Q2 2023 Constellium SE Earnings Call
Sensors attached in today's slide presentation, which supplement our <unk> disclosure I would now like to hand, the call over to John Mark. Thank.
Thank you Jason Good morning, Good afternoon, everyone and thank you for your interest income failure.
Let's begin on slide five and discuss the highlights from our second quarter results I would like to start with safety. Our number one priority. After a strong first quarter performance, our recordable case rate declines in the second quarter, leading to a rate of one 9 billion.
Worked for the first half of the year.
This is a humbling reminder, that's why we always strive to deliver best in class safety performance, we need to constantly maintain our focus on safety to achieve the ambitious targets. We have set it is a never ending task for our company and one we take very seriously.
Turning to our financial results shipments were 398000 tons down 6% compared to the second quarter of 2022, due to lower shipments and Barb and arsenite.
Revenue of 2 billion euros decreased 14% compared to last year as improved price and mix was more than offset by lower shipments and lower metal prices remember what our revenues are affected by changes in metal prices, we operated pass through business model.
Minimizes our exposure to metal price risk.
Our value added revenue, which reflects our sales excluding the cost of metal was 785 million euros.
11% compared to the same period last year.
Our net income of 32 million euros in the quarter compared to a net loss of 32 million euros in the second quarter of last year.
As you can see in the bridge on the top right. The adjusted EBITDA of 209 million euros in the quarter was up 5% compared to last year and is a new quarterly records for the company.
Adjusted EBITDA is a new quarterly record as well and increased 33 million euros compared to last year.
<unk> adjusted EBITDA decreased 16 million euros, and <unk> adjusted EBITDA decreased 7 million euros in the quarter.
Compared to last year.
Looking across our end markets aerospace demand remains very strong with shipments up 30% compared to last year. The recovery in automotive continued with a higher shipments in both rolled and extruded products versus last year.
Packaging shipments were down in the quarter as demand remained below prior year levels and we continue to experience weakness in most industrial markets.
We continue to face significant inflationary pressures.
Which Jack will discuss in more detail, but thanks to our pricing power contractual protections improved mix and solid execution by our team we are managing the current environment well.
Moving now to free cash flow, our free cash flow in the quarter was strong at 68 million euros, we will remain committed to generating positive free cash flows and deleveraging as you can see on the bottom right of the slide our leverage at the end of the second quarter was two seven times OIBDA down 0.3 times from the end of the second.
Quarter last year.
Overall, I am very proud of our second quarter performance.
Looking forward, we like our end market positioning and we are optimistic about our prospects for the remainder of this year and beyond based.
Based on our strong performance in the first half of this year and our current outlook for the second half we are raising our guidance and expect adjusted EBITDA in the range of 700 to 720 million euros and free cash flow in excess of 150 million euros in 2023.
Our outlook assumes no major deterioration in the macro economy called geopolitical fronts.
<unk> remained confident in our ability to deliver our long term target of adjusted EBITDA over 800 million euros in 2025.
Before I turn the call over to Jack I wanted to comment quickly on our recently announced divestiture last week, we announced the sale of our soft alloy extrusion in Germany for a total cash consideration of $48 8 million euros. The three plants specializing soft alloy extruded products for the building and construction transportation.
And industry markets in Europe .
This transaction will allow us to further streamline our portfolio of strategic assets and strengthen our focus on our core end markets. We expect the transaction to close in the second half of this year.
With that I will now hand, the call over to Jack for further detail on our financial performance Jack.
Thank you Mark and thank you everyone for joining the call today. Please.
Please turn now to slide seven.
Value added revenue was 785 million euros in the second quarter, a new quarterly record for the company and up 11% compared to the same quarter last year.
Looking at the second quarter.
176 mailing euros of this increase was due to improved price and mix in each of our segments.
Volume was a headwind of 43 million euros due to lower shipments in our F&I.
Metal impact were a headwind of 22 million euros compared to the same period last year.
The balance of the change was largely due to unfavorable FX translation.
There are two important takeaways from this slide.
First we grew our value added revenue by 11% compared to last year.
And second we continue to have pricing power.
And mix and price specifically is the biggest increment of our year over year variance and helped us offset inflationary pressures.
Now turn to slide eight let's focus our PARP segment performance.
Adjusted EBITDA of 79 million euros decreased 17% compared to the second quarter last year.
Volume was a headwind of 13 million euros with higher shipments in automotive more than offset by lower shipments in packaging and specialty rolled products.
Automotive shipments increased 16% in the quarter versus last year as new platforms continue to ramp up and demand generally appear stronger.
Packaging shipments decreased 12% in the quarter versus last year due to inventory adjustment across the supply chain in both North America, and Europe , and lower demand at the consumer level.
Price and mix was a tailwind of 52 million euros, primarily on improved contract pricing, including inflation related pastures.
Costs were a headwind of 53 million euros as a result of higher operating costs due to inflation.
Operating challenges at muscle Shoals, and on favorable metal costs.
Now turn to slide nine and let's focus on the A&P segment.
Adjusted EBITDA of 96 million euros increased 53% compared to the second quarter of last year.
Volume was stable as higher aerospace shipments offset lower tid shipments in the quarter.
Aerospace shipments were up 30% versus last year as the recovering aerospace markets continues.
Shipments in Tid went down 15% versus last year, reflecting a slowdown in most industrial markets, particularly in Europe , partially offset by strong demand in other markets like defense.
Price and mix was a tailwind of 68 million euros on improved contract pricing, including inflation related pastors and a stronger mix with more aerospace.
Costs were a headwind of 33 million euros as a result of higher operating costs.
Due to inflation and continued ramp up in activity levels.
Yes.
Now, let's turn to slide 10, and focus on the F&I segment.
Adjusted EBITDA of 39 million euros decreased 15% compared to the second quarter last year.
Volume was a 9 million euro headwind with higher shipments and automotive more than offset by lower industry shipments.
Automotive shipments increased 7% in the quarter versus last year as we continue to experience improvement in activity levels.
Industry shipments were down 19% in the quarter versus last year as.
As a result of weaker market conditions in Europe .
Price and mix was a 21 million euro tailwind, primarily due to improved contract pricing, including inflation related pastures.
Costs were a headwind of 19 million euros.
Higher operating costs, mainly due to inflation.
Now, let's turn to slide 11.
I want to give an update on the current inflationary environment, we're facing and our focus on pricing and cost control to offset these pressures.
In the second quarter and as expected, we experienced broad based and significant inflationary pressures across our business.
As you know we operate a pass through business model.
So we're not materially exposed to changes in the market price of aluminum our largest cost input.
That said other metal and alloy supply remains tight today and while we're confident about the security of supply some of it does come at a higher cost.
In addition, labor and other nonmetal costs will also be higher this year, particularly in our European energy.
As previously noted we purchased energy multi year rolling forward basis, which has helped us to mitigate some of the energy cost pressures and helped us to smooth some of the steep increases in costs.
As a reminder.
Our 2023 energy costs are largely secured but at higher average prices.
Both electricity and gas forward energy prices in Europe have come down from their 2022 peaks, but still remain well above historical averages.
Given these cost pressures.
We continue to work across a number of fronts to mitigate their impact on our results.
We have demonstrated strong cost performance in the past years.
And we will continue our relentless focus in 2023, including continued execution on our previously announced division 25 initiatives.
Across the company, we're working to increase our efficiency.
Reduce our consumption of expensive inputs.
And lower our fixed cost.
As we've previously noted many of our existing contracts have inflationary protection.
As PPI and flavors were surcharge mechanisms and where they do not we are working with our customers to include them.
We have made very good progress across all of our end markets.
As you can see in the bridge on the right in.
In the first half of this year, we were very successful with price and mix the largest incremental price in offsetting inflationary pressures.
As of today, we still expect inflationary pressures to remained significant at least through the end of this year and at a comparable level to 2022.
We continue to believe that we will be able to offset most of this cost pressure in 2023 and the rest in future periods with a combination of the tools, we noted and a relentless focus on cost control.
The net impact of inflation and other cost increases and the actions, we're taking to offset them.
Included in our guidance for 2023.
Now, let's turn to slide 12, and discuss our free cash flow.
We generated 68 million euros or free cash flow in the second quarter, bringing our year to date total to 34 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 and enhance our financial flexibility.
Looking at 2023, we now expect to generate free cash flow in excess of 150 million euros for the full year.
We expect capex to be between 340, and 350 million euros.
Cash interest of approximately 120 million euros and cash taxes of approximately 30 million euros.
In line with our previous guidance.
Lastly, we now expect working capital to be a modest use of cash for the full year.
Now, let's turn to slide 13, and discuss our balance sheet and liquidity position.
At the end of the second quarter, our net debt of $1 9 billion euros decreased slightly compared to the end of 2022, given the 34 million euros of free cash flow generated in the first half and favorable noncash FX translation of 21 million euros with the weakening.
Of the U S dollar.
Our leverage reached a multi year low of two seven times at the end of the second quarter were down three times versus the end of the second quarter last year.
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 752 million euros as of the end of the second quarter.
Last week, we completed the redemption of $50 million of our.
Five 875% U S dollar bonds due in 2026 further strengthening our balance sheet.
We're very proud of the progress we have made on our capital structure and have the financial flexibility we are building.
I'll now hand, the call back to John Marc Thank you Jack.
Let's turn to slide 15, and discuss our current end market outlook.
The majority of our portfolio today is serving end markets currently benefiting from durable.
Inability driven secular growth in.
The important takeaway here is that aluminum is a catalyst behind these secular growth given a sustainable attributes.
<unk> Infinity recyclable and does not lose its properties when recycled as a result, our aluminum will play a critical role in the circular economy and it would be a driver of growth in light weighting electrification and sustainable packaging.
So turning first to packaging during the quarter the inventory adjustments continued across the supply chain in both North America and Europe .
We're also seeing demand weakness in both regions as a result of the current inflationary environment. The lack of promotional activity and following a multiyear period of rapid growth during COVID-19.
Even in today's environment, where we're seeing weaker demand in packaging market aluminum cans continue to outperform other substrates like plastic and glass.
We are confident in the long term outlook for this end market.
Given capacity growth plans from can makers in both regions. The Greenfield investments ongoing here in North America, and the growing consumer preference for the sustainable aluminum beverage can longer term, we expect packaging markets to grow low to mid single digits in both North America and Europe , we will felt.
But in these growth in both regions as we announced at our analyst day last year.
The company remains highly focused on stabilizing the operating challenges we have been experiencing at muscle Shoals.
As we can take advantage of these end market dynamics here in North America were.
We're encouraged by the improved performance, we have seen recently at muscle Shoals and remain 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 have increased the last several quarters, but remain well below pre COVID-19 levels automotive inventories are low consumer demand remains high and vehicle electrification and sustainability trends will continue to drive the demand for light weighting.
And use of aluminum products as a result, we remain very positive on this market and increased demand in both rolled and extruded products give us reason for optimism.
Let's turn now to aerospace the recovery in aerospace continued in the quarter with shipments up 30% versus last year, though 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 will.
Remain confident that the long term fundamentals driving aerospace demand remain intact.
<unk> growing passenger traffic and greater demand for new more fuel efficient aircraft. In addition demand is strong and the business and regional jet market and the defense and space market.
As the chart on the left side of this page highlights. These three core end markets represent 77% of our last 12 months' revenue will lag the fundamentals in each and as I have said in the past, we like our hand in the options for us.
Turning lastly to specialties.
We expect weakness to continue in most industrial markets and in general These markets are dependent upon the health of the industrial economies in each region overall demand has been more stable in North America and Europe .
In Tid rolled products demand remains strong in markets like defense and transportation in North America.
Industry extrusion, while demand is strong in some sectors like solar demand remains weak in most other markets.
It is also of note that many of the sustainability trends.
Supporting growth in our core markets are very much at play here in other specialties as well.
<unk> is well positioned today with our diverse and balanced portfolio to capture the secular growth fueled by sustainability and <unk>.
Summary, we continue to like the prospects for the end markets, we serve and we strongly believe that the diversification of our end markets is an asset for the company.
Turning to slide 16, we detail our key messages and financial guidance.
<unk> delivered strong performance in the first half of the year.
I'm very proud of our entire team as we achieved solid operational performance and strong cost control. Despite a number of challenges including significant inflationary pressures.
Looking forward 2023 continues to be a challenging year given the extraordinary inflationary pressures, we are facing and the demand weakness in some of our end markets like packaging and other specialties.
As Jack noted, we are still expecting significantly completion rate pressures in 2023, but we remain confident in our ability to pass through most of these costs in 2023 and the rest in future periods.
Based on our strong performance in the first half of this year and on our current outlook for the second half we are raising our guidance and expect adjusted EBITDA in the range of 700 720 million euros and free cash flow in excess of 150 million euros in 2023.
As a reminder, our outlook assumes no major deterioration on the macro economy, while geopolitical front.
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 our current energy positions, including higher full of energy prices as of today.
As 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 substantial opportunities to grow our business and then hence 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 can light weighting and transportation the electrification of the automotive fleet and the increased focus on recycling.
The consortium 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.
We remain focused on executing our strategy driving.
Achieving our ESG objectives and shareholder value creation.
I remain very optimistic about our future less.
Lastly, and it is not on the slide here, but before we open it up for Q&A I wanted to congratulate Ingrid yard.
Im very pleased to announce that I have appointed Ingrid to executive Vice President and Chief operating officer, This new and exciting role will allow us to continue to strengthen our organizational structure and focus and develop our people.
New role Ingrid who will continue to work closely with me in the coming years to drive further value creation for the company Ingrid operationally head <unk> three business units driving sustainable growth operational efficiencies and world class safety performance ingredients.
Very successfully as you can see as a president of consortiums empty business unit since June 2015 with that operator, we will now open the Q&A session.
Thank you.
We would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you with item at that question. Please press star followed by Chief again to ask a question.
Star followed by one as a reminder, if you like using eastbound.
But you picked up the <unk> handsets before asking your question and please to ensure that you are on mute locally.
Yeah.
Our first question today comes from the line of <unk> from BMO. Please.
Please go ahead. Your line is now open.
Hi, Thank you for taking my questions.
The margin.
Hello.
Martin in the A&D segment remained very strong previously you said through the cycle margin in that business should be somewhere between 800 to 900 euros per tonne is it still.
Does that still hold or have margins structurally increase.
Yes. Thank you for the question Carter so.
And to your right in the first quarter, we mentioned.
Our margin a cycle average margin of 8% to 900 euro per ton.
And it will stay high in this up cycle environment.
That's certainly what we saw in the second quarter with better price and mix and with more aerospace has.
Having a higher margin compared to the tid business, but also in the second quarter.
We have a better mix with thing our aerospace product portfolio towards some of the more technically demanding products, which obviously.
Hold a premium.
So.
The business also had solid cost control in the second quarter relative to the increased levels of activity.
With two quarters seeing.
We believe we can maintain attractive margin for this business certainly for this year and that provide some upside for margin throughout the cycle. So our view today is.
There is 100 euro per ton upside to the 8% to 900 euro per ton guidance, we give them to you last quarter.
So yes, we think structurally margins are up around the one southern Europe up to us.
And the second half of the <unk>.
In the second half of the year should we see some easing I'm assuming and margins.
There could be some easing just given the seasonality of the business and cost is continuing to catch up in this business unit, but we're optimistic about the margin profile for this business.
But this year will be below the average over the cycle and for all.
Okay. That's fair now your leverage is approaching your target can you mine does once you reach that target how youre, how youre going to be thinking about the capital allocation.
Yes, so look I mean, our overall objective is to increase our financial flexibility because that will kind of help open up.
Capital deployment options that allow us to maintain.
Balanced I would say a balanced capital allocation policy. So as we reach our leverage target. It certainly opens up our options, including returning cash to shareholders.
Yes.
Thank you very much.
Thank you.
Thank you.
Our next question today comes from the line of Bill Peterson from Jpmorgan.
Please go ahead. Your line is now open.
Yes, hi, good morning, and thanks for taking the questions.
It's great to see the upward guidance revisions.
It's great to see the upward guidance revision what is I guess what has changed since the prior outlook that gives you confidence in the revisions and I guess, given the higher free cash flow guidance can we expect accelerated debt Paydown premier.
And so bill I'll get started and Jack will help me.
No.
The visibility has improved as the year progresses. That's number one we are extremely pleased with outperformance in our aerospace and as we mentioned in a response to <unk>.
Question on it's not a flash in the ban will be there is much more room to grow and we that's why we were raising also our expected average margin for the segment.
And we're seeing a very good mix within aerospace where as you saw.
Customers like us we get from a fantastic awards as best suppliers from them and that means more business for us so.
Very strong fundamentals overall in aerospace and even better for us as a supplier as a preferred supplier to our customers. So that's definitely a.
<unk> strong contributor to the increased guidance in packaging the <unk>.
First half was rough with demand being down we expect the second half to be less rough.
And in that space and all the book and what we will say so by contrast, H one of 22 to one of 'twenty three that was difficult we expect <unk> to be much much better in terms of comparison.
Still are not where we'd like it to be in the long run, but making some progress.
And automotive as you saw continues to be strong for us it's a very good year.
I think we're seeing both the strength in the underlying market, but also the continued penetration of aluminum in automotive. So all these are giving us good reasons for the increased guidance now at the same time.
It is striking to see that.
Our specialty segment, all suffering from a quasi ore from <unk>.
<unk> recession recessionary environment.
Inflation continues to be strong and are.
Eating into our.
Our cost base.
So it's.
We're extremely pleased with the outlook, we're giving and sharing with you today, because there's still quite a few.
Headwinds that are that we are faced with and despite this we are increasing our guidance. So yes, the increased guidance translates into.
On the EBITDA side translates into more cash flow that gives us more flexibility and I don't know Jack do you want to add anything to my comment I think thats good okay.
And as you so we'd like to pay down some debt. So we'll see what we do in the future.
Okay, great. Thanks for that and I guess you.
Kind of mentioned some of the.
Issues around inflation.
I know I know, there's a lot of the mitigation efforts.
<unk> captured in your full year EBITDA view, but I guess, if we think about some of the bigger items, you mentioned like energy or.
Metals are still I guess inflationary pressure at some of the sites, but I guess, what's typically as a team doing to mitigate these and I guess can you provide an initial view on how to think about these cost headwinds as we move into next year.
Yeah. So.
On energy, we think we have crested.
At the moment, given our hedge positions, we helping a bit.
Ben.
Being higher than the spot prices would be on average.
So as those hedges roll off and hopefully the spot prices continue to be.
What happens in the future we should see.
Decrease in energy cost.
I'm hopeful that's what happens but anyway.
Expecting going into next year.
On metals.
I think we will see.
Inflation subside, but they are still much higher I mean magnesium as a.
Multiple times more expensive today than it was back in.
2020, or 2019 right pre pandemic.
So we see these elevated costs to continue so in terms of mitigation measures.
And I could go on and on about different buckets of costs that are going up with inflation, we will leave that in our business and the consumer life I would think so in terms of mitigation measures.
First one is making sure we are getting paid by our customers for the reality of the new product the new customers that we are faced with and as I said there has been a fantastic job done by the teams to reflect the increased cost into our pricing, but there is a lag to that so you haven't seen it yet.
The impact of those price increases.
Second item is we've got to be a much more economical and I'll use of resources, which is a good thing actually so it's forcing us to put on the front burner.
Questions like how do we save energy how do we better operate our plans how do we improve our recoveries. So that every cost item. If we use a resort is minimized and theirs.
That's a lot of work grinding through every opportunity to minimize the use of resources within the plants and then the third aspect is both strategic and longer run is we have to go.
And continue on our path towards more value added products.
Big element of that is making sure we have the right product mix that we focus on those products that have better margins that are more constructive in the long term.
So that the value of it we're making is more recognized in the market and that's one of the reasons why we commented we announced the sale of the three.
Extrusion plants in Germany that will focus on lower margin products.
We thought this.
This is a this is a kind of a market where it may be a little bit more difficult in the future to face increased cost base and we found a buyer that use them as a strategic asset wealthy the buyer found us actually we do we will not auctioning off these assets and Thats part of the steps we take.
To continually make sure we got the right cut space.
Without this space in the right markets.
Alright, great. Thanks for the insights.
Nice job on the quarterly execution.
Thank you Bill.
Thank you.
The next.
Question today comes from the line of Scott with West from Credit Suisse. Please go ahead. Your line is now open.
Yes, Thanks, Good morning, Tom Martin Jackson for well.
I wanted to come out there are already sort of A&P hey.
<unk> margin profile.
Profile, maybe a little bit differently I mean, as you think about.
Going for the next couple of quarters in the next year.
This phase included.
Clearly is going to grow much faster than tid.
So I would think that your mix all else equal would be improving your fixed cost absorption would be.
Improving and then at some point I would think.
Given some of the increase is potentially on the wide body side of the market that would also be accretive to mix. So is that a fair characterization I think that your mix within that segment should be improving and then you know I know.
Air where some of the extremely high margin products you do <unk>.
Can create a lot of quarter to quarter volatility. So it was it was there anything that was kind of extremely unique in this quarter that you could call out that.
Wouldn't repeat next quarter.
Yes.
Youre right to on a broad base the more aerospace we do in the mix compared to Tid that will drive up the average margin because they are risk based margins are higher than tid and on a go forward basis as well seeing.
The aerospace recovery strengthening and strengthening that's going to come into play.
It is true that we've got some within aerospace there is also a micro mix so to say with some products that are extremely profitable, but remember the.
Required quite significant investments in the past so it's fair that they are much.
Much more profitable.
And we've had strong demand in our space and defense and the higher end of the products, we expect that to continue.
But yes, there can be some fluctuation. So overall I think Jack mentioned earlier, we're expecting for this year margins in the <unk>.
Int segment that continue to be above the revised long term average that we mentioned.
<unk> mentioned that both the 1000 euro per ton.
But they may come off a little bit from what we've seen in Q1, and Q2, which are seasonally strong quarters.
Yes, Kurt.
And I agree with everything Mark mentioned.
Certainly more aerospace will be helpful.
<unk> from a margin perspective, I remember the tid business.
Is.
Down.
This year in the first half compared to the first year first half sorry first half of this year versus the first half of last year, it's down somewhere around 15%. So.
That <unk>.
Part of the A&P business rebalanced recovers that will eat.
Into the margin as well.
Okay.
And then on packaging.
Are you seeing any evidence that some of the Destocking is over I mean, it seemed like you were intimating that the second half would be better on a comp basis, and then with respect to the.
Phase one expansion plan, which I think was 200000 tons by 2025.
Later, Dan is that do you still feel.
We're confident that you can get that incremental volume by 2025.
Update us on where you stand with that thanks very much.
Yes, so in the short term, we're seeing some signs of improvement in packaging.
Pointing towards end of Destocking.
So that's why we will see the comp would be we expect to come to be better going into <unk> than it was in each one.
With regards to the 200000 tons of additional capacity that we have.
I liked it.
State back in April of 'twenty two.
Remember, it's a 26 really.
The increase right by the end of 'twenty five that could be the increase we have in capacity.
Given the fact that the market has taken a step back maybe it's going to be a little bit more gradual.
You always want to maintain flexibility in our capital allocation. So that we can accelerate some projects Dora slowdown some projects and within the same envelope of capital expenditures that we have mentioned so we'll have to see how it goes there is no fundamental reason to.
Not meet that 200000 tons of extra capacity.
They come in a little bit.
More slowly than what.
What we initially thought.
Because the markets may not need it as quickly and we've got other opportunities elsewhere, because we're really talking about tweaking at the edges here the fundamentals are not changing.
Okay, Great and maybe just a quick one on part up in the quarter, you outlined $53 million of incremental costs, which.
It is a pretty substantial delta.
Outlines three buckets between mill costs muscle Shoals, and then is there still low inflation could you.
Maybe add a little bit more granularity in terms of the bucket. It break out and then just update us on how you see cost progression in the back half of the year and PARP.
So I.
I think youre right the cost pressure continued to be high for our businesses, including par if I would say and inflation.
It really stayed high in this quarter and it was broad based for for PARP and for somebody other.
For the other to be used as well and that continued to be have an adverse impact across a number of categories that John Mark was mentioning so I would say inflation is a big piece of that minus 53 that you mentioned about the <unk>.
Same time operating cost outside of inflation has.
<unk> has increased it increased as well with more labor more maintenance more sub contracting if you will and some of the other operating cost categories, but they're generally I would say kind of more contained relative to the higher activity levels.
So I think we're okay there.
Muscle shoals maintenance.
While still high its more under control.
This quarter and the team is working really hard to bring the plant back to normal and the impact as we mentioned in the past will continue to last throughout the rest of the year.
Okay. Thanks.
Thank you.
The next question today comes from the line of Tim the tenants from Wolfe Research. Please.
Please go ahead. Your line is now open.
Yeah, Hi, Hello, and thanks for the great detail I wanted to dive a little bit and not taking away from the strength in auto and aerospace, but the packaging and building and construction markets that have shown a bit more weakness so starting with packaging.
Yesterday, a little over a year ago, you talked about 4% to 5% growth now you're talking about low to mid single digit is that a change in it.
So like is there anything structural that should give us some pause in terms of the extent of upside to packaging I know you talked about near term less destocking, but if we think out to the future is the growth story, a little more muted than we thought if he can provide some more color there.
Yes.
I think it's I would quantify it as tweaking around the edges here to go to 1% difference in growth rate doesn't impact so much.
Certainly not to twenty-five outlook, nor even at 28 outlook. So.
And I I think it's more a reflection of the fact that because.
We have had that kind of set back with <unk>.
The reduction in volume this year, we think that.
You know the long term growth rate, maybe a little bit more muted because otherwise that would imply a very significant catch up very soon in our packaging. So it's more kind of the arithmetic. So if we look at the packaging market long term will continue to think it's a good market. The cans continue to win share to win share.
<unk> gained share against all of the substrates.
But the best maybe a little bit more moderate.
But still very attractive to us.
Okay, Thanks, and the German sale that you detailed what does that say about the building construction market outlook. It seems to us that maybe that was near a bottom so but youre also exiting it.
Wondering what we should take away from that in terms of your outlook for that segment.
Well then it wasn't opportunistic sales so building and construction as you know there's not a big market for us right. So.
A couple of percent of volatile sales as a company. So it's certainly not an area of focus for us.
What happened here is we've got these three plants.
We have actually improved performance of these three plans put a fair amount in the past five years, and we had somebody come to us and say we're interested in buying them, we want to expand in the German market.
So you go to a situation where.
We as a company don't view these plants are strategic and we've made a nice improvement in profitability.
And we go to buyer was interested in them.
And places a higher value.
And we do on this business.
And then it's a matter of you know.
If we keep a business we will have to put some capital expenditures in.
Is it the best return for US, we don't think so and therefore the decision was.
Relatedly easy once it was clear that the buyer was putting a higher value on the assets and we did it made sense to.
Sell them so it wasn't so much about.
We are afraid of the outlook and building and construction.
It's just that it was the right thing to do for US at the right time, Yeah, Timna I would just.
Reemphasize, which I'll Mark I mentioned earlier.
We didn't put this business on the market and this was not a fire sale. If you will it was really an opportunistic transaction its been years in the making right just the timing kind of works out the way it did and the business is a better fit in the buyers' portfolio than in our portfolio.
Now that's helpful color. Thank you makes a lot of sense, if I could squeeze one more in.
I was interested in your talk about potentially pushing and pushing out some of the expansion to 2026 as you know there is what three new mills that are kind of targeting that same timeframe.
Just wanted to ask if you're seeing any evidence of them in the market starting to talk about contract extensions or if theres any influence on the new mills in your discussions with customers that far out.
No there isn't and as we said we are fully contracted out and we are through 2006, and we've got contracts.
Contracts that go into 27 28, 29, so it's more a matter of us looking at what do we think the long term forecast is and how quickly do we need the extra capacity because we need it but the question is do we need it and January 'twenty four 'twenty five 'twenty six.
We don't want to spend the money sooner than we need and we certainly don't want to spend it later than we need because otherwise we'd be not meeting our contractual commitments. So it's really about.
Talking with our customers through their expectations and getting a sense of what do we need to do it but again those volumes are contracted.
Got it okay. Thanks again.
And as you know there is a margin of tolerance right typically within a contract it's not like it's a <unk>.
Absolutely.
Mount tons right. So there's a margin and we're talking of playing within that margin that tolerance around the contract and looking at you know the.
The market is all software related basically to the market saw strong we'll put it for a while.
Got it.
Thank you. Thank you.
Thank you.
Question today comes from the line of chlorine gunshot from Deutsche Bank Clean. Please go ahead. Your line is now open.
Hey, good morning, everyone.
I want to come back to the to the guidance and I know that's been a lot of question but.
It wasn't guidance leased multi driven by the performance of <unk>.
And Ken.
But I think the only change that assumption.
Yeah, you got it correct correct assumption okay.
No I wouldn't.
I wouldn't I wouldn't say that I would say well, yes, partially driven by the outperformance in the first half and then when we looked at.
Look at the second half, we do expect some of the underlying strength of strengthening the business to continue into the second half that will drive additional outperformance in the second half.
So of course.
Aerospace continues to be strong we expect packaging includes a bit of a gap.
Pricing is very good and.
That should give us some lift and we don't and we expect to continue to have a pain in the specialty segment and we continue to expect the automotive to be strong so pretty much. What you saw at play in the first half will continue in the second half and we are raising our our own internal expectations have been raised for the <unk>.
I don't have.
Okay that makes sense so.
What would be the likelihood for you guys to potentially increase again next quarter, because you feel I assume you are significant.
Again from an higher margin into the business.
<unk> thousand per ton for the sidecar very nicely, we should see an annual number that is going to be too wildly and al Bolles the guidance right.
Well at this stage this is al.
Best outlook right and obviously, there is plenty of value pulses into it.
<unk>.
You can have several of them turn better or civil or them to on the worse.
And.
Depending on how many of them doing better or worse, you can be within the guidance or outside of the guidance is our best view of today.
<unk> and outlook and what it means for the company.
Some are negative.
But you know some risks out there right, which we.
We've baked into our guidance.
There's lots of talk about the UAW strike of the automakers.
They stubbed their lines, we're going to not going to ship to them right. So we tried to factor that in our guidance as well and all the things are you know spot prices for energy. They are low, but remember, we're 90% hedged I mean, some of our markets we are actually producing.
20, 30% less than what we should and therefore, we are.
But positions in energy that we have to unwind in the market that we're making losses. So that you've got all of these factors at play.
And today, our best view of it is 720.
Uh huh.
You know, obviously, we're working hard to meet.
<unk> targets and beat them, if we can.
Yes.
Brian just bearing in mind sorry.
Sorry, just just bear in mind second half Theres seasonality impact as well. So you can just look at the outperformance in the first half and put on to the second half. So we got to take that into consideration.
Got it.
And then just quickly come back on for cash flow free cash flow guidance was increased again you talk about.
The net debt target to be almost.
<unk> you want to be.
Sure.
Cash flow there that you can in but is there any do you think.
Any specific end market that you would give <unk> like you said.
So I think.
Well I mean over the short term, we want to maintain as we mentioned a balanced capital allocation policy, we guided $3 40 to $3 50.
Of Capex. So you can count that number in for the full year and as we continue to generate free cash flow John Marc alluded to this.
We will look at other opportunities to reduce our gross debt obligation because increasing financial flexibility is not just about the leverage target. It's also about reducing.
The gross debt obligation.
I don't know if thats, what youre asking but.
Yes.
That's it for me.
Thank you. Thank you.
Thank you.
The next question today comes from the line of Josh Sullivan from the Benchmark Company. Please go ahead, Josh Your line is now open.
Hey, good morning.
Good morning, Josh.
Regarding aerospace demand do you think youre shipping products in concert with the current build rates communicated by aerospace Oems.
We.
Theres a lag of you see Josh as you know between the.
What they are building today and what they will need to build in the future yield then we tend to be you know one to two years ahead.
So yes.
I think we are another way to answer your question would be to say that.
We think we've got sustained growth ahead of us that will take us higher than pre COVID-19 levels.
Somewhere around 25 would be my my guess, so we see continued strength.
Cause.
Anything that we can make is needed.
So as far as the Oems inventories you don't think you are.
You don't think Thats a headwind anymore.
Are you shipping at rate with what they're communicating.
Okay.
Yes, I'm not even sure. There is there are also parts of the supply chain, where are restocking is complete all those where it isn't and I think we.
Yes, we.
Everything we can ship everything we can make we can ship.
Okay.
And then as we look to later in the decade, there's some aspirational build rate targets that some of the aerospace Oems would like to get to.
How should we think of <unk> capacity to maybe address some of those out year.
Yeah, well, that's going to require a lot of work from us Josh because as I mentioned, our strategy is focused on value added products I mean, there's several pillars to our strategy, but that's the number one which means we are making more and more complex complicated high value products, which take more.
Time to.
If you look at the pre Covid shipments will making say two.
2019, and you contrast that with what we could be making in 2025. The same tons number of tonnes will require much more work and will command even more value added revenue and EBITDA. So we have challenges in terms of capacity and the teams are working very hard to debottleneck, our plants and makes it on that.
Smart investment not capex into the plant so that we.
Build more flexibility more capability more capacity, so that's going to be.
With chat and we're very excited about it it's a good challenge to have and it creates a very nice opportunities for very high return on capital expenditures.
Okay.
And then just as you look to <unk>.
Refine the portfolio and understand the divestiture was more opportunistic but as you.
You are talking about some of those higher value products and aerospace.
You think youll move up the value chain at all are there opportunities to do more complex products for your aerospace or space customers.
There is somebody said the margin.
<unk>.
So.
Hi.
I think it's a constant gradual improvement and what you have seen is what you will continue to see sales no. It's an evolution does.
Revolution in terms of our product.
Product positioning or our manufacturing.
Capabilities or footprint.
Got it great. Thank you for the time.
Thank you.
Thank you.
Next question today comes from the line of.
<unk> from Deutsche Bank, Sean. Please go ahead. Your line is now open.
Good morning, Sean.
Hi.
Good morning, Thank you for taking my questions.
Graduations to Ingrid.
Promotion.
Sure. Thank you going back and sorry to beat the dead horse here.
But the packaging question.
Last quarter, when we spoke you seemed a little bit down on the segment hanmi weren't quite sure.
Get into enough marketing and promotional activity.
So kind of move the process along there.
EMEA has improved a little bit with.
With respect to that.
Would you say that's fair to say that maybe youre kind of seeing what you needed to see that maybe we're in the early innings of the recovery can you just comment on modeling please.
Yeah, I think I think that's a fair Sean.
Okay.
The second quarter was not as bad from a comp basis of the first quarter.
What we have in our books. So the third quarter is making some progress but the comps also are getting easier because we started seeing some slowdown in the second half of last year as well so we're getting to a more normal territory.
So that's good.
It's factored obviously in our forecast guidance.
And we believe.
As we look at the data that can continue to be the preferred package.
It was clear when they add the wouldn't Kansas the upswing.
So very clear in the downturn and I think thats very reassuring for the long run.
So that's why you know.
The long term view is coloring a little bit by lenses yet.
Which is.
It is a package.
A very good future and thats good for us.
That's good to hear.
And then just.
<unk>.
Hey to your own improvement here with Robert.
It's coming down so much on getting closer to that target.
When you think about capital allocation is there any chance that you would consider some form of M&A, whether it's north America or Europe .
Yeah, Andy here and another.
So the store or whatnot.
Well, that's part of it indeed of their capsular location choices, we gotta make but the first thing about M&A is.
Most of them fail.
So if we were to go down that path.
They failed for the buyer by the way.
If we were to go down that path, we would be highly selective.
So that's really both that it wouldn't be it would need to be in line with our strategy would be highly selective Jack you want to comment further.
Basically repeat what you just said I mean look.
M&A as a tool in the toolkit as I like to say right. So.
I think being selective would have to be really convince any deals we do create access.
Value for our shareholders the targets will have to be a guess fit strategically.
Strategically and they have to be a gift fit culturally and we will not jeopardize our financial flexibility.
If that's helpful Alright.
No that's very helpful. I appreciate it and thank you for taking my questions today.
Thank you. Thank you.
Thank you David.
No additional questions waiting at this time, so I'd like to pass the conference back to tissue <unk> CEO for any closing remarks.
Well. Thank you very much everybody for attending today as you can see we're very pleased with the progress, we're making and very pleased with our revised outlook and.
We look forward to updating you on our further progress in a few months' time. Thank you have a good day.
Yes.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
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