Constellium SE Q1 FY2023 Earnings Call

Hello and welcome to the Constellium First Quarter 2023 Results Conference Call. My name is Alex, and I will be coordinating the call today. I will now hand over to your host, Jason Hershiser, Director of Investor Relations. Please go ahead.

Thank you, Alex. I would like to welcome everyone to our first quarter 2023 earnings call. On the call today, we have our Chief Executive Officer, Jean-Marc Germain and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q&A session. A copy of the slide presentation for today’s call is available on our website at constellium.com and today’s call is being recorded. Before we begin, I would like to encourage everyone to visit the company’s website and take a look at our recent filings. Today’s call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company’s anticipated financial and operating performance, future events and expectations and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements. Please refer to the factors presented under the heading Risk Factors in our annual report on Form 20-F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking 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 supplements 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 begin on Slide 5 and discuss the highlights from our first quarter results. I would like to start with safety, our number one priority. We delivered best-in-class safety performance in the first quarter with a recordable case rate of 1.6 accidents per million hours worked. In the first quarter, we had several sites achieve safety milestones with anniversaries for a number of years up to 8 without a recordable case. 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. While our performance in the quarter was excellent, we are always focused on maintaining and improving our safety performance, and we still have accidents happen. Turning to our financial results, shipments were 389,000 tons, down 3% compared to the first quarter of 2022, mainly due to lower shipments in PARP. Revenue of €2 billion decreased 1% compared to last year as improved price and mix was more than offset by lower 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 value-added revenue, which reflects our sales, excluding the cost of metal, was €754 million, up 16% compared to the same period last year. Our net income of €22 million in the quarter compares to €179 million in the first quarter of 2022. As you can see in the bridge on the top right, adjusted EBITDA was €166 million, slightly below the first quarter of 2022. A&T adjusted EBITDA was a new quarterly record and increased €20 million compared to last year, while AS&I adjusted EBITDA is a new first quarter record and increased €6 million versus last year. PARP adjusted EBITDA decreased €27 million in the quarter. Looking across our end markets, aerospace demand was very strong, with shipments up over 50% compared to last year. Automotive shipments in both rolled and extruded products were up double digits in the quarter versus last year. Packaging shipments were down in the quarter, due to inventory adjustments across the supply chain and lower end demand. We continue to face significant inflationary pressures which Jack will discuss in more detail. But thanks to our pricing power, contractual protections, improved mix, and solid execution by our team, we are managing the current environment quite well. Moving now to free cash flow. Our free cash flow in the quarter was negative €34 million, which was in line with our expectations. We continue to expect to generate positive free cash flow this year of greater than €125 million. We remain committed to generating positive free cash flows and deleveraging. As you can see on the bottom right of the slide, our leverage at the end of the first quarter was 2.8x, down 0.4x from the end of the first quarter last year. Overall, I am very proud of our first quarter performance. Looking forward, while there are uncertainties on the macroeconomic and geopolitical fronts, we like our end-market positioning and we are optimistic about our prospects for the remainder of this year and beyond. Based on our current performance and our current outlook, we are raising our guidance and expect adjusted EBITDA in the range of €650 million to €680 million and free cash flow in excess of €125 million in 2023. We also remain confident in our ability to deliver on our long-term target of adjusted EBITDA over €800 million in 2025. With that, I will now hand the call over to Jack 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 7. Value-added revenue or VAR was €754 million in the first quarter, up 16% compared to the same quarter last year. Looking at the first quarter, €157 million of this increase was due to improved price and mix in each of our segments. Volume was a headwind of €20 million due to lower shipments in PARP. Finally, metal impacts were a headwind of €40 million due to inflation on input costs, such as hardeners and alloying elements, as well as weaker scrap performance in the quarter compared to the same period last year. The balance of the change was due to favorable FX translation tied to a stronger U.S. dollar. There are two important takeaways from this slide. First, we grew our value-added revenue by 16% compared to last year. And second, we continue to have pricing power. Price and mix, and price specifically, is the biggest increment of our year-over-year variance and helped us offset inflationary pressures. Now turn to Slide 8 and let’s focus on our PARP segment performance. Adjusted EBITDA of €55 million decreased 33% compared to the first quarter of 2022. Volume was a headwind of €11 million, with higher shipments in automotive more than offset by lower shipments in packaging and specialty rolled products. Automotive shipments increased 19% in the quarter versus last year as new platforms continue to ramp up and demand generally appears stronger. Packaging shipments decreased 11% in the quarter versus last year due to inventory adjustments across the supply chain in both North America and Europe and lower demand. Price and mix was a tailwind of €47 million primarily on improved contract price, including inflation-related pass-throughs. Costs were a headwind of €64 million as a result of higher operating costs due to inflation, operating challenges at Muscle Shoals, and our favorable metal costs. As we discussed last quarter, our Muscle Shoals has been highly dedicated, and we are working hard to recruit new hires, but this will take some time. FX translation, which is non-cash, was a tailwind of €1 million in the quarter due to a stronger U.S. dollar. Now turn to Slide 9 and let’s focus on the A&T segment. Adjusted EBITDA of €73 million increased 37% compared to the first quarter of 2022. Volume was a tailwind of €9 million with higher aerospace shipments more than offsetting lower TID shipments. Aerospace shipments were up over 50% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 15% versus last year reflecting a slowdown in certain industrial markets partially offset by strong demand in other markets like defense. Price and mix was a tailwind of €57 million on improved contract pricing, including inflation-related pass-throughs, and a stronger mix with more aerospace. Costs were a headwind of €48 million as a result of higher operating costs due to inflation and production increases. FX translation, there was a tailwind of €2 million in the quarter due to a stronger U.S. dollar. Now let’s turn to Slide 10 and focus on the AS&I segment. Adjusted EBITDA of €43 million increased 17% compared to the first quarter of 2022, volume with a €1 million tailwind with higher shipments in automotive more than offsetting lower industry shipments. Automotive shipments increased 13% in the quarter versus last year as we continue to experience improvement in activity levels. Industry shipments were down 5% in the quarter versus last year. Price and mix was a €23 million tailwind primarily due to improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of €18 million on higher operating costs, mainly due to inflation. Now turn to Slide 11, where I want to give an update on the current inflationary environment we are facing and are focused on pricing and cost control to offset these pressures. In the first quarter, and as expected, we experienced broad-based and significant inflationary pressures across our business. As you know, we operate a pass-through business model, so we are not materially exposed to changes in the market price of aluminum, our largest cost input. That said, other metal and alloy supply remains tight today. And while we are confident about the security of supply, some of it does come at a higher cost. In addition, labor and other non-metal costs will also be higher this year, particularly European energy. As previously noted, we purchase energy on a multi-year rolling forward basis, which has helped us to mitigate some of the energy cost pressures and helped us to smooth out some of the steep increases in costs. As of today, our 2023 energy costs are largely secured by the higher average prices. Both electricity and gas forward energy prices in Europe have come down from their 2022 peaks, but still remain well above historical averages. Given these cost pressures, we continue to work across a number of fronts to mitigate their impact on results. We have demonstrated strong cost performance in the past years and will continue our relentless focus in 2023, including continued execution on our previously announced Division 25 initiative. Across the company, we’re working to increase our efficiency, reduce our consumption of expensive inputs, and lower our fixed costs. In addition, as we previously noted, many of our existing contracts have inflationary protections, such as PPI inflator surcharge mechanisms, and where they do not, we’re working with our customers to include them. Where we’re signing new contracts, they’re coming with better pricing and a range of inflationary protections. We have made very good progress across all of our end markets. As you can see in the bridge on the right, in the first quarter of this year, we were very successful with price and mix, with the largest increment being pricing offsetting inflationary pressures. As we mentioned last quarter, we expect inflationary cost pressure to run close to €300 million in 2023. We continue to believe that we will be able to offset most of this cost pressure in 2023 and the rest in future periods, with a combination of the tools we know that in our relentless focus on cost control. Now let’s turn to Slide 12 and discuss our free cash flow. Our free cash flow was negative €34 million in the first quarter, which was in line with our expectations. The result in the quarter reflects a strong adjusted EBITDA offset mainly by higher capital expenditures and increased working capital. Looking at 2023, we continue to expect to generate free cash flow in excess of €125 million for the full year, which we expect to be weighted more towards the second half. As we noted last quarter, we expect working capital to be a use of cash in the first half of the year and a source of cash in the second half, and based on current forecasts, roughly neutral for the full year. We expect EapEx, cash interest, and cash taxes in line with our previous guidance. Now let’s turn to Slide 13 and discuss our balance sheet liquidity position. At the end of the first quarter, our net debt of €1.9 billion increased slightly compared to the end of 2022 given the free cash flow in the quarter. Our leverage remained at 2.8x at the end of the first quarter, down 0.4x versus the end of the first quarter of 2022. We remain committed to achieving our average target of 2.5x and maintaining our long-term target leverage range of 1.5x to 2.5x. As you can see from our debt summary, we have no bond maturities until 2026. Our liquidity remains strong at €688 million as of the end of the first quarter. We’re very proud of the progress we have made in our capital structure and the financial flexibility we’re building. I will now hand the call back to Jean-Marc.

Thank you, Jack. Let’s move on to Slide 15 and discuss our current end market outlook. Starting with packaging, in packaging, the inventory adjustments continued across the supply chain in both North America and Europe. We are starting to see some signs of demand weakness in both regions as a result of the current inflationary environment, a lack of promotional activity, and following a multi-year period of rapid growth during COVID. We are confident in the long-term outlook for this end market, though, given can makers' capacity additions in both regions, recent announcements of Greenfield investments here in North America, and the growing consumer preference for the sustainable aluminium beverage can. Longer term, we expect packaging markets to grow in the low to mid-single digits in both North America and Europe. We will participate in this growth in both regions as announced at our Analyst Day last year. As Jack noted, the company is highly focused on stabilizing the operating challenges we have been experiencing at Muscle Shoals so that we can take advantage of the end market dynamics in North America. We’re encouraged by the improved performance we have seen recently at Muscle Shoals, and remain very confident in our ability to restore the plant's profitability and performance over the course of 2023. Turning now to automotive. OEM sales and production numbers globally are still at a low base compared to pre-COVID levels, with uncertainty continuing in the order books. However, we remain very positive in this market, and increased demand in PARP and AS&I gives us reason for optimism. Automotive inventories are low, consumer demand remains high, and vehicle electrification and sustainability trends will continue to drive demand for lightweighting and the use of aluminium products. Let’s turn now to aerospace. The recovery in aerospace continued in the quarter, with shipments up over 50% versus last year, though still below pre-COVID levels. Major OEMs have announced build rate increases in the short-term and the desire for further increases in the medium-term. We remain confident that the long-term fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In addition, demand is strong in the business and regional jet markets, and the Defense and Space markets. As a chart on the left side of the page highlights, these three core end markets represent 76% of our last 12 months revenue. We like the fundamentals in each and, as I have said in the past, we like our hand and the options it affords us. Turning lastly to other specialties. While we do see some weakness in segments like general engineering plate and building and construction, demand remains solid in many of our specialties and markets. Demand has been more resilient in North America than in Europe. In general, these other markets are dependent on the health of the industrial economies in each region. In TRD rolled products, demand remains strong in markets like defense and in transportation in North America. In industry extrusions, demand is still strong in sectors like solar and rail. It is also of note that many of the sustainability trends supporting growth in our core markets are very much at play here in other specialties as well. In summary, we continue to like the prospects for the end markets we serve. And we strongly believe that the diversification of our end markets is an asset for the company. Let’s turn to Slide 16, where I want to highlight several favorable market trends that we see as tremendous opportunities for our future. As you can see in the table on the left part of the slide, the majority of our portfolio today is serving markets currently benefiting from durable sustainability-driven secular growth. The important takeaway here is that aluminium is a catalyst behind the secular growth. Given its sustainable attributes, aluminium is infinitely recyclable and does not lose its properties when recycled. As a result, aluminium will play a critical role in the circular economy and will be a driver of growth in lightweighting, electrification, and sustainable packaging. As we mentioned before, we’re continuing to invest in and grow our recycling capabilities. The recycling center we are building is well underway, we started and ramped up on track for 2025. We also believe the current regulatory environment further supports the long-term growth of our products. For example, legislation in both Europe and North America currently supports the increased adoption of electric vehicles and the increased focus on recycling. In packaging, consumers and brand owners today consider aluminium cans as the beverage container of choice. The aluminium can is more recyclable than both plastic and glass and can be recycled at a profit. It provides a superior marketing tool using the can as a billboard. It is lightweight, easier to transport and store, and provides better shelf utilization in stores. Aluminium cans are also recession resilient. Even in today’s environment, where we have seen inventory corrections across packaging supply chains, and some signs of demand weakness as a result of inflation, aluminium cans continue to outperform other substrates like plastic and glass. Lightweighting creates significant opportunities across multiple end markets. In automotive, lightweighting is critical to reducing emissions in vehicles with internal combustion engines and also to extend the range for battery electric vehicles. Aluminium is continuing to gain share in automotive as a result, and Constellium is uniquely positioned with greater exposure to premium vehicles like trucks and SUVs, all of which tend to have the highest amount of aluminium content, as well as opportunities in both rolled and extrusion-based solutions. Electrification accelerates the growth opportunities for aluminium in automotive. On average, battery electric vehicles use 2 to 3x more aluminium sheet and extrusions than their traditional internal combustion engine counterparts. More and more of the fleet is going electric in both North America and Europe, which is supported by legislation and customer incentives. Constellium is well positioned today with our diverse and balanced portfolio to capture the secular growth fueled by sustainability. Turning now to Slide 17, we detail our key messages and financial guidance. Constellium has delivered strong performance in the first quarter. I’m very proud of our entire team, as we achieved solid operational performance and strong cost control despite a number of challenges, including significant inflationary pressures. Looking forward, 2023 will be another challenging year, given the extraordinary inflationary pressures we are facing, particularly on European energy costs. As Jack noted, we are currently expecting comparable inflationary pressures in 2023, to those we experienced in 2022. But we remain confident in our ability to pass through most of these costs in 2023, and the rest in future periods. Based on our current outlook, we are raising our guidance for 2023 and now expect adjusted EBITDA in the range of €650 million to €680 million and free cash flow in excess of €125 million. I also want to reiterate our long-term guidance of adjusted EBITDA in excess of €800 million by 2025. And our target leverage range of 1.5 to 2.5x. And let me add this guidance is based on our current energy positions, including higher forms of energy prices as of today. As inflationary pressures subside, we believe we will emerge as an even stronger company. Our business model provides a strong foundation for long-term success. We believe we have substantial opportunities to grow our business and enhance profitability and returns with a diversified portfolio. Our end market positioning will enable us to take advantage of sustainability driven secular growth trends, such as consumer preference for infinitely recyclable aluminium cans, lightweighting in transportation, the electrification of the automotive fleet, and the increased focus on recycling. The Constellium team has demonstrated its resilience and ability to execute across a range of different market conditions. I am confident we will continue to do so. We remain focused on executing our strategy, driving operational performance, generating free cash flow, achieving our ESG objectives, and shareholder value creation. In conclusion, I remain very optimistic about our future. With that, Alex, we will now open the Q&A session please.

Thank you. Our first question for today comes from Emily Chieng from Goldman Sachs. Emily, your line is now open. Please go ahead.

Good morning, Jean-Marc and Jack, thank you for the update today. I wanted to start with the packaging markets. I know you’ve talked a little bit about the destocking cycle. I think last quarter, you also mentioned you were still confident in meeting internal volume targets for packaging this year, given the contractual thresholds you have in place. But is there any risk to that view at this point, and for your customers, specifically, in what you’re seeing there? Where does Constellium stand in the destocking cycle?

Yes, good morning, Emily. Thanks for the question. So on packaging, we remain confident in our ability to achieve our internal targets. But they are towards the low end of the variance that is allowed within our contractual arrangements with customers because we are seeing not only destocking, but as I mentioned, some weakness in end demand. I think that’s due to two factors. One is inflation, which clearly squeezes disposable income for consumers. But more importantly, there’s been no promotional activity of late, and these factors impact cans and beverages in general. You see that in the results of the beverage companies where pricing is very strong for them, but volume is weaker. So I think we’re in a place where we believe the market will still be growing over the medium-term. But this year is a little bit of a challenge and will be towards the lower end of our expectations volume-wise.

Understood. And maybe a second question, just shifting gears a little to the Muscle Shoals asset. I know you mentioned there were some labor inefficiencies that were driving the weakness, but were there any other operational issues or will we just expect over time as labor inefficiencies position that asset for better profitability?

Yes, so yes, we expect to recover by the end of the year, as I mentioned, since the last few earnings calls, it takes time to recruit and train people. We are making progress; we have fewer open positions; we are spending a lot on maintenance on the assets as well. So that’s a headwind in our cost variance when you look at PARP performance versus last year, this quarter versus last year. But I think we’re setting the foundation for a return to solid operating performance and financial performance by the end of the year. The encouraging signs that we’re seeing is that when we look at our indicators, there are more green lights on the dashboard, in terms of performance of the plant. And that allows us, for instance, even though can sheet is weak, as we mentioned, to capitalize on opportunities in automotive, and that’s one of the beauties of our diversified model where, if one market is not doing well, there are opportunities in other markets that we can seize. So I’m quite encouraged by what I’m seeing but typically, operational performance improves before financial performance improves. I think by the end of the year, we will be in a very good place.

Great, thank you.

Thank you. Our next question comes from Curt Woodworth of Credit Suisse. Your line is now open. Please go ahead.

Great, thanks. Good morning, Jean-Marc and Jack. First question is around changes to the guidance. It seems like from a cost perspective, you are still seeing a €300 million target. You did raise the guidance. I’m just kind of curious about what has changed from the update you gave towards the end of last year; we were looking for a more meaningful decline. And then with respect to price cost, it seems like you’re getting a very strong price mix this quarter of €157 million. So, that’s a pretty strong run rate. But it seems like you intimated that you still would be negative price cost this year. Could you give us any color on what you think net price is embedded in the guidance?

Yes, thank you, Curt. Let me start with your first question just to give you a little bit of color here. I think, as we finished Q1, it was a little better than we had expected, just given the favorable trends in aerospace and automotive, as well as some of the sub-segments within the industrial markets. We expect some of that to continue into the second quarter; aerospace and automotive should continue to perform, while lower can stock demand may also persist into this quarter. The visibility for some of the other markets is not at the level we’re used to seeing. Remember, you also have the continued cost pressure from inflation, as well as from Ravenswood's activities, given the strengthening in our aerospace and automotive businesses. That’s why we are fundamentally not really changing our existing views and outlooks for the second half of the year, and that kind of explains the guidance. And then on to your second question about cost side; we did call out expecting to see high levels of inflation, around €300 million. We're kind of one quarter into that, but we are confident in our ability to offset some of the cost with the pricing power that we have.

And if I step back, Curt, when we were late last year, we were concerned about this big wave of inflationary pressures—would we be quick enough to pass that through? There was no doubt in our minds that we could pass it through, but the pace at which we can do that has a significant impact on 2023 outcomes. We were prudent in our assessment of how well we could negotiate with customers, and our customers have been supportive. We are in a much better place than we thought we would be six months or three months ago, and that’s why we see less of a pinch.

Okay. And then one follow-up on packaging for me as well. At the Analyst Day, you talked about 200,000 tons of incremental can sheet by '25 and ultimately estimated that the duration of these contracts was being extended up to, I think, 4 years to 5 years. Can you comment on how much of that you have contracted at this point in time? Obviously, on the beverage can side, there have been some push-outs in the capacity and the CapEx around that; do you still feel comfortable with that 175 to 200 number you quoted? Thank you, guys.

Yes. So, we did communicate last year at the Analyst Day, 200,000 tons of additional volumes in can sheet. Now, that’s a '26 number, because it’s the run rate in '25, due to the ramp-up. We are 80% to 90% contracted on those. As you know, there is some variance within the contractual commitments, so we can come in a little lower, but not meaningfully lower, if weakness persists. So, we feel very comfortable about this market, the capital deployment plans we have. Remember that these products use the same lines as the automotive line, so we have versatility and optionality in terms of where we decide to use that capacity. So, we feel very good about the outlook, and we are essentially close to 90% contract.

Okay. Thanks very much.

Thank you.

Thank you. Our next question comes from Timna Tanners of Wolfe Research. Your line is now open. Please go ahead.

Hey. Good morning. Just a few follow-ups regarding the percentage of your tonnage that you think you can pass-through cost pressures on. I think in the past, you have talked about 90% to 95% of costs you could pass-through in a given year. I know you alluded to some spillage into further time periods; is that 90% to 95% still a good frame of reference?

Yes, I think it’s directional, but it’s good. And as you can see on the variance chart, in Page 11 of the presentation, you see a price and mix variance of 138. There is an element of mix in there, so it’s not all price. And on the cost variance of 130, it’s not just inflation; there are other factors like, for instance, we are bringing in more people in aerospace and transportation because of the booming demand. We are spending more on maintenance in our facilities to ensure we are ready for the future. But overall, yes, I think the numbers show our ability to pass through most of the inflation as it happens, with the rest in the following periods.

Okay, great. And then I know you addressed the can sheet expansion with Curt, but I thought it would be helpful to get an update across the board with some of those initiatives that you had laid out for us.

Sure. Those initiatives are really the foundation for the over €800 million of EBITDA guidance we give for 2025. Looking at the different elements there, maybe by market, we talked about can sheets, seeing 2025, it’s roughly 140,000 tons that would be for the year, right? Most of that, as I mentioned, 90% is contracted essentially. We are a little bit behind given the current market situation overall, because of the weakness in cans. But I think the silver lining here is that cans are still preferred by brands and consumers. Additionally, with the increased focus on recycling, we see that aluminium pays for its recycling, while plastic and glass do not. This means that as legislation evolves in favor of recycling, demand for cans will only increase, if not for their favorable recycling properties. The other big initiative we have is the recycling center; it’s going on budget and on time. We are very excited about it. I visited it just a couple of months ago, and it’s moving quickly now that we have started construction. We will start up at the end of 2024 and ramp it up very quickly. I think we will see more recycling mandated in Europe, creating tremendous opportunities for us. The financial returns when we announced this are likely to be better than we thought. The automotive market continues to be strong. Recent announcements from the Biden administration are turbocharging the growth of electric vehicles, which will accelerate aluminium's adoption. In the aerospace market, we have very good positions with Airbus, Boeing, and about every OEM in the market; the demand we’re experiencing will continue for the next few years.

Yes. I just wanted an update, so that’s great. Thank you very much.

Thank you.

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

Hey. Good morning, Jean-Marc and team. I am just going to go back on the packaging and the trend that you are seeing. We normally see higher seasonality in Q2 and Q3. Would you expect that to be relatively muted this year, or do you still expect to have intermediate seasonality coming through?

So, I am not sure I heard your question, Corinne, exactly. But yes, typically, you have the strong first half in can stock given the seasonality of the business. Now, this year, we do have this lower demand factor and destocking phenomenon that’s happening. We are seeing it continuing into Q2, so that’s going to have a little bit of impact on volume. But we are hopeful that things will come back in the second half.

I think what’s going to drive it, really, which is unknown still, is whether the beverage companies will run promotions. I was at my local store the other day, and what I used to get for €6, I am paying €9 for it now. So, that’s a change. If there are promotions, I think that’s going to spur some more demand. If not, we’ll have a much more muted environment from a seasonality standpoint than what we are used to seeing.

It makes sense. And then maybe a follow-up on competition; I think Steel Dynamics has been announcing further expansion or capacity coming sooner than maybe the market was expected. Can you comment if that creates any weight for you, and in which segments maybe?

Yes. I don’t know the specifics of what you are mentioning regarding Steel Dynamics. But in our supply-demand projections, we believe we need more capacity as a North American industry. This capacity is needed because of the growth we expect in both can and automotive, alongside a substantial share of imports, which we do not believe are competitive or provide the good service levels that our can makers need. We believe that capacity is needed. If it comes sooner than when it is exactly needed, it could be a problem. But as I mentioned, we are more than 90% contracted through 2025, so we feel we are in a very good place.

Great, thank you.

Our next question comes from Josh Sullivan of The Benchmark Company. Josh, your line is now open. Please go ahead.

Hey. Good morning.

Good morning, Josh.

Just as far as the record aerospace demand, is that broad-based across airframers and customers? Is there any particular platform driving the near-term results? We have seen some other material suppliers talk about inventory stocking for the A350. Does that mean your aluminium lithium products might be accelerating faster than other products?

So, Josh, we still see narrowbody as a key driver for growth. A350 may come back with increased build rates; it’s not a substantial driver just yet. We are seeing demand in a broad basis, much more. I remind you that when we went through COVID, our shipments and production went down by 50% when the build rates only went down by 30%. There is an element of restocking that needs to happen. It is very difficult to know how long it’s going to take to restock. What we are seeing through the supply chain is that everyone is concerned about not running out of product. This is really accelerating the growth that is needed. However, we are still shipping below what is needed to meet the build rates announced by the OEMs, so there are longer passive opportunities for us for ‘24 and ‘25.

And then just one on the automotive side. In 2022, the number of plant shutdowns due to various supply chain issues, how should we think of the recent automotive strength for Constellium just relative to restarting some of that production and inventory catch-up versus organic growth relative to kind of full year SAR expectations?

So, I think the full-year SAR expectations are both North America and Europe kind of 6% to 7%. And we are growing double digits. The gap here is a result of a number of factors, but one that’s important is further penetration of aluminium. We feel pretty good about our ability to maximize the use of our automotive assets, and we are not fully sold out just yet. We think there is some nice upside there going into next year as well.

Got it. Thank you for the time.

Thank you.

Thank you. Our next question comes from Sean Wondrack of Constellium. Sean, your line is now open. Please go ahead.

Hi, Jean-Marc and Jack. Thank you for taking my question.

We know you are still at Deutsche Bank, by the way.

So, just looking today, it’s great to see that you’ve increased the guidance. What has sort of changed versus your prior outlook that you gave us?

Yes. Our beat in the first quarter clearly helps us be more comfortable with our ability to pass-through the price increases. But, as Jack mentioned earlier, for the nine months to go, we are not really changing our guidance. We feel like there are still uncertainties around the geopolitical environment. The order books in some of our segments tend to be short. We see a lot of strength in auto and aero for instance. However, there is still uncertainty around packaging with regards to promotions. We feel very good about our increased guidance, but we are not calling it yet real upside for the next nine months.

Great. And do you think the fact that the packaging guys might be seeing some easing inflationary trends might increase their willingness to lower prices a little?

Possibly. Yes, I hope so.

Great. Thank you very much for taking my questions.

Thank you.

Thank you. Our next question comes from Katja Jancic from BMO Capital Markets. Your line is now open. Please go ahead.

Hi. Thank you for taking my question. Just quickly on the A&T segment, either the offered ton was very strong this quarter. Last quarter, you mentioned margins that business should be somewhere between €800 and €900 per ton. How should we think about margins going forward or over the next few quarters?

So, obviously, A&T had a stellar performance this quarter and continued to have a stellar performance, very proud of the achievement. I think first-quarter margins really reflect continued pull from customers, so more aerospace as part of the portfolio, aero, and TID, but also more favorable aerospace mix within aero. The TID business is also holding up pretty strong. Remember, the business flexed quite a bit in terms of cost during COVID, in the down cycle, and not all of that has caught up in the up-cycling environment we are in today, benefiting margins. We saw some of that in the fourth quarter of last year, it was throughout last year, and is continuing this year. Over time, we do expect costs to catch up, but margins for this business unit should stay very strong in an up-cycling environment.

So, in other words, the €800 to €900 range, Katja, is kind of an average across cycles for the aerospace and transportation division. In a very strong aerospace market going up, margins will be above that range, and I think that’s what we’re seeing now. So, we would expect for this year to be above the €800 to €900 average through the cycle.

Okay. Thank you so much.

Thank you.

Thank you. We have no further questions. I will hand back to Jean-Marc Germain for any further remarks.

Well, thank you, Alex, and thank you everybody for participating today. We are delighted with our performance in the first quarter. I think it’s a good foundation for a strong and better than expected 2023. Thank you everybody and stay safe. Goodbye.

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