Q3 2024 Constellium SE Earnings Call
Hello, everyone and welcome to today's can study in the third quarter at 2020 people, adding is cool funny to be true and I'll be your moderator today.
During today's call we will have a Q&A session to register a question. Please press star followed by one on your telephone keypad and if you wish to withdraw. Your question then is stuff on the bye to all.
Speaker Change: I'll now turn the call over to Jason Hershiser Director of Investor Relations to begin. Please go ahead Jason.
Jason Hershiser: Thank you drew I would like to welcome everyone to our third quarter 2024 earnings call on the call today, we have our Chief Executive Officer, John Marc Germain and our Chief Financial Officer, Jack well.
Jason Hershiser: After the presentation, we will have a Q&A session.
Jason Hershiser: Copy of the slide presentation for today's call is available on our website at <unk> Dot Com and today's call is being recorded.
Jason Hershiser: Before we begin I'd like to encourage everyone to visit the company's website and take a look at our recent filings.
Jason Hershiser: Today's call May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such.
Jason Hershiser: Such statements include statements regarding the company's anticipated financial and operating performance future events and expectations and may involve known and unknown risks and uncertainties.
For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward looking statements. Please refer to the factors presented under the heading risk factors in our annual report on form 20-F.
Jason Hershiser: All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward looking statement as a result of new information future events or otherwise except as required by law.
Jason Hershiser: 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 Srs disclosures.
Jason Hershiser: Before turning the call over to John Mark I wanted to remind everyone that earlier this year, we revised the definition of adjusted EBITDA at the consolidated level based on prior discussions with the SEC.
Jason Hershiser: The new definition will no longer exclude the noncash impact of metal price lag.
Jason Hershiser: We will continue to Bryan to provide investors and other stakeholders with the noncash metal price lag impact as it is necessary to get a true assessment of the economic performance of the business or.
Jason Hershiser: Our segment adjusted EBITDA will continue to exclude this impact and any guidance we provide for adjusted EBITDA will also exclude the impact.
Speaker Change: And with that I would now like to hand, the call over to John Mark.
John Mark: Thank you Jason Good morning, Good afternoon, everyone and thank you for your interest income stadium.
John Mark: Let's begin on slide five and discuss the highlights from our third quarter results I would like to start with safety. Our number one priority. Our recordable case rate was lower in the third quarter, leading to a rate of one 9 million hours worked for the first nine months of the year.
John Mark: Why did the safety performance puts us among the best in manufacturing the rate is still higher than where we want it to be we all need to constantly maintain our focus on safety to achieve the ambitious targets. We have set it is a never ending task for our company and one that we take very seriously.
John Mark: Turning to our financial results shipments were 350350, 2000 tons down 5% compared to the South Dakota 2023, mainly due to lower shipments in the a N D N S Tonight.
John Mark: Revenue of $1 6 billion euros decreased 5% comp to.
John Mark: Two last year, primarily due to lower shipments.
John Mark: Oh gosh.
John Mark: Partially offset by higher prices.
John Mark: Yeah.
John Mark: Okay.
John Mark: They have run into.
Speaker Change: Can you hear me.
Remember what our revenues are affected by changes in metal prices, we operated pass through business model, which minimizes our exposure to metal price risk.
Speaker Change: Net income of 3 million euros in the quarter compared to net income of 64 million euros in the third quarter of last year.
Speaker Change: Minder, the third quarter of last year included a 36 million euro gain related to the sale of all C D business in Germany.
Speaker Change: Adjusted EBITDA was 110 million euros in default to the this includes a negative impact at valley, Switzerland of 17 million euros as a result of the float.
This also includes a negative noncash impact from metal price lag of 3 million euros. If you were to exclude the impact of the flood and the impact of metal price lag as Jason mentioned earlier, the real economy. The performance of the business reflects adjusted EBITDA of 100, and still 2 million euros in the quarter.
Speaker Change: Compared to the 168 million euros, which she last year.
Speaker Change: Yeah.
Looking across our end markets packaging demand remained healthy during the quarter.
Speaker Change: While the backlog in aerospace remains robust aerospace demand has started to slow down and shift to the right as commercial aerospace Oems all dealing with supply chain challenges and continues to struggle to increase build rates.
Speaker Change: Automotive demand during the quarter started to soften in North America.
Speaker Change: Weakness accelerated during the quarter in Europe.
Speaker Change: We experienced a sharp decline in demand in North America in most industrial markets and further weakness in most industrial and specialty markets in Europe.
Speaker Change: Jack will go through our detailed segment performance in a few moments.
Speaker Change: Moving now to free cash flow, our free cash flow in the quarter was negative 10 million euros, which includes a negative impact at valley of 6 million euros as a result of the flood.
Speaker Change: I am pleased to report that we continued our share buyback activities in the quarter during the quarter, we will repurchase one 2 million shares for 21 million U S. Dollars. I'm also pleased to report that our new recycling center and casting centuri Netflix that started up in September.
Speaker Change: Head of schedule and below budget.
Speaker Change: Our leverage at the end of the third quarter was two eight times, which is slightly above our target leverage range.
Speaker Change: As you can see the third quarter was very challenging for us as demand continued to weaken during the quarter in several end markets and the weakness has now spread to some other end markets. In addition, the flooding valley at a significant impact on our financial results during the quarter.
It gives you a full update on the current situation in the valley a little later on with that I will now hand, the call over to Jack for further details on our financial performance Jack.
Jack Well: Thank you Mark and thank you everyone for joining our call today. Please.
Jack Well: Please turn now to slide seven let's focus our apartment segment performance.
Jack Well: In the third quarter of 2020 for PARP generated segment adjusted EBITDA.
Jack Well: 1 million euros, which was down 9% compared to the third quarter last year.
Jack Well: Shipments in park were stable versus the same quarter last year.
Jack Well: Packaging shipments increased 3% in the quarter versus last year as demand remained healthy in both North America and Europe.
Jack Well: Automotive shipments decreased 6% in the quarter as demand started to weaken in North America and weakened further in Europe.
Jack Well: Mix was stable compared to the third quarter last year.
Jack Well: Costs were a headwind of 6 billion euros as a result of some favorable metal costs, given tighter scrap spreads in North America, partially offset by lower operating costs.
Speaker Change: Now I'll turn to slide eight and let's focus on the A&D segment.
Speaker Change: Adjusted EBITDA of 47 million euros decreased 41% compared to the record third quarter last year.
Speaker Change: <unk> was a 10 million euro headwind as a result of lower tid shipment.
T I D markets in North America saw a sharp decline during the quarter and markets in Europe continue to weaken.
Speaker Change: Tid shipments were also impacted.
Speaker Change: As a result.
Speaker Change: Aerospace shipments were stable in the quarter.
Speaker Change: Price and mix was a headwind of 12 million euros due to a softer pricing environment in tid and weaker aerospace mixing a quarter.
Speaker Change: Costs were a headwind of 3 million euros.
Speaker Change: During the third quarter.
Speaker Change: He had a negative impact of 7 million euros at that late as a result of the fly.
Now turn to slide nine.
Speaker Change: And let's focus on the F&I segment.
Speaker Change: Adjusted EBITDA of 10 million euros decreased 61% compared to the third quarter last year.
Speaker Change: Volume was a 2 million euro headwind as a result of lower shipments and automotive and industry shoot it products.
Speaker Change: Automotive shipments were down 9% in the quarter versus last year as demand started to weaken in North America and weakened further in Europe.
Speaker Change: Industry shipments were down 35% in the quarter versus last year.
Speaker Change: As a result of further weakening in Europe, the sale of our German infusion business in the third quarter last year and the impact that that law as a result of the flooding this year.
Speaker Change: Price and mix with eight mailing euro headwind, primarily due to a softer pricing environment in the industry and weaker mixing in the quarter.
Speaker Change: Uh huh.
Speaker Change: Costs were a tailwind of 6 million euro some lower operating costs.
Speaker Change: FX and other was a headwind of 2 million euros in the quarter.
Speaker Change: During the third quarter and I had a negative impact of 10 million euros at that late as a result of the flood.
Speaker Change: It is not on the slide here, but I wanted to summarize the current cost environment, we're facing.
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.
Speaker Change: <unk> energy, our 2024 costs are moderately more favorable compared to 2023, although energy prices remain well above historical averages.
Speaker Change: Labor and other nonmetal costs continue to be higher this year.
Speaker Change: And given the pressure we're seeing in the markets, we're accelerating our vision twenty-five cost improvement programs, including additional fixed cost reduction efforts.
Speaker Change: We have demonstrated strong cost performance in the past and we're confident in our ability to rightsize our cost structure for the current demand environment.
Speaker Change: Now, let's turn to slide 10, and discuss our free cash flow.
Speaker Change: Free cash flow was a negative 10 million euros in the third quarter, which includes a negative 6 million euro impact at that late as a result of the flood.
Speaker Change: Year to date, we have generated free cash flow of 57 million or 63 million euros, excluding the impact of the flood.
Speaker Change: The year over year decrease in the first nine months as a result of lower segment adjusted EBITDA.
Speaker Change: Higher capital expenditures and cash taxes, and the impact that the flood, which are partially offset by a favorable change in working capital and lower cash interest.
Speaker Change: As you Mark mentioned previously.
Speaker Change: We continued our share buyback activities in the quarter.
During the quarter, we repurchased one 2 million shares for $21 million, bringing our year to date total to roughly $3 1 million shares for just over $60 million U S.
Speaker Change: We plan to continue executing on the share buyback program.
Speaker Change: We're not giving guidance on free cash flow for 2024 at this point.
Speaker Change: Given the rapid changes in market conditions during the third quarter and the actions, we're taking internally to manage the current environment.
Speaker Change: There are many moving pieces and we do not have certainty yet what will come in the fourth quarter of this year versus the first quarter next year.
Speaker Change: However, we remain focused on generating consistent free cash flow.
Speaker Change: Now, let's turn to slide 11, and discuss our balance sheet and liquidity position.
Speaker Change: At the end of the third quarter, our net debt of $1 7 billion euros increased slightly compared to the end of 2023.
Speaker Change: Our leverage was two eight times at the end of the quarter were up three times versus the end of the third quarter of 2023 is slightly above our target leverage range.
Speaker Change: We remain committed to maintaining our leverage target range of one half to two and a half times over time and at this stage, we expect leverage to trend down to our target leverage range in 2025.
Speaker Change: During the quarter, we successfully refinanced both the U S dollar and Euro denominated senior notes that were due in 2026.
Speaker Change: Also during the quarter, we extended the Pan U S. ABL maturity to 2029 and increase the commitment to $550 million from $500 million previously.
Speaker Change: As you can see our desk summary, we have no bond maturities until 2028.
Speaker Change: Our liquidity remains strong at 778 million euros as of the end of the third quarter.
Speaker Change: Extremely proud of the progress we have made our capital structure and have the financial flexibility, we're building, including the ability to continue returning capital to our shareholders.
Speaker Change: With that I'll now hand, the call back to John Mark.
John Mark: Thank you Jack let's turn to slide 13, and discuss our current end market outlook.
John Mark: The majority of our portfolio today is serving end markets benefiting from durable sustainability, driven particular growth in which aluminum light and infinitely recyclable material plays a critical role. However in the short term many of these market itself facing headwinds.
John Mark: Turning first to the aerospace market commercial aircraft backlogs are robust today and continues to grow major Aero Oems remained focused on increasing build rates for both narrow and widebody aircraft.
John Mark: The supply chain challenges are again slowing deliveries of completed aircraft.
John Mark: As a result.
John Mark: Mostly supply chains need to adjust to lower than expected build rates, which is causing a shift in demand to the rights for some of our products.
Despite the slowdown in the near term, we remain confident that the long term fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new more fuel efficient aircraft.
John Mark: Demand remains healthy in the business and regional jet and defense market.
John Mark: Turning now to automotive.
John Mark: People OEM production of light vehicles in Europe remains well below pre COVID-19 levels and he's still below pre COVID-19 levels in North America as well.
John Mark: In the quarter automotive demand started to soften in North America, while demand further weakened in Europe, particularly in the luxury and premium vehicles and electric vehicles segments, where we have greater exposure.
John Mark: As a result of the weakness you know automotive we have seen many global automotive Oems reduce their outlooks at least once in the last two quarters.
John Mark: In the long term vehicle electrification and sustainability trends will continue to drive demand for light weighting and use of aluminum products. As a result, we remain positive on this market over the longer term in both regions. Despite the weakness we are seeing today.
John Mark: Let's turn now to packaging inventory adjustments and can stuck all behind us and demand remains healthy in both North America and Europe.
John Mark: Promotional activity at the retail level is up year over year, but remains below historical levels.
John Mark: Long term outlook for the end market continues to be favorable.
John Mark: Evidenced by the growing consumer preference for the sustainable aluminum beverage can capacity growth plans from can makers in both regions and the Greenfield investments ongoing here in North America.
John Mark: Longer term, we continue to expect packaging market to grow low to mid single digits in both North America and Europe.
John Mark: Our new recycling and testing center enough for exact started up in September slightly ahead of schedule and below budget. The facility is running strong and should ramp up quickly.
John Mark: Muscle Shoals, what he said as made progress and had a solid third quarter production wise. We're encouraged by the improved performance. We have seen there recently and we expect operations to continue to improve as the year progresses.
Speaker Change: As you can see on the page. These three core end markets represent just over 80% of our last 12 months' revenue.
Speaker Change: Turning lastly to all of those specialties.
Speaker Change: During the quarter, we saw sharp declines in demand in North America and demand continued to weaken in Europe.
Speaker Change: At this point, we have experienced weakness.
Speaker Change: Most specialties market for more than two years now as a reminder, these market itself typically dependent upon the health of the industrial economies in each region, including drivers like the interest rate environment industrial protection levels and consumer spending patterns.
Speaker Change: We are working hard to adjust our cost structure to the current demand environment, which will put the business he doesn't even better position when the industrial economies do recover.
Speaker Change: To conclude on the end markets, we like the fundamentals in each of the markets. We serve and we strongly believe that the diversification of our end buckets as an asset for the company in any environment and that the current conditions will pass.
Speaker Change: Yeah.
Speaker Change: Please turn to slide 14, now and I wanted to give you an update to the impact of the flooding in the valley.
Speaker Change: In late June we experienced unprecedented flooding in the valley region of Switzerland, which divestiture the region, including industrial activities that can stadium and elsewhere, our plate and extrusion trups and share in the cast house and shippers will severely flooded and operations were suspended.
Speaker Change: The Sierra and ship these facilities were under four to five feet of water at the crest eight tubes.
Speaker Change: Six weeks to restore power to the site cleaning.
Speaker Change: Cleaning efforts are well underway with a strong focus on safety and efficiency.
Speaker Change: I am pleased to report that as of mid October 2024 operations, partially resumed and we anticipate restarting food operations in both our extrusion and plagued shops by the end of November 2024, we currently aim to complete the production ramp up for the extrusion and plate business by the end of the first call till next year.
Speaker Change: <unk> plans have been implemented including transferring some production to other facilities such as he swept zynga where.
Speaker Change: Also able to recover some of the inventory and ship it to customers.
Speaker Change: We're actively discussing with local authorities to secure the site against future flooding and niche and ensuring its long term viability.
Speaker Change: The financial impact in the third quarter of this year at Valley as a result of the float was 17 million euros of adjusted EBITDA and 6 million euros of free cash flow.
Speaker Change: For the full year in 2024, we currently expect back to be 30 to 40 million euros of adjusted EBITDA and 60 to 70 million euros of free cash flow, including the assumption of four partial receipts so reinsurance payment.
Speaker Change: We currently expect some cost impact in early 2025, that's the protection of the facilities will continue to ramp and we also expect some of the remaining insurance proceeds in 2025.
Speaker Change: All of the insurance proceeds that we received are accounted for below adjusted EBITDA.
Speaker Change: As of today.
We believe that the totally back from the flood will come in slightly favorable to our original estimates of July.
Speaker Change: Most of you are familiar with is saying when life gives you lemon make lemonade, what I think that is an accurate statement for our situation in the valley.
Speaker Change: As a result of the flood we're examining every aspect of the operations here and there.
Speaker Change: A lot of the equipment is getting repaired and we'll be in better shape than before the flawed when looking in the rearview mirror at these events. We believe we will emerge with a lower overall cost structure and valley as a result of our efforts and our competitive position should improve.
Speaker Change: Assets will be better.
Speaker Change: Managed.
Speaker Change: I cannot say enough how proud I am of fault team on the ground there and the incredible progress made in a short period of time against significant odds.
Speaker Change: Wanted to take a second here to thank them for their incredible results I encourage during this very difficult time.
Turning now to slide 15, we detail our key messages and financial guidance.
Speaker Change: As I mentioned earlier, the third quarter was very challenging for us as demand weakness accelerated during the quarter in several end markets.
Speaker Change: And the weakness has now spread to some other end markets were surprised to see how rapidly market conditions deteriorated since July.
Speaker Change: Based on our current outlook with these weak market conditions for the full year in 2020 full we expect adjusted EBITDA to be in the range of 580 to 600 million euros.
Speaker Change: This excludes an estimated one time impact of 30 to 40 million euros in 2024 from the floods in Switzerland, and excludes the noncash impact of metal price lag we.
Speaker Change: We are doing everything we can to manage costs in the business and we are working to reduce our working capital levels to support the current demand environment.
Speaker Change: Given the softness we are experiencing today across most of our end markets and with no signs of recovery in the near term. We are also more cautious as we head into 2025.
Speaker Change: At this stage, our adjusted EBITDA target of over 800 million euros, excluding the noncash impact of metal price lag.
Speaker Change: Late pending market recovery.
Speaker Change: In the near term.
Speaker Change: I have several adjusted EBITDA drivers that are within our control.
Speaker Change: The drivers we discussed in July this year, such as our new recycling and guys seem center enough for exact ramping up.
Speaker Change: The better contractual terms in aerospace next year, and increasing our efforts to reduce costs across the business as part of our vision 2025.
Speaker Change: We also assume that the two significant weather events in 2020 full in muscle Shoals, and the values do not trips.
We are confident that the long term fundamentals driving secular growth markets remain intact and when markets do recover it will create additional upside.
Speaker Change: In addition over the last few quarters, we've outlined several new organic investments. We are making this will start to contribute to adjusted EBITDA in 2026, and it will ramp up in the years beyond 2020.
Speaker Change: To conclude while we are facing very challenging conditions in most of our markets. Today. We believe that this too will pass and I remain very excited about our future we have demonstrated over and over again that we have the right strategy. The right teams the right products in the right markets and as we know how to overcome crisis.
Speaker Change: Our business model is flexible and resilient diversified portfolio allows us to have options in very different market condition.
Speaker Change: We have built the balance sheet, we need to both weather crises and seize opportunities and our high value recyclable and sustainable products respond to the growing needs of our customers and society.
Well positioned for long term success and remain focused on executing our strategy and shareholder value creation.
Speaker Change: With that drew.
Speaker Change: We'll now open the Q&A session. Please.
Speaker Change: Thank you starting today's Q&A session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If you wish to withdraw that question than it is star followed by <unk>.
Speaker Change: First question today comes from <unk> <unk> from BMO capital markets. Your line is now open. Please go ahead.
Speaker Change: Hi, Thank you for taking my questions.
Speaker Change: John Mark you just mentioned there are several EBITDA drivers that I guess are non market related can you just remind us how much does drivers could add to EBITDA when combined.
Speaker Change: Sure Good morning, Jeff Thanks for the question so.
John Mark: The first one is the recycle center, even enough precisely which as I said is.
Ramping up nicely as we speak that's a 35 to 40 million euros.
John Mark: For next year.
John Mark: The second one.
John Mark: His vision twenty-five it used to be the third one, but obviously given the market conditions, we'll see we're working hard on the cost structure and that should be north of 25 million euros.
John Mark: Cost savings are into next year.
John Mark: The third element is the repricing of some of our aerospace contracts.
John Mark: I didn't give an exact number but.
John Mark: You can figure it out given the fact that it used to be more than 15, and now we would say 25 somewhere in between.
John Mark: And then I think we feel like we are turning a corner in muscle Shoals, we are seeing a better production.
John Mark: Out of the facility now obviously.
John Mark: That's good in the context of a can sheet demand being a healthy, especially in North America, but also in Europe.
That should also help us next year and provide some further EBITDA lift now it's likely to be a little bit mitigated because as Jack mentioned the metal costs are unfavorable scrap spreads are tighter than they used to be by quite a bit. So that's offsetting some of the.
John Mark: The improvements in muscle Shoals, but net net that is going to be an improvement as well. So these are the one immediately now that are within our control and.
That should provide you add up all these you get north of $100 million of additional EBITDA as we mentioned back in July.
John Mark: No.
John Mark: Longer term also in our control we announced.
John Mark:
John Mark: Right.
John Mark: To her first earnings call this year for investments in our Ravenswood muscle Shoals is who are and zynga.
John Mark: Is that all going to.
John Mark: Get them until it's about 300 million of.
John Mark: Capital expenditures that are within our usual 300 350 million Euro of Capex every year and these should generate close to $100 million.
John Mark: The additional EBITDA no none of that will impact 'twenty five because these projects will start.
John Mark: Later in 'twenty, six and really ramp up in 27 28, but these are definitely a number of activities that are within our control and that's already well underway.
John Mark: Yeah.
Speaker Change: And maybe going back to the vision 25 that the cost reduction of $25 million does that include any incremental cost.
Speaker Change: Cost reductions that you were mentioning today to there you are trying to do.
Speaker Change: So I think our objective is to kind of rightsize our cost structure. So previously division twenty-five remember we said.
Targeting 50 million euros of savings over three years right. So we're kind of halfway into that program.
Speaker Change: The program is performing well now we're accelerating in addition to the vision. The prior vision 'twenty five target. We're looking at some of the labor cost reduction efforts and cutting back on some of the other kind of nonessential categories. So the 25 is incremental to the prior estimate.
Speaker Change: Okay. Thank you.
Speaker Change: Yep.
Our next question today comes from Bill Peterson from Jpmorgan. Please go ahead.
Speaker Change: Yeah, Hi, good morning, Thanks for taking my questions.
Speaker Change: Just thinking about 2024, it's hard to make sure I understand some of the impacts in more detail.
Speaker Change: If you could speak about the $590 million plus I guess sort of I don't know what $35 million from the Florida.
Speaker Change: That was still kind of puts you maybe and then I guess, if you added a $15 million from at muscle Shoals that still puts you kind of like a 100 million euros below the low end of the prior I guess the original guidance can you walk us through I guess the market drivers, obviously, youre, commenting that autos worse in the U S and Europe.
Speaker Change: <unk> seems to have taken a leg down maybe some pricing and mix impacts can you walk us through the various buckets of I guess what.
Speaker Change: Worse and quantify amongst the various buckets. Please.
Speaker Change: Yeah. Good morning, Bill. Thanks for the question, Yeah, I'll do that so.
Speaker Change: I'll start with the markets in our in our.
Speaker Change: Sequence right. So the first one industrial markets. We had we knew no Europe was weak got weaker.
Speaker Change: In addition, we've seen a sharp decline in North America.
Speaker Change:
Speaker Change: Industrial markets in namely that's going to affect us through the tid product lines.
Speaker Change: In the second half of this year.
Speaker Change: And you'll seeing already evidence of that.
Speaker Change: Q3, PMT numbers, so that that's been.
Speaker Change: A sharp reversal I mean, you look at the trailer builds.
Speaker Change: We're looking at a 25, 30% reduction year on year, but just one segment right.
Speaker Change: Compared to last year, clearly a much worse than what was expected.
Speaker Change: Then you look at the.
Speaker Change: Automotive market back in July we're still thinking in the outside the exalt.
Forecast for the industry will steel.
Slightly up compared to last year, and I will talking of a 5% decline and that decline is actually worse in the electric vehicle and luxury market segments to be you've seen most of the Oems.
Speaker Change: Published a revision to the guidance we know that.
Speaker Change: There is a significant player in North America still on this is an important customer evolves or they are struggling with a lot of inventory piling up on the dealers' lots. So that is causing a very sharp reduction in demand going into the end of the year.
Speaker Change: And then in terms of.
Speaker Change: You know can sheets were happy with it it's a three means a steady and strong.
Speaker Change: But we've got aerospace as well, where the supply chain issues are creating a further reduction in.
Speaker Change: In in.
Speaker Change: In demand now we have started the year with a more conservative assumption than what the Oems, who are giving us but now the reality is even more below are considered what we thought was a conservative assumption going into the year and what that means is sum of all demand is growing but we thought it would.
And he's taken half of the year and getting pushed into the next.
Speaker Change: And next year.
Speaker Change: No.
Speaker Change: You'll also remember that when we started the year, we had thought on the basis of discussions with our customers and.
Speaker Change: So the market that the second half would be stronger we actually had fooled falloff from the outages to make sure. We had the older production capacity available in the second half and clearly.
Speaker Change: We got caught a wrongfooted because the markets are telling.
Speaker Change: Telling us a different.
Speaker Change: Venue than what we thought at the beginning of the year.
Speaker Change: So you think of all these items you had them up and you add to that the fact that the scrap spreads in North America are a way tighter than they've ever been in the past five years.
Speaker Change: Plus.
Speaker Change: You get to an impact of 80 to 100 million euros.
Speaker Change: Negative EBITDA compared to last year. So that's a very sharp difference bill and I think the.
Speaker Change: What we're seeing here.
Speaker Change: Then begs the question of what do we think that turns around we don't know.
Speaker Change: But there is some elements that we know are going to be moved to the future. They are going to happen. Those aircraft will be built and now for other markets and we all know there can be cyclical Linda.
Speaker Change: <unk> vacuums anybody's guess, but we don't think it's going to be a Q1 event.
Speaker Change: And I don't know if I answered that was a long answer I don't know if I answered all your question Bill.
Speaker Change: Ed if you're good and evil.
Speaker Change: That was a lot of market driven things I, just don't I don't know if there's other Thomas maybe price or mix or maybe just internally.
Speaker Change: Cost related it may it may be also impacting in addition, no PV actually that.
Speaker Change: Actually so under on the price side, Yeah, I mean, when markets are Lou <unk>.
Speaker Change: <unk> strong the pricing is a bit weaker as well, it's not such a dramatic impact for us it's more about the mix and especially in aerospace right with some of the more profitable products are the ones that are pushed to the right.
Speaker Change: Because they tend to be the ones that the Oems will stuck up on and anticipate that to make sure that you're doing.
Speaker Change: They don't run out of them.
Speaker Change: We tend to be the more difficult ones to make some of these other ones that are more critical that'd be one make sure they've got enough of it.
Speaker Change: The build rates go down then they adjust those stock levels, but.
Speaker Change: I think back to the pricing issue not really I mean, the pricing in automotive you said the pricing in our country. It is that the price itself on aerospace you said what changes is it makes them. It makes has been unfavorable.
Speaker Change: And on the cost side actually we will doing.
Speaker Change: I think we're doing reasonably well.
Okay.
Speaker Change: Our next question comes from Timna Tanners from Wolfe Research. Your line is now open. Please go ahead.
We have an extremely poor line here.
Speaker Change: Yeah.
Speaker Change: Tim Your line is now Laythan. Please go ahead.
Speaker Change: Okay.
We are going to oppose the cool momentarily please standby.
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Speaker Change: Thank you for your patience, everyone. We will now continue with today's Q&A session. Our next question comes from Timna Tanners from Wolfe Research. Your line is now open. Please go ahead.
Timna Tanners: Great. Thank you very much sorry, I was having a hard time with the audio.
Timna Tanners: I have missed it but I was hoping we could talk a little bit about.
Timna Tanners: What signs of any recovery you might be seeing.
Timna Tanners: In about next year.
Speaker Change: On the aerospace side I was little concerned you talked about just starting to see weakness.
Timna Tanners: So have we.
Timna Tanners: How do we think about the margin compression in that mix shift if that important high margin product and any signs of that that could be like a temporary destocking from your customers or how to think about that business in particular.
Speaker Change: Okay. Good morning, Timna asked so I'll address the first question on the do.
Speaker Change: Do we see any signs of a recovery in the market.
Speaker Change: Not really.
Speaker Change: The moment we.
Speaker Change: Obviously you can.
Speaker Change: It's going okay right.
Speaker Change: Aerospace I think will come back to the second part of your question.
Speaker Change: I think it's just a bump in the road.
Speaker Change: Automotive in the specialties or industry, we don't see a recovery signs yet.
Speaker Change: Actually we've seen her.
Speaker Change: <unk> done what we could have thought back in July so no.
Speaker Change: No good news on that on that front.
Speaker Change: Regarding aerospace.
I think it's.
Speaker Change: We're starting to see weakness.
Speaker Change: Back to the assumptions, we had but it's still a market with.
Speaker Change: There is.
Speaker Change: Needful more aircrafts, the Oems want to build more aircrafts, but they are faced with temporary supply chain challenges of the supply chain Zara ramping up so there's no need to dwell on Boeing right. We all know what's happening there, but in the case of available seats read you about.
Speaker Change: Making sure.
Speaker Change: But to get the engine the leap <unk>.
Speaker Change: That they need to complete the aircraft and as they are slowing.
Speaker Change: Slowing down their ramp up.
They also going down the long lead time items.
Speaker Change: We supply to them.
Speaker Change: That's fair.
Speaker Change: What's happening so what it means.
Ultimately those products will be made and sold by us to them.
Speaker Change: But it's not happening as well.
Speaker Change: We will thinking in the second half of Bcf.
Speaker Change: Now in terms of margin compression what that means is you got a less rich mix in the <unk>.
Speaker Change: Aerospace sales.
Speaker Change: So that creates a bit of a margin compression, but we don't think our.
Speaker Change: Our <unk>.
Speaker Change: Apologies are really at risk and if anything <unk> seen in this quarter are likely depressed because of that mix shift, but also because of the valley flowed.
Speaker Change: Doug.
Speaker Change: Yes, some presence in Nevada, so be it.
Mechanically.
Speaker Change: Bradshaw their average margin.
Speaker Change: Yes.
Speaker Change: The only thing I would add sorry, the only thing I'll add is if you were to kind of strip out the impact that that late.
Speaker Change: For the quarter, the A&P margins still.
Speaker Change: Attractive.
Speaker Change: From a historical.
Speaker Change: Perspective, right compared to what we had.
Speaker Change: In the past so the quarterly margin.
Speaker Change: It was.
Speaker Change: Phil about 1100 Yuan per ton.
Speaker Change: Sure I was asking because you said youre just starting to see it I was trying to think of how much downside there could be.
Speaker Change: To elaborate that'd be great, but I did want to also ask I mean, given that you talked a lot in the past about having good visibility based on you know the bulk of your business being in contracts how does that protect you against some of this weakness.
Speaker Change: And in light of that like how do you think about <unk>.
Speaker Change: Off market with more capacity coming on if there is much risk there or if you still think you know some of your contacts keep you're protected.
Speaker Change: Yeah. So.
But we do have a good contracts, but obviously.
Speaker Change: Think of them as you know.
Speaker Change: Market share driven or requirement base right. So over time, I'm, just going to sell products for end product.
Speaker Change: For end products, so I'm not going to be made you didn't give it a period of time.
Speaker Change:
Speaker Change: That said.
Speaker Change: It does.
Speaker Change: A number of different factors here.
Speaker Change: In automotive, we can claim compensation from our customers or our Oems. So that's providing us some protection.
Speaker Change: And in.
Speaker Change: Yeah.
Speaker Change: You can sheet tolerances are pretty narrow and we know it's a pretty good market and also we're taking a long term view.
Speaker Change: I think what we're seeing is a very sharp change in market conditions.
Speaker Change: But those things will bounce back as well so on the upside will be we'll be very happy with the contracts. We have so I think thats, how we look at it in windows.
Speaker Change: We have experience already a number of cycles. This one maybe a little bit sharper than we had thought.
Speaker Change: And it will be weaker.
Speaker Change: But there.
Speaker Change: There will be a bounce back as well.
Speaker Change: Okay, if I could squeeze one more in and Theres been some noise about additional taxes potentially in Paris. This is something you could address first please.
Speaker Change: Income tax yes, yes, so correct.
Okay.
Speaker Change: Happy to so timna, so it wouldn't impact.
Speaker Change: Pat.
2024.
Speaker Change: Because the incremental kind of attacks.
Speaker Change: Increasing tax rate is applied on 24 payable in 2025, and what that means and now.
Speaker Change: Half two.
Speaker Change: <unk> thousand 26 compared to 2025, so it just means a sort of a temporary modest amount of increase.
Speaker Change: Cash tax.
Yes.
Speaker Change: Okay. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question today comes from Josh Sullivan from the Benchmark Company. Your line is now open. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: Good morning, just on the aerospace.
Speaker Change: Just on the aerospace.
Speaker Change: The supply chain issues mentioned related to both the large Oems or is there incremental impact stronger from one versus the other this quarter.
Speaker Change: Well, we are much more exposed to have us as you know Josh so in the absolute.
Smaller impacts.
Speaker Change: Well this is a big area for us in that.
Oh boy, so that's what I would say.
Speaker Change: Yep.
Speaker Change: And we are single source.
Okay.
Speaker Change: Big Challenge so that you know delayed so that's also causing us a bit of Greece.
Speaker Change: Okay.
Speaker Change: And then are you at minimums now or when did you go to the minimums on the on the contracts.
Speaker Change: So.
Speaker Change: And I used at all.
Speaker Change: Contracts I don't want to go into too much detail.
Speaker Change: No.
Speaker Change: But dow requirement based.
Speaker Change: Who.
Speaker Change: We believe we are reasonably close to the minimum but another way to look at it as you look at 2019 right of shipments go up much higher than they are today.
Speaker Change: Through the pre Covid times.
Speaker Change: Gives you an idea of where we stand.
Speaker Change: Got.
Speaker Change: And then just on the sharp decline in North America. I know you said, it's pretty broad based but how should we think of inventory in the distribution channels are at customers.
Speaker Change: The sharp decline coming into play.
Speaker Change: The inventory supply chain or where customers leaner at this point in the cycle anyways.
Speaker Change: No I think I think there is a quite a bit of stocking up in the inventory and that's great.
Speaker Change: Some of the issue.
Speaker Change: Yeah.
Speaker Change: If boeing cannot produce.
Speaker Change: Should because of the safety issue.
Striking shoes and all of that then obviously.
Speaker Change: The material keeps some slowing in the supply chain and fives up rightful aircraft that isn't a big bill. So at some point there is a correction and I think thats, where we are.
Speaker Change: Got it.
Speaker Change: I was thinking on the North American industrial sharp declines.
Speaker Change: On the agenda.
Speaker Change: Yes, well.
Speaker Change: Since those assets typically make also aerospace then what happens is you have got.
Speaker Change: So as I said, so down there's more appetite for tid volumes.
Speaker Change: From the manufacturers.
Speaker Change: Blade.
Sheets.
And the market so I'll throw it out there as well so it creates a more tension in the market.
Speaker Change: Okay. Thank you for the time.
Speaker Change: Thank you.
Speaker Change: As a reminder, if you would like to ask a question on todays call. Please press star followed by one on your telephone keypad. If you wish to withdraw your question. It is star followed by <unk>.
Speaker Change: Next we have a follow up from Bill Peterson from Jpmorgan. Your line is now open. Please go ahead.
Bill Peterson: Yes, thanks for taking the follow up the audio was that earlier and didn't get the second question I wanted to come back and ask a few questions around the flooding.
Bill Peterson: So on the on the remaining sort of.
Bill Peterson: I guess $13 million to $23 million of EBITDA impact can you I guess, how would that be split between <unk> and <unk> segments and I. Thank you.
Your free cash flow guidance of around 100 million.
Bill Peterson: Ex Florida.
Bill Peterson: Does that hold and then I guess sort of finally on the flooding.
Bill Peterson: To get a sense for how much EBITDA and cash flow impact could bleed into 2025.
Speaker Change: Okay. So bill.
Speaker Change: These two questions. So first on the flood.
Bill Peterson: So I think the way to think about the impact between ASML A&P is call. It two thirds at hsni and one third A&P.
Speaker Change: And these are just to be clear the cost to EBITDA represent business interruption expenses or other.
Speaker Change: Expenditures like cleanup costs like equipment, Opex, which are below the line.
Speaker Change: The other.
Speaker Change: One time cost, which is offset against the insurance proceeds which we received.
Speaker Change: We receive and that falls below adjusted EBITDA shall mark mentioned that as well.
Speaker Change: I just wanted to be clear on that point.
Speaker Change: And then.
Speaker Change: In terms of the impact into 2025.
Speaker Change: We're kind of focused on restarting our operations as quickly as possible and some of it was fully wrap up this year by the end of this year I'll continue to kind of wrap up in the first quarter of next year. So there could be some impact there.
Speaker Change: There, but any.
Speaker Change: The cash impact there will be.
Speaker Change: Because if you look at the insurance and now we.
Speaker Change: Pennsylvania 50 million euros, we had received 21.
Speaker Change: This quarter in Q3, we expect to receive about $30 million by the end of the year. So we still have call. It $20 million to go next year, which will be offset against the expenses.
Speaker Change: Free cash flow perspective that makes sense.
Speaker Change: So I'll pause here and make sure I just want to make sure. Your question I just wanted to make sure. If there is any other impacts from that.
Speaker Change: Any impacts in the 25%.
Speaker Change: And I guess and then just if you address the free cash flow target for 2024.
Speaker Change: As does the 100 million still hold.
Speaker Change: Yeah.
No I think I'm well, so hopefully the answer.
Speaker Change: Your final question about la.
Speaker Change: But maybe move too.
Speaker Change: Free cash flow.
Speaker Change: So look we're not guiding and I mentioned this in the script a little bit, but we're not guiding free cash flow. This year and there are a number of reasons for that first.
Speaker Change: As you can imagine with lower activity levels, we would expect.
Speaker Change: Working capital release in the system, but there's typically a lag right where in other words you know it does take some time for us to get the benefits on the cash side from having reduced metal intake. So it's really here, it's really timing the timing is a bit uncertain and that means some of the benefits from the working capital.
Speaker Change: Elyse could come in in Q4 of this year and some of it may come in the first quarter of next year. So it's just timing.
Speaker Change: The cash will be there.
Speaker Change: Outside of that.
Speaker Change: There is going to be some modest amount of working capital impact as we're shifting part of the production.
Speaker Change: Elsewhere in our system as a result of the flooding that lag and then.
Speaker Change: In addition to that we have you know there are many kind of action items, we're working on to help improve our free cash flow this year. So.
Speaker Change: There are really a lot of moving pieces here.
Speaker Change: And that's why we don't want to be too prescriptive now we're focused on managing.
Speaker Change: Managing as carefully as we can we're focused on consistent free cash flow generation and now we're still buying back shares right, which hopefully shows you that.
Speaker Change: We have confidence in our ability to generate cash.
Speaker Change: Thanks, Thanks, Chuck Thanks for taking the follow up.
Bill Peterson: Thank you Bill.
Speaker Change: We have no further questions in the queue at this time, so I'll hand back over to the management team for closing remarks.
Well. Thank you everybody for attending the call as you can see this was a challenging quarter and we have the challenging market conditions that will dealing with.
Speaker Change: I'm.
Speaker Change: Reasonably please give these comp takes that actually our operations are performing well and we believe that will emerge from these challenging market conditions even stronger.
Speaker Change: And we.
We will.
Speaker Change: We look forward to update you on our progress at all make surrounding scope. Thank you very much.
Speaker Change: That concludes today's call. Thank you all for your participation you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Uh huh.
Speaker Change: Yes.
Speaker Change: [music].