Q3 2022 Constellium SE Earnings Call
They are a complete and we all need to remain focused on this critical priority everyday.
Turning to our financial results shipments will 387000 tons down 2% compared to the third quarter of 2021 is higher shipments in Nancy and <unk> were more than offset by lore shipments inbox.
Increased 27% with 2 billion euros as a result of higher metal prices and improved price had mix as we have said previously well are rare.
The news are affected by changes in metal prices, we operate to burst through business model, which minimize use our exposure to metal price risk.
Our value added revenue, which reflects our sales excluding the cost of metal was 673 million euros up 21% compared to the third quarter of last year.
Net income of 131 million euros into quarter compares to the net income of 99 million euros in the third quarter of 2021.
The increase in net income is primarily related to the recognition of deferred tax asset that were previously unrecognized.
As you can see in the breach on the top right. Adjusted EBITDA was 160 million euros, 12% above the third quarter of 2021. This is a record for the company in the sales quota and includes record third quarter results in both <unk> and <unk>.
Holdings in culprit was a tailwind of 5 million euros and the quarter.
Looking cross our end markets aerospace demand was very strong with shipments up around 50% compared to last year for the second quarter in a row automotive shipments were up double digits in the quarter versus last year with new platform launches grieve driving our growth, but it continues to be impacted by the semiconductor.
Shortage and other supply chain challenges.
Packaging demand continues to be resilient, though are shipments well down in the quarter due to operating challenges that are muscle shoals facility in large part due to a shortage of experienced engineers and operators.
What we are seeing signs of weakness across certain industrial market, we like our overall and market positioning the combination of solid demand pricing power and good execution by our team and a stronger U S. Dollar drove better results. Despite the significant cost pressures, which pizza will discuss later.
No details.
Moving now to cash flow, we extended our track record of consistent free cash flow generation with 74 million euros in the quarter.
As you can see on the bottom right to aside we demonstrated our continuing commitment to deleveraging and in the third quarter at three times hold down 0.6 times from the end of the cell to call to her last year.
Main committed to achieving our leveraged I'll get a 2.5 times and maintaining our long term leverage target range of 1.5 to 2.5 times.
Overall, I am very proud of our third quarter performance.
Looking at the balance of 2022 macroeconomic and geopolitical risks remain elevated and we expect inflationary pressures to continue especially for inputs like energy and in regions more directly affected by the ongoing war in Ukraine.
Like seeing signs of weakness across Tilton industrial market, we have not experienced a material reduction in demand in our core and market.
As I mentioned, we are dealing with some operating challenges I'll tell my Socials facility, but overall, our business have continued to perform well.
We expect to finish 20 twenty-two was adjusted EBITDA landing at the low end of our guidance range of 672, 690 million euros, which would be a new record year for the company. We continue to expect free cash flow in excess of 170 million euros and 2000 2002.
Turning to slide six before handing it over to Peter I want to give an overview of the environment, who are currently facing in Europe .
European Energy markets are in disarray today, largely as a result of the war in Ukraine, and Russia is significant reduction of gas flew to Europe .
Both gas and electricity prices have been significantly above historical levels at some point more than 10 times since the start of the war.
To date or operations have not been affected from an availability standpoint, and we feel comfortable that gas will continue to be available in the near term. There is though still some risks and availability of gas in Europe , especially if you're up experiencing the colder than normal winter.
The current energy situation also has knock on effects in other markets as a result of substantially higher energy costs. Several smelters of guilt sailed operations, which is impacting aluminum and their lawyers availability.
Higher energy costs also creating certain inflationary pressures across a wide range of inputs to our business.
The risk of lower demand due to the impact of throwing markets has increased compared to where we were three months ago.
As you should expect given the performance track record of the Canadian team, we are working hard to manage the company through the current environment.
On the energy front, we have accompanied by default to reduce our energy consumption across our operation.
Underway as we speak here today are active discussions with customers who passed through these higher energy costs, we are making very good progress on these fronts and pizza will go into more details on this.
Relation with pressures in general.
Finally, thanks to the Greta faults of our procurement and operations team, we have thus far been able to successfully manage a number of supply chain challenges overall, our plans are running well without interruption and kidney focus on controlling costs were obviously monitoring the situation very closely and will continue to.
Date, you on development.
That I will now hand, the call over to pizza for further details on our financial performance Peter Thank you John Mark and thank you everyone for joining the call today. Please turn now to slide eight.
Value added revenue or bar was 673 million euros, and the third quarter of 2022 up 21% compared to the same quarter last year.
109 million euros of this increase was due to improve price and mix in each of our segment 44 million euros of this increase was due to favourable FX translation tied to a stronger euro dollar.
Oh, it was a headwind of 11 million euros as higher shipments and anti and asked and I were more than offset by lower shipments in.
<unk> finally metal impacts or a headwind of 27 million euros as inflation input costs, such as hardeners and alloying elements more than offset or scrap performance in the quarter.
There are three important takeaways from this slide.
First we grew our value added revenue by 21% in the quarter versus last year.
Second we continue to have pricing power price and mix in price specifically is the biggest increment of our year over year variance and it's helping us combat inflationary pressures and third with adjusted EBITDA of 160 million euros, and the quarter or margin on value added Robyn you in the quarter was twenty-three.
7%, which is better than our 2019 bar margin.
Now turn to slide nine and let's focus on our part segment performance.
Adjusted EBITDA of 78 million euros decreased 17% compared to the third quarter of 2021.
Volume was a headwind of 9 million euros with higher shipments in automotive more than offset by lower shipments and packaging and specialty rolled product.
Automotive shipments increased 16% in the quarter versus last year as new platforms began to ramp up though we continued to be impacted by the semiconductor shortage and other supply chain challenges.
Packaging shipments decreased 9% versus last year, while demand and packaging continued to be resilient our shipments were lower in the in the quarter, mainly due to the operating challenges that are muscle shoals facility that John Mark mentioned earlier or muscle Shoals team is highly dedicated and is working hard to read.
Crude and trained new hires but this will take some time.
Price and mix was a tailwind of 22 million euros, primarily on improved contract pricing, including inflation related pastors.
Cause we're a headwind a 35 million euros as a result.
Bolt of higher operating costs due to inflation across PARP.
And higher maintenance and supply costs up muscle shoals related to the people shortages, but I just noted.
FX translation, which is non-cash was a tailwind of 6 million euros and the quarter due to a stronger U S. Dollar.
Now turn to slide 10, and let's focus on the Amt's segment.
Justin EBITDA of 45 million euros increased 136% compared to the third quarter of 2021 volume was a tailwind a 4 million euros with higher aerospace shipments more than offsetting lower tid shipments.
Aerospace shipments were up 46% versus last year as the recovery and aerospace markets continues.
Shipments and Tid were down 8% versus last year, reflecting a slowdown in certain industrial markets.
Price and mix was a tailwind of 47 million euros unimproved contract pricing, including inflation related pastors and a stronger mix with more aerospace.
Costs were a headwind of 30 million euros on higher operating costs due to inflation and the production ramp up in aerospace.
FX translation was a tailwind a 4 million euros in the quarter due to a stronger U S dollar.
Now turn to slide 11, and let's focus on the eighth deny segment.
Justin EBITDA of 35 million euros increased by 7% compared to the third quarter of 2021 volume was a 4 million euro tailwind with higher shipments in automotive automotive shipments increased 12% in the quarter versus last year as we experienced some improvement in activity levels. However.
The business continues to be impacted by the semiconductor shortage and other supply chain challenges.
[noise] industry shipments were stable in the quarter versus last year.
Price and mix was a 22 million euro tailwind prior.
Primarily due to improved contract pricing, including inflation related passers.
Cause we're a headwind of 23 million euros on higher operating costs, mainly due to inflation.
It is not on the slide but I want to conclude with a quick comment on holdings in corporate and the quarter holdings in corporate was a tailwind of 5 million euros.
Mark noted the positive result was related to a number of one off adjustments in the quarter. We continue to expect holdings in corporate cost to run at approximately 20 million euros per annum.
Now turn to slide 12, and I want to give an update on the current inflationary environment, we are facing and our focus on pricing and cost control to offset these pressures.
And the third quarter is expected we continued to experience significant inflationary pressures across our business many of which are exacerbated by the war in Ukraine.
As you know we operate a pastor business model. So we are not materially exposed to changes in the price of aluminum.
Our most significant cost input.
That said metal supply remains tight today with high energy prices in Europe , increasingly, forcing smelters to reduce or eliminate capacity aluminum smelter capacity today in Europe is down approximately 1.4 million tons compared to previous levels. We currently expect to be able to source.
Our needs, but in certain cases at an incremental costs.
The cost of alloying elements like magnesium and lithium are significantly higher this year due to supply disruptions enter the actions. We took previously to secure our 2022 supply.
Alloy supply is not currently a major concern for us however.
Supply disruptions in certain cases are forcing us to resource alloy inputs at elevated market prices and we will add significant incremental costs to the second half of 2022.
Nonmetal costs are also higher this year, particularly European energy as previously noted we purchase energy on a multiyear rolling forward basis, which has helped us to mitigate some of the current cost pressures. However, our energy costs will run significantly higher this year, particularly in.
Europe .
Our total energy costs over the 2019 to 21 period averaged around 150 million euros per annum.
Currently we expect total energy cost to be around 250 million euros in 2022, and we expect total energy costs to be materially higher in 2023.
As John Mark noted, we are an active dialogue with our customers on passing through these costs and are making very good progress across all of our end markets.
We will continue to update as you as we progress these discussions.
Well not to the same extent, we are also experiencing significant cost pressures across most other categories, which we expect to continue through the balance of 2022 and into 2000 2003.
Given these cost pressures, we are working across our.
A number of fronts to mitigate the impact on our results are businesses continued to deliver strong cost performance in the quarter and our recently announced vision twenty-five initiative, it's helping.
Across the company, we are working to increase our efficiency reduced 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 inflator surcharge mechanisms where.
And where are they do not we are working with our customers to include them.
We have now for example, been successful and incorporating magnesium and lithium price protection and most of our existing contracts in response to the extraordinary changes in these markets.
The extraordinary change the extraordinary increases in European energy prices support the need for some type of energy surcharge mechanism and we have already been successful in adding one and a number of existing contracts.
Where we are signing new contracts, they are coming with better pricing and a range of inflationary protection.
As you can see in the bridge on the right year to date, we have been very successful with price and mix the largest increment being price and offsetting inflationary pressures.
Inflation continues to be significant in 2022, we believe it's manageable and that it will be largely offset by improved pricing and our relentless focus on cost control.
The net impact of inflation and other cost increases and the actions. We are taking to offset are included in our guidance for 2022.
2022 has been a challenging year from the standpoint of inflationary cost pressures that have run north of 200 million euros.
Looking forward to 2023 with energy prices at current levels and inflation generally remaining stubbornly elevated we expect the inflationary pressures in 2023 to be greater than in 2022, we.
We continued to believe that we will be able to offset most of this cost pressure in 2023 or in future periods.
With a combination of the tools that we have noted.
Consistent with our past practice. It is too early to provide any specific guidance for 2000 twenty-three, especially this year given the current environment and the number of open initiatives. However, based on our current view of 2023 costs and business conditions and the potential lag between.
We believe that our 2023 adjusted EBITDA will be moderately lower than our 2022 adjusted EBITDA.
Now, let's turn to slide 13, and discuss our free cash flow, we generated 74 million euros, a free cash flow in the third quarter, bringing our year to date total to 160 million euros.
As you can see on the bottom left of the slide we have continued to deliver on our commitment to generate consistent strong free cash flow since the beginning of 2019, we have generated over 625 million euros, a free cash flow.
Looking at 2022, we expect to generate free cash flow in excess of 170 million euros. This includes a number of strategic inventories. We are built to ensure that we can meet our customer needs given the shifting market conditions. We will continue to evaluate this need over the fourth quarter we.
We expect capex to be between 100, or 265 and $275 million a year.
This year, we expect cash interest to be approximately 110 million euros, we expect cash taxes of approximately 20 million euros.
Now, let's turn to slide 14, and discuss our balance sheet and liquidity position.
At the end of the third quarter. Our net debt was 2 billion euros. This was roughly flat compared to the end of 2021 as a 160 million euros of free cash flow generated in the first nine months of this year was offset by unfavourable non-cash FX translation of 160 million euros with.
The strengthening of the U S dollar.
Our leverage remained at a multiyear low of three times at the end of the third quarter or down six times versus the end of the third quarter last year.
Given our 2022 guidance for adjusted EBITDA, and free cash flow and the impact of the stronger U S. Dollar we expect leverage to end the year around three times.
We remain committed to achieving our leverage target of two and a half times and to maintaining our longterm leverage target range of one and a half to two and a half time.
As you can see in our depth summary, we have no bond maturities until 2026 or liquidity remains strong at 819 million euros at the end of the third quarter. We are very proud of the progress we have made on our capital structure and have the flexibility. We are building and I'll know him to call back to his remark remark.
Pizza.
To cite 16, please and discuss current and market outlooks.
The packaging market continues to be strong in both North America, and Europe and domestic supply remains tight.
In North America, we have seen some short term inventory adjustments at the Ken makers, but we believe this will be short lived.
Focus on sustainability is driving increased demand for infinity recyclable aluminum cans and we are confident in the long term outcome for this and market even announced can make our capacity additions in both regions as well as recent announcements of Greenfield investment here in North America.
What about this based on these growth in both North America, and Europe through a series of projects to 200000 tonnes of capacity by 2025 as announced at the Ah nearly state earlier this year.
Turning to motif near term the demand continues to be hindered by the semiconductor shortage and other supply chain challenges in the industry low radio operating at Lou utilization rate. However will remain very positive in this market inventories are low consumer demand remains high and vehicle electrification.
<unk> and sustaining the trends will continue to increase the demand for Lightweighting and Lucille two recycled Thompson.
Let's till now to aerospace.
Aerospace shipments were around 50% in the third quarter of his last year, but they'll still only back to approximately two thirds of pre COVID-19 levels may.
Major Oems of announced field rates increases will remain confident that the fundamentals driving aerospace demand remained intact, including growing passenger traffic and greater demand for new more fuel efficient aircraft.
As a johnson the left side of the page highlights these three core and markets represent 76% of our LTM revenue, we like the fundamentals in each and hence my consistent comment we like a hand, even in these uncertain times.
Turning less due to all the space shuttle is in general these markets are dependent on the health of the industrial economies in Europe , and North America, and we are seeing signs of weakness in a number of markets across both continents. It is also of note that many of the sustainable keep trends.
Bolting growth and alcohol market are very much at play here as well in markets like those will semiconductors rail and Fuller.
<unk> applications of cool remaining high demand in the current environment.
On balance Ethan across all specialties portfolio, we liked Cal hand too.
But it's still noticed like 17 to wrap up before we open the line for Q&A from stadium deliver strong performance in the quarter, including record sales quarter. Adjusted EBITDA of 160 million euros were extended off track record the free cash flow generation and our net debt too just EBITDA three times remains in Milton.
<unk>.
We continue to expect a strong 2022, and I will targeting the low end of our adjusted EBITDA guidance range of 672, 690 million euros and free casually in excess of 117 million euros silhouette of our guidance reflects adjusted EBITDA growth of around 15% compared to 2020.
One and a very strong free cash flow yield.
Achieving this will be a strong results, particularly given the significant number of full civil challenges we have faced this year.
Looking for all of 2023 would be another challenging year, given the extraordinary inflationary pressures, we are facing particularly particularly on European energy costs and given the recent slowdown in sales and industrial market.
<unk>, we are currently expecting higher inflationary pressures twenty-three the 822, which will remain confident in our ability to burst through most of these ghosts in 2000 2003 or in future periods.
Is inflationary pressures subside, we believe we will emerge an even stronger company business model provides a strong foundation for long term success and we believe we have an exciting future ahead with a alternative to grow our business and enhance profitability in return.
Diversified portfolio and our end bucket positioning will enable us to take advantage of sustaining VT driven secular growth trends such as consumer preference for infinity, recyclable aluminum cans, lightweighting and transportation and the electrification of the utility feet.
<unk> team as demonstrated resilience and ability to execute across a range of different market conditions and am confident will continue to do so.
As a result to Ah redecorating, our long term guidance of adjusted EBITDA in excess of 800 million euros by 2025 and target leverage range of 1.5 to 2.5 times, where.
We remain focused on operational performance cost control free cash flow generation, you achievement of our ESG objectives and shareholder value creation in conclusion, I remain very optimistic about our future with that operator will now open to any session.
Thank you <unk>.
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We'll pause here briefly ask questions are registered.
My first question is with Emily Chang from Goldman Sachs.
Emily Your line is open.
Good morning, John Locke and painter and thank you for the update this money. My first question is just around.
Thank you and the last question is just around the palace hedging strategy that you have an understandably that the 2020 train outlook probably has a few meeting pieces that we wanted to understand if you can <unk> that <unk> books of 2023, and if he's being able to take advantage and some of <unk>.
<unk> lowered European top prices right now.
Yeah. Thanks, Emily so.
We had just we've said in the past on a multi year rolling forward basis.
And we lay our in our hedges over time.
And so if you take kind of a three year horizon. That's typically what we're working with and we aim to be approximately kind of 75% to 80% hedged before the beginning of the year, so without saying exactly kind of what are.
What are kind of hedge position is for 23, you can kind of figure it out in rough order of magnitude from.
And then with respect to your second question.
We are watching energy prices very closely.
What you've seen in the spot market has not really translated itself fully into the forward market, but but we're watching that carefully.
Hopefully it will create some opportunities for us.
Great. Thanks, Tanner and then a second question if I May and then you mentioned, there's Sally type metal supply landscape out there right now and in the past I believe you've mentioned that you no longer can see me in Russian model across your portfolio is small but to the extent that we do get announcement from either the white house on the island me around further.
Sanctioning, Russia, not all how do you see that impacting our ability to package primary aluminum.
So.
Still purchase some Russian Mitchell.
Pull all the records and we've got contracts, so, which we honor I mean.
Roussel sanctioned.
I think it's.
Very difficult to associate you knew what would happen if there was.
Sanctions and what kind of sanctions that would be against.
But I think we went through that a little bit in 2018, and what happened was.
Let me see.
So.
So section of.
Purchases from Roussel, and a big Spike in.
NME in premiums, which means on one and it gets a little bit more difficult in the short term two fundamental we need but on the other hand, I'll scrub profits are increasing because the NME goes up so in terms of impact on the EBITDA, which ultimately what matters.
And I think.
And in terms of what it means we'll we'll see when it happens, but I think from any of the deaths standpoint that shouldn't be.
Catastrophe fall from it and just one thing to jump into.
Enhancement, Joe Mark said.
We buy less than five per cent of our metal.
Resolve.
And finally I'll add as well you will have noted that our inventories are quite high.
Deliberately sue and we plan to continue to maintain some high inventories going into the end of the year, So that's where they're insulate it from.
The vicissitudes of what May happen in terms of what we saw from where.
Great. That's very helpful. Thank you bye.
Thank you.
Our next question is from current Woodworth from credit Suisse.
Care to your line is open.
Yeah. Thank you good morning, John Maher computer.
Moaning growth.
So I guess with respect to the guy for for twenty-three and if we look at year to date. This year based on your bridge. It seems like your roughly 30 million.
Ahead on price first cost and obviously, you're outlining materially higher energy continued inflation next year.
So that the 210 bucket year to date.
Kind of give us a little bit of idea that.
If you're ahead. This year then are you kind of thinking that you're gonna see a reversal of navy the same magnitude so theoretically.
It's kind of like what you are saying that the operating libraries is gonna be negated by price cause if you can give any more.
Granularity, how should we should be thinking about that that'd be helpful.
And to occur well first I mean, we're not giving guidance yet I mean, we're trying to give you some color as to how we look at the future given the pressures we are feeling on the.
Cuss side on there will be inflation in Europe through your writing if you look at page 12.
We're ahead. This year, we are able to improve our price I'll mix of products more than we suffer from the inflation.
However.
There is a lag in terms of what we tend to how.
How we can push through the.
The.
The cost pressures and we are seeing more inflation.
Energy in the second half of this year than we are but then we have seen in the first half compared to two.
Two 2021 so.
All judgment at this point in time.
Look at the big bucket from a volume standpoint, we've got 76% of our business is pizza lasseigne markets that we like.
I mean.
That we like very much key strategic markets packaging should continue to be resilient arrow, the new signs of weakening whatsoever.
And it's going to continue to grow quite significantly next year.
And then in the <unk>.
<unk>, we've been down.
21, 22, 20% below the trend rate.
In terms of <unk>.
<unk> do we think the fundamentals on the volumes are quite good and you know specialties.
There is more than half of them, which are going to be very good.
Going into next year so.
We think on the volume side.
No it's not too bad in this the weakness will seeing may continuing to next year, but overall we.
I said in the prepared remarks, we'd like guidance.
In terms of pricing, we've been very strong and very good at pushing food price increases the low low price increases coming but there is also no crust coming next year with that is there.
Significant spikes, we've seen energy prices in Europe , and he told a matter of how fast do we get to a resolution how fast do.
Do we push that through through energy surcharges, we could PPI protection <unk> would apply to the.
To the price <unk>.
<unk> in the prior period.
Inflation and push it into the next period and that may be a lag typically of one year between when you get the higher prices compared to when you get the higher costs into Yo P&L. So I think that's what we're trying to describe with our best view.
Under the current conditions.
We think that lag is going to penalize us going into next year, but two Essex temporary spleen and that's why we all read to racing very 32025 guidance. If you look into foreign markets in 2025.
Four energy these outcast that we'd have been passed through.
Given our business model and once we factor that in with still feel very comfortable with the 2025 guidance. We just think there is going to be kind of a page.
Next year as the slope of <unk> has been so tremendous.
Does it help okay. That's helped.
Yeah, I mean, I know that I think I believe yet PPI escalators for a fair amount of your your business as well in Europe , I mean German.
P. P I was up in 45% in September so.
I I assume that that will be a meaningful health coupled with the fact that you're trying to implement surcharges, but it seems like what you're saying is it just the contractual nature of these contracts that just takes it takes time essentially to show the court coming in and then you can recoup price or.
Or is it just the fact that energy is upset dramatically. That's P. P. I is not going to be enough to help upset and I know, it's still early to talk about next year as well cause energies.
Around a lot.
Yeah, but those factors come into play I mean.
Will such an extraordinary environment that the pizza and make any of them himself has not been tested with energy prices had good by 500 600, 700% right. So we have to see how it comes out but then also we're pushing through energy sociologists re success with the with some.
Customers, but.
To get a <unk> or all three months later that does make a difference.
Okay. Thank you very much that's all.
Yep.
Our next question is with Corinne blonde charged from Deutsche Bank Green.
Screen Your line is open.
Hanging in Nottingham I can take care. Thank you for that time is money. After question may be the first one you mentioned the operation Netflix back at the at the Mets actually <unk> can you provide any anything else coming Tammy alone is that going to transition to function.
23, Sweet and then I think the second question was trying to <unk> the package.
And the volume I think William went on 14 15 per cent just caught the island and anytime Susan 90 fee, but I think that doesn't affect most of the day. So just change anything maybe what happened is cloth and how to think about the Netflix nine months cough up my kitchen.
Yeah, Good morning Glory and thanks for the question. So in terms of the operational issues that to my Socials.
The essentially boils down to the key factor, which is the finding and retaining talents in the night. So ISTAT recently that turnover stepped on over in the U S and manufacturing is around 40% to another that level where in the twenties.
But that's painful.
Painful in terms of bringing in new people training them and we have jobs that need pretty solid qualification experience.
So if it takes one year two years to bring somebody to the top of their game, obviously as you have more new people.
The multitude people spend time training then.
Get that has an impact on productivity. So that's really the key challenge, we face the socials and that translates into <unk>.
Less volume that we were able to produce do we still need a contractual commitments that there is always a band around them. So we tend to be at the lower end of the band right now and in addition, there has been some inventory adjustments.
In in the North American system is.
The market is growing very fast.
That's never a linear when the market grows.
So fast so.
So that that's on the volume sides I mean, the root cause and also the cost side the lack of.
Experienced trained operators engineers discussing us a little bit in volume an annuity.
Annuity cusp.
We've got another factor too which is with the decreasing.
NME in Midwest premium price all recycling operations.
A little bit less profitable and we used to say that we had something around.
5 million euros of benefit to.
Two strep spreads.
<unk> notes here animals. So it's a combination of these.
Two factors I mean trading experience people, leading to higher cost and lower volumes and scrub spreads out alright, creating the situation now in terms of how that projects balls.
I will make a prediction on a scrap spreads.
In the.
The person thinks germs that continues to be very favorable Joseph theories.
At any zoa.
But I think.
Getting the situation.
Back to.
Target productivity system Essentials, we will take a few quarters, we have stabilized situation, we used to have a 150 open positions.
<unk> 30, 40, now so we're making progress that he is going to take six months nine months to to get back on track.
In terms of the packaging market continues to see does the free strong and solid and.
Pretty good outlook for.
The rest of the year.
And next year, you are right to point out that there is seasonality and typically two.
Two four is going to be Q lower than Q3.
<unk>.
So that's that's kind of mine socio question.
Thank you so just to clear up hopefully understand for the <unk>.
<unk> when you see William <unk>, Netflix <unk>, well, I think actually using that and move on when that anything is coming from the night.
Oh is there is there is a portion of it which comes from the fact that lacking enough staff trained staff, we have not been able to run at the rate of productivity that we wished we would have so there is some of it which is inventory adjustments in the market and there is some of it which is not reaching the productivity levels.
We we should have it.
And dunno most circumstances.
Mmk great. Thank you.
Thank you.
Our next question is with Tim Tanners from Wolf Research <unk>. Your line is open.
Yeah, Hey, guys. Thanks, a lot.
Just touch again on the client's situation.
Lower prices, we've been kind of watch balance inventory and work down and and I know you mentioned that there is a reason to keep strategic inventories of certain.
Allies, and so on but that's still been pretty EM, yeah, sticky inventory levels they'll get to ask the question that definitely what do you think it takes to see and unwind Darren an improvement in working capital Lisa.
Yeah, Thanks, Tim I think.
Well first of all remember that.
We had our inventory so from a kind of a metal price variability there might be some translation impacts, but there shouldn't be material cash impact on us.
But in terms of.
What we're seeing we still see a decent amount of uncertainty in the market.
In terms of metal supply in terms of.
And market demand and so forth and all of us leading us to make sure that.
We want to be sure that we have the materials to kind of serve our customers. So as.
As we see more stability and.
Think more stability would probably mean that.
Just to paint the picture that we've got a little bit clearer guide on the direction of the economy that number two we have a little bit clearer guide on kind of where energy prices are going.
And therefore kind of output.
Output from various smelters on metals and alloys is clear.
Then we'd be prepared to to bring that down but it's a it's a it's definitely an opportunity for us and I'll remind everyone on the call but <unk>.
A significant source of cash for us when we do eventually unwind it so.
Right, Okay, and that's why we're still watch they'll have it I guess the along the same lines. This corner you talked about and have your leverage.
You said at three times and then that prior earnings last corner, you had said below sorry three times.
Library expectations, so is that purely that slower inventory release and the low end of the EBITDA guide or is there anything else. There and is there and is this just a question of timing and greater visibility that you can get to that the target she laid out thanks.
Yeah sure. So I guess there are a couple of things number one moving to the low end of the EBITDA guide definitely <unk>.
But the big headwind that we have had is an FX alright. So we're generating all of this cat.
Free cash flow, but the effects of offsetting it and if you do the math on this the incremental EBITDA that we get from.
Kind of FX tailwind is not does not offset the negative that we get.
Effects translation on the on the dollar dot right. So as a consequence.
We are.
Our leverage ends up being a little bit higher than what we expected it to be.
But of course when FX moderates then this will go the other way.
Got it okay that makes sense makes damage.
Yeah, maybe just one other point.
Given some of the uncertainties in the market, we've probably been a little bit more conservative with our capital structure than we might have otherwise been for example, our depth trading at a pretty significant discount and so some might say why don't you buy back from that but we want to make sure. We know what we're heading for are heading.
Through before we start making those decisions.
Okay. Thank you.
Our next question is with Josh Sullivan from the benchmark company Yeah.
Joshua line is open.
Hi, good morning.
Pulling Josh.
Is there any arbitrage you're able to coordinate between the European and North American operations or inventory how fungible.
Production in Europe could you shift anything in North America, or the Christian cost is too high.
I think we can do it in a very marginal basis, but typically we'd like to avoid it.
The market itself steel.
Good for us in Europe , I mean, we're running it to free high utilization rate.
So.
There is not that much even if.
Economical.
Advantages, which scale.
So much.
We are very booked in Europe .
And in the U S. We don't have this kind of our capacity to to do that in a big way.
Okay. Okay.
Just on the Aerospace died what have you seen relative to OEM inventory stock you know how to upcoming production increases historically, we would see policy in the line to prepare for these increases.
Clearly unique cycle, you think that the current demand that you are seeing reflects any policy on the inventory or do you think there's been any longterm structural changes to more kind of it just in time environment going forward.
I think it's too early to tell.
Everybody's scrambling to rebuild inventories.
Because they were really depleted as I think I've mentioned in the full two years not gets slowed down by 30% of the we're shifting at 50% of which we used to be shipping. So I think everybody's trying to rebuild and that's it.
I think it's too early to tell.
Okay.
Thank you for that.
Thank you. Thank you.
Our next question is with Carl Blendon from Goldman Sachs Carl.
Karl Your line is open.
Thanks, so much for the time, Peter you kind of preemptive one of my questions there as to why not buy back some debt given where it's trading now I guess he just to build on that comment that you were making the prior question. When you think about the market may be normalizing of becoming more.
Just visibility improving is the next step on the balance sheet.
Pay down debt or is it to extend the maturity runaway in other words wood.
They would need to be really really unclear as to where it was heading for you to look to extend versus just to pay down and get towards that leverage target that you're looking to get to about 2025.
Well again, if you think about what we've said consistently we want a lower gross debt so that kind of points us in the direction of of.
Paying down debt as opposed to just extending.
The other thing I'd say is that.
Despite some of these headwinds that we have and as John Mark said.
We're kind of going through the lip of energy prices in Europe .
When we look at the overall.
Kind of horizon, we see a lot of opportunities for the company.
Internal opportunities that we can do take advantage up to be better projects that we can do so markets that really want our project. So our want our our product so.
That leads us to more forcefully direct ourselves towards getting that balance sheet to a place where.
Regardless of what the environment is we can pursue these because we really believe that there are some opportunities to really enhance the returns of accompanied by by some of these initiatives.
Uh-huh that's helpful contact with us.
Sorry, sorry.
Sorry, John wanted Felix.
Really do not feel any need to refinance anything at this stage.
If you look at the quantum of what becomes due in 2026 and you compare it to the free cash flow generation of the company.
To the level of fitness entry, we have now that we will not have by that time.
We should be paying that down.
Quite handsomely so I.
I think we're in a very good place from the.
Capital structure standpoint.
Just be patient.
Chipping away at the growth that mhm.
Uh-huh that's helpful.
There was some comments only around forward purchases of energy and doing that on a rolling basis.
I understand that.
Details might be hard to disclose but how much flexibility do you have there to to do more in a given month versus another month or is it should we expect it to be fairly consistent over the course of the year.
Well I.
I think you should expect it to be fairly linear I mean, we have a policy that we fought and we followed the policy right. So however, within the context of the policy. We also have the ability to get the team together and decide there is a good opportunity here are we should you know on the other hand, we should wait a little bit.
So we have some flexibility within it but generally speaking we're following the policy.
Thanks, a lot I appreciate it.
Yep.
Our next question is with <unk> from Deutsche Bank <unk>.
John Your line is open.
Hey, there just a couple from me.
So I guess he's going back to the aerospace question I think you said, you're roughly two thirds of pre COVID-19 levels is that.
Sort of a utilization should we assume utilization sort of in the two thirds level.
Yes.
That's and then Shaw.
Is it fair to think that you guys can't greater economies of scale as that ramps up moving forward.
Somewhat but at the same time, you're good threshold effects and we need to hire more staff and all that so that's a varied some economies of scale.
But.
Like everything.
She'll have done is pure gravy.
So it is definitely our best margin product right. So you'll see it fall fall through and you are seeing it fall through on the on.
EBITDA line for for anti.
Right absolutely.
And then I guess, just switching the capex a little bit obviously, you haven't given guidance I respect that but I think in the past Peter you've sort of talked about the flexibility to adjust capex the market conditions.
I was curious if you can comment on that and then also can you just remind us what is sort of sustaining or maintenance versus growth.
Yep, so well first on the on the second question maintenance is about 200 so.
A good number to use an upfront.
So you know we've been on this journey to improve our capital structure and I think the.
The frustrating thing for US is that we're really almost there and then we're hitting this a bit of a speed bump your butt.
But but one thing is is that when we look at this and this goes a little bit to the response that we gave to Carl's question.
We think we've gotten to a place where we need to run the company for the long term benefit of our stakeholders right.
And therefore, we think that we can continue with our Capex plan. The the plan that we outlined in the in the analyst day and put some of those projects in place to deliver returns even though.
We might be a little bit lower on the on the adjusted EBITDA side. So so for the time being I mean again never say never but for the time being our plan is to is to <unk>.
Stick to the Capex plan that we have outlined up the analysts say and and build the company for the future taking advantage of the opportunities we see.
Fair enough.
And an extra work.
[noise] working.
Let's see.
Sorry go ahead, just wanted to compliment.
And actually on some of these projects that we have in the site that we <unk>.
April to any state that profitability their returns are improving the higher energy costs are making quite a few of these projects around the recycling and efficiencies very attractive to us.
So yes, I mean, the plan would be to go ahead, and Ah twenty-three and onward, because we think these are very good project alone in the short and number of info shareholders.
Understood as usual alright.
Thank you very much I appreciate all your help.
Thank you.
That concludes our Q&A session. So I will pass the confidence back over to our house, John Mark Charmaine C O <unk>.
Thank you Austin and thank you everyone for listening in today as.
As we said we've got some challenges ahead, but we faced up to our worst challenges in the past and I'm sure. The company will prevail again, I'm very optimistic about our future and our ability to.
<unk> temporary squeeze a very temporary one thank you so much.
That concludes today's call. Thank you for your participation you may now disconnect your line.
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