Q2 2020 Constellium SE Earnings Call
Thank you for standing by welcome to come Stallions second quarter 2020 results call I just don't all participants are in listen only mode meter. We will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press star you on your Touchstones, how the phone.
To remind during this conference call me being recorded I would now like to turn the conference over to your hosted each Mr. I am thinking director of Investor Relations. Sir. Please go ahead.
Thank you operator, I would like to welcome everyone to our second quarter 2020 earnings call on the call today, our Chief Executive Officer, Mark Jermaine.
Our Chief Financial Officer, Peter Matt.
After the presentation, we will have a Q and a recession.
Copy of the slide presentation for today's call is available on our website at Constellium Dot 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 a 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 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 data. 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 and passion today's slide presentation would supplement or I it for us disclosures I.
I would now like to hand, the call over to John Moore.
Thanks, Ryan Good morning, Good afternoon, everyone and thank you for your interest income to tell you.
Let's turn to slide five.
The study on the health and safety or for employees. So first priority we have implemented many initiatives to protect our employees in response to the Govies 19 pandemic.
We have provided a person they always personal protective equipment increased cleaning and said he station allowed for and then for social distancing and works to raise awareness was our employees.
I want to personally thank our employees for taking the seriously and following the precautions we have put into place.
Last Friday, approximately one half of 1% of our employees have tested positive for Cobiz 90, and all of whom have recovered or our recovery.
Needless to say, we must remain vigilant.
During the second quarter of plants operated wells, despite the significant disruptions to customer demand from looked down both Europe and the U.S.
As I am speaking all our plants are running now and well.
We are carefully monitoring Soviet 19, Hubspots, both for the health of our employees and any potential impact on supply chain.
The demand for all products gradually increase during the full for the second falter and this trend has continued into July.
However, those levels of demand and visibility from our customers remain below historical levels.
We took strong actions to combat the effects of the pandemic on our business, we aggressively reduced off gscs, including flexing variable cost to match production levels.
Reducing fixed cost and lowering all targeted capital expenditures.
Well, the 40% of our workforce, where and some type of far should unemployment to temporary lay of scheme during the quarter.
Where appropriate we have also implemented permanent headcount reduction.
Our ability to fix cost was slightly better than the scenario, we provided last fall so.
This was a great achievement by the entire consider MTV and demonstrated a flexibility and resilience.
Our liquidity at the end of the Salto was 949 million euros, an increase of over 300 million euros compared to the end of the first of all so.
We added an additional 50 million euros of liquidity in July through present facilities subtleties basis, driven states, bringing our pro forma liquidity to approximately 1 billion euros.
In June we access to debt markets to refinance of 2021 volumes. These transaction removed up only near term bond maturity at the very attractive Cooper.
In conclusion with a significant actions we have taken.
I'm very confident in our ability to navigate through these crisis.
On slide six you will see some of the highlights from the second full service Twentytwenty.
Shipments were 310000 metric tons, a decrease of 25% compared to second quarter of 2019.
Revenue decreased 33% to 1 billion euros of the roughly 500 million euro decline in revenue compared to the second quarter of last year. Two thirds was related to lower shipments and was that was related to lower metal prices.
I remind you that while our revenues are affected by changes in metal prices, we operate success through business model to minimize middle risk.
Net loss of 32 million euros compared to net income of 17 million euros in the second quarter of 2019.
Adjusted EBITDA of 81 million euros decreased 51% confesses second quarter of two inch 19.
With a strong focus on cost control, we're able to offset significant felt of the volume headwinds to adjusted EBITDA across each of our business units I am proud of for the team was able to achieve challenging environments.
Cool Stadium generated 228 million of adjusted EBITDA in the first half the decline of 24% compared to the first six months of last year.
Our free cash flow was negative 33 billion euros in the second quarter of 2020.
This result would not have been thoughtful without a strong actions to reduce cost and capital expenditures and cash expenditures of also.
Free cash flow for the first half of 2020 was 54 million euros based on our current view if market conditions, we expect to generate positive free cash flow in 2020.
I will now handover to Peter discussed our financial performance in more detail Peter Thank you John Mark and thank you everyone for joining the call today.
Turning now to slide eight you will find the change in adjusted EBITDA by segments for the second quarter in the first half of 2020 compared to the same periods of last year.
For the second quarter of 2020, Constellium achieved 81 million euros of adjusted EBITDA.
Decrease of 86 million euro or 51% year over year.
Our adjusted EBITDA of 58 billion Euro decreased by 21 million euros or 27% compared to last year.
Hey, MP adjusted EBITDA of 31 million euros decreased by 33 million euros or 51% compared to the second quarter of 29.
And I adjusted EBITDA of negative 1 million euros decreased by 31 million euro compared to last year.
Lastly holdings in corporate cost of 7 million euros were 1 million euros higher than last year.
In the first six months of 2020 consume achieved 228 million euros of adjusted EBITDA, a decrease of 74 million euros or 24% year over year.
PARP adjusted EBITDA of 124 million euros decreased by 14 million euros or 11% compared to last year.
Antique adjusted EBITDA of 83 million euros decreased by 33 million euros or 28% compared to the first six months of 29 team.
And so all you adjusted EBITDA of 33 million Euro decreased by 26 million euros or 44% compared to last year.
Lastly holdings in corporate costs of 12 million Euro for 1 million euros higher than last year.
We expect agency costs of approximately 20 million euros in 2020.
Now turning to slide nine and let's focus on the part segment.
Adjusted EBITDA of 58 million Euro decreased 27% compared to the second quarter of last year.
Volume was a headwind of 41 million euros in the quarter.
Packaging shipments fell by 12% primarily as a result of the temporary shutdown in March of our numbers that plant in France due to covert 19.
Shipments to the North American can cheap market increased slightly year over year.
Automotive shipments declined 54% compared to last year as many of our automotive OEM customers curtailed production for April and most of med.
Price and mix was a headwind of 2 million euros.
We're a tailwind of 21 million euro due to strong broad based cost control with labor and maintenance as important contributors.
Metal costs were neutral in the quarter as we face difficult year over year call, you VC supply chain challenges and lower metal prices.
Thanks translation was a tailwind of 1 million euros.
Now turning to slide 10, and let's focus on the T. segment.
Adjusted EBITDA of 31 million euros decreased by 51% compared to last year.
Volume was a headwind of 46 million euro on lower aerospace and T. I'd shipments.
Aerospace shipments fell 37% compared to last year as aerospace OEM and distributors began to reduce orders.
T I'd shipments declined by 20% due to lower industrial activity in both Europe and the USA.
Price and mix was a 3 million euro headwind due to lower aerospace shipments.
Costs were a tailwind of 15 million euros.
Due to strong broad based cost control with labor metal and maintenance as important contributors.
Lastly, FX translation was a 1 million euro tailwind in the quarter.
Now turning to slide 11, and let's focus on the answer my segment.
Adjusted EBITDA of negative 1 million euros decreased by 31 million euros compared to the second quarter of 2019.
Volume was up 31 million euro headwind.
Automotive shipments declined 52% compared to last year due to customer shutdowns for a significant portion of the quarter.
Industry shipments declined 16% due to lower industrial activity in Europe.
Price and mix was a 9 million euro headwind, partially due to price and mix as a consequence of weaker market conditions.
Costs were a 9 million euro tailwind strong cost control with.
With labor energy and fixed cost.
As important contributors.
Lastly, FX translation was a 1 million euro headwind in the quarter.
Now turning to slide 12, I want to highlight our very strong cost performance during the second quarter.
In the second quarter, we managed to flex our costs by 83%.
Cost flux represents the change of cost over the change of revenues for the second quarter of 2020 compared to the second quarter of 2019.
Effectively for every dollar change in revenue, we're able to flex our cost by 83 cents.
This compares favorably to the 75% variable cost estimate we provided last quarter.
At the bottom of the page you can see that each of our businesses demonstrated strong cost control with PARP at 92% call flux and am TNS Tonight at 75%.
To put this in contact excluding metal on depreciation.
We reduced costs by approximately 100 million euro compared to the second quarter of last year.
These cost savings were driven by strong cost control across the businesses, including labor maintenance professional fees subcontractors and energy.
I will note that our second quarter 2020 figures include approximately a 15 million euro benefit from European State employment eight related to covert 19.
I want to congratulate the team for the aggressive actions taken on costs.
We will continue to maintain our strong focus on cost control, particularly given the uncertain demand environment.
Now, let's turn to slide 13, and discuss our balance sheet and liquidity position.
At the end of the second quarter, our leverage was 4.4 times and our net debt was 2.2 billion euros slightly lower than our net debt position at the end of 2019.
We remain very committed to capital discipline, we reduced our 2020 capex target to approximately 175 million euros.
96 million reduction euro reduction from 2019.
Through the first half of 2020, we've spent 32 million euros left in capex than in the same period of last year.
Our free cash flow for the second quarter was negative 33 million euros.
During the quarter as a consequence of lower activity are factored receivables were lower than the levels that we have maintained in recent quarters and negatively impacted our free cash flow by 73 million Euro.
We would expect the reversed to occur as activity levels increase.
Excluding the impact of factoring the company actually generated positive free cash flow in the second quarter, which is a very impressive outcome in my view.
Our free cash flow for the first half of 2020 were 54 million Euro as John Mark noted earlier, we expect to generate positive free cash flow in 2020 based on our current view of market conditions.
Generating free cash flow is it from priority and we remain committed to de leveraging.
As you can see in our debts summary on the bottom left hand side of the page we have no bond maturities until 2024.
While we initially planned to repay the 21 with free cash flow. We felt it was prudent to remove this near term maturity given the favorable debt market condition known.
Notably this was lower.
A coupon dollar Bauma constellium has ever priced a considerable achievement in the midst of a pandemic.
As a result of our financing activities. Thus far in 2020, we now expect cash interest of 150 to 160 million euros.
Our cash plus amounts available under our committed facilities was 949 million euro at the end of the second quarter as John Mark noted, we added 50 million euros to this balance in July and we remain very comfortable in our liquidity position.
Ill now hand, the call back to Joe Mark Thank you Peter.
Let's turn to say 15.
I wanted to highlight something that is core to our business sustainability in early July with at least 2019 business in sustainability result, which you can find on our website.
I'd like to point out a few highlights from 29 Keith.
Safety is our first priority.
Target is to reduce our recordable case rates by 10% year after year.
Between 2016 in 2019, a recordable case rate decreased by 27%.
And we are trending very well this year. This means that more about colleagues are returning home injury free everyday.
We also improves our energy efficiency by 6.4% compared to a 2015 baseline.
That is the equivalent of 100000 metric tons of fuel to savings every year.
So, though we introduce it 2025 target to reduce greenhouse gas emission intensity by 25% against 2015 baseline and we have a detailed plan to achieve these targets.
As many of you know recycling is it's called company competency of Constellium aluminum is infinity recyclable, we 75% of aluminum ever produced steel in use today. This socials is one of the largest recyclers of aluminum cans globally with the capacity.
To recycle over 20 billion cans every year.
At Nestle Zack we also recycled the equivalent of 12 billion beverage cans every year.
As a company constellium recycled of 560000 metric tons of externally schools aluminum scrap in 29 key.
I'm also proud that stood thoughts these are recognizing from stadium for our sustainability achievements the aluminum stewardship initiatives or DSI is an industry led initiative to drive sustainability across the entire aluminum value chain from producers to customers.
2019, we received ESI certifications for Zyngas casting enrolling operation.
And we began producing is sites that site cause for our customers from Zyngas in Twentytwenty.
We also received is sites, so geisha NFL nestle's ex the CDC under provisional Govies conditions in Twentytwenty.
We achieved the Ecovadis platinum rating, which is a well due to the tough 1% of companies assist worldwide.
And we received any sq rating of diversity from NSPI, placing us in the sub 5% of all sector.
Overall, we had a very successful year on sustainability objectives in 2019, and I look forward to continuing our progress in these very useful to initiatives.
Now, let's turn to slide 16, and discuss our end markets.
We believe our balanced portfolio of products across end markets geographies and customers is a competitive advantage during challenging times like these.
I will start to the packaging markets packaging is a coal market for can stay on the new we presented 38% of our LTM revenue.
We continue to see strong demand in North America and stable demand in Europe.
Further evidence that this market is both recession resilient and secular growth.
We believe the packaging market as long term secular growth tailwinds driven by customer preference for aluminum cans.
Customers continue to invest in new guidelines, we several additional investments in North America, just announcing the last week.
These additional lines should driving clip incremental demand for can keep in the years to go.
The consumer preference trend is only one of the tailwinds for can sheet.
In Europe the demand for can sheet continues to grow based on substitution of aluminum full steel.
In the U.S., we continue to expect the growth of auto body sheet demand.
Thanks, and supplied to the packaging market over the medium to long term.
Now, let's move to automotive.
Over the long term automotive remains a secular growth market for aluminum.
Customers continued to prefer larger vehicles.
These regulations aimed at increasing fuel efficiency and reducing emissions the automotive market will need to continue to lightly.
In addition, we expect hybrid and electric vehicles to continue to gain share of the seat.
These vehicles, our aluminum intensive due to the importance of flights waiting to achieve their range objectives.
Stadium is well positioned to realize the benefits of the secular shift to aluminum in automotive and the electrification of the feet.
Moving to more recent trends automotive Oems began trading production in March and largely resumed production in may.
While demand from our customers increased significantly in June we have experienced any than demand for our products as a result of supply chain challenges and Govies 19 hotspots.
Why we're optimistic about automotive demand in the back half of 2020, the demand for our products will be dependent on the live level of productions at the OEM.
Let's turn now to aerospace.
Aerospace, we presented 15% of our LTM revenues the near term outlook for aerospace remains uncertain due to the effects from movies 19, and the 737 Max.
Aerospace Oems have reduced build rates and it is clear how loan build rates will remain at these levels.
We expect aerospace shipments into third and fourth quarter of 2020 would be lower than the level in the second filter of 22000.
In T.I.D., we expect to continue to expand in each products in a diversified range of markets over the long term.
In the near term the defense and rail markets remained strong, but most industrial and transportation markets remain weak.
These markets I'll dependent, but the health of the industrial economy in Europe, and North America.
It is unclear when and to what extent these markets will rebound.
In closing I again want to thank the competitive team for their tireless efforts during the strike time.
We remain committed to operational execution harvesting the benefits of our investments disciplined capital deployment debt reduction and shareholder value creation.
With that Joanna we will now open the Q any session.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchstone telephone. If your question asked and answered are you Michelle.
Secondly can you please press the mountain.
Your first question comes from the line of greed, Tony from Deutsche Bank. Your line is open.
Great.
Please UN mute.
Please your line is now open.
Hi, Joe Makan, Peter can you hear me ill again good morning.
Good morning.
Thanks for taking my question.
The first thing I wanted to start with was just the utilization rates and the comments from one Q you sort of stepped through how you saw utilization in each of the division.
Twoq here and then perhaps for Threeq and Fourq. You. Appreciate you joining has guidance, but I wondered whether you could maybe conceptually talk through.
Threeq versus Fourq, you and just versus Twoq you any comments you could Mike on the divisions as an upside from last quarter. Thanks.
Sure, Chris So I'll start to the markets and then kind of strong safety to do what can meaningful the divisions rights of the business units.
So when you look at our second call to have this year. This is the second closer of last year right you see.
Packaging, roughly 10% down you see.
Automotive, 50% down you see aerospace 40 person down right roughly and the other markets in each market is about 25 cindat.
This is made a very different dynamics right. So in packaging. What we're seeing now is 95 cents utilization there was a bit of the dropped.
Especially in April we build a love downs in Europe reduce reduction can consumption and all that but thats come back very strong in the U.S continues to be quite strong.
So we look at packaging again recession resilient.
Secular growth and we're very confident fill the second half of the year, we look at.
Q2, as being kind of UN billable quota because of all that happen.
In April and movies in May.
If I look at automotive.
It has reached netback I mean, I think when we talked on Q, when we're talking up 20% utilization as we will speaking and now we're at those 80% right. Now if you do the average of 20 in 80, you will you get to 50, which is about what we experience.
In the second half into the reduction in their shipments.
It is.
You too.
It seems like it can be stronger than 80% going full well do we still running very well in July but we've seen that these restart has been with all kinds of fits and starts right. So you got ups, but some good supply chain disruptions you've got.
Difficulties in bringing products from Mexico building trucks in Texas is challenging so you got all those operational issues at all of us into supply chain of to deal with.
But clearly the demand seems to be.
Well in excess of 80% of where we will last year, so that's encouraging and hopefully.
Good 19 doesn't to throw too much of a wrench in that's a good trends.
So I look now at aerospace, where we were running at around 60% in the quota.
We expect more pain in the second half of the yet.
And I think the reason for that is it's a long supply chain.
And the customers move a little bit more flutie in terms of adjusting their orders.
And that that is creating a bit of the of the lag in terms of.
It should fade we take.
We are in very detailed discussions with our customers in a very good underwriting session to look at what the second half two looks like and WICED contractually, we could force of volumes on us that that off type where they don't need we don't want to fulsome them. So what we're working through is taking more pain now.
In the second apps that 2021, we start with a clean slate. So we would expect some reduction in operating rates in aerospace.
In the second half of the so if you translate all that into what it means for the different views I would expect Dol packaging and automotive to be better I would expect asinine automotive.
Structures essentially to be better in the second half and it would expect TNT to be a little change given the second half.
Thanks, Thanks, so much and sorry.
Good.
Just 100 follow up on packaging specifically.
Where the volumes are down around about 10% I think year on year, and you, saying muscle Shoals is doing well it seems like the us is going going well I think crown yesterday mentioned that southern Europe was way.
Can you comment a little bit further about packaging.
You region is it was it down in the quarter because of demand, though because you had facilities offline and maybe quantify some of the you impacts yeah. I think so the reason I am seeing more than 90% on 90 bucks than whatever it that's a 100% is exactly because of some weakness in Europe right.
And I think it's going to do with.
Both.
The reduction in activity in southern Europe, I mean, a lot of these countries of the.
Economies that are based on tourism and this is not the best tearful tourism as we all know.
And we are seeing unit is little clusters and Hubspots everybody's.
Vigilant as it should be right. So that is weighing down the little beaten the can consumption in Europe, yes.
Okay and just.
Yes.
One follow up on on a on on working capital specifically I just wondered maybe Peter if you could talk through the.
Yes, the two two moving parts, obviously, you stepped through those waterfall charts and you getting cost at doing a great job on the cost side I. Just wanted is your comment a little bit further on the second half of the year.
And what opportunities are on working capital.
You sign positive for the full you've already obviously hit the positive number at the halfway point. So just just wondering if you talk through the moving parts of working capital sure happy to do it just for contact so.
The second quarter as we said last quarter, we would use working capital and we in fact burn 63 million of working capital and the.
In Q2 and for the first half were positive 24.
So based on where we sit today I think its plausible to think that with auto ramping with packaging kind of continuing to ramp back up.
That we could lose some ground in in the back half of the year. So.
Not a huge negative, but we could see working capital being a youth in the back half of the year.
But Chris I would say that we remain confident in spite of.
That we we can achieve a free cash flow position.
Thanks, Thanks for that so that's it from me. Thank you good.
Your next question comes from the line of Josh Sullivan from the Benchmark Company. Your line is open.
Hey, good morning.
Turning Josh.
Just a question you how are you thinking any tariffs on Canadian aluminum have you increased any inventory expecting that are just what should we be thinking on that front.
To fruition.
Well.
We believe excessive misguided measure if it happens rights, we levied against it in the past ability to move may come back.
We think its misguided any doesn't address a problem, which she's overcapacity from China from and on market. You've got to me that doesn't play by say rules as we do now that said if it happens it's got a very limited impact and as I remind you that.
We pass through the mill.
Cost essentially to most of our customers there maybe a little.
Section of the business, where we cannot reprice immediately way Athens.
But in deals side, we may gain a little bit more on scrap recycling as well so not much of an impact for us.
The reason were against it is much more of matter of principal because we believe in free and fair trade than RIDEA problems for our finances or are you going to mitigate outcome.
Got it.
And then just on the can sheet front can you remind us of when.
Your larger contracts are up for renegotiation and that just a comment around pricing strength.
So we see.
So we don't going to the detailed exactly which contracts mature wed.
Yes.
That we've got a few renewals coming in around the 22 ryzen.
We are making good progress.
And I think the pricing environment is.
I would describe it doesn't mildly positive in the U.S. and nightly negative in Europe because of the specific situation now I remind you that contractual negotiations take a lot of time here and whilst we I seats mildly positive Nike negative there between now and whenever we.
Actually inc. contract things May change.
But I think it's a pretty benign environment.
And our product using demand.
Ill brag, a little detail quality and service is very much recognized mr. Charles has done a terrific job in.
Over the best ideas.
And is very strong player in the market now very recognized quite Csos wise. If we think has always been so we have strong positions and I'm.
Looking at the future was a great deal of confidence.
Great. Thank you.
Thanks, Joe.
Your next question comes from the line of maybe Doug We are now from BMO capital markets. Your line is open.
Great. Thanks for taking my questions.
First I did have one question on the numbers for the second quarter did you say there was a $15 million onetime benefit.
Included in the 81 million dollar adjusted EBITDA line.
You are targeting both for the for the labor benefit.
I thought it was a co at 19 steady benefit is that in credit and.
Included in adjusted EBITDA vary, but it's not a one off any clear to use those programs are which is referred to as a group solve social much belsito fulltime work and these government programs continue through 2020 in some cases into 2021.
Okay, and so we should assume about a $50 million quarterly benefit from those programs each quarter well, yes, no because what will happen David is remember so in the second quarter, we had a lot of people on the sidelines right, but as we ramp up then we're going to have substantially less of that so I think you should assume that.
In the businesses.
It's going to so packaging for example, where we had some benefit in Q2, we should have basically very limited if any benefit in Q3, and automotive which should fade away in aerospace we'll have some continuing given the operating utilization rate there but.
It will be a much lower number.
To give you any indication we mentioned it but people.
Thank you to an employee during the call to at the trough, which is behind us.
We had 6000 people into some kind of unemployment benefits or temporary layoff now we are at less than 2000.
Flows.
Dramatically.
Yes, and David just appointed in perspective the.
If you get to the fourth quarter, the number might be something like 25% of that right just based on the utilization rate just rough number.
Okay. That's actually helpful. Thank you and then just in terms of the.
You know the individual.
End market commentary on the aerospace side, obviously thats the.
Or has the highest margin business.
And just in terms of the outlook commentary.
You framed obviously.
Two segment up one segment down but the down segment is again, the highest margin segment I didn't really got.
Sensors to order of magnitude of the down number versus the up numbers can you just give a sense as to give you you believe that aerospace will completely offset the recovery in auto and packaging.
Second half are a bit more.
Color on magnet order of magnitude on the on the decline in aerospace would be helpful. And so it's very difficult to tell that David because we are as we speak in a very active discussions with customers and at the end of the dates of goal that we have to make jointly with the as I mentioned, we've got contracts, whereby we can fulsome to take some products.
Which it will take an faithful, but then they don't need to full year right. So they will be.
The inventory holding back so we are working collaboratively with them in terms of what is it exactly they need which by the way I don't think fully know now.
No criticism of them I mean, he's very unusual sides.
And once we know what they need and we look at what do we take that I could answer your question.
At this stage I cannot just say that there will be tool more pain.
In the order structures and then deal a notice for cures in aerospace My budget Aerospace now the other thing too is this is compounded by the fact that if you look at 80 period in the recent past the second assay as always.
Weaker than the first half.
Right in aerospace so that's something to connect during as well.
Okay and just.
My last related question is on the I think you mentioned.
I think average utilization rates for aerospace.
Related.
Demand in this in the second quarter was around 60% correct facilities is that right what does that number now.
We're running still around that.
Number, but I would expect it to.
Go down and maybe to 50% that kind of range.
Okay, all right Thats helpful. Thanks, very much.
Yes, so it's important to say, we're not expecting it to go down to 30%.
Got it.
That's on the horizon.
Your next question comes from the line of Great Woodward from Credit Suisse. Your line is open.
Yes, hi, good morning.
Currently.
Peter first question on 100 million Euro cost reductions how much of that would you view is structural and then I guess just in general in terms of the amount of costs. You think you could take kind of the business.
This year on a permanent basis can you give us an update on on those efforts.
So.
If we look if we look at the I mean, so the biggest piece of that 100 million.
Is related to labor.
Great. So.
And that's probable labor is probably half of that 100 million.
So.
What we're doing now is we are really closely looking at the business and what it's likely to be like for the next couple of years and then you are trying to size our labor forces according to that.
So.
In that regard I think we would expect that theres going to be some kind of permanent savings, but remember as we kind of ramp up the operation.
We do expect some of that cost is going to come back right. So.
I'd say, it's hard to give a really precise number on that occurred at the difficult one.
Okay.
The Kurds thing that.
We have talked about it will rise and 22 rights in one of the strategic initiatives was to look at how do we.
Lean our organization, we dug using competencies capabilities relatively lean and make the organization stronger.
And I think what could lead 19 is doing to us and I guess to many other companies are there is I consider rate and number of initiatives that may have taken more time to be pigmented. So long lines that Peter was.
Saying I think we'll come out of the squeeze some permanent cost reductions and as we rent that who knows rent that that inject back 100 million of costs.
How much we will remain to be seen because we are really.
Learning as we are doing and we're just in the middle of it now but we.
We will definitely emerge out of that leaner and stronger and there are certain categories. Like for example, professional fees subcontractors were kind of as we work without these because those are kind of big categories of reduction I think we were able to kind of live without.
Lot of that going forward so.
I think there theres definitely a piece of up but we can carry forward.
Sure example that are not trivial there like revealing right. So we did a very strong.
R&D and technical support organization, which is.
People that are centrally located and go into health plans and historically load of the work was done by people going to the location now obviously in the past three months nobody's been able to travel anywhere.
And the none of that is being done through remotes in direction.
Conference, but even when you go to that.
To a plant and you look as I go to problem and I need to improve the speed of this mill. We've had people you interacting cited a nickel based on the face time and going into the looking into the role.
The Rolling Mills face time with.
Technical advisor audio side of the tenant their networks actually sign which we wouldn't have study would be possible. So in the future what you'll gating here is.
You'll saving travel time, which is not very good for the aerospace business, but also your.
Yes. It could you are seeing the custodial seeing to time, which means that people can be on several interventions west historically within a week fix so we could get to the plant where you get the joke, Doug. So I think we're going to discover if you new ways of doing business in our.
You know space that are going to be quite interesting in the future and I think it's going to help us injectable brain and talents remotely was more.
Thanks.
Yes incurred as we go forward will we may be able but give you more color on this but hopefully it comes across that we're really looking hard at taking structural costs out in the short term.
The objective is we want to be kind of free cash flow positive through this crisis.
And so that we don't take on any incremental debt ideally and in the longer term, we want to emerge with a cut a much stronger earnings power. So we're focused on exactly that and.
We'll have more to phase as we progress.
Okay now that that's helpful and then in terms of the free cash flow.
You know dynamics, you mentioned I think at 73 million dollar impact from.
Factoring this quarter or otherwise you'd be.
Free cash flow positive, which is pretty high.
Pretty positive given your utilization rate and now you're talking about 95% utilization in packaging over 80% and auto and it seems like auto should move higher one supply chains get more normalized so.
75% of your businesses could be close to 90% utilization in a couple months I get that arrow is weaker.
But it seemed like from a free cash flow generation standpoint.
And less working capital will be a major negative you.
You should be generating decent free cash in the back half of the year can you can you comment at all on.
Free cash flow potential in the back half of the year, Yes sure. Thanks for the question. So we won't put a specific number but but we're confident that we will generate free cash flow.
For the full year.
And the back half of the year I think there's.
There's a very good chance that we can generate some free cash flow, but it depends a lot on what happens with trade working capital as I said, we've got the ramp of these businesses. So we want to be a little cautious until we see the pace of the ramp.
And the consequences of the ramp.
But again for the full year, we remain confident that we can generate free cash flow.
Okay and then just final question on the arrows on Mark you had to comment on it.
I guess working with the Oems create.
You said, a clean slate entering 2021, so is that.
Statement kind of reflecting the fact that the Oems cut very quickly and I assume there's sort of an excess inventory issue that theyre dealing with or in general its supply chain and so.
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Hypothetically your volumes would be below the actual build rate to help them clear inventories to then would you get into 2021.
The supply chain is in a pretty good position then contractually you said, you're not going to force on them, but then if you're going to help them manage that do they do you getting anything and return E.
Price benefit or this is kind of everyone, helping each other just a little bit better understanding of kind of what you meant by the clean slate combat.
Well, yes, no fair question so.
I think I've come into didn't pass on the fact that I thought that the shipments while making into the.
To the Oems striking to supply chain, we're actually higher than what.
Build race, where warranty appetite and obviously the build rates are going down very significantly down so now so.
The pain, we're going to take into second half I think he's not going to cure all the.
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Inventory buildup in the supply chain.
First of all.
I think what that does it positions us for 2021 that doesn't show so they'll deterioration that's what we're we're into right and we want to be placed with what do we supplied by end.
Consistent with what is being built right. So that's what we're trying to do whether we get there we I don't know, but certainly we are aiming to be better in 21.
The second nine on so.
Bosko Vito.
We'll be in.
That's that's one of the goals.
In terms of what we're getting from the Oems.
We've got very strong deep strategic relationships with them.
I've come into due mostly the best of effected in the older long haul and I think it's as evidenced by the 10 year contract, we signed with Airbus.
And your is a long duration never happened before.
And we did it.
Because it was the right thing to do for those.
Companies for both businesses and we didn't do it as a reaction to govi to whatever right mean.
Really.
The desire to send them to strategic alignment between the two companies. So we looking past the current crises. The current prices will go to get all the same those are in the same aircraft and put us into say place look together to overcome the crises and we are not talking about.
If I do that you give me a bit more price or whatever I think it's just a relationship where we want to be new we thought leadership and we do some things that help them and they will do something that help us in the future, which have already done in the past and that's already.
It's already happened and Thats continuing.
Okay, great. Thank you very much.
Joel.
Your next question comes from the line of Matthew Fields from Bank of America. Your line is open.
Hi, Mark you Peter.
One on that on the markets and then won the balance sheet. Please so.
You saw that can volumes were down about 11%, but.
Norsk.
Reported can volumes up 11%.
I think you guys face relatively the same markets in Europe can you can you sort of point to why maybe they're having more success.
Can volumes was it wasn't enough for stock being down issue or or a market as you're well like what can you just explain that discrepancy for US. Please go fix mainly I believe I mean, I think kind of comment there.
Because situation.
Okay. The main reason was that we have to take down at least four week and then rented to gradually I remind you that was.
Center of a hotspots of the first to reload Hubspot in France.
And there was a very.
Terry terrible conditions for.
Second half of not so in Austria continue to shift out of finished goods that we had to replenish the.
Finished goods and Thats really took down.
Shipments in the second quarter through it back to normal now.
Okay, Thanks, Thats, what sort of going as expected.
And on the balance sheet. It looks like you got a decent amount of funding from from France, and and obviously, it's what's Switzerland and Germany.
He said it was partially guaranteed but it's also secured can you just give us.
As a better understanding of sort of what it secured by his inventory or is it sort of pp needs and then to what extend to the guaranteed by the French government.
Well it.
Depends on the facility, but the big one the French one is secured on on.
Pp any.
And.
In the case of the German ones one of them as procured in one of them is unsecured and the Swiss one of unsecured.
And the guarantees what's the way they work if they guarantee a certain percentage of the principle. So.
It's a normal syndicator banks with in the case of France, I think the guarantee is for 70% of the or sorry, 80% of indicates a friend of the.
Of the principal balances guaranteed by the by the French state in the case of Germany, I think it's 80% to.
So just just for our purposes as credit analyst, 80% of that French loan is sort of non recourse to you.
Well.
Again, it's.
It is it is recourse to us.
What I think the point is that if you're a lender. So for example, if you're in the syndicate of banks and you.
Our lending say, 50% your responsibility as for 10 or sorry, 50% 50 million your responsibility as for 10 have bought.
Right. So the it's the banks that benefit from the guaranteed not not the company.
Okay. So you still have to deliver on the commitments to the banks.
Yes, absolutely absolutely, but one final.
Yes, Im sorry.
The government isn't Backstopping Malone for you know backstopping the loan.
The bank exactly exactly but one thing to kind of I think is a really important point is you know are.
Our intent in putting this liquidity on the balance sheet wants to remove any question about the fact that we have enough liquidity as we said from the beginning and based on the performance in the second quarter, we do not anticipate using this so the French facility, we had to draw.
Just by the terms of the agreement, but it just sits on our balance sheet as cash.
And the German facility that we've now signed up in July we don't expect to draw that.
The DD the delayed draw term loan, we havent draw them out and the Swiss facility.
We don't have drawn in most instances so.
And the way we benefit from the state guarantee is through a very cheap interest rate.
Right.
Great cheap money in that it was important to US we don't think we need the money. So we're not going to be.
Interest for it.
Exactly that and it obviously was a inducement for the banks to land.
Right.
Fair enough and that I know I think you the French facilities, what 2.5% effectively at this point.
Yes, it does the code.
All right. So you don't really have an incentive to pay that off quickly given your bonds are kind of twice that right.
No that's right now remember that the the use of the cap there are some limitations on the use of the capital right. So for example, we can't use that capital to go in.
Buyback bonds in the market. So it's really meant to be for kind of operating needs of the company, but yes, you're right. We don't have we done on a strong incentive to repay about.
But.
Well, what we will do is obviously there are some costs through it right. So as we kind of emerge from the crisis and have a little more visibility than will unwind those facilities.
Okay, but that's very helpful. Thanks for all the color and good luck in the back half. Thank you.
Your next question comes from the line of Sean Wondrack from Deutsche Bank. Your line is open.
Hey, guys. Thanks, taking my question really great job on transparency and cost here, it's very helpful. Thanks.
When you think about big picture, if you look the auto market.
More sort of projections out in the market that will have about 25%.
Decline in new cars this year.
Mostly based on the fact that we weren't producing back in March April.
And if you look at the used auto market, it's been pretty strong visibly used prices really.
Rise even above last year.
You talked about how production's been increasing demand is increasing there.
It's the kind of get to down 25%.
You'd have to have some pretty strong growth in threeq human Threefour. So I guess, what I'm asking do you see that market as potentially in collecting Stan.
You know with demand pulling through based on a lack of cars you can provide a little color what you're seeing there would be very helpful.
Yes so.
Then deal that book is strong there's no question, it's to move the 80% that I'm mentioning right.
But we've been a little bit costs.
By customers, just a few months ago, telling us.
We need product tomorrow and into the gives and takes discipline to shut down right.
So we have very vigilant right. So I hope I think the end demand is there I think that's true into USS two in Europe right. The governments of injected a lot of money in the hands of consumers right through the.
Josh the unemployment benefits of different shapes and forms and you see on both continents.
And that is.
Pretty good for the end demand at the end of the date.
So I hope, it's going to be it's going to materialize into the older book, we have is going to be actually real orders and shipments in which case should be better.
But.
We have seen fits and starts you see a plans, resulting and then shutting down because it is a govies infections or you see people living in trouble staffing either the full shifts because as a.
Too many cases into into hotspot so.
Steel fraud JV loops.
Like good but he steel franchise.
Right.
That's helpful. Thank you John Morgan I guess, that's a good lead into the next question. So when you think about your customers you know we've had some shutdowns.
Things come back online do you do you feel that your customers on their CEO are getting more confidence in their ability to stay online are getting better in terms of protocols and sort of advancing at the current Matt.
Yeah, I would think so I think all of this have made tremendous.
Efforts to provide the proper environment for us for our employees.
Very interesting I was commenting on the.
Half a percent of our employees have been affected by visa.
Confirmed.
We have add new new case.
Confirm case in Europe since the middle of me.
So I'd say something about the fact that when people take responsibility.
He knows daily lives right because it goes beyond what they do within our factories old during the ace hours and hours whatever that they worked with us.
You can have an impact.
And I think.
If people were masks when the interacts with.
Outside people.
The come across I think it makes a tremendous difference.
So I hope the reality will slowly yield.
In summary.
Sizzling and a good practices will get that virus away from us sooner rather than later.
And I think Thats, all seeing the Constance building up I mean.
Human nature, you need to be affected take steps and I think we're in the process where in many places people are still being affected equal to take that if you look at China in China.
Going extremely strong.
It's a smaller operation for us, but we are those budgets of both last year.
Right you look at Europe nude new cases are really.
On the done well trend even to this fiscal year in there and we're seeing a stronger.
Recall rebound.
This coming to us in the U.S. throw the.
Thats, great and it's good to hear John Mark and I Hope everybody takes and while the there. Thank you very much and good luck.
Thank you.
Okay.
Go ahead, Sir go ahead John.
And yes, I am showing no further questions at this time I would like to turn the conference back to Mr., John Marchioni CEO options that you.
Thank you join us so thanks, thanks, everyone.
For it but spacing in nickel today as you can see we're very focused on the.
Facing the crises protecting cash flow and building a stronger stadium when things are behind us.
Thank you very much as opposed to updating you on our progress.
Three take care.
Thank you, Sir ladies and gentlemen. This concludes today's conference call. Thank you also joining you may now disconnect.
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