Constellium SE

Good day and thank you for standing by and welcome to the ConstellU fourth quarter and full year 2021 results. 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 the session, you will need to press star 1 on your telephone or touch-tone key. If you require an operator assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Jason Hershiser, Director, Investor Relations. Thank you. Please go ahead, sir.

Thank you, operator. I would like to welcome everyone to our fourth quarter and full year 2021 earnings call. On the call today, we have our Chief Executive Officer, John Mark 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 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 filing. 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 uncertainty. 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.

Thank you, Jason. Good morning, good afternoon, everyone, and thank you for your interest in our continuum. I want to start by thanking each of our 12,000 employees for their relentless focus on safety and their commitment to serving our customers in these challenging times. I am extremely proud of what we were able to achieve in 2021, and I look to the future with great optimism. Now, let's turn to slide five and discuss the highlights from our fourth quarter performance. Shipments were 385,000 tons. That's up 3% compared to the fourth quarter of 2020. Revenue increased 37% to 1.7 billion euros. This was primarily due to higher metal prices. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our net income of 7 million euros compares to a net income of 26 million euros in the fourth quarter of 2020. Adjusted EBITDA was 147 million euros, 33% above the fourth quarter of 2020, and well above our implied guidance range. Strong end market demand, particularly from our packaging and industrial customers, and better than expected cost performance, helped us overcome continued weakness in automotive caused by the semiconductor shortage, and inflationary pressures across the business. I am very pleased with our strong execution this quarter. We extended our track record of consistent free cash flow generation with 14 million euros in the quarter. Lastly, we demonstrated our commitment to reduce gross debt with a redemption of $200 million of our 2026 notes in November. So now turn to slide six for our full year results. Beginning with safety, our recordable case rate was 1.85 per million hours worked, and very close to our record performance last year. While this is best-in-class performance, we remain committed to continuous improvement in this most important area. I would like to specifically recognize the efforts at Changshun and Deqin in the fourth quarter. Changshun reached more than three years without a recordable case, and Dachin achieved more than 1 million worked hours without a recordable case. For the full year, our shipments were 1.6 million tons, up 10% compared to 2020, as all foreign markets, except aerospace, showed strong year-over-year growth. Revenue increased 26% to 6.2 billion euros. This was primarily due to higher metal prices and higher shipments. Our net income of 262 million euros compares to a net loss of 17 million euros in 2020. Adjusted EBITDA was 581 million euros, 25% above 2020, and notably 3% above 2019, our last full pre-COVID year. This performance is a record for the company and a record for our PARP and AS&I segments. I am particularly pleased with this result, given the fact that aerospace and automotive are still running below 2019 levels. We delivered our third consecutive year of positive free cash flow with a total of 135 million euros in 2021, and we remain very confident in our ability to maintain and improve this performance in the future. Our leverage declined to 3.4 times at the end of the year, down more than a full term from the first quarter of 2021 and at a multi-year low. Overall, I am very proud of our fourth quarter and full year 2021 performance. We delivered strong adjusted EBITDA, solid free cash flow generation, and substantial deleveraging. 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. Please turn now to slide number eight. For the fourth quarter of 2021, Constellium achieved 147 million euros of adjusted EBITDA, an increase of 33% compared to the fourth quarter of 2020. Compared to the fourth quarter of last year, PARP adjusted EBITDA of 88 million euros increased by 6 million euros. A&T adjusted EBITDA of €30 million increased by €17 million, and AS&I adjusted EBITDA of €31 million increased by €9 million. Holdings and corporate costs of €2 million decreased by €4 million compared to last year due to a number of one-off adjustments in the quarter and cost reduction initiatives. For the full year 2021, Constellium achieved €581 million of adjusted EBITDA, a 25 percent increase compared to the full year 2020. Compared to the fourth quarter of last year, PARP adjusted EBITDA of 344 million euros increased 53 million euros to a record level. A&T adjusted EBITDA of 111 million euros increased by 5 million euros, and AS&I adjusted EBITDA of 142 million euros increased by 54 million euros, also to a record level. Holdings and corporate costs of 16 million euros decreased by 4 million euros compared to 2020. We continue to expect holdings and corporate costs to run at approximately 20 million euros per annum. Now, turn to slide nine and let's focus on our PARP segment performance. Adjusted EBITDA of 88 million euros increased 7 percent compared to the fourth quarter of 2020. Volume was flat as higher shipments in packaging and specialty rolled products were offset by lower shipments in automotive rolled products. Packaging shipments increased 5% on continued strong demand. Automotive shipments decreased 18% on continued impacts from the semiconductor shortage. This trend was roughly consistent with our experience in the third quarter of 2021. Price and mix was a headwind of 3 million euros on a lower share of automotive shipments and a weaker packaging mix. Costs were a tailwind of €7 million as favorable metal costs more than offset higher maintenance and labor costs. FX translation, which is non-cash, was a tailwind of €2 million in the quarter due to a stronger US dollar. For the full year 2021, PARP generated record adjusted EBITDA of 344 million euros. Volume was a tailwind of 56 million euros with higher shipments in packaging, automotive, and specialty roll products compared to 2020. Price and mix was a headwind of 4 million euros due to weaker mix in both packaging and automotive. Costs were an 8 million euro tailwind due to solid cost control and favorable metal costs. FX translation for the year was a headwind of 7 million euros due to a weaker US dollar. Turn now to slide 10 and let's focus on the A&T segment. Adjusted EBITDA of 30 million euros increased 142% compared to the fourth quarter of 2020. Volume was a tailwind of 16 million euros. TID shipments increased 34% on strong broad-based demand in both North America and Europe, while aerospace shipments were flat. Price and mix was a tailwind of €10 million on better TID mix and pricing, while costs were a headwind of €10 million on higher labor costs, including additional costs in anticipation of improved aerospace demand. FX translation was a tailwind of €1 million in the quarter due to a stronger U.S. dollar. For the full year 2021, A&T generated adjusted EBITDA of 111 million euros. Volume was a tailwind of 33 million euros, with higher shipments in TID offsetting lower aerospace shipments. Price and mix was a 55 million euro headwind, with lower shipments in aerospace compared to 2020. Costs were a tailwind of 29 million euros due to strong cost control and favorable metal costs. partially offset by higher labor costs. FX translation for the year was a headwind of 2 million euros due to a weaker US dollar. Turn now to slide 11, and let's focus on the AS&I segment. Adjusted EBITDA of 31 million euros increased by 45 percent compared to the fourth quarter of 2020. Volume was a 1 million euro tailwind as industry shipments increased 17% on strong, broad-based demand, while automotive shipments decreased 16% due to reduced demand resulting from the semiconductor shortage. As noted in our comments on the automotive demand in PARP, our fourth quarter experience was roughly similar to that of the third quarter. Price and mix was a 10 million euro tailwind due to stronger industry mix. Cost was a 2 million euro headwind with higher labor, energy, and other costs offsetting fixed cost actions. For the full year 2021, AS&I generated adjusted EBITDA of 142 million euros. Volume was a tailwind of 35 million euros with higher shipments in both automotive and industry. Price and mix was a tailwind of 18 million euros on a better mix in automotive structures and better industry pricing. Costs were a 1 million euro tailwind due to solid cost control. Turn now to slide 12, where I want to give an update on the current inflationary environment we are facing. In the fourth quarter, we experienced more significant inflationary pressures than in previous quarters. non-metal costs like labor, energy, maintenance, and transportation were all higher compared to last year. In looking at the business unit bridges, however, it is clear that increased price more than offset inflationary pressures in the quarter. Our businesses have continued to focus on cost control and again delivered strong cost performance in the quarter. This continued discipline should help us combat cost increases in 2022. Looking at 2022, we expect inflationary pressures to increase in the near term. As you know, we operate a pass-through business model, so we are not materially exposed to changes in the price of aluminum, our most significant cost input. We do, though, expect the cost of alloying elements to be significantly higher this year, given some of the challenges we discussed on our third quarter call and the need to secure supply. We have made significant progress in securing our 2022 supply and are not currently concerned about our ability to do so. We are experiencing higher labor costs, but these are manageable thus far, and our bigger challenge is in finding people at all levels across the company. With respect to energy, our hedging strategy gives us some protection on energy costs given the fact that we buy our energy on a forward basis, but we do expect energy costs to be up materially this year, particularly in Europe. We are working hard to mitigate these inflationary pressures. Our Horizon 2022 initiatives have reduced structural costs, increased efficiency, and reduced input consumption. On the commercial side, many of our existing contracts have inflationary protections, such as PPI inflators. We are also signing new contracts with better pricing and inflationary protections. While inflation will be significant in 2022, we believe it is manageable and that it will be largely offset by improved pricing and our relentless focus on cost control. The net impact of inflation and the actions we are taking to offset it are included in our guidance for 2022. Now let's turn to slide 13 and discuss our free cash flow. We generated 135 million euros of free cash flow, including 14 million euros in the quarter. This is despite significant working capital build as shipments rebounded across a number of our businesses this year and higher capex. As you can see on the bottom left side of the slide, we have continued to deliver on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated over €460 million of free cash flow, while also reducing our factoring balance by over €100 million. Looking at 2022, we expect to generate free cash flow in excess of €150 million. We expect CapEx to be between €250 and €260 million. We expect cash interest of approximately €100 million. which represents a milestone for the company and reflects the significant actions we have taken to reduce gross debt and cash interest. We expect cash taxes of 20 to 25 million euros. Now let's turn to slide 14 and discuss our balance sheet and liquidity position. At the end of the fourth 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 77 million euros of FX translation and the cost of our balance sheet actions. Our leverage reached a multi-year low of 3.4 times at the end of the fourth quarter, or down 0.9 times versus the end of 2020. We remain committed to deleveraging and to achieving our 2.5 times leverage target. As you can see in our debt summary, we have no bond maturities until 2026. In November, in line with our objective of reducing gross debt, we redeemed 200 million dollars of our 5.875 senior notes due 2026. As previously noted, our capital structure actions in 2021 reduced run rate cash interest expense by 38 million euros per annum. We are proud of the progress we have made on our capital structure and of the financial flexibility we are building in the company. Our liquidity was strong at 773 million euros as of the end of the fourth quarter. As we have noted on recent calls, we will continue to gradually reduce the extra liquidity we added during the COVID-19 pandemic. And with that, I will now hand the call back to Jean-Marc.

Thank you, Peter. So let's turn to slide 16 and discuss our current end market outlooks. Demand remains generally very strong in the markets we serve. We are benefiting from sustainability-driven secular growth trends, such as consumer preference for infinitely recyclable aluminum cans, lightweighting in transportation, and the electrification of the automotive fleet. Constellium is well positioned today with our diverse and balanced portfolio to capture this growth. Starting with packaging, Packaging is our core market for ConStadium and represented 43% of our revenue in 2021. The growth in demand for aluminum cans is underpinned by consumer preference for cans versus other alternatives, such as plastics. Aluminum cans are infinitely recyclable, making them the most sustainable beverage packaging container and a well-understood participant in the circular economy. The packaging market is strong in both North America and Europe. We expect mid-single-digit demand growth in the medium term, which is supported by can maker capacity additions in both regions, and we are doing our best to meet the needs of our customers. We are continuing to investigate 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 of our operations and additional investments in the future. Now, let's move to automotive. Automotive represented 26% of our revenue in 2021. Costellium is well positioned in both heat and extrusions to benefit from the secular shift to aluminum in automotive and the electrification of the automotive fleet. Electric vehicles need to be light to meet their range objectives, which makes aluminum the logical material of choice for auto body sheet, crash management systems, structural components, and battery enclosures. We also expect continued light weighting of internal combustion engine vehicles to meet increased regulation, the societal focus on sustainability, and demand for improved safety and performance. Near term, automotive demand continues to be hindered by the semiconductor shortage. OEMs experienced production stoppages throughout the fourth quarter. We expect these to continue in the first half of this year and to improve in the second half. From an end market demand perspective, however, we remain very positive on this end market. Dealer inventories are low, and we believe underlying consumer demand remains strong, especially for light trucks, SUVs, and luxury vehicles. But Constellium has greater exposure. Let's turn now to aerospace. Aerospace represented 6% of our revenue in 2021, well below historical levels. Demand for our products remained at a low level in the fourth quarter. Remember, aerospace used to be 15% of our revenue in 2019. Optimism in the aerospace supply chain is increasing, and the destocking appears largely complete. More recently, major OEMs have announced build rate increases. The timing is still uncertain, but 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 remain intact, including growing passenger traffic and greater demand for new or fuel-efficient aircraft. Turning lastly to other specialties, other specialties represented 25% of our revenue in 2021. We continue to execute on our strategy of expanding 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. It is also of note that many of the sustainability-driven secular growth trends impacting our other core markets are very much at play here as well. For example, Lightweighting is driving increased applications for aluminum in rail, trucks, boats, anything that moves. In addition, increased investment in renewable energy is increasing demand for our extruded products. Specialty markets are generally strong today in both Europe and North America. Turning now to slide 17, we detail our key messages and financial guidance for 2022. Coal Stadium achieved very strong performance in 2021. We delivered record adjusted EBITDA of 581 million euros that surpassed 2019 levels. I'm very proud of our entire team as they delivered solid operational performance and strong cost control despite the many challenges we faced. Importantly, we extended our track record of free cash flow generation and further deleveraged our balance sheet. Looking forward, I believe there are substantial opportunities for Constellium to benefit from sustainability-driven secular growth megatrends, which are creating significant momentum around sustainable packaging, lightweighting, and fleet electrification. We will continue to work closely with our customers and deliver value-added products that help reduce their carbon footprint. Constellium is part of the solution in the circular economy. As we previously announced, we are expanding our recycling footprint with a significant investment in a European recycling center with 130,000 tons of capacity. We are very excited about this investment as it will strengthen our business, help us be a further solutions provider to our customers with increased recycling, and contribute to a more sustainable future. It is a triple win for Constellium, for our customers, and for the environment. Looking to this year, we are well positioned to deliver another year of strong performance in 2022. Packaging and industrial markets remain strong, and we are starting to see signs of a recovery in aerospace. Automotive is still facing issues with semiconductor shortages to start the year, but we are expecting automotive to improve in the second half of the year. While we are facing significant inflationary pressures in 2022, as Peter highlighted, We are confident in our ability to offset most of these impacts with improved pricing and a relentless focus on cost control. For 2022, we are targeting adjusted EBITDA of 600 to 620 million euros and free cash flow in excess of 150 million euros. We remain focused on operational performance, cost control, free cash flow generation, and shareholder value creation. I am very optimistic about the future. Before we open the Q&A session, I want to remind everyone of our upcoming Analyst Day on April 6, 2022. We're holding the event at our facility in Muscle Shoals, Alabama, where we expect to update you on our business, detail our plans for the future, establish new long-term guidance, present our 2030 sustainability strategy, and of course, offer a tour of the facility, all that in the presence of a very strong executive team. With that, operator will now open the Q&A session.

Okay. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question or if your question has been answered, press the pound or hash key. Your first question comes from the line of David Gagliano from BMO Capital Markets. Your line is now open.

All right, great. Thanks for taking my questions, and congratulations on the strong results and the solid outlook. Just when I look at 4Q results, I compare it to the implied guidance three months ago. EBITDABD, you know, Constellium's own guidance by 20 to 30 million euros. It's a pretty big number, especially if that were to be annualized. Then when I look at the 2022 guidance, it implies about 2% to 5% growth versus the 4Q actual result annualized. And that's despite the fact that, you know, fourth quarter is typically the weakest quarter. and that you flagged positives in each of your, you know, significant positives in each of your three major buckets for 2022. So my questions are, you know, one, what changed versus three months ago that caused consulting to beat by so much in 4Q? And then number two, you know, what are the implications in terms of upside potential for the, you know, for the full year 2022 guidance? Thanks.

Hey, good morning, Dave. Thanks for the question and congratulations. So on the first part of your question, yes, it was a significant beat. We're very pleased, and we clearly surpassed our own internal expectations. That's in the context of strong demand, stronger than we were even seeing, and excellent execution in all our facilities. So we're very pleased with that, and we hope to be able to maintain that level of performance, but You know, we really had an excellent quarter from an operations standpoint. Now, looking forward, one thing that hasn't escaped any of us is inflationary pressures. And we benefited. I think Peter commented on it in his remarks. If you look at pricing, we have better pricing in 21 than we had in 2020. but inflation kicked in only at the end of the year and only partially because a lot of our contracts for supplies reset on the 1st of January. So we had a little bit of impact of inflation, but we had the full benefit of our price increases. Going forward into next year, we are going to have the full impact of inflation, and we know that our prices are going up as well, but the compression due to inflation price increases on inflationary cost pressures, sorry, the compression is there. So that's going to put a bit of a damper on our ability to grow EBITDA, and that's what we're reflecting in our guidance. We've got pretty good visibility, obviously, as to what our prices are for the year, both on the input side and on the output side, and that's why you're seeing an increase in EBITDA that may be a little bit more modest than what we've been delivering in the past. Peter, anything you want to add?

No, I think that's great.

That's great.

Okay. And so that factors in obviously all the cost pass throughs that you've flagged multiple times, you know, on this call and in the past. So I guess, you know, is there a way to frame a certain level of, I mean, it just seems pretty conservative to me. I'm trying to gauge, you know, what your assumptions are embedded in there for, for example, timing of an aerospace recovery, timing of an automotive recovery. I know you gave us the mid-single digit growth on the packaging side.

So maybe I can shed a bit more light on the inflation and the pass-throughs. We are in long-term relationships with our customers, and obviously we discuss, we negotiate new contracts, we discuss existing contracts, and we look for solutions that work for us and for our customers. So what's important also to understand is that we will not be passing through all the inflationary pressures all at once on January 1st, right? There will be a ramp-up. And what is not passed through in 2022 will be passed through in 2023. So I think we need to look at the long-term perspective here in terms of how our pass-throughs work. And clearly what that means is we expect more – to fully pass through all the cost pressures we are feeling, but that will kind of bleed over into 2023. That's one. Then on the assumptions we have related to our guidance, we're expecting every quarter some recovery in aerospace compared to the same quarter of the prior year. And we expect aerospace to be back to pre-COVID levels or thereabouts by 2024. So it's a gradual increase. In terms of automotive, we expect that the chip shortage gets resolved in the second half of the year. And if you remember, we said it's costing us about 5 million euros every quarter this past year. So we expect that kind of drag on our earnings to continue in Q1, Q2, and then abate in Q3, Q4. And then packaging, I mean, solid, continuing, and here the challenge is more about producing everything that our customers want. I hope that gives you a bit more color as to what's embedded in the guidance.

Okay, that's helpful. Thanks. You're welcome.

Your next question comes from the line of team net tanners from Wolf Research. Your line is now open.

Oh, hey, good morning. Good morning. I wanted a little bit more color on some of the contact revision opportunity that you talked about, just to understand that a little bit more. And then also the mention of the bottlenecking and expansion and packaging, if you can elaborate on those opportunities and maybe the size of any investment there.

Certainly. So we've been on a multi-year journey to improve the value we bring to our customers and make sure it's recognized and translates into higher prices. So we're very happy with the progress we've made. And, you know, that's one of the good things about an inflationary environment is that it actually puts wind in our sails in terms of getting better pricing in the marketplace. So look at it as a continuing journey. And we've had nice price increases in 21. I think it's well known that there is even more contracts that come up for renewal in 22. So they have come up for renewal. They've been renewed at, you know, good, better, improved prices compared to the past. So we are quite pleased with the progress we're making, and that is true in packaging, and that is true as well in automotive, right? We have a nice gradual ramp-up of pricing. Regarding the de-bottlenecking, further investment in capacity, when you look at how much the can-sheet market is growing worldwide, in the U.S., in Europe, with all the new can lines, there is substantial need for more can-sheet capacity. And today, as an industry, we have a fantastic opportunity to ramp up our production and meet the growing needs of our customers. We'll talk more about the options we are considering when we have our analyst day on April 6th in Muscle Shoals. But let me say that we are very excited about the future, and we've grown our capacities in the past in the muscle shows, and we think we have opportunities to further grow them both in Europe and North America at this time. So stay tuned until April 6th, please.

Got it. Will do. So just on the first part of the question, though, just to think about the contracts, like can you give us any framework on how much, is how much of the contracts are coming due or how to think about how much is pure pass-through. Because it's a little confusing if you talk about the ability to have some that are passing through inflation but others are lagging. I'm just trying to get an understanding of how to quantify that.

Sure. And we don't want to go, obviously, into too specific details because it's commercially sensitive. But think of our contracts, and I'm talking here more specifically about packaging, but that could also apply to automotive, right? Typically, five-year duration. So on any given year, you should have about 20% of your contracts that renew. And we said 2022 is a higher year of renewal. So a bit more than 20% would be the answer. When we renew contracts, we've been in a positive price environment. So there was a step up in pricing. That step up in pricing, will kick in per se i don't look at it as an inflation pass-through because you know it's driven by supply demand and all that and and these contracts you negotiate them over many years so what we knew is on january 1st 2022 you know we didn't negotiate it in december 2021 right we negotiated in december 2020 and for the full for six months thereafter So the inflation was not very much in the picture then. But we have inflationary protections in those contracts, which means that, by and large, there's a step up in price in 22, and then you've got inflation protection kicking in in 23 on the basis of what inflation would have been observed in 22, which is very much what we're living through. So I hope that helps you understand a bit more how, you know, the mechanism of, you know, The combination of inflation pass-through and our pricing power, quite frankly, is working in two of our main segments.

Got it. So there's a lag effect. I'll SQL if inflation is static here. We'll see, theoretically, margin expansion into 2023, it sounds like.

Yes, we are seeing compression in 21 as a result of that and an expansion in 22. Okay.

All right. Thank you.

Sure.

Your next question comes from the line of Emily Chang from Goldman Sachs. Your line is now open.

Good morning, Jean-Marc and Peter, and thanks for the update today. My first question is around the automotive segment. Appreciate the color there around your expectations for that segment to more meaningfully rebound in the second half, but can you perhaps provide some color on what you're seeing there in terms of ordering activity from the OEMs and the difference between different regions and how that's sort of trending versus 2019 levels.

Yeah, so we are still subdued compared to 2019 levels. And we do not expect to be at full capacity by the end of the year because of all these disruptions we're seeing. And it's very choppy. You've got customers that, you know, pulled very heavily for a month, and then the following month, they announced they will shut down for a week. So it's been really choppy. I mean, just to give you an example, I think in Bowling Green, so in North America, where we've had quite a few disruptions, we were down 20 days in the quarter, right? So down, I mean, the plants, you know, idle for 20 days out of 90 in the quarter. So that's... and sometimes with a very short notice. So it is still very choppy, but the underlying demand is strong, and whenever they can make cars or trucks, they will.

Got it. That's helpful. And my second question is just around the recycling footprint. Can you remind us what the latest update here is on the European Recycling Center expansion? And remind us of the timing of when that additional volume should hit and the anticipated margin improvement there. Thank you.

Sure. So we're making good progress. It's a significant investment, needs permitting and all that. So the timeframe is start of production in the second half of 2024, but very quickly it ramps up to full capacity, right? So you should expect, you know, 24 is a nominal start, 25 is 80% plus of capacity, and 26 are at 100%. Margin expansion. The way I think of it is we said it's about 1,000 euros per ton of investment, 1,000 euros of capital expenditures and working capital built and all that per ton of installed capacity. And we want to meet our 20% hurdle rate, internal rate of return. So that gives you an idea of what contribution it has to EBITDA on a go-forward basis.

Great.

That's very clear. Thank you.

Sure. Thank you, Amiri.

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

Good morning. Good morning, Josh. Just the comment on aerospace with expectations to be back to pre-COVID levels by 2024, how does that contemplate your new Airbus contracts? And then separately, if we look at the structure of that new contract and the long-term nature of it, are there any new features that would ramp differently than what happens historically in a restocking cycle?

Yeah, that's a good and difficult question to answer because of the commercial nature and sensitivity of it. Yeah. I think when we say we expect 2024 to be back to pre-COVID levels, it's in the market. And I think we've been successful with our customers at better serving them. So maybe we can do a little bit better for that, but we have to earn it. So that's how I would best answer it, I think. The feature we very much value our relationship with Airbus. They're very important to us. and we want to be a very good supplier to them, and we believe there are some rewards for us being good, and that should mean that maybe we can grow a little bit faster than their needs.

Got it. And just on the alloying agent needs, do you have concerns with actually getting supply of the alloys, or is it just a matter of having to absorb the higher prices, which are just going to be eventually passed on to customers?

Yeah, Josh, it's really around the pricing. And at this point, we feel pretty good about the supply. I mean, in Q3, clearly the supply was a concern. We worked really hard over the last quarter to kind of get that right. And I think now most of the alloys that we're seeing, the kind of disruptions that there were have now been resolved. So the flow of material is coming. But the prices have remained stubbornly high. And so, we're going to experience that, as Jean-Marc said, starting in the first quarter when these contracts start to take effect. But we are, just as an aside, we're not standing there just taking this. We're obviously working a lot on increasing recycled content where we can, because there we can kind of effectively displace the need to purchase some alloys. We're working on conservation. So we're working on a number of things to lessen the blow. And this is in our guidance, too. That's maybe the last point to make.

Okay.

Thank you.

Your next question comes from the line of Kirk Woodworth from Credit Suisse. Your line is now open.

Yeah. Hi. Good morning, Tom, Mark, and Peter, and congrats on the quarter. Hi, Kirk. Thanks, Kirk. So I just kind of wanted to circle back to one of the initial questions. To some degree, when you look at seasonality and you notice some cost pressure in the business in the fourth quarter, yet you're still annualizing EBITDA, $590 million, and you clearly have a lot of operating leverage inherent in the business this year and an inability to recapture some of the inflation, as you said. You know, I'm just kind of curious what you see as kind of the puts and takes because it seems like just from your exit rate this year, you'd be on a seasonally adjusted basis, you'd be above the low end of guide for next year. So, yeah, maybe just kind of help frame the puts and takes on the upper low point and then the ability to which you can parse out the 30 million of EBITDA growth by segment in terms of, you know, what segments you think are going to grow faster or slower would be helpful. Thank you.

So, Kurt, maybe a way to help frame this is to focus on Q1. So, that will give you some context of, you know, what we're seeing in the near term. And, you know, I'll remind this audience that we typically do not like to talk about, you know, kind of quarterly performance. But in this instance, maybe to help you understand the cost pressures will do that. So if we just go back and look at the first quarter of 2021, we had 121 million of EBITDA, right? And we also called out there was a 10 million extraordinary. So if you kind of adjust for that, you're at 131 for the first quarter of 21. As we see the first quarter of 22 shaping up, given some of the pressures, we should definitely be able to beat the 131, but we will have a hard time beating the sequential quarter, so the 147 that we just did. And so hopefully that gives you a sense for, you know, kind of the range of what we're expecting in the first quarter and some guidance on how it might, you know, kind of play out given some of the cost pressures that are going to run through the year. In terms of, you know, kind of looking forward and, where the incremental EBITDA comes from. Remember, we are expecting, based on what Jean-Marc was saying and what we said in the prepared remarks, we are expecting an uptick in aerospace shipments in every quarter as we go through the year, and those are highly remunerative tons. So that should be a nice benefit for us. Automotive, if we get that benefit in the second half, which we're expecting, then that should also be a nice bump for us in terms of EBITDA. And I would say, you know, the packaging is we're, you know, we're running, as you know, we're running pretty full on packaging, but as we continue to work on costs there and so forth, we'll get some benefit on the packaging side too. Jean-Marc, if you'd add anything.

Yeah, maybe I'll just add that, you know, in this inflationary times, we've got the timing element and we're going to, As we pass through inflation, automotive is lagging a bit more than packaging, right? So that also can help frame how, you know, we think about 2022. Okay.

And then in terms of packaging, you know, historically there's been some benefit to the widening of scrap spreads, which have widened pretty dramatically the last couple quarters here. You know, I'd say maybe it's been somewhat evident in your EBITDA per ton performance in part, but, you know, obviously you talked about the next effect from lower automotive and inflationary pressures. But, you know, can you talk to maybe more specifically about packaging this year in terms of either the benefit of the scrap spread widening? Obviously, the beverage can companies are talking about pretty significant can-sheet conversion costs going up. I know, I believe you have a fairly heavy reset year this year. But any color you could give with regard to kind of packaging dynamics would be great. Thank you.

Yeah, and I'm assuming you're talking specifically as it relates to scrap, right?

Correct.

Okay, yeah. So maybe just to rewind a little bit to remind you on scrap. So first of all, not all scrap is created equal, right? And so some scrap comes at a bigger discount than others, and then there's also obviously – the cost to convert it into a usable form for us. And then the last thing I'd note is that today we have a stronger footprint of recycling in North America than we do in Europe. So just a couple of things to keep in mind. Now, having said that, recycling, and you noted this, or we noted this in our comments on favorable metal costs, recycling definitely was a contributor in the quarter. The scrap profit was definitely a contributor, and it helped us in part, no question about it. But again, the way we're looking at this is it's part of a basket of benefits that we're putting against some of these inflationary pressures that we're facing. So yes, it helped us And, you know, kind of we expect it's going to continue at the kind of levels roughly around where it is today. But we wouldn't say it's, you know, it's not changing the story at PARP, I guess maybe is the way to put it.

And maybe, Kurt, to add to what Peter said, in 21, it was a benefit, right, compared to 20. But going forward, we do not anticipate scrap spreads to widen and all that. But we do anticipate energy costs, which are a big part of the conversion costs that Peter was talking about, to be higher. So the net impact of that may be a little bit less scrap profit, so to say, in 22 than we had in 21. Okay.

And can you comment on how much of your canned sheet is repricing? maybe this year or next year, if possible?

Yeah, I think I said more than 20% just earlier in one of the questions, and less than 30% would be a good ballpark.

Okay, thanks very much.

Your next question comes from the line of Corrine Blanchard from Equity. Your line is now open.

Hey, good morning. I think one of the first comments goes back on some of the questions You expect auto to recover in the second half of the year. How do you view seasonality? Would you still expect the regular seasonality that we've seen in 4Q or a little bit different?

Hey, Corinne. Well, it's an assumption more than a definite prognostic, right? The assumption is a recovery in Q3, Q4. which means that we would expect Q4 next year to be better than Q4 this year. And typically, you know that auto is stronger in the first half and second half, so maybe a more balanced year is the way I look at it for 2022. Okay, thank you.

And just another question, to go back on your aerospace comment, I believe you mentioned expecting 2024 back to the 2019 level. Is it like an industry comment or is it more specific to Constellium?

It's more an industry comment.

Okay. So if that's an industry comment, what's your view on the impact on Constellium in terms of margins? I believe, you know, aerospace is one of your highest EBITDA margin contributors, right?

Sure. Yep, yep. So we think we should be able to replicate margins that we had back in 2019 or thereabout, right? So we said, you know, trend line, we said 700 to 800, maybe 750 to 850 euro per ton would be the kind of...

For A&T overall.

For A&T overall, yes. That would be the overall kind of guidepost for knowledge engine A&T.

Okay, let's see. Just one last, if I can, actually, on A&T. I think you have seen significant improvement in terms of volume and pricing mix for TID. Do you expect that to continue like this year and maybe like 2023 as well?

So I think we've reached a very nice performance level, and our objective now is to maintain that. It's putting pressure on the system because the same assets that produce TID are also the assets that produce aerospace. And if aerospace grows gradually or if it grows all of a sudden, that puts a different type of pressure on TID. So our objective is try and maintain the TID levels where they're at now, and accommodate for the growth of aerospace.

Great, thank you. Your next question comes from the line of Christian Georgis from Societe Generale. Your line is now open.

Yes, thank you, Jeanne, and thank you for the call. On your free cash flow, you did over $100 million again this year, right? And then the net debt is down significantly. hardly more than 10 million euros, which is kind of like a low conversion level. If you look at Bloomberg consensus, that suggests 1.71 billion net debt at the end of next year, or about 200 million net debt reduction. Is that realistic to expect you to have a really high level of conversion to net debt reduction next year?

Well, first of all, Christian, You know, just to call out what happened in 2021, we did have some FX translation that worked against the debt reduction. And remember that we had some costs associated with some of the refinancings that we did that also, you know, kind of worked against the absolute debt reduction number. And looking at 22, again, our guidance is greater than $150 million. And we are, you know, kind of very confident in our guidance and we'll do as well as we can. But, you know, I'd say assume 150 million euros or better of free cash flow and therefore debt reduction. Everything that we're going to generate from a free cash flow perspective, we're going to put into debt reduction until we get to that two and a half times leverage target.

So is the $1.71 billion something you would judge as a challenge or realistic?

Well, we're going to try to get as low as we possibly can, but I'm telling you our guidance is kind of $150 million or better. So for 1981, take $150 million off of that, and that's about where we should be.

Okay, that makes sense. Another question is on this automotive world. If I go back to what Jean-Marc was saying, we've been subdued since 2019. We're running at about 55,000 tons per quarter with a peak, I suppose, 63 back in Q1 2021. Say that by the second half of 2022, given the incredibly buoyant demand for automotive, secondhand cars are going through the roof. I mean, what would be this amount in second half? If things had been normal for the past two years, would you be running at like 65,000, 70,000 tons per quarter? Is that a realistic top level?

So our maximum capacity in rolled automotive products, Christian, is 280,000 tons a year, which means you never quite get there, right? You need a little bit of buffer. But, you know, shipping... up to 70 in any given quarter is possible as a consequence. And obviously that's not included in our guidance, right? So that would be upside if the markets recover strongly and faster.

Okay. So 210,000 tons per quarter is your packaging type of like, you know, a full on 70 on automotive. I mean, within, 18 months. I know you're going to talk to us in April, but on rural products, you're pretty much at capacity, right?

Yes, we are pretty much at capacity, and that's why we're going to be talking about capacity expansions. And again, we'll be talking about it in the context of we want to remain at that 2.5 times leverage target over time. It's going to happen in the medium term. It's not anymore a long-term target. It's a medium-term target. We want to stay around that, and we think that there are plenty of very attractive growth opportunities for us that will require some capital investment, but we'll make those capital investments and continue to maintain that leverage level and actually deliver over time because this is a company that I think we've demonstrated can generate meaningful free cash flow in about any market situation, right? Up market, down market, pandemic, crisis, recovery. And we want to maintain that economic model through good times and bad times.

Super. Thank you very much.

Thanks, Christian. Thanks, Christian.

Your next question comes from the line of Carl Blunden from Goldman Sachs. Your line is now open.

Good morning. Thanks for taking the time. Just a question, maybe more for Peter. On the liquidity side, you have been reducing your liquidity post the pandemic-induced borrowing. Would you say that $500 million to $600 million is the right level for the company to run with? I know that was the 2019 level, but you have some growth. You also potentially have some working cap needs associated with supply chain uncertainty. So just wondering how you think about what the right level is going forward.

Yeah, we'd be very comfortable at that level. And I think, you know, as we've said in the past, we could, you know, comfortably run the company even at lower levels than that. But I think, you know, we'd be very comfortable at that level, and I think that's very likely the type of place we go to in the interims.

That's really helpful as we think about debt reduction. And just with regard to inflation for this year, as you look at what the variables are that could lead to the most variation versus your guidance, what should we have on our mind as we work through our models?

Well, I think, you know, so, again, metal is a password, just to remember to remind everyone I'm not – Alloys, we've kind of locked in a lot of the pricing there, so we're, you know, we still have some to buy, but, and we're hopeful that that price is going to move favorably, but, you know, thus far it has not, but there's obviously some risk there. Labor, which is our, you know, labor's our second biggest increment of cost, and labor, we benefit from contracts that we, you know, today know where we're going to be on our labor costs for 22, so we should be you know, we should be in reasonably good shape there. And then on energy, so energy, remember, we buy forward. We are going to see some significant increases in energy costs this year, just given the, you know, kind of way the energy curve has shaped up and some of the needs that we have there. I would say that that is maybe one place with some of the challenges going on around the world, you know, just with the energy transition and then geopolitically we could have some slightly higher costs there than what's built into our guidance, you know, if things turn the wrong way.

So on energy, do you basically build in strip prices, you know, just what you see in the market today?

Well, no, we have actual costs that we're contracted, so we would build in those costs, and then for whatever's outstanding, we would factor in something more along the lines of what you're saying.

Right, for the uncontracted volumes. Okay, thanks very much. I appreciate it.

Okay, you're welcome.

There are no further questions at this time. I will hand it over back to Jean-Marc Germain, CEO of Gonsalium.

Well, thank you very much, everyone. Great to talk to you today, and I look very much forward to updating you on our future and establishing our new long-term guidance on April 6, 2022. We hope you can come to Muscle Shoals. Otherwise, it will be available with all the modern technology options. Thank you so much, and have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.