Constellium SE

Hello and welcome to today's Constellium fourth quarter and four year 2022 results call. My name is Bailey and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Jason Hershiser, Head of Investor Relations. Please go ahead.

Thank you, Bailey. I would like to welcome everyone to our fourth quarter and full year 2022 earnings call. On the call today, we have our Chief Executive Officer, John Mark Germain, our Chief Financial Officer, Peter Matt, and Jack Guo, our CFO designate. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at Constellium.com. And today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events, and expectations, and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statement, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20F. All information in the presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statements that involve 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. Without further ado, I'd like to turn the call over to John Mark.

Thank you, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Concilium. Let's begin on slide five. I want to start by thanking each of our 12,500 employees for their relentless focus on safety. Safety is our number one priority and a key pillar of our sustainability strategy. I am pleased to report that we delivered, again, best-in-class safety performance in 2022. reducing our recordable case rate for the year to 1.8 per million hours worked. I would like to specifically recognize several of our sites for their excellent safety performance. Our Changchun joint venture in China completed 3 million hours without a recordable case in 2022. Muscle Shoals, Nesprizac, Ravenswood, Zingen, and Vale Operations all completed 1 million hours without a recordable case. And finally, 12 of our sites completed 2022 with zero recordable cases. Our safety journey is never complete, though, and we all need to remain focused on this critical priority every day. We remain fully committed to achieving our safety target to reduce our recordable case rate to 1.5 per million hours by 2025. Now, let's turn to slide six and discuss the highlights from our fourth quarter performance. Shipments were 368,000 tons, down 5% compared to the fourth quarter of 2021. Revenue increased 8% to 1.8 billion euros as a result of improved price and mix, partially offset by lower metal prices and lower shipments. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our value-added revenue, which reflects our sales, excluding the cost of metal, was 696 million euros, up 18% compared to the same period last year. Our net income of 30 million euros in the quarter compares to net income of 7 million euros in the fourth quarter of 2021. As you can see in the bridge on the right, adjusted EBITDA was 148 million euros, slightly above the fourth quarter of 2021, and in line with our prior guidance. Also, we extended our track record of consistent free cash flow generation with 22 million euros in the quarter. Looking across our end markets, aerospace demand was very strong, with shipments up around 50% compared to last year for the third quarter in a row. Automotive shipments were up double digits in the quarter versus last year, with new platform launches driving our growth. Packaging shipments were down in the quarter due to inventory adjustments across the channel at most can makers and operating challenges at our plants in Mussel Shoals, which, as we discussed last quarter, were in large part due to a shortage of experienced engineers and operators. While we are seeing signs of weakness across certain industrial markets, our industrial business overall performed well. The combination of improved mix Pricing power and solid execution by our team in overcoming significant inflationary pressures drove our strong results, which Peter will discuss later in more detail. Now let's turn to slide seven for the full year highlights. For the full year, shipments were 1.6 million tons, or up slightly compared to 2021. Revenue increased 32% to 8.1 billion euros. This was primarily due to higher metal prices and improved price and mix. Our net income of €308 million compared to net income of €262 million in 2021. Adjusted EBITDA was €673 million or up 16% compared to last year. This performance is a record for the company and a record for our ANT and AS&I segments. We delivered our fourth consecutive year of positive free cash flow with a total of 182 million euros in 2022, which was also a record for the company. As many of you recall, in April last year at our Annals Day, we began reporting our Return on Invested Capital, or ROIC, and said we would update our ROIC at the end of each calendar year. For 2022, We achieved the ROIC of 11%, up 120 basis points from 9.8% in 2021. As you can see on the bottom right of the slide, we demonstrated our continuing commitment to deleveraging, ending the year at 2.8 times or down 0.6 times from the end of 2021. Overall, I am very proud of our fourth quarter and full year 2022 performance. We demonstrated our pricing power by delivering record adjusted EBITDA and record free cash flow in 2022, despite significant inflationary pressures. 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 nine. Value added revenue or VAR was 696 million euros in the fourth quarter, up 18% compared to the same quarter last year. Looking at the fourth quarter, 134 million euros of this increase was due to improved price mix in each of our segments. 35 million euros of this increase was due to favorable FX translation tied to a stronger US dollar. Volume was a headwind of 27 million euros due to lower shipments in parts. Metal impacts were a headwind of 37 million euros as inflation on input costs such as hardeners and alloying elements more than offset our scrap performance in the quarter. For the full year of 2022, bar drivers were similar except for volume, which was a positive contributor. There are two important takeaways from this slide. First, we grew our value-added revenue by 21% compared to last year. And second, we continue to have pricing power. Price and mix and price specifically is the biggest increment of our year-over-year variance and helped us to offset inflationary pressures. Now, turn to slide 10 and let's focus on our PERP segment performance. Adjusted EBITDA of 71 million euros decreased 20% compared to the fourth quarter of 2021. Volume was a headwind of 13 million euros with higher shipments in automotive more than offset by lower shipments in packaging and specialty rolled products. Automotive shipments increased 20% in the quarter versus last year as new platforms began to ramp up and demand generally appeared stronger. Packaging shipments decreased 12% in the quarter versus last year due to short-term inventory adjustments from our cam sheet customers in both North America and Europe and production challenges at Muscle Shoals. Price and mix was a tailwind of 33 million euros, primarily on improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of 42 million euros as a result of higher operating costs due to inflation across PARP and higher maintenance costs at Muscle Shoals related to the shortage of experienced engineers and operators that John Mark mentioned previously. Our Muscle Shoals team is highly dedicated and we are working hard to recruit and train new hires, but this will take some time. FX Translation, which is non-cash, was a tailwind of 5 million euros in the quarter due to a stronger US dollar. For the full year 2022, PARP generated adjusted EBITDA of 326 million euros, a decrease of 5% compared to 2021. The drivers of the full year performance were similar to those in the fourth quarter. Now, turn to slide 11 and let's focus on the A&T segment. Adjusted EBITDA of 56 million euros increased 87% compared to the fourth quarter of 2021. Volume was a tailwind of 1 million euros with higher aerospace shipments offsetting lower TID shipments. Aerospace shipments were up 50% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 18% versus last year, reflecting a slowdown in certain industrial markets partially offset by strong demand in defense and semiconductors. Price and mix was a tailwind of 64 million euros on improved contract pricing, including inflation-related pass-throughs and a stronger mix with more aerospace. The price and mix bucket in the fourth quarter of 22 included a customer payment of 8 million euros related to a contractual volume commitment. Costs were a headwind of 38 million euros on higher operating costs due to inflation. For the full year 2022, A&T generated record adjusted EBITDA of 217 million euros, an increase of 96% compared to 2021. The drivers of the full year performance were similar to those in the fourth quarter. As a reminder, the price and mix bucket for the full year included customer payments of 18 million euros related to contractual volume commitments One last point on A&T. In the past, we have said EBITDA per ton for the segment should be in the 700 to 800 euro range. Based on our contractual positions and the performance of the business, we now expect EBITDA per ton to be 800 to 900 euros. Now, turn to slide 12 and let's focus on the AS&I segment. Adjusted EBITDA of 31 million euros was flat compared to the fourth quarter of 2021. Volume was a 2 million euro tailwind with higher shipments in automotive partially offset by lower industry shipments. Automotive shipments increased 8% in the quarter versus last year as we experienced some improvement in activity levels. Industry shipments were down 3% in the quarter versus last year. Price and mix was a 15 million euro tailwind primarily due to improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of 18 million euros on higher operating costs, mainly due to inflation. For the full year 2022, AS&I generated record adjusted EBITDA of 149 million euros, an increase of 5% compared to 2021. The drivers of the full year performance were similar to those in the fourth quarter. It is not on the slide, but I want to provide a quick comment on holdings and corporate. In the quarter, holdings and corporate was a headwind of 8 million euros. The result was mainly due to timing and a number of one-off adjustments in the quarter. For the full year 2022, our holdings and corporate expense was 19 million euros. and we continue to expect holdings and corporate expense to run at approximately 20 million euros per annum. Now turn to slide 13, where I want to give an update on the current inflationary environment we are facing and our focus on pricing and cost control to offset these pressures. Throughout 2022, we were faced with broad-based and significant inflationary pressures, and we currently expect this to continue throughout 2023. As you know, we operate a pass-through business model, so we are not materially exposed to changes in the price of aluminum, our largest cost input. That said, metal and alloy supply remains tight today, given smelter shutdowns and supply disruptions. We were able to resource our needs in 2022, and we currently expect to do so again in 2023, but at incremental costs. Labor and other non-mental costs will also be higher again this year, particularly European energy. I will go into more detail on energy in just a moment. Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results. Our businesses delivered strong cost performance in 2022, and we continue our relentless focus on costs in 2023. Our recently announced Vision 25 initiative is helping. Across the company, we are working to increase our efficiency, reduce our consumption of expensive inputs, and lower our fixed costs. On the commercial side, many of our 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. As we have mentioned in the past, These surcharge mechanisms typically have a lag impact, but they do provide an effective mechanism through which we can recoup our costs. Where we are signing new contracts, they are coming at better pricing and with a range of inflationary protections. As you can see in the bridge on the right, in 2022, we were very successful with price and mix. The largest increment being price in offsetting inflationary pressures. 2022 was very challenging, was a very challenging year from the standpoint of inflationary cost pressures that ran close to 300 million euros. Looking forward to this year, we expect the inflationary pressures in 2023 to be comparable to 2022. We continue to believe that we will be able to offset most of this cost pressure in 2023. and the rest in future periods with a combination of the tools we noted and our relentless focus on cost control. The net impact of inflation and other cost increases and actions we are taking to offset them are included in our guidance for 2023. Now turn to slide 14 where I want to give an update on energy. Our total energy costs over the 2019 to 2021 period averaged around 150 million euros per annum. In 2022, our total energy costs were around 275 million euros, and we expect total energy costs to be materially higher in 2023. As previously noted, we purchased energy on a multi-year rolling forward basis, which has helped us to mitigate some of the energy cost pressures and helped us to smooth out some of the steep increases in costs. As of today, our 2023 energy costs are largely secured, but at higher average prices. As you can see in the charts on the right side of the slide, both electricity and gas forward prices in Europe have come down from their 2022 peaks, but still remain at three or more times historical averages. As we previously noted, we are in active dialogue with our customers on passing through these costs and have made very good progress across all of our end markets. During 2022, we initiated an energy call to action across our entire organization. And I'm happy to say that as a result, we have uncovered numerous opportunities to reduce our own consumption. More recently, several governments in Europe have discussed potential initiatives that could bring some relief to help offset higher energy prices. These initiatives are still under development and at this stage, eligibility is uncertain and any potential benefit is difficult to quantify. Longer term, we, like others, see that structural solutions for European energy markets should be in place by 2025, including the restoration of existing energy sources, alternative source countries for natural gas, LNG imports, and increased use of renewable energy sources. We will continue to update you on developments impacting our total energy costs and our ability to recover or offset these higher costs. Let's now turn to slide 15 and discuss our free cash flow. we generated record free cash flow of 182 million euros in 2022, including 22 million euros in the fourth quarter. 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 650 million euros of free cash flow. Looking at 2023, We expect to generate free cash flow in excess of 125 million euros for the full year, though this will be weighted more towards the second half. We expect CapEx to be between 340 and 350 million euros this year, which includes higher spending on cost savings and growth projects that John Mark will talk more about in a few moments. We expect cash interest of approximately 120 million euros which includes the impact of higher interest rates. We expect cash taxes of approximately 30 million euros. And lastly, we expect working capital to be a use of cash in the first half and a source of cash in the second half. And based on our current forecast, roughly neutral for the full year. Now, let's turn to slide 16 and discuss our balance sheet and liquidity position. At the end of the fourth quarter, our net debt of 1.9 billion euros declined slightly compared to the end of 2021 as free cash flow generation was partially offset by unfavorable non-cash FX translation of 64 million euros with the strengthening of the US dollar. Our leverage reached a multi-year low of 2.8 times at the end of 2022 or down 0.6 times versus the end of 2021. We remain committed to achieving our leverage target of 2.5 times and maintaining our long-term target leverage range of 1.5 to 2.5 times. As you can see in our debt summary, we have no bond maturities until 2026 and our liquidity remains strong at 709 million euros as of the end of 2022. We are very proud of the progress we have made on our capital structure and of the financial flexibility we are building. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to slide 18 and discuss our current end market outlook, starting with packaging. In packaging, we have experienced some short-term inventory adjustments at can makers in both North America and Europe, but we believe this will be largely complete during the first half of the year. The focus on sustainability is driving increased demand for infinitely recyclable aluminum cans, and we are confident in the long-term outlook for this end market, given canmaker capacity additions in both regions, as well as recent announcements of greenfield investments here in North America. We will participate in this growth in both North America and Europe, as we announced at our Analyst Day last year. As Peter noted, the company is highly focused on stabilizing the operating challenges we have been experiencing at Muscle Shoals so that we can take advantage of these end market dynamics. Our issues at the plant stem primarily from the labor shortages you have read about. We are very confident in our ability to restore the plant's profitability over the course of 2023. Turning now to automotive, OEM sales and production numbers globally are still at a low base compared to pre-COVID levels, with uncertainty continuing as a result of the semiconductor shortage and other supply chain challenges. However, we remain very positive on this market, and increased demand in both PARP and AS&I gives us reason for optimism. Automotive inventories are low, consumer demand remains high, vehicle electrification and sustainability trends will continue to increase the demand, for lightweighting and low CO2 recycled content. Let's turn now to aerospace. The recovery in aerospace continued in the quarter, with shipments up 50% versus last year for the third quarter in a row, though still well below pre-COVID levels. Major OEMs have announced build rate increases in the short term and a desire for further increases in the medium term. We remain confident that the long-term fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In addition, demand is strong in the business regional jet segment, defense, and space markets as well. As the chart on the left side of the page highlights, these three core end markets represent 76% of our LTM revenues. We like the fundamentals in each of these markets, and as I have said previously, we like our hands. Turning lastly to other specialties. While we do see some weakness in segments like general engineering plate and building and construction, early 2023 demand remains solid in many of our specialties and markets. Demand has been more resilient in North America than in Europe. In general, These other markets are dependent upon the health of the industrial economies in each region. In TID rolled products, demand remains strong in markets like semiconductors and defense and in transportation in North America. In industry extrusions, demand is still strong in sectors like solar and rail. It is also of note that many of the sustainability trends supporting growth in our core markets are very much at play here as well in other specialties in summary we continue to like the prospects for the end markets we serve and strongly believe that the diversification of our end markets is an asset for the company let's turn to slide 19 where i want to provide more details on our plans to invest organically in our future as we outlined previously we are increasing our growth capex for the next few years to invest in highly strategic high return cost savings and growth projects As Peter mentioned before, our total capex this year should be around €350 million and includes roughly €150 million for these attractive growth investments. Our performance over the last several years across varying business conditions, coupled with our strong financial position today, give us confidence to continue investing. We expect to continue to generate strong free cash flow through these investment cycles. The strategic investments we are making today are important contributors to our adjusted EBITDA target of over 800 million euros by 2025. Lastly, I want to mention that in a sharply deteriorating environment, the pace of investment could be slowed. While we are not planning for this outcome today, we will continue to monitor the situation and make any necessary adjustments to the timing of these investments. Let's turn now to slide 20. wrap up i would like to thank peter who will be leaving constellium at the end of march for an exciting opportunity at commercial metals i will miss you peter you've been a very good partner and i also want to congratulate jaguo on his promotion to senior vice president and chief financial officer peter has been a great partner and he's made significant contributions to our company including building a strong team from which we were able to promote jack Jack has been with the company for over six years, and most recently has done a tremendous job running our strategy function. Prior to this, he had already two decades of finance experience that included investment banking and operational finance. He brings to the role exceptional intelligence, strong knowledge of the company and the industry, and a well-rounded set of finance experiences. I have worked very closely with Jack on numerous projects, And I'm very excited to welcome in into this new role. And I look forward to working even more closely with you, Jack. Turning back to Constellium, our team achieved very strong performance in 2022. We delivered record adjusted EBITDA of 673 million euros and record free cash flow of 182 million euros. Importantly, we also further deleveraged our balance sheet to a multi-year low of 2.8 times. I am very proud of our entire team as it delivered solid operational performance and strong cross control despite a number of challenges, including significant inflationary pressures. Looking forward, 2023 will be another challenging year given the extraordinary inflationary pressures we are facing, but we are used to it. As Peter noted, we are currently expecting comparable inflationary pressures in 2023 to those we experience in 2022. but we remain confident in our ability to pass through most of these costs in 2023 and the rest in future periods. Based on our current outlook for 2023, we are targeting a justitive bid of 640 to 670 million euros and free cash flow in excess of 125 million euros. We do not give quarterly guidance, but given the destocking in packaging, the operating challenges in muscle shoals, and the timing of inflationary impacts on our business, We do expect adjusted EBITDA in the first quarter of 2023 to be weaker than the same period last year, and free cash flow to be negative in the quarter. These expectations are obviously included in our full year guidance that I just provided. As inflationary pressures subside, we believe we will emerge an even stronger company. Our business model provides a strong foundation for long-term success, and we believe we have substantial opportunities to grow our business and enhance profitability and returns. We have a diversified portfolio, and our end market positioning will enable us to take advantage of sustainability-driven secular growth trends, such as consumer preference for infinitely recyclable aluminum cans, lightweighting in transportation, and the electrification of the automotive fleet. The Constellium team has demonstrated its resilience and ability to execute across a range of different market conditions, and I am confident we'll continue to do so. I also want to reiterate our long-term guidance of adjusted EBITDA in excess of 800 million euros by 2025, and our target leverage range of 1.5 to 2.5 times. And let me add, this guidance is based on the current energy positions that we have, including higher forward energy prices as of today. We remain focused on executing our strategy, driving operational performance, generating free cash flow, achieving our ESG objectives, and shareholder value creation. In conclusion, I remain very optimistic about our future. And with that, Bailey, we will open the Q&A session.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star followed by one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. The first question today comes from the line of Emily Ching from Goldman Sachs. Please go ahead. Your line is now open.

Good morning, Jean-Marc and Peter. Congratulations on the new opportunity there. My first question is just around the EBITDA guidance that you've provided for 2023. The 640 to 670 million euro I think is down only slightly below 2022 levels, which I think was a little bit more of an improvement versus the guidance that was talked to at the last quarter call. But maybe, Jean-Marc, if you could help bridge what has changed versus your prior quarter's expectations there. Has there been anything from the energy cost side coming down that you might see flowing through into the back end of this year that's been helping out?

Yeah, good morning, Emily, and thanks for your question. So, yes, we feel more comfortable now, and there's a number of reasons for that. And it is true that we believe our prospects are brighter than what we believed they would be back in October. The reason for that is, number one, we have more clarity in our order book for the year. Number two, we have also much more clarity in terms of pricing. There's obviously a contract season in the fall. In October, we're kind of halfway through it. Now we're complete. So we've got much better visibility on our pricing for the year. And number three, as you pointed out, we got a little bit lucky with energy prices. They came down with a mild winter in Europe, so that's helping as well. So these three are helping us, you know, converge towards that range of guidance we're giving today. And we feel, again, more comfortable today than we did back in October.

Great. That's very helpful, Jean-Marc. And a follow-up, if I may. I know you've talked about a little bit of additional capital that will be spent to help support some of the operations there and with some of the growth CapEx there. But you also mentioned that that pace could be slowed in a more adverse operating environment. Perhaps could you define what that adverse environment could look like and what the flex would be on capital spending?

Sure. So, and clearly it's a remote possibility, but we want to highlight that there is, we've got quite a bit of flex in our ability to flex capex. And we've demonstrated it in the COVID times when we brought down capital expenditures by 100 million, whilst COVID hit really in March of 2020, right? So already a lot of projects are already launched. And despite this, we're able to reduce our capital expenditures by 100 million in the year. So I think that gives you a little bit of an idea of how much flex there is. You know, 12 months out, you can reduce by 100 million and then, you know, possibly even more if it's for longer. But I think what we, I mean, what we've demonstrated in the past is our ability to thrive in very different environments, right, when there is a sharp reduction in demand, like in COVID times when there's a strong pickup, when the business is more stable. This is a business that generates substantial and consistent free cash flow. And we think the fundamentals of our business are strong and that's why we want to continue to invest to the extent we can and our balance sheet allows it in the future of the business. So it would take a very significant downturn in the economy for us to change our plans regarding CAPEX deployment. Again, we're in it for the long run, and 2025 is nearly around the corner, and we want to make sure that we are able to seize the opportunities, the many opportunities we have ahead of us. And finally, I'll add that a lot of the investments we're talking about, some that are going to contribute to our negative free cash flow in the first quarter, are the investments we're making in recycling, especially in Neuf-Prisac, France, And these are defensive investments at the same time as they expand our margins. They make us more independent from primary suppliers. It's better for the planet. We want to do those things come hell or high water, I would say.

Understood. That's very clear. Thank you.

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

Yeah, thank you. Good morning, Jean-Marc and Peter. Peter, congratulations on the new role.

Thank you. Good morning, Kurt.

Hi. So I was wondering if we could unpack the guidance a little bit. I think you did say you're still expecting over $100 million of energy inflation, and I think in the past you noted at least $100 million, I think, of labor and other sort of consumable-related inflation. So what are you assuming in terms of price costs delta for the year? And then do you also have a view of how much productivity or cost down you could achieve as well?

So as we look at inflation for the full year 2023, Kurt, what we said in the prepared remarks was that we expected it to be similar to what we saw this year, or sorry, last year in 2022. And that was in the order of $300 million. So we're expecting that order of magnitude. And that includes, as you noted, higher energy costs. It includes, you know, higher metal costs. And that's really, you know, kind of alloying costs. It does include higher labor costs. Labor is, you know, up more than it was in 2022. And then, you know, supplies in general across the portfolio. And all of that will add up to roughly a $300 million-ish increase. We believe that we're going to be able to pass through most of that, as Jean-Marc said, and I said in the prepared remarks, we have pricing power. And one of the things that's been gratifying, and to Emily's question on why we are more conservative in October, we are right in the front end of this discussion around energy with customers. And we've had very good success through the contract season. And I think what becomes clear is that our customers, they want us to be their suppliers because we're reliable and they need the material. And so therefore, they're willing to work with us on this. And so we've had good success. And as we did in 2022, we expect to pass through most of that to our customers in 2020 three or beyond. There are some instances where we said there's a lag and that remains the case. In terms of our costs, I think we continue to grind our costs down and we'll continue to do that. In Muscle Shoals, clearly with some of the challenges there, our costs are elevated relative to where they would be, but I think that's temporary. And we feel like the programs we have in place, the productivity improvements, targets that we have in place are going to lead us to a very competitive cost position. So we'll continue to work on cost. And maybe just to conclude, we, you know, on the analyst day, we talked about a 50 million cost opportunity, and we continue to see that as very, very viable.

Okay. Thanks, Sean. And then a follow-up, I guess, with respect to, you know, part profitability and margins. You know, they definitely came in, you know, weaker than we had anticipated, certainly in the back half of the year, you know, roughly, I think, 290, a metric ton. And in the past, you know, we've discussed auto profitability, I believe, in kind of the 500 to 600 level. And, you know, I thought that packaging with the contract resets was kind of moving more up to, definitely above 300, so can you kind of talk to what you think margin per ton in PARP could look like this year on a more normalized basis? Obviously, it's great to see you take the A&T margin target up by 100, but just curious what's going on in PARP, if you could unpack that a little bit.

Sure. I'll start, and Peter will continue. On the out-of-side in PARP, we are very comfortable with the levels of margin we discussed in the past, and that's what's happening right now, so we're good there. The shortfall, which you pointed to, is mainly on the packaging side, comes from the packaging side. But remember that in packaging, we've had difficulties at Muscle Shoals, as we've discussed, but also we have been squeezed last year there is a lag in terms of our ability to pass through inflationary pressures. A lot of that has to do with the way the PPI works, where you look at the prior year and you, you know, you increase your price the following year. And also, as we discussed a couple of years ago, the alloy surcharges started being implemented only this year, but only partially, sorry, last year, but only partially. So there has been a margin squeeze also in packaging because of those two factors, alloying cost and the PPI fundamentals. Looking forward, the PPI and the inflation are passed through in 23. The alloys are passed through in 23. And the lag should be largely resolved. That said, we still have to restore operating performance at Muscle Shoals. And that is what we're working on this year. As I mentioned, it's mostly because of lack of experience, resources, and that takes time to build. And we believe that over the course of 23, we will restore profitability at Muscle Shoals and therefore in packaging. And those three causes, right, the PPI, the alloys, and inexperienced labor should be resolved by the end of 23.

The only thing I'd add to that is that, remember, we talk about this inventory correction across packaging. that's going on among our customers. And you can imagine with the reduction in the tonnage across the business unit, it reduces our ability to leverage our fixed costs.

And what do you think a more normalized margin level is? I think in the past you've talked about I think closer to 400, but could you update us on what you think? You know, a more fully economic level would look like for that division or is it too difficult to say right now.

So I think maybe we should so certainly north of 300 we should be able to be north of 300 I think maybe something in the order of 325 to 350 is a good place to start and then. You know, if you have automotive pulling at full strength, maybe there's some opportunity beyond that. But we'd leave it there for now.

Okay. Great. Thank you, guys.

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

Good morning, Jean-Marc and Peter. First question from me would be on EBITDA cadence. Do you expect a higher seasonality to happen this year, especially 1Q and maybe going into 2Q because of packaging versus previous year?

Yeah, well, so what you should expect to see is that Q1 is going to be weaker than it usually is, and so that would be contrary to the seasonality that we usually see. Usually our first two quarters are the strongest, and we should see a weaker Q1, a recovering Q2, and then obviously Q3 and Q4, hopefully we're back on track.

And remember, typically PPI adjustments take place very often on the 1st of April, so we are still pricing in some segments at a

prices that yet do not reflect yet the spike in the inflation of last year but they will start to uniform thank you um and then maybe two quick follow-up the first one on aerospace margins so similar to the previous question if you can unpack or if you can give a little bit more color on um i think you mentioned like 800 to 900 is that really coming just from aerospace or is it also like transportation for TID impacts for that?

Yeah I think it's based essentially on better performance in our plants and better pricing as well and we look at it you know across the cycle right so if you're in a time when aerospace is a very strong and the rest of TID is lower then it's drifting up, and if it's the other way around, TID is strong, but aerospace is at the bottom, then it's drifting a little bit lower.

Okay, thank you. And just the last one from me. Can you remind us the energy contract? Most of it is locked, and you would renegotiate in September, October. How much of the energy cost is kind of like spot exposed? Is that 25%, 20%?

I'm not sure we fully understood the question, but I'll try to answer. So going into 2023, today about 90% of our energy needs are locked in, hedged, essentially physically or through supply contracts and derivatives as well. And then since we do it on a rolling three-year basis, we have to renew 25%, roughly, 25%, of our needs over the course of the year and split the hedges for, you know, 24 and 25.

Okay, great. Thank you.

Thank you. The next question today comes from the line of Tim Lutanis from Wolf Research. Please go ahead. Your line is now open.

Hey, Greg. Good morning and congrats on the opportunity. Peter, we'll talk to you on the other side. Wanted to ask a couple questions. One, maybe this is a dumb question, but inventory adjustments, it just seems like a euphemism for something. What exactly does that mean? Do you not have protection from contracts? Is that something more onerous in terms of underlying demand? I'd just love to get some more color on that, on the packaging side.

Hi, Tim. Yeah, I'll take this one. So there's excess inventory of contracts. cans and coils in the system compared to demand there's a number of reasons for that like in the summer the lack of promotion activities at the beverage companies which you know typically there is and people start to stock up and then it doesn't happen so then the supply chain slows down there's been also a period of high growth after you know 20 years of markets being essentially flat, you have three years at plus 5%, people expect that the following year is going to be also at plus 5%, that you've got a war, you've got inflation, people spend less money, buy less product, you expect to have promotions, you don't have promotions, so all of a sudden, the supply chain gets, you know, full with metal, and it takes time to resolve that. Our contracts typically provide for a fixed amount of terms, but there is some variation around it, and I will not go into the specific details, but let's say, you know, plus 5% plus 10% or minus 5, 10%. So when everybody's, you know, putting below, then you can have a C and that happens, you know, if that variance is say over the course of one year, but it materializes over the course of six months. And obviously that creates a big swing in what demand is and people are still within their contracts. So I think that's what we're seeing. And that's why also, fundamentally, this is a reasonably stable market. There is not that much floor space on the shelves or in the warehouses to have full cans or empty cans. So it will resolve reasonably quickly, and that's why we believe, and through our discussion with our customers, we're confirming that by the end of the first half of this year, things will be back to normal.

That's helpful. I guess I'm wondering if this is a sign of just slowing demand after very strong COVID activity. Do you see anything structurally weaker in the packaging outlook? Obviously, there's more cans and adoption of greater cans, but did maybe the market get ahead of itself and needs to adopt maybe a slower growth outlook?

Well, I wouldn't revise the growth outlook, but I think the COVID, the spike in consumption took everybody by surprise and people got maybe a little bit too excited about it. But fundamentally, you see more and more categories moving to cans. I mean, I don't know if you've noticed in your, you know, going to the grocery store or your travels, you start to see flat water in the cans and bottles. And that's a very good sign for us because there's a tremendous amount of plastic to displace. So when things grow, it's never linear. But I do believe that the growth trends in favor of metal against plastic are going to stay on for many, many, many years.

And Tim, just one maybe to add to what Jean-Marc's saying. So as we look at our forecast for packaging demand in 23, We expect it's going to grow. It's going to grow at kind of low single digits, probably 0% to 2% type of range. And then longer term, I think we're in line with what the can makers are saying, which is somewhere in a range of kind of 2% to 5%. It's probably the right way to bracket it. And that feels right to us.

Okay, that's great. And if I could squeeze one more in. Just how good is your visibility on Europe? I'm asking kind of if things were to start to recover there, when would you start to see it? How well locked in are you? And kind of more color on what you're seeing in Europe would be great. Thank you.

Yeah, so depending on the products, our lead times are, you know, six weeks to six months, right? In aerospace, there's some that take a long time to, products that take a long time to make. I think we've got pretty good visibility for 2023 for over 75% of our business there. I mean, aerospace is pretty locked in. Automotive, I mean, the signs are quite encouraging. And packaging, you know, even though it's, Flattish, as Peter mentioned, I think we've got pretty decent visibility because those inventory corrections really are not going to last longer than the first half of the year. So I think we've got decent visibility in Europe for 75% of our business, probably. I don't know if I'm answering fully your question. Feel free to follow up if not.

When you say decent visibility, you mean for the full 2023 timeframe? Great, thank you.

Thank you.

Thank you. The next question today comes from the line of Carl Blunden from Goldman Sachs. Please go ahead, your line is now open.

Hi, thanks very much for the time and congratulations to Peter and Jack on the new roles. I wanted to talk just about the 2025 guidance and certainly good to hear the reiteration there of over 800. Is it fair to say that Canada Mine and energy costs have come in more challenging and perhaps the outlook is a bit more challenging than when that guidance was initially adopted and I'd be interested to hear what the offsets are giving you confidence on that longer term guide. Presumably a few things going better than expected and love to hear what those are.

Sure. So Carl, if I Go back to what we thought in April of last year when we gave that more than 800 million guidance. I think CAN is a big challenge now, but I don't think it is that much by 2025. And if anything, the volumes may be a bit lower, but the pricing is better. So overall in CAN, I'd say it's even. Energy prices are definitely higher. We offset that by increased pricing and better efficiencies in our plants as well. And I'm quite encouraged by the early progress we're making. There's nothing like lighting a fire under us to get us moving for sure. And then in aerospace, we are, you know, we were really at the beginning of the recovery last year. It's come stronger. Maybe there is some upside in aerospace on our 2025 guidance, and automotive is steady compared to our projections of last year. Finally, on the cost side, I mean, you know, our costs are much higher because of inflation, obviously, than what we thought they would be. But at the same time, I think our productivity and our progress in vision 2025 gives us good confidence. So since, you know, the inflation is pass-through, and our productivity could be better, I think we've got some upside. So all in all, can in the same place, automotive in the same place, aero may be some upside, and on the productivity cost side, maybe some upside.

That's really helpful. Thanks. Just a quick one on the balance sheet. You've done a lot of good work there in deleveraging and approaching the high end of that target range. Should we think if Constellium is interested in notional debt reduction or should we think about your leverage target being achieved primarily through EBITDA growth from here?

We want to pay down debt also.

It'll be both. It'll be both. We want to reduce gross debt and our EBITDA is going to grow too.

Fantastic. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star followed by one. Our next question today comes from the line of Richard Phelan from Deutsche Bank. Please go ahead, your line is now open.

Hello, yeah, thanks, and Peter, good luck on the new role. You've touched on this multiple times here, but let me just do a little clarification on the lower packaging volumes. I think you said 12% in Q4. You know, that's going to contribute to the lower EBITDA performance in Q1. You still think that where you stand today, that continues into Q2 as well, and are they similarly double-digit sorts of declines in terms of volumes in that end segment?

Yes, on Q1, it'll be lower in Q1, and then as we get into Q2, we think we should be starting to recover. We're kind of calling the trough somewhere around where we are today.

We think the full year should be about the same or maybe a bit better than last year.

Great. Thank you. And then, again, you've already partially addressed this, but the higher cost, roughly $300 million in total, there was some mention in one of the questions about energy comprising over $100 million, but you didn't attach a specific figure. to the breakdown between energy, labor, the higher material alloying or supply costs. It's fair to say, though, that energy will still be the largest component of that $300 million basket year on year above the sort of $275 million expense that the group spent in 2022. That is fair.

That is fair. And remember, we have a piece of our energy that's still open. So, you know, hopefully that will continue to be an opportunity for us.

Okay. And related to that, just in terms of supply, access to metal, no problems at all in terms of that at this point?

No. No problem with access to metal. I mean, we work.

But it's so far so good, and we don't see a problem.

Thank you very much.

Thank you. There are no additional questions waiting at this time, so I'd like to pass the conference back over to Jean-Marc Jumet, CEO of Concelium. Please go ahead when you're ready.

Thank you, Bailey. As you can tell, we're very happy with our performance in 2022, and we look forward with a lot of confidence to our performance of 2023. I want to wish good luck to Peter. That's not his last day with us, far from it. We still have the benefit of his presence for quite a few weeks, and I look forward to updating you on our progress when we release our Q1 results at the end of April. Thank you, and have a good day all.

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