Earnings Call Transcript - CSTM Q3 2021

Operator, Operator

Good day, and thank you for being with us. Welcome to the Constellium Third Quarter 2021 Results Conference Call. I would now like to turn the conference over to your first speaker today, Ryan Wentling, Director of Investor Relations. Thank you. Please proceed.

Ryan Wentling, Director of Investor Relations

Thank you, operator. I would like to welcome everyone to our third quarter 2021 earnings call. On the call today are our Chief Executive Officer, Jean-Marc Germain; and our Chief Financial Officer, Peter Matt. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at constellium.com, and today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events and expectations and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20-F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which supplement our IFRS disclosures. I would now like to hand the call over to Jean-Marc.

Jean-Marc Germain, CEO

Thanks, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's turn to Slide 5 and discuss the highlights from our third quarter results. I would like to start with safety, our #1 priority. Our year-to-date recordable case rate was 1.8 per million hours worked, in line with our record performance in 2020. I would like to specifically recognize the efforts at Neuf-Brisach, Singen and Gottmadingen. Each of these locations achieved more than 1 million hours worked without a recordable case in the third quarter. Shipments were 395,000 tons, that's up 12% compared to the third quarter of 2020. Revenue increased 35% to €1.6 billion. This was primarily due to higher metal prices and higher shipments. Remember, while our revenues are affected by changes in metal prices, we operate at a pass-through business model, which minimizes our exposure to metal risk. Net income of €19 million compares to a net income of €20 million in the third quarter of 2020. Adjusted EBITDA was a record €143 million, 14% above the third quarter of 2020 and 3% above our results from the third quarter of 2019 pre-pandemic. Strong end market demand, particularly from our packaging and industrial customers and solid cost control helped us overcome the reduced contribution from aerospace, the continued impact from the semiconductor shortage and increased inflationary pressures. I am very pleased with our team's strong execution again this quarter. Looking forward, we are updating our 2021 adjusted EBITDA guidance to a range of €550 million to €560 million. That compares to our previous guidance of €545 million to €560 million. We extended our track record of consistent free cash flow generation with €40 million in the quarter, bringing our total to €121 million through the first 9 months. We continue to expect free cash flow in excess of €125 million in 2021. Moving now to leverage. As you can see in the chart on the bottom right, our leverage declined to 3.6x at the end of the third quarter, down a full turn from the first quarter and at a multiyear low. We remain committed to reducing our leverage to our long-term targets of 2.5x. We are also acting on our commitment to reduce gross debt with our recent announcement of the redemption of $200 million of our 2026 notes. Overall, I am very proud of our third quarter performance. We delivered strong adjusted EBITDA, solid free cash flow generation and further deleveraging in excess of our expectations. With that, I will now hand the call over to Peter for further details on our financial performance. Peter?

Peter Matt, CFO

Thank you, Jean-Marc, and thank you, everyone, for joining the call today. Let's turn to Slide 7. For the third quarter of 2021, Constellium achieved €143 million of adjusted EBITDA, an increase of 14% compared to the third quarter of 2020. Compared to the third quarter of last year, PARP adjusted EBITDA of €94 million increased by €9 million, A&T adjusted EBITDA of €20 million increased by €10 million and AS&I adjusted EBITDA of €32 million decreased by €1 million. Holdings and corporate costs of €3 million increased by €1 million compared to last year. For the first 9 months of 2021, Constellium achieved €434 million of adjusted EBITDA, a 23% increase compared to the first 9 months of 2020. PARP and A&T adjusted EBITDA increased compared to the prior year on strong overall performance, while AS&I adjusted EBITDA declined due to weaker automotive shipments as a result of the semiconductor shortage. Now let's focus on our segment performance. Turn to Slide 8 for the PARP segment. Adjusted EBITDA of €94 million increased 10% compared to the third quarter of 2020. Volume was a €17 million tailwind as shipments increased 9% compared to the third quarter of 2020. Packaging shipments increased 12% on strong demand, while automotive shipments decreased 8% on continued effects from the semiconductor shortage. We continue to expect the strength in packaging to offset the weakness in automotive. Price and mix was a headwind of €8 million on a lower share of automotive shipments. Costs were a tailwind of €1 million as favorable metal costs offset higher maintenance and labor costs. FX translation, which is noncash, was a headwind of €1 million in the quarter due to a weaker U.S. dollar. Now I'll turn to Slide 9, and let's focus on the A&T segment. Adjusted EBITDA of €20 million increased 91% compared to the third quarter of 2020. Volume was a tailwind of €38 million. TID shipments increased 86% on strong broad-based demand in both North America and Europe, while aerospace shipments declined 13%. Price and mix was a headwind of €31 million due to a lower share of aerospace shipments relative to TID. Costs were a tailwind of €3 million as improved productivity and favorable metal costs offset higher maintenance, labor and outside processing costs. Now turn to Slide 10, and let's focus on the AS&I segment. Adjusted EBITDA of €32 million decreased by €1 million compared to the third quarter of 2020. Volume was a €3 million tailwind as industry shipments increased 24% on strong broad-based demand, while automotive shipments decreased 16% due to reduced demand from the semiconductor shortage. Price and mix was a €5 million headwind due to increased share of industry shipments relative to automotive. And cost was a €1 million tailwind on solid cost control. Now turn to Slide 11, where I want to highlight our continued strong cost performance. On the top left of the slide, you can see that our cost flex was 96% in the third quarter. In other words, our costs, including metal costs, increased 96% for every euro increase in revenue. In light of the inflationary pressures we are experiencing, we are pleased with this result, and each of our businesses demonstrated strong cost performance. We are seeing increasing signs of inflation across the business, specifically in energy, alloying agents, transportation and labor. Some of the inflationary pressures are likely structural, but we expect many to be transitory. In the meantime, we are working on numerous mitigation strategies to offset these costs. Importantly, our significant efforts in reducing structural costs by €75 million through Horizon '22 have provided a solid foundation from which to manage the current inflationary pressures and support future profitability. We will need more time to fully assess the impacts on our future results, but we expect these pressures will have a greater impact in '22 than what we are experiencing in '21 as we have already secured the vast majority of our inputs for 2021. Based on our current outlook, we expect the inflationary impacts to be manageable and to a large extent offset by higher pricing. This includes the effect of signing new contracts at higher prices and the inflation protection or cost pass-throughs within existing contracts. We are also having success implementing inflation protections in our new multiyear contracts. Lastly, I would like to address magnesium availability. China has produced 80% to 85% of the world's magnesium, but now is operating at approximately 50% of those levels. If this shortage continues for too long, many industries and supply chains will be impacted. Based on where we stand today, we expect to be able to meet our contractual requirements for the fourth quarter, and we believe we are in good shape for the first quarter. We have less clarity further into '22, and the situation remains quite fluid. While it is important to recognize that there are some factors that are out of our control like Chinese production levels or a force majeure at a U.S. supplier, we are taking internal mitigation actions, and we are taking steps to secure the magnesium we need, albeit at elevated prices so that we can continue to support our customers. Now let's turn to Slide 12 and discuss free cash flow. We generated €40 million of free cash flow in the third quarter, bringing our year-to-date total to €121 million. As you can see at the bottom left of the slide, we delivered on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated over €450 million of free cash flow. Looking forward, we expect to generate in excess of €125 million of free cash flow in 2021. We expect relatively muted free cash flow generation in the fourth quarter as a result of timing of CapEx spending and continued inventory build to help meet customer demand. We remain committed to significant sustainable free cash flow generation. Now let's turn to Slide 13 and discuss our balance sheet and liquidity position. At the end of the third quarter, our net debt of €2 billion declined slightly compared to the end of 2020 as free cash flow generation was partially offset by €60 million of FX translation. Our leverage reached a multiyear low of 3.6x at the end of the third quarter. We continue to expect our leverage to end the year at or below 3.5x. And as you can see in our debt summary, we have no bond maturities until 2026. Yesterday, we announced the redemption of $200 million of our 5.875% senior notes due 2026, which is expected to save us approximately €8 million of annual interest cost and is consistent with our objective of reducing gross debt. In total, our capital structure actions in 2021 are expected to save €38 million of annualized cash interest. We are rapidly approaching our cash interest target of less than €100 million per annum. This is a fantastic achievement. Our liquidity was strong at €900 million as of the end of the third quarter. As we have noted on recent calls, we will continue to gradually reduce our excess liquidity as the risk of COVID recedes.

Jean-Marc Germain, CEO

Thank you, Peter. Let's turn now to Slide 15 and discuss our portfolio and our end market outlooks. I would first like to highlight a diverse and balanced portfolio of end markets. On the left, you can see the breakout of our LTM revenue across our 4 end markets. The packaging market is strong in both North America and Europe. We expect mid-single digit demand growth in the medium term. This growth is underwritten by new can lines announced by our customers in both North America and Europe. The can sheet market continues to improve, and we have continued to secure long-term strategic agreements with our customers. These agreements reflect the substantial value that we bring to the market as a major domestic supplier in both Europe and the U.S. As I mentioned last quarter, we are investigating a number of initiatives to increase can sheet capacity across our packaging platform to serve this growing market. We expect this will be achieved through both debottlenecking and additional investments. Moving now to automotive. Near term, automotive demand continues to be hindered by the semiconductor shortage. OEMs experienced production stoppages throughout the third quarter, and we expect this to continue into the fourth quarter. However, we believe underlying consumer demand remains strong, especially for light trucks, SUVs and luxury vehicles where Constellium has greater exposure. Let's turn now to aerospace. Demand for our products has remained at a low level. However, optimism in the aerospace supply chain is increasing. While difficult to pinpoint precise timing, we expect to show year-over-year growth in aerospace shipments in the coming quarters. Over the longer term, we remain confident that the fundamentals driving aerospace demand growth remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In other specialties, we continue to execute on our strategy of expanding in niche products in a diversified range of markets. In general, these markets are dependent upon the health of the industrial economies in Europe and North America. Specialties markets are generally strong in both Europe and North America. Across each of these four end markets, we have demonstrated to our customers the value that Constellium's products bring. Over the past 2 years, we have been able to increase pricing and obtain contractual protections. As Peter mentioned earlier, we expect these price increases to largely offset the inflation we are experiencing. While we obviously would prefer not to be facing the current inflationary pressures, we are much better equipped to manage them. Let's turn now to Page 16. On the left side of the slide, our diversified portfolio benefits from positive market trends across each of our segments. Many of these are long-term trends driven by sustainability, such as the circular economy, lightweighting, and electrification in transportation, along with the aluminum can being a preferred beverage package. We continue to benefit from the resilience of can sheet during economic downturns, as seen during the COVID crisis, and the diversification advantages from our focus on other specialties. Aluminum plays a significant role in the circular economy. It is infinitely recyclable and retains its properties during recycling, unlike paper or plastic. As one of the largest recyclers of aluminum globally, Constellium is crucial to this trend. We plan to enhance this advantage with our investment in a recycling center in Europe. Initially, we aimed to add at least 60,000 tons of slab making capacity, but we are now exploring a larger facility that could add around 130,000 tons. The capital expenditure for this project will be spread over about three years and will not hinder our debt reduction efforts. This is a strategically important project for Constellium. With the increasing use of aluminum, there is a rising demand for recycling end-of-life scrap. We will contribute to the circular economy by utilizing recycled materials bought at a discount to primary aluminum and casting our own slabs, which will enhance our supply security and reduce our dependence on virgin metals, including aluminum and other alloys. Additionally, we will meet customer demands for products with greater recycled content and lower CO2 footprints. At Constellium, we are increasingly conscious of our environmental impact, and our customers and their consumers share this awareness. Consequently, we anticipate our customers will become more selective regarding the CO2 footprint of the metals they use. We believe our ability to provide these products will give us a competitive edge, as this environmental focus is expected to grow stronger over time. Moving on to other favorable market trends. Aluminum is inherently lightweight, strong and corrosion resistant. These traits provide a strong value proposition for transportation applications, notably for lightweighting and for the electrification of the automotive fleet. We provide solutions across a wide spectrum of transportation applications, including auto body sheet, automotive structures, rail and other transportation extrusions, aerospace sheet and plate and TID seat. We expect electrification in transportation to continue to gain traction. As I have noted in the past, electric vehicles contain more of the aluminum products that we produce, like ABS, crash management systems and battery boxes than internal combustion engine vehicles. Electric vehicles are increasingly represented in our customer portfolios in both PARP and AS&I. A recent example is our supply of structural components for the F-150 Lightning. We are proud to support Ford in its electrification of the F-150. Lastly, cans are increasingly the beverage packaging material of choice, with more than 70% of new beverage launches in can. This compares to only 30% back in 2014. Aluminum cans are inherently sustainable, being infinitely recyclable with a lifecycle that returns them to the shelf in as few as 60 days. We believe there are substantial additional opportunities for cans, notably in steel water, wine and other alcoholic drinks. Before I conclude, I would like to highlight the fact that Constellium's sustainability efforts are being increasingly acknowledged. Most recently, Sustainalytics improved our ESG risk rating, placing us at the top of our peers and within the top 5% of the diversified metals industry. We believe this is strong validation of the progress that we have made in recent years, and I look forward to sharing more details about our 2030 sustainability strategy early next year. Turning now to Slide 17, we detail our key messages and financial guidance. I am very proud of Constellium's third quarter performance. We are successfully navigating an environment that has been more challenging than we expected in July. We delivered adjusted EBITDA that surpass 2019 levels, overcoming substantial headwinds. Importantly, we extended our track record of free cash flow generation, and we further deleveraged our balance sheet. Looking forward, I believe there are many opportunities for Constellium to benefit from secular megatrends. Constellium is part of the solution. We have already taken actions to capture some of these opportunities, and we will continue to plant the seeds for future growth in a disciplined manner. For 2021, we are targeting adjusted EBITDA of €550 million to €560 million and free cash flow in excess of €125 million. We remain focused on operational performance, cost control, free cash flow generation and shareholder value creation. With that, operator, we will now open the Q&A session, please.

Operator, Operator

Your first question is from the line of Emily Chieng, Goldman Sachs.

Emily Chieng, Analyst

Congratulations on a good quarter. My first question is just around the recycled material that you're currently using in your portfolio. Can you give us a sense as to how much you are using? And then when you think about using scrap material as your raw material input, can you use that across every different end market? Or is there still demand for virgin alloy materials out there for different applications?

Jean-Marc Germain, CEO

Yes. Good morning, Emily, and thank you for your positive feedback about Q3. Scrap is a crucial input for us, and we use about 600,000 tons of it, which presents significant opportunities for expansion. Scrap can effectively be converted into materials comparable to virgin products through our processes. Although this incurs some cost, we purchase it at a discount, making it a profitable endeavor, which is why we plan to increase our recycling capacity by an additional 130,000 tons over the next few years. The amount of scrap we can utilize largely depends on the chemistry of both the scrap and the final products we produce. Certain applications have stricter requirements regarding the types and combinations of materials we can supply to customers. Generally, can sheets can incorporate a high percentage of recycled content, while automotive applications can also accommodate a fair amount. In aerospace, however, the situation is more complex due to the stringent tolerances for chemical compositions, which complicates the use of recycled metals. Additionally, some specific niches allow for limited use of recycled inputs while others find it challenging. Nonetheless, given that we are currently utilizing 600,000 tons and shipping 1.6 million tons, we have ample growth potential. The 130,000 tons we plan to add is an important milestone, but it is just one step in our journey to enhance our recycled content.

Emily Chieng, Analyst

I have a follow-up regarding the magnesium discussion. You mentioned that for the fourth and first quarters, you have the material available. How quickly can you pass on the impact of cost inflation to your customers?

Jean-Marc Germain, CEO

We are in a relatively good position regarding availability. While some may perceive that visibility for the first quarter isn’t strong, the reality is that much of our business operates on a quarterly timeline, so we are sticking close to our historical practices. However, we are purchasing at higher prices now than we have in the past, which will present challenges as we move into next year. It's difficult to predict prices for the coming year because, as mentioned, most transactions are quarterly. Our capacity to adjust prices involves several factors. We have contracts that allow for direct pass-throughs and many that have general inflation protections. There was significant inflation in 2021 compared to 2020, which will lead to broader price increases in 2022. In our current environment, we've also seen opportunities to raise prices due to supply and demand dynamics, as we continue to deliver quality products and reliable service. The market is growing, and while there may be timing effects that prevent us from passing all costs through immediately, we expect to recover much of what we face in 2022 over time. Even though there are many variables in play, I'm confident that we will be able to compensate for most, if not all, of the rising costs of magnesium.

Operator, Operator

Your next question is from the line of Josh Sullivan, The Benchmark Company.

Joshua Sullivan, Analyst

Congrats on the quarter here. Just a follow-up on the recycling expansion here. The inflationary environment on the rise; how is the scrap market for aluminum looking? Is it getting more competitive? How do you guys keep a moat around that as you expand?

Jean-Marc Germain, CEO

Yes. Since we're discussing inflation, recycling aluminum serves as a hedge against it. We have more control over the process, which is beneficial. The advantage of recycling lies in our capability to rightfully own the scrap and transform it into metal because we possess the hot mills necessary to create products that customers require. By doing this, we eliminate the middleman. Recycling aluminum is inherently profitable, unlike plastics and paper, which can be costly to recycle. Every piece of aluminum that people choose to recycle will be recycled because of its profitability. Our strategy allows us to access scrap directly and convert it in our furnaces into products that our customers want, instead of allowing it to go to others who lack the necessary hot mills to produce what customers need. This gives us a strong defensive position since there are not many hot mills available, especially as no new ones have been built in the western region in the last 30 years. Thus, we are confident in our ability to generate significant profits from aluminum recycling.

Peter Matt, CFO

And Josh, I think it's reasonable to believe that the current ESG trends will lead to higher recycling rates or increased pressure to recycle, which will create more scrap feed. Additionally, as we see growth in the end markets and produce more aluminum for these markets, we will generate more scrap that requires recycling. Therefore, there should be a larger supply of scrap available.

Joshua Sullivan, Analyst

And then is there any arbitrage you guys can do between the North American market versus the European market given that you straddle both? I mean, can you move any of your magnesium supplies between the two, if there's an arbitrage opportunity?

Jean-Marc Germain, CEO

We can, if needed, but we don't think we really need to.

Peter Matt, CFO

Yes, we believe both markets have solid fundamentals. We are confident in the model we have consistently shared, which is to produce for and within the market. Therefore, we will source our materials from the market when possible.

Operator, Operator

Your next question is from the line of David Gagliano, BMO Capital Markets.

David Gagliano, Analyst

Given that magnesium has been an important focus lately, could you provide more details about your commentary on magnesium? Specifically, where does Constellium source its magnesium? Are there differences between North America and Europe? How much exposure do you have after the first quarter? You mentioned quarterly contracts, but I'm interested in supply availability and visibility after the first quarter, rather than costs. Lastly, could you elaborate on the mitigation efforts you mentioned? What specific actions are you taking?

Jean-Marc Germain, CEO

Sure. Good morning, David. That's quite a question and a lengthy one, so I'll do my best to address it, and Peter will assist me. We source magnesium from China, as well as various other suppliers in different countries, which provides us some security in ensuring we have the magnesium necessary. That's why we feel relatively confident at the start of the year regarding our mitigation efforts related to the crisis. The first effort involves broad diversification of our suppliers, as I mentioned. The second involves using recycled magnesium, which is not subject to the same issues we're facing. The third effort is enhancing our use of our metal recycling, which lowers the need for hardeners overall. The fourth strategy is adjusting our product offerings as needed, which can also help us minimize magnesium consumption since not all alloys require the same magnesium levels; there's a significant variation in magnesium content depending on the product. Lastly, we focus on conservation practices that allow us to save magnesium. As costs rise, we are even more motivated to conserve it. We're making efforts to be financially prudent, which gives us some level of extended security and supply assurance in light of this crisis.

Peter Matt, CFO

Yes. I would like to add that our priority is to address the upcoming quarters first. It's not that we will have no supply after the first quarter; rather, it will gradually decrease. However, based on our observations and the latest news from China, we believe we will be able to manage this situation as we progress through the upcoming periods.

David Gagliano, Analyst

Can you provide the percentage of magnesium you source directly from China compared to the rest of the world? Additionally, if the current situation remains unchanged, what can you share about the volumes that might decrease after the first quarter in relation to your production capabilities? That’s my follow-up.

Jean-Marc Germain, CEO

I prefer not to go into too many specifics because it's a sensitive topic. I can say that we are less dependent on China compared to its overall contribution to global production. When Peter mentions tapering off, many of our contracts are quarterly, so our focus is on reaching the first quarter. Prices are currently quite high, so we are not as eager to secure fourth-quarter volumes at these rates. Considering the measures we have implemented and the fact that Chinese production has started up again to some degree, we believe the current situation will gradually improve. We are taking a balanced approach to ensure we can obtain the magnesium needed to serve our customers while also finding the best way to achieve that.

David Gagliano, Analyst

And then just real quick, last one on my side. The 2022 inflationary cost pressures overall. Obviously, a lot of moving parts there. But is there a way to frame the potential for 2022? In terms of, for example, if we use the cost flex bar chart on Slide 11, just as a reference, given what you know now, what's a reasonable range for those cost flex bars for 2022 overall?

Peter Matt, CFO

So David, I can share where we stand for 2021. As mentioned in our prepared remarks, we feel quite confident about 2021 because we have secured nearly all of our costs for the year. However, for 2022, there are many variables at play, and it is too early to provide a clear picture. If we attempted to do so, we might miss the mark. We need some more time to draw conclusions. For example, we've identified energy as an area with increased costs in 2022. However, we purchase our energy in advance and have a multi-year strategy for it. Therefore, when energy prices increased this year, we had already secured a significant portion of our energy costs for 2022. While we will face higher energy costs, we can spread these out over time, meaning not all of it will affect 2022. I hope this gives you some insight, but defining 2022 is quite challenging at this stage.

Jean-Marc Germain, CEO

Yes and, I mean, as Peter was mentioning, there's plenty of moving pieces, and we're right in the middle of our budgetary process. So as we do every year, we will be able to give you a good feel for '22 when we publish our Q4 results, our budgets are behind us, and we know where we're standing. But today it's a bit premature.

Operator, Operator

And your next question is from the line of Curt Woodworth, Credit Suisse.

Curtis Woodworth, Analyst

First question is just on the can sheet side. I know you made a lot of progress with respect to repricing some of these legacy contracts. But can you just give us an update on what percent of your contracts have been reset at higher margins? And secondarily, I know you've said in the past that you really wouldn't look to add any incremental capacity in meaningful fashion until kind of the base business is fully repriced. So can you also kind of discuss maybe timeline around future growth in can sheet? And would that be done in tandem with this recycling investment? And any color on the CapEx for the recycling investment?

Jean-Marc Germain, CEO

On the pricing front, all our renegotiated agreements this year are coming in at higher prices for can sheet, which positions us well for 2022 and 2023 and beyond. We are noticing that customers are more interested in developing strategic, long-term relationships, which we welcome. This ties into our approach to capital investment, as we want to ensure long-term visibility before committing to new capacity. Our goal is to secure good returns on investments supported by solid contracts, which involve additional volumes at higher prices. Currently, we are actively exploring all opportunities to enhance our capacity through reasonable brownfield investments. We anticipate being able to commit to customers by the first or second quarter of next year, and we will provide updates on our progress by that time. The market conditions for can sheet are looking very positive, which is exciting for our pricing growth, and we also need to focus on increasing volumes through investment. We remain committed to our number one priority of deleveraging, ensuring that any actions we take do not jeopardize this goal. The scrap recycling investments and can sheet developments are interconnected. The recycling investment involves building a new plant within an existing facility, expected to take 2 to 3 years, with production aimed to start in the second half of 2024. Our initiatives to increase can sheet capacity will be more gradual and happen sooner, allowing us to make minor increases in capacity through CapEx while benefiting from the resulting cash flow.

Peter Matt, CFO

The only other thing is, you asked about CapEx. So what we've said historically, Curt, is that kind of rule of thumb, €1,000 per ton.

Jean-Marc Germain, CEO

For the scrap.

Peter Matt, CFO

Yes, for the scrap investment, excuse me. And remember that there are inflationary pressures around CapEx too. But we're keeping that in mind as we kind of go into this, and we're confident that the returns are going to be compelling on this investment. And to Jean-Marc's point, it will be spread over kind of 3 years.

Curtis Woodworth, Analyst

When we examine scrap spreads, we can see that they have significantly increased over the last three quarters, approximately by 30%. You mentioned that you have 600,000 tons of scrap processing capacity. Can you discuss your ability to capitalize on that? I understand there have been some historical offsets due to third-party scrap resulting in a net loss, but it appears to be a considerable advantage for you.

Jean-Marc Germain, CEO

Yes, the scrap spreads you're talking about are the used beverage can spreads, and while they have improved, these are spot prices. We manage our business to minimize exposure to spot prices, which can fluctuate in unpredictable ways. So the impact on us is not as pronounced as the spreads you might see on trading platforms. This is just one type of scrap, and other types may not react the same way, especially since we are discussing the American market rather than globally. Additionally, the melt cost must be aligned with that scrap spread, and it varies depending on the grades of scrap being recycled. Currently, aluminum prices are quite high, making the melt cost significantly higher than in the past. Overall, we are seeing some benefits from scrap spreads, which help offset inflation, but it's not as substantial as simply looking at the scrap spreads and assuming a large impact from the 600,000 tons we process.

Curtis Woodworth, Analyst

And then just one last one on auto. When we look at sort of the volume cadence even relative to '19, it's been down in the past couple of quarters. So it seems like, clearly, the chip shortage has been a big issue here. But at the same time, you've invested for growth. You've had some nomination growth in structures. Can you kind of frame what the upside opportunity is here in auto and except short indents? Any sense for maybe what is your utilization rate in auto relative to what you could ship if the availability was there?

Jean-Marc Germain, CEO

Yes, you're correct. We have discussed the €100 million EBITDA loss in aerospace, but the automotive sector is also facing challenges. However, I am pleased with our performance this quarter because we have actually exceeded pre-COVID levels in Q3 and Q2, despite the difficulties in aerospace and the automotive sector's struggles due to the chip shortage. We estimated the impact of the chip shortage to be between €3 million and €5 million, and in Q3, it has been somewhat higher than that. So, we are looking at a €20 million headwind and we don’t know when this will improve. Additionally, we are capable of increasing production and are ramping up with new contracts. We clearly have over €20 million in annual headwinds due to constrained demand in the automotive sector, coupled with the €100 million in aerospace. If you compare these figures to our guidance of $550 million to $560 million, we should be well positioned for when the markets recover.

Operator, Operator

And your next question is from Corinne Blanchard, Deutsche Bank.

Corinne Blanchard, Analyst

Most of my question has been answered. But just a few, I would say, follow-up. For magnesium, how much do you use? I believe this is mostly used for autos and can alone. Is that correct?

Jean-Marc Germain, CEO

So it's mostly used in can stock, particularly for the lids, and there is also some usage in automotive for the inner panels and doors. Yes.

Peter Matt, CFO

The 5,000 series.

Jean-Marc Germain, CEO

Yes, it’s referred to as the 5,000 series in our terminology. The amount we use is a question we prefer not to answer, and we can't really provide a specific figure since it varies based on the sources we utilize. That's part of our mitigation strategy. Some of it is incorporated into the sheeting girt or the billets we purchase, while some is procured directly and added to our casting recipes. There is also secondary magnesium involved, and depending on how we operate our casting centers, our usage can vary. This is part of our unique approach, so we won’t disclose the exact ingredients.

Corinne Blanchard, Analyst

I understand your point. I have another question regarding recycling in general. You mentioned that you are utilizing a significant amount of scrap and recycling for can production. Could you provide an approximate percentage range? Is it around 70% or 80% of the content, while for auto, it might be lower, perhaps in the 50% range?

Jean-Marc Germain, CEO

Yes, I think directionally, you've got bodies in can sheet, even in can sheet you've got body stock has more recycled content than end stock has. Automotive has less recycle. So the number you are quoting around 70%, 80% is generally right for body stock, and then everything else becomes lower and lower.

Corinne Blanchard, Analyst

Just one last question from my end. Shifting to the IR space, it seems that we, along with most of the industry, were anticipating some improvement beginning in the third and fourth quarters, but it appears to be taking longer. What are your thoughts on the stocking situation? Boeing also announced a slower ramp-up or build-off rate earlier today. What is your perspective on the timing and the potential shape of the recovery as we move into 2022?

Jean-Marc Germain, CEO

Yes. So I think last time I mentioned that we're seeing some green shoots, and we're continuing to see them. But they are not materializing yet in increases in volumes year-on-year. I mean, our Q3 shipments are less in aero than they were in Q3 last year. But that said, we are seeing destocking coming to an end. But it's important to notice, and especially for you guys that follow different companies and industries that not all of us happen to interject ourselves in the supply chain at the same point in time. So you may have destocking over in one category of material and still not finished in the other. What we believe is going to happen is we're getting close to the inflection point. Precisely pinpointing it is difficult, but it feels like somewhere in 2022, we should see with the increased bill rates that Airbus has published, we should see higher demand for our products, Constellium's products. And that's why I was commenting on the fact that we're expecting to see in the coming quarters, year-on-year increases in shipments. How it happens? I mean, historically, when destocking is over and restocking starts again, it can happen in a span of 8 weeks. So you don't see it coming in all of a sudden, you're ramping up production again. And that's what we've got to be ready for, and that's clearly, in addition to the great job that the AMT team has done managing on the way down. They have a significant challenge being readying themselves to ramp up very shortly at a very short notice, most likely sometime in 2022.

Corinne Blanchard, Analyst

Just one more on that and if you can comment, do you expect an inflation front start in like 2Q, 3Q, more like mid of the year? Or is that something that you expect is still about like 9 to 12 months away from it?

Jean-Marc Germain, CEO

I think we just don't know. I think on the inflation side, we will see some impact starting in Q1, right?

Peter Matt, CFO

Yes.

Jean-Marc Germain, CEO

That's indisputable. But we'll see how it progresses through the year.

Operator, Operator

And your next question is from the line of Matthew Fields, Bank of America.

Matthew Fields, Analyst

I don't know if I missed it, but would you be willing to give some clarity on the timing of your $130 million investment? Is it '22 and '23 to get the facility ready for 2024? And I assume that this new facility will be at Neuf-Brisach?

Jean-Marc Germain, CEO

The timing for the investment spans over three years, specifically in '22, '23, and '24, with a greater emphasis on '23. The exact location for the facility hasn't been finalized for various reasons. One key factor is that we have multiple options and we want to ensure we can take full advantage of potential subsidies.

Matthew Fields, Analyst

For subsidy?

Jean-Marc Germain, CEO

Yes. We're playing a critical part in the circular economy in Europe, and Europe has very great ambitions in terms of reducing their carbon footprint. So we're contributing to that, and we're hoping to be rewarded for it.

Matthew Fields, Analyst

So there could be some kind of offset to the CapEx deployment?

Jean-Marc Germain, CEO

Possibly. Yes, that's certainly the goal.

Matthew Fields, Analyst

I apologize for the 25th question about magnesium. Given that on the can side, magnesium is used more heavily in end and tab stock, do you anticipate some sort of negative mix impact in maybe the fourth quarter and first quarter from your efforts to choose to sell more products that use less magnesium?

Jean-Marc Germain, CEO

Our main priority is to support our customers. We will work through that with them, but I can't provide a detailed answer to the question, sorry.

Operator, Operator

And your next question and last question is from Sean Wondrack, Deutsche Bank.

Sean Wondrack, Analyst

Congratulations on the top ESG rating relative to peers by Sustainalytics. Quickly to start with aerospace for a second. I appreciate your comments earlier. And could you just remind us if you're placing the supply chain in terms of the lag to a new airplane? And beyond that, sort of how long do you think the restocking cycle, obviously, it operates at a bit of a lag to a new OEM being built. So if you could talk about that a little bit, appreciate it.

Jean-Marc Germain, CEO

On the aerospace side, in terms of the supply chain, we typically say there is a 12 to 24 month period between production and when it ends up on an airplane, with 12 months being the shorter end. Regarding the recovery, which I believe you are asking about, once it begins, we anticipate a gradual increase in build rates. Historically, when recovery starts, there is often a strong initial demand as the supply chain becomes depleted, and manufacturers require more materials. Thus, we expect that once the demand kicks in, it will generate a significant pull until build rates stabilize.

Sean Wondrack, Analyst

And you've shown you have a pretty flexible business model. Are there any other sort of alloys that you're seeing out there that are showing potential supply constraints? And any weakness there in earnings, do you think you could potentially offset it with lower CapEx?

Jean-Marc Germain, CEO

What I would say is there are other alloys available, such as manganese and silicon, but their presence in our mix is significantly lower. Our current perspective is that the risk concerning supply is minimal, so we are not particularly worried about it at this time.

Sean Wondrack, Analyst

And what is the interest cost savings year-over-year?

Jean-Marc Germain, CEO

We will reduce our cash interest. Cash interest next year should be around $100 million.

Sean Wondrack, Analyst

Are you still focused on generating cash and reducing debt aside from possibly the investment here?

Peter Matt, CFO

Absolutely. Absolutely. I mean, we take our 2.5x target very seriously and the sooner, the better. So yes. And as I mentioned, I mean, we've got plenty of exciting opportunities. We only need to make sure that we fit them into a glide path that takes us to 2.5x at a reasonable clip. So the recycling investments we're talking about in Europe, the expansion in can sheet capacity. None of that will threaten our objective to get to 2.5x sooner rather than later.

Jean-Marc Germain, CEO

Thank you everyone for joining the call. I am very pleased with our performance so far. We have returned to pre-COVID levels despite challenges in aerospace and automotive sectors. While we are facing inflation headwinds in the future, our pricing model and efforts to ensure we are compensated for our production should mitigate these challenges, if not more. I am confident in our long-term ambition for 2.5x leverage, and I look forward to updating you on our progress at the beginning of next year. Thank you all, goodbye.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Have a great day.