most of them fail. So if we were to go down that path, they fail for the buyer, by the way. If we were to go down that path, we would be highly selective. So that's really important.

Speaker 2

It would need to be in line with our strategy. It would be highly selective. Jack, you want to comment further? Yes.

Speaker 3

I would just basically repeat what you just said. I mean, look, M and A is a tool in the toolkit, as I like to say, right? So I think on being selective, we have to be really convinced any deals we do will create access Value for our shareholders. The targets will have to be a good fit strategically, and they That's helpful.

Speaker 10

All right. No, that's very helpful. I appreciate it. And thank you for taking my questions today.

Speaker 2

Thank you. Thank

Operator

you. Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference back over to Jean Marc Jermaine, CEO of Cisilium, for any closing remarks.

Speaker 2

Well, thank you very much, everybody, for attending today. As We're very pleased with the progress we're making and very pleased with our revised outlook, and we look Forward to updating you on our further progress in a few months' time. Thank you. Have a good day.

Operator

This concludes today's conference call. Thank you all for your participation. You may now disconnect your line.

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Key Takeaways

  • Despite a 6% shipment decline to 398,000 tonnes, Constellium delivered a record Q2 adjusted EBITDA of €209 million and net income of €32 million, reversing last year’s loss.
  • Aerospace demand drove 30% volume growth and a 53% year-over-year jump in the A&T segment’s EBITDA to €96 million, while packaging and industrial markets remained soft.
  • Free cash flow reached €68 million in Q2, reducing leverage to 2.7x; management raised full-year guidance to €700–720 million in EBITDA and over €150 million in free cash flow, with a 2025 target of €800 million+
  • Significant inflationary pressures on energy, labor and alloy costs persist, but strong pricing power, contractual pass-through mechanisms and cost-saving initiatives under Vision 25 are expected to offset most cost increases in 2023.
  • Constellium streamlined its portfolio with the sale of three German soft-alloy extrusion plants for €48.8 million and appointed Ingrid Jorg as Executive VP & COO to lead the three business units and drive operational performance.
A.I. generated. May contain errors.
Earnings Conference Call
Constellium Q2 2023
00:00 / 00:00