Q2 2022 Constellium SE Earnings Call
Okay.
Sure.
Hello, and welcome to today's <unk> second quarter 2022 results. My name is <unk> and I'll be coordinating your call space.
If you would like to register a question during the presentation Metro served by pressing star followed by one on your telephone keypad.
I would now like to hand over to Jason Hershiser from director of Investor Relations. The floor is yours. Please go ahead.
Thank you Elliot I would like to welcome everyone to our second quarter 2022 earnings call on the call today, we have our Chief Executive Officer, John Marc Germain and our.
Our Chief Financial Officer, Peter Matt.
After the presentation, we will have a Q&A session.
Copy of the slide presentation for today's call is available on our website at compelling 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 our recent filings.
Today's call May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Statements include statements regarding the company's anticipated financial and operating performance future events and expectations and may involve known and unknown risks and uncertainties.
For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward looking statements.
Please refer to the factors presented under the heading risk factors in our annual annual report on form 20-F.
All information in this presentation is as of the date of the presentation winter take 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 reconciliation of non-GAAP financial measures attached in today's slide presentation, which supplement our <unk> disclosures I would now like to hand, the call over to John Mark.
Thank you Jason Good morning, Good afternoon, everyone and thank you for your interest income stadium.
Let's turn to slide five and discuss the highlights from our second quarter results I would like to start with safety our number one priority.
After a strong first quarter performance, our recordable case rate declined in the second quarter, leading to a rate of $2 2 billion hours worked for the first half of the year.
This is a humbling reminder, that while we always strive to deliver best in class safety performance, we need to constantly maintain our focus on safety to achieve the ambitious targets we have set.
It is a never ending task for our company and one that we take very seriously.
Turning to our financial results shipments were 424000 tonnes at 4% compared to the second quarter of 2021 due to higher shipments in each of our segments.
Revenue increased 50% to $2 3 billion euros as a result of higher metal prices improved price and mix and increased volumes.
As we have said previously while our revenues are affected by changes in metal prices, we operate to burst through business model, which minimizes our exposure to metal price risk.
Our value added revenue, which reflects all sales excluding the cost of metal was 704 million euros up 22% compared to the second quarter of last year.
Our net loss of 32 million euros into quarter compares to a net income of 408 million euros in the second quarter of 2021. The decreases in net income is primarily related to a 168 million euro unfavorable change in unrealized gains and losses on derivatives most.
Fee related to our Mitchell our hedging position.
As you can see the breach in the top right. Adjusted EBITDA was 198 million euros, 17% above the second quarter of 2021.
Is a new record for the company and it includes record results in both bulk and Eni.
Demand remained strong across most end markets during the quarter and notably the aerospace recovery continued in the quarter with strong growth both year over year and sequentially.
<unk> continues to be impacted by the Seneca Victor shortage and other supply chain challenges.
The combination of stronger demand pricing power solid execution by our team and a stronger U S. Dollar drove better results. Despite the significant cost pressures, which Peter will discuss later in more detail.
Okay.
Moving now to free cash flow, we extended our track record of consistent free cash flow generation was 60 million euros in the quarter as you can see on the bottom right of the slide we demonstrated our continued our continuing commitment to deleveraging ending the second quarter at three <unk> times or download most half a turn from the.
End of 2021.
We remain committed to achieving our leverage target to two five times.
And maintaining our long term leverage target range of one five to two five times.
Overall, I am very proud of our second quarter performance.
Looking forward macroeconomic and geopolitical risks remain elevated and we expect inflationary pressures to continue especially for inputs like energy in regions more directly affected by the ongoing war in Ukraine.
Despite some warning signs we are not experiencing a material reduction in demand in our core end markets and our business has continued to perform well as a consequence, we are optimistic about our prospects for the remainder of this year well therefore, raising our 2022 adjusted EBITDA guidance to a range of 600 <unk>.
<unk> 690 million euros that increases our previous guidance of 642 660 million euros.
In addition, we continue to expect free cash flow in excess of 170 million euros in 2022.
Turning to slide six and before handing it over to Peter I want to directly address it choppy I know you are all focused on and so all we which is natural gas prices and <unk> in Europe .
As is the case for Europe generally with bullshit of natural gas used in our facilities comes from Russia to date, our operations have not been affected from an availability standpoint.
There is clearly an increased risk that Russia further reduced seasonal stubs each drove natural gas to Europe at some point.
He is difficult to know if or when this may after bill. We believe there is good logic for Russia to gradually reduce the flow of gas to Europe . We noted no stream. One recent return to service at a lower flow rate than pre maintenance level and well below capacity.
To address this risk Europe is moving quickly to limit any potential impact. This includes finding alternative sources of gas the European Commission's, 15% demand plan demand reduction plan and our broader plan to and dependence on Russian gas in the future.
As you all know Russian guests dependence varies widely by country across Europe , while we do have exposure in some countries that depend heavily on Russian gas a substantial amount of our EBITDA in Europe is generated in countries with less dependence.
In addition, we'll be doing a 15% reduction in gas supply would lead to much less than a 15% reduction in our production capacity.
Also as a reminder, during COVID-19 most of our plants, we are deemed critical.
Given our exposure in markets, such as aerospace defense and packaging food and pharmaceuticals.
If we are afforded the same treatment in a scenario where gas rationing is necessary it could limit the impact on our operations.
We are obviously monitoring the situation very closely and we'll continue to update you on developments.
For the avoidance of doubt the guidance I provided a moment ago assumes that natural gas will continue to be available, albeit at elevated prices.
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.
<unk> turn now to slide eight.
Value added revenue or bar was 704 million euros in the second quarter of 2022 up 22% compared to the same quarter of last year.
34 million euros of this increase was due to higher volumes in each of our segments.
81 million of this increase was due to improved price and mix also in each of our segments.
It'll impacts were a headwind of 21 million euros.
Inflation on input such as hardness and alloying element.
More than offset our scrap performance in the quarter. Finally, 35 million euros of the increase was due to favorable FX translation tied to a stronger U S. Dollar.
There are three important takeaways from this.
First as Mark noted the topline dynamics in our business remain remained favorable in the quarter.
With adjusted EBITDA of 198 million euros in the quarter our margin on value added revenue was 28, 1%.
Third to put our performance in context compared to the first half of 2019 var. In the first half of this year was up 11% and our adjusted EBITDA margin on bar was up approximately 200 basis points.
Now turning to slide nine and let's focus on the PARP segment performance.
Adjusted EBITDA of 95 million euros.
<unk> for PARP increased 2% to two the second compared to the second quarter of 2021 volume was a tailwind of 5 million euros with higher shipments in packaging and automotive.
Packaging shipments increased 4% versus last year on continued strong demand.
Automotive shipments increased 3% in the quarter versus last year as new platforms.
Began to ramp up.
Overall demand continues to be well below pre COVID-19 levels due to the semi conductor shortage and other supply chain challenges.
Price and mix was a tailwind of 15 million euros, primarily on improved contract pricing, including inflation related pastures.
Costs were a headwind of 26 million euros as higher operating costs, mainly due to inflation more than offset favorable metal cost effort.
FX translation, which is noncash was a tailwind of 7 million euros in the quarter due to a stronger U S dollar.
Now.
Now turn to slide 10, and let's focus on the E&P segment.
Adjusted EBITDA of 63 million euros increased 50% compared to the second quarter of 2021.
Volume was a tailwind of 12 million euros.
Aerospace shipments were up 54% compared to last year.
<unk> mix was a tailwind of 39 million euros unimproved contract pricing, including inflation related passers, and a stronger mix with more aerospace and a better tid mix.
Costs were a headwind of 33 million euros on higher operating costs due to inflation and the production ramp up in aerospace.
FX translation was a tailwind of 3 million euros in the quarter due to a stronger U S dollar.
Now turn to slide 11, and let's focus on the F&I segment adjusted.
Adjusted EBITDA of 46 million euros, a new record for <unk> increased by 13% compared to the second quarter of 2021.
Volume was a $3 million euro tailwind with higher shipments in industry and automotive industry shipments increased 5% versus last year on continued strong demand.
Automotive shipments increased 3% in the quarter versus last year, but as noted for pump overall demand continues to be well below pre COVID-19 levels.
Price and mix was a $24 million euro tailwind, primarily due to improved contract pricing, including inflation related pastures costs were a headwind of $23 million euros on higher operating costs, mainly due to inflation.
Now.
Now turn to slide 12, where I want to give you an update on the current inflationary environment, we are facing and our focus on cost control to offset these pressures.
In the second quarter as expected, we experienced significant inflationary pressures across our business many of which were exacerbated by the war in Ukraine.
These cost pressures are creating a significant headwind to our otherwise strong performance.
As you know we operate a pasture business model. So we are not materially exposed to changes in the price of aluminum are most significant cost input.
That said metal supply remains tight today with high energy prices increasingly forcing smelters to shutdown. Most recently centuries shutdown of its hospital smelter eliminates an important supplier and we will put pressure on high purity aluminum pricing. We currently expect to be able to resource the Smith.
<unk> supply, but at a higher cost.
The cost of alloying elements like magnesium in lithium are significantly higher this year due to supply disruptions and to the actions we took previously.
To secure our supply.
Magnesium supply of organic concern in the U S where one of our suppliers has reduced production. We have worked with our other suppliers and are not currently concerned about our ability to secure the magnesium we need however, our magnesium cost will be higher than expected.
Non metal costs are also higher this year, particularly European energy.
Previously noted we purchase energy on a rolling forward basis, which has helped mitigate some of the current cost pressures. However, our energy costs will run significantly higher of this share, particularly in Europe , given the unprecedented energy price increases.
Our total energy costs over the last three years have averaged around 150 million per annum.
Currently we expect total energy costs to be closer to 250 million euros in 'twenty two with additional increases in 'twenty three.
While not to the same extent, we are experiencing significant cost pressures across most other categories, which we expect to continue throughout the balance of 2022.
Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results are.
Our business continued to deliver strong cost performance in the quarter and our recently announced vision 25 initiative is beginning to help.
Across the company, we are working to increase our efficiency and reduce our consumption of expensive inputs and lower our fixed costs.
On the commercial side many of our existing contracts have inflationary protections, such as PPI and flavors or surcharge mechanisms and where they do not we are working with our customers to include them.
The extraordinary increases in European Energy crisis for example.
European Energy prices for example support the need for an energy surcharge mechanism.
We are also signing new contracts with better pricing and inflationary protections. We have for example been successful in incorporating magnesium price protections and most of our contracts.
Inflation continues to be significant in 2022, we believe it's manageable and it will be largely offset by improved pricing and a relentless focus on cost control.
I want to reiterate that the net impact of inflation and other cost increases, including energy and magnesium and the actions. We are taking to offset them are included in our revised guidance for 2022.
Now, let's turn to slide 13, and discuss our free cash flow, we generated 60 million euros of free cash flow in the second quarter, bringing our year to date total to 86 million euros. As you can see on the bottom left of the slide we have continued to deliver on our commitment to generate.
<unk> strong free cash flow.
Since the beginning of 2019, we have generated over 550 million euros of free cash flow.
Looking at 'twenty, two we expect to generate free cash flow in excess of $170 million, we expect capex to be between 265, and 275 million euros up from our previous guidance of 250 to 260 million euros due to a combination of inflationary pressures and.
A stronger U S dollar.
We expect cash interest of approximately $100 million euros, and cash taxes of $20 to $25 million.
Now turn to slide 14, and let's discuss our balance sheet and liquidity position.
At the end of the second quarter. Our net debt was 2 billion euros. This was roughly flat compared to the end of 2021 86 million euros of free cash flow generated in the first half was offset by unfavorable noncash FX translation of 90 million euros with the strengthening of the.
U S dollar.
Our leverage reached a multi year low of three times at the end of the second quarter were down almost.
<unk> almost <unk> five from the end of 2021.
Given our revised 'twenty two guidance for adjusted EBITDA and free cash flow, we expect leverage to continue to decline and to fall below three times by the end of this year.
We remain committed to achieving our leverage target of two five times and maintaining our long term leverage target range of one 5% to two five times.
As you can see in our debt summary, we have no bond maturities until 2026. It is of note that during the second quarter, we repaid all of our Covid related financing.
Might this our liquidity of 899 million euros increased compared to the end of the first quarter.
We are very proud of the progress we have made on our capital structure and of the financial flexibility. We are building and with that I will hand, it back to Joe Mark.
Thank you Peter let's turn to slide 16, and discuss our current end market outlooks.
As I mentioned before demand generally remains very strong in the markets, we serve while benefiting from sustainability driven secular growth trends such as consumer preference for infinity recyclable aluminum cans light weighting in transportation and the electrification of the automotive fleet.
<unk> is well positioned today with our diverse and balanced portfolio to capture at least growth.
The packaging market is strong in both North America, and Europe , and domestic supply remains tight we expect mid single digit demand growth in the medium term, which we supported by already announced can make a capacity additions in both regions as well as recent announcements of Greenfield.
Here in the U S to build new aluminum rolling mill.
We recently announced a series of projects to unlock 200 200000 tons of capacity by 2025 to serve these growing market.
These brownfield projects will expand our capacity in both North America, and Europe and come with very attractive returns for our shareholders.
Near term automotive demand continues to be hindered by the semiconductor shortage and other supply chain challenges.
<unk> experienced production stoppages again in the second quarter.
Expect these to continue in the second half of this year from an end market demand perspective. However, we remain very positive on this market and its growth potential given low inventories high consumer demand electrification trends and continued penetration of aluminum.
Let's turn now to aerospace aerospace shipments were up over 50% in the second quarter versus last year and up 25% sequentially.
Major Oems have announced build rate increases we remain confident that the fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new more fuel efficient aircraft.
Turning lastly to specialties.
In general these markets all dependent upon the health of the industrial economies in Europe and North America is also of note that many of the sustainability driven secular growth trends impacting our other core markets are very much at play here as well.
While we have begun to see some preliminary signs of potential weakness in certain end market all specialties markets in both Europe , and North America I'll steal strong today.
Yes.
Let's turn to slide 17 and before.
Before concluding I want to acknowledge some of the challenges we face on the macroeconomic and geopolitical from but to reiterate why we believe steady AUM will continue to succeed.
Our diversified portfolio serves a range of resilient end markets that are well positioned today.
Packaging and stable and growing aerospace is in the early innings of a multiyear recovery.
Automotive is operating well below pre COVID-19 build rates with substantial pent up demand.
Together these three end markets represent roughly 75% of our revenue base.
Second the demand for aluminum in our core market is growing due to durable sustainability, driven particular growth drain these strengths foster healthy supply demand dynamics.
Third we have demonstrated our pricing power over the last several quarters with our ability to pass through most of the inflationary cost increases.
<unk>.
We have built a strong track record of execution and a proven ability to control our costs across both contracting and expanding business environments.
Steve we are demonstrating our ability to generate consistent free cash flow and finally, our balance sheet is rapidly approaching our target leverage range and we have no near term bond maturities and we have a strong liquidity position.
Remain very confident in our ability to succeed.
So, let's turn to slide 18 to wrap up before we open the line for Q&A.
<unk> performance in the second quarter of 2022 was very strong we delivered record adjusted EBITDA of 198 million euros through solid operational performance and strong cost control in the face of significant inflationary pressures, we extended our track record of free cash flow generation.
Net debt to adjusted EBITDA of 3.0 times is a multiyear low.
Looking forward, we are well positioned to deliver strong full year performance in 2022 and beyond.
For 2022, we are now targeting adjusted EBITDA of $670 to 690 million euros and free cash flow in excess of 170 million euros, our guidance assumes business conditions remain roughly as they are today.
Long term, we are targeting adjusted EBITDA in excess of 800 million euros by 2025, and we expect to maintain a leverage target range of one five to two five times.
Main focused on operational performance cost control free cash flow generation, the achievements of our ESG objectives and shareholder value creation I am very optimistic about our future. Despite all the turmoil out there with that idiot, we will now open the Q&A session.
Thank you Carl Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
If you change your lines. Please press star followed by <unk>.
When preparing to ask a question. Please ensure your phone is on mute locally.
Our first question today comes from Curt Woodworth from Credit Suisse. Your line is open. Please go ahead.
Yes. Thank you good morning, John Martin Peter.
Good morning, Kurt.
Okay.
First question I, just wanted to kind of get your thoughts on.
Potential capital return going forward I mean, when you look at kind of your net library and certainly going forward in the free cash flow outlook.
It seems like your balance sheet is getting to be roughly speaking where you want it. So I was wondering if you could kind of address potential.
Pivots in capital allocation priority as you move into next year.
Yes, great question, Kurt So we're going to be consistent on this one as we've said in the past the number one priority is.
Kind of achieve our leverage target and that was two and a half and once we're at two five then we will.
Kind of reconsider our options, but but absolutely as we get to two five which we are rapidly approaching.
Then shareholder distributions will become a more central focus for us and we're kind of thinking about framing that right now.
Okay.
Okay.
And then I guess maybe.
I know you don't give kind of quarterly guidance, but as we think about sort of sequential progression.
Into.
<unk> it seems like momentum obviously in A&P is very good.
Price and mix was obviously, a big upside this quarter, maybe I guess question. A question will be on A&P did you feel like the mix and the progression will continue to scale up.
EBITDA per ton was obviously very strong and then within.
Automotive structures.
It seems like automotive that may be getting a little bit better, but can you comment on maybe what your automotive assumptions are for.
For <unk> in the back half of the year. Thank you.
Yeah, I'll get started and pizza will help me so.
Remember there is seasonality and typically the second half of the year is not as strong as the first half of the year, but thinking about it sequentially.
We continue to see strong demand in A&P, so it's going to be a very solid second half.
But when you look at the EBITDA per tonne you remember we've said historically 700 to 800 Euro EBITDA per ton is a good number maybe a little drifting up towards the higher end of the range Q2 was exceptionally strong I think over 1000. So we don't expect the Q2 performance and will be developed under continue through the end of the.
The year.
Talking about auto.
We don't anticipate.
Much of a change in terms of the.
All of the supply chain issues.
Zero.
OEM customers are going through we expect a continuation of.
The social environment for them.
But we are pleased with how we're doing in that.
Government and yes year over year, if you look at the first half of 'twenty to slightly up.
Overall automotive shipments than we think.
Well said around those levels seasonally adjusted on the second half yes.
Yes, the only thing I'd add I think that's great. The only thing I'd add is that when <unk> comes back we're ready right I mean those are.
Our lines are running very well and so we're ready to absorb incremental demand.
Okay.
Maybe just one quick one I mean, we've seen three new Greenfield.
The hospital being announced.
Tim two months' time, roughly minus $1 8 million tonne.
So it's a pretty.
Pretty significant step function change in capacity coming into the market 25, 26, I would think.
A lot of the I know you can't speak for them, but clearly they've got commitment for some of that capacity beyond which the Jeff.
More growth ahead I was just wondering can you can you kind of comment on your view of that you feel like the market will be able to absorb that capacity. Thank you.
Sure.
As we commented during the analyst day.
<unk> sold out essentially through 2025, 26, and we've got significant contracts that go beyond those dates in the decade.
We are not sold out through 2030 that is for sure.
We believe that given the growth in the market.
You do need.
This additional capacity over the by the end of the decade, So fast we come up on line and the ramp up and how quickly they ramp above six fiscal year ramp up may create.
Either or.
Very tight.
<unk> balance or some excess supply.
If everything comes on stream.
Quickly and ramped up very quickly.
<unk> thousand 687 Aurizon.
Ultimately that level of capacity as needed and b yet besides remember this.
The equivalent today, there's already the equivalent of one of these greenfield that is imported from overseas because we are lacking domestic capacity in the U S.
Indeed in bulbs.
We are certainly part of the equation that we need to think through as we think of the.
Supply demand balance in the U S.
Great. Thank you.
Our next question comes from Emily Chang from Goldman Sachs. Your line is open.
Good morning, John Mark and Peter and Thanks for taking the time today. My first question is just around your comments earlier on the energy cost increases.
And.
Essentially what you're expecting in 2023, but perhaps could you shed some color as to maybe what the hedging.
What hedging you have in place or contracts that you have that to give you that confidence that the additional cost increase into 2023 remains manageable, particularly as it relates to Europe .
Well, so let me first comment on 2022, and say that vis vis 2022, where effectively we purchased all of our energies or effectively.
'twenty two.
Moving into 2023.
The way, we think about this is that.
We do expect there to be significant increases however, as I said in the prepared remarks.
We also think given the extraordinary increases that there is a need for some type of energy surcharge mechanism and we're working with our customers on that right now.
So right now it's hard to give a lot of guidance on 2023, because we really need to see how effective we are in working through that aspect of it so as that develops.
Kind of Q3, and Q4 and early next year, we'll be able to give you a lot more color on 'twenty three in terms of energy cost.
Understood and then a follow up is just around the higher metal costs from sourcing new sources of high purity aluminum.
And similar on maybe domestic U S mag as well, but others costs more one off efficiencies or do they ultimately get pass through on pricing as you work through new supply sources.
Well so.
Well so high purity.
These are costs likely we will have to absorb and it'll be absorbed and kind of through the different mechanisms that we have in place the PPI structure and so forth magnesium cost again as I said in the prepared remarks, we've put in place.
Kind of pass through mechanisms on magnesium cost some of them with delay so.
We will not.
We will not necessarily get all of that in 'twenty two.
Kind of 'twenty three comes along we should be fully protected and.
And it's and it's in our guidance.
Great. Thank you.
Our next question comes from Corinne gunshot from Deutsche Bank. Your line is open. Please go ahead.
Hey, good morning, John Marc and Pete. Thank you for your time today I just wanted to.
You go back maybe on the packaging and.
Can you just remind us.
The contract and the volume that we can expect to be a renewed into 2023 and 2024.
Well we.
We have extended.
Quite a few of our contracts so the rule of thumb, which was historically.
Most of the time five years, sometimes three years, so youre kind of renewing every year, 20%, 25% of the volume maybe it's a little bit less now.
Okay.
And then maybe to just start on that.
Go ahead, I mean, how do you view pricing negotiation photos of contract.
On the <unk>.
20, <unk> thousand 27, given the upcoming capacity in the market.
Yes, so we don't have anything really much to negotiate anymore because.
Most of our contracts are already agreed in lockstep locked in for the period 'twenty three 'twenty four 'twenty five.
That's pretty much.
Done.
Extensions to current contracts entering with plenty of time to work on them. So today, we don't have a building you need all sales.
To get to.
The market and sell our capacity for 28 29 27.
Thank you and maybe one last question, if I can and maybe more for Peter.
Located in an interested into ace.
Thanks, gentlemen, PV Keith <unk> can you just provide some color about the impact that you'd see from days in what could be impacted all I. Thank you for the fiddle Nick over to you.
Yes so.
So.
Maybe the best way to do this in the context of the first half right. So.
In the first half in the first quarter on a year over year basis, we had.
About a $5 million impact in the second quarter, we had about a $10 million impact so relative to last year, we're talking about a $15 million ish tailwind from FX in the quarter.
Oh, sorry, sorry on EBITDA excuse me. Thank you.
So I think $15 million is the is probably the right order of magnitude for the for the first half of the year and then if you look at.
I assume you want to know the impact on our balance sheet and our balance sheet. It really kind of flows into the.
The translation impact.
Our net debt, which is negative which is.
The strengthening of the U S. Dollar is really the reason why our debt balance is maintained persistently around.
2 billion, despite the repayments that we've been making.
But that on a cash flow basis, the FX it should be.
Modest positive to neutral because the.
The benefit that we get on the EBITDA side gets absorbed in things like interest expense and Capex and so forth.
It is positive.
Great. Thank you Larry.
Youre welcome.
Our next question comes from Josh Sullivan from the Benchmark Company. Your line is open.
Hey, good morning.
Good morning, Josh.
Just.
Within aerospace and congrats on the strong growth here, but curious as engines remain a gating factor for OEM deliveries and Airbus has built a couple of gliders already.
Do you see any scenario, where the engine supply chain needs to catch up in there as it related needs slowdown demand for aluminum structured need Scott.
Yeah.
So we're very much aware that the engine part of it is.
Most significant bottleneck at the moment in the aerospace industry.
Industry that gets a lot of breadth.
I don't see any of Hawker customers.
Hitting us to slowdown if anything I mean, we're in Farnborough just earlier this month.
Everybody is asking for more metal than what we can produce.
And so.
So it is a very strong need to replenish the supply chain I mean remember Josh for two years, the build rates slowed down by 30% and we are delivering at 50% less than what we were.
Yes, I guess the.
The rest of the industry as well so there's really paucity of aluminum in the supply chain and everybody is scrambling to get more aluminum and we see that continuing into 2023.
The only thing I might add and then.
Sorry go ahead.
No go ahead please.
No.
Say, the only thing I might add to that is.
Once the.
Aerospace companies start a build rate, we don't think theyre going to be quick to change it right. So we don't see this as a.
We don't see there being a.
Risks.
Slows down in the kind of 'twenty two 'twenty three time frame.
And then just given the impressive EBITDA per ton to A&P.
And then just thinking about the aluminum lithium product.
Understand Airbus when they took over the <unk> hundred 20 program might have reviewed that supply, but given order activity around the <unk> hundred 20 and that the prospects for that program have you seen an uptick in aluminum lithium demand.
Little bit, but nothing different from the rest of me to heavily mix dependent I mean, you know that.
A bit of our aluminum lithium.
Alloys goes on.
<unk> hundred 50, which are the wide body aircraft, which is not.
Experiencing wide bodies are recovering a little bit more slowly than the narrow body. So there's plenty of factors in there.
But we remain very optimistic about the prospects for bioware.
Thank you for the time.
Sure. Thank you.
Okay.
Our next question comes from Karl Blunden from Goldman Sachs. Your line is open. Please go ahead.
Hi, good morning, Thanks for the time.
There are a lot of comments on energy cost and ability to put that on one of you could comment a little bit more on energy supply just given the.
The volatility we've seen in natural gas supply to Europe .
Your thoughts around operating the business in that environment.
Sure.
The way I think of it is.
Two bookends and I'm, not saying, they're all big spend.
We will never change, but one bookend is the current situation where guests continues to flu.
Albeit at a much reduced level.
Right.
Still available for us to operate any until Brexit it's.
Well at very high prices.
So that's one <unk>. The other book end is the commission as the ablation.
The 15% reduction in demand.
From Europe .
And which would trigger certainly even more expensive gas and gas prices.
Russia and scenarios.
What's important to understand is for us.
A 15% reduction in natural gas availability translates into less than that in terms of.
Each of our production.
It would happen most likely that there's plenty of other factors in the environment around us that may change in unpredictable ways, we cannot predict.
15% of reduction.
Natural gas usage, how would that impact.
<unk> customers, our aerospace customers are all packaging customers right, maybe they are impacted more or less than the 15% same for all suppliers. So there's uncertainty, but if this is a widespread.
Kind of share the pain equally across all segments and all geographies in Europe than you were in a place where the reduction is for US is much less in terms of our acuity level merchandise and a 15% reduction so that's one point.
Other point is.
Different regions in Europe are exposed to.
Different levels to Russian gas supply.
And it's important to note that that 15% is <unk>.
They're all European number it's not clear whether it would be different depending on the countries depending on the level of <unk> to our Russian gas.
We are operate as I mentioned in our prepared remarks.
Mostly in countries with the dependency on the European.
Russian gas, sorry, less because thats going to help us as well.
To some extent, but we'll see.
Ill finish by saying is our teams are very reactive we've already done.
Desktop exercises as to what happens if gas is reduced by X y Z.
How do we run our operations, how do we engage with our customers.
So we're getting ready.
We hope we don't have to use our contingency plans, but we already and we are not.
Looking at 18 panicky mode at all.
I think to the extent, it's a 15% reduction in it's very manageable.
That's very helpful. Maybe if I might be more for Peter just on the liquidity and net debt.
Part of the business you provided quite a few updates in your release there on optimizing the various credit facilities you have in place and you paid down substantial regional credit facilities.
Is there more to come on this front in the second half of the year or do you feel like you are where you need to be now on from liquidity standpoint, then.
Flexibility.
I think we're I think we're in a great position from a liquidity standpoint.
Just on what we see right now we don't think we need more liquidity.
We.
Kind of in a more stable environment, we candidly would reduce our liquidity.
But I think given some of the uncertainty around we're going to be a little bit patient and that.
And see what comes in.
Once we start to see more stability will gradually bring that down.
Thank you.
I think it's important to say that we've put ourselves in a position where we can be opportunistic.
Yes.
As a reminder to ask any further questions. Please press star one on your telephone keypad now.
Our next question comes from Sean <unk> from Deutsche Bank. Your line is open. Please go ahead.
Yes.
Sure.
Hi, John Mark and Peter and congrats on guidance.
Guidance amid a difficult environment.
Sean I guess my first question I was curious if there are any opportunities for you to build inventory.
Ahead of any potential curtailments weather on that.
Not on the energy side, but on the metal side and if you've seen any kind of willingness from your clients to allow you to secure inventory ahead of time.
Well you will have noted that.
We've raised our EBITDA guidance, but we haven't really touched all free cash flow guidance and.
We want to maintain that flexibility to be able to increase the inventory. If we believe it's the right business decision for us to make.
We're looking at it.
We certainly again.
Job is to put the company in a place where we can take the best options and we are not.
Constrained by our financial situation, our operating performance, that's where we are so we're quite happy we can make those choices that they make sense.
Great I appreciate that I know a lot of this is game theory right now, but it's very helpful to us over here.
And then my second question I was just curious if particularly around the auto segment.
We had another issuer sort of commenting that Saar had.
<unk> had been sort of depressed for the past two years and they believe that there is a lot of pent up auto demand out there.
Do you also see that being the case.
We think that is yes, and you just need to drive around in the U S and look at the <unk>.
Lots of the RMT right I mean invisible there is an issue there.
So yes, we believe so and again as Peter was saying earlier, we are ready for any big set but we have stopped opening for it.
We will just organizing ourselves for when it happens, but we will not hoping for it anymore.
We'll wait for closing and that makes it.
Yes.
Thank you and then just lastly.
Peter you've outlined a number of things today, it's very helpful on the capital allocation side.
We're curious.
That is potentially an option out there and some of your bonds are trading at a discount is there any willingness to use any of your free cash flow to go out there and repurchase the bonds.
Okay.
Potentially in that kind of a follow up to my comment I made to Carl.
Absolutely, it's an option for us and we're kind of monitoring them up.
We are also cognizant of the fact that.
There's tremendous uncertainty in the market and so as I said before I think our bias for the short term is there kind of keep our liquidity.
Strong, but yes, we're going to continue to be opportunistic and as Joe Mark size I think one of the nice things that we've done as a company over the last several years as we've really put ourselves in a position where we can be opportunistic so we'll.
We will continue to evaluate.
Great and thanks again for highlighting on the energy side today, it's very helpful. Good luck. Thank you.
Got it.
We have no further questions I'll hand back to John <unk>, Chairman and CEO of <unk> for final remarks.
Thank you Elliot and thank you everybody for participating in our call today as you can see there is plenty of uncertainties out there.
Considering these very well positioned to make the most of the situation and we believe that.
Most of our markets are very good long term fundamentals, we are well positioned to reap the benefits of that and in the interim should there be.
So there are crises, we are approaching this crisis with a very strong position on the balance sheet side on the operating side you would have noticed.
<unk> mentioned in his remark.
Our level of activity today as evidenced by the var is higher than it was pre COVID-19.
Despite arguably quite a few of our segments being still in a recession.
Our operating performance in terms of the margin or EBITDA margin.
Stronger than what it was.
And I think Thats, a testament to the great job by everybody at <unk> to make sure that we work on what we can control.
Company and a good play so that we can be opportunistic and make the move with whatever situation and being thrown in there.
So we approach the future with a lot of confidence excitement and optimism. Thank you very much and really pull up to fill in for you again.
<unk>.
Thank you.
Today's call is now concluded I would like to thank you for your participation you may now disconnect your lines.
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