Constellium SE

Hello and welcome to today's Constellium second quarter 2022 results. My name is Elliot and I'll be coordinating your call today. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to Jason Heisheiser from Director of Investor Relations. The floor is yours. Please go ahead.

Thank you, Elliot. I would like to welcome everyone to our second quarter 2022 earnings call. On the call today, we have our Chief Executive Officer, John Marks 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 uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20F. All information in this presentation is as of the date of the presentation. will 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 reconciliation 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 Constellium. Let's turn to slide five and discuss the highlights from our second quarter results. I would like to start with safety, our number one priority. After a strong first quarter performance, our recordable case rate climbed in the second quarter, leading to a rate of 2.2 per million hours worked for the first half of the year. This is a humbling reminder that While we always strive to deliver best-in-class safety performance, we need to constantly maintain our focus on safety to achieve the ambitious targets we have set. It is a never-ending task for our company and one that we take very seriously. Turning to our financial results, shipments were 424,000 tons, up 4% compared to the second quarter of 2021, due to higher shipments in each of our segments. Revenue increased 50% to 2.3 billion euros as a result of higher metal prices, improved price and mix, and increased volumes. As we have said previously, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our value-added revenue, which reflects our sales, excluding the cost of metal, was 704 million euros, up 22% compared to the second quarter last year. Our net loss of 32 million euros in the quarter compares to a net income of 108 million euros in the second quarter of 2021. The decreases in net income is primarily related to a 158 million euro unfavorable change in unrealized gains and losses on derivatives, mostly related to our metal hedging position. As you can see in the bridge on the top right, adjusted EBITDA was 198 million euros, 17% above the second quarter of 2021. This is a new record for the company, and it includes record results in both PARP and ASNI. Demand remained strong across most end markets during the quarter, and notably, the aerospace recovery continued in the quarter with strong growth both year-over-year and sequentially. Automotive continues to be impacted by the semiconductor shortage and other supply chain challenges. The combination of stronger demand, pricing power, solid execution by our team, and a stronger U.S. dollar drove better results despite the significant cost pressures, which Peter will discuss later in more detail. Moving now to free cash flow, we extended our track record of consistent free cash flow generation with 60 million euros in the quarter. As you can see on the bottom right of the slide, we demonstrated our continuing commitment to deleveraging, ending the second quarter at 3.0 times or down almost half a turn from the end of 2021. We remain committed to achieving our leverage target of 2.5 times and maintaining our long-term leverage target range of 1.5 to 2.5 times. Overall, I am very proud of our second quarter performance. Looking forward, macroeconomic and geopolitical risks remain elevated, and we expect inflationary pressures to continue, especially for inputs like energy in regions more directly affected by the ongoing war in Ukraine. Despite some warning signs, we are not experiencing a material reduction in demand in our core end markets, and our business has continued to perform well. As a consequence, we are optimistic about our prospects for the remainder of this year. We are therefore raising our 2022 adjusted EBITDA guidance to a range of 670 to 690 million euros. That increases our previous guidance of 640 to 660 million euros. In addition, we continue to expect free cash flow in excess of 170 million euros in 2022. Turning to slide six, and before handing it over to Peter, I want to directly address a topic I know you are all focused on, and so are we, which is natural gas prices and availability in Europe. As is the case for Europe generally, a portion of the natural gas used in our facilities comes from Russia. To date, our operations have not been affected from an availability standpoint. There is clearly an increased risk that Russia further reduces or stops its flow of natural gas to Europe at some point. It is difficult to know if or when this may occur, though we believe there is good logic for Russia to gradually reduce the flow of gas to Europe. We noted Nord Stream 1's recent return to service at a lower flow rate than pre-maintenance level, and well below capacity. To address this risk, Europe is moving quickly to limit any potential impacts. This includes finding alternative sources of gas, the European Commission's 15% demand reduction plan, and a broader plan to end dependence on Russian gas in the future. As you all know, Russian gas dependence varies widely by country across Europe. While we do have exposure in some countries that depend heavily on Russian gas, a substantial amount of our EBITDA in Europe is generated in countries with less dependence. In addition, we believe a 15% reduction in gas supply would lead to much less than a 15% reduction in our production capacity. Also, as a reminder, during COVID, most of our plants were deemed critical, given our exposure in markets such as aerospace, defense, and packaging, food and pharmaceutical. If we are afforded the same treatment in a scenario where gas rationing is necessary, it could limit the impact on our operations. We are obviously monitoring the situation very closely and will continue to update you on developments. For the avoidance of doubt, the guidance I provided a moment ago assumes that natural gas will continue to be available, albeit at elevated prices. 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 eight. Value-added revenue, or VAR, was €704 million in the second quarter of 2022, up 22% compared to the same quarter of last year. €34 million of this increase was due to higher volumes in each of our segments. Eighty-one million euros of this increase was due to improved price and mix also in each of our segments. Metal impacts were a headwind of 21 million euros as inflation on inputs such as hardeners and alloying elements more than offset our scrap performance in the quarter. Finally, 35 million euros of the increase was due to favorable FX translation tied to a stronger U.S. dollar. There are three important takeaways from this page. First, as Jean-Marc noted, the top-line dynamics in our business remained favorable in the quarter. Second, with adjusted EBITDA of 198 million euros in the quarter, our margin on value-added revenue was 28.1%. And third, to put our performance in context, compared to the first half of 2019, VAR in the first half of this year was up 11%, and our adjusted EBITDA margin on VAR was up approximately 200 basis points. Now, turn to slide 9, and let's focus on the PARP segment performance. Adjusted EBITDA of 95 million euros, a new record for PARP, increased 2% compared to the second quarter of 2021. Volume was a tailwind of 5 million euros with higher shipments in packaging and automotive. Packaging shipments increased 4% versus last year on continued strong demand. Automotive shipments increased 3% in the quarter versus last year as new platforms began to ramp up. But overall, demand continues to be well below pre-COVID levels due to the semiconductor shortage and other supply chain challenges. Price and mix was a tailwind of 15 million euros primarily on improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of 26 million euros as higher operating costs, mainly due to inflation, more than offset favorable metal costs. FX translation, which is non-cash, was a tailwind of 7 million euros in the quarter due to a stronger US dollar. Now, turn to slide 10 and let's focus on the A&T segment. Adjusted EBITDA of 63 million euros increased 50% compared to the second quarter of 2021. Volume was a tailwind of 12 million euros as aerospace shipments were up 54% compared to last year. Price and mix was a tailwind of 39 million euros on improved contract pricing, including inflation-related pass-throughs and a stronger mix with more aerospace and a better TID mix. Costs were a headwind of 33 million euros on higher operating costs due to inflation and the production ramp up in aerospace. FX translation was a tailwind of 3 million euros in the quarter due to a stronger US dollar. Now, turn to slide 11 and let's focus on the AS&I segment. Adjusted EBITDA of 46 million euros a new record for AS&I, increased by 13% compared to the second quarter of 2021. Volume was a 3 million euro tailwind with higher shipments in industry and automotive. Industry shipments increased 5% versus last year on continued strong demand. Automotive shipments increased 3% in the quarter versus last year, but as noted for PARP, overall demand continues to be well below pre-COVID levels. Price and mix was a 24 million euro tailwind, primarily due to improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of 23 million euros on higher operating costs, mainly due to inflation. Now turn to slide 12, where I want to give you an update on the current inflationary environment we are facing and our focus on cost control to offset these pressures. In the second quarter, As expected, we experienced significant inflationary pressures across our business, many of which were exacerbated by the war in Ukraine. These cost pressures are creating a significant headwind to our otherwise strong performance. 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. That said, metal supply remains tight today. with high energy prices increasingly forcing smelters to shut down. Most recently, Sentry's shutdown of its Hawesville smelter eliminates an important supplier and will put pressure on high purity aluminum pricing. We currently expect to be able to resource this missing supply, but at a higher cost. The cost of alloying elements like magnesium and lithium are significantly higher this year due to supply disruptions and to the actions we took previously to secure our supply. Magnesium supply is again a concern in the U.S. where one of our suppliers has reduced production. We have worked with our other suppliers and are not currently concerned about our ability to secure the magnesium we need. However, our magnesium costs will be higher than expected. Non-metal costs are also higher this year, particularly European energy. As previously noted, we purchase energy on a rolling forward basis which has helped mitigate some of the current cost pressures. However, our energy costs will run significantly higher this year, particularly in Europe, given the unprecedented energy price increases. Our total energy costs over the last three years have averaged around 150 million per annum. Currently, we expect total energy costs to be closer to 250 million euros in 22, with additional increases in 23. While not to the same extent, we are experiencing significant cost pressures across most other categories, which we expect to continue throughout the balance of 2022. Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results. Our business continued to deliver strong cost performance in the quarter and our recently announced Vision 25 initiative is beginning to help. Across the company, we are working to increase our efficiency and reduce our consumption of expensive inputs and lower our fixed costs. On the commercial side, many of our existing contracts have inflationary protections, such as PPI inflators or surcharge mechanisms, and where they do not, we are working with our customers to include them. The extraordinary increases in European energy prices, for example, support the need for an energy surcharge mechanism. We are also signing new contracts with better pricing and inflationary protections. We have, for example, been successful in incorporating magnesium price protections in most of our contracts. While inflation continues to be significant in 2022, we believe it's manageable and it will be largely offset by improved pricing and our relentless focus on cost control. I want to reiterate that the net impact of inflation and other cost increases, including energy and magnesium, and the actions we are taking to offset them are included in our revised guidance for 2022. Now let's turn to slide 13 and discuss our free cash flow. We generated 60 million euros of free cash flow in the second quarter, bringing our year-to-date total to 86 million euros. As you can see on the bottom left of the slide, we have continued to deliver on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated over 550 million euros of free cash flow. Looking at 22, we expect to generate free cash flow in excess of 170 million euros. We expect CapEx to be between 265 and 275 million euros, up from our previous guidance of 250 to 260 million euros due to a combination of inflationary pressures and a stronger US dollar. We expect cash interest of approximately 100 million euros and cash taxes of 20 to 25 million euros. Now, turn to slide 14 and let's discuss our balance sheet and liquidity position. At the end of the second quarter, our net debt was 2 billion euros. This was roughly flat compared to the end of 2021, as 86 million euros of free cash flow generated in the first half was offset by unfavorable non-cash FX translation of 90 million euros with the strengthening of the US dollar. Our leverage reached a multi-year low of three times at the end of the second quarter, or down almost 0.5 from the end of 2021. Given our revised 22 guidance for adjusted EBITDA and free cash flow, we expect leverage to continue to decline and to fall below three times by the end of this year. We remain committed to achieving our leverage target of two and a half times and maintaining our long-term leverage target range of 1.5 to 2.5 times. As you can see in our debt summary, we have no bond maturities until 2026. It is of note that during the second quarter, we repaid all of our COVID-related financing. Despite this, our liquidity of 899 million euros increased compared to the end of the first quarter. We are very proud of the progress we have made on our capital structure and of the financial flexibility we are building. And with that, I will hand it back to Jean-Marc.

Thank you, Peter. Let's turn to slide 16 and discuss our current end market outlooks. As I mentioned before, demand generally remains 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. The packaging market is strong in both North America and Europe, and domestic supply remains tight. We expect mid-single-digit demand growth in the medium term, which is supported by already announced can-maker capacity additions in both regions, as well as recent announcements of greenfield investments here in the U.S. to build new aluminum rolling mills. We recently announced a series of projects to unlock 200,000 tons of capacity by 2025 to serve this growing market. These brownfield projects will expand our capacity in both North America and Europe and come with very attractive returns for our shareholders. Near term, automotive demand continues to be hindered by the semiconductor shortage and other supply chain challenges. OEMs experienced production stoppages again in the second quarter. We expect these to continue in the second half of this year. From an end market demand perspective, however, we remain very positive on this market and in its growth potential given low inventories, high consumer demand, electrification trends, and continued penetration of aluminum. Let's turn now to aerospace. Aerospace shipments were up over 50% in the second quarter versus last year and up 25% sequentially. Major OEMs have announced build rate increases. We remain confident that the fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. Turning lastly to specialties, 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. While we have begun to see some preliminary signs of potential weakness in certain end markets, our specialty markets in both Europe and North America are still strong today. Let's turn to slide 17, where before concluding, I want to acknowledge some of the challenges we face on the macroeconomic and geopolitical front, but reiterate why we believe Stellium will continue to succeed. First, our diversified portfolio serves a range of resilient end markets that are well positioned today. Packaging is stable and growing. Aerospace is in the early innings of a multi-year recovery. Automotive is operating well below pre-COVID build rates with substantial pent-up demand. Together, these three end markets represent roughly 75% of our revenue base. Second, the demand for aluminum in our core market is growing due to durable, sustainability-driven secular growth trends. These trends foster healthy supply-demand dynamics. Third, We have demonstrated our pricing power over the last several quarters with our ability to pass through most of the inflationary cost increases. Fourth, we have built a strong track record of execution and a proven ability to control our costs across both contracting and expanding business environments. Fifth, we have demonstrated our ability to generate consistent free cash flow. And finally, Our balance sheet is rapidly approaching our target leverage range, and we have no near-term bond maturity, and we have a strong liquidity position. We remain very confident in our ability to succeed. So let's turn to slide 18 to wrap up before we open the line for Q&A. Constellium's performance in the second quarter of 2022 was very strong. We delivered record adjusted EBITDA of 198 million euros, through solid operational performance and strong cost control in the face of significant inflationary pressures. We extended our track record of free cash flow generation and our net debt to adjusted EBITDA of 3.0 times is a multi-year low. Looking forward, we are well positioned to deliver strong full-year performance in 2022 and beyond. For 2022, we are now targeting adjusted EBITDA of 670 to 690 million euros, and free cash flow in excess of 170 million euros. Our guidance assumes business conditions remain roughly as they are today. Long term, we are targeting adjusted EBITDA in excess of 800 million euros by 2025, and we expect to maintain a leveraged target range of 1.5 to 2.5 times. We remain focused on operational performance, cost control, free cash flow generation, the achievement of our ESG objectives, and shareholder value creation. I am very optimistic about our future despite all the turmoil out there. With that, Elliot, we will now open the Q&A session.

Thank you. For our Q&A, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, please press star followed by 2. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Kurt Woodworth from Credit Suisse. Your line is open. Please go ahead.

Yeah, thank you. Good morning, John, Mark, and Peter.

Good morning, Kurt.

You know, first question, I just wanted to kind of get your thoughts on potential capital return going forward. I mean, when you look at kind of your net leverage and certainly going forward in the free cash flow outlook, you know, it seems like your balance sheet is getting to be, you know, roughly speaking where you want it. So I was wondering if you could kind of address potential, um, you know, pivots and caps allocation priority as you move into next year.

Great question, Kurt. So, um, we're going to be consistent on this one. As we've said in the past, the number one priority is to kind of achieve our leverage target. And that was two and a half. And once we're at two and a half, then we will, uh, you know, we'll kind of reconsider our options. But absolutely, as we get to two and a half, which we are rapidly approaching, then shareholder distributions will become a more central focus for us. And we're, you know, kind of thinking about that and framing that right now.

Okay. then i i guess maybe um i know you don't give kind of quarterly guidance but as we think about sort of sequential progression into um 3q it seems like momentum obviously in a t is very good um price and mix was obviously a big upside this quarter so maybe you know i guess question you know question would be on a and t do you feel like the mix and the progression will continue to scale up um you know the upper tone is obviously very strong And then within automotive structures, it seems like automotive is maybe getting a little bit better. But can you comment on maybe what your automotive assumptions are for 3Q in the back after the year? Thank you.

Yeah, I'll get started, and Peter will help me. So remember, there is seasonality. And typically, the second half of the year is not as strong as the first half of the year, so thinking about it sequentially. We continue to see a strong demand in ANT, so it's going to be a very solid second half. But when you look at the EBITDA per ton, you remember we've said historically 700 to 800 euro EBITDA per ton is a good number. Maybe we're drifting up towards the higher end of the range. Q2 was exceptionally strong, I think over 1,000. So don't expect the Q2 performance in EBITDA per ton to continue through the end of the year. Talking about auto, we don't anticipate much of a change in terms of all the supply chain issues that our OEM customers are going through. We expect a continuation of a so-so environment for them, but we are pleased with how we're doing in that environment. Year over year, if you look at the first half of 2022, We're slightly up to overall automotive shipments, and we think we'll stay around those levels seasonally adjusted for the second half.

Yeah, the only thing I'd add, I think that's great, the only thing I'd add is that when auto comes back, we're ready, right? I mean, our lines are running very well, and so we're ready to absorb incremental demand.

Okay. Maybe just one quick one. I mean, we've seen three new greenfield hot strip mills being announced in two months' time. It's roughly, I think, 1.8 million tons. So it's a pretty significant step function change in capacity coming into the market, 25, 26. I would think a lot of those, I know you can't speak to them, but clearly they've got commitments for some of that capacity beyond, which suggests more growth ahead. I was just wondering to you, You know, can you kind of comment on your view of that? Do you feel like the market will be able to absorb that capacity? Thank you.

Sure. So as we commented during the analyst day, we are sold out essentially through 2025, 2026, and we've got significant contracts that go beyond those dates in the decade. But we are not sold out through 2030. That is for sure. We believe that given the growth in the market, you do need this additional capacity by the end of the decade. So how fast they come up online and they ramp up and how quickly they ramp up, how successfully they ramp up, may create either a very tight supply-demand balance or some excess supply if everything comes on stream quickly and ramps up very quickly in a kind of 26, 27 horizon. But ultimately, that level of capacity is needed. And besides, remember that there's the equivalent of today, there's already the equivalent of one of these greenfields that is imported from overseas because we're lacking domestic capacity in the US. And these imports are certainly part of the equation that we need to think through as we think of the supply-demand balance in the US.

Great. Thank you.

Our next question comes from Emily Cheng from Goldman Sachs. Your line is open.

Good morning, Jean-Marc and Pierre, and thanks for taking the time today. My first question is just around your comments earlier on the energy cost increases and potentially what you're expecting in 2023. But perhaps could you share some color as to maybe what hedging you have in place or contracts that you have that do give you that confidence that the additional cost increase in 2023 remains manageable, particularly as it relates to Europe?

Yeah. Well, so let me first comment on 2022 and say that, you know, vis-a-vis 2022, we're effectively, you know, we've purchased all of our energy. So we're effectively that on 2022. Moving into 2023, the way we think about this is that we do expect there to be significant increases. However, As I said in the prepared remarks, we also think given the extraordinary increases that there is a need for some type of energy surcharge mechanism. And we're working with our customers on that right now. And so right now it's hard to give a lot of guidance on 2023 because we really need to see how effective we are in working through that aspect of it. So as that develops into, you know, kind of Q3 and Q4 Early next year, we'll be able to give you a lot more color on 23 in terms of energy costs.

Understood. And then a follow-up is just around the higher metal costs from sourcing new sources of high-purity aluminum and similar on maybe domestic US mag as well. But are those costs more one-off efficiencies, or do they ultimately get passed around pricing as you work through new supply sources?

Well, so on high purity, these are costs likely we will have to absorb, and it'll be absorbed in, you know, kind of through the different mechanisms that we have in place, the PPI structure and so forth. Magnesium costs, again, as I said in the prepared remarks, we've put in place the kind of pass-through mechanisms on magnesium costs, some of them with delay. So, you know, we will not We will not necessarily get all of that in 22, but by the time, you know, kind of 23 comes along, we should be fully protected. And it's in our guidance, too.

Great. Thank you.

Our next question comes from Corinne Blanchard from Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning, Jean-Marc and Peter. Thank you for the time today. I just want to go back maybe on the packaging. Can you just remind us on the contract and the volume that we can expect to be renewed into 2023 and 2024? Well, we have extended...

quite a few of our contracts. So the rule of thumb, which was historically, you know, it's most of the time five years, sometimes three years. So you're kind of renewing every year 20 to 25% of the volume.

Maybe it's a little bit less now.

Okay. And then maybe to just back on that as well, I mean, how do you view pricing negotiation for those kind of contracts? Like, on the medium term, let's say 2026, 2027, given the upcoming capacity in the market?

Yeah, so we don't have anything really much to negotiate anymore because most of our contracts are already agreed and locked up, locked in for the period 23, 24, 25. So that's pretty much done. Extensions to current contracts, we have plenty of time to work on them. So today we don't have a building need ourselves to get to the market and sell our capacity for 28, 29, 27. Thank you.

And maybe one last question, if I can, and maybe more for Peter. But I was looking and interested into effect sensitivity, so like RO, USD. Can you just provide some color about the impact that you see from this and what could be impacted or expected for the second half of the year?

Yeah, so maybe the best way to do this is in the context of the first half, right? So in the first half, in the first quarter, on a year-over-year basis, we had about a $5 million impact. And in the second quarter, we had about a $10 million impact. So relative to last year, we're talking about a $15 million-ish tailwind from FX in the quarter. So I think $15 million is probably the right order of magnitude for the first half of the year. And then if you look at, I assume you want to know the impact on our balance sheet. In our balance sheet, it really kind of flows into the translation impact on our net debt, which is negative, which is You know, the strengthening of the U.S. dollar is really the reason why our debt balance has maintained persistently around $2 billion, despite the repayments that we've been making. But then on a cash flow basis, the FX, it should be, you know, modestly positive to neutral because the benefit that we get on the EBITDA side gets absorbed in things like interest expense and CapEx and so forth. So it's a modest positive.

Great, thank you. Very helpful.

You're welcome.

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

Hey, good morning.

Morning, Josh.

Just within aerospace, and congrats on the strong growth here, but you're curious as engines remain a gating factor for OEM deliveries, and Airbus has built a couple gliders already. Do you see any scenario where the engine supply chain needs to catch up and there's a related need to slow down demand for aluminum structure needs?

Yeah, so we're very much aware that the engine part of it is the most significant bottleneck at the moment in the aerospace industry that gets a lot of press. We don't see any of our customers telling us to slow down. If anything, when we were in Farnborough just earlier this month, everybody's asking for more metal than what we can produce. And so there's a very strong need to replenish the supply chain. I mean, remember, Josh, for two years, build rates were down by 30% and we're delivering at 50% less than what we were. And not only us, I guess, you know, the rest of the industry as well. So there's really paucity of aluminum in the supply chain, and everybody's scrambling to get more aluminum, and we see that continuing into 2023.

The only thing I might add to that is that, you know, once the aerospace companies start a build rate, we don't think they're going to be quick to change it, right? We don't see this as a – we don't see there being a risk that this slows down in the kind of 22, 23 timeframe.

And then just given the impressive EBITDA efforts on it at A&T, and then just thinking about the aluminum lithium product, you know, I understand, you know, Airbus, when they took over the AT20 program, might have reviewed that supply. You'll give an order activity around the A220 and the prospects for that program. Have you seen an uptick in aluminum-lithium demand?

A little bit, but nothing different from the rest. I mean, it's heavily mix-dependent. I mean, you know that quite a bit of our aluminum-lithium, our airway alloys goes on A350, which is a wide-body aircraft, which is not, you know, experiencing wide bodies are recovering a little bit more slowly than... So there's plenty of factors in there, but we remain very optimistic about the prospects for airware.

Thank you for the time. Thank you.

Our next question comes from Carl Blunden from Goldman Sachs. Your line is open. Please go ahead.

Hi, morning. Thanks for the time. A lot of comments on energy costs and ability to pass that on. What if you could comment a little bit more on energy supply, just given the volatility we've seen in natural gas supply to Europe and your thoughts around operating the business in that environment?

Sure. Well, Carl, the way I think of it is, I mean, two bookends, and I'm not saying they are fixed and will never change, but one bookend is the current situation where gas continues to flow, albeit at a much reduced level. but it's still available for us to operate, and it's available at very high prices. So that's one bookend. The other bookend is what the Commission has published, which is a 15% reduction in demand from Europe, which would trigger certainly even more expensive gas prices as part of the rationing scenarios. I think what's important to understand is for us, you know, a 15% reduction in natural gas availability translates into less than that in terms of, you know, heat on our production. But what would happen most likely that there's plenty of other factors in the environment around us that may change in unpredictable ways. So we cannot predict, you know, if there's a 15% reduction in natural gas usage, you know, how would that impact the our auto customers or aerospace customers or our packaging customers right maybe they're impacted more or less than the 15 same for our suppliers so there's uncertainty but if this is a widespread you know kind of a share the pain equally across all segments and all geographies in europe then you're in a place where you know the reduction is for us is much less in terms of our activity level much less than a 15 reduction so that's one point the other point is You know, different regions in Europe are exposed to different levels to Russian gas supply. And it's important to note that 15 percent is an overall European number. It's not clear whether it would be different depending on the countries and depending on their level of exposure to Russian gas. We are operate, as I mentioned in prepared remarks, you know, mostly in countries where know the dependency on the european uh on russian gas sorry is less so that could uh that could help us as well uh to some extent but we'll we'll see now what i'll finish by saying is you know our teams are very reactive we've already done desktop exercises as to what happens if gas is reduced by x y z how do we run our operations how do we engage with our customers so we're getting ready We hope we don't have to use our contingency plans, but we are ready and we are not looking at it in a panicky mode at all. And I think, you know, to the extent it's a 15% reduction, it's very manageable.

That's very helpful. Maybe this one might be more for Peter, just on the liquidity and net debt. part of the business. You provided quite a few updates in your release there on optimizing the various credit facilities you have in place and you pay down substantial regional credit facilities. Is there more to come on this run in the second half of the year or do you feel like you are where you need to be now from a liquidity standpoint and flexibility?

I think we're in a great position from a liquidity standpoint. Based on what we see right now, we don't think we need more liquidity. We, you know, kind of in a more stable environment, we candidly would reduce our liquidity. But I think given some of the uncertainty around, we're going to be a little bit patient in that and see what comes. And then once we start to see more stability, we'll gradually bring that down.

Thank you.

I think it's important to say that we've put ourselves in a position where we can be opportunistic.

As a reminder, to ask any further questions, please press star 1 on your telephone keypad now. Our next question comes from Sean Wondrak from Deutsche Bank. Your line is open. Please go ahead.

Hi, Jean-Marc and Peter, and congrats on improved guidance in a difficult environment. I guess my first question, I was curious if there are any opportunities for you to build inventory ahead of any potential curtailments, obviously not on the energy side but on the metal side, and if you've seen any kind of willingness from your clients to allow you to secure inventory ahead of time.

Well, you will have noted, Sean, that we've raised our EBITDA guidance, but we haven't really touched our free cash flow guidance, and we want to maintain that flexibility to be able to increase inventory if we believe it's the right business decision for us to make. We're looking at it, and we certainly, again, our whole job is to put the company in a place where we can select the best options, and we are not... constrained by our financial situation or our operating performance. That's where we are. So we're quite happy. We can make those choices if they make sense.

Right now. I appreciate it. I know a lot of this is game theory right now, but it's very helpful to us over here. Um, and then my second question, I was just curious if particularly around the auto segment, um, you know, we had another issue or sort of commenting that SAR, had been sort of depressed the past two years, and they believe that there's a lot of pent-up auto demand out there. Do you also see that being the case?

We think that is, yes. And, you know, you just need to drive around the U.S. and look at the dealer's lots, and they are empty, right? I mean, it's visible that there is an issue there. So yes, we believe so. And again, as Peter was saying earlier, we are ready for when it picks up, but we have stopped hoping for it. We're just organizing ourselves for when it happens, but we're not hoping for it anymore. We wait for a pleasant surprise.

That makes a lot of sense. Thank you. And then just lastly, Peter, you've outlined a number of things today. It's very helpful on the capital allocation side. We're curious, given that it's potentially an option out there and some of your bonds are trading at a discount, is there any willingness to use any of your free cash flow to go out there and repurchase the bonds?

Potentially. That kind of follows on to my comment that I made to Carl. Absolutely, it's an option for us, and we're kind of monitoring that. We are also kind of cognizant of the fact that there's tremendous uncertainty in the market. And so, as I said before, I think our bias for the short term is to kind of keep our liquidity strong. But yeah, we're going to continue to be opportunistic. And as Jean-Marc says, I think, you know, one of the nice things that we've done as a company over the last several years is we've really put ourselves in a position where we can be opportunistic. So we'll continue to evaluate that.

Great, and thanks again for highlighting on the energy side today. It's very helpful.

Good luck.

Thank you, Sean.

We have no further questions. I'll now hand back to Jean-Marc Germain, CEO of Constellium, for final remarks.

Well, thank you, Elliot, and thank you, everybody, for participating in the call today. As you can see, there's plenty of uncertainties out there, but Constellium is very well positioned to make the most of the situation. We believe that Most of our markets have very good long-term fundamentals. We're well positioned to reap the benefits of that. And in the interim, should there be a further crisis, we are approaching this crisis with a very strong position on the balance sheet side, on the operating side. You would have noted, as Peter mentioned in his remarks, that our level of activity today, as evidenced by the VAR, is higher than it was pre-COVID-19. despite arguably quite a few of our segments being still in a recession. Our operating performance in terms of VAR margin, our EBITDA margin, is stronger than where we were before COVID. And I think that's a testament to the great job by everybody at Constellium to make sure that we work on what we can control, put the company in a good place so that we can be opportunistic and make the most of whatever situation is being thrown at us. We approach the future with a lot of confidence, excitement and optimism. Thank you very much and we look forward to talking to you again in October.