Q4 2022 Constellium SE Earnings Call
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Hello, and welcome to today's <unk> fourth quarter and full year 2022 results call. My name is Bailey and I'll be the moderator for today's call.
Lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
If you would like to ask a question. Please press star followed by one on your telephone keypad I would now like to pass the conference over to Jason housekeeping head of Investor Relations. Please go ahead.
Thank you Billy I would like to welcome everyone to our fourth quarter and full year 2022 earnings call.
Our call today, we have our Chief Executive Officer, John Marc Germain, our Chief Financial Officer, Peter Matt <unk>, our CFO designate.
After the presentation, we will have a Q&A session.
A copy of the slide presentation for today's call is available on our website that can sell M 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.
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 of risk factors in our annual report on form 20-F.
All information in the presentation is as of the date of the presentation.
Take no obligation to update or revise any forward looking statements are not from new information future events or otherwise except as required by law.
In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which supplement our <unk> disclosures without further Ado I'd like to turn the call over to John Martin.
Thank you Jason Good morning, and good afternoon, everyone and thank you for your interest in consortium.
Let's begin on slide.
Slide five I want to start by thanking each of our 12500 employees for their relentless focus on safety.
Safety is our number one priority and a key pillar of our sustainability strategy.
I'm pleased to report that we delivered again best in class safety performance in 2022, reducing our recordable case rate for the year to one eight per million hours worked I would like to specifically recognize several of our sites for their excellent safety performance all Cheng Cheng joint venture.
In China completed 3 million hours without a recordable case in 2022.
Muscle shoals necessary Zac, Ravenswood Zynga and valet operations, all completed 1 million hours without a recordable case.
Finally, 12 of our sites completed 2022 with zero recordable cases.
Our safety journey is never complete.
We all need to remain focus on this critical priority every day will.
We remain fully committed to achieving our safety targets to reduce our recordable case rate to one 5 billion.
In hours by 2025.
Now, let's turn to slide six and discuss the highlights from our fourth quarter performance.
Shipments were 368000 tons down 5% compared to the first quarter of 2021.
Revenue increased 8% to $1 8 billion euros as a result of improved price and mix.
Partially offset by lower metal prices and lower shipments remember what our revenues are affected by changes in metal prices, we operate to pass through business model, which minimizes our exposure to metal price risk.
Our value added revenue, which reflects our sales excluding the cost of metal was 696 million euros up 18% compared to the same period last year.
Net income of 30 million euros in the quarter.
<unk> to net income of 7 million euros in the first quarter of 2021.
You can see in the bridge on the right. Adjusted EBITDA was 148 million euros slightly above the first quarter of 2021 and in line with our prior guidance.
Also we extended our track record of consistent free cash flow generation was 22 million euros in the quarter.
Looking across our end markets aerospace demand was very strong with shipments at around 50% compared to last year. So the third quarter in a row.
Automotive shipments were up double digits in the quarter versus last year with new platform launches driving our growth.
Packaging shipments were down in the quarter due to inventory adjustments across the channel most can makers and operating challenges at our plants in muscle Shoals.
Which as we discussed last quarter, we're in large part due to a shortage of experienced engineers and operators.
What we are seeing signs of weakness across certain industrial markets, our industrial business overall performed well.
The combination of improved mix and pricing power and solid execution by our team in overcoming significant inflationary pressures drove our strong results, which Peter will discuss later in more detail.
Now, let's turn to slide seven for the full year highlights.
For the full year shipments were one 6 million tons or up slightly compared to 2021 revenue increased 32% to $8 1 billion euros. This was primarily due to higher metal prices and improved price and mix on net income of 308 million euros compare.
As to net income of 262 million euros in 2021.
Adjusted EBITDA was 673 million euros or <unk>.
16% compared to last year. This performance is a record for the company and a record for our A&P and <unk> segments.
We delivered our fourth consecutive year of positive free cash flow with a total of 182 million euros in 2022, which was also a record for the company.
As many of you recall in April last year at our Analyst day, we began reporting our return on invested capital or ROIC.
And said, we would update our ROIC at the end of each calendar year for.
2022, who achieved ROIC of 11%.
120 basis points from nine 8% in 2021.
As you can see on the bottom right of the slide we demonstrated our continuing commitment to deleveraging ending the year at two eight times or down 0.6 times from the end of 2021.
Overall, I'm very proud of our fourth quarter and full year 2022 performance, we demonstrated our pricing power by delivering record adjusted EBITDA and record free cash flow in 2022, despite significant inflationary pressures.
With that I will now hand, the call over to Peter for further details of our financial performance Peter Thank you Jean Marc and thank you everyone for joining the call today. Please turn now to slide nine.
Value added revenue or bar was 696 million euros in the fourth quarter.
Up 18% compared to the same quarter last year.
Looking at the fourth quarter of 134 million of this increase was due to improved price mix in each of our segments 35 million of this increase was due to favorable FX translation tied to a stronger U S. Dollar.
Volume was a headwind of 27 million euros due to lower shipments in part.
Finally metal impacts were a headwind of 37 million euros as inflation on input costs, such as hard nurse and allied elements more than offset our scrap performance in the quarter.
For the full year of 2022 bar drivers were similar except for volume, which was a positive contributor there.
There are two important takeaways from this slide first we grew our value added revenue by 21% compared to last year and second we continue to have pricing power price and mix and price specifically is the biggest increments of our year over year variance.
And helped us to offset inflationary pressures.
Now turn to slide 10, and let's focus on our segment performance.
Adjusted EBITDA of 71 million euros decreased 20% compared to the fourth quarter of 2021.
<unk> was a headwind of $13 million euros, with higher shipments and automotive more than offset by lower shipments in packaging and specialty rolled products.
Automotive shipments increased 20% in the quarter.
Versus last year as new platforms began to ramp up and demand generally appeared stronger packaging shipments decreased 12% in the quarter versus last year due to short term inventory adjustments from our can sheet customers in both North America, and Europe and production challenges at <unk>.
The shoals.
Price and mix was a tailwind of $33 million euros, primarily on improved contract pricing, including inflation related pastures.
Costs were a headwind of 42 million euros.
As a result of higher operating costs due to inflation across park.
And higher maintenance costs at muscle shoals related to the shortage of experienced engineers and operators that Joe Mark mentioned previously.
Our muscle Shoals team is highly dedicated and we are working hard to recruit and train new hires but this will take some time.
FX translation, which is noncash was a tailwind of 5 million euros in the quarter due to a stronger U S dollar.
For the full year 2022, PARP generated adjusted EBITDA of 326 million a decrease of 5% compared to 2021 the drivers of our full year performance were similar to those in the fourth quarter.
Now turn to slide 11, and let's focus on the A&P segment.
Adjusted EBITDA of 56 million euros increased 87% compared to the fourth quarter of 2021 volume was a tailwind of 1 million euros with higher aerospace shipments offsetting lower tid shipments.
Aerospace shipments were up 50% versus last year as the recovery in aerospace markets continues shipments in tid were down 18% versus last year, reflecting a slowdown in certain industrial markets.
Partially offset by strong demand in defense and semiconductors.
Price and mix was a tailwind of 64 million euros on improved contract pricing, including inflation related pass throughs, and a stronger mix with more aerospace.
Price and mix bucket in the fourth quarter of 'twenty two included a customer payment of $8 million related to a contractual volume commitment.
Costs were a headwind of 38 million euros on higher operating costs due to inflation.
For the full year 2022, A&P generated record adjusted EBITDA of $217 million, an increase of 96% compared to 2021. The drivers of our full year performance were similar to those in the fourth quarter as a reminder, the <unk>.
And mixed bucket for the full year included customer payments of $18 million related to contractual volume commitments, one last point on A&P.
In the past, we have said EBITDA per ton for the segment should be in the 700 to 800 Euro range.
Based on.
Our contractual positions and the performance of the business. We now expect EBITDA per ton to be 800 to 900 euros.
Now turning to slide 12, and let's focus on the <unk> segment.
Adjusted EBITDA of $31 million was flat compared to the fourth quarter of 2021 volume was a $2 million euro tailwind with higher shipments and automotive, partially offset by lower industry shipments.
Automotive shipments increased 8% in the quarter versus last year as.
As we experienced some improvement in activity levels.
Industry shipments were down 3% in the quarter versus last year price and mix was a $15 million euro tailwind, primarily due to improved contract pricing, including inflation related pastures costs were a headwind of <unk> 18 million euros on higher operating costs mainly.
Through inflation.
For the full year of 2022, <unk> generated record adjusted EBITDA of 149 million, an increase of 5% compared to 2021. The drivers of our full year performance were similar to those in the fourth quarter.
It is not on the slide but I want to provide a quick comment on holdings and corporate in the quarter Holdings and corporate was a headwind of $8 million euros. The result was mainly due to timing and a number of one off adjustments in the quarter.
For the full year 2022, our holdings in corporate expense was $19 million euros, and we continue to expect holdings and corporate expense to run at approximately $20 million euros per annum.
Now turn to slide 13, where 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.
Throughout 2022, we were faced with broad based and significant inflationary pressures and we currently expect this to continue throughout 2023.
As you know we operate a pass through business model, but we are not materially exposed to changes in the price of aluminum our largest cost input.
That said metal an alloy supply remains tight today, given smelter shutdowns and supply disruptions, we were able to resource our needs in 2022, and we currently expect to do so again in 2023, but add incremental costs lag.
Labor and other non metal costs will also be higher again this year.
Particularly European energy I will go into more detail on energy in just a moment.
Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results. Our businesses delivered strong cost performance in 2022, and we continue our relentless focus on costs in 2023.
Our recently announced vision 25 initiative is helping across the company. We are working to increase our efficiency reduce our consumption of expensive inputs and lower our fixed costs.
On the commercial side many of our 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 as we have mentioned in the past. These surcharge mechanisms typically have a lag impact but.
They do provide an effective mechanism through which we can recoup our costs where.
Where we are signing new contracts, they are coming at better pricing and a range of inflation and with a range of inflationary protections.
As you can see in the bridge on the right. In 2022, we were very successful with price and mix, the largest increment being price and offsetting inflationary pressures.
2022 was very challenging was a very challenging year from the standpoint of inflationary cost pressures that ran close to $300 million euros looking forward to this year, we expect the inflationary pressures in 2023 to be comparable to 2022, we continue to believe that we will be able to offset <unk>.
Most of this cost pressure in 2023, and the rest in future periods with a combination of the tools. We noted in our relentless focus on cost control.
The net impact of inflation and other cost increases and actions. We are taking to offset them are included in our guidance for 2023.
Now turn to slide 14, where I want to give an update on energy our total energy costs over the 2019 to 2021 period averaged around $150 million euros per annum in 2022, our total energy costs were around 275 million euros.
And we expect total energy costs to be materially higher in 2023.
As previously noted we purchased energy on a multi year rolling forward basis, which has helped us to mitigate some of the energy cost pressures and helped us to smooth out some of the steep increases in costs.
As of today, our 2023 energy costs are largely secured but at higher average prices as you can see in the charts on the right side of the slide both electricity and gas forward prices in Europe have come down from their 2022 peaks, but still remain at three or more times historical.
<unk>.
Yes.
As we previously noted we are in active dialogue with our customers on passing through these costs and have made very good progress across all of our end markets.
During 2022, we initiated an energy call to action across our entire organization and I am happy to say that as a result, we have uncovered numerous opportunities to reduce our own consumption.
More recently several governments in Europe have discussed potential initiatives that could bring some relief to help offset higher energy prices. These initiatives are still under development and at this stage eligibility is uncertain and any potential benefit is difficult to quantify.
Longer term, we like others see that structural solutions for European energy markets should be in place by 2025, including the restoration of existing energy sources alternative source countries for natural gas LNG imports and increased use of renewable energy sources.
We will continue to update you on developments impacting our total energy costs and our ability to recover or offset these higher costs.
Let's now turn to slide 15, and discuss our free cash flow, we generated record free cash flow of 182 million euros in 2022, including 22 million euros in the fourth quarter 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 650 million euros of free cash flow look.
Looking at 2023, we expect to generate free cash flow in excess of 125 million for the full year, though this will be weighted more towards the second half, we expect capex to be between 340 and $350 million euros. This year, which includes higher spending on cost savings in.
Growth projects that Joe Mark will talk more about in a few moments.
We expect cash interest of approximately 120 million euros, which includes the impact of higher interest rates.
We expect cash taxes of approximately $30 million euros, and lastly, we expect working capital to be a use of cash in the first half and a source of cash in the second half and based on our current forecast roughly neutral for the full year.
Now, let's turn to slide 16, and discuss our balance sheet and liquidity position at the end of the fourth quarter, our net debt of $1 9 billion.
<unk> declined slightly compared to the end of 2021 as free cash flow generation was partially offset by unfavorable noncash FX translation of 64 million euros with the strengthening of the U S dollar.
Our leverage reached a multi year low of two eight times at the end of 2022 or down six times versus the end of 2021, we remain committed to achieving our leverage target of two five times and maintaining our long term target leverage range of one.
5% to two five times.
As you can see in our debt summary, we have no bond maturities until 2026, and our liquidity remains strong at 709 million euros as of the end of 2022.
We are very proud of the progress we have made on our capital structure and have the financial flexibility. We are building I will now hand, the call back to his remark.
Thank you Peter.
Turn to slide 18, and discuss our current end market outlook, starting with packaging.
In packaging, we have experienced some short term inventory adjustments that can makers in both North America and Europe , but we believe this will be largely complete during the first half of the year. The focus on sustainability is driving increased demand for infinity recyclable aluminum cans and we are confident in the long term outlook for.
And market given cabinet maker capacity additions in both regions as well as recent announcements of Greenfield investments here in North America.
We will participate in these growths in both North America, and Europe , as we announced at our analyst day last year.
As Peter noted the company is highly focused on stabilizing the operating challenges we have been experiencing at muscle shoals. So that we can take advantage of these end market dynamics.
Our issues at the plant stem primarily from the labor shortages you have read about we're very confident in our ability to restore the plant's profitability over the course of 2023.
Turning now to automotive OEM sales and production numbers globally are still at a low base compared to pre COVID-19 levels with uncertainty continuing as a result of the semiconductor shortage and other supply chain challenges.
We remained very positive in these market and increased demand in both spot and hsni gives us reason for optimism.
Automotive inventories are low consumer demand remains high vehicle electrification and sustainability trends will continue to increase the demand for light weighting and loose you to recycled content.
Let's turn now to aerospace the recovering aerospace continued in the quarter with shipments up 50% versus last year, while the sales quarter in a row.
We're still well below pre COVID-19 levels major Oems have announced build rate increases in the short term and the desire for further increases in the medium term, we remain confident that the long term fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for <unk>.
New more fuel efficient aircraft.
In addition demand is strong and the business regional jet segment defense and space markets as well.
As the chart on the left side of the page highlights. These three core end markets represent 76% of our LTM revenue, we like the fundamentals in each of these markets and as I have said previously we like our hand.
Turning lastly to other specialties.
We do see some weakness in segments like General engineering plate and building and construction early 2023 demand remained solid in many of our specialties end markets.
Demand has been more resilient than North America and in Europe .
In general these other markets all dependent upon the health of the industrial economies in each region.
In Tid rolled products demand remains strong in markets like semiconductors in defense and in transportation in North America and.
In industry extrusion demand is still strong in sectors like solar and rail is also of note that many of the sustainability trends supporting growth and I'll call buckets of very much at play here as well in other specialties.
In summary, we continue to like the prospects for the end markets, we serve and strongly believe that the diversification of our end markets is an asset for the company.
Let's turn to slide 19, where I want to provide more details on our plans to invest organically in our future.
As we outlined previously we are increasing our growth capex for the next few years to invest in the highly strategic high return cost savings and growth projects.
<unk> mentioned before our total Capex this year should be around 350 million euros and includes roughly 150 million euros for these attractive growth investments.
Our performance over the last several yields across varying business conditions, coupled with our strong financial position today gives us confidence to continue investing we expect to continue to generate strong free cash flow through this investment cycle.
Strategic investments, we are making today are important contributors to our adjusted EBITDA target of over 800 million euros by 2025.
Lastly, I want to mention that in a sharply deteriorating environment the pace of investment could be slowed while we are not planning for this outcome. Today, we will continue to monitor the situation and make any necessary adjustments to the timing of these investments.
Let's turn now to slide 20.
But before.
Wrapped up I would like to thank Peter.
We will be leaving <unk> at the end of March for an exciting opportunity with commercial metals I will Miss you Peter you've been a very good path there and I also want to congratulate <unk> on his promotion to senior Vice President and Chief Financial Officer Pete.
<unk> has been a great partner and he has made significant contributions to our company, including building a strong team from which we were able to promote Jack Jack has been with the company for over six years and most recently has done a tremendous job running our strategy function.
Prior to this you had already two decades of finance experience that included investment banking and operational findings.
He brings to the role exceptional intelligence strong knowledge of the company in the industry and a well rounded set of finance experiences.
I've worked very closely with Jacqueline numerous projects and I'm very excited to welcome in into this new role and I look forward to working even more closely with Jean Jacques.
Turning back to <unk>, our team achieved very strong performance in 2022, we delivered record adjusted EBITDA of 673 million euros and.
And record free cash flow of 182 million euros. Importantly, we also further deleverage shelf balance sheet to a multiyear low of two eight times I'm very proud of our entire team as they delivered solid operational performance and strong cost control. Despite a number of challenges including significant in.
<unk> re pressures.
Looking forward 2023 will be another challenging year, given the extraordinary inflationary pressures, we are facing but we are used to it.
As Peter noted we are currently expecting comparable inflationary pressures in 2023 to those we experienced in 2022, but we remain confident in our ability to burst through most of these costs in 2023 and the rest in future periods based on our current outlook for 2023, we are targeting adjusted EBITDA.
$640, and 670 million euros, and free cash flow in excess of 125 million euros we.
We do not give quarterly guidance, but given the destocking in packaging the operating challenges in muscle Shoals, and the timing of inflationary impacts in our business. We do expect adjusted EBITDA in the first quarter of 2023 to be weaker.
Period last year and free cash flow to be negative in the quarter. These expectations are obviously included in our full year guidance that I just provided.
As inflationary pressures subside, we believe we will emerge an even stronger company.
This model provides a strong foundation for long term success, and we believe we have substantial opportunities to grow our business and enhance profitability and returns.
We have a diversified portfolio and our end market positioning will enable us to take advantage of sustainability driven secular growth trends such as consumer preference for infinity recyclable aluminum cabs light weighting in transportation and the electrification of the automotive fleet.
The <unk> team has demonstrated its resilience and ability to execute across a range of different market conditions and I am confident we will continue to do so.
I also want to reiterate our long term guidance of adjusted EBITDA in excess of 800 million euros by 2025, and our target leverage range of one five to two five times and let me add this guidance is based on the current energy positions that we have including higher full of energy prices as of today.
We remain focused on executing our strategy driving operational performance generating free cash flow, achieving our ESG objectives and shareholder value creation.
In conclusion, I remain very optimistic about our future and with that Bailey, who will open the Q&A session.
Thank you I.
We'd like to ask a question. Please press star followed by one telephone keypad. If for any reason you would like to repeat that question. Please press star followed by two again to ask a question. Please press star followed by one.
And you if you are using a speaker phone. Please remember to pick up your handset before asking your question.
The first question today comes from the line of Emily Chang from Goldman Sachs. Please go ahead. Your line is now open.
Good morning, John Mark and Peter Congratulations on the new opportunity.
My first question is just around the EBITDA guidance that you provided for 2023 to 640 to 70 million Euro I think is down only slightly below 2022 levels, which I think was a little bit more of an improvement versus the guidance that was.
Talk to you at the last quarter call, but maybe Jean Marc If you could help bridge and what has changed versus your prior quarters expectations that has there been anything from the energy cost side.
Going down that you might see flowing through into the back end of this year, that's been helping out.
Yes, good morning, Emily and thank you for your question.
So, yes, we feel more comfortable now.
There is a number of reasons for that and it is true that we.
We believe our prospects are brighter than what do we believe they would be back in October . The reason for that is number one we have more clarity although booked for the year.
Number two we are also much more clarity in terms of pricing. There is obviously a contract season in full in October we're kind of halfway through it now we're complete so we got much better visibility on our pricing for the year and number three as you pointed out.
We got a little bit Lucky was energy prices came down with a mild winter in Europe . So that's helping as well. So these three are helping us.
Converge towards that range of guidance, we're giving today and we feel again more comfortable today than we did back in October .
Great. That's very helpful. Sean marking a follow up if I may I know you've talked about a little bit of additional capital that will be spent to help support.
On the operations.
And with some of the growth capex that but.
You also mentioned that that pace could be slowed in a more adverse operating environment, perhaps could you define what that adverse environment could look like and what the flex would be on capital spending.
Sure.
And clearly.
Remote possibility, but we want to highlight that there is.
We've got quite a bit of flex in our ability to flex capex and we've demonstrated that.
There could be times, when we broke down capital expenditures by 100 million was Covid hit really in March of 2020, right feel radio a lot of projects are already launched and despite this we were able to reduce our capital expenditures by $100 million in the year. So I think that gives you a little bit of an idea of how much flex.
There is.
12 months out can reduce by $100 million and then possibly even more if it's for longer but.
But I think what do we not.
What we've demonstrated in the past is our ability to thrive in very different environments right. When there is a sharp reduction in demand.
Could be times when there is a strong pick up when the business is more stable. This is a business that generates.
Thanks, Joel and consistent free cash flow.
And we think we are.
The fundamentals of our business are strong and Thats why we want to continue to invest to the extent, we can and no balance sheet allows it.
Future of the business. So it would take a very significant downturn unique autonomy.
For us to change our plans regarding capex deployment again, where we need for the long run and 2025 years nearly across around the corner and we want to make sure that we are able to seize the opportunities of the menu of opportunities. We have ahead of us and finally ill.
Add that to a lot of the investments we're talking about some that are going to <unk>.
Contribute to a negative free cash really in the first quarter all of the investments, we're making in recycling, especially.
Zach France and these are defensive investments at the same time as they expand our margins they make us more independent.
Primary suppliers, it's better for the planet, we wanted to do those things come Hell or high water I would say.
Understood that's very clear thank you.
Thank you. Thank you.
The next question today comes from the line of Curt Woodworth from Credit Suisse. Please go ahead. Your line is now open.
Yes. Thank you good morning, Mark and Peter Peter Congratulations on the new role.
Thank you good morning, Kurt.
Hi.
So I was wondering if you could unpack the guidance a little bit.
You did say, you're still expecting over $100 million of energy inflation and I think in the.
The path you noted at least $100 million I think of labor and other.
Consumable related inflation so.
What are you assuming in terms of the price cost Delta for the year and then you also have a view of how much productivity or cost down you could achieve as well.
So as we look at inflation for the for the full year 2023.
What we said in the prepared remarks was that we expected it to be similar to what we saw this year and or sorry last year in 2022 and that was in the order of $300 million. So we're expecting that order of magnitude and that includes.
As you noted higher energy costs that includes.
Higher metal costs, and Thats really kind of alloying costs. It does include higher labor costs labor is up more than it was in 2022.
And then some.
Applies in general across the portfolio.
And all of that will add up to roughly a $300 million ish increase.
We built.
Believe that we're going to be able to pass through most of that as Jean Marc said and I said in the prepared remarks, we have pricing power and one of the things Thats been gratifying to Emily's question.
While we were more conservative in October we were right in the front end of this discussion around energy with customers and we had we've had very good success.
Through the contract season, and I think what becomes clearer.
Our customers they want us to be their suppliers, because we are reliable and they.
They need the material and so therefore, they are willing to work with us on this and so we've had good success.
We did in 2022, we expect to pass through most of that.
To our customers.
In 2020.
Three or beyond right. There are some instances, where we said there's a lag and that remains the case.
In terms of our costs I think we we continue to.
Grind our costs down.
And we will continue to do that.
In muscle Shoals, clearly with some of the challenges there are costs are elevated relative to where they would be.
But I think thats temporary.
And we feel like the programs we have in place the productivity improvement targets that we have in place are going to lead us to a very competitive cost position. So we will continue to work on costs.
And maybe just to conclude we.
On the analyst day, we talked about a $50 million cost opportunity and we continue to see that as very very viable.
Okay. Thanks, Tom.
And then a follow up I guess with respect to.
Profitability and margins definitely came in weaker than we had anticipated.
In the back half of the year.
Roughly I think $2 90, a metric ton and in the past.
Scott Auto profitability I believe in kind of the five to 600 level.
I thought that packaging with the contract resets is kind of moving more up to definitely above 300.
Can you kind of talk to.
What do you think margin per ton in PARP could look like this year and on a more normalized basis.
Obviously, it's great to see you take the A&P marketing target up by 100, but I'm just curious with what's going on in part, but if you could unpack that a little bit.
Sure I'll start.
Peter will.
So the.
On the auto side in pulp we are.
Very comfortable levels of margin, we discussed in the past and that's what's happening right now.
With good debt, the shortfall, which you've pointed to it's mainly on the packaging side.
From the packaging side.
But remember that in packaging.
We've had difficulties at muscle Shoals as we've discussed but also we have been squeezed last year. There is a lag in terms of our ability to pass through inflationary pressures.
None of that has to do with the way the PPI works, where you look at the prior year in U S.
You increased your price the following year.
And also as we discussed a couple of years ago.
The alloy surcharges.
Started being implemented only this year, but only partially sorry last year, but only partially so there has been a margin squeeze also.
Packaging because of those two factors idling cost in the PPI fundamentals looking full of the PPI and the inflation I'll pass through in 'twenty three.
Alloys are pass through in 'twenty three.
And the lag should be largely resolved that said, we still have to restore operating at fulfillment center muscle Shoals.
And that is what we're working on this year.
As I mentioned, it's mostly because of lack of experience resources and that takes time to build and we believe that over the course of 'twenty three we hit to our profits to be chosen officials and therefore in packaging in those three those three causes right the PPI the alloys and unique.
Inexperienced labor should be resolved by the end of 'twenty three.
The only thing I'd add to that is that remember we talked about this inventory correction across packaging.
That's going on among our customers and you can imagine with the reduction in the tonnage across the business unit it reduces our ability to leverage our fixed costs.
Yes.
And what do you think a more normalized.
Margin level is.
Okay.
In the past you've talked about I think closer to 400, but.
Could you update us on what you thought.
Thank you.
A more fully economic bubble, but look like for that division or is it too difficult to say right now.
So I think.
Maybe we should so certainly north of 300, we should be able to be north of 300.
I think maybe something in the order of $3 25 to $3 50 is a good place to start and then if you <unk>.
If you have.
Automotive pulling at full strength, maybe theres some opportunity beyond that but.
We'd leave it there for now.
Okay, great. Thank you guys.
Thank you Kurt.
The next question today comes from the line of Ghansham from Deutsche Bank. Please go ahead. Your line is now open.
And Ron and John Watkins Please sir.
First question would.
It would be high would be on <unk>.
Kevin do you think the higher seasonality to happen is yes, the city, one Q and maybe going into two Q because of packaging.
Yes.
Sure.
Yes, so what you should expect to see is that Q1 is going to be weaker than it usually is and so that would be contrary to the seasonality that we usually see usually our first two quarters are the strongest.
And we should see a weaker Q1.
Recovery in Q2, and then obviously Q3 and Q4 hopefully we're back on track.
And remember typically PPI adjustment take place very often on the first of April so.
We.
I'll still pricing in some segments to prices yet do not reflect yet despite inflation of last year, but they will sell to you in April .
Thank you.
And then maybe two quick follow ups one on Iowa.
You may now to the previous question. If you can on powerful I think.
Paula on.
I think you mentioned like open that's a line that well so any coming jets from Iowa.
Tom a question for <unk>.
The impact for that.
Yeah, I think so.
Based.
<unk> on.
Better performance in our plans and better pricing as well.
And we look at it across the cycle right. So if you're in a time when our aerospace is a very strong in the rest of <unk> is lower.
Then the.
Drifting up and if it feel that way around tid strong but aerospace.
And then shifting a little bit lower.
Okay. Thank you and then the last one from me can you remind that.
Any contract.
Mobile thank you.
And you would renegotiate.
October how much of the energy cost.
He can affect Paul take that 25% on your question.
How much.
Yes.
I'm not sure I fully understood the question.
Try to answer so going into 'twenty three today about 90% of our energy needs locked in hedged okay.
Essentially physically or through supply contracts some derivatives.
As well and then since we do it on a rolling three year basis, we have to renew 25% roughly 25% to 30%.
Both our needs over the course of the year.
And as it relates to the hedges for 'twenty, four and 'twenty five.
Okay, great. Thank you.
Thank you.
The next question today comes from the line of Timna Tanners from Wolfe Research. Please go ahead. Your line is now open.
Hey, great good morning, and congrats on the opportunity Peter will talk to you on the other side.
Wanted to ask a couple of questions. One maybe maybe this is a dumb question, but.
<unk> adjustments does that just seems like a euphemism for something like what what exactly does that mean do you not have protection.
Is that something more onerous in terms of underlying demand I just wanted to get some more color.
And the packaging side.
Yes, I'll take this one so there is.
Excess inventory of cans in Cogs in the system compared to demand does a number of reasons for that.
Like some of the lack of promotion activities.
The beverage companies, which typically there is and people start to stuck up and then he doesn't happen. So then the supply chain goes down there's been also a period of high growth after 20 years.
Sure.
Markets being essentially flat you have three years at plus 5% and people expect that the full year is going to be <unk>, 5% that you go to war you got inflation people spending this money buy less product you expect to have promotions you don't have promotions. So all of a sudden the supply chain get food with metals and it takes time to resolve that.
Our contracts typically provide for a fixed amount of tons, but there is some variation around it and I will not go into the specific details, but let's say, 5% 10% or.
Minus 10% so when everybody is.
Putting below.
Then you can have.
That happens.
Is that variance is say over the course of one year, but materializing over the course of six months and how we see that creates a big swing and when demand is and people are still within that contracts. So I think thats, what you will see.
And that's why also fundamentally this is a reasonably stable market. There is not that much floor space on the shelves or in the warehouses to have full cans are empty cans. So it will.
Resolved reasonably quickly and that's why we believe in us.
While discussions with our customers, we're confirming that that by the end of the.
First.
Half of this year things will be back to normal.
Okay. That's helpful. I guess I'm wondering if this is.
Sign of just slowing demand after various non COVID-19 activity and do you see anything structurally weaker in the packaging outlet. Just obviously, there is mark hands and adoption of greater Kent, but maybe the market get ahead of itself and it needs to adopt maybe slower growth outlook.
Well.
<unk> revised our growth outlook, but I think the COVID-19 the spike in consumption to get everybody by surprise people.
B.
And it'll be too excited about it but fundamentally you see more and more categories moving to cans.
Cans.
Don't have you've noticed and youre going to the grocery store travels you start to see flat water in.
Cans and bottles and Thats, a very good sign for us because there's a tremendous amount of plastic displays.
When things grow it's never linear.
But I do believe that the growth trends for <unk> in favor of metal against plastic are going to steel and for many many many years and timna.
Just one maybe the.
Add to what Joe Mark, saying, so as we look at our forecast for packaging demand in 'twenty. Three we expect it's going to grow it's going to grow at kind of low single digits.
We would probably zero to 2% type of thing type of range.
And then longer term I think were in line with what.
The can makers are saying, which is somewhere in a range of kind of 2% to 5%, it's probably the right way to bracket and that feels right to us.
Okay, that's great and if I could squeeze one Brian just how good is your visibility on Europe masks.
I'm asking kind of if things were to start to recover there when when would you start to see it how locked in are you in kind of more color on what youre seeing in Europe would be great. Thank you.
Yes so.
Depending on the products our lead times.
Six weeks to six months right in aerospace, there's some that take a long time to products that take a long time to to make I think we've got pretty good visibility for 2023 for over 75% of our business there.
Aerospace is pretty.
Locked in.
With the mood CS I mean, the signs are quite encouraging.
And packaging.
Even though it's.
Flattish as Peter mentioned, I think we've got a pretty decent visibility because of those inventory corrections.
It's going to.
That's stronger than the first half of the year. So.
I think we've got decent visibility in Europe for 75% of our business.
I don't know Simon Thanks for your question.
<unk>, let's see if nuts.
But when you say decent visibility you mean for the fall 2023 time frame.
Correct.
Okay. Thank you.
Thank you.
Thank you the.
Our next question today comes from the line of Karl Blunden from Goldman Sachs. Please go ahead. Your line is now open.
Alright, thanks, very much for the time and congratulations to Peter and Jack on the new role.
I wanted to talk just about the 2025 guidance and then suddenly.
Good to hear the reiteration there of over 800.
Is it fair to say that can demand in energy costs have come in more challenging and perhaps the outlook is a bit more challenging than when that guidance was initially adopted and I'd be interested to hear what the offsets are giving you confidence on that on that longer term guide.
A few things going better than expected and love to love to hear what those are.
Sure. So if I go back to what we thought in April of last year, when we gave that.
Bold at $800 million guidance.
Ken is a big challenge now, but I don't think it is that mix by 2025, and if anything the volumes may be a bit lower but the pricing is better.
So overall in Cannes.
<unk> even.
Energy prices are definitely higher.
We offset that by increased pricing and.
Better efficiencies in our plants as well and I'm quite encouraged by the early progress we're making.
Nothing like lighting, a fire under us to get us moving for sure.
<unk>.
And then in aerospace.
We.
<unk>.
We're really at the beginning of the recovery last year.
Stronger.
Maybe there is some upside in aerospace so now 2025 guidance in order to move Tvs.
Steady compared to protect.
Projections of last year.
Finally on the cost side.
Sure.
Costs are much higher because of inflation, obviously than what we thought they would be but at the same time, we think our productivity and our progress in vision 2025 gives us good confidence.
<unk>.
The inflation pass through.
And our productivity could be better I think we've got some upside so all in all kind of in the same place automotive in the same place arrow may be some upside and on the productivity side, maybe some upside.
That's really helpful. Thanks, just a quick one on the balance sheet and have done a lot of good work, there and deleveraging and approaching the high end of that target range should we think of can sell them is interested in notional debt reduction or should we think about your leverage.
Target being achieved primarily through EBITDA growth from here.
We wanted to pay down debt, so it'll be both it'll be both.
We want to reduce gross debt.
And our EBITDA is going to grow too.
Thank you.
Thank you.
Remind you if you would like to ask a question. Please press star followed by one on this.
Question today comes from the line of Richard <unk> from Deutsche Bank. Please go ahead. Your line is now open.
Hello, Yes, thanks, Peter Good luck in the new role.
You've touched on this multiple times here, so, but let me just get a little clarification on the lower packaging volumes I think you said, 12% in Q4.
That's going to contribute to the lower EBITDA performance in Q1.
You still think that where you stand today that continues into Q2 as well or are they similarly double digit sorts of declines in terms of volumes in that segment.
Yes, so I think so yes, Q1, it will be lower in Q1, and then as we get into Q2, we think we should be starting to recover so we're kind of.
Calling the trough somewhere around where we are today.
We think that full year should be about the same or maybe a bit better.
Last year.
Great. Thank you and then.
<unk> already partially addressed this but the higher cost roughly $300 million in total.
There was some mention of.
And one of the questions about energy comprising over $100 million, but you didnt attach a specific figure to the breakdown between energy labor the higher material.
Alloying our supply costs.
Fair to say, though that energy will still be the largest component of that $300 million basket year on year above the sort of $275 million expense that group.
<unk> in 2022.
That is fair.
And we and remember we have a piece of our energy Thats still open so.
Hopefully that'll continue to be an opportunity for us.
Okay and related to that on.
Just in terms of supply.
Access to metal no problems at all in terms of of that at this point.
No.
No problem with access to metal.
Work yeah.
But it's so.
So far so good and we don't see a problem.
Alright.
Understood. Thank you very much.
Yes.
Thank you.
There are no additional questions waiting at this time, so I'd like to pass the conference back.
The tissue Moshe.
Please go ahead when you're ready.
Thank you Brady as you can tell we're very happy without performance in 2022, and we look forward with confidence.
<unk> of 2023, I want to wish good luck to Peter that's not his last day with this far from it we still have the benefit of his presence for quite a few weeks and I look forward to updating you on our progress.
When we release our Q1 results at the end of April Thank you and have a good deal.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
[music].
Yes.
Yes.