Constellium SE

Good day and thank you for standing by. Welcome to the Constellium third quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first Today, Ryan Wendling, Director of Investor Relations. Thank you. Please go ahead.

Thank you, Operator. I would like to welcome everyone to our third quarter 2021 earnings call. On the call today are our Chief Executive Officer, Jean-Marc Germain, and our Chief Financial Officer, Peter Matt. 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 consilium.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 20-S. 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.

Jean-Marc Jean- Thanks, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's turn to slide five and discuss the highlights from our third quarter results. I would like to start with safety, our number one priority. Our year-to-date recordable case rate was 1.8 per million hours worked, in line with our record performance in 2020. I would like to specifically recognize the efforts at Neuf-Brisach, Zingen, and Gottmaningen. Each of these locations achieved more than 1 million hours worked without a recordable case in the third quarter. Shipments. were 395,000 tons, that's up 12% compared to the third quarter of 2020. Revenue increased 35% to 1.6 billion euros. This was primarily due to higher metal prices and higher shipments. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal risk. Our net income of 99 million euros compares to a net income of 20 million euros in the third quarter of 2020. Adjusted EBITDA was a record 143 million euros, 14% above the third quarter of 2020 and 3% above our result from the third quarter of 2019 pre-pandemic. Strong in market demand, particularly from our packaging and industrial customers, and solid cost control helped us overcome the reduced contribution from aerospace, the continued impact from the semiconductor shortage, and increased inflationary pressures. I am very pleased with our team's strong execution again this quarter. Looking forward, we are updating our 2021 adjusted EBITDA guidance to a range of 550 to 560 million euros. that compares to our previous guidance of 545 to 560 million euros. We extended our track record of consistent free cash flow generation with 40 million euros in the quarter, bringing our total to 121 million euros through the first nine months. We continue to expect free cash flow in excess of 125 million euros in 2021. Moving now to leverage, As you can see in the chart on the bottom right, our leverage declined to 3.6 times at the end of the third quarter, down a full turn from the first quarter, and at a multi-year low. We remain committed to reducing our leverage to our long-term targets of 2.5 times. We are also acting on our commitment to reduce gross debt with our recent announcement of the redemption of $200 million of our 2026 notes. Overall, I am very proud of our third quarter performance. We delivered strong adjusted EBITDA, solid free cash flow generation, and further deleveraging in excess of our expectations. With that, I will now hand the call over to Peter for further details on our financial performance.

Peter? Thank you, Jean-Marc, and thank you, everyone, for joining the call today. Let's turn to slide seven. For the third quarter of 2021, Constellium achieved 143 million euros of adjusted EBITDA, an increase of 14 percent compared to the third quarter of 2020. Compared to the third quarter of last year, PERP adjusted EBITDA of 94 million euros increased by 9 million euros, A&T adjusted EBITDA of 20 million euros increased by 10 million euros, and AS&I adjusted EBITDA of 32 million euros decreased by 1 million euros. Holdings and corporate costs of 3 million euros increased by 1 million euros compared to last year. For the first nine months of 2021, Constellium achieved 434 million euros of adjusted EBITDA, a 23% increase compared to the first nine months of 2020. PARP and A&T adjusted EBITDA increased compared to the prior year on strong overall performance, while AS&I adjusted EBITDA decline due to weaker automotive shipments as a result of the semiconductor shortage. Now let's focus on our segment performance. Turn to slide eight for the PARP segment. Adjusted EBITDA of 94 million euros increased 10% compared to the third quarter of 2020. Volume was a 17 million euro tailwind as shipments increased 9% compared to the third quarter of 2020. Packaging shipments increased 12 percent on strong demand, while automotive shipments decreased 8 percent on continued effects from the semiconductor shortage. We continue to expect the strength in packaging to offset the weakness in automotive. Price and mix was a headwind of 8 million euros on a lower share of automotive shipments. Costs were a tailwind of 1 million euros as favorable metal costs offset higher maintenance and labor costs. FX translation, which is non-cash, was a headwind of 1 million euros in the quarter due to a weaker U.S. dollar. Now, turn to Slide 9, and let's focus on the A&T segment. Adjusted EBITDA of 20 million euros increased 91 percent compared to the third quarter of 2020. Volume was a tailwind of 38 million euros. TID shipments increased 86 percent on strong broad-based demand in both North America and Europe, while aerospace shipments declined 13%. Price and mix was a headwind of €31 million due to a lower share of aerospace shipments relative to TID. Costs were a tailwind of €3 million as improved productivity and favorable metal costs offset higher maintenance, labor, and outside processing costs. Turn to slide 10, and let's focus on the AS&I segment. Adjusted EBITDA of 32 million euros decreased by 1 million euros compared to the third quarter of 2020. Volume was a 3 million euro tailwind as industry shipments increased 24 percent on strong broad-based demand, while automotive shipments decreased 16 percent due to reduced demand from the semiconductor shortage. Price and mix was a 5 million euro headwind due to increased share of industry shipments relative to automotive. And cost was a 1 million euro tailwind on solid cost control. Now, turn to slide 11, where I want to highlight our continued strong cost performance. On the top left of the slide, you can see that our cost flex was 96% in the third quarter. In other words, our cost, including metal costs, increased 96% for every euro increase in revenue. In light of the inflationary pressures we are experiencing, we are pleased with this result, and each of our businesses demonstrated strong cost performance. We are seeing increasing signs of inflation across the business, specifically in energy, alloying agents, transportation, and labor. Some of the inflationary pressures are likely structural, but we expect many to be transitory. In the meantime, we are working on numerous mitigation strategies to offset these costs. Importantly, our significant efforts in reducing structural costs by €75 million through Verizon 22 have provided a solid foundation from which to manage the current inflationary pressures and support future profitability. We will need more time to fully assess the impacts on our future results, but we expect these pressures will have a greater impact in 22 than what we are experiencing in 21 as we have already secured the vast majority of our inputs for 2021. Based on our current outlook, we expect the inflationary impacts to be manageable and to a large extent offset by higher pricing. This includes the effect of signing new contracts at higher prices and the inflation protection or cost pass-throughs within existing contracts. We are also having success implementing inflation protections in our new multi-year contracts. Lastly, I would like to address magnesium availability. China has produced 80 to 85 percent of the world's magnesium, but now is operating at approximately 50 percent of those levels. If this shortage continues for too long, many industries and supply chains will be impacted. Based on where we stand today, we expect to be able to meet our contractual requirements for the fourth quarter, and we believe we are in good shape for the first quarter. We have less clarity further into 22, and the situation remains quite fluid. While it is important to recognize that there are some factors that are out of our control, like Chinese production levels or a forced majeure at a U.S. supplier, We are taking internal mitigation actions, and we are taking steps to secure the magnesium we need, albeit at elevated prices, so that we can continue to support our customers. Now, let's turn to slide 12 and discuss free cash flow. We generated 40 million euros of free cash flow in the third quarter, bringing our year-to-date total to 121 million euros. As you can see at the bottom left of the slide, we delivered on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated over 450 million euros of free cash flow. Looking forward, we expect to generate in excess of 125 million euros of free cash flow in 2021. We expect relatively muted free cash flow generation in the fourth quarter as a result of timing of CapEx spending, and continued inventory build to help meet customer demand. We remain committed to significant, sustainable free cash flow generation. Now, let's turn to slide 13 and discuss our balance sheet and liquidity position. At the end of the third quarter, our net debt of 2 billion euros declined slightly compared to the end of 2020, as free cash flow generation was partially offset by 60 million euros of FX translation. Our leverage reached a multi-year low of 3.6 times at the end of the third quarter. We continue to expect our leverage to end the year at or below 3.5 times. As you can see in our debt summary, we have no bond maturities until 2026. Yesterday, we announced the redemption of $200 million of our 5.875% senior notes due 2026. which is expected to save us approximately 8 million euros of annual interest costs and is consistent with our objective of reducing gross debt. In total, our capital structure actions in 2021 are expected to save 38 million euros of annualized cash interest. We are rapidly approaching our cash interest target of less than 100 million euros per annum. This is a fantastic achievement. Our liquidity was strong at 900 million euros as of the end of the third quarter. As we have noted on recent calls, we will continue to gradually reduce our excess liquidity as the risk of COVID recedes. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn now to slide 15 and discuss our portfolio and our end market outlooks. I would first like to highlight our diverse and balanced portfolio of end markets. On the left, you can see the breakout of our LTM revenue across our four end markets. The packaging market is strong in both North America and Europe. We expect mid-single-digit demand growth in the medium term. This growth is underwritten by new can lines announced by our customers in both North America and Europe. The can ship market continues to improve and we have continued to secure long-term strategic agreements with our customers. These agreements reflect the substantial value that we bring to the market as a major domestic supplier in both Europe and the U.S. As I mentioned last quarter, we are investigating a number of initiatives to increase can sheet capacity across our packaging platform to serve this growing market. We expect this will be achieved through both de-bottlenecking, and additional investment. Moving now to automotive. Near-term, automotive demand continues to be hindered by the semiconductor shortage. OEMs experience production stoppages throughout the third quarter, and we expect this to continue into the fourth quarter. However, we believe underlying consumer demand remains strong, especially for light trucks, SUVs, and luxury vehicles. where Constellium has greater exposure. Let's turn now to aerospace. Demand for our products has remained at a low level. However, optimism in the aerospace supply chain is increasing. While difficult to pinpoint precise timing, we expect to show year-over-year growth in aerospace shipments in the coming quarters. Over the longer term, we remain confident that the fundamentals driving aerospace demand growth remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In other specialties, we continue to execute on our strategy of expanding in niche products in a diversified range of markets. In general, these markets are dependent upon the health of the industrial economies in Europe and North America. Specialties markets are generally strong in both Europe and North America. Across each of these four end markets, we have demonstrated to our customers the value that Constellium's products bring. Over the past two years, we have been able to increase pricing and obtain contractual protections. As Peter mentioned earlier, we expect these price increases to largely offset the inflation we are experiencing. While we obviously would prefer not to be facing the current inflationary pressures, we are much better equipped to manage them. Let's turn now to page 16. As you can see on the left side of the slide are diversified portfolio benefits from favorable market trends across each of our segments. Several of these are secular megatrends driven by sustainability, including the circular economy, lightweighting and electrification in transportation, and the aluminum can as a preferred beverage package. We also continue to benefit from the recession resilience of canned sheet, which was demonstrated again during the COVID crisis, and the diversification benefits that our focus on other specialties provides. Aluminum is a major contributor to this circular economy. Aluminum is infinitely recyclable and does not lose properties when recycled, unlike paper or plastic. As one of the largest recyclers of aluminum in the world, Constellium plays a key role in this critical trend. We are planning to build on this advantage through our investment in a recycling center in Europe. As you know, we initially planned to add a minimum of 60,000 tons of slab-making capacity. We are now investigating a larger facility that would add approximately 130,000 tons of capacity. The capital spending for a project like this would be spread over approximately three years and would not impact our deleveraging journey. This is a strategically important project for Constellium. With increased use of aluminum comes a greater need to recycle end-of-life scrap. we will be doing our part to contribute to the circular economy. By using recycled inputs purchased at a discount to primary aluminum and casting our own slabs, we will increase our security of supply and reduce our reliance on virgin metals, including aluminum and other alloys. We will also be able to meet customer requests for higher recycled content and low CO2 footprint products. At Constellium, We are increasingly aware of our environmental footprint, and the same can be said for our customers and all the way to the end consumers. Therefore, we expect our customers to be increasingly selective about the CO2 footprint of the metal they choose to use. We believe our ability to offer these products will be a competitive advantage as this environmental focus is likely to continue to intensify over time. Moving on to other favorable market trends, aluminum is inherently lightweight, strong, and corrosion-resistant. These traits provide a strong value proposition for transportation applications, notably for lightweighting and for the electrification of the automotive fleet. We provide solutions across a wide spectrum of transportation applications, including auto body sheet, automotive structures, rail, and other transportation exclusions, aerospace sheet and plate, and TID sheet. We expect electrification in transportation to continue to gain traction. As I have noted in the past, electric vehicles contain more of the aluminum products that we produce, like ABS, crash management systems, and battery boxes. than internal combustion engine vehicles. Electric vehicles are increasingly represented in our customer portfolios in both PARP and AS&I. A recent example is our supply of structural components for the F-150 lighting. We are proud to support Ford in its electrification of the F-150. Lastly, cans are increasingly the beverage packaging material of choice. with more than 70% of new beverage launches in cans. This compares to only 30% back in 2014. Aluminum cans are inherently sustainable, being infinitely recyclable with a life cycle that returns them to the shelves in as few as 60 days. We believe there is substantial additional opportunities for cans, notably in still water, wine, and other alcoholic drinks. Before I conclude, I would like to highlight the fact that Constellium's sustainability efforts are being increasingly acknowledged. Most recently, Sustainalytics improves our ESG risk rating, placing us at the top of our peers and within the top 5% of the diversified metals industry. We believe this is strong validation of the progress that we have made in recent years, and I look forward to sharing more details about our 2030 sustainability strategy early next year. Turning now to slide 17, we detail our key messages and financial guidance. I am very proud of Constellium's third quarter performance. We are successfully navigating an environment that has been more challenging than we expected in July. We delivered adjusted EBITDA at surpassed 2019 levels, overcoming substantial headwinds. Importantly, we extended our track record of free cash flow generation, and we further deleveraged our balance sheet. Looking forward, I believe there are many opportunities for Constellium to benefit from secular megatrends. Constellium is part of the solution. We have already taken action to capture some of these opportunities, and we will continue to plant the seeds for future growth in a disciplined manner. For 2021, we are targeting adjusted EBITDA of 550 to 560 million euros and free cash flow in excess of 125 million euros. We remain focused on operational performance, cost control, free cash flow generation, and shareholder value creation. With that, operator, we'll now open the Q&A session, please.

Thank you, sir. As a reminder to all participants, if you have a question, please press star 1 on your telephone keypad. Again, it's star 1 on your telephone keypad. However, if your question has been answered and you wish to remove yourself from the queue, please press the pound key. Standby while we compile the Q&A roster. Your first question is from the line of Emily Ching with Goldman Sachs. Your line is open.

Good morning, Jean-Marc and Peter. Congratulations on a good quarter. My first question is just around the recycled material that you're currently using in your portfolio. Can you give us a sense as to how much you are using? And then when you think about using scrap material as your raw material input, can you use that across every different end market, or is there still demand for virgin alloying materials out there for different applications?

Good morning, Emily, and thank you for your encouragement with Q3. So scrap, yes, it's a very important input. We use about 600,000 tons of it, and we ship 1.6 million tons of products. So there's a lot of opportunity for us to expand. And scrap, essentially, can be returned into virgin-like material through our processes. And obviously, that is costing some money. That's why we're buying it at a discount. But it's a very profitable undertaking, and that's why we want to expand our capacity. That's why we're announcing our project to grow that recycling by another 130,000 tons in the coming couple of years. We can use, the amount of scrap that you can use depends on the chemistry of the scrap and the chemistry of the end product you're making. And some applications need more, have a much less tolerance in terms of how much different ingredients or alloys can be in the material that you're selling to your customers. So the rule of thumb, in canned sheets you can have very high recycled content. You can have quite a bit of recycled content in automotive. In aerospace, it's more challenging. But we do recycle a lot of the supply chain scrap, right? So in terms of getting scrap generated in our process downstream by the process of our customers, if we implement good closed-loop, we can recycle this into themselves. But typically, the aerospace alloys have very tight tolerances for chemical composition that make them more difficult to use recycled metal. And then, you know, the other niches, I mean, there's a different story there with some that can accommodate quite a bit of recycled inputs and others that are most struggling. But, again, between the 600 we are using and the 1.6 million tons we are shipping, there is a lot of growth for us, and the 130 is certainly a big step, but it's not the last step in our journey to improve our recycled content.

Thanks, Jean-Marc. That's really clear. And one follow-up just around the magnesium discussion there. You mentioned it looks like four Q and one Q. You've got the material on hand there. But in terms of the cost inflation impact, how quickly can you pass that through to your customers?

Yeah. So, yeah, as Peter said, I mean, we are in reasonably good shape in terms of availability. And, you know, wise to some of you, it may sound like visibility through Q1 is not great. Actually, this is a market where a lot of the business is done on a quarterly basis, so we are not straying too far from historical practice. But yes, we're buying at a higher price than we used to, so it's going to be a headwind going into next year. I wish it wasn't there, but it is, so we have to face reality. I think it's difficult to say what the prices will be over the course of next year, because as I mentioned, most of it is done on a quarterly basis. And our ability to pass it through is, you've got to think of it in a number of different ways. We have some contracts where you've got a direct pass-through. We've got quite a few contracts where we've got general inflation protection. And as you know, there was already quite a bit of inflation in 21, general inflation compared to 2020. And that will trigger price increases, broad-based price increases in 22. Then in the current environment we are in, We've also been able, you know, in addition to, you know, pass through of magnesium in some cases and pass through of general inflation, we've been able to step up our pricing, you know, just because supply-demand is helping us and we're providing good products and good reliability, and the markets are growing. So, overall, you know, there will be some timing effects, and not all of it will be able to pass through in the year. But over time, we will recover what's happening ahead of us in 2022. So whilst, again, there's plenty of moving pieces, I feel pretty comfortable that, and I think Peter mentioned it, that we will be able to offset most, if not more than most, more than all, the increase in cost of magnesium.

Understood. That's very clear. Thank you.

Thank you.

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

Hey, good morning, and congrats on the quarter here. Thanks, Josh. Good morning. Just to follow up on the recycling expansion here, the inflationary environment on the RAS, how is the scrap market for aluminum looking? Is it getting more competitive? How do you guys keep a moat around that as you expand?

Yeah, so I think we, you know, since we're talking about inflation, I mean, recycling aluminum is also a hedge against inflation ultimately, right, because we get more of the process in our hands. The moat around recycling is the fact that we and people in our situation, right, are the most legitimate to ultimately own the scrap and convert it into metal, because we've got the hot mills to make that product into something that customers can use. So I think what we're doing is we're kind of cutting the middleman, because every aluminum, so sorry for rambling here, aluminum is inherently profitable to recycle, and that's the beauty of the material we are with, right? You should try to recycle pre-elastics It is costly. If you try to recycle paper, it is costly. Aluminum, there is profit in recycling aluminum. So every piece of aluminum that's out there that people care to recycle will be recycled because it is profitable. So what we do, think of it as we're cutting the middleman. We're getting access to the sources of scrap and putting it directly in our furnaces and converting it into the product that our customers want as opposed to that product going into somebody else's furnaces but then they don't have the hot mill and they can't make the product that the customers want. So I think this is a very defensible situation, a structural defensible situation, because there's not that many hot mills out there, and there certainly in the West hasn't been a new hot mill in the past 30 years. So we feel very comfortable that we are in a very legitimate place to make a lot of money by recycling aloe vera.

And Josh, maybe just to jump in a little bit, You know, I think we expect that it's not unreasonable to think that with the ESG trends out there, that there will be increased recycling rates or pressure on increased recycling rates, which will, of course, you know, create more scrap feed. And secondly, and I think importantly, when you look at the growth in the end markets that we're seeing, you know, as we're kind of producing more aluminum for these end markets, there's going to be more scrap that gets produced. that needs to be recycled. So I think there should be a bigger pool of scrap to draw from.

And then is there any arbitrage you guys can do between the North American market versus the European market, given that you straddled both? I mean, can you move any of your magnesium supplies between the two if there's an arbitrage opportunity?

We can if needed, but we don't think we really need to.

Yeah, I mean, we think both markets have good fundamentals, and we really like the model that we've always articulated to you that we like to produce in the market for the market, right? So to the extent that we can source our material in the market, then we will do that.

Thank you for the time.

Cool.

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

Hi. Thanks for taking my questions. Given that magnesium is a decent focus lately, I was wondering if you could kind of drill down a bit more into the magnesium commentary. I don't mean to harp on it, but just where does – Can Cellium source its magnesium? Are there differences between North America and Europe? How much exposure do you have after the first quarter? You mentioned it's quarterly contracts, but in terms of supply, not on cost, but supply availability in terms of visibility after the first quarter. And then, sorry for all the questions, but then the last one is the mitigation efforts. You mentioned that you're taking mitigation efforts. If you could just talk a little more specifically about what those efforts are.

Sure. Morning, David. Well, that's quite a question and a long one, so I'll try to cover it as best as I can, and Peter will help me. So we buy magnesium from China, but we also buy from a number of other suppliers in other countries, which gives us some protection in terms of making sure we've got the magnesium we need. That's why we are reasonably comfortable for the beginning of the year. And we, in terms of mitigation efforts vis-a-vis the crisis, so the first one is, you know, everything, so the broad, the diversification of our suppliers is the first one, which I just explained. Second one is we also use secondary mag, right, recycled magnesium, for which is not exposed to what we're describing. The third one is by improving our use of our own metal recycling, we reduce the need for hardeners in general, right? The fourth one is by choosing to sell more or less of this or that product to the extent we can, that also helps us consume less magnesium because not all alloys use the same amount of magnesium, right? You have a factor of 1 to 10. in terms of mag content, depending on what product you're making. The fifth one, I guess I'm at number five, is conservation. Depending on our practices, we can conserve magnesium, and obviously the more expensive it is, the more incentivized we are to conserve it. And there's a lot of focus in our cast houses to make sure that we conserve it as best as we can. So all these give us quite a bit of, you know, not leeway, sounds a little bit too comfortable given the size of the crisis, but that gives us quite a bit of extended life and more security of supply and availability in the context of this crisis.

Yeah, and David, the only thing I'd jump in to add is that, you know, obviously what we're trying to do is fill out the near quarters first. So it's not like once you get past the first quarter, we have no supply at all. It kind of tapers off from there. But I think based on what we see and kind of based on some of the, at least the most recent news out of China, we feel like we'll be able to chip away at this as we move through the period. Or period, sorry.

Okay, that's helpful. Just one quick follow-up and then another quick one after that. Can you just give us a sense of the percentage of magnesium you buy directly from China versus the rest of the world? And if the environment was to stay where it is, can you give us a sense as to, I don't know if it's volumes or overall volumes or how much would actually taper off after the first quarter in terms of your ability to produce? That's my follow-up.

I don't think I want to go into too many specifics here because it starts to be commercially sensitive. I would just say that we are less exposed to China than what they represent in total production in the world, quite a bit. And when Peter is saying tapering off, as I mentioned, a lot of these contracts are quarterly, right? So we are now focused on making sure we get the Q1 The prices are very elevated, so we're a little bit less keen to secure Q4 volumes at the current prices, given the fact that we believe with all the measures we're describing and also the fact that the Chinese production is restarting, has restarted to some extent, we think the current shock will progressively taper off as well. So we're having a balanced approach. We want to make sure that we are able to get the magnesium we need to supply our customers, and then we're trying to find the smartest way around making that happen.

Okay. And then just real quick, last one on my side, the 2022 inflationary cost pressures overall, obviously a lot of moving parts there, but is there a way to frame the potential for 2022 in terms of For example, if we use the cost flex bar chart on slide 11, just as a reference, given what you know now, what's a reasonable range for those cost flex bars for 2022 overall?

So, David, I would say, look, what we're prepared to talk about today is kind of where we are for 21. And as we said in the prepared remarks, I think we feel kind of very good on 21 because You know, we've locked in a lot of our or locked in basically all of our costs for 21, right, so in terms of key inputs. So for 22, there's a lot of things moving right now, and it's really premature to kind of try to frame it for you. And if we did, we'd probably be wrong. And I think we need a little bit more time to kind of come to some conclusions on it. Maybe just a few side points. If you take something like energy, we called out energy as an area where we have elevated costs kind of in the 22 horizon. But remember, we buy our energy forward. We have kind of a multi-year look forward, so we're buying energy forward. So we're kind of layering in energy costs. So if you think about when energy prices really moved this year, we had already bought a substantial portion of our energy costs for 2022 when that move happens. So, yes, we will experience higher energy costs, but, you know, we can expect to layer them in over time, and it won't all impact 22. So, anyway, hopefully that gives you a sense on it, but it's just it's really hard to define 22 right now.

As Peter was mentioning, there's plenty of moving pieces, and we're right in the middle of our budgetary process. So as we do every year, we'll be able to give you a good feel for 22 when we publish our Q4 results, our budgets are behind us, and we know where we're standing. But today it's a bit premature.

Okay, understood. That's helpful. Thank you.

Sure.

And your next question is from the line of Kurt Woodworth with Credit Suisse. Your line is open.

Yeah, thanks. Good morning, Mark and Peter. Hi, Kurt.

Hey, Kurt.

First question is just on the canned sheet side. I know you made a lot of progress with respect to repricing some of these legacy contracts, but can you just give us an update on what percent of your contracts have been reset at higher margins? And secondarily, I know you've said in the past that you really wouldn't look to add any incremental capacity in meaningful fashion until kind of the base business is fully repriced. So can you also kind of discuss maybe a timeline around future growth in Cansheed, and would that be done in tandem with this recycling investment, and any color on CapEx for the recycling investment?

All right. Okay, Gert. On the pricing side, everything that we have renegotiated this year comes in at higher prices in CanSheet. Everything. So that is setting us up very nicely for 22, 23 onwards. What we're seeing is customers willing to engage in more strategic, longer-term relationships, which we are welcoming because to your second question, I think, around capital investment. We want to have visibility over the long run and make sure that if we commit capital to a new capacity, we don't commit it just because the markets are good today and may not be so good tomorrow. We want to be sure we have good returns on our investment that are backed up by a very solid contract with additional volumes at higher prices. And that's where we are now. So we expect, I think I mentioned that three months ago, we are working on every opportunity we can see within our plans to de-bottleneck, make reasonable investments in a brownfield fashion to increase our capacity. And we believe we'll be in a position to commit that to customers somewhere in Q1, Q2 of next year. and we will obviously update you as to where we stand by that time. So I think the backdrop in CanSheet is very good, very solid, and that's very exciting for us in terms of our ability to grow pricing, which we've done, and now grow volumes, which we need to invest towards. As we do that, we are very cognizant of the fact that deleveraging continues to be our number one priority. So whatever we do will be done in a way that doesn't jeopardize our deleveraging journey. You kind of draw the parallel between the scrap recycling investment and can sheets. I mean, they kind of go hand in hand. But if you think of the scrap recycling investment, you know, basically we're building a new plant within an existing plant, right? So that's... two, three-year undertaking, right? So we're targeting start of production somewhere in the second half of 2024. Our de-bottlenecking initiatives in can sheets will be progressive and will increase our capacity sooner than that and will continue further than that, right? So think of something that is not like a step change but a more gradual increase in capacity, which is very good as well because you put a little bit of dollars into capex and you get a few pounds out of it and you continue feeding on the cash flow stream this way, and you make it very digestible for us as a company.

The only other thing is you asked about CapEx. So what we've said historically, Kurt, is that kind of rule of thumb, 1,000 euros per ton. For the scrap investment. Yeah, for the scrap investment, excuse me. And remember that there are inflationary pressures around CapEx too, but we're keeping that in mind as we kind of go into this, and we're confident that the returns are going to be compelling on this investment. And to Jean-Marc's point, it'll be spread over kind of three years.

Okay. And then when we look at scrap spread, they've obviously widened here. you know, very dramatically the past three quarters, you know, roughly on our math, 30 cents. Um, and you commented, you have 600,000 tons of scrap processing. So, you know, can you, can you comment on your ability to monetize that? I know historically there's been some offsets with respect to, you know, third party scrap that's from ingot. So you have a net loss there. Um, but it seems like it'd be a pretty material tail end for you.

Yeah. So, um, I think the scrap spreads you're referring to are the UBC, the used beverage cans spreads, and yes, have improved, but these are spot prices, right? And again, we run our business in a way where we don't want to be exposed all the time to spot prices, and we're happy we're not, given, you know, sometimes they go the right way, sometimes they don't. So whatever happens is more muted than, you know, the spreads that you're reading on labs or whatever, right? And that's just one category of scrap, right? Other scraps may not behave the same way. It's scrap spread in America, by the way, not globally. And then, you know, melt loss, as I mentioned a number of times, has to be covered by that scrap spread. And depending on the different grades of scrap you're recycling, you have more or less melt loss. And typically, those that have the wider spreads are the ones that have the higher melt loss. And as you know, I mean, aluminum prices are quite high these days, and the premiums are. So the melt loss, the cost of the melt loss is much higher than it was historically. So, yes, I mean, overall, we are getting some scrap spread benefit. It's actually part of offsetting inflation when you think of it. But it's not as big as, you know, just looking at the spot scrap spread and assuming that, 600,000 tons or whatever are exposed to that huge variation.

Okay. Okay, that's helpful. And then just one last one on auto. When we look at sort of the volume cadence, even relative to 19, it's been down the past couple quarters. So it seems like, you know, clearly the chip shortage has been a big issue here. But at the same time, you've invested for growth. You've had some nomination growth in structures. Can you kind of frame what the upside opportunity is here in auto in the tip shortage end? Any sense for, you know, maybe what is your utilization rate in auto relative to what you could ship if the availability was there?

Thank you. Yeah, no, you're right. I mean, we talk a lot about aero and kind of 100 million euros of EBITDA we're missing in aero, but auto is also not very good. And by the way, that's why I'm quite happy with the performance we are having this quarter because Because you look at it, we're back to pre-COVID levels. We're actually better than pre-COVID in Q3 and in Q2, despite aero being in the doldrums and auto being, you know, suffering from the chip shortage. So the chip shortage, I think we mentioned, you know, 3 to 5 million euros, and we are kind of a little bit in Q2, right? We're a little bit more than that in Q3. So call it, it's a 20 million euro headwinds, and we don't know when it's going to subside. In addition... We can produce more, and we're ramping up with new contracts. So we do have, you know, clearly north of 20 million euros on an annual basis of headwinds for lack of, you know, demand, constrained demand in auto. And we've got 100 million in can sheets. Sorry, not in can sheets, in aeros. So you just add the two and you compare it to our guidance at, you know, 550 to 560, we should be in a good place when markets return.

Great. Thank you very much. Cool.

And your next question is from Corinne Blanchard with Deutsche Bank. Your line is open.

Hey, good morning, everyone. Most of my questions have been answered, but just a few, I would say, follow-up. For magnesium, how much do you use? I believe this is mostly used for autos and can alloys. Is that correct?

It's used mostly in can and stock, right, so the lid of the cans. And there is also some usage for automotive for inners, right, the inside panels and doors and that kind of stuff, yeah. The 5,000 series. Yeah. In our jargon, it's the 5,000 series. How much do we use is a question we don't want to answer, and we can't really answer either because it really depends on what sources we're using, and that's part of it. mitigation strategy, right? Some of it we buy kind of embedded in a sheeting gut or the billets we buy. Some of it we buy directly and add to our casting recipes. Some of it is secondary mags. Some of it is, you know, depending on how we use our casting centers, we may use more or less of it. So it's part of a secret sauce, right? So we are not going to give the detailed ingredient list

Okay, I mean, fair enough on this. And just another question to go back to the recycling just in general. You said you are using a lot of the scrap and recycling for the can. Can you put, like, you know, maybe a range of percentage? Is that 70%, 80% of the content that you use to recycle, and also would be maybe lower, like around the 50% range? Yeah.

So, yeah, I think directionally you've got in can sheets, even in can sheets, you've got body stock has more recycled content than end stock has. Automotive has less recycled. So the number you are quoting, around 70%, 80%, is generally right for body stock, and then everything else becomes lower and lower.

Okay, makes sense. Just one last on my side and kind of shifting as everyone has been talking about the magnesium. So just shifting on aerospace and I mean, I think we were, or most of the industry were expecting to see some improvements already starting in 3Q or 4Q and it seems it's taking longer. What's your view on this talking or You know, Boeing seems to have announced as well a slower ramp-up or build-off rate earlier this morning. Just what do you think in terms of timing and maybe like the shape of the recovery going into 2022?

Yeah, so I think last time I mentioned we're seeing some green shoots and we continue to see them, but they are not materializing yet in, you know, increases in volume year on year. Our Q3 shipments are less in error than they were in Q3 last year. But that said, we are seeing the stocking coming to an end, but it's important to notice, and especially for you guys that follow different companies and industries, that not all of us happen to interject ourselves in the supply chain at the same point in time. So you may have the stocking over in one category of material and still not finished in the other. What we believe is going to happen is we're getting close to the inflection point. Precisely pinpointing it is difficult, but it feels like somewhere in 2022, we should see, with the increased bill rates that Airbus has published, we should see higher demand for our products, Constellium's products. And that's why I was commenting on the fact that we're expecting to see in the coming quarters year-on-year increases in shipments. How it happens? I mean, historically, when destocking's over and restocking starts again, it can happen in a span of eight weeks. So you don't see it coming and all of a sudden you're ramping up production again. And that's what we've got to be ready for, and that's clearly you know, in addition to the great job that the A&T team has done managing on the way down, they have a significant challenge being, you know, readying themselves to ramp up very shortly, at a very short notice, most likely sometime in 2022.

Thank you. Just one more on that term, and if you can comment, do you expect an infection pond starting like, you know, 2Q, 3Q, more like mid of the year, or is that something that you expect we're still about like 9 to 12 months away from it?

Sorry, can you repeat the question? You cut out a little bit, Corinne.

Sure. For the inflection pond and, you know, seeing improved volume into next year, do you expect this to happen, I would say, 1Q or 2Q, or closer to the second half of 2022.

I think we just don't know.

Fair enough. Thank you.

I think on the inflation side, we will see some impact starting in Q1, right? Yeah. That's indisputable. But we'll... We'll see how it progresses through the year.

Yeah, that's right. Definitely starting in Q1, and our hope would be obviously some of the transitory effects wane over the course of the year, so it moderates a bit.

And your next question is from the line of Matthew Fields with Bank of America. Your line is open.

Hey, everyone. I don't know if I missed it, but Would you be willing to give some clarity on the timing of your $130 million investment? Is it 22 and 23 to get the facility ready for 2024? And I assume that this new facility will be at Neuf-Bressac?

Yeah, so the timing is over three years, so 22, 23, 24, maybe a bit more in 23 than there would be in 22 and 24. So that would be the kind of profile. But much less than 22. Yeah, yeah, yeah. So most of it will be 23, 24. And the precise location is not fully decided yet for different reasons, but one of the reasons is we've got different options and we want to make sure we maximize our opportunity for subsidies. For subsidy? Yes. Okay, okay. Well, we're playing a critical part in the circular economy in Europe, and Europe has very great ambitions in terms of reducing their carbon footprint. So we're contributing to that, and we're hoping to be rewarded for it.

So there could be some kind of offset to the CapEx deployment? Possibly.

Yeah, that's certainly the goal.

Okay. And I apologize for the 25th question about magnesium, but given that, at least on the canned side, magnesium is heavier used and ends in tab stock. Do you see some kind of negative mix impact in maybe 4Q and 1Q from your sort of mitigation efforts to kind of choosing to sell more of the products that use less of the magnesium?

Well, I mean, our first priority is to support our customers. So we'll see. We'll work through that with them, right? Yeah. I can't really answer the question in great detail or certainty. Sorry.

Okay. All right. Well, thanks very much, and good luck for the rest of the year. Thank you.

And your next question and last question is from Sean Wondrak with Deutsche Bank. Your line is open.

Hi. Good morning. Congratulations on the... Top ESG rating relative to peers by Sustainalytics. Thank you, Sean. Good morning. We could start with aerospace for a second. Appreciate your comments earlier. And can you just remind us of your place in the supply chain in terms of the lag to a new airplane? And, you know, beyond that sort of how long do you think the restocking cycle, you know, obviously it operates at a bit of a lag to, you know, to a new OEM being built. So if you could talk about that a little, we'd appreciate it.

So on the aerospace side, in terms of the supply chain, it's probably, you know, we always say it's 12 to 24 months between the time that we produce, with 12 being on obviously the short side, and the time that it ends up on an airplane. And so that's kind of how we would answer that one. In terms of the... the recovery, which is, I think, what you're asking about, Sean, you know, once it starts, we see it as being a, you know, kind of a fairly gradual increase, and let me characterize this, a fairly gradual increase from the vantage point of, you know, kind of build rates, but the impact on our supply chain, if it's like it has been in historical cycles, will be a pretty strong pull at the beginning, right, because the supply chain tends to drain itself, and then all of a sudden the manufacturers need more material. So our expectation is that when they start to pull, we're going to see kind of a fairly strong pull until they get on a rate that, you know, is kind of close to approximating build rates.

That's good to hear. I appreciate that. And, you know, you've shown you have a pretty flexible business model, right? are there any other sort of alloys that you're seeing out there that are showing potential supply constraints? And any weakness there in earnings, do you think you could potentially offset it with lower CapEx?

Well, so what I'd say is there are other alloys out there. You hear about manganese and you hear about silicon, but the order of magnitude in our mix is much lower. And the our view at least at this point is that the risk around supply is much lower. So we're not super concerned about that right now.

Gotcha. And what is the interest cost savings year over year?

So we will have – we'll reduce our cash interest. We should be close – maybe the easiest way to answer this is that cash interest next year should be right around 100 million.

Wow. That's great. And just last one for me. Are you still focused on generating cash and deleveraging aside from maybe the investment here?

Absolutely. Absolutely. I mean, we take our 2.5 target very seriously, and the sooner the better. So, yes. And as I mentioned, I mean, we've got plenty of exciting opportunities. We only need to make sure that we fit them into a glide path that takes us to 2.5 at a reasonable clip. So the recycling investments we're talking about in Europe, the expansion in can-sheet capacity, none of that will threaten our objective to get to 2.5 sooner rather than later.

All right. Thank you very much.

Thank you, Sean. Thank you, Sean. Well, thanks, everybody, for attending the call. And as... As I mentioned, I'm very pleased with our performance so far. I mean, we've come back to pre-COVID level, despite aerospace, despite automotive. Surely in the future we'll see inflation headwinds, but our pricing model and our work on making sure we get paid for what we make should offset most of that, if not more than most of that. So I'm very confident with our long-term ambition, 2.5%. and I look forward to updating you on our progress at the beginning of next year. Thank you so much, everybody. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining Humanities Connect. Have a great day.