Q2 2021 Constellium SE Earnings Call
[music].
Good day, Thank you for standing by and welcome to the can stemming from second quarter 2021earnings call. At this time all participants are in a listen only.
After the speaker presentation that will be a question and answer session.
That's the question during the session you will need to press star 1 on your telephone.
Could be a lag of today's conference may be recorded if you require any further assistance. Please press star Zero, Illinois like the had the conference over to the Speaker today Ryan Wentling.
Most of them in the Investor Relations. Please go ahead.
Thank you operator.
Like to welcome everyone to our second 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.
For today's call is available on our website at <unk> Dot com.
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 1095.
Such statement.
Present. It includes 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 from 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.
Statement information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures of the attached in today's slide presentation, which supplement our eye for us the disclosures.
I would now like to hand, the call over to John Martin.
Thank you Ryan good morning, good afternoon, everyone and thank you for your interest and of course.
<unk> net.
Turn to slide 5 and discuss the highlights from our second quarter of results.
Shipments were 406000 subs, that's the 31 per cent compared to the second quarter of 2020.
Revenue increased 47% to $1.5 billion euros the.
The primarily due to higher shipments in the higher metal prices remember 1 of our revenues are affected by changes in metal prices, we operate the best business model, which minimizes our exposure to metal risks.
Our net income of 180 million euros compared to a net loss of 30.
2 million euros in the second quarter of 2020.
The adjusted EBITDA was a record 170 million euros of 110% of over the second quarter of 2020, and 2% above our previous record from the second quarter of 2019.
Bob and Hsni.
Each reported record adjusted EBITDA.
As a result of our strong first half performance and our outlook for the second half we are increasing our 2021 guidance for adjusted EBITDA to a range of 545 million to 560 million euros.
That is up from our previous.
Guidance of 510 to 530 million euros.
We extended our track record of free cash flow generation with 35 million euros into quarter, bringing our first half of total to 81 million euros. We now expect free cash flow in excess of 125 million euros.
Previously <unk>.
'twenty 1.
Moving now to leverage.
You can see in the chart on the right our leverage declined to 3.7 times at the end of the second quarter down nearly a full turn from the first quarter and back to a pre COVID-19 Lou.
We remain committed to deleveraging.
And we expect the deleverage sales there in the back half of the year.
Lastly of Trillium was included within the Russell 2000 Index in June.
We believe index inclusion is very important and are excited to be included in the benchmark index.
Overall I am extremely proud.
Our second quarter performance and the tremendous performance of all of our teams we.
We delivered strong adjusted EBITDA solid free cash flow generation and substantial deleveraging. This performance is the clear validation of our business model and our strategy.
Now, let's turn to slide 6 the discussed.
ESG highlights of the first half.
At <unk> study of the health and safety of our employees of the priority.
The other recordable case rate of 1.8 in the first half of 2021 in line with our record low performance in 2020, all safety of results I.
Good of the best in the industry and we remain committed to continuous improvement.
In the first half of the year, we should to sustainability linked bond of.
Our February issuance was the first <unk> in the metals industry now approximately 40% of our outstanding bonds now of a sustainably.
The <unk> linked to the future.
Over the course of 2021, we will be developing our 2030 sustainability strategy, which will establish a new set of sustainability targets and the steps to achieve them.
I can say with confidence that aluminum will be an important part of the solution given the extremely.
<unk> unique characteristics.
I'll stay on the is very well positioned compared to global competitors on the basis of the current Calvert footprint.
The key aspects of our strategy will be delivering on our investment to increase our recycling capacity in Europe. These projects will lower our costs generate an attractive return on investment.
And help to further reduce our overall carbon footprint.
Australia is also dedicated to gender diversity across the organization I am proud to say that our board of directors reflect this commitment with 2 of diesel female directors added to our board of 2021AGM.
Now.
Comprised over 40% of our board members.
With that I will now hand, the call over to Peter for further details on our financial performance Peter Thank you Jean Marc and thank you everyone for joining the call today, let's turn to slide 8.
For the second quarter of 2021, <unk> achieved 170.
In euros of adjusted EBITDA, an increase of 110% compared to the second quarter of 2020.
Compared to the second quarter of last year part of adjusted EBITDA of 94 million euros of increased by 36 million euros.
<unk> adjusted EBITDA of $42 million increased by 11.
$20 million in euros, and the F&I adjusted EBITDA of 41 million euros increased by 42 million euros.
Holdings, and corporate costs of $7 million euros were comparable to last year.
For the first half of 2021, <unk> achieved 291 million of adjusted EBITDA a 27%.
11 of increase compared to the first half of 2020.
<unk> and <unk> adjusted EBITDA increased compared to prior year strong performance, while A&P adjusted EBITDA declined due to weaker aerospace shipments.
Now, let's focus on our segment performance turning to slide 9 for the.
<unk> segment.
Adjusted EBITDA of 94 million euros increased 63% compared to the second quarter of 2020 and as John Mark noted was a record quarterly performance.
Volume was of $42 million euro tailwind as shipments increased 29% compared to the second quarter of 2020.
<unk>.
Packaging shipments increased 13%, while automotive shipments more than doubled while we saw some temporary weakness in automotive demand from the semiconductor shortage.
This was largely offset by strong packaging demand.
And mix was a tailwind of.
Of $7 million euros on a greater share of automotive shipments, partially offset by a weaker packaging mix.
Costs were a headwind of $8 million euros on higher cost due to increased activity, notably maintenance freight and labor costs due to the state aid received in 2020.
And not in 2021.
FX translation, which is non cash was a headwind of 4 million euros in the quarter due to a weaker U S dollar.
Now turn to slide 10, and less focus on the A&D segment.
Adjusted EBITDA of 42 million euros increased.
34% compared to the second quarter of 2020.
Volume was the tailwind of $11 million euros Tid shipments increased 51% of strong broad based demand in both North America and Europe.
The aerospace shipments declined 31.
<unk>.
Price and mix was a headwind of $6 million euros due to a lower share of aerospace shipments relative to the tid.
Costs were a tailwind of 8 million euros on solid cost control and favorable metal costs.
Lastly, FX translation.
Was the 2 million headwind in the quarter.
Now turn to slide 11.
And let's focus on the <unk> segment.
Adjusted EBITDA of 41 million euros increased by $42 million compared to the second quarter of 2020 and as John Mark noted was a record.
Record quarterly performance.
Volume was the $25 million tailwind with automotive shipments, increasing 93% and industry shipments increasing 37% on strong broad based demand.
Our automotive shipments were impacted by the semiconductor shortage.
Adulting in a moderate negative effect on adjusted EBITDA in the quarter.
The mix was an $18 million euro tailwind due to the increased share of automotive shipments and cost was of $1 million headwind on solid cost control.
Turn now to slide 12.
Given the unique nature of the second quarter of 2020, we felt it was helpful to compare our adjusted EBITDA in the second quarter of 2021 to the second quarter of 2019.
On the left side, you will find our adjusted EBITDA Bridge by segment.
Adjusted EBITDA increased by 15.
3 million euros on continued improvement across the business and notably at bowling Green.
<unk> adjusted EBITDA declined $22 million.
On lower aerospace shipments, partially offset by higher tid shipments and strong cost performance.
<unk> adjusted EBITDA.
<unk> increased by $11 million euros on improved operational and cost performance in automotive structures.
On the right hand side of the slide you will find our adjusted EBITDA average by driver.
Volume was a headwind of $19 million euros, while most of our end markets are at or above 19 levels, including.
Packaging automotive and specialties aerospace remains well below price and mix was a headwind of $52 million.
Primarily related to lower contribution from aerospace.
Costs were a tailwind of 80 million euros, which reflects the costs, we've taken out of the business through the pandemic.
And the ongoing success of Horizon 'twenty 2.
We are committed to retaining as much of this cost reduction as possible and lastly, FX translation was of $5 million headwind as a consequence of of weaker U S. Dollar.
As the slide demonstrates we have made substantial progress.
On reducing our cost base and have significant earnings leverage to an aerospace recovery.
Now turn to slide 13, where I want to highlight our progress on the horizon 'twenty 2 and our continued strong performance on cost.
As of June we have nearly achieved our $75 million.
The structural cost reduction target, we are investigating further opportunities to reduce our structural costs and are confident we can find them.
In addition to structural cost reductions, we believe there are substantial opportunities through a number of initiatives across the company, including metal cost savings.
Operational excellence cost savings procurement cost savings and interest cost savings.
On the top right of the slide you can see our cost flex with 82% in the second quarter in other words, our costs only increased 82.
For every euro increase in revenue.
Each.
And contributed to the strong results, notably A&P at 70% and F&I at 66%.
This focus on cost helped us double of our adjusted EBITDA year over year, while our shipments increased by only 31% and our revenue increased by only 47%.
There is a lot of talk about inflation in the economy and while we are seeing inflationary pressures in some areas, notably labor and freight thus far inflation has been manageable and remember that many of our contracts include inflation provisions that allow us to pass through some of those risks.
So we remain laser focused on limiting increases in our costs.
Now, let's turn to slide 14, and discuss our free cash flow.
We generated $35 million of free cash flow in the second quarter, bringing our first half total to 81 million euros.
As you can see.
See on the top right of the slide we have delivered on our commitment to generate consistent strong free cash flow.
Since the beginning of 2019, we have generated over 400 million of free cash flow.
Looking forward, we expect to generate in excess of 125 million.
Dollars of free cash flow in 2021.
We expect Capex of approximately 225 million euros cash interest of approximately of $125 million and cash taxes of 5 to 10 million euros.
We remain committed to significant and sustainable.
1 of free cash flow generation.
Now turn to slide 15, and let's discuss our balance sheet and liquidity position.
At the end of the second quarter, our net debt of $2 billion euros declined slightly compared to the end of the year as free cash flow generation.
Was partially offset by $35 million of.
FX translation.
Our leverage return to our pre Covid low of 3.7 times.
This is a remarkable achievement considering the contribution from our aerospace business remains far below the 2019 level.
We expect our.
Leverage at the end of the year to be at or below 3.5 times.
As you can see in our depth summary, we have no bond maturities until 2026.
Our refinancing in the first half of 2021 are expected to save 30 million euros of annualized.
<unk> interest expense.
We continue to target cash interest of less than $100 million euros per annum and I am pleased to say that we are rapidly approaching the goal.
Our liquidity was strong at 887 million euros of of the end of the second quarter, we expect to gradually reduce our extra.
The over the course of 2021 and 2022 as the risk of Covid receipts I will now hand, the call back to Joe Mark.
Thank you Peter let's turn to slide 17.
Secular growth trends are creating opportunities across our portfolio.
We are taking actions to capture these opportunities.
Aluminum is a contributor to the circular economy aluminum.
Aluminum is in CDP recyclable and does not lose profit Ts when recycled unlike the.
Paper of plastic.
Each of our businesses benefit from these competitive advantage.
And of the focus of the circular economy is currently most pronounced in packaging, where cans of the beverage packaging material of choice.
And the Ken sorry, the syndicate recyclable and kind of returned to shelves and ask you of 60 days.
We are currently working on a number of initiatives to increase again cheap capacity.
Development of controls plan and are exploring other opportunities across our packaging platform to further increase our capacity to serve these growing market through debottlenecking and additional investments.
In addition to being a major producer of can sheet. We are 1 of the largest recycler.
Recyclers of aluminum cans globally.
Turning to build on the recycling advantage of the aluminum for our investment to substantially increase our recycling capacity in Europe, both for cash and <unk>.
Aluminum is also inherently lightweight strong and corrosion resistance.
These trades provides.
The strong value proposition for transportation applications, notably for light weighting and sold the electrification of utility of fleet.
In addition to our auto body sheet capability, our recent extrusion press in the automotive structures, the investments position us well to capture.
Growing demand.
In addition, we believe that our recent investments in the Raven foods to unlock the tid volume of timing and we will meet customer demands none automotive transportation application.
We expect the regulatory environment to accelerate the electrification of the autumn.
The loosing fleet.
As I have noted in the past electric vehicles contain substantially more of the aluminum products that we produce like auto body sheet crush management system and battery boxes that internal combustion engine vehicles.
We're already seeing the shift in our order book.
The electric vehicles increasingly represented and our customer portfolios in both <unk> and <unk>.
1. Notable example is our recent announcement that we are supplying the Audi E Tron, which autobody sheets, and extrusion base structure, including boss of the battery and closure.
I would.
I'd like to highlight our diverse and balanced portfolio of end market exposures on the bottom left you can see our LTM revenue as compared to 2019 revenue.
Our portfolio has remained well balanced and as Peter mentioned earlier, we have significant earnings growth potential.
We'd also space rebounds.
Now, let's turn to slide 18, and discuss our outlook for our 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.
<unk> announced by our customers in both North America and Europe.
Can sheet market has continued to improve and we have secured multiple long term agreements with customers, both current and new over the past few quarters.
These agreements reflect the value that we bring to these markets.
<unk> is 1 of the largest domestic suppliers in both Europe and the United States.
Im pleased with the outcome.
Moving now to automotive.
Automotive demand has remained resilient despite the semiconductor shortage under.
The underlying consumer demand remains strong, especially for light.
Suvs and luxury vehicles, where can study of a greater exposure.
We continue to experience disruption from the semiconductor shortage with new shutdowns of announced just last week we.
We expect the fix itself to continue into the second half of 2021.
However, we expect the financial impact to be manageable due in large part to the strong underlying demand in packaging.
Let's turn now to aerospace.
Despite the NAND remaining at low levels in the near term, we remain confident that the long term fundamentals driving aerospace demand.
Remain intact, including growing passenger traffic and greater demand for new more fuel efficient aircraft.
This is supported by commentary from our customers around the plan to increase output of single aisle aircraft.
In the near term optimism in the aerospace.
The Chinese increasing but increased passenger traffic and recent aircraft the orders from the airlines. We expect this optimism to turning to increase the older for aerospace for aerospace plate and sheet in the coming quarters.
In other specialties, we continue to execute on our strategy of expanding.
Supplying in each products and the diversified range of markets.
In general these markets of dependence from the health of the industrial economies in Europe, and North America.
Specialties markets of generally.
Generally very strong growth across both Europe and North America.
Turning now to <unk>.
Slide 19, we detail our key messages and financial guidance.
I am very proud of <unk> second quarter performance, we reported record adjusted EBITDA extended our track record of free cash flow generation and de Levered by nearly of term.
We are committed to completing our deleveraging journey.
I am also very optimistic about our future.
Demand in virtually all of our end markets strong in <unk>.
Fortunately the recovery feels durable within aerospace recovery still to come.
I believe there are many opportunities for <unk> to benefit from secular mega trends.
Aluminum is part of the solution to a more sustainable world.
3 of them is well positioned to be a winner.
We have already taken actions to capture of 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.
545 to 560 million euros, and free cash flow in excess of 125 million euros.
We remain focused on operational performance cost control free cash flow generation and shareholder value creation.
With that operator, we would now open the Q&A session.
So from.
Ladies and gentlemen ask the question you will need to press star 1 on your telephone and 2 of drawing a question press the pound key place.
Please from buying only compile the Q&A roster.
Our first question will come from the line of Curt Woodworth from credit Suisse, maybe begin.
Yes, Thanks, good morning from Martin Theater.
Right.
The first question is just with respect to the free cash flow outlook for the rest of the year and also some of the moving piece of it.
Year to date.
Look at the impact of the metal lag.
And the adjusted EBITDA reconciliation of its about an.
85 million headwind year to date, and then also look like there were some losses on hedges or derivatives of another 45 million of 44, So I'm.
I'm, just curious to the sort of the degree that.
Impacted free cash flow I don't know if some of those hedges physically settled and then in terms of going forward would you expect.
Again, what is your expectation around working capital or potential.
Continued overhang of metal lag on the business as my first question.
The Kurt.
Maybe I'll take those in.
Slightly of.
The reverse order, but so on hedges remember the hedges are these are this.
This was mostly <unk>.
And it relates to hedges that we have on fixed price sales contracts, so as metal prices rise.
The derivative is in the money in a positive value and thats offset by kind of the commercial.
Transaction underneath so it's.
It'll we're completely hedged and it's just the 1 offsets the other.
Kind of an accounting adjustment.
So on hedge of I think it should be kind of a neutral for us.
On metal lag remember metal like what we're doing and metal lag as we're just making the adjustment between the fact that our.
It's for US accounts are on a weighted average cost basis, and EBITDA stated on a LIFO basis. So it's just about adjustments.
And lastly, working capital for the full year or so.
This is something that we.
We talked about in prior quarters that we hadn't.
<unk> seen working capital.
But.
But that as the business expanded we'd start to see it and we did see that in the in the second quarter and in the first half of the year. So as we go through the full year, we expect working capital to be of use for the full year.
And the extent of that use.
We will really depend on the extent to which there is any pickup in aerospace or any incremental pickup from the business from where we are today.
And I would just add the economics working capital days actually we're doing pretty well, so it's really because of increased metal prices and more business coming to us.
But the teams are doing a fantastic job.
Managing working capital in the day to day basis.
Okay got it that was the mix a lot of sense on the metal lag issue.
I guess the packaging market has been the topical and it seems like last quarter, you talked about how most of your 'twenty, 1 and 'twenty 2.
Deals have been.
<unk> completed the now the negotiation thats more on the 23 basis, but I was wondering if you could help provide a little bit more context around the sort of what youre doing in packaging packaging can you comment on.
The amount of contracts that have reset can you give any sort of transparency around how pricing compares.
There is the cycle.
The last cycle and with respect of the Debottlenecking at muscle Shoals of over 75000 tons I think.
It's more like 100 can you can you comment on exactly where that stands how much of that debottleneck of now in the market or would you expect to get into the market.
Next year. Thanks.
So.
Kurt on the.
Packaging market conditions, we've seen them gradually improved over the past year year and a half.
I started was being mildly optimistic very optimistic and that translates into pricing going up which if you remember when we did the long term sort of another.
Yes.
The rooms of EBITDA guidance for 2022 pre Covid. We said we were not expecting pricing improvement we are seeing that now.
Remember these are gradual.
Research because.
Typically those contracts out 5 years, sometimes you have a little bit more renewing in 1 year of than the other but typically you would.
Renewed 20% of the contracts every year of thereabouts, and therefore, you know a 10% price increases under the 2% price increase on day in any given year.
Accept overtime. So we are seeing over the course of.
We're seeing some improvements in pricing this year already we can see.
A little bit of vacuum of variance from that as well as more of that in 'twenty 2 more of that in 'twenty 3 more of that.
In 'twenty, 4 and I'm very optimistic about the trend.
Really telling you that the discussions we have with our customers out of more and more and more strategic in nature.
Both our ability to accompany them over the long term and we see that.
We saw that in aerospace rights, where we had to.
We moved from the historically of 5 year contracts with Airbus 2 of 10 year contract, which obviously the much more meaningful sizable and complicated contract.
But we are seeing also some of that trend with the can makers, saying, we're making all of these investments the beverage companies are really shifting.
At <unk>, we want to be true we are supplied and there are economies.
That can be gained by all of us by having a more of a long term view. So all of that is very positive very conducive to higher pricing and also set the stage for more.
Our capacity expansion I mean, the more visibility we haven't.
<unk>.
The happier we are about committing to some capacity expansion as I mentioned in the prepared remarks, we're looking at what do we can do in the muscle Shoals of also in the results of the markets are stronger than both sides of the ocean.
The.
People want to depend more and more.
Onshore supply as opposed to adults and we're getting to price levels of justify making some incremental investments in our facilities. That's what we are studying and it's too early to to sales.
Hope next.
<unk>.
6 months or so we should be able to.
Our visibility around what the additional capacity we can.
The unleash in both Europe, and the U S now.
You'll remember in muscle Shoals, we had announced a 75000 tons more of the capacity we are well on track to deliver on that.
But beyond that we would need a little bit more time.
2.
The multiyear numbers in our engineering.
Sure.
And how do you how do you think about balancing.
Capital spending with respect the packaging when you have.
Were also very strong secular growth across automotive sheet and structure of them I think on your on your flat rolled out of business. It seems like youre getting pretty <unk>.
To think or utilization.
I'm kind of curious do you plan to try to grow at a C. Moore.
Can you also discuss kind of the nomination dynamic.
The dynamics within the structures business I know that you took some time to digest what you have.
1 of the last 18 months, but it seems like that also is now heating.
Heating up again.
Congrats on a great quarter very impressive.
Well.
All good questions Kurt.
I would be remiss not to mention again that will firmly committed to deleveraging. We are really happy with the progress we've made this quarter.
$3.7 but you knew all along said the target is $2.5 and we'd like the.
Most of them to not be too much in the long term. So that's priority number 1 get to that 2.5 leverage which has been a target of ours for a few years now.
On this path to $2.5 we will invest and we of the capacity to invest beyond.
Maintenance capital right.
The long term to get to.
The profitable returns on growth projects, but we will make choices as you pointed out.
Because we want to make sure we do not compromise the fast trajectory to 2.5 leverage within that we think packaging is excellent opportunities.
Very pleased with the investments we've made the net.
Right.
And you remember of the first Investor day that Peter and I did back in 2017, we we talked about you'll see them not only being packaging aerospace and automotive, but I think of lot of specialties right tid being 1 of them.
And it is very important that we take care of that.
And the Tito of our business that is the.
Very good.
Very good applications, where we got some of the good customer connections directly to Oems and you see that translated to the margin you see.
T..2 day, despite the very low aerospace so we'll keep on investing in that segment too.
In terms of auto body sheet.
Think we are quite happy with where we are today and given the prospect sales slip I am not seeing a second calc line in the U S sales.
Of the 1 in Europe.
In the near future.
We will continue to optimize our mix.
And.
Make sure that we are.
Delivery of the differentiated products to our customers and thats going to be our focus.
So that's how we think about growth of pizza or anything you want to maybe just so Kurt as we said in the past we've looked at kind of our capital spending and forecasted it out for several years and.
In that.
Forecast, we have kind of various growth initiatives that we hope to undertake and then we've prioritized some of them right. So.
We're going to be very focused on where we start to spend on growth initiatives that we are super disciplined about the capital we're spending.
And that we're targeting high returns and then the only other.
The thing that I would supplement.
You asked about auto structures and there I would say.
Our path on auto structures is we'll probably you'll probably see us moderate the growth relative to what it was just a couple of years ago, but specifically focused on.
The very high return.
Turn margin optimization initiatives.
Great. Thanks, Thanks, a lot of sense okay.
The next question comes from the line of Josh Sullivan from the benchmark company.
I begin.
Hey, good morning, Greg.
Part of it.
Can you just talk a little bit about the inflationary pressures and how you're able to pass a lot of those through.
Is there any dichotomy between maybe some of the inflationary pressures in your European operations versus the U S operations at this point.
Sure.
So let me just kind of step.
Net back a little bit of them talk about inflation. So we have a couple of mitigates to inflation. So.
1 is in a number of our cost areas, we have our costs committed on a forward basis. So for example energy is the best example of that where we've kind of bought our energy forward for.
In the case of energy.
It's about a year forward so.
So we do have some mid against.
The case, we also have.
The Michigan and some of our contracts, where we have the ability to pass through kind of inflationary cost pressures.
And that's not everywhere, but it is across a number.
Trucks and.
As a company we are kind of focused on increasingly building in these inflationary pass through clauses.
Into our contracts and I will say in recent contract negotiations, we're succeeding in getting them. So we feel kind of positive about that.
Now as.
Of our kind.
Kind of specific areas of inflation, we talked about.
Labor a bit we talked about transportation. So we are seeing some inflationary pressures in those areas.
I think we feel we can still kind of keep it under control for the time being but.
But we definitely are seeing it there.
And then lastly, with respect to your question on Europe versus the U S. I would say, we're seeing kind of it depends on the topic.
The spend area, but I would say in general slightly more inflation in the U S and we are in Europe.
And maybe just out of it in this.
As to on labor inflation, we have.
Contracts, you're targeting the bargaining unit.
US quite of bit of visibility all the many years. So we don't see inflation refresh of where we have that on the.
All of the salaried workforce this year raises have been zero right.
Alright as the comps.
Sequence of the Covid.
Moving prices.
And as Peter was mentioning many of our contracts of inflation protection clauses. In addition, the best protection, we have against the inflation is actually all margin.
The higher our EBITDA margin.
Like inflation on EBITDA margin right. That's the good thing so by balancing all of that we're looking at <unk>.
We're very as Peter said, we're laser focused on containing costs, but we're quite sanguine about what we see in the market when it comes to the inflation. These days.
I appreciate all of the detail.
Maybe just 1 on the general engineering market can you talk about some of the structural differences that can keep the cycle.
The going long term I mean, do you see competitors raising production it does seem to be of a bit of of relief valve for the market.
How long can that cycle continues so I think there's a number of factors that are in play here of some of them all of our external to us and some of them in total on the.
The external side.
You see the recovering economies in Europe, and North America.
See the trend towards onshoring in short of supply chains and.
And you see antidumping duties index.
In extrusion in the rolled products from Europe in the U S and all of that is creating a very good and very favorable environments you are right.
Side competitors are increasing capacity as well in the space, but quite frankly, it's very needed given the trend towards onshoring.
Specifically to US we've had a very deliberate strategy over the past 5 years to focus the sales teams.
Product development engineers.
That's the vacation engineers on these markets building relationships.
Our relationships with Oems. So we are net very dependent on the distribution markets right.
Kind of the less the value.
The valuable to adjust we were really deepening our relationships with customers in finding the products that are that give them the best of total cash.
<unk> at ownership, so that's helping US also justify higher prices of the higher margin. So I do think.
Lisa.
Recovery in our place in it.
The long legs and.
And should be quite sticky and you see that in the margins you.
Reported both of us in Idaho that quite of bit of specialties.
You see it certainly in aerospace and transportation with the margins you see today.
Higher than what's aerospace margins of 5 years ago, and that's because we've been very good flow.
Singing from the.
Where we really provide differentiated products in tid and even in a bump this quarter.
A few niches there where we are doing a pretty good job of optimizing what markets, we're up to but the customers we bring real value to.
That's a constant work of optimizing our assets and our production capabilities to best meet.
Customers that has the need for the products, we can deliver and offer.
For a better margin. So I think it's got a long long legs.
Okay.
If I could just sneak in 1 last 1 on the aerospace side can you just talk about any indications of the progress in the market at the distributor OEM level of the Airbus production announcements, how if at all thank you.
So we are hearing the same things and we are.
Covid directly from our OEM customers. So there is the anticipation for a recovery.
And.
Our customers are putting SB already gone live yet, placing the holders, but I think the the momentum is building.
It feels like the Destocking is getting.
Close.
Our ear and it depends I mean, its complicated even better than we do lose Josh it's a very complicated supply chain as many of them.
Many of the different thoughts in play here, but it feels like Destocking is getting towards the towards the end so we stand ready to.
2 for demand to pick up.
Thank you.
Okay.
Some of them.
And they would go Guillermo.
<unk> capital May begin.
Hi, Thanks for taking my question I, just wanted to drill down a little bit on the.
The number of themselves in the quarter.
I think you know.
On a recurring basis.
How much volatility in EBITDA per ton in the A&D segment and I realize.
The volumes of relatively low and it can move around a lot of mix.
Bridge.
<unk> versus the <unk>.
The as long as were the same 48 to 40.
49.
EBITDA per ton of went from 396 euros 7.
794, Euro I'm, just wondering or something like that I'm. Just wondering can you breakdown that jump between for example.
Metal price related.
The gains versus.
The mix shift in that.
Other.
The major buckets.
Sure happy to do it so.
Couple of things, let me just start by saying the <unk>.
Quarter as you know was very strong in tid.
And that gives us some from leverage on costs secondly, kind.
Kind of our cost performance.
Other.
The A&P segment in general I think has been.
Very good and we're meaning we're able to maintain.
Kind of a cost structure of that some help.
Helping us maximize that leverage.
Thirdly, I would say that the.
There are some timing.
Impacts in the quarter.
Which is just these are kind of mixed related timing effects that are benefiting in the quarter as well.
So David as we step back from this we still think if we go back to the kind of aerospace margin A&P margins of 7% to 800 per ton on a normal.
<unk> advised basis, that's still probably a decent place to be.
But kind of I think that the performance in the quarter.
In the absence of an aerospace recovery is.
The very strong performance and I wouldn't expect it to be.
Kind of recurring in the third and.
Normal orders, particularly without an aerospace recovery, particularly given the fact that remember in aerospace.
Most pronounced the second half of weaker given the kind of shutdowns in the middle of the year on the shutdowns of the end of the year.
And I think of itself as well as you see tid volume speaking.
Speaking of the Pizza was mentioning in the second quarter, we still have extreme.
The extremely well controlled.
And any.
Net basis any increase in the volume as the disproportionate effects on the on.
On EBITDA and we had a few as Peter was mentioning.
A very high margin.
Aerospace sales, which.
We'd be rounded up in the tonnage the dot are actually extremely contribute to that took place in the Q2 as opposed to being spread over Q2 Q3 Q4.
Okay.
I didn't quite get the breakdown, specifically, but what I understand I understand youre.
Point about non recurring and so I guess.
Maybe another way to ask the questions.
How much of the.
The jump that we saw in the quarter over quarter in <unk> versus <unk>.
As expected to really be non recurring on a forward basis.
I mean.
It's the.
I mean, I'd say, if you put that number at.
Something around kind of I don't know.
Mid single digits.
But.
It's a hard it's a.
It's hard to put your finger exactly on it but I would say something.
Around that range would be okay.
Okay. So maybe another way I mean, so we had EBITDA well David actually just 1 other thing to say.
It's not nonrecurring isn't the right word to use here because there is some timing impacts, but it's not like it's not non.
Non recurring.
Right in other words as Jean Marc said, you had some aerospace shipments that came in the quarter that were very remunerative tons that benefit the quarter, but thats just the timing difference between we expected maybe in Q3 of them. They came in Q2.
And things like adjustments.
From slide 5.
Okay, Alright, and then just real quick shifting gears to other.
The quick questions here.
Just the capex it seems to be heavily weighted to the back half of the year I believe and I'm. Just wondering is there anything specific going on in second half of the universe of first half.
It is very.
Backend weighted I think.
We spent we're giving guidance for $2.25, and we spent 67. So there's a lot of to be spent in the second half I think it's the consequence of a couple of things.
Every year the second half is more prone to capex, because that's when customers shut down.
The boats in the summer months, even the.
And in Europe, specifically, where most of the industrial companies shut down for 3 weeks in August and then you've got the holidays around the Christmas time, So thats when we will be spending our capex on the major maintenance, where we've got to take the mill down for a week or 2 do you want to do it in the.
In the off season as opposed to the peak season.
Like where we are in the second quarter.
Other aspects too as we work quite unsure of steel about what the recovery from Covid would look like back in the November December So we constrained capital at the beginning of the year as we got more and more confident going into March April we decided to release some of the capsule.
And that obviously is a bit of of lag before it happens. So for these 2 reasons, we got a quite of hill to climb and obviously when we talk about our cash flow.
Guidance for the full year, we're very happy with the first half we got it recognized in the second half there will be quite of bit of Capex spent.
But all true productive uses obviously, so that's quite exciting.
Okay.
Okay. That's helpful and my last question, just a slightly bigger picture on the again just on the numbers.
Out of the 2023, obviously the aerospace is still.
It's still kind of treading water a bit.
But likely to improve.
The other businesses are really humming.
With some potential upside on auto I guess so the.
Question is really I.
It looks to us like 700 million euros of EBITDA in 2023 non.
Easily attainable, but.
Within sight here.
And that was the guide prior to Covid.
I'm wondering what what are you what are your views towards the 2023 outlook and how it compares to.
What you thought it was going to be.
Pre COVID-19.
I think we agree with all your statements David except that we will stop short of the.
Giving guidance of 2023, I would just add that packaging is actually getting stronger and stronger and is even better than what we thought it would be.
Though some volume, but certainly on the pricing. So that's that's very helpful. So as we said the number of times. We're ahead in every day.
Never respect on the business side right.
The markets are good our positioning the market strengthening with the most of these strong casually strong specialty is super strong.
Aerospace is still an unknown as you pointed out in our cost performance is excellent as you can see it and we're very committed to keeping the close loop. So are we.
We still like.
The 700 million target per we'll stop short of the.
Saying exactly when it happens.
Okay. Thank you very much helpful. Thank you David.
Yes.
Our next question comes from the line.
Current Blanchard.
Deutsche Bank you may begin.
Hey, good morning, guys, hi, coronary per se.
Very impressive quarter.
Part of 2 question asked most of the amount of R&D and.
And so the could you.
Just give any thought of it more clarity on the guidance for the full year. So you are right.
Between 545, and $5.50 million of that imply I'm, you know I would say much of the lower EBITDA in the second of our investors. The chest of is it can you just give us like the main drivers of she's of 90 is it also some impact from the semiconductor of shelf edge.
Yes.
Sure.
All of them.
The try at it so.
Assuming <unk>.
<unk> of what we've seen in the first half of the year strong in market no recovery in aerospace.
The strong end markets otherwise.
We're assuming that the.
Microchip shortage of continuing to penalize us like it has in the first half.
And we're expecting our cost performance to continue at a high level as you point out of it means the second half is not as good of the first half, but again, we've got the seasonality.
As I mentioned earlier.
Well there is much more of shutdowns.
At our customers and most of all maintenance.
In our plants, which means less revenue more cost.
The risk before none of us good EBITDA in the second half and I think if you go back to where we were in 2019 of pre Covid, you see that kind of seasonality.
So that's the good.
End of.
Benchmark of template for what you know now.
Normal could look like for us.
So I think thats out in the series and the.
Obviously whenever we give guidance, we're very committed to meet or exceed guidance. So at the moment, we're giving the guidance.
But we see the is the best.
Best we can give given the market conditions.
Yes, the only thing I'd add current if you still do have some COVID-19 hangover going on.
Who knows what the.
That translates into in the back half.
That's the only other factor I dive in.
Alright.
And I think very good comment I'm going to be part of my next question.
Well, let me say I think Tommy.
Raske encourage and everywhere in the U S also in the country.
The country.
The China game there.
As you started to.
Look into it.
When you really the guidance, how do you see for the aerospace and Oh by the other.
Our free.
Could you I think day in Japan and impactful.
Yeah.
Still it's true that the headlines.
May seem a bit worrisome at times.
But we are not seeing it in our order book.
Frankly, when you travel around and.
C airports back you'll see of slides pack.
You see people going about living their lives.
<unk>.
The kind of business as usual way.
No.
It doesn't feel like the catastrophes of bonus but obviously.
We didn't think of catastrophe.
But in the January or February of 2020, so are we going to be anvil.
So as Peter said, there may be a little bit of caution here.
It doesn't feel like we are for the <unk>.
Force wave of our fifth wave that would be the same as the first 1.
So that's not embedded in our guidance the return of the <unk>.
First wave.
Yeah.
It seems like current them it seems like the governments around the world are committed to staying open. So when we think about guidance as Jean Marc says, it's definitely not we don't have.
Embedded in our guidance at all.
And what where it might manifest itself is in slightly longer supply chain channel of slightly greater supply chain challenges in certain instances of something things like that but manageable manageable.
The facts.
Okay. Thank.
Thank you.
Just the last 1 quickly.
On the semiconductor shortage I think.
<unk>, what I'd say that the 3.3 million in fact for EBITDA.
Thank you mentioned any number of lots of <unk>, Washington, the same oriented.
Is that going to be as well.
Net range 3 to 5 million going forward.
Yes, I think I think that's the right range going forward.
So.
There's different impacts from the different businesses and 1 of the things that we.
We love our diversified model and.
In this instance, PARP is of Great example of of how that diversification really helps us because.
Clearly.
<unk> see.
Some kind of shutdowns on the automotive side related to semiconductor.
But the but the demand on the packaging side is so strong we're able to kind of basically divert every ton that we can't ship into auto into packaging right. So it's a very.
A very.
Mike.
My of effect in park, and then in auto structures, even there we're able to divert some of our shipments so but I think 3 to 5 as of.
A good number to use going forward.
Great. Thank you that's it from me.
Our next question will come from the line of Christian Georges.
Current society zero net.
I begin.
Yes, thank you very much somehow.
Some of them just to clarify.
Something you said of it earlier about the top line as you said no cap lines in Europe all of the U S. Did you mean, the required or did you mean the announced.
What I meant is we are in the.
Planning actively.
Building on the other calc line in either of the U S or.
The Europe.
We believe that the film will be needed over time.
But it's not like we are actively planning.
Planning to build of new 1 and Thats again looking at.
Allocation of capital and where do we get the best free for our investment.
Great.
In terms of where the market may need as the.
Semiconductor.
Shortage of about the Qdoba hub snow of moves on them.
You need to see.
<unk> of it.
It could cause the lightweight requirements.
Batesville take on the on what is the right now available for some of these companies 2 of them to be able to rely on sufficient supply, yes, I think we said that.
Historically as soon as 2023 of the market.
Needing more capacity.
So maybe it's 24 with the chip prophage, so some of it.
Reasonably close.
But again for us the conditions to invest our.
The central demand.
The real demand.
<unk> contracts was very favorable prices and the absence of another alternative.
Capacity even better.
That's the <unk>.
Factors of balancing in the as I sit now I don't see us investing more in the auto body sheet, we're very happy with what we have we're very happy with.
What do we can do with the assets, we have and we're really focused on optimizing in this sector as opposed.
With growing that May change in the 6 months time moving.
Okay. Thank you.
The thing is the when you mentioned youre talking of leverage skews the very much of 2.5 times.
And of course, you go should we read the sort of Suez.
Is that being when you will contemplate paying a dividend or not.
Particularly the.
Yes, I think that's the good question Christian.
So we are for the time being we're very focused on bringing the leverage down we think that's the.
The highest.
The impact item on our share price. So we'll focus on that in the short term.
As we start.
That's the shoe have visibility on about 2.5 times I think it's very fair to say that the broad.
<unk> capital allocation discussion will come out of the table and we'll address it at that time, but for the kind of immediate future I think we're going to focus on delevering.
Okay. Thank you.
Start the <unk>.
On the part of the vision, if I look at less true of the second half of 2020, you did the.
And maybe the 100 <unk> hundred $67 million I mean, you had some puts you would the shipments as well.
So the just because.
So it's tough.
Looking to the second half of this year.
Yes.
Just the difference between the second half of you feel through the second half that's true.
Well I think the non.
Markets are.
All of a bit.
Better and the recoveries more than in the second half and we'll see.
And especially.
As usual right out of the crisis the U S rebounds, much more quickly than Europe. So we had the rebound last year in the U S already in the second half we didn't have as much of it yet.
Europe, So we should see Europe stronger in the second half of the field any fluids in the second half.
Any detail.
So for pumps should look pretty good in the second half range.
I think all of our businesses are looking pretty good.
And so forth.
Okay. Just 1 other question on the other medium.
We know that some of the.
Some strain on the upside right now we've issued about supply from.
And so on.
Because of the Midwest premium.
So we used to record high the that's the thing that happened there was a lot.
The first of all of the budget is very high price of the of growth what was the premium in the U S.
And any way you can probably the I know you're peso, but the.
The Kansas in any way affect your financial D on the on the on there.
Given quarter net.
On the material fashion.
We've learned our lesson from the past and we've done a pretty good job of shielding our sales from the volatility in the regional premiums in both the U S and Europe.
So it kind of of kind of a timing effect, but nothing really economical.
The material.
Over the 6 months of the linear period.
Right.
Moving on price for the whole of independently of us.
Premiums.
<unk> continues to 2 of too.
And so towards the 3000.
And because of that for a prolonged period do you see that as a placebo the headwind for some of your end markets or is it.
<unk> net to source of the major concern for you.
Historically customer choices around what the material the use.
I have been largely unaffected by milk prices we've been in.
Back in 2008.
<unk> reached $33.3500.
And we did.
The of change with bacteria with packaging material that come to the customer as well.
Choosy and when 1 commodity rises the other ones also rise right. So I think if you look at deals of these.
A pretty high level isn't it so I'm not even sure then when you look at aluminum price.
He didn't flood of fees.
Sure the the volatility of the aluminum is great.
The actual volatility of for the commodity as of May not be closely the data.
All of the steel.
Moving up and down quite a bit so it doesn't change it doesn't impact it.
Okay. Okay.
Very good question on.
The other.
N T.
Youre running your tid and other.
You had 40000 tons of it.
And then at what pace with about 50000 tons of controls the downturn. So 17, 70.80000 tons of wood capacity something that you kind of taking your existing facilities.
Yes, we.
We can make everything we're making Ti E plus the everything we used to making the aerospace we look forward to the day when he comes back and.
Well still lagging of 100 million euros of the adjusted EBITDA in the aerospace.
Because of the.
Downturn in the aerospace market. So we look forward to the good signs.
It's coming back.
I'm sure the wisdom.
Good quarter. Thank you very much.
And our last question will come from the line of Sean 1 of rock from Deutsche Bank.
To begin.
Hey, good morning, Joe Mark Peter and team.
Sure.
I'm just.
The follow up on the metal premium question.
Thinking about this right and that is basically excluded from EBITDA, but it might have of transitory impact on the cash flow.
That should even out over time.
Well the weighted.
Maybe the way to think about this is Ed.
So just in terms of more specifically on metal premium Orajel, Marc was saying before is generally speaking like the metal price itself, we're passing it through right. So in our customer contracts, we're passing it through or we're using financial.
That's the hedge it okay. So for the vast vast majority of it we pass through of.
John Mark was referring to is there are some isolated incidents incidents, where we of customer contracts that don't allow us to pass through right, but typically those contracts are short duration, so they might be.
Martin of 6 maximum 12 months contracts and so what happens typically is that okay.
We have to absorb the Midwest premium change in the short term, but then when the contract comes up for renegotiation. We go back and we kind of embed unimproved price to reflect the higher premium.
That's why he was saying it's the timing impact.
In our financials.
Okay, no that makes sense.
Okay, Great and then on the can side and between North America, and Europe have you seen a greater relative increase in pricing of crafts.
The North America, given that Europe is in high demand.
Are you seeing sort of stable across the board.
No.
We're seeing the trends.
Across the globe.
There is a need from all can sheet in both Europe and North America.
And that is.
Some spacing of very favorable environmental pricing from both sides of the future.
Maybe maybe North America has started the little bit earlier in the.
Europe is catching up to that in North America.
Right, Okay and have you considered any entering any new geographies and packaging.
We have 32, we haven't we're very focused on what we have from.
Instantly optimizing what we have been increasing.
Our capacities in the most capital efficient manner.
In Q entering of new geographies.
The best way to manage your.
Your return of investment.
Yes, and Sean if you look at the growth profile in both North America and Europe, It's a very exciting growth profile right now.
Alright.
Been hearing the same and then the last 1 from me.
Just looking back you've been an early mover in terms of instituting some accountability around your ESG.
The goals.
The investments in recycling seen attractive considering the airline with the ESG initiatives.
Do you see some more investments in recycling going forward is there any potential for M&A. There do you think at all of the organic thank you.
Yes, so we're committed to organic investment.
We were doing it in Europe.
And we have partnerships in the U S as well so we believe recycling as.
It has great potential and good for the planet, it's good for our financials.
Like it very much and we will keep on the.
Exploring new opportunities, but again.
We want to be very responsible.
Investment in.
Managing all of our growth projects and make sure the deleveraging continues to target.
Targets of any projects or additional projects.
Undertake organic growth M&A or whatever in the recycling or other needs too.
Keep us on net.
Trend line.
It's deleveraging.
That's what we will focus the.
Okay, great. Thank you for answering my questions. Thanks, Sean.
Thank you.
We have no further questions in the queue I'd like to turn the call back over to Jean Marc Germain point.
<unk> 2 remarks well thank.
Thank you very much all for attending the call. We're very excited with our progress this quarter very excited about the deleveraging that is happening fast and also very excited about all of the.
Great market conditions.
That are ahead of us so we look forward to continuing on our journey.
<unk>.
In closing for the.
End of Q3.
Again, everyone Bye bye.
This concludes the conference call. Thank you from participating you may now disconnect.
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