Constellium SE Q3 FY2022 Earnings Call

Good morning and thank you for joining today's Constellium Third Quarter 2022 Results Conference Call. My name is Austin and I will be your moderator. I would now like to turn the call over to our host, Jason Hershiser, Director of Investor Relations. Jason, please proceed.

Thank you, Austin. I would like to welcome everyone to our third 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. Without further ado, I would now like to turn the call over to Jean-Marc.

Thank you, Jason. And good morning, good afternoon everyone. Thank you for your interest in Constellium. Let’s turn to slide five and discuss the highlights from our third quarter results. I'd like to start with safety, our number one priority and a key pillar of our sustainability strategy. I am pleased to report that we delivered best-in-class safety performance in the third quarter. We reduced our year-to-date recordable case rate to 1.8 million hours worked. In the third quarter, several of our sites achieved safety milestones. Our research center C-TEC in France achieved the one-year milestone without a recordable case. Nanjing, China achieved two years and both Vigo, Spain and Astrex in Canada achieved three years. I want to congratulate all of our employees on this excellent performance. But the safety journey is never complete. And we all need to remain focused on this critical priority every day. Turning to our financial results, shipments were 387,000 tons, down 2% compared to the third quarter of 2021. As higher shipments in A&T and AS&I were more than offset by lower shipments in part. Revenue increased 27% to €2 billion as a result of higher metal prices and improved price and mix. 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 €673 million, up 21% compared to the third quarter last year. Our net income of €131 million in the quarter compared to the net income of €99 million in the third quarter of 2021. The increase in net income is primarily related to the recognition of deferred tax assets that were previously unrecognized. As you can see in the bridge on the top right, adjusted EBITDA was €160 million, 12%, double the third quarter of 2021. This is a record for the company in the third quarter and includes record third-quarter results in both A&T and AS&I. Holdings and corporate was a tailwind of €5 million in the process. Looking across our end markets, aerospace demand was very strong with shipments up around 50% compared to last year for the second quarter in a row. Automotive shipments were up double digits in the quarter versus last year with new platform launches driving our growth. But we continue to be impacted by the semiconductor shortage and other supply chain challenges. Packaging demand continues to be resilient, though our shipments were down in the quarter due to operating challenges at our Muscle Shoals facility, in large part due to a shortage of experienced engineers and operators. While we are seeing signs of weakness across certain industrial markets, we like our overall end market positioning. The combination of solid demand, pricing power, and good execution by our team and a stronger U.S. dollar drove better results despite the significant cost pressures, which Peter will discuss later in more detail. Moving now to cash flow, we extended our track record of consistent free cash flow generation with €74 million in the quarter. As you can see on the bottom right-hand side, we demonstrated our continuing commitment to deleveraging ending the third quarter at three times or down 0.6 times from the end of the third quarter last year. We remain committed to achieving our leverage target of 2.5 times and maintaining our long term leverage target range of 1.5 times to 2.5 times. Overall, I'm very proud of our third quarter performance. Looking at the balance of 2022, macroeconomic and geopolitical risks remain elevated, and we expect inflationary pressures to continue, especially for inputs like energy and in regions more directly affected by the ongoing war in Ukraine. Despite seeing signs of weakness across certain industrial markets, we have not experienced a material reduction in demand in our core end market. As I mentioned, we are dealing with some operating challenges at our Muscle Shoals facility. But overall, our business has continued to perform well. We expect to finish 2022 with adjusted EBITDA landing at the low end of our guidance range of €670 million to €690 million, which would be a new record year for the company. We continue to expect free cash flow in excess of €170 million in 2022. Turning to slide six before handing it over to Peter, I want to give an overview of the environment we are currently facing in Europe. European energy markets are in disarray today, largely as a result of the war in Ukraine and Russia's significant reduction of its gas flow to Europe. Both gas and electricity prices have been significantly above historical levels, at some point more than 10 times since the start of the war. To date, our operations have not been affected from an availability standpoint, and we feel comfortable that gas will continue to be available in the near term. There is, though, still some risk and availability of gas in Europe, especially if Europe experiences a colder than normal winter. The current energy situation also has knock-on effects in other markets. As a result of substantially higher energy costs, several smelters have curtailed operations, which is impacting aluminum and alloy availability. Higher energy costs are also creating certain inflationary pressures across a wide range of inputs to our business. Further, the risk of lower demand due to the impact of slowing markets has increased compared to where we were three months ago. As you should expect, given the performance track record of the Constellium team, we are working hard to manage the company through this current environment. On the energy front, we have a company-wide effort to reduce our energy consumption across our operation. Underway as we speak here today, we are in active discussions with customers to pass through these higher energy costs. We are making very good progress on these fronts and Peter will go into more details on this and on the inflationary pressures in general. Finally, thanks to the great efforts of our procurement and operations team, we have thus far been able to successfully manage a number of supply chain challenges. Overall, our plants are running well without interruption and are keenly focused on controlling costs. We're obviously monitoring the situation very closely, and we'll continue to update you on developments. 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 eight. Value-added revenue or VAR was €673 million in the third quarter of 2022, up 21% compared to the same quarter last year. €109 million of this increase was due to improved price and mix in each of our segments. €44 million of this increase was due to favorable FX translation tied to a stronger U.S. dollar. Volume was a headwind of €11 million, as higher shipments in A&T and AS&I were more than offset by lower shipments in part. Finally, metal impacts were a headwind of €27 million as inflation on input costs such as hardeners and alloying elements more than offset our scrap performance in the quarter. There are three important takeaways from this slide. First, we grew our value-added revenue by 21% in the quarter versus last year. Second, we continue to have pricing power. Pricing mix and price specifically is the biggest increment of our year-over-year variance and is helping us combat inflationary pressures. And third, with adjusted EBITDA of €160 million in the quarter, our margin on value-added revenue in the quarter was 23.7%, which is better than our 2019 VAR margin. Now, turn to slide nine and let's focus on our PARP segment performance. Adjusted EBITDA of €78 million decreased 17% compared to the third quarter of 2021. Volume was a headwind of €9 million, with higher shipments in automotive more than offset by lower shipments in packaging and specialty road products. Automotive shipments increased 16% in the quarter versus last year, as new platforms began to ramp up. Though we continue to be impacted by the semiconductor shortage and other supply chain challenges. Packaging shipments decreased 9% versus last year while demand in packaging continued to be resilient. Our shipments were lower in the quarter mainly due to the operating challenges at our Muscle Shoals facility that Jean-Marc mentioned earlier. Our Muscle Shoals team is highly dedicated and is working hard to recruit and train new hires, but this will take some time. Pricing mix was a headwind of €22 million primarily on improved contract pricing, including inflation-related pastures. Costs were a headwind of €35 million as a result of higher operating costs due to inflation across PARP and higher maintenance and supply costs at Muscle Shoals related to the people shortages that I just noted. FX translation, which is non-cash, was a tailwind of €6 million in the quarter due to a stronger U.S. dollar. Now, turn to slide 10 and let's focus on the A&T segment. Adjusted EBITDA of €45 million increased 136% compared to the third quarter of 2021. Volume was a tailwind of €4 million with higher aerospace shipments, more than offsetting lower TID shipments. Aerospace shipments were up 46% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 8% versus last year, reflecting a slowdown in certain industrial markets. Price and mix was a tailwind of €47 million on improved contract pricing, including inflation-related pastures and a stronger mix with more aerospace. Costs were a headwind of €30 million on higher operating costs due to inflation and the production ramp-up in aerospace. FX translation was a tailwind of €4 million in the quarter due to a stronger U.S. dollar. Now turn to slide 11. And let's focus on the AS&I segment. Adjusted EBITDA of €35 million increased by 7% compared to the third quarter of 2021. Volume was a €4 million tailwind with higher shipments in automotive. Automotive shipments increased 12% in the quarter versus last year as we experienced some improvement in activity levels. However, the business continues to be impacted by the semiconductor shortage and other supply chain challenges. Industry shipments were stable in the quarter versus last year. Price and mix was a €22 million tailwind primarily due to improved contract pricing, including inflation-related factors. Costs were a headwind of €23 million on higher operating costs mainly due to inflation. It is not on the slide, but I want to conclude with a quick comment on holdings and corporate. In the quarter, holdings and corporate was a tailwind of €5 million as Jean-Marc noted. The positive result was related to a number of one-off adjustments in the quarter. We continue to expect holdings and corporate costs to run at approximately €20 million per annum. Now turn to slide 12. And I want to give an update on the current inflationary environment we are facing and our focus on pricing and cost control to offset these pressures. In the third quarter, as expected, we continued to experience significant inflationary pressures across our business, many of which are exacerbated by the war in Ukraine. 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 in Europe increasingly forcing smelters to reduce or eliminate capacity. Aluminum smelter capacity today in Europe is down approximately 1.4 million tons compared to previous levels. We currently expect to be able to source our needs, but in certain cases at an incremental 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 2022 supply. Alloy supply is not currently a major concern for us. However, supply disruptions in certain cases are forcing us to resource alloy inputs at elevated market prices and will add significant incremental costs to the second half of 2022. Non-metal costs are also higher this year, particularly European energy. As previously noted, we purchased energy on a multi-year rolling forward basis, which has helped us to mitigate some of the current cost pressures. However, our energy costs will run significantly higher this year, particularly in Europe. Our total energy costs over the 2019 to 21 period averaged around €150 million per annum. Currently, we expect total energy costs to be around €250 million in 2022, and we expect total energy costs to be materially higher in 2023. As Jean-Marc noted, we are in active dialogue with our customers on passing through these costs and are making very good progress across all of our end markets. We will continue to update you as we progress these discussions. While not to the same extent, we’re also experiencing significant cost pressures across most other categories, which we expect to continue through the balance of 2022 and into 2023. Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results. Our businesses continued to deliver strong cost performance in the quarter, and our recently announced Vision ‘25 initiative is helping. Across the company, we are working to increase our efficiency, 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, where and where they do not we are working with our customers to include them. We have now for example been successful in incorporating magnesium and lithium price protections in most of our existing contracts in response to the extraordinary changes in these markets. The extraordinary increases in European energy prices support the need for some type of energy surcharge mechanism. And we have already been successful in adding one in a number of existing contracts, where we are signing new contracts, they are coming with better pricing and a range of inflationary protection. As you can see, in the bridge on the right, year-to-date we have been very successful with pricing mix, the largest increment being price in offsetting inflationary pressures. While inflation continues to be significant in 2022, we believe it's manageable, and that it will be largely offset by improved pricing and our relentless focus on cost control. The net impact of inflation and other cost increases and the actions we are taking to offset them are included in our guidance for 2022. 2022 has been a challenging year from the standpoint of inflationary cost pressures that have run north of €200 million. Looking forward to 2023, with energy prices at current levels and inflation generally remaining stubbornly elevated, we expect the inflationary pressures in 2023 to be greater than in 2022. We continue to believe that we will be able to offset most of this cost pressure in 2023 or in future periods with a combination of the tools that we have noted. Consistent with our past practice, it is too early to provide any specific guidance for 2023, especially this year given the current environment and the number of open initiatives. However, based on our current view of 2023 costs and business conditions and the potential lag between when cost materials and when they can be passed through, we believe that our 2023 adjusted EBITDA will be moderately lower than our 2022 adjusted EBITDA. Now let's turn to slide 13 and discuss our free cash flow. We generated €74 million of free cash flow in the third quarter, bringing our year-to-date total to €160 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 €625 million of free cash flow. Looking at 2022, we expect to generate free cash flow in excess of €170 million. This includes a number of strategic inventories we have built to ensure that we can meet our customer needs. Given the shifting market conditions, we will continue to evaluate this need over the fourth quarter. We expect CapEx to be between €265 million and €275 million this year. We expect cash interest to be approximately €110 million. We expect cash taxes of approximately €20 million. Now let's turn to slide 14 and discuss our balance sheet and liquidity position. At the end of the third quarter, our net debt was €2 billion. This was roughly flat compared to the end of 2021 as €160 million of free cash flow generated in the first nine months of this year was offset by unfavorable non-cash FX translation of €160 million with the strengthening of the U.S. dollar. Our leverage remained at a multi-year low of three times at the end of the third quarter, or down 0.6 times versus the end of the third quarter last year. Given our 2022 guidance for adjusted EBITDA and free cash flow and the impact of the stronger U.S. dollar, we expect leverage to end the year around three times. We remain committed to achieving our leverage target of 2.5 times and to maintaining our long term leverage target range of 1.5 times to 2.5 times. As you can see in our debt summary, we have no bond maturities until 2026. Our liquidity remained strong at €819 million at the end of the third quarter. We are very proud of the progress we have made on our capital structure and of the flexibility we are building. And I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to slide 16 please and discuss our current end market outlooks. The packaging market continues to be strong in both North America and Europe and domestic supply remains tight. In North America, we have seen some short-term inventory adjustments at the can-makers, but we believe this will be short-lived. The focus on sustainability is driving increased demand for infinitely recyclable aluminum cans, and we are confident in the long-term outlook for this end market. Even announced can-maker capacity additions in both regions, as well as recent announcements of Greenfield investments here in North America, will participate in this growth in both North America and Europe through a series of projects to unlock 200,000 tons of capacity by 2025 as announced at our Analyst Day earlier this year. Turning to automotive, near term, the demand continues to be hindered by the semiconductor shortage and other supply chain challenges, and the industry is already operating at a low utilization rate. However, we remain very positive on this market. Inventories are low, consumer demand remains high, and vehicle electrification and sustainability trends will continue to increase the demand for lightweighting and low CO2 recycled content. Let's turn now to Aerospace. Aerospace shipments were up around 50% in the third quarter versus last year, but are still only back to approximately two-thirds of pre-COVID levels. Major OEMs have announced field 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. As a chart on the left side of the page highlights, these three core end markets represent 76% of our ALTM revenue. We like the fundamentals in each and hence my consistent comments that we like our hand even in these uncertain times. Turning lastly to other specialties. In general, these markets are dependent on the health of the industrial economies in Europe and North America. And we are seeing signs of weakness in a number of end markets across both continents. It is also of note though, that many of the sustainability trends supporting growth in our core markets are very much at play here as well, in markets like those for semiconductors, rail, and solar. Defense applications, of course, remain in high demand in the current environment. On balance, even across our specialties portfolio, we like our hand too. Let's turn now to slide 17 to wrap up before we open the line for Q&A. Constellium delivered strong performance in the quarter, including record sales and adjusted EBITDA of €160 million. We extended our track record of free cash flow generation and our net-debt-adjusted EBITDA of three times remains a multi-year low. We continue to expect a strong 2022 and are targeting the low end of our adjusted EBITDA guidance range of €670 million to €690 million and free cash flow in excess of €170 million. The low end of our guidance reflects adjusted EBITDA growth of around 15% compared to 2021 and a very strong free cash flow yield. Achieving this will be a strong result, particularly given the significant number of unforeseeable challenges we have faced this year. Looking forward, 2023 will be another challenging year, given the extraordinary inflationary pressures we are facing, particularly on European energy costs and given the recent slowdown in certain industrial markets. As Peter noted, we are currently expecting higher inflationary pressures in 2023 than in 2022 but we remain confident in our ability to pass through most of these costs in 2023, or in future periods. As inflationary pressures subside, we believe we will emerge an even stronger company. Our business model provides a strong foundation for long-term success, and we believe we have an exciting future ahead with opportunities to grow our business and enhance profitability and return. We have a diversified portfolio and our end market positioning will enable us to take advantage of sustainability-driven secular growth trends, such as consumer preference for infinitely recyclable aluminum cans, lightweighting in transportation, and the electrification of the automotive fleet. The Constellium team has demonstrated its resilience and ability to execute across a range of different market conditions. And I am confident we will continue to do so. As a result, we are reiterating our long term guidance of adjusted EBITDA in excess of €800 million by 2025 and a target leverage range of 1.5 times to 2.5 times. We remain focused on operational performance, customer relations, free cash flow generation, the achievement of our ESG objectives, and shareholder value creation. In conclusion, I remain very optimistic about our future. With that operator, we will now open the Q&A session.

Thank you. Our first question is with Emily Chieng from Goldman Sachs. Emily, your line is open.

Good morning, Jean-Marc and Peter, and thank you for the update this morning. My first question is just around the power hedging strategy that you have. And understandably, the 2023 outlook probably has a few moving pieces there. But wanted to understand that if you can share any color around how the hedge book looks at 2023. And if you've been able to take advantage of some of the recent lowered European power prices right now?

Yes, thanks, Emily. So we had just we've set in the past on a multiyear rolling forward basis. And we layer in our hedges over time. And so if you take kind of a three-year horizon, that's typically what we're working with. And we aim to be approximately, kind of 75% to 80% hedge before the beginning of the year. So without saying exactly what our hedge position is for 2023, you can kind of figure it out in rough order of magnitude from that. And then with respect to your second question. We are watching energy prices very closely. What you've seen in the spot market has not really translated itself fully into the forward market. But we are watching that carefully. And hopefully, it will create some opportunities for us.

Great, thanks, Peter. And then a second question, if I may. I know you mentioned those fairly tight metal supply landscape out there right now. And in the past, I believe you've mentioned that you're no longer consuming Russian metal across your portfolio as well. But to the extent that we do get announcements from either the White House or the LME around further sanctioning of Russian metal, how do you feel see that impacting your ability to purchase primary aluminum?

So we’ll purchase some Russian metal, just for the record, and we've got contracts, which we honor; I mean, as you know, Rusal is not sanctioned. I think it's very difficult to ascertain what would happen if there were sanctions and what kind of sanctions would be against Rusal and whether they would apply to Europe or to America. But I think we went through that a little bit in 2018. And what happened was, obviously, the cessation of purchases from Rusal, and a big spike in NME and premiums, which means on one hand, it gets a little bit more difficult in the short term to find the metal we need, but on the other hand, our scrap profits are increasing because the LME goes up. So in terms of impact on EBITDA, which ultimately is what matters, I think you've got an upsetting mechanism here. And I think we'll be monitoring the situation complying with all the laws, regulations, or sanctions, obviously. And in terms of what it means, we'll see when it happens. But I think from any business standpoint, that shouldn't be a catastrophe.

And just one thing to jump into enhance what Jean-Marc said, we buy less than 5% of our metal from Rusal.

As well, you will have noted that our inventories are quite high, and deliberately so. And we plan to continue to maintain some high inventories going into the end of the year. So that we are insulated from the vicissitudes of what may happen in terms of what we saw from there.

Great, that's very helpful. Thank you both.

Yes, thank you. Good morning, Jean-Marc and Peter.

Good morning, Curt.

So I guess with respect to the guide for 2023. And if we look at year-to-date this year, based on your bridge, it seems like you're roughly €30 million ahead on price versus cost. And obviously, you're outlining materially higher energy and continued inflation next year. So, the 210 buckets year-to-date, can you kind of give us a little bit of idea that, if you're ahead this year, then are you kind of thinking that you're going to see a reversal of maybe the same magnitude? So theoretically, it's kind of like what you're saying the operating leverage is getting negated by price and cost. So if you can give any more granularity on how should we should be thinking about that, that'd be helpful.

I mean, we're not giving guidance, gentlemen. We're trying to give you some color as to how we look in the future, given the pressures we are feeling on the cost side with the inflation. And you're right; I mean if you look at page 12. We're ahead this year. We were able to improve our price on nickel products more than we suffer from inflation. However, there is a lag in terms of what we can do, how we can push through the cost pressures, and we are seeing more inflation on energy in the second half of this year than we have seen in the first half compared to 2021. So our judgment at this point in time is, if I look at the big bucket, from a volume standpoint, we've got 76% of our business, as Peter was saying, in markets that we like very much; our key strategic market packaging should continue to be a resilient area, there are no signs of weakening whatsoever. And it's going to continue to grow quite significantly next year. And then in automotive, we've been down in 2021 and 2022, kind of 20% below the trend rate in terms of auto build. So we think the fundamental on the volumes are quite good. And in our specialties, more than half of them are going to be very good going into next year. So we think on the volume side, it's not too bad and with the weakness we're seeing may continue into next year. But overall, as I said in the prepared remarks, we like our fundamentals. In terms of pricing, we've been very strong and very good at pushing through price increases. There are more price increases coming. But there's also knocks coming next year with very significant spikes we've seen in energy prices in Europe. And it's all a matter of how fast do we get to a resolution? How fast do we push that through energy surcharges. We've got PPI protection; typically, a PPI would apply to the price, we compute the PPI on the prior period's inflation and then push it into the next period. And there may be a lag here at the beginning of one year between when you get the higher prices compared to when you get the higher costs into your P&L. So I think that's what we're trying to describe with our best view, kind of under the current conditions. We think that life is going to penalize us going into next year, but to us, it's a temporary squeeze. And that's why we are reiterating very firmly our 2025 guidance to look into foreign markets in 2025. For energy, these are costs that will have been passed through given our business model. And once we factor that in, we still feel very comfortable with 2025 guidance; we just think there's going to be kind of a pinch next year as the slope of increase has been so tremendous. Does that help?

Okay, that's helpful. Yes. I mean, I know that. I think I believe you had PPI escalators for a fair amount of your business as well. In Europe, I mean, German PPI was up at 45% in September. So I assume that that will be a meaningful help coupled with the fact that you're trying to implement surcharges. But it seems like what you're saying is just the contractual nature of these contracts, it just takes time, potentially, to show the cost coming in, and then you can recoup price, or is it just the fact that energy is up so dramatically that the PPI is not going to be enough to help offset? And I know, it's still early to talk about next year as well? Because energy is around a lot.

Yes, but both factors come into play. I mean, it's, I mean, we're such in an extraordinary environment, that the PPI mechanism itself has not been tested with energy prices that go up by 500%, 600%, or 700%. Right. So we have to see how it comes out. But then, also, we were pushing through energy surcharges with success with some customers, but you're getting three months sooner or three months later; that does make a difference.

Okay, thank you very much. That's all I had.

Hey, good morning, Jean-Marc and Peter. Thank you for the time this morning. I have two questions. Maybe the first one. You mentioned the operation or setback at the Muscle Shoals facility. Can you just provide a service commentary around are they going to transition into Q4 in 2023? And then I think the second question was trying to listen better to the packaging market and the volume. I think volume went down 14% or 15% this quarter. I understand there is some seasonality, but I think that was an effect most of the decline. So just trying to understand maybe what happened this quarter and how to think about the next six to nine months for packaging?

Yes. Good morning, Corinne. Thanks for the question. So in terms of the operational issues at Muscle Shoals, they essentially boil down to the key factor, which is the finding and retaining talents. I saw a stat recently that turnover staff turnover in the U.S. in manufacturing is around 40%. To another that level, we're in the 20s. But that's painful in terms of bringing in new people, training them, and we have jobs that need pretty solid qualification and experience. So if it takes one year, two years to bring somebody to the top of their game, obviously, as you have more new people, the multiannual people spend time training them, that gets that has an impact on productivity. So that's really the key challenge we faced in Muscle Shoals. And that translates into less volume that we're able to produce. We still meet our contractual commitments, but there was always a band around them. So we tend to be at the lower end of the band right now. And in addition, there's been some inventory adjustments in the North American system, as the market is growing very fast. And that's never linear when the market grows too fast. So that's on the volume side. I mean, the root cause, and also the cost side, the lack of experienced trained operators, engineers, is costing us a little bit in volume and a little bit in costs. We've got another factor too, which is with a decrease in LME and Midwest premium price. Our recycling operations are a little bit less profitable than we used to say that we had something around €5 million of benefit to scrap spreads in the past; they are not here anymore. So it's a combination of these two factors. I mean, training experienced people leading to higher costs and lower volumes and scrap spreads that are creating the situation. Now in terms of how that projects rollout will not make a prediction on scrap spreads. In percentage terms, it continues to be very favorable; it’s just that there is the LME is lower, but I think getting the situation back to a target product which has Muscle Shoals will take a few quarters. We have stabilized the situation. We used to have 150 open positions; we’re around 30, 40 now, so we're making progress, but it's going to take six months, nine months to get back on track. And in terms of the packaging market, I continue to see it as free, strong, and solid. And I've got a pretty good outlook for the rest of the year. And next year, you're right to point out that there is seasonality. And typically Q4 is lower than Q3, which and the best quarter for the balance sheet is 3 to 2. So that's kind of my answer to your question.

Thank you. So just to follow up on the sense for this quarter when we see volume down like let's say 15% or so, was it like purely a seasonal move or was there anything coming from them?

No, there is a portion of it, which comes from the fact that lacking enough trained staff, we have not been able to run at the rate of productivity that we wished we would have. So there is some of it, which is inventory adjustments in the market. And there is some of it, which is us not reaching the productivity levels we wish we would have under normal circumstances.

Yes. Hey, guys, thanks a lot. I wanted to just touch again on the inventory situation with lower prices. We've been kind of watchful of inventory and work down. And I know, you mentioned that there's a reason to keep strategic inventories of certain alloys and so on. But there's still been a pretty sticky inventory level. So I guess to ask the question a different way. What do you think it takes to see an unwind there and an improvement in working capital release there?

Yes, thanks, Timna. I think, well, first of all, remember that we hedge our inventory. So from a kind of a metal price variability, there might be some translation impacts, but there shouldn't be material cash impacts on us. But in terms of what we're seeing, we still see a decent amount of uncertainty in the market in terms of metal supply, in terms of end market demand, and so forth. And all that's leading us to make sure that we want to be sure that we have the materials to kind of serve our customers. So as we see more stability and I think more stability would probably mean that, just to paint the picture, that we've got a little bit clearer guide on the direction of the economy, that number two, we have a little bit clearer guide on kind of where energy prices are going. And therefore, kind of the output from various smelters on metals and alloys is clear, then we'd be prepared to bring that down. But it's definitely an opportunity for us. And I'll remind everyone on the call that it's a significant source of cash for us when we do eventually unwind it. So.