Constellium SE Q2 FY2022 Earnings Call

Hello and welcome to today's Constellium Second Quarter 2022 Results. My name is Elliot and I'll be coordinating your calls today. I would now like to hand over to Jason Hershiser, Director of Investor Relations. The floor is yours, please go ahead.

Thank you, Elliot. I would like to welcome everyone to our second quarter 2022 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. Let's turn to slide 5 and discuss the highlights from our second quarter results. I would like to start with safety, our number one priority. After a strong first quarter performance, our recordable case rate climbed in the second quarter leading to a rate of 2.2 per million hours worked for the first half of the year. This is a humbling reminder that while we always strive to deliver best-in-class safety performance, we need to constantly maintain our focus on safety to achieve the ambitious targets we have set. It is a never-ending task for our company and one that we take very seriously. Turning to our financial results, shipments were 424,000 tons, up 4% compared to the second quarter of 2021 due to higher shipments in each of our segments. Revenue increased 50% to €2.3 billion as a result of higher metal prices, improved price and mix, and increased volumes. As we have said previously, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our value-added revenue, which reflects our sales excluding the cost of metal was €704 million, up 22% compared to the second quarter last year. Our net loss of €32 million in the quarter compares to a net income of €108 million in the second quarter of 2021. The decrease in net income is primarily related to a €158 million unfavorable change in unrealized gains and losses on derivatives, mostly related to our metal hedging position. As you can see in the bridge on the top right, adjusted EBITDA was €198 million, 17% above the second quarter of 2021. This is a new record for the company and it includes record results in both P&ARP and AS&I. Demand remains strong across most end markets during the quarter. Notably, the aerospace recovery continued in the quarter with strong growth both year-over-year and sequentially. Automotive continues to be impacted by the semiconductor shortage and other supply chain challenges. The combination of stronger demand, pricing power, solid execution by our team, and a stronger US dollar drove better results despite significant cost pressures, which Peter will discuss later in more detail. Moving now to free cash flow, we extended our track record of consistent free cash flow generation with €60 million in the quarter. We demonstrated our continuing commitment to deleveraging, ending the second quarter at 3.0 times or down almost 0.5 times from the end of 2021. We remain committed to achieving our leverage target of 2.5 times and maintaining our long-term leverage target range of 1.5 to 2.5 times. Overall, I am very proud of our second quarter performance. Looking forward, macroeconomic and geopolitical risks remain elevated. We expect inflationary pressures to continue, especially for inputs like energy, in regions more directly affected by the ongoing war in Ukraine. Despite some warning signs, we are not experiencing a material reduction in demand in our core end markets, and our business has continued to perform well. As a consequence, we are optimistic about our prospects for the remainder of this year, while we are raising our 2022 adjusted EBITDA guidance to a range of €670 million to €690 million. That increases our previous guidance of €640 million to €660 million. In addition, we continue to expect free cash flow in excess of €170 million in 2022. Turning to slide 6, and before handing it over to Peter, I want to directly address the topic I know you are all focused on and so are we, which is natural gas prices and availability in Europe. As is the case for Europe generally, a portion of the natural gas used in our facilities comes from Russia. To-date our operations have not been affected from an availability standpoint. There is clearly an increased risk that Russia further reduces or stops its flow of natural gas to Europe at some point. It is difficult to know if or when this may occur, though we believe there is good logic for Russia to gradually reduce the flow of gas to Europe. We noted Stream One recently returned to service at a lower flow rate than the pre-maintenance level and well below capacity. To address this risk, Europe is moving quickly to limit any potential impacts. This includes finding alternative sources of gas, the European Commission's 15% demand reduction plan, and a broader plan to end dependence on Russian gas in the future. As you all know, Russian gas dependence varies widely by country across Europe. While we do have exposure in some countries that depend heavily on Russian gas, a substantial amount of our EBITDA in Europe is generated in countries with less dependence. In addition, we believe a 15% reduction in gas supply would lead to much less than a 15% reduction in our production capacity. Also, as a reminder, during COVID, most of our plants were deemed critical given our exposure in markets such as aerospace, defense and packaging, food and pharmaceuticals. If we are afforded the same treatment in a scenario where gas rationing is necessary, it could limit the impact on our operations. We are obviously monitoring the situation very closely, and we'll continue to update you on developments. For the avoidance of doubt, the guidance I provided a moment ago assumes that natural gas will continue to be available albeit at elevated prices. 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. Value-added revenue or VAR was €704 million in the second quarter of 2022, up 22% compared to the same quarter of last year. €34 million of this increase was due to higher volumes in each of our segments. €81 million of this increase was due to improved price and mix, also in each of our segments. Metal impact provided a headwind of €21 million, as inflation on inputs such as hardeners and alloying elements more than offset our scrap performance in the quarter. Finally, €35 million of the increase was due to favorable FX translation tied to a stronger U.S. dollar. There are three important takeaways from this page. First, as Jean-Marc noted, the top line dynamics in our business remained favorable in the quarter. Second, with adjusted EBITDA of €198 million in the quarter, our margin on value-added revenue was 28.1%. And third, to put our performance in context, compared to the first half of 2019, VAR in the first half of this year was up 11% and our adjusted EBITDA margin on VAR was up approximately 200 basis points. Now turn to Slide 9 and let's focus on the PARP segment performance. Adjusted EBITDA of €95 million, a new record for PARP, increased 2% compared to the second quarter of 2021. Volume was a tailwind of €5 million with higher shipments in packaging and automotive. Packaging shipments increased 4% versus last year on continued strong demand. Automotive shipments increased 3% in the quarter versus last year as new platforms began to ramp up, but overall demand continues to be well below pre-COVID levels due to the semiconductor shortage and other supply chain challenges. Price and mix was a tailwind of €15 million, primarily on improved contract pricing including inflation-related pass-throughs. Costs were a headwind of €26 million, as higher operating costs mainly due to inflation more than offset favorable metal costs. FX translation, which is noncash, was a tailwind of €7 million in the quarter due to a stronger US dollar. Now turn to Slide 10 and let's focus on the A&T segment. Adjusted EBITDA of €63 million increased 50% compared to the second quarter of 2021. Volume was a tailwind of €12 million, as aerospace shipments were up 54% compared to last year. Price and mix was a tailwind of €39 million on improved contract pricing including inflation-related pass-throughs and a stronger mix with more aerospace and a better TID mix. Costs were a headwind of €33 million on higher operating costs due to inflation and the production ramp-up in aerospace. FX translation was a tailwind of €3 million in the quarter due to a stronger US dollar. Now turn to Slide 11 and let's focus on the AS&I segment. Adjusted EBITDA of €46 million, a new record for AS&I, increased by 13% compared to the second quarter of 2021. Volume was a €3 million tailwind with higher shipments in industry and automotive. Industry shipments increased 5% versus last year on continued strong demand. Automotive shipments increased 3% in the quarter versus last year. But as noted for PARP, overall demand continues to be well below pre-COVID levels. Price and mix was a €24 million tailwind, primarily due to improved contract pricing including inflation-related pass-throughs. Costs were a headwind of €23 million on higher operating costs mainly due to inflation. Now turn to Slide 12 where I want to give you an update on the current inflationary environment we are facing and our focus on cost control to offset these pressures. In the second quarter, as expected, we experienced significant inflationary pressures across our business, many of which were exacerbated by the war in Ukraine. These cost pressures are creating a significant headwind to our otherwise strong performance. 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. That said, metal supply remains tight today with high energy prices increasingly forcing smelters to shut down. Most recently, Century's shutdown of its Hawesville smelter eliminates an important supplier and will put pressure on high purity aluminum pricing. We currently expect to be able to resource this missing supply, but at a higher cost. The cost of alloying elements like magnesium and lithium are significantly higher this year due to supply disruptions and to the actions we took previously to secure our supply. Magnesium supply is again a concern in the US where one of our suppliers has reduced production. We have worked with our other suppliers and are not currently concerned about our ability to secure the magnesium we need. However, our magnesium cost will be higher than expected. Nonmetal costs are also higher this year, particularly European energy. As previously noted, we purchased energy on a rolling forward basis, which has helped mitigate some of the current cost pressures. However, our energy costs will run significantly higher this year particularly in Europe given the unprecedented energy price increases. Our total energy costs over the last three years have averaged around €150 million per annum. Currently, we expect total energy costs to be closer to €250 million in 2022, with additional increases in 2023. While not to the same extent, we are experiencing significant cost pressures across most other categories, which we expect to continue throughout the balance of 2022. Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results. Our business continued to deliver strong cost performance in the quarter and our recently announced Vision 2025 initiative is beginning to help. Across the company, we are working to increase our efficiency and reduce our consumption of expensive inputs and lower our fixed costs. On the commercial side, many of our existing contracts have inflationary protections such as PPI inflators or surcharge mechanisms, and where they do not, we are working with our customers to include them. The extraordinary increases in European energy prices, for example, support the need for an energy surcharge mechanism. We are also signing new contracts with better pricing and inflationary protections. We have, for example, been successful in incorporating magnesium price protections in most of our contracts. While inflation continues to be significant in 2022, we believe it's manageable and it will be largely offset by improved pricing and our relentless focus on cost control. I want to reiterate that the net impact of inflation and other cost increases including energy and magnesium and the actions we are taking to offset them are included in our revised guidance for 2022. Now, let's turn to slide 13 and discuss our free cash flow. We generated €60 million of free cash flow in the second quarter, bringing our year-to-date total to €86 million. As you can see on the bottom left 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 €550 million of free cash flow. Looking at 2022, we expect to generate free cash flow in excess of €170 million. We expect CapEx to be between €265 million and €275 million, up from our previous guidance of €250 million to €260 million, due to a combination of inflationary pressures and a stronger US dollar. We expect cash interest of approximately €100 million and cash taxes of €20 million to €25 million. Now, turn to slide 14, and let's discuss our balance sheet and liquidity position. At the end of the second quarter, our net debt was €2 billion. This was roughly flat compared to the end of 2021 as €86 million of free cash flow generated in the first half was offset by unfavorable non-cash FX translation of €90 million with the strengthening of the US dollar. Our leverage reached a multiyear low of three times at the end of the second quarter, down almost 0.5 from the end of 2021. Given our revised 2022 guidance for adjusted EBITDA and free cash flow, we expect leverage to continue to decline and to fall below three times by the end of this year. We remain committed to achieving our leverage target of 2.5 times and maintaining our long-term leverage target range of 1.5 to 2.5 times. As you can see in our debt summary, we have no bond maturities until 2026. It is of note that during the second quarter, we repaid all of our COVID-related financing. Despite this, our liquidity of €899 million increased compared to the end of the first quarter. We are very proud of the progress we have made on our capital structure and of the financial flexibility we are building. And with that, I will hand it back to Jean-Marc.

Thank you, Peter. Let's turn to slide 16, and discuss our current end market outlook. As I mentioned before, demand generally remains 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, light weighting in transportation, and the electrification of the automotive fleet. Constellium is well positioned today with our diverse and balanced portfolio to capture this growth. The packaging market is strong in both North America and Europe, and domestic supply remains tight. We expect mid-single digit demand growth in the medium term, which is supported by already announced can-maker capacity additions in both regions, as well as recent announcements of greenfield investments here in the US to build new aluminum rolling mills. We recently announced a series of projects to unlock 200,000 tons of capacity by 2025 to serve this growing market. These brownfield projects will expand our capacity in both North America and Europe, and come with very attractive returns for our shareholders. Near-term automotive demand continues to be hindered by the semiconductor shortage and other supply chain challenges. OEMs experienced production stoppages again in the second quarter. We expect these to continue in the second half of this year. From an end market demand perspective, however, we remain very positive on this market and its growth potential given low inventories, high consumer demand, electrification trends, and continued penetration of aluminum. Let's turn now to aerospace. Aerospace treatments were up over 50% in the second quarter versus last year, and up 25% sequentially. Major OEMs have announced build rate increases. 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 specialties, 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. While we have begun to see some preliminary signs of potential weakness in certain end markets, our specialties markets in both Europe and North America are still strong today. Let's turn to slide 17. Before concluding, I want to acknowledge some of the challenges we face on the macroeconomic and geopolitical front, but reiterate why we believe Constellium will continue to succeed. First, our diversified portfolio serves a range of resilient end markets that are well positioned today. Packaging is stable and growing. Aerospace is in the early innings of a multiyear recovery. Automotive is operating well below pre-COVID build rates, with substantial pent-up demand. Together, these three end markets represent roughly 75% of our revenue base. Second, the demand for aluminum in our core market is growing due to durable sustainability-driven secular growth trends. These trends foster healthy supply-demand dynamics. Third, we have demonstrated our pricing power over the last several quarters with our ability to pass through most of the inflationary cost increases. Fourth, we have built a strong track record of execution and a proven ability to control our costs, across both contracting and expanding business environments. Fifth, we have demonstrated our ability to generate consistent free cash flow. And finally, our balance sheet is rapidly approaching our target leverage range, and we have no near-term bond maturity, and we have a strong liquidity position. We remain very confident in our ability to succeed. So let's turn to slide 18 to wrap up, before we open the line for Q&A. Constellium's performance in the second quarter of 2022 was very strong. We delivered record adjusted EBITDA of €198 million through solid operational performance, and strong cost control in the face of significant inflationary pressures. We extended our track record of free cash flow generation, and our net debt to adjusted EBITDA of 3.0 times is a multiyear low. Looking forward, we are well positioned to deliver strong full year performance in 2022 and beyond. For 2022, we are now targeting adjusted EBITDA of €670 million to €690 million, and free cash flow in excess of €170 million. Our guidance assumes business conditions remain roughly as they are today. Long-term we are targeting adjusted EBITDA in excess of €800 million by 2025, and we expect to maintain a leverage target range of 1.5 times to 2.5 times. We remain focused on operational performance, cost control, free cash flow generation, the achievement of our ESG objectives, and shareholder value creation. I am very optimistic about our future despite all the turmoil out there. With that, Elliot, we will now open the Q&A session.

Thank you. Our first question today comes from Curt Woodworth from Credit Suisse. Your line is open. Please go ahead.

Yes. Thank you. Good morning Jean-Marc and Peter.

Good morning, Curt.

Good morning, Curt.

First question I just wanted to kind of get your thoughts on potential capital return going forward. I mean, when you look at kind of your net leverage and certainly going forward in the free cash flow outlook, it seems like your balance sheet is getting to be roughly speaking where you want it. So I was wondering if you could kind of address potential pivots and capital allocation priority as you move into next year.

Yes. Great question Curt. So, we're going to be consistent on this one. As we said in the past the number one priority is to kind of achieve our leverage target and that was 2.5. And once we're at 2.5 then we'll reconsider our options. But absolutely as we get to 2.5, which we are rapidly approaching, then shareholder distributions will become a more central focus for us. And we're kind of thinking about that and framing that right now.

Okay. I understand you don't provide quarterly guidance, but as we look ahead to the third quarter, it's clear that momentum in A&T is strong. Price and mix were significant factors for this quarter. My question pertains to A&T: do you expect the mix and progression to continue improving? EBITDA per ton is impressive. Also, regarding automotive structures, it appears that the automotive sector is showing some improvement; could you share your expectations for automotive in the third quarter or the latter half of the year? Thank you.

Yes. I'll get started and Peter will help me. So remember there is seasonality. Typically, the second half of the year is not as strong as the first half of the year, so thinking about it sequentially. We continue to see strong demand in A&T, so it's going to be a very solid second half. But when you look at the EBITDA per ton, you remember we've said historically that €700 to €800 EBITDA per ton is a good number. Maybe we're drifting up towards the higher end of the range. Q2 was exceptionally strong at over €1,000. So we don't expect the Q2 performance in EBITDA per ton to continue through the end of the year. Talking about auto, we don't anticipate much of a change in terms of all the supply chain issues that the OEM customers are going through. We expect a continuation of a challenging environment for them, but we are pleased with how we're doing in that environment. Yes, year-over-year if you look at the first half of 2022, we're slightly up in overall automotive shipments, and we think we'll stay around these levels seasonally adjusted for the second half.

Yes. I think that's great. I would also like to mention that when the automotive sector rebounds, we are prepared. Our production lines are operating efficiently, and we are ready to handle any additional demand.

We've recently seen the announcement of three new greenfield plants in just two months, totaling approximately 1.8 million tons. This represents a significant increase in capacity expected to enter the market in 2025 and 2026. While I know you can't discuss specifics, it seems likely that there are commitments for some of this capacity, indicating further growth opportunities. I'm curious about your perspective on this. Do you believe the market will be able to accommodate this additional capacity? Thank you.

Sure. So as we commented during the Analyst Day, we are essentially sold out through 2025-2026, and we've got significant contracts that go beyond those dates into the decade. But we are not sold out through 2030, that is for sure. We believe that given the growth in the market, you do need this additional capacity by the end of the decade. So how fast they come online and ramp up, and how quickly they ramp up may create either a very tight supply-demand balance or some excess supply if everything comes on stream quickly and ramps up very quickly in the 2026-2027 horizon. Ultimately, that level of capacity is needed. Also, remember that there's an equivalent of today, one of these greenfield plants that is imported from overseas because we're lacking domestic capacity in the US. These imports are certainly part of the equation that we need to think through as we consider the supply-demand balance in the US.

Great. Thank you.

Our next question from Emily Chieng from Goldman Sachs. Your line is open.

Good morning, Jean-Marc and Peter. And thanks for taking the time today. My first question is just around your comments earlier on the energy cost increases and potentially what you're expecting in 2023. But perhaps could you share some color as to maybe what hedging you have in place or contracts that you have that do give you that confidence that the additional cost increase into 2023 remains manageable particularly as it relates to Europe?

Yes. Well, let me first comment on 2022 and say that vis-à-vis 2022, we've effectively purchased all of our energy. So we're effectively locked in on 2022. Moving into 2023, the way we think about this is that we do expect there to be significant increases. However, as I said in the prepared remarks, we also think given the extraordinary increases that there is a need for some type of energy surcharge mechanism. We're working with our customers on that right now. So right now it's hard to give a lot of guidance on 2023 because we really need to see how effective we are in working through that aspect of it. As that develops into Q3 and Q4 and early next year, we'll be able to give you a lot more color on 2023 in terms of energy cost.

Understood. And then a follow-up is just around the higher metal costs from sourcing new sources of high purity aluminum and similar on maybe domestic US magnesium as well. But are those costs more one-off efficiencies, or do they ultimately get passed through on pricing as you walk through new supply sources?

Well, so on high purity, these are costs likely we will have to absorb and it will be absorbed in kind of through the different mechanisms that we have in place, the PPI structure and so forth. Magnesium costs, again, as I said in the prepared remarks, we've put in place the kind of pass-through mechanisms on magnesium costs, some of them with delay. So we will not necessarily get all of that in 2022. But by the time 2023 comes along, we should be fully protected. And it's in our guidance too.

Great. Thank you.

Our next question comes from Corinne Blanchard from Deutsche Bank. Your line is open. Please go ahead.

Hi, good morning, Jean-Marc and Peter. Thank you for the time today. I just want to go back maybe on the packaging. And can you just remind us on the contract and the volume that we can expect to be renewed into 2023 and 2024?

Well, we have extended quite a few of our contracts. So the rule of thumb, which was historically, is most of the time five years sometimes three years, so you're kind of renewing every year 22%, 25% of the volume. Maybe it's a little bit less now.

Okay. And then maybe to just try on that as well I mean, how do you view pricing negotiation for those kinds of contracts like on the medium term, let's say 2026, 2027 given the upcoming capacity in the market?

Yeah. So we don't have anything really much to negotiate anymore because most of our contracts are already agreed and locked in for the period 2023, 2024, 2025. So that's pretty much done with extensions to current contracts. I mean, we have plenty of time to work on them. So today, we don't have a burning need ourselves to get to the market and sell our capacity for 2028, 2029.

Thank you. And maybe one last question if I can and maybe more for Peter. But I was looking interested into FX sensitivity like Euro, USD. Can you just provide some color about the impact that you see from this and what could be impacted or expected for the second half of the year?

Yeah. So maybe the best way to do this is in the context of the first half, right? So in the first half, in the first quarter on a year-over-year basis, we had about a €5 million impact and in the second quarter we had about a €10 million impact. So relative to last year, we're talking about a €15 million-ish tailwind from FX in the quarter.

Sorry, on EBITDA.

Thank you. I believe €15 million is likely the correct estimate for the first half of the year. If we consider the impact on our balance sheet, it is reflected in the translation effect on our net debt, which is negative. The strengthening of the US dollar explains why our debt remains consistently around €2 billion, despite the repayments we have made. On a cash flow basis, foreign exchange should be slightly positive to neutral because the gains on the EBITDA side are offset by items like interest expense and capital expenditures. Overall, it's a modest positive.

Great. Thank you. Very helpful.

You're welcome.

Our next question comes from Josh Sullivan from The Benchmark Company. Your line is open.

Hey, good morning.

Good morning, Josh.

Just within aerospace and congrats on the strong growth here, but curious, as engines remain a gating factor for OEM deliveries. And Airbus has built a couple of gliders already. Do you see any scenario where the engine supply chain needs to catch up and there's a related need to slow down demand for aluminum structure needs?

We understand that the engine component is currently the biggest bottleneck in the aerospace industry, which is frequently reported. Our customers are not asking us to reduce production; in fact, everyone we spoke with earlier this month is seeking more materials than we can provide. There is a pressing need to replenish the supply chain. For two years, production rates decreased by 30%, and our deliveries were 50% lower than usual, similar to the situation across the industry. There is a significant shortage of aluminum in the supply chain, and demand for aluminum continues to grow, which we expect will persist into 2023.

The only thing I might add is that once the aerospace companies start a build rate, we don't think they're going to be quick to change it. So we don't see this as a risk that this slows down in the 2022, 2023 timeframe.

Given the impressive EBITDA per ton at A&T and considering the aluminum lithium product, I understand that Airbus may have reviewed the supply when they took over the A220 program. However, with the recent order activity surrounding the A220 and the prospects for that program, have you noticed an increase in aluminum lithium demand?

A little bit, but nothing different from the rest. It's heavily mix dependent. A significant portion of our aluminum lithium alloys goes to the A350, a wide-body aircraft that is experiencing a slower recovery compared to narrow-bodies. There are several factors at play, but we remain very optimistic about the prospects for hardware.

Thank you for the time.

Sure. Thank you.

Our next question comes from Karl Blunden from Goldman Sachs. Your line is open. Please go ahead.

Hi. Good morning. Thanks for the time. A lot of comments on energy costs and ability to pass that on. I wonder if you could comment a little bit more on energy supply, just given the volatility we've seen in natural gas supply to Europe and your thoughts around operating the business in that environment.

Sure. I see it as having two extremes, not set in stone but worth noting. On one side, we have the current situation where gas continues to flow, although at a significantly reduced level. It's still accessible for us to operate, even at high prices. On the other side, the Commission has indicated a 15% drop in demand from Europe, which would likely lead to even higher gas prices in a rationing scenario. It's essential to recognize that for us, a 15% reduction in natural gas supply means a smaller impact on our production. However, many other factors could influence the situation in unpredictable ways, making it hard to gauge how a 15% drop in natural gas use would affect our automotive, aerospace, or packaging customers. Their impact could vary. The same applies to our suppliers, creating uncertainty. If this situation becomes widespread, though, we expect the effect on us to be much less severe than a 15% reduction. Additionally, different regions in Europe are at varying levels of exposure to Russian gas. It's worth mentioning that the 15% figure applies to Europe as a whole; the situation might differ by country depending on their reliance on Russian gas. Most of our operations are in countries with relatively low dependence on Russian gas, which should benefit us somewhat. Moving forward, our teams are proactive. We've conducted assessments on how to maintain operations if gas supply decreases significantly and how to communicate with our customers. We're preparing ourselves, hoping to avoid activating our contingency plans, but we are ready and not approaching this with panic. A 15% reduction, in our view, is quite manageable.

That’s very helpful. Maybe, this one might be more for Peter. Just on the liquidity and net debt part of the business. You provided quite a few updates in your release there on optimizing the various credit facilities you have in place and you paid down substantial regional credit facilities. Is there more to come on this front in the second half of the year, or do you feel like you are where you need to be now on liquidity standpoint and flexibility?

I believe we are in a strong position regarding liquidity. Currently, we do not see the need for additional liquidity. In a more stable environment, we would likely reduce our liquidity levels. However, considering the current uncertainties, we plan to be patient and monitor the situation. Once we begin to see more stability, we will gradually decrease our liquidity.

I think it's important to say that we've put ourselves in a position where we can be opportunistic.

Our next question comes from Sean Wondrack from Deutsche Bank. Your line is open. Please go ahead.

Hi, Jean-Marc and Peter, congrats on improved guidance some of its difficult environment.

Thanks, Sean.

I guess my first question, I was curious if there are any opportunities for you to build inventory ahead of any potential curtailments, whether on the obviously, not on the energy side but on the metal side. And if you've seen any kind of willingness from your clients to allow you to secure inventory ahead of time.

We have raised our EBITDA guidance, but we have not changed our free cash flow guidance, as we want to maintain flexibility to increase inventory if we believe it's the right business decision. We are evaluating this, and our priority is to position the company to select the best options. We are not limited by our financial situation or operating performance, so we are pleased to have the ability to make these choices if they align with our strategy.

I appreciate that much of this is game theory right now, but it's very helpful to ask. My second question is about the auto segment. There was another issuer commenting that SAR has been somewhat depressed for the past two years, and they believe there is significant pent-up auto demand. Do you see that as well?

We think that is, yes. You just need to drive around in the US and look at the dealers' lots; they are empty, right? I mean, it's visible that there is an issue there. So yes, we believe so. And again, as Peter was saying earlier, we are ready for when it picks up but we have stopped hoping for it. We're just organizing ourselves for when it happens but we're not hoping for it anymore. We would wait for a pleasant surprise.

That makes a lot of sense. Thank you. And then just lastly, Peter you've outlined a number of things today. It's very helpful on the capital allocation side. We're curious, given that it's potentially an option out there some of your bonds are trading at a discount. Is there any willingness to use any of your free cash flow to go out there and repurchase the bonds?

Potentially, and that kind of follows on to my comment that I made to Karl. Absolutely it's an option for us and we're kind of monitoring that. We're also kind of cognizant of the fact that there's tremendous uncertainty in the market. As I said before, I think our bias for the short term is to kind of keep our liquidity strong. But yes, we're going to continue to be opportunistic. And as Jean-Marc said, I think one of the nice things that we've done as a company over the last several years is we've really put ourselves in a position where we can be opportunistic. So we'll continue to evaluate that.

Great. And thanks again for highlighting on the energy side today. It’s very helpful. Good luck.

Thank you, Sean.

We have no further questions. I'll now hand back to Jean-Marc Germain, CEO of Constellium for final remarks.

Well, thank you Elliot and thank you everybody for participating in the call today. As you can see, there are plenty of uncertainties out there, but Constellium is very well positioned to make the most of the situation. We believe that most of our markets have very good long-term fundamentals. We're well positioned to reap the benefits of that. In the interim, should there be a further crisis, we are approaching this crisis with a very strong position on the balance sheet side and on the operating side. You would have noted, as Peter mentioned in his remarks, that our level of activity today as evidenced by the VAR is higher than it was pre-COVID, despite quite a few of our segments still being in a recession. Our operating performance in terms of VAR margin or EBITDA margin is stronger than before COVID, and I think that's a testament to a great job by everyone at Constellium to ensure we work on what we can control. We are putting the company in a good place so that we can be opportunistic and make the most of whatever situation comes our way. So we approach the future with a lot of confidence, excitement, and optimism. Thank you very much, and we look forward to talking to you again in October.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.