Constellium SE Q2 FY2021 Earnings Call

Good day. Thank you for standing by, and welcome to the Constellium Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Ryan Wentling, Director of Investor Relations. Please go ahead.

Thank you, operator. I would like to welcome everyone to our second quarter 2021 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'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. 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.

Thank you, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's turn to slide 5 and discuss the highlights from our second quarter results. Shipments were 406,000 tons. That's up 31% compared to the second quarter of 2020. Revenue increased 47% to €1.5 billion. This was primarily due to higher shipments and higher 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 risk. Our net income was €108 million compared to a net loss of €32 million in the second quarter of 2020. Adjusted EBITDA was a record €170 million, 110% above the second quarter of 2020, and 2% above our previous record from the second quarter of 2019. PARP and AS&I each reported record adjusted EBITDA. As a result of our strong first half performance and outlook for the second half, we are increasing our 2021 guidance for adjusted EBITDA to a range of €545 million to €560 million, up from our previous guidance of €510 million to €530 million. We extended our track record of free cash flow generation with €35 million in the quarter, bringing our first half total to €81 million. We now expect free cash flow in excess of €125 million in 2021. Moving now to leverage. As you can see in the chart on the right, our leverage declined to 3.7 times at the end of the second quarter, down nearly a full turn from the first quarter and back to our pre-COVID low. We remain committed to deleveraging and expect to deleverage further in the back half of the year. Lastly, Constellium was included within the Russell 2000 Index in June. We believe index inclusion is very important and are excited to be included in this benchmark index. Overall, I am extremely proud of our second quarter performance and the tremendous performance of all of our teams. We delivered strong adjusted EBITDA, solid free cash flow generation, and substantial deleveraging. This performance is a clear validation of our business model and our strategy. Now, let's turn to slide 6 to discuss our ESG highlights of the first half. At Constellium, the health and safety of our employees is a priority. At Constellium, our recordable case rate was 1.8 in the first half of 2021, in line with our record low performance in 2020. Our safety results are among the best in the industry, and we remain committed to continuous improvement. In the first half of the year, we issued sustainability-linked bonds; our February issuance was the first SLD in the metals industry. Currently, approximately 40% of our outstanding bonds now have a sustainability-linked future. Over the course of 2021, we will be developing our 2030 sustainability strategy, which will establish a new set of sustainability targets and the steps to achieve them. I can say with confidence that aluminum will be an important part of the solution given its unique characteristics. Constellium is very well-positioned compared to global competitors based on its current carbon footprint. The key aspects of our strategy will be delivering on our investment to increase our recycling capacity in Europe. These projects will lower our costs, generate an attractive return on investment, and help further reduce our overall carbon footprint. Constellium is also dedicated to gender diversity across the organization. I am proud to say that our Board of Directors reflects this commitment, with two additional female directors added to our Board at our 2021 AGM; women now comprise over 40% of our Board members. With that, I will now hand the call over to Peter for further details on our financial performance.

Thank you, Jean-Marc, and thank you everyone for joining the call today. Let's turn to slide 8. For the second quarter of 2021, Constellium achieved €170 million of adjusted EBITDA, an increase of 110% compared to the second quarter of 2020. Compared to the second quarter of last year, PARP adjusted EBITDA of €94 million increased by €36 million. A&T adjusted EBITDA of €42 million increased by €11 million, and AS&I adjusted EBITDA of €41 million increased by €42 million. Holdings and corporate costs of €7 million were comparable to last year. For the first half of 2021, Constellium achieved €291 million of adjusted EBITDA, a 27% increase compared to the first half of 2020. PARP and AS&I adjusted EBITDA increased compared to the prior year on strong performance, while A&T adjusted EBITDA declined due to weaker aerospace shipping. Now, let's focus on our segment performance. Turning to slide 9 for the PARP segment. Adjusted EBITDA of €94 million increased 63% compared to the second quarter of 2020. As Jean-Marc noted, it was a record quarterly performance. Volume was a €42 million tailwind, as shipments increased 29% compared to the second quarter of 2020. Packaging shipments increased 13% while automotive shipments more than doubled. While we saw some temporary weakness in automotive demand from the semiconductor shortage, this was largely offset by strong packaging demand. Price and mix was a tailwind of €7 million on a greater share of automotive shipments, partially offset by a weaker packaging mix. Costs were a headwind of €8 million on higher costs due to increased activity, notably maintenance, freight, and labor costs due to state aid received in 2020 and not in 2021. FX translation, which is non-cash, was a headwind of €4 million in the quarter due to a weaker U.S. dollar. Now turn to slide 10 and let's focus on the A&T segment. Adjusted EBITDA of €42 million increased 34% compared to the second quarter of 2020. Volume was a tailwind of €11 million. TID shipments increased 51% on strong broad-based demand in both North America and Europe, while aerospace shipments declined 31%. Price and mix was a headwind of €6 million due to a lower share of aerospace shipments relative to TID. Costs were a tailwind of €8 million on solid cost control and favorable metal costs. Lastly, FX translation was a €2 million headwind in the quarter. Now turn to slide 11, and let's focus on the AS&I segment. Adjusted EBITDA of €41 million increased by €42 million compared to the second quarter of 2020. As Jean-Marc noted, it was a record quarterly performance. Volume was a €25 million tailwind with automotive shipments increasing 93% and industry shipments increasing 37%, on strong broad-based demand. Our automotive shipments were impacted by the semiconductor shortage, resulting in a moderate negative effect on adjusted EBITDA in the quarter. Price and mix was an €18 million tailwind due to the increased share of automotive shipments, and costs were a €1 million headwind on solid cost control. Turning now to slide 12, given the unique nature of the second quarter of 2020, we felt it was helpful to compare our adjusted EBITDA in the second quarter of 2021 to the second quarter of 2019. On the left side, you will find our adjusted EBITDA Bridge by Segment. PARP adjusted EBITDA increased by €15 million on continued improvement across the business and notably at Bowling Green. A&T adjusted EBITDA declined €22 million on lower aerospace shipments, partially offset by higher TID shipments and strong cost performance. AS&I adjusted EBITDA increased by €11 million on improved operational and cost performance in automotive structures. On the right-hand side of the slide, you'll find our adjusted EBITDA Bridge by driver. Volume was a headwind of €19 million, while most of our end markets are at or above 2019 levels, including packaging, automotive, and specialties; aerospace remains well below. Price and mix was a headwind of €52 million, primarily related to lower contribution from aerospace. Costs were a tailwind of €80 million, which reflects the costs we have taken out of the business through the pandemic and the ongoing success of Horizon '22. We are committed to retaining as much of this cost reduction as possible. Lastly, FX translation was a €5 million headwind as a consequence of a weaker U.S. dollar. As the slide demonstrates, we have made substantial progress on reducing our cost base and have significant earnings leverage to an aerospace recovery. Now turn to Slide 13 where I want to highlight our progress on Horizon '22 and our continued strong performance on costs. As of June, we have nearly achieved our €75 million structural cost reduction target. We are investigating further opportunities to reduce our structural costs and are confident we can find them. In addition to structural cost reductions, we believe there are substantial opportunities through a number of initiatives across the company, including metal cost savings, operational excellence cost savings, procurement cost savings, and interest cost savings. On the top right of the slide, you can see our cost flex was 82% in the second quarter. In other words, our costs only increased €0.82 for every €1 increase in revenue. Each segment contributed to these strong results, notably A&T at 70% and AS&I at 66%. This focus on cost helped us double our adjusted EBITDA year-over-year while our shipments increased by only 31% and our revenue increased by only 47%. There's a lot of talk about inflation in the economy. And while we are seeing inflationary pressures in some areas, notably labor and freight, thus far, inflation has been manageable. And remember that many of our contracts include inflation provisions that allow us to pass through some of this risk. We remain laser-focused on limiting increases in our costs. Now let's turn to Slide 14 and discuss our free cash flow. We generated €35 million of free cash flow in the second quarter, bringing our first half total to €81 million. As you can see on the top right of the slide, we have delivered on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated over €400 million of free cash flow. Looking forward, we expect to generate in excess of €125 million of free cash flow in 2021. We expect CapEx of approximately €225 million, cash interest of approximately €125 million, and cash taxes of €5 million to €10 million. We remain committed to significant and sustainable free cash flow generation. Now turn to Slide 15 and let's discuss our balance sheet and liquidity position. At the end of the second quarter, our net debt of €2 billion declined slightly compared to the end of the year, as free cash flow generation was partially offset by €35 million of FX translation. Our leverage returned to our pre-COVID low of 3.7 times. This is a remarkable achievement considering the contribution from our aerospace business remains far below the 2019 level. We expect our leverage at the end of the year to be at or below 3.5 times. As you can see in our debt summary, we have no bond maturities until 2026. Our refinancing in the first half of 2021 is expected to save €30 million of annualized interest expense. We continue to target cash interest of less than €100 million per annum, and I am pleased to say that we are rapidly approaching this goal. Our liquidity was strong at €887 million as of the end of the second quarter. We expect to gradually reduce our excess liquidity over the course of 2021 and 2022, as the risk of COVID recedes. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to Slide 17. Secular growth trends are creating opportunities across our portfolio, and we are taking actions to capture this opportunity. Aluminum is a contributor to the circular economy. Aluminum is infinitely recyclable and does not lose properties when recycled, unlike paper or plastic. Each of our businesses benefit from this competitive advantage. The focus on the circular economy is currently most pronounced in packaging, where aluminum cans remain the beverage packaging material of choice. Aluminum cans are infinitely recyclable and can return to shelves in 60 days. We are currently working on several initiatives to increase the can sheet capacity of our Muscle Shoals facility and are exploring other opportunities across our packaging platform to further increase our capacity to serve this growing market through debottlenecking and additional investments. In addition to being a major producer of can sheet, we are one of the largest recyclers of aluminum cans globally. We are planning to build on the recycling advantage of aluminum for our investments to substantially increase our recycling capacity in Europe, both for cans and automotive applications. Aluminum is also inherently lightweight, strong, and corrosion-resistant. These traits provide a strong value proposition for transportation applications, notably for lightweighting and for the electrification of the automotive fleet. In addition to our autobody sheet capabilities, our recent extrusion projects and automotive structures investments position us well to capture this growing demand. Furthermore, we believe that our recent investments in Ravenswood to unlock TID volumes are timely and will meet customer demand in non-automotive transportation applications. We expect the regulatory environment to accelerate the electrification of the utility fleet. As I have noted in the past, electric vehicles contain substantially more of the aluminum products that we produce, such as autobody sheet, crash management systems, and battery boxes than internal combustion engine vehicles. We are already seeing this shift in our order books, with electric vehicles increasingly represented in our customer portfolio in both PARP and AS&I. One notable example is our recent announcement that we are supplying the Audi e-tron with auto body sheet and extrusion-based structure, including parts for the battery enclosure. I would also like to highlight our diverse and balanced portfolio of end market exposures. On the bottom left, you can see our LTM revenue as compared to our 2019 revenue. Our portfolio has remained well balanced. As Peter mentioned earlier, we have significant earnings growth potential when aerospace rebounds. Now let's turn to Slide 18 and discuss our outlook for our end markets. The packaging market is strong in both North America and Europe, and we expect mid-single-digit demand growth in the medium term. This growth is underpinned by new can lines announced by our customers in both regions. The can sheet market has continued to improve, and we have secured multiple long-term agreements with customers, both current and new, over the past few quarters. These agreements reflect the value that we bring to these markets as one of the largest domestic suppliers in both Europe and the United States, and I am pleased with the outcome. Moving now to automotive. Automotive demand has remained resilient despite the semiconductor shortage. Underlying consumer demand remains strong, especially for light trucks, SUVs, and luxury vehicles, where Constellium has greater exposure. We continue to experience disruption from the semiconductor shortage, with new shutdowns announced just last week. We expect these shutdowns to continue into the second half of 2021. However, we expect the financial impact to be manageable, due in large part to the strong underlying demand in packaging. Let's turn now to aerospace. Despite demand remaining at low levels in the near term, we remain confident that the long-term fundamentals driving aerospace demand growth remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. This is supported by commentary from our customers around their plans to increase output of single-aisle aircraft. In the near term, optimism in the aerospace supply chain is increasing due to rising passenger traffic and recent aircraft orders from airlines. We expect this optimism to translate into increased orders for aerospace plate and sheet in the coming quarters. In other specialties, we continue to execute on our strategy of expanding in niche products in a diversified range of markets. These markets generally depend on the health of the industrial economy in Europe and North America. Specialties markets are generally very strong across both regions. Turning now to slide 19, we detail our key messages and financial guidance. I'm very proud of Constellium's second quarter performance. We reported record adjusted EBITDA, extended our track record of free cash flow generation, and deleveraged by nearly a turn. We are committed to completing our deleveraging journey. I am also very optimistic about our future. Demand in virtually all of our end markets is strong. Importantly, this recovery feels durable, with an aerospace recovery still ahead. I believe there are many opportunities for Constellium to benefit from secular megatrends. Aluminum is part of the solution to a more sustainable world. Constellium is well-positioned to be a winner. We have already taken actions to capture some of these opportunities, and we will continue to plant the seeds for future growth in a disciplined manner. For 2021, we are targeting adjusted EBITDA of €545 million to €560 million and free cash flow in excess of €125 million. We remain focused on operational performance, cost control, free cash flow generation, and shareholder value creation. With that operator, we will now open the Q&A session.

Our first question comes from the line of Curt Woodworth from Credit Suisse. You may begin.

Yes, thanks. Good morning, Jean-Marc and Peter.

Hi, Curt.

Hi.

My first question is about the outlook for free cash flow for the rest of the year and some of the factors at play year-to-date. Considering the effect of metal lag, the adjusted EBITDA reconciliation shows an €85 million headwind year-to-date. Additionally, it seems there are losses on hedges or derivatives amounting to around €44 million to €45 million. I'm interested in how much these have affected free cash flow. I'm unsure if any of those hedges physically settled. Looking ahead, what is your expectation regarding working capital and the potential ongoing impact of metal lag on the business?

So Curt, I'll address those in reverse order. Regarding hedges, keep in mind that they mostly pertain to metal and relate to our fixed-price sales contracts. As metal prices increase, the derivative becomes valuable, which is balanced by the underlying commercial transaction. Therefore, we are fully hedged, and it’s primarily an accounting adjustment. For hedges, I anticipate it should not have a significant impact on us. Concerning metal lag, we are making adjustments because our IFRS accounts use a weighted average cost, while EBITDA is calculated on a LIFO basis. Lastly, about working capital for the full year, we previously indicated that while we hadn't observed working capital growth, we expected to see it as the business expanded. We noted this in the second quarter and the first half of the year. Moving forward, we foresee working capital being a use for the year, and the amount will largely depend on any improvements in aerospace or additional business growth from our current position.

And I would just add that if you look at working capital days, actually, we're doing pretty well. So it's really, because of increased metal prices and more business coming to us, but the teams are doing a fantastic job at managing working capital on a day-to-day basis.

Okay. Got it. That makes a lot of sense on the metal lagging issue. I guess that the packaging market has been topical, and it seems like last quarter you talked about how most of your 2021 and '22 deals have been completed, and now the negotiation is more on a '23 basis. But I was wondering if you could help provide a little bit more context around sort of what you're doing in packaging. Can you comment on the amount of contracts that have reset? Can you give any sort of transparency around how pricing compares this cycle versus the last cycle? And with respect to the debottlenecking at Muscle Shoals over 75,000 tons, I think the potential is more like 100. Can you comment on exactly where that stands? How much of that debottleneck is now in the market? Or would you expect to get into the market next year? Thanks.

Yes. So Curt, on the packaging market conditions, we've seen them gradually improve over the past year and a half. I started with being mildly optimistic; now I'm very optimistic. That translates into pricing going up, which if you remember when we did the long-term EBITDA guidance for 2022 pre-COVID, we said we were not expecting pricing improvement. We are seeing that now. Remember, these are gradual resets because typically those contracts are five years; sometimes you have a little bit more renewing in one year than in the other. Typically, you renew about 20% of contracts every year or thereabouts, and therefore, a 10% price increase is only a 2% pricing increase in any given year, but it adds up over time. So we are seeing some improvements in pricing this year already, and you can see a little bit of that in the variance analysis. We'll see more of that in 2022, 2023, and 2024, and I'm very optimistic about the trend. It's really telling that the discussions we have with our customers are more and more strategic in nature about our ability to accompany them over the long-term. We saw that in aerospace, where we went from historically a five-year contract with Airbus to a 10-year contract, which is significantly larger and more complex, but we're also seeing that trend with can makers saying we're making all these investments. Beverage companies are really shifting their packaging mix. We want to be sure we are supplied, and there are economies that can be gained by all of us by having more of a long-term view. So all that is very positive and conducive to higher pricing, and it also sets the stage for more capacity expansion. I mean, the more visibility we have in our business, the happier we are about committing to capacity expansion. As I mentioned in the prepared remarks, we're looking at what we can do in Muscle Shoals, because the markets are strong on both sides of the ocean. People want to depend more and more on onshore supply as opposed to imports. We're getting to price levels that justify making some incremental investments in our facilities. That's what we are studying. It's too early to tell, but I hope in the next six months or so, we should have more visibility around what additional capacity we can unleash in both Europe and the US. Now, you remember in Muscle Shoals, we had announced 75,000 tons more of capacity. We're well on track to deliver on that. But beyond that, we will need a little bit more time to fine-tune our numbers and our engineering.

And how do you think about balancing capital spending with respect to packaging when you have also very strong secular growth across automotive sheets and structures? And I think on your flat-rolled auto business, it seems like you're getting pretty close to full utilization. So, I was just kind of curious: do you plan to try to grow auto sheet more? Can you also discuss kind of the nomination dynamics within the structures business? I know that you took some time to digest what you have over the last 18 months, but it seems like that also is now heating up again. Thanks, and congrats on a great quarter; very impressive.

Thank you. Well, all good questions, Curt, but I would be remiss not to mention again that we are firmly committed to deleveraging. We are really happy with the progress we've made this quarter, at 3.7 times, but our long-term target is 2.5, and we'd like the long-term goal not to be too far off. So that's priority number one, right? Get to that 2.5 leverage, which has been a target of ours for a few years now. On this path to 2.5, we will invest, and we have the capacity to invest beyond maintenance capital to obtain profitable returns on growth projects. But we will make choices, as you point out, because we want to ensure we do not compromise that fast trajectory to 2.5 leverage. Within that, we think packaging has excellent opportunities. We're delighted with the investments we've made in TID. You remember at the first Investor Day that Peter and I did back in 2017, we talked about Constellium being not only in packaging, aerospace, and automotive but also having various specialties; TID being one of them. It is critically important for us to take care of that quarter of our business that has a very good product and very good applications, where we have solid customer connections directly to OEMs, and you see that translate into the margin we see in A&T today despite the very low aerospace segment. So, we'll keep on investing in that segment too. In terms of Auto Body Sheet, I think we are quite happy with our current status. Given the prospects elsewhere, I am not advocating for a second calp line in the US or a third one in Europe in the near future. We will continue to optimize our mix and ensure that we deliver differentiated products to our customers; that will be our focus. So, that's how we think about growth. Peter, anything you want to add?

Curt, as we've mentioned before, we have assessed our capital spending and have forecasted it for several years. In that forecast, we identified various growth initiatives that we plan to pursue and prioritized them accordingly. We will be very focused on our spending in these growth areas; we are disciplined about our capital expenditures and are aiming for high returns. Additionally, regarding auto structures, we anticipate moderating our growth compared to just a couple of years ago, with a particular emphasis on high-return margin optimization initiatives.

Great. Thanks. Makes a lot of sense.

And our next question comes from the line of Josh Sullivan from The Benchmark Company. You may begin.

Hey, good morning. Great quarter here. Can you just talk a little bit about the inflationary pressures and how you're able to pass a lot of those through? Is there any dichotomy between maybe some of the inflationary pressures in your European operations versus your US operations at this point?

Sure. Let me step back a little bit and talk about inflation. We have a couple of mitigants to inflation. One is, in many of our cost areas, we have our costs committed on a forward basis. For example, energy is the best example, where we've essentially bought our energy forward for about a year. We do have some mitigants in that case. We also have the mitigant in some contracts where we have the ability to pass through inflationary cost pressures. That's not universal, but it is across several of our contracts. As a company, we are focused on increasingly building in these inflationary pass-through clauses into our contracts, and I will say that in recent contract negotiations, we're succeeding in getting them. So we feel positive about that. Regarding specific areas of inflation, we talked about labor a bit, and we mentioned transportation; we observe some inflationary pressures in those areas. We feel that we can still manage inflation for the time being, but we are definitely observing it there. In terms of Europe versus the U.S., I would say, we see slightly more inflation in the U.S. than in Europe.

And maybe just to add on this. On labor inflation, we have contracts with bargaining units that give us quite a bit of visibility over many years; so we don't see inflationary pressure there. For all salaried work this year, raises have been zero as a consequence of the COVID crisis. Many of our contracts also have inflation protection clauses. The best protection we have against inflation is actually our margin. The higher our EBITDA margin, the less impact inflation has. We're very focused on containing costs, but we are quite unconcerned about what we see regarding inflation these days.

I appreciate all the details. Maybe just one on the general engineering market. Can you talk about some of the structural differences that can keep this cycle going long-term? I mean, do you see competitors raising production? It does seem to be a little bit of a relief valve for the market; how long can that cycle continue?

I think there are a number of factors in play here; some external to us and some internal. On the external side, you see the recovering economies in Europe and North America. You see the trend towards onshoring and shorter supply chains, and you see antidumping duties in extrusions, in rolled products, in Europe, in the U.S., and all of that is creating a very favorable environment. You're right that some competitors are increasing capacity as well in this space. But quite frankly, it's very needed, given the trend towards onshoring. We've had a deliberate strategy over the past five years to focus sales teams, product development engineers, and application engineers on these markets, building relationships with OEMs. We are not very dependent on distribution markets; the last variable to adjust—we're really deepening our relationships with customers and finding products that offer them the best total cost of ownership. This helps us justify higher prices and higher margins. I believe this recovery has a long duration and should be quite stable. You see that in AS&I's margins, where we have quite a bit of specialties, and you'll see it certainly in aerospace and transportation, where the margins you see today are higher than they were five years ago because we've focused on differentiated products in TID. Even in PARP, there are many niches where we optimize our product offerings to meet customer needs, leading to better margins. So I think the potential for growth is strong.

Okay. And if I could just sneak in one last one on the aerospace side. Can you just talk about any indications of progress in the market at the distributor OEM levels? Did the Airbus production announcement help at all? Thank you.

We're hearing the same things from our OEM customers. There is anticipation for recovery. Our customers are urging us to be ready. We are not yet placing orders, but it feels like destocking is nearing its end. The supply chain is complicated, as you know, but it seems that destocking is wrapping up. We stand ready for demand to pick up.

The next question comes from the line of David Gagliano from BMO Capital. You may begin.

Hi. Thanks for taking my question. I just wanted to drill down a little bit on the numbers themselves in the quarter. And I think on a recurring basis, there's so much volatility in EBITDA per ton in the A&T segment. I realize the volumes are relatively low and they can move around mix. I'm wondering if you can bridge 2Q versus 1Q as long as we're the same 48%, 49%, but EBITDA per ton went from €396 to €794. I’m just wondering if there is something like that. I’m just wondering, can you break down that jump between, for example, metal price-related gains versus mix shift and other major buckets?

Sure. Happy to do it. So a couple of things: the quarter as you know was very strong in TID, which gives us leverage on costs. Secondly, our cost performance in the A&T segment in general has been very good— we’ve maintained a cost structure that helps us maximize that leverage. Thirdly, there are some timing impacts in the quarter, which are kind of mix-related timing effects that benefited the quarter as well. So as we step back from this, we still think our A&T margins of €700 to €800 per ton on a normalized basis is a good place to be. But this quarter's performance, in the absence of an aerospace recovery, is very strong. I wouldn't expect it to recur in the third and fourth quarters without an aerospace recovery, particularly given that the second half is generally weaker due to mid-year shutdowns and end-year shutdowns.

What helped as well is you saw TID volumes picking up in the second quarter. We’re still keeping costs extremely well controlled. Thus, any increase in volume has a disproportionate effect on EBITDA. We also had a few high-margin aerospace sales, which were rounded up in the tonnage, and those have been extremely contributive, which took place in Q2 instead of being spread over Q2, Q3, and Q4.

Okay. So I didn't quite get the breakdown specifically, but I understand. I understand your point about non-recurring. And so I guess, maybe another way to ask the question is how much of the jump that we saw quarter-over-quarter in 2Q versus 1Q is expected to be non-recurring on a forward basis?

I mean, I'd say, if you put that number at something around, I don't know, mid-single digit, but it's hard to put your finger exactly on it, but I'd say something around that range would be okay.

Okay. So—maybe another way, I mean, so we had EBITDA?

Well, David, actually, just one other thing to say. It's not non-recurring isn't the right word to use here, because there are some timing impacts, but it's not really non-recurring. In other words, as Jean-Marc said, you had some aerospace shipments that came in the quarter, which were very remunerative tons that benefited the quarter, but that’s just the timing difference; we expected them in Q3 and they came in Q2.

Okay. And then just real quick, shifting gears to other quick questions here. Just on the CapEx, it seems to be heavily weighted to the back half of the year, I believe. I'm just wondering if there is anything specific on the second half of the year versus the first half?

Yeah. No, it is indeed very back-end weighted. I think we spent— we've given guidance for €225 million, and we spent €67 million. So there's a significant amount to be spent in the second half. That’s partly because every year the second half is more prudent for CapEx since that’s when customers shut down in the summer. In Europe, specifically, most industrial companies shut down for two or three weeks in August, and there are holiday shutdowns around Christmas time. You want to do major maintenance then, during the off-season, as opposed to peak season, like we are in the second quarter. Additionally, we were quite uncertain about the recovery from COVID back in November and December. Therefore, we constrained capital spending at the beginning of the year. As we gained more confidence going into March and April, we decided to release some capital, but there's typically some lag before it kicks in. So for these two reasons, we have quite a hill to climb. When we provide our cash flow guidance for the full year, we're very happy with the first half, but we should recognize in the second half that there will be significant CapEx spent, all to productive uses, so that's quite exciting.

Okay. That's helpful. And my last question just in a slightly bigger picture, again, just on the numbers. As we look out to 2023, obviously aerospace is still kind of treading water a bit but likely to improve. The other businesses are really humming with some potential upside on auto, I guess. So the question is really, it looks to us like €700 million of EBITDA in 2023 is not easily attainable, but it is within sight here, and that was guidance prior to COVID. I'm wondering what your views towards the 2023 outlook and how it compares to what you thought it was going to be pre-COVID?

I think we agree with all your statements, David, except we’ll stop short of giving guidance for 2023. I would just add that packaging is getting stronger and stronger, and is even better than we thought, both on volumes and pricing, which is very helpful. We've said a number of times that we are ahead in every respect on the business side; the markets are good, and our position in the market is strengthening. Automotive is strong, can sheet is strong, and specialty is super strong. Aerospace is still an unknown, as you pointed out, but our cost performance is excellent as we see it, and we're very committed to keeping the cost through control. We still like the €700 million target, but we’ll stop short of saying exactly when it happens.

Okay. Thank you very much. That's helpful. Thanks.

Thank you, David.

Our next question will come from Corinne Blanchard from Deutsche Bank. You may begin.

Hey, good morning guys.

Hi, Corinne.

Hi. Great quarter. I have two questions since most have already been addressed. Could you provide more clarity on the full-year guidance? You indicated a range between €545 million and €560 million, which suggests lower EBITDA in the second half compared to the first half. Can you share the main factor behind this? Is it due to seasonality or perhaps the semiconductor shortage? That would be helpful.

Sure. I'll try. So, we're assuming the continuation of what we've seen in the first half of the year: strong end market, no recovery in aerospace but strong markets otherwise. We're assuming that the microchip shortage continues to penalize us like it has had in the first half. We're expecting cost performance to remain high. Now as you point out, it means the second half is not as good as the first half. But again, we've got seasonality as I mentioned earlier, where there is much more shutdown at our customers and much more maintenance in our plants, which means less revenue and more cost, and that’s a recipe for less favorable EBITDA in the second half. If you go back to where we were in 2019 pre-COVID, you see that kind of seasonality, right? So, that’s a good benchmark for what normal could look like for us. At the moment, we are giving guidance that we see as the best we can attain given the market conditions.

Okay.

No. The only thing I'd add, Corinne, is that you still have some COVID hangover going on, and who knows what that translates into in the back half. But that's the only other factor I'd add.

Yeah Jean. That's a good product and it'll be partly my next question. We're seeing obviously, I think COVID risk increasing everywhere in the US and also in Europe with countries starting lockdown and etc. again there. As you started to look into it, like when you released that guidance, how do you see it for the aerospace in the second half? Should you expect to see an impact?

Yes. It's difficult to tell. It's true that the headlines may seem a bit worrisome at times. But we are not seeing it in our order book. When you travel around, you see airports packed, you see flights packed; people are going about living their lives in a business-as-usual way. It doesn't feel like a catastrophe is upon us. However, we didn't think a catastrophe was upon us in January or February of 2020. We have to be cautious. While Peter said there may be some caution here, it doesn't feel like we are up for a fourth or fifth wave like the first one by far. That’s not embedded in our guidance.

Yes. It seems like, Corinne, the governments around the world are committed to staying open. In terms of guidance as Jean-Marc states, we do not have a shutdown embedded in our guidance at all. Where it may manifest itself is in slightly longer supply chain or slightly greater supply chain challenges, but manageable effects.

Okay. Thank you. Just a last one quickly. On the semiconductor shortage, I think in 1Q you had said about €3 million impact for EBITDA. I don't think you've mentioned any number for 2Q. Was it in the same range? Is it current to be around that range of €5 million to €5 million going forward?

Yes, I think that's the right range going forward. There's different impacts from different businesses. One of the things we love is our diversified model. In this instance, PARP is a great example of how that diversification helps us because you see some shutdowns on the automotive side are related to semiconductor issues, but the demand on the packaging side is so strong we can divert every ton we can't ship into auto into packaging, right? So, very mild effect in PARP. In auto structures, we're also able to divert some of our shipments. But I think €3 to €5 million is a good number to use going forward.

Great. Thank you. That’s it from me.

Our next question will come from the line of Christian Georges from Societe Generale. You may begin.

Thank you very much. Jean-Marc, just to clarify something you said a bit earlier about the CALP line. You said no CALP lines in Europe or the US; did you mean required or did you mean announced?

What I meant is we are not planning to actively build another CALP line in either the US or Europe. We believe that some will be needed overtime, but it's not like we are actively planning to build a new one. Again, that's based on capital allocation and where we achieve the best return on our investments.

But I mean, in terms of what the market may need, as the semiconductor shortage in particular perhaps moves on and we keep seeing a ramp-up of light-weighting requirements. What's your take on what is presently available for automotive companies to rely on sufficient supply?

Yes. As we’ve stated historically, as soon as 2023, the market will be needing more capacity. Maybe it’s 2024 with the typical patterns. But again, for us, the conditions to invest are substantial demand, solid contracts with very favorable pricing, and the absence of better alternatives. Those are the factors we’re balancing. As I sit now, I don't see us investing more in Auto Body sheet. We're very happy with what we have, and we're focused on optimizing our assets to meet customer needs. That may change in six months; we’ll see.

Okay. Very clear. And the second thing is when you mentioned your target leverage, still very much at 2.5 times as soon as possible. Should we read this also as that being when you will contemplate paying a dividend? Or is that not associated with it?

Yes. That's a good question, Christian. For the time being, we’re very focused on reducing leverage. We think that is the highest impact item on our share price. We will focus on that over the short-term. As we start to gain visibility on reaching 2.5 times, we will discuss broader capital allocation.

Okay. Very clear. And totally different thing. On the part division, if I look at last year the second half of 2020, you did an EBITDA of €167 million. I mean, you had some pretty good shipments as well after the difficult first half. You're looking to the second half of this year; is there any big difference between the second half this year and the second half last year?

The markets are a bit better and the recovery is more advanced than the second half last year. We're seeing— especially as usual, right out of the crisis— the US rebounded quickly compared to Europe. We had the rebound last year in the US already in the second half. We didn’t see as much in Europe, so we should see Europe stronger in the second half of this year than last year.

So PARP should look pretty good in the second half, right?

I think all our businesses are looking pretty good, Christian.

That's a fair point. Okay. Just one last question. On aluminum, we know there's some strain on the upside right now with issues about supply from China and so on. But looking at the Midwest premium, I think it's now at a historical high. The last time that happened, there was a lot of discussion about the very high price of the premium in the US. I mean, is this in any way impact? I know you passed on. But they can't this in any way affect you financially on a given quarter?

Not in a material fashion. We've learned our lesson from the past and have done a good job shielding ourselves from the volatility in regional premiums in both the US and Europe. It can create a timing effect but nothing really economical or material over a six-month or one-year period.

Okay. As a whole, obviously, premiums continue to strengthen; say towards the €3,000 level. If we get that for a prolonged period, do you see that as a potential headwind for some of your end markets? Or is it really not a source of major concern for you?

Historically, customer choices around material use have been largely unaffected by metal prices. Back in 2007-2008, LME reached €3,300-€3,500, and we didn't see a change in what packaging material customers were choosing. When one commodity rises, others typically do as well. I’m not even sure that aluminum's volatility is greater than other commodities that may not be quoted but that still move up and down quite a bit. It hasn't impacted us.

Okay. That’s been very clear. And very last question on your A&T, because you're running your TID and other specialty at 40,000 tons, right? And aerospace was about 30,000 tons before the long-term. So, 70,000 to 80,000 tons overall capacity is something that you can take in your existing facilities?

Yes, we can manage everything we make in TID plus everything we used to make in aerospace. We look forward to that day when it comes back. We are still lagging €100 million of adjusted EBITDA in aerospace, only because of the downturn in the market. We look forward to good times coming back.

Okay. Sure. I am always looking for a great quarter. Thank you very much.

Thanks.

And our last question will come from the line of Sean Wondrack from Deutsche Bank. You may begin.

Hey, good morning, Jean-Marc, Peter, and team.

Hi, Sean.

Hi, Sean.

Just to follow-up on the metal premium question. Am I thinking about this right in that it's basically excluded from EBITDA, but it might have a transitory impact on cash flow that should even out over time?

The way to think about this is that, more specifically on metal premium, as Jean-Marc was saying, we pass through the metal price itself. In our customer contracts, we're passing it through or using financial markets to hedge it. For the vast majority, we pass through; what was referred to earlier are isolated incidents where we have contracts that don’t allow us to pass through. Those contracts are typically short duration, maybe six, maximum 12 months. Typically, we absorb the Midwest premium change in the short term. But when the contract comes up for renegotiation, we go back and embed an improved price to reflect the higher premium. That's why we said it has a timing impact.

Okay. No. That makes a lot of sense. Okay, great. And then, on the can side, between North America and Europe, have you seen a greater relative increase in pricing across, maybe North America, given that Europe has lagged a bit? Or are you seeing it stable across the board?

No. We’re seeing the trends across the board; there is a need for more can sheet in both Europe and North America, and that creates a very favorable environment for pricing in both regions. North America started a little bit earlier, and Europe is catching up.

Right. Okay. And have you considered entering any new geographies in packaging?

We have, for instance...

We have, and we are very focused on what we have. We are constantly optimizing what we have and increasing our capacities in the most capital-efficient manner. Entering new geography is not the most effective way to manage your return on investment.

Yeah. Looking at the growth profile in both North America and Europe, it’s a patient growth profile right now.

All right. And we've been hearing the same. And then last one for me, just looking back, you've been an early mover in terms of instituting some accountability around our ESG goals. Investments in recycling seem attractive, considering the line with your ESG initiatives. Do you see more investments in recycling going forward, and is there any potential for M&A there? Or do you think it will all be organic? Thank you.

We're committed to organic investment. We're doing it in Europe, and we have partnerships in the U.S. Recycling has great potential; it’s good for the planet and our financials. We like it very much and will explore new opportunities. But we aim to be responsible in managing all our growth projects and make sure that deleveraging continues towards our 2.5 target. Any projects or additional projects we undertake, whether organic or M&A, need to keep us on the track for deleveraging. That’s our primary focus.

Okay, great. Thank you for answering my questions.

Thanks, Sean.

Thank you. We have no further questions in the queue. I'd like to turn the call back over to Jean-Marc Germain for any closing remarks.

Thank you all for attending the call. We're very excited about our progress this quarter. Very excited about the deleveraging that is happening fast. Also very excited about the great market conditions that are ahead of us. We look forward to continuing our journey and updating you further after the end of Q3. Thank you again, everyone. Bye-bye.

This concludes the conference call. Thank you for participating. You may now disconnect.