Constellium SE

Hello everyone and welcome to today's Constellium Third Quarter 2024 earnings call. My name is Drew and I'll be your moderator today. During today's call we will have a Q&A session. To register a question please press star followed by one on your telephone keypad and if you wish to withdraw your question then it is star followed by two. I'll now turn the call over to Jason Hersheiser, Director of Investor Relations to begin. Please go ahead Jason.

Thank you Drew. We would like to welcome everyone to our third quarter 2024 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 risk 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 disclosures. Before turning the call over to John Mark, I wanted to remind everyone that earlier this year we revised the definition of adjusted EBITDA at the consolidated level based on prior discussions with the SEC. The new definition will no longer exclude the non-cash impact of metal price lag. We will continue to provide investors and other stakeholders with a non-cash metal price lag impact as it is necessary to get a true assessment of the economic performance of the business. Our segment adjusted EBITDA will continue to exclude this impact and any guidance we provide for adjusted EBITDA will also exclude the impact. And with that, I would now like to hand the call over to John Mark.

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 third quarter results. I would like to start with safety, our number one priority. Our recordable case rate was lower in the third quarter, leading to a rate of 1.9 per million hours worked for the first nine months of the year. While the safety performance puts us among the best in manufacturing, the rate is still higher than where we want it to be. We all need to constantly maintain our focus on safety to achieve the ambitious target we have set. It is a never ending task for our company and one that we take very seriously. Turning to our financial results, shipments were 350,000, 352,000 tons down 5% compared to the third quarter of 2023, mainly due to lower shipments in ANT and ASNI. Revenue of 1.6 billion euros decreased 5% compared to last year, primarily due to lower shipments. Partially upset by higher metal prices. We have run into technical difficulties. Can you hear me? Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model which minimizes our exposure to metal price risk. Our net income of 3 million euros in the quarter compares to net income of 64 million euros in the third quarter last year. As a reminder, the third quarter last year included a 36 million euro gain related to the sale of our CED business in Germany. Adjusted EBITDA was 110 million euros in the quarter, though this includes a negative impact at Valle in Switzerland of 17 million euros as a result of the flood. This also includes a negative non-cash impact from metal price lag of 3 million euros. If you were to exclude the impact of the flood and the impact of metal price lag, as Jason mentioned earlier, the real economic performance of the business reflects adjusted EBITDA of 730 million euros in the quarter compared to the 168 million euros we achieved last year. Looking across our end markets, packaging demand remained healthy during the quarter. While the backlog in aerospace remains robust, aerospace demand has started to slow down and shift to the right as commercial aerospace OEMs are dealing with supply chain challenges and continue to struggle to increase build rates. Automotive demand during the quarter started to soften in North America while weakness accelerated during the quarter in Europe. We experienced a sharp decline in demand in North America in most industrial markets and further weakness in most industrial and specialty markets in Europe. Jack will go through our detailed segment performance in a few moments. Moving now to free cash flow. Our free cash flow in the quarter was negative 10 million euros, which includes a negative impact at valet of 6 million euros as a result of the flood. I am pleased to report that we continued our share buyback activities in the quarter. During the quarter, we repurchased 1.2 million shares for 21 million US dollars. I am also pleased to report that our new recycling center and casting center in Nuff-Brizaq started up in September, slightly ahead of schedule and below budget. Our leverage at the end of the third quarter was 2.8 times, which is slightly above our target leverage range. As you can see, the third quarter was very challenging for us as demand continued to weaken during the quarter in several end markets and the weakness has now spread to some other end markets. In addition, the flood in valet had a significant impact on our financial results during the quarter. I will give you a full update on the current situation in the valet a little later on. With that, I will now hand the call over to Jack for further details on our financial performance. Jack?

Thank you, Jean-Marc, and thank you everyone for joining the call today. Please turn now to slide seven. Let's focus on our PARP segment performance. In the third quarter of 2024, PARP generated segment adjusted EBITDA of 61 million euros, which was down 9% compared to the third quarter last year. Shipments in PARP were stable versus the same quarter last year. Packaging shipments increased 3% in the quarter versus last year as demand remained healthy in both North America and Europe. Automotive shipments decreased 6% in the quarter as demand started to weaken in North America and weaken further in Europe. Price and mix was stable compared to the third quarter last year. Costs were a headwind of 6 million euros as a result of unfavorable metal costs given tighter scrap spreads in North America, partially offset by lower operating costs. Now turn to slide eight and let's focus on the ANT segment. Adjusted EBITDA of 47 million euros decreased 41% compared to the record third quarter last year. Volume was a 10 million euro headwind as a result of lower TID shipments. TID markets in North America saw a sharp decline during the quarter and markets in Europe continued to weaken. TID shipments were also impacted at LA as a result of the flood. Aerospace shipments were stable in the quarter. Price and mix was a headwind of 12 million euros due to a softer pricing environment in TID and weaker aerospace mixing the quarter. Costs were a headwind of 3 million euros. During the third quarter, ANT had a negative impact of 7 million euros at LA as a result of the flood. Now turn to slide nine and let's focus on the ASNI segment. Adjusted EBITDA of 10 million euros decreased 61% compared to the third quarter last year. Volume was a 2 million euro headwind as a result of lower shipments in automotive and industry-assorted products. Automotive shipments were down 9% in the quarter versus last year as demand started to weaken in North America and weakened further in Europe. Industry shipments were down 35% in the quarter versus last year. As a result of further weakening in Europe, the sale of our German extrusion business in the quarter last year had the impact of LA as a result of the flood this year. Price and mix was an 8 million euro headwind primarily due to a softer pricing environment in industry and weaker mixing the quarter. Costs were a tailwind of 6 million euros on lower operating costs. Effects and other was a headwind of 2 million euros in the quarter. During the third quarter, ASNI had a negative impact of 10 million euros at that late as a result of the flood. It is not on the slide here, but I wanted to summarize the current cost environment we're facing. 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. For energy, our 2024 costs are moderately more favorable compared to 2023, although energy prices remain well above historical averages. Labor and other nonmetal costs continue to be higher this year, and given the pressure we're seeing in the market, we're accelerating our Vision 25 cost improvement program, including additional fixed cost reduction efforts. We have demonstrated strong cost performance in the past, and we're confident in our ability to right-size our cost structure for the current demand environment. Now let's turn to slide 10 and discuss our free cash flow. Free cash flow was a negative 10 million euros in the third quarter, which includes a negative 6 million euro impact at that late as a result of the flood. -to-day, we have generated free cash flow of 57 million euros or 63 million euros, excluding the impact of the flood. The -over-year decrease in the first nine months is a result of lower segment adjust EBITDA, higher capital expenditures and cash taxes, and the impact of the flood, which are partially offset by a favorable change in working capital and lower cash interest. As Jean-Marc mentioned previously, we continued our share of buyback activities in the quarter. During the quarter, we repurchased 1.2 million shares for 21 million US dollars, bringing our -to-day total to roughly 3.1 million shares for just over 60 million US dollars. We plan to continue executing on the share of buyback program. We're not giving guidance on free cash flow for 2024 at this point. Given the rapid changes in market conditions during the third quarter and the actions we're taking internally to manage the current environment, there are many moving pieces, and we do not have certainty yet what will come in the fourth quarter this year versus the first quarter next year. However, we remain focused on generating consistent cash flow. Now, let's turn to slide 11 and discuss our balance sheet and liquidity position. At the end of the third quarter, our net debt of 1.7 billion euros increased slightly compared to the end of 2023. Our leverage was 2.8 times at the end of the quarter, we're up 0.3 times versus the end of the third quarter of 2023, and slightly above our target leverage range. We remain committed to maintaining our leverage in the target range of one-half to -and-half percent leverage to trend down to our target leverage range in 2025. During the quarter, we successfully refinanced both the U.S. dollar and euro denominated senior notes that were due in 2026. Also, during the quarter, we extended the Penn-US ABL maturity to 2029 and increased the commitment to $550 million from $500 million previously. As you can see in our debt summary, we have no bond maturities until 2028. Our liquidity remains strong at 778 million euros as of the end of the third quarter. We're extremely proud of the progress we have made on our capital structure and of the financial flexibility we're building, including the ability to continue returning capital to our shareholders. With that, I will now hand the call back to Jean-Marc.

Jean-Marc D'Alessandro, Director of the Financial Services and Management Department Thank you, Jack. Let's turn to slide 13 and discuss our current end market outlook. The majority of our portfolio today is serving end markets benefiting from durable, sustainability-driven secular growth, in which aluminum, a light and infinitely recyclable material, plays a critical role. However, in the short term, many of these markets are facing headwinds. Turning first to the aerospace market. Commercial aircraft backlogs are robust today and continue to grow. Major aero OEMs remain focused on increasing build rates for both narrow and wide-body aircraft, although supply chain challenges are again slowing deliveries of completed aircraft. As a result, aerospace supply chains need to adjust to lower than expected build rates, which is causing a shift in demand to the right of some of our products. Despite the slowdown in the near 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. Demand remains healthy in the business and regional jet and defense markets. Turning now to automotive. Automotive OEM production of light vehicles in Europe remains well below pre-COVID levels and is still below pre-COVID levels in North America as well. In the quarter, automotive demand started to soften in North America, while demand further weakened in Europe, particularly in the luxury and premium vehicle and electric vehicle segments, where we have greater exposure. As a result of the weakness in automotive, we have seen many global automotive OEMs reduce their outlooks at least once in the last two quarters. In the long term, vehicle electrification and sustainability trends will continue to drive demand for lightweighting and use of aluminum products. As a result, we remain positive on this market over the longer term in both regions, despite the weakness we are seeing today. Let's turn now to packaging. Inventory adjustments in CanStock are behind us and demand remains healthy in both North America and Europe. Promotional activity at the retail level is up year over year but remains below historical levels. The long term outlook for the spend market continues to be favorable, as evidenced by the growing consumer preference for the sustainable aluminum beverage can, capacity growth plans from can makers in both regions, and the greenfield investments ongoing here in North America. Longer term, we continue to expect packaging markets to grow low to mid-single digits in both North America and Europe. Our new recycling and casting center in Neuf-Boisac started up in September, slightly ahead of schedule and below budget. The facility is running strong and should ramp up quickly. Muscle Shoals, on its end, has made progress and had a solid third quarter production-wise. We are encouraged by the improved performance we have seen there recently, and we expect operations to continue to improve as the year progresses. As you can see on the page, these three core end markets represent just over 80% of our last 12 months' revenue, turning lastly to other specialties. During the quarter, we saw sharp declines in demand in North America, and demand continued to weaken in Europe. At this point, we have experienced weakness across most specialties markets for more than two years now. As a reminder, these markets are typically dependent on the health of the industrial economies in each region, including drivers like the interest rate environment, industrial production levels, and consumer spending patterns. We are working hard to adjust our cost structure to the current demand environment, which will put the business in an even better position when the industrial economies do recover. To conclude on the end markets, we like the fundamentals in each of the markets we serve, and we strongly believe that the diversification of our end markets is an asset for the company in any environment, and that the current conditions will pass. Please turn to slide 14 now, and I want to give you an update on the impact of the flooding in the valley. In late June, we experienced unprecedented flooding in the valley region of Switzerland, which devastated the region, including industrial activities at Consilium and elsewhere. Our plate and extrusion shops in Sierre and the cast house in Chippis were severely flooded, and operations were suspended. The Sierre and Chippis facilities were under four to five feet of water at the crest, and it took six weeks to restore power to the site. Cleaning efforts are well underway, with a strong focus on safety and efficiency. I am pleased to report that as of mid-October 2024, operations have partially resumed, and we anticipate restarting full operations in both our extrusion and plate shops by the end of November 2024. We currently aim to complete the production ramp up for the extrusion and plate business by the end of the first quarter next year. Mitigation plans have been implemented, including transferring some production to other facilities, such as Issoir and Zingen. We are also able to recover some of the inventory and ship it to customers. We are actively discussing with local authorities to secure the site against future flooding and ensure its long-term viability. The financial impact in the third quarter this year at Valley, as a result of the flood, was 17 million euros of adjusted EBITDA and 6 million euros of free cash flow. For the full year in 2024, we currently expect the impact to be 30 to 40 million euros of adjusted EBITDA and 60 to 70 million euros of free cash flow, including the assumption of partial receipts of insurance payments. We currently expect some cost impact in early 2025, as production of the facilities will continue to ramp, and we also expect some of the remaining insurance proceeds in 2025. All of the insurance proceeds received are accounted for below adjusted EBITDA. As of today, we believe that the total impact from the flood will come in slightly favorable to our original estimate of July. Most of you are familiar with the saying, when life gives you lemon, make lemonade. Well, I think that is an accurate statement for our situation in the Valley. As a result of the flood, we are examining every aspect of the operations here, and a lot of the equipment is getting repaired and will be in better shape than before the flood. When looking in the rearview mirror at this event, we believe we will emerge with a lower overall cost structure in Valley as a result of our efforts, and our competitive position should improve as our assets will be better managed. I cannot say enough how proud I am of our team on the ground there, and the incredible progress they have made in a short period of time against significant odds. I wanted to take a second here to thank them for their incredible resolve and courage during this very difficult time. Turning now to slide 15, we detail our key messages and financial guidance. As I mentioned earlier, the third quarter was very challenging for us, as demand and weakness accelerated during the quarter in several end markets, and the weakness has now spread to some other end markets. We are surprised to see how rapidly market conditions deteriorated since July. Based on our current outlook with these weak market conditions for the full year in 2024, we expect the adjusted EBITDA to be in the range of 580 to 600 million euros. This excludes an estimated one-time impact of 30 to 40 million euros in 2024 from the flood in Switzerland, and excludes the non-cash impact of metal price lag. We are doing everything we can to manage costs in the business, and we are working to reduce our working capital levels to support the current demand environment. Given the softness we are experiencing today across most of our end markets, and with no signs of recovery in the near term, we are also more cautious as we head into 2025. At this stage, our adjusted EBITDA target of over 800 million euros, excluding the non-cash impact of metal price lag, is delayed pending market recovery. In the near term, we have several adjusted EBITDA drivers that are within our control, including the drivers we discussed in July this year, such as our new recycling and center ramping up, better contractual terms in aerospace next year, and increasing our efforts to reduce costs across the business as part of our vision 2025. We also assume that the two significant weather events in 2024 in Musselshorls and the Valley do not repeat. We are confident that the long-term fundamentals driving secular growth in our markets remain intact, and when markets do recover, it will create additional upside. In addition, over the last few quarters, we have outlined several new organic investments we are making that will start to contribute to adjusted EBITDA in 2026, and will ramp up in the years beyond 2026. To conclude, while we are facing very challenging conditions in most of our markets today, we believe that these two will pass, and I remain very excited about our future. We have demonstrated over and over again that we have the right strategy, the right teams, the right products in the right markets, and that we know how to overcome crisis. Our business model is flexible and resilient. Our diversified portfolio allows us to have options in very different market conditions. We have built the balance sheet we need to both weather crises and seize opportunities, and our high-value recyclable and sustainable products respond to the growing needs of our customers and society. We are well positioned for long-term success and remain focused on executing our strategy and shareholder value creation. With that, Drew, we will now open the Q&A session, please.

Thank you. Starting today's Q&A session, if you would like to ask a question, please press star followed by one on your telephone keypad, and if you wish to withdraw that question, then it is star followed by two. Our first question today comes from Katia Janic from BMO Capital Markets. Your line is now open, please go ahead.

Hi, thank you for taking my questions. John Mark, you just mentioned there are EBITDA drivers that I guess are non-market related. Can you just remind us how much those drivers could add to EBITDA when combined?

Sure, good morning, Katia. Thanks for the question. So, the first one is the recycle center in Neuf-Brisac, which as I said is ramping up nicely as we speak. That's 35 to 40 million euros for next year. The second one is Vision 25. It used to be the third one, but obviously given the market conditions we're seeing, we're working hard on the cost structure, and that should be north of 25 million euros in cost savings into next year. The third element is the repricing of some of our aerospace contracts. I didn't give an exact number, but you can figure it out, even the fact that it used to be more than 15, and now it's less than 25, so it's somewhere in between. Then I think we feel like we are turning a corner in muscle shows. We're seeing better production out of the facility. Now, obviously, that's good in the context of can sheet demand being healthy, especially in North America, but also in Europe. That should also help us next year and provide some further EBITDA lift. It's likely to be a little bit mitigated because, as Jack mentioned, the metal costs are unfavorable. The scrap spreads are tighter than they used to be by quite a bit, so that's upsetting some of the improvements in muscle shows, but that's going to be an improvement as well. These are the ones immediately now that are within our control, and that should provide, you know, you add up all these, you get north of 100 million of additional EBITDAs, as we mentioned back in July. Now, longer term, also in our control, we announced in the first two first earnings calls this year, four investments in Ravenswood, Muscle Show, Deeswar, and Zingen that are going to, you look at them in total, it's about 300 million of capital expenditures that are within our usual 300 to 350 million euros of capex every year, and these should generate close to 100 million of additional EBITDA. Now, none of that will impact the vision 25, because these projects will start later in 26 and really ramp up in 27, 28, but these are definitely a number of activities that are well within our control and that are well underway.

And maybe going back to the vision 25, the cost reduction of 25 million, does that include any incremental cost reductions that you were mentioning today that you're trying to do?

So, Katya, I think our objective is to kind of right-size our cost structure. So previously, the vision 25, you know, remember we said targeting 50 million euros of savings over three years, right, so we're kind of halfway into that program, and the program is performing well. Now, we're accelerating in addition to the vision, the prior vision 25 target, and we're looking at, you know, some of the labor cost reduction efforts and cutting back on some of the other kind of non-essential categories, so the 25 is incremental to the prior effort.

Okay,

thank you.

Yep.

Our next question today comes from Bill Peterson from JP Morgan. Please go ahead.

Yeah, hi, good morning, and thanks for taking my questions. Maybe just thinking about 2024 to try to make sure, understand some of the impacts in more detail. If you, if you, if you think about the 590 million plus the, I guess, sort of, I don't know what, 35 million from the flood, that would still kind of put you, maybe, and then I guess if you added the 15 million from the muscle shoulders, that still puts you kind of like 100 million euros below the low end of the prior, or I guess the original guidance. Can you walk us through, I guess, the market drivers? You know, obviously you're commenting that auto is worse in the U.S. and Europe, and industrial seems to have taken a lag down, maybe some pricing and mixed impacts. Can you walk us through the various buckets of, I guess, what is worse in quantifier amongst the various buckets, please?

Good morning, Bill. Thanks for the question. Yeah, I'll do that. So, I'll start with the markets in a, you know, sequence, right? So, the first one, industrial markets. We had, we knew Europe was weak, it got weaker. In addition, we've seen a sharp decline in North American industrial markets, and namely, that's going to affect us through the TID product lines in the second half of this year. And you're seeing, you know, already sharp reversal. I mean, you look at the trailer build, we're looking at a 25, 30 percent reduction year on year, but just one segment, right, compared to last year. Clearly, much worse than what was expected. Then you look at the automotive market. Back in July, we were still thinking when outside, it's all forecast for the industry, we're still, you know, slightly up compared to last year. Now, we're talking of a five percent decline, and that decline is actually worse in the electric vehicle and luxury market segments. I mean, you've seen most OEMs have published a revision to their guidance. We know that there's a significant player in North America. Stellantis is an important customer of ours. They are struggling with a lot of inventory piling up in the dealer slots, but that is causing a very sharp reduction in demand going into the end of the year. Then in terms of, you know, Ganshee, we're happy with it. It remains steady and strong, but we've got aerospace as well, where the supply chain issues are creating a further reduction in demand. Now, we had started the year with a more conservative assumption than what the OEMs were giving us, but now the reality is even

more

below what we thought was a conservative assumption going into the year. What that means is some of our demand is going out that we thought would happen is taken out of the year, is getting pushed into the next year. Now, you also remember that when we started the year, we had thought on the basis of our discussions with our customers and you know, our analysis of the market, that the second half would be stronger. We actually had pulled forward some outages to make sure we had all the production capacity available in the second half. Clearly, we get caught wrong-footed because the markets are serving us a different menu than we thought at the beginning of the year. So, you think of all these items, you add them up, and you add to that the fact that the scrap spreads in North America are way tighter than they've ever been in the past five years. Plus, you get to an impact of 80 to 100 million euros of negative EBITDA compared to last year. So, that's a very sharp difference, Bill. I think, you know, what we're seeing here, you know, then begs the question of when do we think that turns around? We don't know, but there's some elements that we know are going to be moved, you know, to the future. They're going to happen. Those aircrafts will be built. And now, for other markets, and we all know they can be cyclical and, you know, when they turn back, is anybody's guess, we don't think it's going to be a Q1 event. I don't know if I answered, that was a long answer. I don't know if I answered all your questions, Bill. Go ahead, if you've got any follow-up. Well, I think

that was a lot of market-driven things. I just don't, I don't know if there's other comments that maybe price or mix or maybe just internally cost-related that may be also impacting in addition to the... No, actually that,

that actually, so on the price side, yeah, I mean, when markets are low, are not strong, the pricing is a bit weaker as well. It's not such a dramatic impact for us. I mean, it's more about the mix and especially narrow space, right? Where some of the more profitable products are the ones that are pushed to the right because they tend to be the ones that the OEMs will stock up on in anticipation so that they make sure they don't get, they don't run out of them. They tend to be the more difficult ones to make. So these are the ones that are more critical that they won't make sure they got enough of. And if the build rates go down, then they adjust those stock levels. But I think back to the pricing issue, not really. I mean, the pricing in automotive is set, the pricing in the account sheet is set, the price itself on aerospace is set. What changes is the mix and the mix has been unfavorable. And on the cost side, actually, we're doing, I think we're doing reasonably well.

Our next question comes from Tim Natanas from Wolf Research. Your line is now open. Please go ahead.

We have an extremely poor line here.

Tim, your line is now open. Please go ahead. We're going to pause the call momentarily. Please stand by. Thank you for your patience, everyone. We will now continue with today's Q&A session. Our next question comes from Tim Natanas from Wolf Research. Your line is now open. Please go ahead.

Great. Thank you very much. Sorry, I was having a hard time with the audio. So I might have missed this, but I was hoping we could talk a little bit about what signs of any recovery you might be seeing. So thinking about next year. On the aerospace side, I was a little concerned you talked about just starting to see weakness. So have we, you know, how do we think about the margin compression and that mix shift of that important high margin product? And any signs of if that could be like a temporary de-stocking from your customers or how to think about that business in particular?

Okay, good morning, Tim. So I'll address the first question on the do we see any signs of a recovery in the markets? Not really at the moment. We, you know, obviously cans, it's going okay, right? Aerospace, I think we'll come back to the second part of your question. I think it's just a bump in the road and on automotive and specialties or industry. I mean, we don't see recovery signs yet.

Actually, we've seen a sharper decline than what we could have thought back in July. So

no

good news on that

on that front. Regarding aerospace, I think it's, we started to see weakness compared to the assumptions we had. But it's still a market where there is a clear need for more aircraft. The OEMs want to build more aircraft, but they are faced with temporary supply chain challenges of the supply chains are ramping up. So there's no need to dwell on Boeing, right? We all know what's happening there. But in the case of Airbus, it's really about, you know, making sure that for them that they get the engines and the interiors that they need to complete the aircraft.

And as they are slowing down, you know, their ramp up, they are slowing down the long lead time items that, you know, we supply to them. And that's what's happening. So what it means is ultimately those products will be made and sold by us to them. But it's not happening as we were thinking in the second half of

this year. Now, in terms of margin compression, what that means is you've got a less rich mix in aerospace itself.

So that creates a bit of a margin compression. But we don't think our, you know, our margins are really at risk here. And if anything, the margins we'll see in this quarter are slightly depressed because of that mixed sheet, but also because of the valley flood. Remember, you know, there's some, A&T has some presence in the valley. So they're, that's, you know, mechanically putting pressure on their average margin.

Yeah, Tim, the only thing I would add, sorry, the only thing I'll add is if you were to kind of strip out the impact of L.A., for the quarter, the A&T margin is still, you know, attractive from a historical perspective, right, compared to, you know, what we had in the past. So the quarterly margin was, you know, still above 1,100 euro per ton.

Sure. It was awesome because you said you're just starting to see it. So I was trying to think of how much downside there could be. So if you'd like to elaborate, that would be great. But I want to also ask, given that you've talked a lot in the past about having good visibility based on, you know, the bulk of your business being in contracts, how does that protect you against some of this weakness? And in light of that, like, how do you think about in a soft market with more capacity coming on if there's much risk there or if you still think, you know, some of your contracts keep you protected?

Yeah. So we do have good contracts, but obviously you need to think of them as, you know, market share driven or requirement based, right? So over time, we are not going to sell products for, you know, end products that are not going to

be

made in a given period of time. That said, there's a number of different factors here. In automotive, we can claim compensation from our customers, our OEMs. So that's providing us some protection. And in Ganshee, the torrenties are pretty narrow and we know they're pretty good at solid markets. And also we're taking a long term view. I think what we're seeing is a very sharp change in market conditions, but

those things will bounce back as well. So on the upside, we'll be very happy with the contracts we have. So I think that's how we look at it. I mean, we've experienced already a

number of cycles. This one may be a little bit sharper than we

had thought and a little bit quicker, but there will be a bounce back as well.

Okay. If I could squeeze one more in. There's been some noise about additional taxes potentially in Paris. Is there something you could address for us,

please? Oh, income tax.

Yeah. Yeah. So, so we'll be happy to. So it wouldn't impact 2024 because the incremental kind of tax, increasing tax rate is applied on 24 payable in 2025. But what that means, and that will, you know, half in 2026 compared to 2025. So it just means a sort of a temporary modest amount of increase in cash tax.

Okay. Thank you.

Okay.

Our next question today comes from Josh Sullivan from the benchmark company. Your line is now open. Please go ahead.

Hey, good morning. Good morning, Josh. Just on the, the aerospace piece, you know, with the supply chain issues mentioned, you know, is this related to both the large OEMs or is there incremental impact stronger from one versus the other this quarter?

Well, we are much more exposed to Airbus as you know, Josh. So in the absolute, you know, a smaller impact for Airbus is a bigger impact for us than for Boeing. So that's what I would say. Yep. And we'll see also being challenged so that, you know, so that's also causing us a bit of grief.

And then are you at minimums now or when did you go to minimums on the contracts?

So, as I said, our contracts, I don't want to go into too much detail, but they are requirement based. So we believe we are reasonably close to the minimum. Another way to look at it is you look at 2019, right? Our shipments were much higher than they are today. So

the pre-COVID times. So that gives you an idea of where we stand.

And then just on the sharp decline in North America, I know you said it's pretty broad based, but how should we think of inventory in the distribution channels or at customers? Is the sharp decline coming into a inventory supply chain or were customers leaner at this point in the cycle anyways?

No, I think there's quite a bit of stocking up in the inventory and that's creating some of the issue. You know, if Boeing cannot produce as they should because of the safety issue, the strike issues and all that, then obviously,

you know, the material keeps on flowing in the supply chain and buys up, right? For aircraft that is not being built. So at some point there is a correction and I think that's where we are.

Got it. I was thinking on the North American industrial sharp decline comment from the general.

Yeah, well, since those assets typically make also aerospace, then what happens

is

you've got, you know,

those assets slow down, there's more appetite for TID volumes from the manufacturers of, you know, plate and sheet and the markets are slowing down there as well. So it creates more tension in the market.

Thank

you for the time.

Thank you. As a reminder, if you would like to ask a question on today's call, please press star followed by one on your telephone keypad. And if you wish to withdraw your question, then it is star followed by two. Next, we have a follow up from Bill Peterson from JP Morgan. Your line is now open. Please go ahead.

Yes, thanks for taking the follow up. The audio was bad earlier and I couldn't get the second question in. I wanted to come back and ask a few questions around the flooding. So on the remaining sort of, I guess, 13 to 23 million of EBITDA impact, can you, I guess, how would that be split between AS and I and A&T segments? And I think you prior free cash flow guidance is around 100 million. Exploiting, would you think does that hold? And I guess sort of finally on the flooding, I want to get a sense for how much EBITDA and cash flow impact could bleed into 2025.

Okay. So Bill, I'll take these two questions. So first on the flood. So I think the way to think about the impact between AS and I and A&T is, you know, call it two thirds at AS and I and one third at A&T. And these are just to be clear, the cost to EBITDA represent, you know, business interruption, expense or other, you know, expenditures like cleanup costs, like equipment op-bacs, which are below the line, other kind of one-time costs, which is offset against the insurance proceeds which we receive and that falls below adjusted financial market as well. I just wanted to be clear on that point. And then in terms of the impact into 2025, you know, we're kind of focused on restarting our operations as quickly as possible and some of it will fully wrap up this year. By the end of this year, I'll continue to kind of wrap up in the first quarter of next year. So there could be some impact there, but any, you know, the cash impact there will

be

offset because if you look at the insurance amount, you know, we penciled in 50 million euros, we had received 21 this quarter in Q3. We expect to receive, you know, about 30 million by the end of the year. So we still have, you know, call it 20 million to go next year, which will be offset against the expenses from a free cash flow perspective, if that makes sense. So I'll pause here and make sure. I just want to make sure your question about that. Well, I just

want to make sure there's any other impacts in the, any impacts in the 25. And I guess, and then just if you address the free cash flow target for 2024, does 100 million still hold?

Yeah. So no, I think, well, so hopefully my answer verified on the question about that. But maybe moving to the cash flow. So, you know, look, we're not guiding, and I mentioned this in the script a little bit, but we're not guiding pre-cash flow this year. And there are a number of reasons for that. You know, first, you know, as you can imagine, with lower activity levels, we would expect some working capital release in the system, but there's typically a lag, right? In other words, you know, it does take some time for us to get the benefits on the cash side from having reduced metal intake. So it's really here, it's really timing. The timing is a bit uncertain. And that means, you know, some of the benefits from the working capital release to come in this in Q4 of this year, and some of the day coming in the first quarter of next year. So it's just timing and the cash will be there. But outside of that, you know, there is going to be some, you know, modest amount of working capital impact as we're shifting, you know, part of the production elsewhere in our system as a result of the flooding that lay. And then in addition to that, we have, you know, there are many kind of action items we're working on to help, you know, improve our free cash flows here. So there are really a lot of moving pieces here. And that's why we don't want to be kind of too prescriptive. You know, we're focused on managing as carefully as we can. We're focused on consistent free cash flow generation. And, you know, we're still buying back shares, right? Which, you know, hopefully shows you that, you know, we have confidence in our ability to generate cash.

Thanks, Jeff. Thanks for taking the follow up. Thank you,

Ben. We have no further questions in the queue at this time. So I'll hand back over to the management team for closing remarks.

Well, thank you everybody for attending the call. As you can see, this was a challenging quarter and we have challenging market conditions that we're dealing with. I'm, you know, reasonably pleased in this context that actually our operations are performing well. And we believe that we'll emerge from these challenging market conditions even stronger. And we'll look forward to date you on our progress at our next earnings call.

Thank you very much.