Constellium SE

Hello and welcome to today's Constellium second quarter 2023 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 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 our host, Jason Hershiser, Director of Investor Relations. Jason, please go ahead.

Thank you, Bailey. I would like to welcome everyone to our second 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 filing. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events, and expectations, and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law. In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation which supplement our IFRS disclosure. 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 second quarter results. I would like to start with safety, our number one priority. After a strong first quarter performance, our recordable case rate climbed in the second quarter, leading to a rate of 1.9 per million hours worked for the first half of the year. This is a humbling reminder that while we always strive to deliver best-in-class safety performance, we need to constantly maintain our focus on safety to achieve the ambitious targets we have set. It is a never-ending task for our company and one we take very seriously. Turning to our financial results, shipments were 398,000 tons, down 6%, compared to the second quarter of 2022. due to lower shipments in PARP and AS&I. Revenue of 2 billion euros decreased 14% compared to last year, as improved price and mix was more than offset by lower shipments and 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 ourselves excluding the cost of metal, was 785 million euros, up 11% compared to the same period last year. Our net income of 32 million euros in the quarter compares to a net loss of 32 million euros in the second quarter last year. As you can see in the bridge on the top right, adjusted EBITDA of 209 million euros in the quarter was up 5% compared to last year and is a new quarterly record for the company. ANT adjusted EBITDA is a new quarterly record as well and increased 33 million euros compared to last year. BARP adjusted EBITDA decreased 16 million euros and AS&I adjusted EBITDA decreased 7 million euros in a quarter compared to last year. Looking across our end markets, aerospace demand remained very strong with shipments at 30% compared to last year. The recovery in automotive continued with higher shipments in both rolled and extruded products versus last year. Packaging shipments were down in the quarter as demand remained below prior year levels and we continue to experience weakness in most industrial markets. 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 well. Moving now to free cash flow. Our free cash flow in the quarter was strong at 68 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 second quarter was 2.7 times or down 0.3 times from the end of the second quarter last year. Overall, I am very proud of our second quarter performance. Looking forward, we like our end market positioning and we are optimistic about our prospects for the remainder of this year and beyond. Based on our strong performance in the first half of this year and our current outlook for the second half, we are raising our guidance and expect adjusted EBITDA in the range of 700 to 720 million euros and free cash flow in excess of 150 million euros in 2023. Our outlook assumes no major deterioration on the macroeconomic or geopolitical fronts. We also remain confident in our ability to deliver our long-term target of adjusted EBITDA over 800 million euros in 2025. Before I turn the call over to Jack, I wanted to comment quickly on our recently announced divestiture. Last week, we announced the sale of our soft alloy extrusion in Germany for a total cash consideration of 48.8 million euros. The three plants specialize in soft alloy extruded products for the building and construction, transportation, and industry markets in Europe. This transaction will allow us to further streamline our portfolio of strategic assets and strengthen our focus on our core end markets. We expect the transaction to close in the second half of this year. With that, I will now hand the call over to Jack for further detail on our financial performance. Jack?

Thank you, John Mark, and thank you, everyone, for joining the call today. Please turn now to slide seven. Value-added revenue was 785 million euros in the second quarter, a new quarterly record for the company and up 11 percent compared to the same quarter last year. Looking at the second quarter, 156 million euros of this increase was due to improved price and mix in each of our segments. Volume was a headwind of 43 million euros due to lower shipments in PARP and AS&I. Metal impact were a headwind of 22 million euros compared to the same period last year. The balance of the change was largely due to unfavorable FX translation. There are two important takeaways from this slide. We grew our value-added revenue by 11% 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 on PARP segment performance. Adjusted EBITDA of 79 million euros decreased 17% compared to the second quarter last year. Volume was a headwind of 13 million euros with higher shipments in automotive, more than offset by lower shipments in packaging and specialty road products. Automotive shipments increased 16% in the quarter versus last year as new platforms continue to ramp up. and demand generally appeared stronger. Packaging shipments decreased 12% in the quarter versus last year due to inventory adjustments across the supply chain in both North America and Europe and lower demand at the consumer level. Price and mix was a tailwind of 52 million euros, primarily on improved contract pricing, including inflation-related factors. Costs were a headwind of 53 million euros as a result of higher operating costs due to inflation, operating challenges at muscle shoals, and unfavorable metal costs. Now turn to slide nine and let's focus on the A&T segment. Adjusted EBITDA of 96 million euros increased 53% compared to the second quarter last year. Volume was stable. as higher aerospace shipment offset lower TID shipments in the quarter. Aerospace shipments were up 30% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 15% versus last year, reflecting a slowdown in most industrial markets, particularly in Europe, partially offset by strong demand in other markets like defense. Price and mix was a tailwind of 68 million euros on improved contract pricing, including inflation-related past dues, and a stronger mix with more aerospace. Costs were a headwind of 33 million euros as a result of higher operating costs, mainly due to inflation and continued ramp-up in activity levels. Now, let's turn to slide 10 and focus on the AS&I segment. Adjusted EBITDA of 39 million euros decreased 15% compared to the second quarter last year. Volume was a 9 million euro headwind with higher shipments in automotive, more than offset by lower industry shipments. Automotive shipments increased 7% in the quarter versus last year as we continue to experience improvement in activity levels. Industry shipments were down 19% in the quarter versus last year as a result of weaker market conditions in Europe. Price and mix was a 21 million euro tailwind, primarily due to improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of 19 million euros, a higher operating cost, mainly due to inflation. Now, turn to slide 11. We 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 second quarter, and as expected, we experienced 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 changes in 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 cost. As a reminder, 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 or impact our results. We have demonstrated strong cost performance in the past years, and we 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. As we previously noted, many of our existing contracts have inflationary protection, such as PPI inflators or surcharge mechanisms, and where they do not, we're working with our customers to include them. 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 half of this year, we were very successful with price and mix. the largest increment in price in offsetting inflationary pressures. As of today, we still expect inflationary pressures to remain significant at least through the end of this year and at a comparable level 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 the actions we're taking to offset them are included in our guidance for 2023. Now let's turn to slide 12 and discuss our free cash flow. We generated 68 million euros of free cash flow in the second quarter, bringing our year-to-date total to 34 million euros. As you can see on the bottom left of the slide, we have continued to deliver our commitment to generate consistent, strong free cash flow and enhance our financial flexibility. Looking at 2023, we now expect to generate free cash flow in excess of 150 million euros for the full year. We expect CapEx to be between 340 and 350 million euros, cash interest of approximately 120 million euros, and cash taxes of approximately 30 million euros, all in line with our previous guidance. Lastly, we now expect working capital to be a modest use of cash for the full year. Now, let's turn to slide 13 and discuss our balance sheet and liquidity position. At the end of the second quarter, Our net debt of 1.9 billion euros decreased slightly compared to the end of 2022, given the 34 million euros of free cash flow generated in the first half and favorable non-cash FX translation of 21 million euros with the weakening of the US dollar. Our leverage reached a multi-year low of 2.7 times at the end of the second quarter, were down 0.3 times versus the end of the second quarter last year. 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 752 million euros as of the end of the second quarter. Last week, we completed the redemption of $50 million of our 5.875% U.S. dollar bond due in 2026, further strengthening our balance sheet. 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 John Mark.

Thank you, Jack. Let's turn to slide 15 and discuss our current end market outlook. 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 the 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 lightweighting, electrification, and sustainable packaging. So turning first to packaging. During the quarter, the inventory adjustments continued across the supply chain in both North America and Europe. We are also seeing 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. Even in today's environment, where we are seeing weaker demand in packaging markets, aluminum cans continue to outperform other substrates like plastic and glass. We are confident in the long-term outlook for this end market, though, given capacity growth plans from can makers in both regions, the greenfield investments ongoing 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 we announced at our analyst day last year. The company remains 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 here in North America. We're encouraged by the improved performance we have seen recently at Muscle Shoals and remain 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 have increased the last several quarters, but remain well below pre-COVID levels. Automotive inventories are low, consumer demand remains high, and vehicle electrification and sustainability trends will continue to drive the demand for lightweighting and use of aluminum products. As a result, we remain very positive on this market, and increased demands in both rolled and extruded products give us reason for optimism. Let's turn now to aerospace. The recovery in aerospace continued in the quarter, with shipments up 30% versus last year. though still well 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 market. As the chart on the left side of this page highlights, these three core end markets represent 77% 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 specialties, we expect weakness to continue in most industrial markets, and in general, These markets are dependent upon the health of the industrial economies in each region. Overall, demand has been more stable in North America than in Europe. In TID rolled products, demand remains strong in markets like defense and in transportation in North America. In industry extrusions, while demand is strong in some sectors like solar, demand remains weak in most other markets. 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. Constellium is well positioned today with our diverse and balanced portfolio to capture the secular growth fueled by sustainability. 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. Turning to slide 16, we detail our key messages and financial guidance. Constellium delivered strong performance in the first half of the year. I am very proud of our entire team as they achieved solid operational performance and strong cost control despite a number of challenges, including significant inflationary pressures. Looking forward, 2023 continues to be a challenging year given the extraordinary inflationary pressures we are facing and a demand weakness in some of our end markets, like packaging and other specialties. As Jack noted, we are still expecting significant inflationary pressures in 2023, 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 strong performance in the first half of this year and on our current outlook for the second half, We are raising our guidance and expect adjusted EBITDA in the range of 700 to 720 million euros and free cash flow in excess of 150 million euros in 2023. As a reminder, our outlook assumes no major deterioration on the macroeconomic or geopolitical front. 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 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, 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 will continue to do so. 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. Lastly, and it is not on the slide here, But before we open it up for Q&A, I want to congratulate Ingrid Jorg. I'm very pleased to announce that I have appointed Ingrid to Executive Vice President and Chief Operating Officer. This new and exciting role will allow us to continue to strengthen our organizational structure and focus and develop our people. In our new role, Ingrid will continue to work closely with me in the coming years to drive further value creation for the company. Ingrid will operationally head Constellium's three business units, driving sustainable growth, operational efficiency, and world-class safety performance. Ingrid has served very successfully, as you can see, as the president of Constellium's NT business unit since June 2015. With that, operator, we will now 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 phone, please remember to pick up your handset before asking your question, and please do ensure that you are unmuted locally. Our first question today comes from the line of Katja Janik from BMO. Katja, please go ahead. Your line is now open.

Hi. Thank you for taking my questions. The margin in the A&T... Hello. Margin in the ANT segment remains very strong. Previously, you said through the cycle margin in that business should be somewhere between 800 to 900 euros per ton. Is it still, does that still hold or have margins structurally increased?

Yep. Thank you for the question, Katya. So, you know, in ANT, you're right. In the first quarter, we mentioned the a cycle average margin of 800 to 900 euro per ton, and it will stay high in this up cycle environment. So that's certainly what we saw in the second quarter with better price and mix and with more aerospace having a higher margin compared to the TID business. But also in the second quarter, we have a better mix within our aerospace product portfolio towards some of the more technically demanding products, which obviously hold a premium. So, you know, the business also had solid cost control in the second quarter relative to the increased levels of activity. You know, with two quarters in, you know, we believe we can maintain attractive margin for this business, certainly for this year, and that provides some upside for margin throughout the cycle. So, you know, our view today is you know, there's 100 euro per ton upside to the 800 to 900 euro per ton guidance we gave to you last quarter.

So, yes, we think structurally margins are up around the 1,000 euro per ton.

And in the second half of the year, should we see some easing, I'm assuming, in margins?

there could be some easing just given the seasonality of the business and, you know, cost is continuing to catch up in this business unit. But, you know, we're optimistic about the margin profile for this business.

But this year will be over the average of the cycle. That's true.

Okay, that's fair. Now, your leverage is approaching your target. Can you remind us once you reach that target how you're going to be thinking about the capital allocation?

Yes, so look, I mean, our overall objective is to increase our financial flexibility because that will kind of help open up capital deployment options and allow us to maintain a balanced, I would say a balanced capital allocation policy. So, you know, as we reach our leverage target, it certainly opens up more options, including returning cash to shareholders.

Thank you very much.

Thank you.

Thank you. Our next question today comes from the line of Bill Peterson from JPMorgan. Bill, please go ahead. Your line is now open.

Yeah, hi. Good morning, and thanks for taking the questions. It's great to see the upward guidance revisions. Yeah, good morning. It's great to see the upward guidance revisions. What has changed since the prior outlook that gives you confidence in the revisions? And I guess given the higher free cash flow guidance, can we expect accelerated debt paydown from here?

Yeah, so Bill, I'll get started and Jack will help me. So the visibility has improved as the year progresses. That's number one. We are extremely pleased with our performance in aerospace. And as we mentioned in response to Katia's question, it's not a flash in the pan. We believe there is much more room to grow. And that's why we're raising also our expected average margin. for this segment. And we're seeing a very good mix within aerospace where, as you saw, customers like us, we get some fantastic awards as best suppliers from them. And that means more business for us. So very strong fundamentals overall in aerospace, and even better for us as a supplier, as a preferred supplier to our customers. So that's definitely a strong contributor to the increased guidance. In packaging, the first half was rough with demand being down. We expect the second half to be less rough, and that's based on our older book and what we're seeing. So by contrast, you know, H1 of 22 to H1 of 23, that was difficult. We expect H2 to H2 to be much better in terms of comparison. Still not where we like it to be in the long run, but making some progress. And automotive, as you saw, continues to be strong for us. It's a very good year. I think we're seeing both the strength in the underlying market, but also the continued penetration of aluminum and automotive. So all these are giving us good reasons for the increased guidance. Now, at the same time, it is striking to see that, you know, our specialty segments are suffering from a quasi or completely resuscitated recessionary environment. Inflation continues to be strong and eating into our cost base. So we're extremely pleased with the outlook we're giving and sharing with you today, because there's still quite a few headwinds that we're faced with. And despite this, we're increasing our guidance. So yes, the increased guidance translates into on the EBITDA side translates into more cash flow that gives us more flexibility. And I don't know if, Jack, you want to add anything to my comments. I think that's good. Okay. And as usual, we'd like to pay down some debt, so we'll see what we do in the future.

Okay, great. Yeah, thanks for that. And I guess, you know, you kind of mentioned some of the issues around inflation. And, you know, I know a lot of the mitigation efforts and inflation is captured in your full year EBITDA view. I guess if we think about some of the bigger items you mentioned, like energy or metals, there's still, I guess, inflationary pressure at some of the sites. But I guess what specifically is the team doing to mitigate these? And I guess, can you provide an initial view on how to think about these cost headwinds as we move into next year?

Yeah. So on energy, we think we have crested. And actually at the moment, given our hedge positions, we are paying a bit higher than the spot prices would be on average. So as those hedges roll off and hopefully the spot prices continue to be what happens in the future, we should see a decrease in energy costs. I'm hopeful that's what happens. But anyway, that's what we're expecting going into next year. On metals, I think we're seeing inflation subside, but they are still much higher. I mean, magnesium is multiple times more expensive today than it was back in 2020 or 2019, right, pre-pandemic. So we see these elevated costs to continue. So in terms of mitigation measures, and I could go on and on about, you know, different pockets of costs that are going up with inflation. We all live that in our business and consumer life, I would say. So in terms of mitigation measures, the first one is making sure we are getting paid by our customers for the reality of the new costs that we are faced with. And as I said, there's been a fantastic job done by the teams to reflect the increased cost into our pricing, but there is a lag to that. So you haven't seen yet the full impact of the price increases. The second item is we've got to be much more economical in our use of resources, which is a good thing, actually. So it's forcing us to put on the front burner questions like, how do we save energy? How do we better operate our plants? How do we improve our recovery so that every cost item, every use of resource is minimized? And that's a lot of work grinding through every opportunity minimize the use of resources within the plants. And then the third aspect is more strategic and longer run is we have to go and continue on our path towards more value-added products. And a big element of that is making sure we have the right product mix, that we focus on those products that have better margins, that are more constructive in the long term, so that the value of what we're making is more recognized in the market. And that's one of the reasons why we announced the sale of the three extrusion plants in Germany that were focused on lower margin products. We thought, you know, this is a kind of market where it may be a little bit more difficult in the future to face increased cost base. And we found a buyer that used them as a strategic asset. Well, the buyer found us, actually. We were not auctioning off these assets. And that's part of the steps we take to continually make sure we've got the right cost base and we participate in the right market.

Great. Thanks for the insights and nice job on the quarterly execution.

Thank you, Bill.

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

Yes, thanks. Good morning, John, Mark, and Jack. Hope you're well. I wanted to come at the sort of A&T, hey, the A&T margin profile maybe a little bit differently. I mean, as you think about, you know, going for the next couple quarters and then next year, you know, aerospace clearly is going to grow much faster than TID. So I would think that your mix all else equal would be improving. Your fixed cost absorption would be improving. And then at some point I would think, you know, given some of the increases potentially on the wide body side of the market, that would also be accretive to mix. So, you know, is that a fair characterization? I think that your mix within that segment should be improving. And then, you know, I know Airware and some of the extremely high margin products you do can create a lot of quarter to quarter volatility. So was there anything that was kind of extremely unique in this quarter that you could call out that, you know, say wouldn't repeat next quarter?

Yeah, so you're right that on a broad base, the more aerospace we do in the mix compared to TID, that will drive up the average margin because the aerospace margins are higher than TID. And on a go-forward basis, as we're seeing the aerospace recovery strengthening and strengthening, that's going to come into play. It's true that we've got some within aerospace, there is also a micro mix. So to say with some products that are extremely profitable, remember they required quite significant investments in the past. So it's fair that they are much more profitable. And we've had strong demand in space, in defense, and the higher end of the products. We expect that to continue. But yes, there can be some fluctuation. So overall, I think Jack mentioned earlier, we're expecting for this year margins in the ANT segment that continue to be above the revised long-term average that we mentioned, above the 1,000 euro per ton, but they may come off a little bit from what we've seen in Q1 and Q2, which are seasonally strong quarters.

Yeah, Kurt, I would just add, I agree with everything that John Mark mentioned, and certainly more aerospace will be helpful, contributed from a margin perspective. Remember, the TID business is, you know, down this year in the first half compared to the first year, first half of, sorry, first half of this year versus the first half of last year, right, down somewhere around 15%. So, you know, as that

part of the ant business rebounds recovers that will eat into the margin as well okay yep um and then on packaging um are you seeing any evidence that some of the destocking is over i mean it seemed like you were intimating that the second half would be better on a comp basis and then with respect to the you know, phase one expansion plan, which I think was 200,000 tons by 2025, and that was going to be steadily layered in. Is that, you know, do you still feel confident that you can get that incremental volume by 2025? And just kind of update us on where you stand with that. Thanks very much.

Yeah, so in the short term, we're seeing some signs of improvement in packaging pointing towards, you know, end of destocking. So that's why we're saying the comp will be We expect the COMP to be better going into H2 than it was in H1. With regards to the 200,000 tons of additional capacity that we highlighted at the Analyst Day back in April of 22, remember it's the 26th really increase, right? By the end of 25, that should be the increase we have in capacity. Given the fact that the market has taken a step back, maybe it's going to be a little bit more gradual. And we always want to maintain flexibility in our capital allocation so that we can accelerate some projects or slow down some projects and within the same envelope of capital expenditures that we have mentioned. So we'll have to see how it goes. There's no fundamental reason to not meet that 200,000 tons of extra capacity. It may come a little bit more slowly than what we initially thought, but that's because The markets may not need it as quickly, and we've got other opportunities elsewhere. But we're really talking about tweaking at the edges here. The fundamentals are not changing.

Okay, great. And maybe just a quick one on PARP and the quarter. You outlined $53 million of incremental costs, which is a pretty substantial delta. You outlined three buckets between metal costs, muscle shoals, and then just general inflation. Could you maybe add a little bit more granularity in terms of the bucket breakout, and then just update us on how you see cost progression in the back half of the year in PARP.

So, Kurt, I think you're right. The cost pressure continued to be high for our businesses, including PARP, I would say. And inflation, it really stayed high in this quarter, and it was broad-based for PARP and for some of the other for the other to be used as well, and that continued to have an adverse impact across a number of categories that, you know, John Mark was mentioning. So I would say inflation is a big piece of that minus 53 that you mentioned. But at the same time, you know, operating costs outside of inflation has increased as well with more labor, you know, more maintenance, more subcontracting, if you will, and some of the other operating cost categories. But they're generally, I would say, Patrick O' Kind of more contained relative to the higher activity levels. So I think we're, we're okay there, you know, muscle shows maintenance. It's while you know still high. It's more under control. Patrick O' This quarter and the team is, you know, working really hard to bring the plan back to normal and the impact as we mentioned in the past will continue to last throughout the rest of the year.

Patrick O' Thank you. Thank you. The next question today comes from the line of Timnit Ennis from Wolf Research. Timnit, please go ahead. Your line is now open.

Yeah, hi, hello, and thanks for the great detail. I wanted to dive a little bit in, not taking away from the strength in auto and aerospace, but the packaging and building construction markets that have shown a bit more weakness. So starting with packaging, on Investor Day a little over a year ago, you talked about 4% to 5% growth. Now you're talking about low to mid-single digits. Is that a change, and if so, is there anything structural that should give us some pause in terms of the extent of upside to packaging? I know you talked about near-term less destocking, but if we think out to the future, is the growth story a little more muted than we thought? If you can provide some more color there.

Tim, I think I would qualify it as tweaking around the edges here, because the 1% difference in growth rate doesn't impact so much. but certainly not a 25 outlook, nor even a 28 outlook. So, no, and I think it's more a reflection of the fact that because we have had that kind of setback with the reduction in volume this year, we think that, you know, the long-term growth rate may be a little bit more muted, because otherwise that would imply a very significant catch-up very soon in packaging. So it's more... kind of the arithmetics of how we look at the packaging market long-term. We continue to think it's a good market. The cans continue to win share, to gain share against all the substrates, but the past may be a little bit more moderate, but still very attractive to us.

Okay, thanks. And the German sale that you detailed, what does that say about the building construction market outlook? Because it seemed to us that maybe that was near a bottom, but you're also exiting it. And so I'm just wondering what we should take away from that in terms of your outlook for that segment.

Well, that was an opportunistic sale. So building and construction, as you know, is not a big market for us, right? It's a couple of percent of our total sales as a company. So it's totally not an area of focus for us. What happened here is we've got these three plants. We have actually improved performance of these three plants quite a fair amount in the past five years. And we had somebody come to us and say, we're interested in buying them. We want to expand in the German market. So you've got a situation where we as a company don't view these plants as strategic. And we've made a nice improvement in profitability. And we got a buyer who was interested in them and places a higher value than we do on this business. And then it's a matter of, you know, if we keep a business, we will have to put some capital expenditures in. Is it the best return for us? We don't think so. And therefore, the decision was relatively easy once it was clear that the buyer was putting a higher value on the assets that we did, it made sense to sell them. So it wasn't so much about, you know, we're afraid of the outlook in building and construction. It's just that it was the right thing to do for us at the right time.

Tim, I would just re-emphasize what Jean-Marc mentioned earlier. You know, we didn't put this business on the market, and this was not a far sell, if you will. It was really optimistic.

transaction it's been years in the making right just the timing kind of worked out the way it did and the business is a better fit in the buyers portfolio than in our portfolio now that's helpful color thank you makes a lot of sense um if i could squeeze one more in i i was interested in your talk about potentially pushing in the pushing out some of the expansion to 2026 as you know there's what three new mills that are kind of targeting that same time frame So I just wanted to ask if you're seeing any evidence of them in the market starting to talk about contract extensions or if there's any influence of the new mills in your discussions with customers that far out.

No, there isn't. And as we said, we are fully contracted out and we are through 26 and we've got contracts that go into 27, 28, 29. So it's more a matter of us looking at what do we think the long-term forecast is, and how quickly do we need the extra capacity, because we need it. But the question is, do we need it in January 24, 25, 26, and we don't want to spend the money sooner than we need, and we certainly don't want to spend it later than we need, because otherwise we'd be not meeting our contractual commitments. So it's really about, you know, talking with our customers through their expectations and getting a sense of what do we need to do when. But again, those volumes are contracted.

Got it. Okay, thanks again.

And as you know, there is a margin tolerance, right? Typically within a contract, it's not like it's an absolutely firm amount of tons, right? So there's a margin and, you know, we're talking of, you know, playing within that margin, that tolerance around the contract and looking at, you know, the markets are served, we'll delay it a bit. If the markets are strong, we'll put it forward.

Got it.

Thank you. Thank you.

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

Hey, good morning, everyone. I want to come back to the guidance. And I know there has been a lot of questions, but what the guidance leaves mostly driven by the performance of 1Q and 2Q, implying kind of, you know, relatively unchanged assumption for the second half of the year? Is that the correct assumption of it?

No, I wouldn't say that. I would say, yes, partially driven by the outperformance in the first half, and then when we looked at Look at the second half, we do expect some of the underlying strength of strengthening the business to continue into the second half. That will drive additional outperformance in the second half.

So Corinne, we expect aerospace to continue to be strong. We expect packaging to close a bit of the gap. Our pricing is very good, and that should give us some lift. And we expect to continue to suffer pain in the specialty segment. and we continue to expect the automotive to be strong. So pretty much what you saw at play in the first half will continue in the second half, and we're raising our own internal expectations that have been raised for the second half.

Okay, that makes sense. So what would be the likelihood for you guys to potentially increase again next quarter? If you assume you have significant performance again from ANT and a higher margin into the second half versus 900 or 1,000 petons for the usual cycle, very likely you should see an annual number that is going to be toward and above the guidance, right?

Well, at this stage, this is our best outlook. Right? And obviously there's plenty of hypothesis into it. And, you know, you can have several of them turn better or several of them turn worse. And depending on how many of them turn better or worse, you can be, you know, within the guidance or outside of the guidance. This is our best view of today's conditions and outlook and what it means for the company. There's some negative, you know, some risks out there, right, which we've bake into our guidance uh like the uh there's lots of talk about a uaw strike and the automakers i mean if they stop their lines we're gonna not gonna ship to them right so we try to factor that in our guidance as well and and other things uh you know spot prices for energy they are low but remember we're 90 percent hedged and in some of our markets we are actually producing you know 20 30 percent less than what we should and therefore we are got positions in energy that we have to unwind in the market that we're making losses on. So you've got all these factors at play. And today, our best year of it is 700 to 720. And obviously, we're working hard to meet our targets and beat them if we can.

Yeah, and Corinne, just bear in mind Sorry, just bear in mind, you know, second half, there's seasonality impact as well. So you can just look at the outperform in the first half and put it on to the second half. So we got to take that into consideration.

Got it. And then just quickly to come back on, so cash flow, free cash flow guidance was increased. And again, you talk about the net debt target to be almost right where you want to be. So you're going to have some cash flow there that you can invest. Is there any specific area or any specific end market that you would give priority for?

So I think, you know, as we, well, I mean, over the short term, you know, we want to maintain, as we mentioned, a balanced capital allocation policy. You know, we guided 340 to 350 of CapEx, so you can count, you know, that numbering for the full year. And, you know, as we continue to generate free cash flow, and John Mark alluded to this, you know, we'll look at, you know, other opportunities to reduce our gross debt obligation because increasing financial flexibility is not just about the leverage target, it's also about reducing the gross debt obligation. I don't know if that's what you're asking, but.

Yeah, that's very cool. Thanks. That's it for me.

Thank you. Thank you.

Thank you. The next question today comes from the line of Josh Sullivan from the Benchmark Company. Please go ahead, Josh. Your line is now open. Hey, good morning.

Good morning, Josh.

Just regarding aerospace demand, do you think you're shipping product in concert with the current build rates communicated by aerospace OEMs?

Well, there's a lag, as you see, Josh, as you know, between you know, what they're building today and what they will need to build in the future years. And we tend to be, you know, one to two years ahead. So, yes, I think we are. Another way to answer your question would be to say that we think we've got sustained growth ahead of us that will take us higher than pre-COVID levels. somewhere around 25 would be my my guess so we see continued strength because anything that we can make is needed so as far as the oem's inventories you don't think you're you don't think that's a headwind anymore you think you're you're shipping at rate with what they're communicating yes i'm not even sure there's There are some parts of the supply chain where restocking is complete, others where it isn't. And I think we, yes, everything we can make, we can ship.

Okay. And then as we look to later in the decade, you know, there's some aspirational build rate targets that some of the aerospace OEMs would like to get to. How should we think of Constellium's capacity to maybe address some of those out-year targets?

Yeah, that's going to require a lot of work from us, Josh, because, as I mentioned, our strategy is focused on value-added products. There are several pillars to our strategy, but that's the number one, which means we are making more and more complex, complicated, high-value products, which take more time to produce. If you look at the pre-COVID shipments we're making, say 2019, and you contrast that with what we could be making in 2025, the same tons, number of tons, will require much more work and will command even more value-added revenue any bit down. So we have challenges in terms of capacity, and the teams are working very hard to de-bottleneck our plants and make some smart investments, smart capex into the plants so that we build more flexibility, more capability, more capacity. So that's going to be a challenge, but we're very excited about it. It's a good challenge to have. And it creates very nice opportunities for very high return on capital expenditures.

And then just as you look to refine the portfolio and understand the divestiture was more opportunistic, but as you're talking about some of those higher value products in aerospace, Do you think you'll move up the value chain at all? Are there opportunities to do more complex products for your aerospace or space customers?

There is some, but it's at the margin. I think it's a constant, gradual improvement, and what you have seen is what you will continue to see. It's an evolution. There's no... revolution in terms of our product positioning or our manufacturing capabilities or footprint.

Great. Thank you for the time.

Thank you.

Thank you. The next question today comes from the line of Sean Wondrak from Deutsche Bank. Sean, please go ahead. Your line is now open.

Good morning, Sean.

Hi. Good morning. Thank you for taking my questions and congratulations to Ingrid on the promotion. Just going back and sorry to beat the dead horse here with the packaging question. Last quarter when we spoke, you seemed a little bit down on the segment. You weren't quite sure if they were going to get into enough marketing and enough promotional activity. to kind of move the process along there. It does sound like your demeanor has improved a little bit with respect to that. Would you say that's fair to say that maybe you're kind of seeing what you needed to see there? Maybe we're in the early innings of the recovery? Can you just comment on that a little more, please?

Yeah, I think that's fair, Sean. The... The second quarter was not as bad from a comp basis as the first quarter. And what we have in our books for the third quarter is making some progress. But the comps also are getting easier because we started seeing some slowdown in the second half of last year as well. So we're getting to a more normal territory. So that's good. It's factored, obviously, in our forecast and our guidance. And we believe, as we look at the data, that cans continue to be the preferred package. And it was clear when cans had the upswing. It's also very clear in the downturn. And I think that's very reassuring for the long run. So that's why the long-term view is coloring a little bit my lenses here, which is it is a package that has a very good future, and that's good for us.

That's good to hear. And then just, you know, due to your own improvement here with leverage coming down so much and getting closer to that target, when you think about capital allocation, is there any chance that you would consider some form of MA, whether it's North America or Europe, you know, to either add another leg to the stool or whatnot?

Well, That's part of, indeed, of the capsule allocation choices we've got to make. But the first thing about M&A is most of them fail. So if we were to go down that path, they fail for the buyer, by the way. If we were to go down that path, we would be highly selective. So that's really important. It would need to be in line with our strategy. It would be highly selective. Jack, you want to comment further?

Yeah, I'll just basically repeat what you just said. I mean, look, M&A is a tool in the toolkit, as I like to say, right? So I think being selective, you know, we have to be really convinced any deals we do will create access value for our shareholders. The targets will have to be a gift fit strategically, and they have to be a gift fit culturally, and we will not jeopardize our financial flexibility. if that's helpful.

All right. No, that's very helpful. I appreciate it. And thank you for taking my questions today.

Thank you. Thank you.

Thank you. There were no additional questions waiting at this time, so I'd like to pass the conference back over to Jean-Marc Germain, CEO of Custodium, for any closing remarks.

Well, thank you very much, everybody, for attending today. As you can see, we're very pleased with the progress we're making and very pleased with our revised outlook and we look forward to updating you on our further progress in a few months time thank you have a good day this concludes today's conference call thank you all for your participation you may now disconnect your line