Constellium SE Q1 FY2020 Earnings Call

Good morning ladies and gentlemen and welcome to the Constellium First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Ryan Wentling, Head of Investor Relations.

Thank you, operator. I would like to welcome everyone to our first quarter 2020 earnings call. On the call today are our Chief Executive Officer, Jean-Marc Germain, and our Chief Financial Officer, Peter Matt. 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 would 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. 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.

Thanks, Ryan. Good morning, good afternoon, everyone and thank you for your interest in Constellium. At Constellium, the health and safety of our employees is our first priority. We have implemented many initiatives to protect our employees in response to the COVID-19 pandemic. We have increased cleaning and sanitation, enforced full social distancing, and provided our personnel with personal protective equipment. We have also implemented strict visitor policies, banned business travel, and enforced a work-from-home policy wherever possible. Constellium is a key part of the supply chain of many critical industries. To that end, in the U.S., our plants have received the distinction of an essential industry, which allows us to continue to operate despite state stay-at-home orders. All of our plants, with the exception of our automotive-specific plants, have continued to produce to meet demand for these critical industries such as beverage, food, healthcare, national defense, and transportation. I’m very proud that, despite challenging conditions, the Constellium team has stepped up to meet the challenge. I would also like to highlight our strong financial position. The finance team, led by Peter Matt, has worked extremely hard over the past three to four years to improve our cash flow profile, increase our liquidity, and push out our debt maturities. These actions will help us tremendously in successfully navigating this crisis. Now, turning to slide six, I would like to highlight some of the decisive actions Constellium has taken to limit the financial impact of the pandemic. Rest assured, this is not a complete list. I think it is important to lead from the top. Therefore, the Board, the Executive Committee, and myself have only taken a temporary reduction in our compensation. We have aggressively reduced spending to match the challenging conditions that we are currently facing. These include adjusting variable costs to better align with production levels. The reduction in our workforce was necessary to reflect current operating conditions. Nearly 5,000 of our 13,000 employees, or 40% of our workforce, are on some type of partial unemployment or temporary layoff scheme. To build momentum around reducing our spending, we have established spending committees that must approve all expenditures over preset thresholds at plant and corporate levels. For example, any corporate spending above €1,000 is required to be approved by the corporate controller. At our Issoire plant in France, spending over €5,000 requires approvals by the Plant Manager. Regarding capital spending, we are reducing our 2020 target to €175 million, a €96 million or 35% reduction from 2019, and €75 million lower than the target provided in February. We are, for the most part, limiting our capital spending to essential maintenance while ensuring all other capacity restarts when demand returns. We are very serious about reducing spending and have already identified the specific cuts needed to achieve our revised targets. Any new cash flow projects require executive committee-level approval. We are also utilizing governmental aid programs where available to help weather the crisis. This includes utilizing partial employment programs in Europe, reducing our costs during this period of reduced operating rates. Additionally, we are deferring social contributions in Europe and deferring certain payroll taxes and pension payments in the U.S. We are also extremely focused on optimizing working capital. We are reducing our metal purchases to align with our production rates and have shipped out of finished goods inventory where possible. Lastly, we have moved aggressively to augment our liquidity position. Our strong free cash flow generation in the first quarter brought our liquidity balance to €616 million. We signed a new $166 million delayed draw term loan that will add to our liquidity in April. We are also pursuing low-interest loans through European government-sponsored programs in France, Germany, and Switzerland. Now let’s move to Slide 7 and discuss our very strong first quarter performance. Shipments were 393,000 metric tons, a decrease of 5% compared to the first quarter of 2019. Revenue decreased 6% to €1.4 billion. This was primarily driven by lower shipments and lower metal prices. It is important to remember that we substantially pass through metal prices. We reported a net loss of €31 million compared to a net income of €24 million in the first quarter of 2019. The change in net income was largely due to a non-cash unfavorable change in unrealized gains and losses of derivatives related to our commodity hedging positions. Adjusted EBITDA increased 9% to €147 million in the first quarter of 2020. PARP and A&T continue to deliver strong results while AS&I delivered much improved year-over-year results. I’m exceptionally proud of the AS&I team and believe this was a great first step in the right direction. Our very strong first quarter results came despite headwinds from the COVID-19 pandemic in March, which we estimate to have been a headwind to adjusted EBITDA of between €10 million and €20 million across the three segments. Our free cash flow was very strong at €87 million. This performance underscores our objective of being consistent generators of free cash flows. Our first quarter free cash flow benefited from some working capital release due to the slowdown in activity at the end of the quarter. Deleveraging remains our top priority for free cash flow generation. As a result of strong adjusted EBITDA and free cash flow performance in the first quarter of 2020, we have reduced our leverage to 3.7 times. Our liquidity position at the end of the quarter was strong at €660 million. Now, I will hand it over to Peter to provide more details on our financial performance.

Thank you, Jean-Marc, and thank you everyone for joining the call today. Turning now to Slide 8, you will find the change in adjusted EBITDA by segment for the first quarter of 2020, compared to the same period last year. For the first quarter of 2020, Constellium achieved €147 million of adjusted EBITDA, an increase of €12 million or 9% year-over-year. PARP adjusted EBITDA of €66 million increased by €7 million or 12% year-over-year. A&T adjusted EBITDA of €52 million was comparable to the first quarter of 2019. AS&I adjusted EBITDA of €34 million increased by €5 million or 17% compared to last year. Lastly, holdings and corporate costs of €5 million were comparable to last year. Now turn to Slide 10 and let’s focus on the PARP segment. Adjusted EBITDA of €66 million increased 12% compared to the first quarter of last year. Volume was a €6 million headwind as shipments fell across packaging, automotive, and other rolled products, primarily due to reduced demand in Europe late in the quarter resulting from the effects of COVID-19. Price and mix provided a tailwind of €5 million, as we benefited from improvements in pricing and a better mix in packaging and automotive. Costs were a tailwind of €7 million on solid cost controls, primarily due to improved recovery at our plants and, to a lesser extent, favorable metal costs and reduced energy costs. While we no longer report Bowling Green results separately, I’m proud to note that Bowling Green adjusted EBITDA was positive in the first quarter. Lastly, FX translation was a tailwind of €1 million in the quarter. Now turn to Slide 11 and let’s focus on the A&T segment. Adjusted EBITDA of €52 million was comparable to last year. Volume was a headwind of €14 million on lower TIB shipments due to weaker end market demands, exacerbated by the effects of COVID-19. Price and mix improved by €19 million in the first quarter, due primarily to a very good mix in aerospace. Costs were a headwind of €6 million, primarily related to higher raw material costs. Lastly, FX translation was a €1 million tailwind in the quarter. Now turn to Slide 12 and let’s focus on the AS&I segment. Adjusted EBITDA of €34 million increased 17% compared to the first quarter of 2019. Volume was a €1 million headwind, as continued growth in automotive structures was offset by lower other extruded product shipments, both of which were affected by COVID-19-related weakness in March. Price and mix were a tailwind of €6 million due to an improved price mix across both automotive structures and industry. Costs were comparable to the first quarter of last year. I want to echo Jean-Marc’s comments recognizing the good performance of AS&I in the quarter. The business returned to a year-over-year adjusted EBITDA growth through solid execution and a focus on cost controls. While we are not yet ready to declare victory, we remain confident that we are on the right track. Now let’s turn to Slide 13 and discuss our balance sheet and liquidity position. At the end of the first quarter, our net debt was €2.1 billion and we had no significant near-term maturities. Our leverage at the end of the first quarter was 3.7 times. We generated strong free cash flow of €87 million during the first quarter, supported by strong execution in each of our businesses. Our cash plus amounts available under committed facilities was €616 million at the end of the first quarter. In April, as Jean-Marc noted, we closed a $166 million delayed draw term loan to further improve our liquidity position. We are also pursuing approximately €200 million of low-interest loans through European government-sponsored borrowing programs. We are targeting €350 million of additional liquidity through these initiatives. In challenging times like these, reducing costs and preserving liquidity are paramount. We are well prepared to deliver on both. As Jean-Marc noted, we are aggressively cutting fixed costs and flexing our variable costs to better match production levels. While our ability to cut costs depends on many variables, we believe that in the current environment our cost structure is approximately 75% variable or semi-variable and 25% fixed. This split includes metal, which is largely a variable input. We will leave no stone unturned to further reduce costs while also being prepared for volume returns. While we are unable to provide guidance at this time, we wanted to provide a scenario to demonstrate the strengths of our business. In a case where plants run at an average utilization of approximately 70% across the system, we would burn less than €100 million of free cash flow for the remainder of 2020. The majority of this cash burn would occur in the second quarter as we adjust to lower operating rates. This scenario, combined with our strong liquidity position, gives us confidence in our ability to navigate through the COVID-19 crisis and the potentially challenging economic environments that follow. Our preference in the near term will be to preserve liquidity, so we are prepared for the unexpected. Once our visibility improves, we expect to continue deleveraging our balance sheet. I will pass the call back to Jean-Marc.

Thank you, Peter. Now, let’s turn to Slide 15 and provide an end market update. We believe our balanced portfolio of end market exposures is a competitive advantage during challenging times like these. I will start with the packaging market. Packaging represents 37% of our LTM revenue. We continue to see strong market demand in both North America and Europe, further evidence that this market is both recession-resilient and experiencing secular growth. We believe the packaging market has long-term secular growth tailwinds driven by customer preference for aluminum cans. Aluminum cans are infinitely recyclable and clearly the most sustainable beverage packaging container. Our customers continue to move forward with investments in new can lines, which should drive incremental demand for can sheet in the coming years. The consumer preference trend is a significant tailwind for can sheet. In Europe, the demand for can sheets continues to grow based on substitution of aluminum for steel. In the U.S., we continue to expect growth in auto body sheet demand to tighten supply to the packaging markets over the medium to long term. Clearly, we are optimistic about the can sheet market in the near, medium, and long-term. Now, let’s turn to automotive. As I mentioned earlier, automotive OEMs began curtailing production in March, and their facilities remain largely idle. Most OEMs are expected to restart production in May. The demand for our products will depend upon the speed and trajectory of the recovery once our customers resume production. However, we believe automotive remains a secular growth market for aluminum over the medium to long term. Customers continue to prefer larger vehicles while regulations aim to increase fuel efficiencies or reduce emissions. The automotive market will need to continue to lightweight. In addition, we expect hybrid and electric vehicles to continue to gain share of the market. These vehicles are aluminum-intensive due to their need for range. Constellium is well positioned to realize the benefits of the secular shifts to aluminum in automotive and the electrification of the sector. Let’s now turn to aerospace. Aerospace represents 15% of our LTM revenues. The near-term outlook for aerospace is uncertain due to the effects from COVID-19 and the 737-MAX situation. Aerospace OEMs announced temporary stoppages in March and April. Operations have largely restarted, but at lower build rates. We expect these reduced build rates to continue through 2020 and potentially longer. In the long term, we believe the fundamentals driving aerospace demand growth remain intact. Past demand trends suggest that passenger traffic should recover over the medium term. In TID, we expect to continue to expand into niche products across a diversified range of markets over the long-term. In the near-term, the defense and rail markets remain strong, but most industrial and transportation markets are weak. It is unclear when these markets will rebound. In closing, I again want to thank the Constellium team for their tireless efforts during these trying times. Given the uncertainty around the extent and duration of the effects of the pandemic, we are withdrawing our financial guidance until our visibility improves. Again, our first priority remains the health and safety of our employees and their families. We are committed to working with our suppliers and our customers to weather the current storm together. As always, we remain dedicated to operational execution, harvesting the benefits of our investments, disciplined cash flow deployment, debt reduction, and shareholder value creation. With that, operator, we would now open the Q&A session.

[Operator Instructions]. Your first question comes from the line of Chris Terry with Deutsche Bank.

Hi, Jean-Marc and Peter. I hope you are doing well. I had a few questions. I want to run through on the markets and then on cash flow. I just wanted to start in the aerospace sector first. I think previously you talked about having decent visibility to the middle of the year, and then more uncertainty after that. Obviously, Boeing and Airbus have provided updates in the last 24 hours. I just wonder whether you could give another update on what you actually know, how far out you know what orders might be, et cetera. If you could just talk through that specifically in relation to your customers in the aerospace sector. Thank you.

Sure. Good morning, Chris, we are doing well. Thank you, or as well as can be under the circumstances. Regarding aerospace, we do have visibility typically three to six months out in terms of order books, and we continue to see, even though there is a slight reduction in order rates, a pretty decent flow of orders. However, when you combine that with the reduced rates announced, at some point, our product's demand will have to catch up with the demand for aircraft. I think that is what we mentioned in our prepared remarks. We expect demand to go down in the second half of the year and should continue to decline in 2021.

Okay. Thanks, Jean-Marc. And then just a question for Peter. I appreciate the scenario you went through earlier. I just wanted to clarify a couple of points on that. Firstly, can you maybe tie in the overall year on working capital? You, obviously had a very, very strong first quarter. Does that mean that, you have a tougher starting base for working capital from here, or do you see additional opportunities? And then just tying that scenario, I am a little confused about the second quarter versus the second half if you can just talk through that. Thanks.

Sure. Okay. So, first of all, I just want to emphasize that the scenario is not meant to be guidance, right. We are just trying to create a scenario that constructs what the business might look like under this average utilization rate. So, in terms of trade working capital, I think what you can expect is that as business decelerates, there will be some trade working capital generation. However, in this situation, we have a combination of some businesses slowing down and some that have shut down and would be ramping up, which creates consumption of trade working capital. Therefore, while it is a mixed picture, I would expect trade working capital to show modest positives for the rest of the year.

Okay. Thanks. Maybe just to follow up on that 70% utilization mark. Can you talk through what current utilization rates have been to sort of benchmark that 70%?

Sure. And again, this is just a case study. It is not what we are focusing on for the rest of the year; we don’t know. But what we are saying is, if you look at the different markets: Aerospace, as I mentioned, has continued to perform well, but we believe it is going to decline, like OEMs at the same rate are reducing their build rates. For automotive, we are currently running at less than 20% usage, which has been the case in Europe since nearly the early days of the crisis. Packaging has remained relatively strong, close to 100%, despite having some shutdowns in late March and early April to implement sanitation measures. So it is a mixed bag of rates across the different segments. As you can tell, it is challenging to predict future performance due to many uncertainties.

Okay, thanks. Thanks very much, and good luck.

Chris, sorry, just to pick up on what you also inquired about Q2 and trade working capital. The big factor we have going in Q2 on the trade working capital side is that we expect the restart of the auto business, which will consume more trade working capital. Additionally, as mentioned in the comments about that scenario, most negative cash flow is expected in the second quarter as we reconfigure the business for lower operating rates, making it tough to optimize trade working capital. Therefore, Q2 is likely to use trade working capital.

Hi. Thanks for taking my questions. Just picking up on the Q2 commentary. I appreciate the cash flow commentary. I was just wondering now that we are part of the way through the quarter, if you could just give us a little more color on the actual operating expectations, both in terms of volumes and margins per ton in each of the three segments?

Yes, David. That is a difficult question. I don’t think anyone has a real answer to it. In some segments, we do know, right, in packaging, we still have decent visibility. However, in aerospace, there is uncertainty. Across other markets, we really don’t have clear insights. Our focus is ensuring we operate safely and healthily for our employees while adapting closely to changing market conditions with our suppliers and customers. We are in a dynamic environment where we need to adapt quickly. We have made a lot of adjustments to protect cash, liquidity, and our cost structure, but again, I cannot predict where we will land.

And just to put it in perspective, as Jean-Marc said in his prepared remarks, the impact on EBITDA in March was estimated to be between €10 million and €20 million. This significant impact came quite quickly.

Right? And I appreciate that. And, I was going to follow up on that. So, the impact in March was €10 million to €20 million, and so the expectation is, given the seasonality, the second quarter has historically been stronger than the first quarter. Is it reasonable to assume that a €10 million to €20 million impact on a monthly run rate basis is going to be higher in the second quarter than what we got in March or at least in April?

The impact in March was a benchmark of referring to a potential loss versus what could have been. We have to remember that the crisis began impacting Europe before North America. Our system was full and we were ramping up for the busy season. Then as the situation depreciated, we suddenly experienced a significant decline in revenues. Therefore, it is important to note that we have already taken steps to adjust our cost structure and cash flows coming into April, making it difficult to predict impacts based solely on March's figures.

Okay. That is helpful. And then just one last question for me, a bit of a clarification. I appreciate the additional information regarding the current class utilization rates in aerospace, packaging, and automotive. Given the reporting nuances of each of these end markets mixed in the segments, I still find it a little challenging to extrapolate the overall utilization relative to that 70% figure flagged in the prepared remarks. Where are overall operating rates now?

They would be in that range, knowing that auto is essentially at zero or less than 20%.

Yes. Thanks for taking my question. Could you talk a little about the cost reductions you are implementing? How much has come out of cost of goods, SG&A, and R&D at this point? Additionally, of the remaining costs, how much is variable versus fixed?

Okay. So, as we stated in the prepared remarks, our fixed-variable cost split is roughly 25% fixed and 75% variable, including metal. Excluding metal, we estimate about 40% variable and 60% fixed on other costs. It's also important to note that the specifics around SG&A are less clear as those costs tend to be stickier. A good rule of thumb is to consider lower variability compared to overall costs.

Got it. That is very helpful. And then how much has been reduced from SG&A and R&D specifically?

If you look at packaging, customer inventories are normal. Many customers have increased their inventory levels slightly to insulate themselves from supply disruptions. However, this is a fast-moving inventory type. In aerospace, we are seeing supply chain inventories building, while in automotive, the immediate cessation in demand has not led to substantial inventory buildups. This could pose challenges when normal operations resume, as the auto supply chain relies on numerous suppliers for stocking needs, and a disjointed restart may complicate operations.

Got it. Thank you. Excellent job in a bad environment.

Thank you.

Thank you. We take it as encouragement.

Hey, Jean-Marc, Peter, and Ryan. A couple of questions on the balance sheet for me. Firstly, I wanted to confirm that the €166 million delayed draw term loan is secured and it has not been drawn yet.

That is correct.

Okay. You mentioned some other liquidity measures earlier, specifically low-interest government loans in Europe, et cetera, for a total value of, I might have missed the number, was it €330 million or did I hear that right?

€350 million. Just to clarify, the total liquidity estimate would include the delayed draw term loan. We have a very good handle on the government-sponsored loans that have not yet been put in place, and there are a couple of different components to it.

And those are mostly government-sponsored loans?

Yes, they are.

Okay, great. Are those secured loans as well?

It depends on the country, but in most cases, yes.

Great. Do you think with the strong rally your bonds had over the last month that you might want to go to market to extend maturities, especially the 2021, I know it's not that big, but clearing out a good amount of years in the front end might go a long way?

Yes. It is a great question and it is something we are looking at constantly. One of the advantages of the liquidity structure we have put in place gives us time to observe market conditions and manage volatility. This is something we will definitely monitor.

Alright. Thanks very much, everyone, and good luck.

Thank you.

[Operator Instructions]. Your next question comes from the line of Sean Wondrack with Deutsche Bank.

Hello, Jean-Marc, Peter. I appreciate you taking my questions today.

Hi, Sean.

Just one quick clarification. And I hate to do this, but just on the 70% utilization rate, does that include Q1 or is that the forecast for the rest of the year?

That is a run rate number for the rest of the year.

Understood. Thank you. And then when you think about the automotive market, I totally appreciate that visibility is really constrained here. Could you maybe talk about what you are seeing in Europe versus the U.S.? Are you seeing more activity there from the OEMs a little bit more relative to the U.S.? Is there any difference that you’re seeing?

I think everybody is a little bit unsure about when they can restart. Those restart plans depend on various factors — including supply chain readiness, employee willingness to return, and the prevailing conditions in respective areas. Both regions are somewhat foggy at this point.

Thank you for that. Lastly, when you think about the PARP segment, congratulations on getting to a positive EBITDA there in Bowling Green. Do you still expect the mix shift here over time to auto sheet to help offset any pricing weakness and mitigate impacts on EBITDA per ton?

Yes. We are very pleased with Bowling Green's performance. Despite having to shut down for two weeks, they have achieved positive EBITDA. When operations resume, we anticipate auto sheet and can sheet demand will remain strong, benefitting our overall performance. However, we need to be cautious, as past data shows prolonged recovery periods after significant downturns. This could impact supply-demand dynamics and pricing power in the future. We are prepared for varied scenarios, as indicated by Peter's earlier comments regarding our fiscal management strategies.

I would now like to turn the conference back to Jean-Marc Germain, CEO of Constellium.

Thank you very much, everyone, for your interest in Constellium. As you can see, we are really refocused on the health and safety of our employees first, while staying very close to our suppliers and our customers to operationally respond to ever-changing market conditions. We are cautious and aggressive about managing our cost structure to emerge from these crises stronger. We have a great platform, and I think the Q1 results demonstrate that we will weather the storm and come out ahead. Thank you again.

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day. You may all disconnect.