Constellium SE Q4 FY2021 Earnings Call

Good day, and thank you for standing by, and welcome to the Constellium Fourth Quarter and Full Year 2021 Results. I would now like to hand the conference over to your first speaker today, Jason Hershiser, Director, Investor Relations.

Thank you, operator. I would like to welcome everyone to our fourth quarter and full year 2021 earnings call. On the call today, we have 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 statements 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, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. I want to start by thanking each of our 12,000 employees for their relentless focus on safety and their commitment to serving our customers in these challenging times. I am extremely proud of what we were able to achieve in 2021, and I look to the future with great optimism. Now let’s turn to Slide 5 and discuss the highlights from our fourth quarter performance. Shipments were 385,000 tons, that’s up 3% compared to the fourth quarter of 2020. Revenue increased 37% to €1.7 billion. This was primarily due to 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 price risk. Our net income of €7 million compared to a net income of €26 million in the fourth quarter of 2020. Adjusted EBITDA was €147 million, 33% above the fourth quarter of 2020 and well above our implied guidance range. Strong end-market demand, particularly from our packaging and industrial customers and better-than-expected cost performance helped us overcome continued weakness in automotive caused by the semiconductor shortage and inflationary pressures across the business. I am very pleased with our strong execution this quarter. We extended our track record of consistent free cash flow generation with €14 million in the quarter. Lastly, we demonstrated our commitment to reduce gross debt with a redemption of $200 million of our 2026 notes in November. So now turn to Slide 6 for our full year results. Beginning with safety, our recordable case rate was 1.85 per million hours worked and very close to our record performance last year. While this is best-in-class performance, we remain committed to continuous improvement in this most important area. I would like to specifically recognize the efforts at Changchun and Decin in the fourth quarter. Changchun reached more than 3 years without a recordable case and Decin achieved more than 1 million worked hours without a recordable case. For the full year, our shipments were 1.6 million tons, up 10% compared to 2020 as all of our end markets, except aerospace, showed strong year-over-year growth. Revenue increased 26% to €6.2 billion. This was primarily due to higher metal prices and higher shipments. Our net income of €262 million compares to a net loss of €17 million in 2020. Adjusted EBITDA was €581 million, 25% above 2020 and notably, 3% above 2019, our last full pre-COVID year. This performance is a record for the company and a record for our PARP and AS&I segment. I am particularly pleased with this result given the fact that aerospace and automotive are still running below 2019 levels. We delivered our third consecutive year of positive free cash flow with a total of €135 million in 2021, and we remain very confident in our ability to maintain and improve this performance in the future. Our leverage declined to 3.4x at the end of the year, down more than a full turn from the first quarter of 2021 and at a multiyear low. Overall, I am very proud of our fourth quarter and full year 2021 performance. We delivered strong adjusted EBITDA, solid free cash flow generation and substantial deleveraging. 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. Please turn now to Slide #8. For the fourth quarter of 2021, Constellium achieved €147 million of adjusted EBITDA, an increase of 33% compared to the fourth quarter of 2020. Compared to the fourth quarter of last year, PARP adjusted EBITDA of €88 million increased by €6 million. A&T adjusted EBITDA of €30 million increased by €17 million and AS&I adjusted EBITDA of €31 million increased by €9 million. Holdings and corporate costs of €2 million decreased by €4 million compared to last year due to a number of one-off adjustments in the quarter and cost reduction initiatives. For the full year 2021, Constellium achieved €581 million of adjusted EBITDA, a 25% increase compared to the full year 2020. Compared to the fourth quarter of last year, PARP adjusted EBITDA of €344 million increased €53 million to a record level. A&T adjusted EBITDA of €111 million increased by €5 million and AS&I adjusted EBITDA of €142 million increased by €54 million, also to a record level. Holdings and corporate costs of €16 million decreased by €4 million compared to 2020. We continue to expect holdings and corporate costs to run at approximately €20 million per annum. Now turn to Slide 9, and let’s focus on our PARP segment performance. Adjusted EBITDA of €88 million increased 7% compared to the fourth quarter of 2020. Volume was flat as higher shipments in packaging and specialty rolled products were offset by lower shipments in automotive rolled products. Packaging shipments increased 5% on continued strong demand. Automotive shipments decreased 18% due to ongoing impacts from the semiconductor shortage. This trend was roughly consistent with our experience in the third quarter of 2021. Price and mix was a headwind of €3 million on a lower share of automotive shipments and a weaker packaging mix. Costs were a tailwind of €7 million as favorable metal costs more than offset higher maintenance and labor costs. FX translation, which is noncash, was a tailwind of €2 million in the quarter due to a stronger U.S. dollar. For the full year 2021, PARP generated record adjusted EBITDA of €344 million. Volume was a tailwind of €56 million with higher shipments in packaging, automotive and specialty rolled products compared to 2020. Price and mix was a headwind of €4 million due to weaker mix in both packaging and automotive. Costs were an €8 million tailwind due to solid cost control and favorable metal costs. FX translation for the year was a headwind of €7 million due to a weaker U.S. dollar. Turn now to Slide 10, and let’s focus on the A&T segment. Adjusted EBITDA of €30 million increased 142% compared to the fourth quarter of 2020. Volume was a tailwind of €16 million. TID shipments increased 34% on strong broad-based demand in both North America and Europe, while aerospace shipments were flat. Price and mix was a tailwind of €10 million on better TID mix and pricing, while costs were a headwind of €10 million on higher labor costs, including additional costs in anticipation of improved aerospace demand. FX translation was a tailwind of €1 million in the quarter due to a stronger U.S. dollar. For the full year 2021, A&T generated adjusted EBITDA of €111 million. Volume was a tailwind of €33 million, with higher shipments in TID offsetting lower aerospace shipments. Price and mix was a €55 million headwind with lower shipments in aerospace compared to 2020. Costs were a tailwind of €29 million due to strong cost control and favorable metal costs, partially offset by higher labor costs. FX translation for the year was a headwind of €2 million due to a weaker U.S. dollar. Turn now to Slide 11, and let’s focus on the AS&I segment. Adjusted EBITDA of €31 million increased by 45% compared to the fourth quarter of 2020. Volume was a €1 million tailwind as industry shipments increased 17% on strong broad-based demand, while automotive shipments decreased 16% due to reduced demand resulting from the semiconductor shortage. As noted in our comments on the automotive demand in PARP, our fourth quarter experience was roughly similar to that of the third quarter. Price and mix was a €10 million tailwind due to stronger industry mix. Cost was a €2 million headwind with higher labor, energy and other costs offsetting fixed cost actions. For the full year 2021, AS&I generated adjusted EBITDA of €142 million. Volume was a tailwind of €35 million with higher shipments in both automotive and industry. Price and mix was a tailwind of €18 million on a better mix in automotive structures and better industry pricing. Costs were a €1 million tailwind due to solid cost control. Turn now to Slide 12, where I want to give an update on the current inflationary environment we are facing. In the fourth quarter, we experienced more significant inflationary pressures than in previous quarters. Nonmetal costs like labor, energy, maintenance and transportation were all higher compared to last year. In looking at the business unit bridges, however, it is clear that increased price more than offset inflationary pressures in the quarter. Our businesses have continued to focus on cost control and again, delivered strong cost performance in the quarter. This continued discipline should help us combat cost increases in 2022. Looking at 2022, we expect inflationary pressures to increase in the near term. As you know, we operate a pass-through business model, so we are not materially exposed to changes in the price of aluminum, our most significant cost input. We do though expect the cost of alloying elements to be significantly higher this year, given some of the challenges we discussed on our third quarter call and the need to secure supply. We have made significant progress in securing our 2022 supply and are not currently concerned about our ability to do so. We are experiencing higher labor costs, but these are manageable thus far, and our bigger challenge is in finding people at all levels across the company. With respect to energy, our hedging strategy gives us some protection on energy costs given the fact that we buy our energy on a forward basis, but we do expect energy costs to be up materially this year, particularly in Europe. We are working hard to mitigate these inflationary pressures. Our Horizon 2022 initiatives have reduced structural costs, increased efficiency and reduced input consumption. On the commercial side, many of our existing contracts have inflationary protections, such as PPI inflators. We are also signing new contracts with better pricing and inflationary protections. While inflation will be significant in 2022, we believe it is manageable and that it will be largely offset by improved pricing and our relentless focus on cost control. The net impact of inflation and the actions we are taking to offset it are included in our guidance for 2022. Now let’s turn to Slide 13 and discuss our free cash flow. We generated €135 million of free cash flow, including €14 million in the quarter. This is despite significant working capital build as shipments rebounded across a number of our businesses this year and higher CapEx. As you can see on the bottom left side of the slide, we have continued to deliver on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated over €460 million of free cash flow, while also reducing our factoring balance by over €100 million. Looking at 2022, we expect to generate free cash flow in excess of €150 million. We expect CapEx to be between €250 million and €260 million. We expect cash interest of approximately €100 million, which represents a milestone for the company and reflects the significant actions we have taken to reduce gross debt and cash interest. We expect cash taxes of €20 million to €25 million. Now let’s turn to Slide 14 and discuss our balance sheet and liquidity position. At the end of the fourth quarter, our net debt of €2 billion declined slightly compared to the end of 2020 as free cash flow generation was partially offset by €77 million of FX translation and the cost of our balance sheet actions. Our leverage reached a multiyear low of 3.4 times at the end of the fourth quarter, down 0.9 times versus the end of 2020. We remain committed to deleveraging and to achieving our 2.5 times leverage target. As you can see in our debt summary, we have no bond maturities until 2026. In November, in line with our objective of reducing gross debt, we redeemed $200 million of our 5.875% senior notes due 2026. As previously noted, our capital structure actions in 2021 reduced run rate cash interest expense by €38 million per annum. We are proud of the progress we have made on our capital structure and of the financial flexibility we are building in the company. Our liquidity was strong at €773 million as of the end of the fourth quarter. As we have noted on recent calls, we will continue to gradually reduce the extra liquidity we added during the COVID-19 pandemic. And with that, I will now hand the call back to Jean-Marc.

Thank you, Peter. So let’s turn to Slide 16 and discuss our current end market outlooks. Demand remains generally very strong in the markets we serve. We are benefiting from sustainability-driven secular growth trends, such as consumer preference for infinitely recyclable aluminum cans, lightweighting in transportation and the electrification of the automotive fleet. Constellium is well positioned today with our diverse and balanced portfolio to capture this growth. Starting with packaging. Packaging is our core market for Constellium and represented 43% of our revenue in 2021. The growth in demand for aluminum cans is underpinned by consumer preference for cans versus other alternatives such as plastics. Aluminum cans are infinitely recyclable, making them the most sustainable beverage packaging container and a well-understood participant in the circular economy. The packaging market is strong in both North America and Europe. We expect mid-single-digit demand growth in the medium term, which is supported by can maker capacity additions in both regions, and we are doing our best to meet the needs of our customers. We are continuing to investigate a number of initiatives to increase can sheet capacity across our packaging platform to serve this growing market. We expect this will be achieved through both debottlenecking of our operations and additional investments in the future. Now let’s move to automotive. Automotive represented 26% of our revenue in 2021. Constellium is well positioned in both sheet and extrusions to benefit from the secular shift to aluminum in automotive and the electrification of the automotive fleet. Electric vehicles need to be light to meet their range of objectives, which makes aluminum the logical material of choice for auto body sheet, crash management systems, structural components and battery enclosures. We also expect continued lightweighting of internal combustion engine vehicles to meet increased regulation, the societal focus on sustainability and demand for improved safety and performance. Near term, automotive demand continues to be hindered by the semiconductor shortage. OEMs experienced production stoppages throughout the fourth quarter. We expect these to continue in the first half of this year and to improve in the second half. From an end market demand perspective, however, we remain very positive on this end market. Dealer inventories are low, and we believe underlying consumer demand remains strong, especially for light trucks, SUVs and luxury vehicles where Constellium has greater exposure. Let’s turn now to aerospace. Aerospace represented 6% of our revenue in 2021, well below historical levels. Demand for our products remained at a low level in the fourth quarter. Remember, aerospace used to be 15% of our revenue in 2019. Optimism in the aerospace supply chain is increasing and the destocking appears largely complete. More recently, major OEMs have announced build rate increases. The timing is still uncertain, but we expect to show year-over-year growth in aerospace shipments in the coming quarters. Over the longer term, we remain confident that the fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. Turning lastly to other specialties. Other specialties represented 25% of our revenue in 2021. We continue to execute on our strategy of expanding each product in a diversified range of markets. In general, these markets are dependent upon the health of the industrial economies in Europe and North America. It is also of note that many of the sustainability-driven secular growth trends impacting our other core markets are very much at play here as well. For example, lightweighting is driving increased applications for aluminum in rail, trucks, boats, anything that moves. In addition, increased investments in renewable energy are increasing demand for our extruded products. Specialty markets are generally strong today in both Europe and North America. Turning now to Slide 17, we detail our key messages and financial guidance for 2022. Constellium achieved very strong performance in 2021. We delivered record adjusted EBITDA of €581 million that surpassed 2019 levels. I’m very proud of our entire team as they delivered solid operational performance and strong cost control despite the many challenges we faced. Importantly, we extended our track record of free cash flow generation and further deleveraged our balance sheet. Looking forward, I believe there are substantial opportunities for Constellium to benefit from sustainability-driven secular growth megatrends, which are creating significant momentum around sustainable packaging, lightweighting and fleet electrification. We will continue to work closely with our customers and deliver value-added products that help reduce their carbon footprint. Constellium is part of the solution in the circular economy. As we previously announced, we are expanding our recycling footprint with significant investment in the European recycling center with 130,000 tons of capacity. We are very excited about this investment as it will strengthen our business, help us be a further solutions provider to our customers with increased recycling and contribute to a more sustainable future. It is a triple win for Constellium, for our customers and for the environment. Looking to this year, we are well positioned to deliver another year of strong performance in 2022. Packaging and industrial markets remain strong, and we are starting to see signs of the recovery in aerospace. Automotive is still facing issues with semiconductor shortages to start the year, but we are expecting automotive to improve in the second half of the year. While we are facing significant inflationary pressures in 2022, as Peter highlighted, we are confident in our ability to offset most of these impacts with improved pricing and a relentless focus on cost control. For 2022, we are targeting adjusted EBITDA of €600 million to €620 million and free cash flow in excess of €150 million. We remain focused on operational performance, cost control, free cash flow generation and shareholder value creation. I am very optimistic about the future. Before we open the Q&A session, I want to remind everyone of our upcoming Analyst Day on April 6, 2022. We are holding the event at our facility in Muscle Shoals, Alabama, where we expect to update you on our business, detail our plans for the future, establish new long-term guidance, present our 2030 sustainability strategy and of course, offer a tour of the facility, all that in the presence of a very strong executive team. With that, operator, we’ll now open the Q&A session.

Your first question comes from the line of David Gagliano from BMO Capital Markets.

All right. Great. Congratulations on the strong results and the solid outlook. When I look at the fourth quarter results and compare them to the implied guidance from three months ago, it shows that EBITDA for Constellium exceeded guidance by €20 million to €30 million. That's a significant number, particularly if annualized. Additionally, the 2022 guidance suggests about 2% to 5% growth compared to the annualized fourth quarter actual results, which is interesting considering that traditionally the fourth quarter is the weakest. You've highlighted significant positives in each of your three main areas for 2022. So my questions are, what changed in the last three months that enabled Constellium to surpass expectations in the fourth quarter? And what implications does that have for the upside potential in the full year 2022 guidance?

Dave, thanks for the question and congratulations. So on the first part of your question, yes, it was a significant beat. We are very pleased, and we clearly surpassed our own internal expectations. That’s in the context of strong demand, stronger than we were even seeing, and excellent execution in all our facilities. So we are very pleased with that. And we hope to be able to maintain that level of performance, but we really had an excellent quarter from an operations standpoint. Now looking forward, one thing that hasn’t escaped any of us is inflationary pressures. And we benefited, I think Peter commented on it in his remarks. If you look at pricing, we have better pricing in ‘21 than we had in 2020. But inflation kicked in only at the end of the year and only partially because a lot of our contracts for supplies reset on the 1st of January. So we had a little bit of impact on inflation, but we have the full benefit of our price increases. Going forward into next year, we are going to have the full impact of inflation. And we know that our prices are going up as well. But the compression due to price increases on inflationary cost pressures, sorry, the compression is there. So that’s going to put a bit of a damper on our ability to grow EBITDA, and that’s what we’re reflecting in our guidance. We’ve got pretty good visibility, obviously, as to what our prices are for the year, both on the input side and on the output side. And that’s why you are seeing an increase in EBITDA that may be a little bit more modest than what we’ve been delivering in the past. Peter, anything you want to add?

No, I think that’s great. That’s great.

Okay. So that takes into account all the cost pass-throughs that you've mentioned several times during this call and previously. Is there a way to express a specific level? It seems quite conservative to me. I'm trying to understand the assumptions that are included, such as the timing of a recovery in aerospace and automotive. I know you mentioned mid-single-digit growth in the packaging sector.

Yes. So maybe I can shed a bit more light on the inflation and the pass-throughs. We are in long-term relationships with our customers. And obviously, we discussed, we negotiate contracts, we discuss existing contracts, and we look for solutions that work for us and for our customers. So what’s important also to understand is that we will not be passing through all the inflationary pressures all at once on January 1, right? There will be a ramp-up. And what is not passed through in ‘22 will be passed through in ‘23. So I think we need to look at the long-term perspective here in terms of how our pass-throughs work. And clearly, what that means is we expect to fully pass through all the cost pressures we are feeling, but that will kind of bleed over into 2023. That’s one. Then on the assumptions we have related to our guidance, we’re expecting every quarter some recovery in aerospace compared to the same quarter of the prior year. And we expect aerospace to be back to pre-COVID levels or thereabout by 2024. So it’s a gradual increase. In terms of automotive, we expect that the chip shortage gets resolved in the second half of the year. And if you remember, we said it’s costing us about €5 million every quarter. This is the past year. So we expect that kind of drag on our earnings to continue in Q1, Q2 and then abate in Q3, Q4. And then packaging, I mean, solid continuing, and here the challenge is more about producing everything that our customers want. So I hope that gives you a bit more color as to what’s embedded in the guidance.

Your next question comes from the line of Timna Tanners from Wolfe Research.

I wanted a little bit more color on some of the contact revision opportunity that you talked about, just to understand that a little bit more. And then also the mention of debottlenecking and expansion in packaging, if you can elaborate on those opportunities and maybe the size of any investment there?

Certainly. We have been on a multiyear journey to enhance the value we deliver to our customers and ensure that this is recognized, enabling us to achieve higher prices. We are pleased with our progress. In an inflationary environment, we have the advantage of securing better pricing in the marketplace. This is an ongoing journey, and we saw positive price increases in 2021. More contracts are up for renewal in 2022, and we have successfully renewed them at improved prices compared to the past. We are satisfied with our advancements, which apply to both packaging and automotive sectors, where we have a steady increase in pricing. Regarding debottlenecking and additional capacity investments, the global demand for can sheet is growing significantly, particularly in the U.S. and Europe, alongside new can line developments. The industry has a great opportunity to boost production to meet our customers' expanding needs. We will discuss further options during our Analyst Day on April 6 in Muscle Shoals. We are very optimistic about the future, having previously expanded our capacities in Muscle Shoals, and we see potential for further growth in both Europe and North America. Please stay tuned until April 6.

Got it. Will do. Regarding the first part of your question, can you provide any insights into the contracts? Specifically, how many are nearing expiration and how much is purely pass-through, as this is a bit unclear. I'm trying to understand how to assess the impact of some contracts that adjust for inflation while others do not.

Sure. We prefer not to delve into specific details due to the commercially sensitive nature of the information. In terms of our contracts, particularly regarding packaging, they generally have a duration of five years. Typically, around 20% of our contracts renew each year. For 2022, we anticipate a higher than usual renewal rate. When we renew contracts, we have been experiencing a favorable pricing environment, leading to an increase in prices. This increase should take effect; however, it isn't merely an inflation pass-through. It results from supply and demand dynamics, and these contracts are negotiated over several years. For instance, contracts renewing on January 1, 2022, were negotiated in December 2020 and through the subsequent six months, so inflation was not significantly considered at that time. Nevertheless, we have safeguards against inflation in these contracts, which means there will be a price increase in 2022, followed by inflation protection starting in 2023 based on the inflation observed in 2022. This mechanism illustrates how both the inflation pass-through and our pricing power are effectively operational in two of our main segments.

Got it. So there’s a lag effect, all else equal if inflation is static here, we’ll see theoretically margin expansion into 2023, it sounds like.

Your next question comes from the line of Emily Chieng from Goldman Sachs.

Jean-Marc and Peter, my question is regarding the automotive segment. I appreciate your insights on your expectations for a more significant rebound in that segment during the second half. Could you provide some details on the ordering activity from the OEMs, including the differences between regions and how that compares to levels in 2019?

Yes, we are still below 2019 levels and do not anticipate reaching full capacity by the year's end due to ongoing disruptions. The situation is inconsistent, with customers heavily increasing orders one month and then announcing a shutdown the next. For example, in Bowling Green, North America, we experienced 20 days of downtime in the quarter, meaning the plant was idle for 20 out of 90 days. This downtime can often occur with little notice. Despite the challenges, the underlying demand remains strong, and as soon as they are able, they will produce cars or trucks.

Got it. That’s helpful. And my second question is just around the recycling footprint. Can you remind us what the latest update here is on the European recycling center expansion? And remind us of the timing of when that additional volume should hit and the anticipated margin improvement there?

Yes, we are making good progress. It’s a significant investment that requires permitting and other processes. We expect to start production in the second half of 2024, quickly ramping up to full capacity. You should anticipate that 2024 will be a nominal start, with 2025 reaching over 80% of capacity, and by 2026, we will be at full capacity. Regarding margin expansion, we estimate an investment of about €1,000 per ton, with similar amounts in capital expenditures and working capital for each ton of installed capacity. Our goal is to achieve a 20% internal rate of return, which gives a sense of the contribution to EBITDA going forward.

Your next question comes from the line of Josh Sullivan from The Benchmark Co.

Just the comment on aerospace with expectations to be back to pre-COVID levels by 2024. How does that contemplate your new Airbus contract? And then separately, if we look at the structure of that new contract and the long-term nature of it, are there any new features that would ramp differently than what happens historically in a restocking cycle?

That's a great and challenging question to address due to its commercial sensitivity. When we mention that we anticipate returning to pre-COVID levels in 2024, it's in reference to the markets. We have made significant progress in meeting our customers' needs. While we may aim to improve further, we recognize that we need to earn that opportunity. Our relationship with Airbus is very important to us, and we strive to be an excellent supplier for them. We believe that by being exceptional partners, we could see growth that aligns with their requirements.

Got it. Got it. And then just on the alloying agent needs, do you have concerns with actually getting supply of the alloys? Or is it just a matter of having to absorb the higher prices, which are just going to be eventually passed on to customers?

Yes, Josh, it's really about the pricing. At this point, we feel pretty good about the supply. In Q3, supply was definitely a concern, but we worked hard over the last quarter to address that issue. Most of the disruptions we were seeing with the alloys have now been resolved, so the flow of materials is steady. However, prices remain stubbornly high, and as Jean-Marc mentioned, we will start feeling the impact of this in the first quarter when new contracts take effect. On a related note, we are not passively accepting this situation; we are actively working to increase recycled content where possible to reduce the need to purchase some alloys. We are also focusing on conservation efforts. We are implementing several strategies to mitigate the impact, and this is reflected in our guidance as well.

Your next question comes from the line of Curt Woodworth from Credit Suisse.

I wanted to revisit one of the initial questions. When considering seasonality, you mentioned some cost pressures in the fourth quarter, yet you're still anticipating EBITDA of €590 million for the year, and you have significant operating leverage in the business this year along with the ability to recover some of the inflation costs as you indicated. I'm curious about your perspective on the factors influencing this situation, as it appears that if we look at your exit rate this year, you would be above the lower end of guidance for next year on a seasonally adjusted basis. It would be helpful if you could frame the factors affecting both the lower and upper ends of that guidance, as well as your thoughts on how to break down the anticipated €30 million in EBITDA growth by segment, specifically which segments you expect to see faster or slower growth.

So, Curt, to give you some context, let's focus on Q1. As you know, we typically refrain from discussing quarterly performance, but in this case, it might help you understand the cost pressures we're facing. Looking back at the first quarter of 2021, we had €121 million in EBITDA, and there was also a €10 million extraordinary item. Adjusting for that, the figure is €131 million for Q1 of 2021. As we look ahead to the first quarter of 2022, we believe we can exceed the €131 million, but we may struggle to surpass the €147 million from the previous sequential quarter. This should give you an idea of our expectations for the first quarter and how it might unfold amid the ongoing cost pressures throughout the year. In terms of future incremental EBITDA, we expect an increase in aerospace shipments in every quarter as the year progresses, which will be beneficial for us. If the automotive sector strengthens in the second half as anticipated, that will also contribute positively to our EBITDA. Regarding packaging, we are currently operating at near-full capacity, but as we continue to manage costs, we expect some benefits there as well. John-Marc, do you have anything to add?

Yes. Maybe I’ll just add that in this inflationary time, we’ve got the timing element. And we’re going to as we pass through inflation, automotive is lagging a bit more than packaging, right? So that also can help frame how we think about 2022.

Okay. And then in terms of packaging, historically, there’s been some benefit to the widening of scrap spreads, which have widened pretty dramatically the last couple of quarters here. I’d say maybe it’s been somewhat evident in your EBITDA per ton performance in part, but obviously, you talked about mix effect from lower automotive and inflationary pressures. But can you talk to maybe more specifically about packaging this year in terms of either the benefit of the scrap spread widening? Obviously, the beverage can companies are talking about pretty significant can sheet conversion costs going up. I know I believe you have a fairly heavy reset year this year. But any color you could give with regard to kind of packaging dynamics would be great.

Yes. And I’m assuming you’re talking specifically as it relates to scrap, right?

Correct.

Okay. To revisit the topic of scrap, it's important to note that not all scrap is the same; some scraps offer more significant discounts than others. Additionally, there are costs associated with converting scrap into a usable form for us. Currently, we also have a stronger recycling presence in North America compared to Europe. With that in mind, recycling did play a role in this quarter, contributing positively along with favorable metal costs. Scrap profits were beneficial and provided assistance, but we view it as one of several advantages we are utilizing to counteract the inflationary pressures we are encountering. It has certainly helped us, and we anticipate it will continue at similar levels for the foreseeable future. However, it’s important to note that it does not fundamentally change the overall outlook for PARP.

Yes. And maybe, Curt, to add to what Peter said, in ‘21, it was a benefit, right, compared to ‘20. But going forward, we do not anticipate scrap spreads to widen and all that. But we do anticipate energy costs, which are a big part of the conversion costs that Peter was talking about to be higher. So the net impact of that may be a little bit less scrap profit, so to say, in ‘22 than we had in ‘21.

Your next question comes from the line of Corinne Blanchard from Equity.

I think one of the first comments to go back on some of the question. You expect auto to recover in the second half of the year. How do you view seasonality? Would you still expect like the regular seasonality that we’ve seen in 4Q or a little bit different?

Corinne, well, it’s an assumption, more than a definite prognostic, right? The assumption is a recovery in Q3, Q4, which means that we would expect Q4 next year to be better than Q4 this year. And typically, you know that auto is stronger in the first half than the second half. So maybe a more balanced year is the way I look at it for 2022.

Okay. And just another question to go back on your aerospace comment. I believe you mentioned expecting 2024 back to the 2019 level. Is it like an industry comment? Or is it more specific to Constellium?

It’s more an industry comment.

What is your perspective on the potential impact on Constellium's margins? I believe aerospace contributes significantly to your EBITDA margins, correct?

Sure. Yes, yes. So we think we should be able to replicate margins that we had back in 2019 or thereabout, right? So we said trend line, we said €700 to €800, maybe €750 to €850 per ton would be the kind of the…

For A&T overall.

Okay. That’s helpful. And just one last, if I can actually on A&T. I think you have seen significant improvement in term of volume and pricing mix for TID. Do you expect that to continue like this year and maybe like 2023 as well?

Yes. So I think we’ve reached a very nice performance level. And our objective now is to maintain that. It’s putting pressure on the system because the same assets that produce TID are also the assets that produce aerospace. And if aerospace grows gradually or if it grows all of a sudden, that puts a different type of pressure on TID. So our objective is to try and maintain the TID levels where they’re at now and accommodate for the growth of aerospace.

Your next question comes from the line of Christian Georges from Societe Generale.

On your free cash flow, you did over €100 million again this year, right? And then the net debt is down hardly more than €10 million, which is like kind of like a low conversion level. If you look at Bloomberg consensus, that suggests €1.71 billion net debt at the end of next year or about €200 million net debt reduction. I mean is that realistic to expect you to have a really high level of conversion into net debt reduction next year?

Well, first of all, Christian, just to highlight what happened in 2021, we faced some foreign exchange translation issues that negatively impacted our debt reduction efforts. Additionally, there were costs related to some refinancings that also affected the overall debt reduction figure. Looking ahead to 2022, our guidance is to achieve more than €150 million in free cash flow. We are very confident in this guidance and will strive to meet it. I would say to expect at least €150 million or more in free cash flow, which will be directed towards debt reduction until we reach our 2.5x leverage target.

So is the €1.7 billion, something you would judge as a challenge or realistic?

Well, we’re going to try to get as low as we possibly can, but I’m telling you our guidance is kind of €150 million or better. So, for €1,981 million, take €150 million off of that, and that’s about where we should be.

Okay. That makes sense. And my other question is on this automotive rolled business. I mean if I go back because Jean-Marc, you were saying we’ve been subdued since 2019, right? So we’re running at about 65,000 tons per quarter. With a peak, I suppose, 63 back in Q1 ‘21. Say that by the second half of 2022, given the incredibly buoyant demand for automotive, right, second-hand cars are going through the roof. I mean what would be this amount in the second half? If things have to be normal for the past 2 years, would you be running at like 65,000, 70,000 tons per quarter? Is that a realistic top level?

So our maximum capacity enrolled automotive products, Christian, is 280,000 tons a year, which means you never quite get there, right? You need a little bit of buffer. But shipping up to 17 in any given quarter is possible as a consequence. And obviously, that’s not included in our guidance, right? So that would be upside if the markets recover strongly and faster.

Okay. So 210,000 tons per quarter is your full packaging type and 70 for automotive. I know you'll update us in April, but regarding rolled products, you are essentially at capacity, correct?

Yes. We are pretty much at capacity, and that’s why we’re going to be talking about capacity expansions. And again, we’ll be talking about it in the context of we want to remain at that 2.5x leverage target all the time. I mean it’s going to happen in the medium term. It’s not even more a long-term target, it’s a medium-term target. We want to stay around that. And we think that there are plenty of very attractive growth opportunities for us that will require some capital investment, but we’ll make those capital investments and continue to maintain that leverage level and actually delever all the time because this is a company that I think we’ve demonstrated can generate meaningful free cash flow in about any market situation, right? Upmarket, downmarket, pandemic, crisis, recovery, and we want to maintain that economic model through good times and bad times.

Your next question comes from the line of Karl Blunden from Goldman Sachs.

Just a question maybe more for Peter. On the liquidity side, you have been reducing your liquidity post the pandemic induced borrowing. Would you say that €500 million to €600 million is the right level for the company to run with? I know that was the 2019 teen level, but you have some growth ambitions. You also potentially have some working cap needs associated with supply chain uncertainty. So just wondering how you think about what the right level is going forward?

Yes. We’d be very comfortable at that level. And I think as we’ve said in the past, we could comfortably run the company even at lower levels than that. But I think we’d be very comfortable at that level. And I think that’s very likely the type of place we go to in the interim.

Okay. That’s really helpful as we think about debt reduction. And just with regard to inflation for this year, as you look at what the variables are that could lead to the most variation versus your guidance. So what should we have on our mind as we work through our models?

Metal serves as a pass-through, and we have secured pricing on many alloys. While we still have some purchasing left to do, we are optimistic that prices will move in a favorable direction, although they have not done so yet, which carries some risk. Labor, being our second-largest cost, is something we have clarity on for 2022 due to existing contracts, so we should be in a good position there. Regarding energy, we purchase forward and anticipate significant increases in energy costs this year due to current trends and our requirements. This could be an area of concern, particularly with global energy transition challenges and geopolitical tensions, which might lead to higher costs than what we have factored into our guidance if the situation shifts negatively.

So on energy, do you basically build in strip prices, just what you see in the market today?

We have actual contracted costs that we will account for. For any outstanding costs, we will consider additional factors as you suggested.

There are no further questions at this time. I will hand it over back to Jean-Marc Germain, CEO of Constellium.

Well, thank you very much, everyone. Great to talk to you today, and I look very much forward to updating you on our future and establishing our new long-term guidance on April 6, 2022. We hope you can come to Muscle Shoals, otherwise, we’ll be available with all the modern technology options. Thank you so much, and have a good day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.