Constellium Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 8 speakers on the call.

Operator

Hello, everyone, and welcome to the Consolium Third Quarter 2023 Results. My name is Nadia, and I'll be coordinating the call today. I will now hand over to your host, Jason Hershiser, Director of Investor Relations to begin. Jason, please go ahead.

Speaker 1

Thank you, Nadia. I would like to welcome everyone to our Q3 2023 earnings call. On the call today, we have our Chief Executive Officer, Jean Marc Germain and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q and A session. A copy of the slide presentation for today's call is available on our website at oncelium.com, and today's call is being recorded.

Speaker 1

Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events and expectations and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed In the forward looking statements, please refer to the factors presented under the heading Risk Factors in our Annual Report on Form 20 F. All information in this presentation is as of the date of the presentation.

Speaker 1

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. I would now like to hand the call over to Jean Marc.

Speaker 2

Thank you, Jason. Good morning, good afternoon, everyone, And thank you for your interest in Constellium. Let's begin on Slide 5 and discuss the highlights from our 3rd quarter results. I'd like to start with safety, our number one priority. Our recordable case rate was higher in the 3rd quarter, leading to a rate of 2.1 Per million hours worked for the 1st 9 months of the year.

Speaker 2

While the safety performance puts us among the best in manufacturing, The rate is higher than where we want it to be, and we have done better in the past. This is a humbling reminder that while always We 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.

Speaker 2

Shipments were 369,000 tonnes, down 5% compared to the Q3 of 2022 due to lower shipments in each of our segments. Revenue of €1,700,000,000 decreased 15% 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 our sales Excluding the cost of metal was €704,000,000 up 5% compared to the same period last year. Our net income of €64,000,000 in the quarter compares to net income of €131,000,000 in the Q3 last year.

Speaker 2

As a reminder, the Q3 of last year included €142,000,000 related to the recognition of deferred tax assets As you can see in the bridge on the top right, adjusted EBITDA of €168,000,000 In the quarter, it was up 5% compared to last year, and it is a new 3rd quarter record for the company. A and T adjusted EBITDA is a new 3rd quarter record as well and increased €34,000,000 compared to last year. FARP adjusted EBITDA decreased €11,000,000 and AS and I adjusted EBITDA decreased €9,000,000 in the quarter compared to last year. Holdings and Corporate was a headwind of €6,000,000 in the quarter. Looking across our end markets, aerospace demand remained very strong, With shipments up over 20% compared to last year, automotive demand decelerated slightly during the quarter, But remains above prior year levels.

Speaker 2

Packaging shipments were down in the quarter, though can stock demand appears to have stabilized Following the last several quarters of destocking, we continue to experience weakness in most industrial markets, especially in Europe. We've continued 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 €78,000,000 This does not include the proceeds which were received From the sale of our soft alloy extrusion business in Germany, which I am very pleased was closed at the end of September.

Speaker 2

As you can see on the bottom right of the slide, our leverage at the end of the quarter was 2.5 times, which is an important milestone for the company. Our free cash flow generation and EBITDA growth allows us to naturally delever further over time. And over the long term, We look to have a more balanced approach to capital allocation. Overall, I'm very proud of our 3rd 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.

Speaker 2

Looking at the balance of 2023, macroeconomic and geopolitical risks remained elevated, and we expect inflationary pressures to continue. While we were not impacted by the UAW strike in the Q3, we do expect some impact in the Q4. Despite these pressures, as well as continued weakness across several of our end markets, while maintaining our prior guidance, We expect to finish 2023 with adjusted EBITDA in the range of €700,000,000 to €720,000,000 which would be a new record for the company. And we continue to expect free cash flow in excess of €150,000,000 in 2023. We also remain confident in our ability deliver our long term target of adjusted EBITDA of over €800,000,000 in 2025.

Speaker 2

With that, I will now hand the call over to Jack for further details on our financial performance. Jack?

Speaker 3

Thank you, Jean Marc, And thank you, everyone, for joining the call today. Please turn now to Slide 7. Value added revenue was €704,000,000 in the Q3 of 2023, up 5% compared to the same quarter last year. Looking at the Q3, €102,000,000 of this increase was due to improved price and mix in each of our segments. Volume was a headwind of €30,000,000 due to lower shipments in each of our segments.

Speaker 3

Metal impacts were a headwind of €17,000,000 Compared to the same period last year, the balance of the change was largely due to unfavorable FX translation Of €24,000,000 due to the weakening of the U. S. Dollar. There are 2 important takeaways from this slide. First, we grew our value added revenue by 5% compared to last year.

Speaker 3

And second, we continue to have pricing power. Price and mix and price specifically continues to be the biggest increment of our year over year variance And helped us offset significant inflationary pressures. Now turn to Slide 8, let's focus on our Parp segment performance. Adjusted EBITDA of €67,000,000 decreased 14% compared to the Q3 last year. Volume was a headwind of €4,000,000 with higher shipments in automotive, more than offset by lower shipments in packaging and specialty roll products.

Speaker 3

Automotive shipments increased 6% in the quarter versus last year as we continue to benefit from higher build rates And penetration of aluminum in automotive. Packaging shipments decreased 5% 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 €40,000,000 primarily on improved contract pricing, including inflation related pass throughs. Costs were a headwind of €43,000,000 as a result of higher operating costs due to inflation. Operating challenges at Muscle shows Though the situation is continuing to improve and unfavorable metal costs.

Speaker 3

FX translation, which is non cash, Was a headwind of €4,000,000 in the quarter due to a weaker U. S. Dollar. Now turn to Slide 9, let's focus on the A and T segment. Adjusted EBITDA of €79,000,000 increased 76% compared to the Q3 last year.

Speaker 3

Volume was a headwind of €5,000,000 as higher aerospace shipments were more than offset by lower TID shipments in the quarter. Aerospace shipments were up 21% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 17% versus last year reflecting a slowdown in most industrial markets, particularly in Europe. Price and mix was a tailwind of €58,000,000 of improved contract pricing, including inflation related pass throughs And a stronger mix with more Aerospace. Costs were a headwind of €15,000,000 as a result of higher operating costs, mainly due to inflation.

Speaker 3

FX translation was a headwind of €4,000,000 in the quarter. Now let's turn to Slide 10 and focus on the AS and I segment. Adjusted EBITDA of Thanks. Adjusted EBITDA of €26,000,000 decreased 27% compared to the Q3 last year. Volume was a €13,000,000 headwind with lower shipments in both automotive and industry.

Speaker 3

Automotive shipments decreased Slightly in the quarter versus last year due to the timing impact between certain program switches and some short term supply chain disruptions tied to certain programs which we serve, But the overall demand remained healthy. Industry shipments were down 22% in the quarter versus last year as a result of weaker Market conditions in Europe. Price and mix was a €16,000,000,000 tailwind, primarily due to improved Contract pricing, including inflation related past dues. Costs were a headwind of €11,000,000 a higher operating cost mainly due to inflation. It's not on a slide, but I wanted to conclude with a quick comment on Holdings and Corporate.

Speaker 3

In the quarter, Holdings and Corporate was a headwind of €6,000,000 as Jean Marc noted. The negative result was related to a number of one off adjustments in the Q3 of last year that did not repeat this year. Now turn to Slide 11, where I want to give an update on the current inflationary environment we're And our focus on pricing and cost control to offset these pressures. In the Q3 and as expected, We continued to experience broad based and significant inflationary pressures across our business. As you know, we operate a pass through business model, so we're not materially exposed to the changes in the market price of aluminum, our largest cost input.

Speaker 3

While we remain confident about the security of supply, some of it does come at a higher cost. In addition, Labor and other nonmetal costs continue to be higher this year, particularly at European Energy. As previously noted, We purchased energy on a multiyear rolling forward basis, which has helped us to mitigate some of the energy cost pressures And helped us to smooth out some of the steep increases in costs. As 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, We still remain well above historical averages. Given these cost pressures, we continue to work across a number We have demonstrated strong cost performance in the past years, And we will continue our relentless focus, including continued execution on our previously announced Vision 25 initiative.

Speaker 3

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 protections such as PPI inflators For surcharge mechanisms 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 1st 9 months of this year, we were very successful with price and mix, The largest increment being price being offsetting inflationary pressures. As of today, we still expect inflationary pressures to remain significant.

Speaker 3

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 Taken to offset them are included in our guidance for 2023. Before turning to the next slide, I also want to point out the FX impact in our results. As you can see in the bridge, FX was a headwind of €10,000,000 In the 1st 9 months of this year, given the weaker U. S. Dollar, of which €9,000,000 was in the 3rd quarter.

Speaker 3

Now let's turn to Slide 12 and discuss our free cash flow. We generated €78,000,000 of free cash flow in the 3rd quarter, Bringing our year to date total to €112,000,000 As you can see on the bottom left of the slide, We continue to build our track record of generating consistent and strong free cash flow. Looking at 2023, We continue to expect to generate free cash flow in excess of €150,000,000 for the full year, which is in line with our previous guidance. Now let's turn to Slide 13 and discuss our balance sheet and liquidity position. At the end of the third quarter, Our net debt was €1,800,000,000 This is down approximately €140,000,000 compared to the end of 2022 And down €100,000,000 compared to last quarter as a result of strong free cash flow generation and the proceeds we received from the sale of our soft alloy extrusion business in Germany in the quarter.

Speaker 3

During the quarter, we used cash on the balance sheet To reduce our short term borrowings and to redeem $50,000,000 of our 5.875 percent U. S. Dollar bonds due in 2026, Further strengthening our balance sheet. Our leverage reached a multiyear low of 2.5 times at the end of the third quarter, Which is down 0.5 times versus the end of the Q3 last year and now at the upper end of our target leverage range. We remain committed to maintaining our target leverage range of 1.5 times to 2.4 times.

Speaker 3

As you can see in our debt summary, we have no bond maturities until 2026, and our liquidity remains strong at €746,000,000 As of the end of Q3, we're extremely proud of the progress we have made on our capital structure and of the financial flexibility we're building. I will now hand the call back to Jean Marc.

Speaker 2

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.

Speaker 2

As a result, aluminum will play a critical role In the circular economy and will be a driver of growth in light weighting, electrification and sustainable packaging. So in terms of packaging, inventory adjustments continued across the supply chain in both North America and Europe early in the quarter, But now appear largely behind us and can sub demand has stabilized. We are still seeing demand weakness in both regions As a result of the current inflationary environment, the lack of promotional activity and following a multiyear 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 And win share against other substrates like plastic and glass. We are confident in the long term Look, for this end market, given capacity growth plans from both can makers in both regions, The greenfield investments ongoing here in North America and the growing consumer preference for the sustainable aluminum beverage can.

Speaker 2

Longer term, we continue to expect packaging markets to grow low to mid single digits in both North America and Europe. We will participate in this growth in both regions, as announced at our Analyst Day last year. We are encouraged by the improved performance we have seen recently at Muscle Shoals, and we remain confident in our ability to restore the plant's profitability Heading into next year, I am also pleased to report that the recycling center we are building at our Neuf Brisach facility in Europe Is well underway and both on time and on budget. Turning now to Automotive. Demand decelerated slightly during the quarter, That remains above prior year levels.

Speaker 2

As I mentioned before, we were not impacted by the UAW strike in the 3rd quarter, So we do expect some impact in the Q4. 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 steady, 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 in this market. Let's turn now to Aerospace.

Speaker 2

The recovery in aerospace continued in the quarter, with shipments up over 20% versus last year, though still well below pre COVID levels. Major OEMs have announced bill 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 remained intact, including growing passenger traffic And greater demand for new, more fuel efficient aircraft. Demand remains strong in the business and regional jet markets And the defense and space markets. In addition, we continue to experience strong demand for our Airwear family of products.

Speaker 2

As the chart on the left side of the page highlights, these 3 core end markets represent 77% of our last 12 months revenue. We like the fundamentals in each of these markets. And as I have said in the past, we like our hands and the options it affords us. Turning lastly to other specialties. We expect weakness to continue in most industrial markets.

Speaker 2

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 generally healthy in markets like defense and North American transportation. In Industrial Extrusions, demand remains weak across industrial markets in Europe. Constellium is well positioned today With our diverse and balanced portfolio, to capture the secular growth fueled by sustainability.

Speaker 2

In summary, we continue to like the prospects of 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 again in the Q3. I'm very proud of our entire team As we achieved solid operational performance and strong cost control despite a number of challenges, including significant inflationary pressures, We generated strong free cash flow in the quarter, and we reduced our leverage to 2.5 times, which is an important milestone for the company. As we look ahead, we like our end market positioning, and we are optimistic about our prospects for the remainder of this year and beyond.

Speaker 2

Looking at the balance of 2023, Macroeconomic, geopolitical risks remain elevated, and we expect inflationary pressures to continue. While we were not impacted by the UAW strike in the Q3, we do expect some impact in the Q4. Despite these pressures, As well as continued weakness across several of our end markets, we are maintaining our prior guidance. We expect to finish 2023 with adjusted EBITDA in the range of €700,000,000 to €720,000,000 which would be a new record for the company, and we continue to expect free cash flow In excess of EUR 150,000,000 in 2023. I also want to reiterate our long term guidance for adjusted EBITDA in excess €800,000,000 in 2025 and our commitment to maintain our target leverage range of 1.5x to 2.5x.

Speaker 2

To conclude, let me say again that I'm very proud of our results and very excited about our future. We have demonstrated over and over again But we have the right strategy, the right teams and the right products in the right markets. Our business model is flexible and resilient. Our diversified portfolio allows us to always have options in very different market conditions. We have built the balance sheet we need to both weather prices And our high value recyclable and sustainable products respond to the growing needs of our customers and society.

Speaker 2

We're extremely well positioned for long term success, and we remain focused on shareholder value creation. With that, Nadia, we will now open the Q and A session, please.

Operator

Thank And our first question today goes to Catcher Jansik of BMO Capital Markets. Catcher, please go ahead. Your line is open.

Speaker 4

Hi. Thank you for taking my questions. Maybe starting off with, your leverage now is at 2.5 times. Can you talk a bit about How you're thinking about potential shareholder return policy?

Speaker 3

Yes, absolutely, Katya. So, well, first of all, we're extremely proud of our focus on deleveraging, having achieved a very important milestone, as you know. I think at this point, the focus is kind of pivoting more towards a balanced capital allocation program, which includes still a focus on the leverage, But also shareholder returns. So in terms of the status, we are in active discussions with our Board. And

Speaker 4

future. Okay. And then looking to 2024. And I understand that it's still early and you haven't provided any guidance. But can you discuss some of the puts and takes we should be thinking about?

Speaker 2

Yes, Katja. It's Jean Marc here. So I think it's useful to look at our guidance for 2023, our guidance So we think we're going to finish the year strong, and we feel very comfortable about our More than €800,000,000 in 2025. What gets us there is we see a continued strength in Aerospace. We see automotive being solid to even.

Speaker 2

The UAW strike would have an In Q4, but shouldn't last long into 2024, I would hope. And we see continued adoption of aluminum in aluminum in automotive. So automotive, the trend should be still positive. We're getting close To full capacity in Rolled Products and as you can see in our results now, AS and I still has a bit of room to grow further. So that should help us in 2024 and 2025.

Speaker 2

Can sheet has been a difficult year. I mean, it's been 12 months of Difficulty, but we are seeing the demand for Gansheet stabilizing and resuming some growth. So that should help us going into 2025 And therefore, it would some upside in 2024. And finally so that's a different market. Finally, the specialty markets, we're not expecting any recovery anytime soon, but we feel that The main markets were in automotive, aerospace, can sheet and the very strong actions we've taken We've taken on pricing as well as sorry, cost control are going to position us well to reach out more than EUR 800,000,000 2025, and therefore, we expect to see some progress towards that goal in 2024.

Speaker 4

Perfect. Thank you so much.

Speaker 2

Welcome.

Operator

Thank you. And the next

Speaker 5

Yes, hi. Thanks for taking my questions and nice to see good execution amid a tough mixed and tough demand environment. My first question

Speaker 2

is on autos.

Speaker 5

So I was hoping if you could help you're welcome. I was hoping you could help quantify some of the impacts Related to the UAW strike, I guess, with the context, it seems like half your auto exposures in the U. S. And maybe presumably less is to the Detroit Big 3, but I guess how should we think about volume impacts With that and maybe even beyond typical seasonality, which I believe is around the 5% decline Q to on Q in 4th quarter. And then is there any difference between auto body sheet versus extrusions?

Speaker 2

Yes. Bill, Yes. So to your question, as you pointed out, so automotive is less than 30% of our sales. We have more exposure in Europe than we do in North America. And within North America, we sell to about every OEM.

Speaker 2

So the Detroit 3 are a portion, But not that big in the totality. And GM, specifically, I think we've commented on this in the past, is GM and Cylantes are Smaller, much smaller than Ford is. So in that context, the sheer amount of Volume that's at risk is quite limited. Now obviously, we'd rather the UAW strike not take place, but it is not a material impact to us Going forward, but it will have we're calling it out because it will have some impact in Q4. And you're right that there is a seasonality as well in Automotive, actually, Q3 is impacted by seasonality.

Speaker 2

I mean, you have shutdowns In July or August, depending on the continent. And you have also some reduced operations in The Q4. So did I answer your question?

Speaker 5

Yes. And is there any difference between sheet versus extrusions?

Speaker 2

Oh, yes. So we are a little bit more quickly exposed to Extrusion and we are to sheet because the sheet when the extrusion products typically most of them go directly on the car as it is assembled So the delivery point to the assembly line was the sheet goes through a stamping And our other processes before it gets on the call. So there's a little bit of a lag here.

Speaker 5

Okay, okay. Makes sense.

Speaker 2

Great, so Matt, Aerospace. Not 7 months. Yes, go ahead.

Speaker 5

Okay, great. Yes, and the next question on Aerospace, you point out the demand outlook remains strong. I'm thinking you guys typically have good line of sight in the commercial production rates in advance. But we also heard from Boeing this morning that they plan to increase 7 37 production By year end as well as 787 production, would you say that would you say this is already anticipated? Or would you say that you could even see Acceleration in your business or demand pull through and potentially margin benefit as a result of increased production?

Speaker 2

No, I think typically this is not new news for us. We the parts we make Takes between 6 months 2 years from the time we ship them and the time they are on an aircraft that's going to fly. So we've got quite a bit of visibility, as you said, and we This is not good news to us. So we feel very comfortable about the strength of the business in this year and going into next year and even 2025. If anything, we see a little bit of hiccups in the supply chain.

Speaker 2

There's plenty of parts that go into making an aircraft. And some of these parts, not our aluminum, but are a little bit challenged in terms of the suppliers being able to ramp up to the desired Levels that the OEMs are communicating to the supply chain. So if anything, we see maybe a little bit of a holdback and some And some demand building up for 2024 and 2025.

Speaker 5

Okay. Thanks for the color. Let's hope that Q3 marks It's a trough for especially packaging shipments, but look forward to watching the progress.

Speaker 1

Thank you.

Operator

Thank you. And the next question goes to Corin Blanchard of Deutsche Bank. Corin, please go ahead. Your line is open.

Speaker 4

Hey, good morning, Jean Marc and Jack. Maybe the first question, Could you try so you maintained the EBITDA guidance. Could you walk us through maybe the key second pause To see a downside risk to the guidance, meaning like what would it take to see a mid or like a very low end of the guidance

Speaker 2

We Corinne, good morning. We do not See the risk to our guidance. I mean, we are 10 months into the year. We've got pretty good line of sight. There is this UAW uncertainty, but it's not, as I said earlier, such a big amount.

Speaker 2

So no, we feel like our balance is guidance is quite balanced. Jack, anything you want to add? Yes.

Speaker 3

So, good morning, Corinne. So I think, yes, we're confident about meeting our full year guidance. And if you kind of just think about some of the drivers, you look at the end market, aerospace will continue to outperform. For automotive, there'll be some impact from the UAW strike in North America and a little bit slower growth in Europe. But still the market is Generally healthy and doesn't change the fundamentals in the automotive market.

Speaker 3

For Can, So Kent stock actually has been running at a pretty stable level. Our overall packaging business was Adversely impacted by the specialty packaging mix within the packaging portfolio, but Kent stock has been more stable, and we're cautiously optimistic there. And then obviously, Industrial Specialties business will continue to see Some weaknesses, especially in Europe. But when you kind of step outside of the end market expectations, We'll continue to focus on operational excellence and cost control, and we'll continue to benefit from A price mix benefit being a bigger offset than the cost increase, similar to kind of what we've seen in the second quarter And the Q3, so hopefully that gives you a little bit color.

Speaker 4

All right. Thank you. That's helpful. And then maybe the follow-up question on North Star Shores. You're still having some operational challenges.

Speaker 4

When do you expect that to turn around?

Speaker 2

Yes, Corinne. So we talked about we've been talking about it for a year, and we said it would take a good year, and That's where we are. So we are pleased with some progress we've made. We still have more to do, but we think we're going to see Improved performance and improved financials going into 2024. In terms of our ability to attract and retain talent and be able to train them so that their The performance of our workforce overall whose experience gets better.

Speaker 2

So I look at 2024 with quite a bit of

Speaker 4

Great. Thank you. That's it for me.

Speaker 2

Thank you, Corin.

Operator

Thank you. And the next question goes to Josh Sullivan of The Benchmark Company. Josh, please go ahead. Your line is open.

Speaker 6

Hey, good morning.

Speaker 2

Good morning, Joe.

Speaker 3

Just on

Speaker 6

the Aerospace side, you talked yes, Monit, on the Aerospace side, you talked about 9 months to 2 year lead times. Any sense of building aluminum inventories ahead of rate increases? Historically, we'd see Aerospace OEMs So the supply chain and what's the build rate? You did mention some comments there about the supply chain in 2024, but any inventory dynamics around aerospace we should think about Heading into 24%.

Speaker 2

I don't think so, Josh. If you look at what happened in the downturn of COVID, I mean, The build rates went down maybe 30%, and our shipments were down went down 50% on a quite sustainable So I think we are just seeing the inventory is being replenished in line with what is needed for the supply chain to operate. So I wouldn't call it it is restocking, but it is still restocking to levels that are Not comfortable enough for the supply chain overall. That makes sense.

Speaker 3

Yes. And then one on

Speaker 6

the automotive side, just the Blue Oval facility, the new BEV F-one hundred and fifty product, any reason to think that steel could make some inroads versus aluminum? Or what do you

Speaker 4

see at Blue Oval as it

Speaker 6

comes together that encourages More aluminum Don minutes going forward.

Speaker 2

I don't want to comment on specific programs, But we see that overall, there is still a need for light weighting. And the Bigger the vehicle is, the more critical it is to lightweight that vehicle. That's where you get the benefits and where you can afford the benefits of it because The price of the vehicle is such that you want to get good overall performance for that vehicle.

Speaker 6

Got it. And then just one last one on the European industrial outlook. Any particular markets which are weaker or stronger than others?

Speaker 2

So they're quite weak, all of them, except for the defense market. And we'll see building and construction is slowing down greatly. I mean, you have seen Some of our competitors or peers reporting very significant declines in European activity. Germany is not doing very well. France is doing a bit better, but the overall sentiment is Reasonably gloomy.

Speaker 2

It's all factored in our guidance. We were expecting this anyway. So it's not that it's getting worse than what we thought Early in the year, we've been quite prudent about it, but it and we are not forecasting an improvement in 2024 For 2025, right. So our renewed guidance doesn't rest on hope that the European markets improve. Great.

Speaker 2

Thank you for the time. Thanks, Josh.

Operator

And our next question goes to Sean Wondrack of Deutsche Bank. Sean, please go ahead. Your line is open.

Speaker 7

Hi, Jean, Mark and Jack. And congratulations on hitting this leverage target. I know you've been gunning for it for a while, and it's great to see you guys have reached it now.

Speaker 2

Thank you, Sean. We're very happy we have.

Speaker 7

So I guess just to that point, right, When I look at your ratings relative to kind of your leverage and your guidance and even your leverage target, there seems to be a bit of a mismatch there. So I was curious how your conversations have been with the rating agencies, and if any comments you could make there, please?

Speaker 3

Yes. So Sean, it's a good comment and observation, and thank you for that. Yes, I mean, I think We the conversations have been quite constructive. We do have positive outlooks from both S and P and Moody's, if not mistaken. And we think there's some opportunities for an upgrade sometime next year.

Speaker 7

That's good to hear. And just in terms of the near term sort of outlook for capital allocation, I realize Going forward, at some point, it's going to become more balanced between debt and equity. But do you think it's possible we could see leverage Continue to creep down from 2.5 turns right now?

Speaker 2

Yes, Sean. I mean, as we said, This company naturally delevers, right? We generate free cash flow, quite significantly free cash flow, and we can have a very balanced Capital allocation policy that allows us to seize a few more opportunities through capital expenditures for organic growth And continue to reduce our net and gross debt and return money to shareholders. So we do see A natural path to continue deleveraging, and that's why we want to stay in our range of 2.5 to 1.5, right?

Operator

Thank you. We have no further questions, and I'll hand back to Jean Marc Germain, CEO, for any closing comments.

Speaker 2

Thank you, Nadia, and thank you, everyone, for attending the call. In conclusion, I just want to say, if I step back, I look at You know, Constellium and our portfolio of markets, we have 2 markets, really, that are clicking. It's aerospace and mainly Europe. It's automotive and mainly North America. And despite an environment which is a little bit subdued on the market side, you can see that our company is having its best year ever, It's best Q3 ever.

Speaker 2

We are looking at going forward that can sheet stabilizing, And we are very proud of the performance we have registered in Q3 and throughout this year. And we look to the future with great Confidence, and I look forward to update you on our progress in February and talk about the balanced capital allocation model.

Operator

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

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Earnings Conference Call
Constellium Q3 2023
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