Constellium SE

Hello and welcome to the Constellium first quarter 2023 results conference call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star followed by one on your telephone keypad. If you'd like to withdraw your question, you may press star followed by two. I'll now hand over to your host, Jason Hershiser, Director of Investor Relations. Please go ahead.

Thank you, Alex. I would like to welcome everyone to our first quarter 2023 earnings call. On the call today, we have our Chief Executive Officer, John Mark Germain, and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at Constellium.com, and today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events, and expectations, and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law. In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which will supplement our IFRS disclosures. I would now like to hand the call over to John Marks.

Thank you, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's begin on slide five and discuss the highlights from our first quarter results. I would like to start with safety, our number one priority. We delivered best in class safety performance in the first quarter with a recordable case rate of 1.6 accidents per million hours worked. In the first quarter, we had several sites achieve safety milestones with anniversaries for a number of years, up to eight, without a recordable case. I want to congratulate all of our employees on this excellent performance. But the safety journey is never complete, and we all need to remain focused on this critical priority. While our performance in the quarter was excellent, we are always focused on maintaining and improving our safety performance. And we still have accidents happen. Turning to our financial results, shipments were 389,000 tons, down 3% compared to the first quarter of 2022, mainly due to lower shipments in PARP. Revenue of 2 billion euros decreased 1% compared to last year as improved price and mix was more than offset by lower 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 value-added revenue, which reflects our sales excluding the cost of metal, was 754 million euros, up 16% compared to the same period last year. Our net income of 22 million euros in the quarter compares to 179 million euros in the first quarter of 2022. As you can see in the bridge on the top right, adjusted EBITDA was 166 million euros, slightly below the first quarter of 2022. ANT adjusted EBITDA was a new quarterly record and increased 20 million euros compared to last year, while AS&I adjusted EBITDA is a new first quarter record and increased 6 million euros versus last year. PARP adjusted EBITDA decreased 27 million euros in the quarter. Looking across our end markets, aerospace demand was very strong, with shipments up over 50% compared to last year. Automotive shipments in both rolled and extruded products were up double digits in the quarter versus last year. Packaging shipments were down in the quarter due to inventory adjustments across the supply chain and lower end demand. We continue to face significant inflationary pressures, which Jack will discuss in more detail. But thanks to our pricing power, contractual protections, improved mix, and solid execution by our team, we are managing the current environment quite well. Moving now to free cash flow. Our free cash flow in the quarter was negative 34 million euros, which was in line with our expectations. we continue to expect to generate positive free cash flow this year of greater than 125 million euros. We remain committed to generating positive free cash flows and deleveraging. As you can see on the bottom right of the slide, our leverage at the end of the first quarter was 2.8 times or down 0.4 times from the end of the first quarter last year. Overall, I am very proud of our first quarter performance. Looking forward, while there are uncertainties on the macroeconomic and geopolitical fronts, we like our end market positioning and we are optimistic about our prospects for the remainder of this year and beyond. Based on our current performance and our current outlook, we are raising our guidance and expect adjusted EBITDA in the range of 650 to 680 million euros and free cash flow in excess of 125 million euros in 2023. We also remain confident in our ability to deliver on our long-term target of adjusted EBITDA over 800 million euros in 2025. With that, I will now hand the call over to Jack for further details on our financial performance.

Thank you, Jean-Marc, and thank you everyone for joining the call today. Please turn now to slide seven. Value-added revenue, or VAR, was 754 million euros in the first quarter, up 16% compared to the same quarter last year. Looking at the first quarter, 157 million euros of this increase was due to improved price and mix in each of our segments. Volume was a headwind of 20 million euros due to lower shipments in PARP. Finally, metal impacts were a headwind of 40 million euros due to inflation on input costs such as hardeners and alloying elements as well as weaker scrap performance in the quarter compared to the same period last year. The balance of the change was due to favorable FX translation tied to a stronger US dollar. There are two important takeaways from this slide. First, we grew our value-added revenue by 16% 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 offset inflationary pressures. Now, turn to slide A, and let's focus our PARP segment performance. Adjust EBITDA of 55 million euros decreased 33% compared to the first quarter of 2022. Volume was a headwind of 11 million euros with higher shipments in automotive more than offset by lower shipments in packaging and specialty road products. Automotive shipments increased 19% in the quarter versus last year as new platforms continue to ramp up and demand generally appears stronger. Packaging shipments decreased 11% in the quarter versus last year due to inventory adjustments across the supply chain in both North America and Europe and lower demand. Price and mix was a tailwind of 47 million euros, primarily on improved contract price, including inflation-related pass-throughs. Costs were a headwind of 64 million euros as a result of higher operating costs due to inflation, operating challenges at muscle shows, and unfavorable metal costs. As we discussed last quarter, our muscle shows team is highly dedicated and we're working hard to recruit and train new hires, but this will take some time. FX translation, which is non-cash, was a tailwind of 1 million euros in the quarter due to a stronger US dollar. Now turn to slide 9 and let's focus on the A&T segment. Adjusted EBITDA of 73 million euros increased 37% compared to the first quarter of 2022. Volume was a tailwind of 9 million euros with higher aerospace shipments more than offsetting lower TID shipments. Aerospace shipments were up over 50% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 15% versus last year, reflecting a slowdown in certain industrial markets partially offset by strong demand in other markets like defense. Price and mix was a tailwind of 57 million euros on improved contract pricing. including inflation-related pastures and a stronger mix with more aerospace. Costs were a headwind of 48 million euros as a result of higher operating costs due to inflation and production increases. FX translation was a tailwind of 2 million euros in a quarter due to a stronger U.S. dollar. Now let's turn to slide 10 and focus on the AS&I segment. Adjusted EBITDA of 43 million euros increased 17% compared to the first quarter of 2022. Volume was a 1 million euro tailwind with higher shipments in automotive more than offsetting lower industry shipments. Automotive shipments increased 13% in the quarter versus last year as we continue to experience improvement in activity level. Industry shipments were down 5% in the quarter versus last year. price and mix with a 23 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. Now, turn to slide 11, where I want to give an update on the current inflationary environment we're facing and our focus on pricing and cost control to offset these pressures. In the first quarter, and as expected, we experience broad-based and significant inflationary pressures across our business. As you know, we operate a pass-through business model, so we're not materially exposed to changing the market price of aluminum, our largest cost input. That said, other metal and alloy supply remains tight today, and while we're confident about the security of supply, some of it does come at a higher cost. In addition, labor and other non-metal costs will also be higher this year, particularly European energy. As previously noted, we purchase 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. Both electricity and gas forward energy prices in Europe have come down from their 2022 peaks, but still remain well above historical averages. Given these cost pressures, We continue to work across a number of fronts to mitigate their impact on results. We have demonstrated strong cost performance in the past years and will continue our relentless focus in 2023, including continued execution on our previously announced Division 25 initiative. Across the company, we're working to increase our efficiency, reduce our consumption of expensive inputs, and lower our fixed costs. In addition, as we previously noted, many of our existing contracts have inflationary protections, such as PPI inflators or surcharge mechanisms, and where they do not, we're working with our customers to include them. Where we're signing new contracts, they're coming with better pricing and a range of inflationary protections. We have made very good progress across all of our end markets. As you can see in the bridge on the right, in the first quarter this year, we were very successful with price and mix. the largest increment in price in offsetting inflationary pressures. As we mentioned last quarter, we expect inflationary cost pressure to run close to 300 million euros in 2023. 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 the actions we're taking to offset them are including our guidance for 2023. Now let's turn to slide 12 and discuss our free cash flow. Our free cash flow was negative 34 million euros in the first quarter, which was in line with our expectations. The result in the quarter reflects a strong adjusted EBITDA offset mainly by higher capital expenditures and increased working capital. Looking at 2023, we continue to expect to generate free cash flow in excess of 125 million euros for the full year. which we expect to be weighted more towards the second half. As we noted last quarter, we expect working capital to be a use of cash in the first half of the year and a source of cash in the second half, and based on our current forecast, roughly neutral for the full year. We expect capex, cash interest, and cash taxes in line with our previous guidance. Now let's turn to slide 13 and discuss our balance sheet and liquidity position. At the end of the first quarter, Our net debt of 1.9 billion euros increased slightly compared to the end of 2022, given the free cash flow in the quarter. Our leverage remained at 2.8 times at the end of the first quarter, we're down 0.4 times versus the end of the first quarter of 2022. 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 688 million euros as of the end of the first quarter. We're very proud of the progress we have made on our capital structure and of the financial flexibility we're building. I will now hand the call back to Jean-Marc.

Thank you, Jack. Let's turn to slide 15 and discuss our current end market outlook, starting with packaging. In packaging, the inventory adjustments continued across the supply chain in both North America and Europe. We are starting to see some signs of demand weakness in both regions as a result of the current inflationary environment, a lack of promotional activity, and following a multi-year period of rapid growth during COVID. We are confident in the long-term outlook for this end market, though given can-maker capacity additions in both regions, recent announcements of greenfield investments here in North America, and a growing consumer preference for the sustainable aluminum beverage can. Longer term, we expect packaging markets to grow low to mid single digits in both North America and Europe. We will participate in this growth in both regions as announced at our analyst day last year. As Jack 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 the end market dynamics in North America. We are encouraged by the improved performance we have seen recently at Muscle Shoals and remain very confident in our ability to restore the plant's profitability and performance 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 in the order books. However, we remain very positive on this market, and increased demand in PARP and AS&I gives us reason for optimism. Automotive inventories are low, consumer demand remains high, and vehicle electrification and sustainability trends will continue to drive demand for light weighting and use of aluminum products. Let's turn now to aerospace. The recovery in aerospace continued in the quarter, with shipments up over 50% versus last year, though still below pre-COVID levels. Major OEMs have announced build rate increases in the short term and the 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 and regional jet markets and the defense and space markets. As the chart on the left side of the page highlights, These three core end markets represent 76% of our last 12 months revenue. We like the fundamentals in each, and as I have said in the past, we like our hand and the options it affords us. Turning lastly to other specialties, while we do see some weakness in segments like general engineering plate and building and construction, 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 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 in other specialties as well. In summary, we continue to like the prospects for the end markets we serve, and we strongly believe that the diversification of our end markets is an asset for the company. Let's turn to slide 16, where I want to highlight several favorable market trends that we see as tremendous opportunities for our future. As you can see in the table on the left part of the slide, the majority of our portfolio today is serving end markets currently benefiting from durable, sustainability-driven secular growth. The important takeaway here is that aluminum is a catalyst behind this secular growth, given its sustainable attributes. Aluminum is infinitely recyclable and does not lose its properties when recycled. As a result, Aluminum will play a critical role in the circular economy and will be a driver of growth in light weighting, electrification, and sustainable packaging. As we mentioned before, we are continuing to invest in and grow our recycling capabilities. The recycling center we are building at Neuf Brissac is well underway with startup and ramp up on track for 2025. We also believe the current regulatory environment further supports the long-term growth of our products. For example, legislation in both Europe and North America currently supports the increased adoption of electric vehicles and the increased focus on recycling. In packaging, consumers and brand owners today consider aluminum cans as the beverage container of choice. The aluminum can is more recyclable than both plastic and glass. and can be recycled at a profit. It provides a superior marketing tool using the can as a billboard. It is lightweight, it is easier to transport and store, and it provides better shelf utilization in the stores. Aluminum cans are also recession resilient. Even in today's environment where we have seen inventory corrections across packaging supply chains and some signs of demand weakness as a result of inflation, aluminum cans continue to outperform other substrates like plastic and glass. Light weighting creates significant opportunities across multiple end markets. In automotive, light weighting is critical to reducing emissions in vehicles with internal combustion engines and also to extend the range for battery electric vehicles. Aluminum is continuing to gain share in automotive as a result and costellium is uniquely positioned with greater exposure to premium vehicles like trucks and SUVs, all of which tend to have the highest amount of aluminum content as well as opportunities in both rolled and extrusion-based solutions. Electrification accelerates the growth opportunities for aluminum in automotive. On average, battery electric vehicles use two to three times more aluminum sheets and extrusions than their traditional internal combustion engine counterparts. More and more of the fleet is going electric in both North America and Europe, which is supported by legislation and customer incentives. Postelium is well positioned today with our diverse and balanced portfolio to capture the secular growth fueled by sustainability. Turning now to slide 17, we detail our key messages and financial guidance. Constellium delivered strong performance in the first quarter. I'm very proud of our entire team as we achieved solid operational performance and strong cost 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, particularly on European energy costs. As Jack noted, We are currently expecting comparable inflationary pressures in 2023 to those we experienced 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, we are raising our guidance for 2023 and now expect adjusted EBITDA in the range of 650 to 680 million euros and free cash flow in excess of 125 million euros. 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 our current energy positions, including higher forward energy prices as of today. 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 in-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, the electrification of the automotive fleet, and the increased focus on recycling. 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. We remain focused on executing our strategy, driving operational performance, generating free cash flow, achieving our ESG objective, and shareholder value creation. In conclusion, I remain very optimistic about our future. With that, Alex will now open the Q&A session, please.

Thank you. As a reminder, if you'd like to ask a question, you can press star followed by 1 on your telephone keypad. If you'd like to withdraw your question, you may press star followed by 2. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Emily Chiang from Goldman Sachs. Emily, your line is now open. Please go ahead.

Good morning, Jean-Marc and Jack. Thank you for the update today. I wanted to start with the packaging markets there. I know you've talked a little bit about the destocking cycle. I think last quarter you also mentioned you were still confident in meeting internal volume targets for packaging this year, given the contractual thresholds you have in place. But is there any risk to that view at this point? And for your customers specifically and what you're seeing there, where does Constellium stand in the destocking cycle?

Yeah, good morning, Emily. Thanks for the question. So on packaging, we remain confident in our ability to achieve our internal targets, but they are towards the low end of the variance that is allowed within our contractual arrangements with customers because we are seeing not only destocking, but as I mentioned, some weakness in end demand. And I think that's due to two factors. One is, you know, inflation clearly squeezes disposable income for a consumers, but more importantly, there's been no promotional activity of late. And this for cans, beverages in general. And you see that in the results of the beverage companies where pricing is very strong for them, but volume is weaker. So I think we're in a place where we believe the market will be still growing over the medium term. But this year is a little bit of a challenge and will be towards the lower end of our expectations volume-wise.

Understood. And maybe a second question, just shifting gears a little to the Muscle Shoals asset there. I know you mentioned there was some labor inefficiencies that were driving the weakness, but were there any other operational issues or Will we just expect over time, as labor inefficiencies pass, that that asset should see better profitability?

Yes, we expect to be recovered by the end of the year. As I mentioned on a few of our earnings goals, I guess, since the fall, it takes time to recruit and train people. We are making progress. We have less open positions. We are spending a lot of maintenance of the assets as well. So that's a headwind in our cost variance when you look at the performance versus last year, this quarter versus last year. But I think we're setting the foundation for a return to solid operating performance and financial performance by the end of the year. The encouraging signs that we're seeing that You know, when we look at our indicators, you know, there's more and more green lights on the dashboard in terms of performance of the plant. And that allows us, for instance, even though can sheet is weak, as we mentioned, to take plenty of opportunities in automotive. And that's one of the beauties of our diversified model where, you know, we can, you know, if one market is not doing so well, well, there's other opportunities in other markets that we're seizing. So I'm quite encouraged by what I'm seeing, but truly typically operational performance improves before financial performance improves, and I think by the end of the year we'll be in a very good place.

Great. Thank you.

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

Great, thanks. Good morning, John, Mark, and Jack. First question is around, hi, I guess just around changes to the guidance. So it seems like from a cost perspective, you still are seeing 300 million target, yet you did raise the guidance. So I'm just kind of curious maybe what has changed from the update you gave towards the end of last year where you were looking for more meaningful decline. And then with respect to price costs, You know, it does seem like you're getting very strong price mix this quarter, 157. So that's a pretty strong run rate. But it seems like you intimated that you still would be negative price cost this year. So I'm just wondering if you could also give us any color on what you think net price is embedded in the guidance.

Yeah. Thank you, Kurt. So let me start with your first question. I'll give you a little bit of color here. I think, you know, as we kind of finished Q1, it really It was a little better than kind of what we had expected, just given the favorable trends in aerospace and automotive, as well as some of the sub-segments within the industrial markets. And we do expect some of that to continue into the second quarter. Aerospace and automotive should continue to perform. The lower Kenstock demand will likely could also last into this quarter and you know the visibility for some of the other markets are not kind of where we're used to seeing so and remember you also have to continue the cost pressure from from inflation as well as from rep of activities given the strength in our aerospace and automotive businesses so that's why we're you know fundamentally not really changing our existing views and outlooks for you know the second half of the year and that kind of explains the guidance. And then on to your second question. I think, you know, on the cost side, you know, we did call out, you know, we should expect to see high levels of inflation, about $300 million. You know, we're kind of one quarter into that. But we're confident in our ability to, you know, pass through, you know, some of the costs as well as with the pricing power that we have.

And if I step back, Kurt, I think, you know, when we were late last year, we were thinking, you know, we've got this big wave of inflationary pressures. Are we going to be quick enough to pass that through? Because there's no question in our mind that we can pass it through, but the pace at which we can pass it through has very significant impact on 2023 outcome. And we were, you know, prudent, I think, in our assessment of what kind of job we can do in passing it through. And what we see nearly six months after seeing that big wave is that the teams have done an excellent job at negotiating with customers. Our customers have been supportive. And we're in a much better place than we thought we would be six months ago or three months ago. And that's why we see less of a pinch.

Okay, and then one follow-up on packaging for me as well. So at the end, let's say you talked about, I think, 200,000 tons of incremental canned sheep by 25, and also noted that duration of these contracts were being extending up to, I think, four to five years. So can you comment on how much of that have you contracted at this point in time? Because obviously, you know, the beverage cans either have been some push-outs, new cans, capacity, and then the CapEx around that, do you still feel comfortable in that, I think, 175 to 200 number you quoted?

Thank you, guys. Yes, so we did communicate last year at the Analyst Day 200,000 tons of additional volumes in a canned sheet. Now, that's a 26 number because it's a run rate in 25, but that's because of the ramp-up. We are 80% to 90% contracted on those. As you know, there is some variance within the contractual commitment, so it can come in a little bit lower, but not meaningfully lower if weakness persists. So we feel very comfortable about this market, the capital deployment plans we have. And remember that these products use the same lines as the automotive line. You can obviously see the finishing lines for automotive. So we have versatility in terms and optionality in terms of where we decide to use that capacity. So we feel very good about the outlook, and we're essentially close to 90 percent contract. Great.

Thanks very much.

Thank you.

Thank you. Our next question comes from Team Natanas of Wolf Research. The line is now open. Please go ahead.

Hey, good morning. Just a few follow-ups. With regard to the percentage of your tonnage that you think you can pass through cost pressures on, I think in the past you've talked about 90% to 95% of cost you could pass through in a given year. And I know you alluded to some spillage into further time periods. Is that 90% to 95% still a good frame of reference?

Yeah, I think it's directional, but it's good. And as you can see on the variance chart, you see that we're referring to page 11 of the presentation. You see a price and mix variance of 138. There's an element of mix in there, so it's not all price. And you see a cost variance of 130. And in the 130, it's not inflation only, right? There's other factors like For instance, we're bringing in more people in aerospace and transportation because of the booming demand. We are spending more on maintenance in our facilities to make sure we're ready for the future. But overall, I think the numbers show our ability to pass through most of the inflation as it happens and the rest of it in the following period.

Okay, great. And then I know you addressed the CanSheet expansion with Kurt, but I just thought it'd be helpful to go back to, again, the Investor Day and some of the other broad growth initiatives you talked about. Can you give us an update across the board with some of those initiatives that you had laid out for us?

Sure. So those initiatives are really the foundation for the over 800 million euro FIBIDA guidance we give for 2025. So if I look at, you know, the different elements there, maybe by market. So we talked about can sheet. See 2025, you know, it's roughly 140,000 tons. That would be for the year, right? For the year 2025, that would be available. And I think most of that, as I mentioned, is, I mean, 90% is contracted essentially. And there may be a little bit of variance depending on how the markets go, but that's, we feel, That's something we feel very good about. That's why we're spending a lot of money on maintenance and capital expenditures to get ready for that. So we feel good about it. I think we're a little bit behind given the current market situation overall because of the weakness in camps. But I think the silver lining here is just two things. One is you get the other beverages, your packaging materials, they are down. much more than cans are. So that shows that for the brands and the consumers, the cans are preferred. The other aspect, the other silver lining, is with the increased focus on recycling, we know that aluminum pays for its recycling whilst plastic and glass don't. And what that means is as there is more and more legislation or push to recycle more, not only will we have more used beverage cans to recycle, but also there will be more need for cans because they are a preferred package and they cost less to recycle than the other packages. So I think the fundamentals here are very strong, and it's going to have a very long tail, well beyond the 2025 horizon. So we feel very good for can sheets, you know, Even though we're a little bit behind now, I think we'll meet our targets in 2025, and I think there's more to come after that. Now, the other big initiative we have is a recycling center. It's going on budget, on time. We're very excited about it. I was visiting it just a couple of months ago. It's amazing how quickly it's moving now that we've We've started to be above ground. The construction is above ground, so that's very exciting. And we'll start it up at the end of 2024 and ramp it up very quickly. And I think with, again, more recycling being mandated in Europe, that's going to be a tremendously attractive opportunity for us. And it's likely to be better than what we thought in terms of financial returns when we announced it. So I think we're going to end up ahead of that. Then if I look at the other markets in automotive, we see continued demand and the recent announcements by the Biden administration mean essentially turbocharging the growth of electric vehicles, which has an accelerating effect on the adoption of aluminum. So that's good for us. And when I look at the aerospace market, We've got very good positions with Airbus and Boeing and about every OEM in the market. And we're seeing a strong pull that's going to continue for the next few years. So I think in aerospace, as you're seeing, we're ahead. We're winning numerous best supplier awards from these plane makers. And this is comforting market share gains. So we'll think we're in a very good place, and that's why we feel so comfortable about our 2025 guidance. I don't know, Tim, if I answered your question in my long answer.

I just wanted an update, so that's great. Thank you very much.

Okay. Thank you.

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

Hey, good morning, Jean-Marc and Tim. I just want to go back on the packaging and the trend that you're seeing. We normally see higher seasonality in 2Q and 3Q. Would you expect that to be relatively muted this year, or do you still expect to have a little bit seasonality coming through?

So I'm not sure I heard the question, Corinne. Exactly. But yeah, I mean, typically you have the strong first half in the Kenstock, given the seasonality of the business. Now, we do this year have this lower demand factor and the stocking phenomenon that's happening, right? And that's continuing. We're seeing it to continue into Q2, so that's going to have a little bit of an impact on volume. But we're hopeful, you know, that's going to come back in the second half.

I think what's going to drive it really, which is unknown still, is whether the beverage companies will run promotions or not. I was at my local store the other day and what I used to get for six bucks, I'm paying nine bucks for it now. So that's a change. If there are promotions, I think that's going to spur some more demand. If there are not, I think we'll be in a much more muted environment from a seasonality standpoint than what we're used to see.

Thanks. And then maybe a follow-up on competition or, you know, I think still dynamic has been announced and, you know, further expansion or, like, capacity coming sooner than maybe the market was expected. Can you comment, like, do you see any risk for you in which segments maybe?

yeah so um i i don't know the specifics of what you're mentioning the announcement you're mentioning about steel dynamics but in our supply demand projections we believe we need as a north america as an industry more capacity so that capacity is needed to because of the growth we see in both can and automotive and the very substantial share of impulse, which we do not believe are competitive or provide the good service levels that our can makers customers need. So we believe that capacity is needed. Now, if it comes sooner than when it is exactly needed, that could be a problem. But as I mentioned, we're more than 90% contracted through 2025. So we feel we're in a very good place. And we've got contracts that run through 2028. So we feel like we're in a very good place.

All right, thank you.

Thank you. As a reminder, if you'd like to ask a question, you can press Start, followed by 1 on your telephone keypad. Our next question comes from Josh Sullivan of The Benchmark Company. Josh, your line is now open. Please go ahead.

Hey, good morning. Good morning, Josh. Just as far as the record aerospace demand, is that broad-based across air framers and customers? Is there any particular platform driving the near-term results? You know, we've seen some other material suppliers talk about inventory stocking for the A350. You know, does that mean your aluminum-lithium products might be accelerating faster than other products?

So, Josh, we still see narrowbody as a key driver for growth. may come back with, you know, may increase the build rates. It's not a substantial driver just yet. We're seeing it's really broad based, much more demand. I remind you that, you know, when we went through COVID, our shipments, our production went down by 50% when the build rates went down by only 30%. So there is an element of restocking that needs to happen. It's very difficult to know how long it's going to take to restock. i think what we're seeing through the supply chain is everybody being worried about you know am i going to run out of product so this is you know really accelerating the growth uh that is that is needed but at the same time we are still shipping below what is needed to uh meet the build rates uh that are announced by the oems so we feel like there is a long uh

uh you know passive opportunity for us for you know 24 25. uh and then just one on the the automotive side you know in 2022 their number of plants shut down due to various supply chain issues how should we think of you know the recent automotive strength or constellium just relative to restarting some of that production and inventory catch-up versus the organic growth relative to kind of full-year SAR expectations yeah so

I think the full year SAR expectations are up, you know, both North America and Europe, kind of 7%, 6, 7%. And we're growing double digits. And what the gap here is a result of a number of factors, but one which is important is further penetration of aluminum. And that's, you know, something that we see continuing to come into play. So we feel pretty good about our ability to maximize the use of our automotive assets. And we are not fully sold out just yet, so we think there's some nice upside going into next year as well.

Thank you for the time.

Thank you.

Thank you. Our next question comes from Sean Wondrak of Constellium. Sean, your line is now open. Please go ahead.

Hi, Jean-Marc and Jack.

Hey, Sean. We know you're still at DB, by the way.

That's correct. So just, you know, looking today, it's great to see that you increased the guidance. What has sort of changed versus your prior outlook that you gave us?

Yeah, so I think our beat in the first quarter clearly helps us uh be more comfortable about you know our ability to pass through the price increases uh but we for as jack mentioned earlier for the nine months to go we are not really changing our our guidance right we feel like there's still uh enough uncertainties around the geopolitical environment the uh the older books in some of our segments tend to be short Whilst we see a lot of strengths in auto and aero, for instance, and there's still this uncertainty around packaging. Are we going to have promotions or not in the summer? So, we feel very good about our increased guidance, but we are not calling it yet a real upside to the next nine months.

Right. And do you think the fact that the packaging guys might be seeing some easing inflationary trends might be increasing their willingness to lower prices a little?

Possibly. Yeah, I hope so. All right. And then just across some of the other cost pockets. Oh, sorry. I was saying that would be an upside if it happened. Right. That makes sense.

And then have you seen inflation easing in any of your other, uh, cost buckets? Um, I know you've mentioned labor has been up, but, um, just within maybe freight or, or any other areas.

Yep. So, um, no, it's, I mean, on the energy side in Europe, you know, if you look at the spot prices, it did kind of come, come down a little bit, but that's really still well above historical averages. Um, And I think, you know, inflation, it's a big category, and it's really broad-based, right? So we're still seeing, you know, tremendous pressure on, you know, other buckets like labor, alloy, you know, coatings, et cetera.

Right. Okay, thank you. And then it's great to see that you've kept your free cash flow outlook. What are your plans to sort of allocate that free cash flow going forward?

Yeah.

Are you just going to build cash, or do you think you would apply it?

Well, so, I mean, this goes into the capital allocation priorities a little bit, right? And I think for us, you know, nothing has changed. Our priority is still to, you know, take our leverage down to, you know, 2.5, less than 2.5 times, and that remains the priority. You know, we were spending more on CapEx to, you know, generate returns, additional returns for our shareholders, but the leveraging remains the priority. You know, and we mentioned in the past that the leveraging comes in a couple of different ways. One is from earnings growth, and secondly, from debt pay down. So that gives you a flavor.

Okay, great. Thank you very much for taking my question.

Thank you.

Thank you. Our next question comes from Katja Jančić from BMO Capital Markets. Your line is now open. Please go ahead.

Hi, thank you for taking my question. Just quickly on the A&T segments, it was very strong this quarter. And I think last quarter you mentioned margins in that business should be somewhere between 800 to 900 per ton. How should we think about margins going forward or over the next few quarters?

Yep. So, you know, obviously A&T had a stellar performance this quarter and continue to have stellar performance. We're very proud of the achievement. I think, you know, first quarter margin really reflects continued pull from customers. So, you know, more aerospace as part of the portfolio, you know, Aero and TID, but also more favorable, you know, aerospace mix within Aero, if that makes sense, and the TID portfolio. know business is also holding up pretty strong so I think remember you know the business Katia remember the business flexed quite a bit in terms of cost during COVID in the down cycle and not all of that has you know kind of fully caught up in an upcycling environment like the one we're in today and you know obviously that's that benefits that's beneficial for margins you know we saw some of that in the fourth quarter of last year. It was actually throughout last year and continuing into this year. But over time, we do expect, you know, cost to catch up. But margin, you know, for this business unit, you know, upcycling environment should still, you know, stay very strong.

So in other words, the 800 to 900 CATIA is kind of an average across cycles for the aerospace and transportation division. in a very strong aerospace market going up, we'll be above that range. And I think that's what we're seeing now. So we would expect for this year, you know, to be above the 800 to 900 average, you know, through the cycle.

Okay. Thank you so much.

Thank you, guys. Thank you.

Thank you. We have no further questions, so I'll hand back to Jean-Marc Germain for any further remarks.

Well, thank you, Alex, and thank you, everybody, for participating today. We're delighted with our performance in the first quarter. I think it poses a good foundation for a strong and better than expected 2023. Thank you, everybody, and stay safe. Goodbye.

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