Constellium SE

Ladies and gentlemen, thank you for standing by, and welcome to Constellium's second quarter 2020 results call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call may be recorded. I would now like to turn the conference over to your host today, Mr. Ryan Ventling, Director of Investor Relations. Sir, please go ahead.

Thank you, Operator. I would like to welcome everyone to our second quarter 2020 earnings call. On the call today are our Chief Executive Officer, Jean-Marc Germain, and our Chief Financial Officer, Peter Math. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at constellium.com. and today's call is being recorded. 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, and 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 20F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law. 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 disclosures. I would now like to hand the call over to Jean-Marc.

Thanks, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's turn to slide five. At Constellium, the health and safety of our employees is our first priority. We have implemented many initiatives to protect our employees in response to the COVID-19 pandemic. We have provided our personnel with personal protective equipment, increased cleaning and sanitation, allowed for and enforced social distancing, and worked to raise awareness with our employees. I want to personally thank our employees for taking this seriously and following the precautions we have put into place. As of last Friday, Approximately one-half of 1% of our employees have tested positive for COVID-19, and all of whom have recovered or are recovering. Needless to say, we must remain vigilant. During the second quarter, our plants operated well, despite the significant disruptions to customer demand from lockdowns in both Europe and the US. As I'm speaking, all our plants are running now and well. We are carefully monitoring COVID-19 hotspots, both for the health of our employees and any potential impacts on supply chains. The demand for our products gradually increased during the course of the second quarter, and this trend has continued into July. However, both levels of demand and visibility from our customers remain below historical levels. We took strong actions to combat the effects of the pandemic on our business. We aggressively reduced our costs, including flexing variable costs to match production levels, reducing fixed costs, and lowering our targeted capital expenditures. Over 40% of our workforce were on some type of partial unemployment or temporary layoff scheme during the quarter. Where appropriate, we have also implemented permanent headcount reduction. Our ability to flex costs was slightly better than the scenario we provided last quarter. This was a great achievement by the entire ConStadium team and demonstrated our flexibility and resilience. Our liquidity at the end of the quarter was 949 million euros, an increase of over 300 million euros compared to the end of the first quarter. we added an additional 50 million euros of liquidity in July through credit facilities supported by the German state, bringing our pro forma liquidity to approximately one billion euros. In June, we accessed the debt market to refinance our 2021 bonds. This transaction removed our only near-term bond maturity at a very attractive coupon. In conclusion, with the significant actions we have taken, I am very confident in our ability to navigate through this crisis. On slide 6, you will see some of our highlights from the second quarter of 2020. Shipments were 310,000 metric tons, a decrease of 25% compared to the second quarter of 2019. Revenue decreased 33% to 1 billion euros. Of the roughly €500 million decline in revenue compared to the second quarter of last year, two-thirds was related to lower shipments and one-third was related to lower metal prices. I remind you that, while our revenues are affected by changes in metal prices, we operate a pass-through business model to minimize metal risk. of 32 million euros compared to net income of 17 million euros in the second quarter of 2019. Adjusted EBITDA of 81 million euros decreased 51% compared to the second quarter of 2019. With a strong focus on cost control, we are able to offset a significant part of the volume headwinds to adjusted EBITDA across each of our business units. I am proud of what the team was able to achieve in a challenging environment. Custodium generated 228 million of adjusted EBITDA in the first half, a decline of 24% compared to the first six months of last year. Our free cash flow was negative 33 million euros in the second quarter of 2020. This result would not have been possible without our strong actions to reduce costs and capital expenditures and cash expenditures of all sorts. Our free cash flow for the first half of 2020 was 54 million euros. Based on our current view of market conditions, we expect to generate positive free cash flow in 2020. I will now hand over to Peter to discuss our financial performance in more detail. Peter?

Thank you, Jean-Marc, and thank you, everyone, for joining the call today. Turning now to slide eight, you will find the change in adjusted EBITDA by segment for the second quarter and the first half of 2020 compared to the same periods of last year. For the second quarter of 2020, Constellium achieved 81 million euros of adjusted EBITDA, a decrease of 86 million euros or 51% year over year. PARP adjusted EBITDA of 58 million euros decreased by 21 million euros or 27% compared to last year. A&T adjusted EBITDA of 31 million euros decreased by 33 million euros, or 51% compared to the second quarter of 2019. AS&I adjusted EBITDA of negative 1 million euros decreased by 31 million euros compared to last year. Lastly, holdings and corporate costs of 7 million euros were 1 million euros higher than last year. In the first six months of 2020, Constellium achieved 228 million euros of adjusted EBITDA, a decrease of 74 million euros or 24% year over year. Part of adjusted EBITDA of 124 million euros decreased by 14 million euros or 11% compared to last year. A&T adjusted EBITDA of 83 million euros decreased by 33 million euros or 28% compared to the first six months of 2019. AS&I adjusted EBITDA of 33 million euros decreased by 26 million euros or 44% compared to last year. Lastly, holdings and corporate costs of 12 million euros were 1 million euros higher than last year. We expect agency costs of approximately 20 million euros in 2020. Now, turn to slide nine and let's focus on the PARP segment. Adjusted EBITDA of 58 million euros decreased 27 percent compared to the second quarter of last year. Volume was a headwind of 41 million euros in the quarter. Packaging shipments fell by 12 percent primarily as a result of the temporary shutdown in March of our Neufbersach plant in France due to COVID-19. Shipments to the North American canned sheep market increased slightly year over year. Automotive shipments declined 54% compared to last year, as many of our automotive OEM customers curtailed production for April and most of May. Price and mix was a headwind of 2 million euros. Costs were a tailwind of 21 million euros due to strong, broad-based cost control with labor and maintenance as important contributors. Metal costs were neutral in the quarter as we faced difficult year-over-year comps, UBC supply chain challenges, and lower metal prices. FX translation was a tailwind of 1 million euros. Turn to slide 10 and let's focus on the A&T segment. Adjusted EBITDA of 31 million euros decreased by 51 percent compared to last year. Volume was a headwind of 46 million euros on lower aerospace and TID shipments. Aerospace shipments fell 37 percent compared to last year as aerospace OEMs and distributors began to reduce orders. TID shipments declined by 20% due to lower industrial activity in both Europe and the U.S. Price and mix was a 3 million euro headwind due to lower aerospace shipments. Costs were a tailwind of 15 million euros due to strong broad-based cost control with labor, metal, and maintenance as important contributors. Lastly, FX translation was a 1 million euro tailwind in the quarter. Now, turn to slide 11 and let's focus on the AS&I segment. Adjusted EBITDA of negative 1 million euros decreased by 31 million euros compared to the second quarter of 2019. Volume was a 31 million euro headwind. Automotive shipments declined 52 percent compared to last year due to customer shutdowns for a significant portion of the quarter. Industry shipments declined 16 percent due to lower industrial activity in Europe. Price and mix was a 9 million euro headwind partially due to price and mix as a consequence of weaker market conditions. Costs were a 9 million euro tailwind on strong cost control with labor, energy, and fixed costs as important contributors. Lastly, FX translation was a 1 million euro headwind in the quarter. Now, turning to slide 12, I want to highlight our very strong cost performance during the second quarter. In the second quarter, we managed to flex our cost by 83 percent. Cost flex represents the change of costs over the change of revenues for the second quarter of 2020 compared to the second quarter of 2019. Effectively, for every dollar change in revenue, we were able to flex our costs by 83 cents. This compares favorably to the 75 percent variable cost estimate we provided last quarter. At the bottom of the page, you can see that each of our businesses demonstrated strong cost control. with PARP at 92% cost flex and A&T and AS&I at 75%. To put this in context, excluding metal and depreciation, we reduced costs by approximately 100 million euros compared to the second quarter of last year. These cost savings were driven by strong cost control across the businesses, including labor, maintenance, professional fees, subcontractors, and energy. I will note that our second quarter 2020 figures include approximately a 15 million euro benefit from European state employment aid related to COVID-19. I want to congratulate the team for the aggressive actions taken on cost. We will continue to maintain our strong focus on cost control, particularly given the uncertain demand environment. Now, let's turn to slide 13 and discuss our balance sheet and liquidity position. At the end of the second quarter, our leverage was 4.4 times and our net debt was 2.2 billion euros, slightly lower than our net debt position at the end of 2019. We remain very committed to capital discipline. We reduced our 2020 CapEx target to approximately 175 million euros a 96 million euro reduction from 2019. Through the first half of 2020, we spent 32 million euros less in CapEx than in the same period of last year. Our free cash flow for the second quarter was negative 33 million euros. During the quarter, as a consequence of lower activity, our factored receivables were lower than the levels that we have maintained in recent quarters and negatively impacted our free cash flow by 73 million euros. We would expect the reverse to occur as activity levels increase. Excluding the impact of factoring, the company actually generated positive free cash flow in the second quarter, which is a very impressive outcome in my view. Our free cash flow for the first half of 2020 was 54 million euros, As Jean-Marc noted earlier, we expect to generate positive free cash flow in 2020 based on our current view of market conditions. Generating free cash flow is a firm priority, and we remain committed to deleveraging. As you can see in our debt summary on the bottom left-hand side of the page, we have no bond maturities until 2024. During the quarter, we refinanced the remaining $200 million of our 4.58% notes due 2021, with $325 million of 5.58% notes due 2028. While we initially planned to repay the 21s with free cash flow, we felt it was prudent to remove this near-term maturity given the favorable debt market conditions. Notably, this was the lowest a coupon dollar bond that Constellium has ever priced, a considerable achievement in the midst of a pandemic. As a result of our financing activities thus far in 2020, we now expect cash interest of 150 to 160 million euros. Our cash plus amounts available under our committed facilities was 949 million euros at the end of the second quarter. As Jean-Marc noted, we added 50 million euros to this balance in July, and we remain very comfortable in our liquidity position. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to Site 15. I want to highlight something that is core to our business, sustainability. In early July, we published our 2019 Business and Sustainability Report, which you can find on our website. I'd like to point out a few highlights from 2019. Safety is our first priority. Our target is to reduce our recordable case rates by 10% year after year. Between 2016 and 2019, our recordable case rate decreased by 27%, and we are trending very well this year. This means that more of our colleagues are returning home injury-free every day. We also improved our energy efficiency by 6.4% compared to a 2015 baseline. That is the equivalent of 100,000 metric tons of CO2 savings every year. Further, we introduced a 2025 target to reduce greenhouse gas emission intensity by 25% against the 2015 baseline. And we have a detailed plan to achieve this target. As many of you know, recycling is a core competency at Constellium. Aluminum is infinitely recyclable, with 75% of all aluminum ever produced still in use today. Muscle Shoals is one of the largest recyclers of aluminum cans globally, with a capacity to recycle over 20 billion cans every year. We also recycle the equivalent of 12 billion beverage cans every year. As a company, Constellium recycled over 560,000 metric tons of externally sourced aluminum scrap in 2019. I am also proud that third parties are recognizing Constellium for our sustainability achievements. The Aluminum Stewardship Initiative, or ASI, is an industry-led initiative to drive sustainability across the entire aluminum value chain from producers to customers. In 2019, we received ASI certifications for Zingen's casting and rolling operations, and we began producing ASI-certified coils for our customers from Zingen in 2020. We also received ASI certification of our Neuf-Brissac facility under provisional COVID conditions in 2020. We achieved the EcoVadis Platinum rating, which is awarded to the top 1% of companies assessed worldwide. And we received an ESG rating of AA from MSCI, placing us in the top 5% of our sector. Overall, we had a very successful year on our sustainability objectives in 2019, and I look forward to continuing our progress on these very important initiatives. Now, let's turn to slide 16 and discuss our end markets. We believe our balanced portfolio of products across end markets, geographies, and customers is a competitive advantage during challenging times like these. I'll start with the packaging market. Packaging is a core market for Constellium and represented 38% of our LTM revenue. We continue to see strong demand in North America and stable demand in Europe. Further evidence that this market is both recession resilient and secular growth. We believe the packaging market has long-term secular growth tailwinds driven by customer preference for aluminum cans. Our customers continue to invest in new can lines, with several additional investments in North America just announced in the last week. These additional lines should drive incremental demand for can sheets in the years to come. The consumer preference trend is only one of the tailwinds for can sheets. In Europe, the demand for can sheets continues to grow based on substitution of aluminum for steel. In the U.S., we continue to expect the growth of auto body sheet demand to tighten supply to the packaging market over the medium to long term. Now, let's move to automotive. Over the long term, automotive remains a secular growth market for aluminum. Customers continue to prefer larger vehicles. With regulations aimed at increasing fuel efficiency and reducing emissions, the automotive market will need to continue to lightweight. In addition, we expect hybrid and electric vehicles to continue to gain share of the fleet. These vehicles are aluminum intensive due to the importance of light weighting to achieve their range objectives. Constellium is well positioned to realize the benefits of this secular shift to aluminum in automotive and the electrification of the fleet. Moving to more recent trends, automotive OEMs began curtailing production in March and largely resumed production in May. While demand from our customers increased significantly in June, we have experienced uneven demand for our products as a result of supply chain challenges and COVID-19 hotspots. While we are optimistic about automotive demand in the back half of 2020, The demand for our products will be dependent on the level of production at the OEM. Let's turn now to aerospace. Aerospace represented 15% of our LTM revenues. The near-term outlook for aerospace remains uncertain due to the effects from COVID-19 and the 737 MAX. Aerospace OEMs have reduced build rates and it is unclear how long build rates will remain at these levels. We expect aerospace shipments in the third and fourth quarter of 2020 will be lower than the level in the second quarter of 2020. In TID, we expect to continue to expand in niche products in a diversified range of markets over the long term. In the near term, the defense and rail markets remain strong, but most industrial and transportation markets remain weak. These markets are dependent upon the health of the industrial economy in Europe and North America. It is unclear when and to what extent these markets will rebound. In closing, I again want to thank the Constellium team for their tireless efforts during this trying time. We remain committed to operational execution, harvesting the benefits of our investments, disciplined capital deployment, debt reduction, and shareholder value creation. With that, Joanna, we will now open the Q&A session.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Chris Terry from Deutsche Bank. Your line is open. Chris, if you are on mute, please unmute. Chris, your line is now open.

Hi, Jean-Marc and Peter. Can you hear me? Yes, we can. Good morning, Chris. Okay. Good morning. Thanks for taking my question. The first thing I wanted to start with was just the utilization rates and the comments from 1Q. You sort of stepped through how you saw utilization in each of the divisions for 2Q and then perhaps for 3Q and 4Q. I appreciate you don't have guidance, but I wondered whether you could maybe conceptually talk through 3Q versus 4Q and just versus 2Q or any comments you could make on the divisions as an update from last quarter. Thanks.

Sure, Chris. So I'll start with the markets and then kind of translate it into what it can mean for the divisions, right, for the business units. So when you look at our second quarter of this year versus the second quarter of last year, right, you see Packaging, roughly 10% down. You see automotive, 50% down. You see aerospace, 40% down, right, roughly. And the other markets, the niche markets, about 25% down. This is made of very different dynamics, right? So in packaging, what we are seeing now is 95% utilization. There was a bit of a drop, especially in April with all the lockdowns in Europe, reduction in canned consumption and all that. But that has come back pretty strong and the U.S. continues to be quite strong. So we look at packaging, again, recession resilient, secular growth, and we're pretty confident for the second half of the year. We look at Q2 as being kind of an abnormal quarter because of all that happened in April and a little bit in May. If I look at automotive, It has really snapped back. I mean, I think when we talked on Q1, we were talking of 20% utilization as we were speaking, and now we're at above 80%, right? And if you do the average of 20 and 80, you get to 50, which is about what we experienced in the second half in terms of reduction in air shipments. It is, you know, it seems like it can be stronger than 80%. going forward. We certainly are running very well in July, but we've seen that this restart has been with all kinds of fits and stops, right? So you've got hotspots, you've got supply chain disruptions, you've got difficulties in bringing products from Mexico, building trucks in Texas is challenging. So you've got all those operational issues that all of us in the supply chain have to deal with. But clearly the demand seems to be, you know, well in excess of 80% of where we were last year. So that's encouraging, and hopefully, you know, COVID-19 doesn't throw too much of a wrench in that good trend. If I look now at aerospace, where we were running at around 60% in the quarter, we expect more pain in the second half of the year. And I think the reason for that is it's a long supply chain, and the customers, you know, move – a little bit more slowly in terms of adjusting their orders. And that is creating a bit of a lag in terms of how much pain we take. We are in very detailed discussions with our customers in a very collaborative fashion to look at what the second half ought to look like. And whilst contractually we could force some volumes on us, that's not our type. What they don't need, we don't want to force on them. So what we're working through is taking more pain now in the second half so that 2021 we start with a clean slate. So we would expect some reduction in operating rates in aerospace in the second half of the year. So if you translate all that into what it means for the different BUs, I would expect BOP, packaging and automotive, to be better. I would expect ASNI, automotive structures, essentially, to be better in the second half, and I would expect ANT to be more challenged in the second half.

Thanks, Jean-Marc. Sorry. Oh, go ahead. I'll just sort of follow up on packaging specifically, where the volumes are down around about 10%, I think, year on year. And you're saying Muscle Shoals is doing well. It seems like the US is going well. I think Crown yesterday mentioned that Southern Europe was weak. Can you just comment a little bit further about packaging in the EU region? Was it down in the quarter because of demand or because you had facilities offline and maybe you could quantify some of the EU impacts?

Yeah, I think so. The reason I'm saying more than 90% or 95% or whatever, not 100% is exactly because of some weakness in Europe, right? And I think it's got to do with both the reduction in activity in Southern Europe. I mean, a lot of these countries have economies that are based on tourism, and this is not the best year for tourism, as we all know. and we are seeing, you know, there's little clusters and hotspots, so everybody's a bit, you know, vigilant, as it should be, right? So that is weighing down a little bit on can consumption in Europe, yes.

Okay, and just, sorry, one follow-up on working capital specifically. I just wondered maybe, Peter, if you could talk through the two key moving parts. Obviously, you've stepped through those waterfall charts and you're getting cost out, doing a great job on the cost side. I just wondered if you'd comment a little bit further on the second half of the year and what the opportunities are on working capital in terms of you saying positive for the full year. You've already obviously hit the positive number. at the halfway point. So just wanted to talk through the moving parts of working capital.

Sure, happy to do it. And just for context, so in the second quarter, as we said last quarter, we would use working capital, and we, in fact, burned $63 million of working capital in Q2. And for the first half, we're positive 24. So based on where we sit today, I think it's plausible to think that with auto ramping, with packaging kind of continuing to ramp back up, that we could lose some ground in the back half of the year. So not a huge negative, but we could see working capital being a use in the back half of the year. But, Chris, I would say that we remain confident in spite of that that we can achieve a free cash flow position.

Thanks, Fedor. That's it for me. Thank you. Okay, good.

Your next question comes from the line of Josh Sullivan from the Benchmark Company. Your line is open.

Good morning. Good morning, Josh. Just a question. How are you thinking of any tariffs on Canadian aluminum? Have you increased any inventory expecting that, or just what should we be thinking on that front if that comes to fruition?

Yeah, well, I mean, we believe it's a misguided measure if it happens, right? We've lobbied against it in the past. We got it removed. It may come back. We think it's misguided and it doesn't address a problem, which is overcapacity from China, from a non-market economy that doesn't play by the same rules as we do. Now, that said, if it happens, it's got a very limited impact on us. I'll remind you that we pass through the metal cost essentially to most of our customers. There may be a little section of the business where we cannot reprice immediately when it happens. But on the other side, we may gain a little bit more on scrap recycling as well. So not much of an impact for us. The reason we're against it is much more a matter of principle because we believe in free and fair trade than really a problem for our finances or our economic outcome.

Got it. And then just on the canned sheep front, you know, can you remind us of, you know, when the, you know, your larger contracts are up for renegotiation and then just any comment around, you know, pricing strength?

Yeah. So we see, so we don't go into the detail of exactly which contracts mature when, but you know that we've got a few renewals coming in around the 22 horizon. We are making good progress, and I think the pricing environment is, I would describe it as mildly positive in the U.S. and mildly negative in Europe because of the specific situation now. I remind you that contractual negotiations take a lot of time here, and whilst I say it's mildly positive here and mildly negative there, between now and whenever we actually ink a contract, things may change. but I think it's a very benign environment. And our product is in demand. I'll brag a little bit. Our quality and our service is very much recognized. Mr. Schultz has done a terrific job over the past five years, and he's a very strong player in the market now, very recognized quality service-wise, and the Polisac has always been. So we have strong positions, and I'm looking at the future with a great deal of confidence.

Great. Thank you. Thanks for your time. Thanks, Josh.

Your next question comes from the line of David Gagliano from BMO Capital Markets. Your line is open.

Great. Thanks for taking my questions. First of all, I did have one question on the numbers for the second quarter. Did you say there was a $15 million one-time benefit included in the $81 million adjusted EBITDA line?

You're talking about for the labor benefit?

I thought it was a COVID-19 state aid benefit. Is that included in 81 million?

Yeah, that's included in adjusted EBITDA. But it's not a one-off and it continues. Those programs are what is referred to as a corpse arbeid or chômage partiel or short-time work. And these government programs continue through 2020 and in some cases into 2021.

Okay, so we should assume about a $15 million quarterly benefit from those programs each quarter?

Well, yeah, no, because what will happen, David, is remember, so in the second quarter we had a lot of people on the sidelines, right? But as we ramp up, then we're going to have substantially less of that. So I think you should assume that in the businesses that, you know, so packaging, for example, where we had some benefit in Q2, we should have basically very limited, if any, benefit in Q3. And automotive, it should fade away, and aerospace will have some continuing given the operating utilization rate there, but it will be a much lower number.

To give you an indication, we mentioned about people being unemployed during the quarter. At the trough, which is behind us, we had 6,000 people under some kind of unemployment benefit or temporary layoff. Now we are at less than 2,000. So it's closed dramatically.

Yeah. And David, just to put it in perspective, if you get to the fourth quarter, the number might be something like 25% of that, right, just based on the utilization rate. Just a rough number.

Okay. That's actually helpful. Thank you. And then, Just in terms of the individual and market commentary, on the aerospace side, obviously that's the or has been the highest margin business. And just in terms of the outlet commentary, you framed obviously two segments up, one segment down. But the down segment is, again, the highest margin segment. I didn't really get it. a census to order of magnitude of the down number versus the up numbers. Can you just give us a census to, you know, do you believe that aerospace will completely offset the recovery in auto and packaging in the second half or a bit more, you know, color on order of magnitude on the decline in aerospace would be helpful?

So it's very difficult to tell, David, because we're, as we speak, in very active discussions with our customers. And at the end of the day, it's a call that we have to make jointly with them As I mentioned, we've got contracts whereby we can force them to take some product, which they will take and pay for, but then they don't need it the following year, right? So they hold the inventory. They are holding the back. So we are looking collaboratively with them in terms of what is it exactly they need, which, by the way, I don't think they fully know now, and it's no criticism of them. I mean, it's very unusual times. And once we know what they need and we look at what cuts do we take, then I could answer your question, possibly. At this stage, I cannot. I would just say that there will be, for sure, more pain in autostructures. And then, in autostructures, in aerospace, my apologies, aerospace. Now, the other thing, too, is this is compounded by the fact that if you look at any period in the recent past, the second half is always weaker than the first half, right, in aerospace. So that's something to factor in as well.

Okay, and just my last related question is, I think you mentioned, I think average utilization rates for aerospace-related demand in the second quarter was around 60% at your facilities, is that right? What is that number now?

We're running still around that, but I would expect it to go down maybe to 50%, that kind of range.

Okay. All right. That's helpful. Thanks very much.

Okay. Yeah, so it's important to say we're not expecting it to go down to 30%, right? That's not on the horizon.

Peter, your next question comes from the line of Kurt Woodworth from Credit Suisse. Your line is open.

Yeah. Hi. Good morning. Hey, Kurt. Hey, Kurt. Peter, first question on the 100 million euro of cost reductions, how much of that would you view as structural? And then, you know, I guess just in general in terms of the amount of costs you think you could take out of the business this year on a permanent basis, can you give us an update on those efforts?

So, if we look at the, I mean, so the biggest piece of that $100 million is related to labor, right? So, and that's probably, labor's probably, you know, half of that $100 million. So, what we're doing now is we are really closely looking at the business and, you know, what it's likely to be like for the next couple of years. and then trying to size our labor forces according to that. So in that regard, I think we would expect that there's going to be some kind of permanent savings. But remember, as we kind of ramp up the operations, we do expect some of that cost is going to come back, right? So, you know, I'd say it's hard to give a really precise number on that, Kurt. It's a difficult one.

Kurt, if I may add, we have talked about Horizon 22, right? And one of the strategic initiatives was to look at how do we lean our organization without losing competencies, capabilities, but how do we lean and make the organization stronger? And I think what COVID-19 is doing to us, and I guess to many other companies out there, is accelerate innovation. a number of initiatives that may have taken more time to be implemented. So along the lines that Peter was saying, I think we'll come out of this with some permanent cost reductions, and as we ramp up, we will not ramp up and inject back 100 million of costs. How much will remain to be seen, because we're really learning as we're doing, and we're just in the middle of it now, but we will definitely emerge out of that leaner and stronger.

And there's certain categories like, for example, professional fees, subcontractors, where, you know, kind of as we work without these, because those are, you know, kind of big categories of reduction, I think we're able to kind of live without a lot of that going forward. So, yeah, I think there's definitely a piece of that that we can carry forward.

Just to give an example, there are – not trivial there, it's like revealing, right? So we've got a very strong R&D and technical support organization, which is people that are centrally located and go and help plants. And historically, a lot of the work was done by people going to the location. Now obviously, in the past three months, nobody's been able to travel anywhere. And a lot of that has been done through remote interaction, video conference, but even when you go to a plant, and you look at, I got a problem and I need to improve the speed of this mill, we've had people interacting by the mill pulpit on FaceTime and looking into the rolling mills by FaceTime with a technical advisor on the other side of the planet, and that works actually fine, which we wouldn't have thought it would be possible. So in the future, what you're gaining here is Well, you're saving travel time, which is not very good for the aerospace business, but also you're saving the cost, you're saving the time, which means that people can be on several interventions, whilst historically within a week, you know, it takes a week to get to the plant where you get the job done. So I think we're going to discover a few new ways of doing business in our industry you know, space that are going to be quite interesting in the future, and I think it's going to help us inject more brain and talent remotely with more impact.

Yeah, and, Kurt, you know, as we go forward, we may be able to give you more color on this, but, you know, hopefully it comes across that we're really looking hard at taking structural costs out, and in the short term, the objective is, We want to be kind of free cash flow positive through this crisis so that we don't take on any incremental debt, ideally. And in the longer term, we want to emerge with a kind of much stronger earnings power. So we're focused on exactly that, and we'll have more to say as we progress.

Okay. Now that's helpful. And then in terms of the free cash flow issue, you know, dynamics. You mentioned, I think, a $73 million impact from back during this quarter. Otherwise, you'd be pretty cash flow positive, which is pretty positive given your utilization rate. And now you're talking about 95% utilization and packaging, over 80% in auto. And it seems like auto should move higher once supply chains get more normalized. So, you know, 75% of your business is could be close to 90% utilization in a couple months. I get that arrow is weaker. But it would seem like from a free cash flow generation standpoint, you know, unless working capital would be a major negative, you should be generating decent free cash in the back half of the year. Can you comment at all on free cash flow potential in the back half of the year?

Yeah, sure. Thanks for the question. So we won't put a specific number on it. but we're confident that we will generate free cash flow for the full year. And the back half of the year, I think there's a very good chance that we can generate some free cash flow, but it depends a lot on what happens with trade working capital. As I said, we've got the ramp of these businesses, so we want to be a little cautious until we see the pace of the ramp and the consequences of the ramp But, again, for the full year, we remain confident that we can generate free cash flow.

Okay. And then just a final question on Arrow, Jean-Marc, you had a comment on, I guess, working with the OEMs to create, you said, a clean slate entering 2021. So, you know, is that statement kind of reflecting the fact that the OEMs cut very quickly, and I assume – there's sort of an excess inventory issue that they're dealing with or in general in the supply chain. And so, you know, hypothetically, your volumes would be below the actual build rate to help them clear inventory. So then when you get into 2021, you know, the supply chain is in a pretty good position. And, you know, contractually, you said you're not going to force it on them. But then, you know, if you're going to help them manage that, do you get anything in return, i.e., you know, price benefit or, you know, this is kind of everyone helping each other. Just a little bit of an understanding of kind of what you meant by the clean slate comment.

Well, yeah, no fair question. So I think I've commented in the past on the fact that I thought that the shipments we're making into the OEMs, right, into the supply chain, were actually higher than what the build rates were warranting at the time. And obviously the build rates are going down very significantly down. Now, the pain we're going to take in the second half, I think, is not going to cure all the inventory buildup in the supply chain, first of all. But I think what that does is it positions us for 2021 that doesn't show further deterioration. That's what we're into, right? And we want to be in a place where what we supply is by and large consistent with what is being built, right? So that's what we're trying to do. Whether we get there fully, I don't know, but certainly we are aiming to be better in 21 than what the nine months of post-COVID will be in A&T. That's one of the goals. In terms of what we're getting from the OEMs, We've got very strong, deep, strategic relationships with them. I've commented also in the past on the fact that we're in it for the long haul. And I think it's evidenced by the 10-year contract we signed with Airbus. I mean, 10 years is a long duration. It never happened before. And we did it because it was the right thing to do for both companies, for both businesses. And we didn't do it as a reaction to COVID or whatever, right? I mean, that was really the desire to cement the strategic alignment between the two companies. So we're looking past the current crisis. The current crisis, we've got to get all in the same boat or in the same aircraft and put us in the same place, work together to overcome the crisis. And we are not talking about you know, if I do that, you give me a bit more price or whatever. I think it's just a relationship where we want to be in a win-win partnership, and we do some things that help them, and they'll do some things that help us in the future, which they have already done in the past, and that's already happened, and that's continuing.

Okay, great. Thank you very much.

Your next question comes from the line of Matthew Fields from Bank of America. Your line is open.

Hey, Mark. Hey, Peter. One on the markets and then one on the balance sheet, please. So, you know, saw that canned volumes were down about 11%, but, you know, Norsk reported canned volumes up 11%. I think you guys face relatively the same markets in Europe. Can you sort of point to why maybe they're having more success on their canned volumes? Was it enough for SOC? being down issue or a market issue? Can you just explain that discrepancy for us, please?

It's mainly, I believe, I mean, I cannot comment on their specific situation, but in our case, the main reason was that we had to take down Nel-Prisac for a full week and then ramp it up gradually. I remind you that Nel-Prisac was at the center of a hotspot, of the first real hotspot in France, and that was very... terrible conditions for the second half of March. So in March, we continued to ship out of finished goods, but then we had to replenish the finished goods, and that really took down our shipments in the second quarter. But we're back to normal now.

Okay, thanks. That's sort of what I expected. And on the balance sheet, it looks like you got a decent amount of funding from France and obviously Switzerland and Germany. You said it was partially guaranteed, but it's also secured. Can you just give us a better understanding of sort of what it's secured by? Is it inventory or is it sort of PP&E? And then to what extent is it guaranteed by the French government?

Well, it depends on the facility, but the big one, the French one, is secured on PP&E. And in the case of the German ones, one of them is secured and one of them is unsecured, and the Swiss one is unsecured. And the guarantees, the way they work is they guarantee a certain percentage of the principal. So it's a normal syndicate of banks with, in the case of France, I think the guarantee is for 70%. or sorry, 80% in the case of France of the principal balances guaranteed by the French state. In the case of Germany, I think it's 80% too.

So just for our purposes as credit analysts, 80% of that French loan is sort of non-recourse to you?

Well, again, it is recourse to us. But what I think the point is, is that if you're a lender, so for example, if you're in the syndicate of banks and you are lending, say, 50%, your responsibility is for 10, oh, sorry, 50%, 50 million, your responsibility is for 10 of that, right? So it's the banks that benefit from the guarantee, not the company.

Okay, so you still have to deliver on the commitments to the banks.

Yeah, absolutely. Okay. Yeah, I'm sorry.

The government isn't backstopping the loan for you. It's backstopping the loan for the banks.

Exactly, exactly. But one thing to kind of I think is a really important point is our intent in putting this liquidity on the balance sheet was to remove any question about the fact that we had enough liquidity As we said from the beginning and based on the performance in the second quarter, we do not anticipate using this. So the French facility we had to draw just by the terms of the agreement, but it just sits on our balance sheet as cash. And the German facility that we've now signed up in July, we don't expect to draw that. The delayed draw term loan, we haven't drawn that. And the Swiss facility... we don't have that drawn in most instances.

And the way we benefit from the state guarantee is through very cheap interest rates.

Yeah, that's right.

That's right. Cheap money, and that was important to us. We don't think we need the money, so we're not going to pay a lot of interest for it.

Yeah, exactly. That, and it obviously was an inducement for the banks to lend, right? Right.

Now, fair enough, and that's, you know, I think the French facility is, what, 2.5% effectively at this point?

Yeah, yeah, that's the code.

All right, so you don't really have an incentive to pay that off quickly, you know, given your bonds are kind of twice that, right?

No, no, that's right. Now, remember, there are some limitations on the use of the capital, right? So, for example, we can't use that capital to go and – buyback bonds in the market. So it's really meant to be for kind of operating needs of a company. But yeah, you're right. We don't have a strong incentive to repay that. But what we will do is obviously there's some cost to it, right? So as we kind of emerge from the crisis and have a little more visibility, then we'll unwind those facilities.

Okay. That's very helpful. Thanks for all the color, and good luck in the back half.

Thank you.

Thank you. Your next question comes from the line of Sean Wondrock from Deutsche Bank. Your line is open.

Hey, guys. Thanks for taking my questions, and really great job on transparency and costs here. Both very helpful.

Thanks, Sean.

Just when you think about big picture, if you look at the auto markets, There are sort of projections out in the market that we'll have about, you know, 25% decline in new cars this year, you know, mostly based on the fact that we weren't producing back in March, April. And if you look at the used auto market, you know, it's been pretty strong as of late with used prices really, you know, rising even above last year. You know, you talk about how production's been increasing and demand is increasing there. You know, to kind of get to down 25%, you know, you'd have to have some pretty strong growth in 3Q and 3.4. So I guess what I'm asking is, do you see that market as potentially inflecting soon, you know, with demand pulling through based on a lack of cars? And if you can provide a little color of what you're seeing there, that would be very helpful.

Yeah. So, I mean, the order book is strong. There's no question. It's above the 80% that I'm mentioning, right? but we've been a little bit caught you know by customers just a few months ago telling us we need product tomorrow and then telling us the next day the plant is shut down right so you know we are very vigilant right so I hope I think the end demand is there I think that's true in the US that's true in Europe right the governments have injected a lot of money in the hands of consumers right through the the unemployment benefits of, you know, different shapes and forms that you see on both continents. And that is, you know, pretty good for end demand at the end of the day. So I hope it's gonna be, it's gonna materialize into the order book we have is going to be actually real orders and shipments, in which case it could be better. But, you know, I've, we've seen fits and starts, you see plants restarting and then shutting down because there's COVID infections, or you see people having trouble staffing, you know, the false shift because there's too many cases in the hotspots. So it's still fragile. I mean, it looks quite good, but it's still fragile.

Right. That's helpful. Thank you, John Morgan. I guess that's a good lead into the next question. So when you think about your customers, You know, we've had some shutdowns. We've had things come back online. Do you feel that your customers and their CEOs are getting more confidence in their ability to stay online, are getting better in terms of protocols and sort of advancing up the curve there?

Yeah, I would think so. I think all of us have made tremendous efforts to provide the proper environment for our employees. It's very interesting, I was commenting on the, you know, half a percent of our employees have been affected by COVID confirmed. We have had no new case, confirmed case in Europe since the middle of May. So I think this is saying something about the fact that when people take responsibility uh in their daily lives right because it goes beyond what they do within our factories or during the eight hours or 10 hours whatever that they work with us you can have an impact and i think you know if people wear masks when they interact with uh outside with people they come across i think it makes a tremendous difference so i hope the reality will slowly or more than slowly settle in and good practices will get that virus away from us sooner rather than later. And I think people are seeing the confidence building up. I mean, it's human nature. You need to be effective to take steps. And I think we're in the process where in many places people are still being effective before they take steps. But if you look at China, I mean, China is, you know, going extremely strong. You know, it's a small operation for us, but we are above budget, above last year, right? You look at Europe, new cases are really on a downward trend, even though there are some clusters here and there, and we're seeing a strong rebound, and I hope this is coming to us in the U.S., throughout the U.S.

That's great. It's good to hear, John Mark, and I hope everybody's safe and well over there. Thank you very much, and good luck.

Thank you.

Go ahead, sir.

Go ahead, Joanna.

Yes, sir. I am showing no further questions at this time. I would like to turn the conference back to Mr. Jean-Marc Germain, CEO of Constellium. Go ahead.

Thank you, Joanna. So thanks, everyone, for participating in the call today. As you can see, we are very focused on... facing the crisis, protecting cash flow, and building a stronger costellium when things are behind us. Thank you very much and look forward to updating you on our progress in Q3. Take care. Stay well.

Thank you, speakers. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.