Constellium SE (NYSE:CSTM) Q3 2023 Earnings Call Transcript
Constellium SE (NYSE:CSTM) Q3 2023 Earnings Call Transcript October 25, 2023
Constellium SE misses on earnings expectations. Reported EPS is $0.43 EPS, expectations were $0.44.
Operator: Hello, everyone, and welcome to the Constellium Third Quarter 2023 Results. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Jason Hershiser, Director of Investor Relations to begin. Jason, please go ahead.
Jason Hershiser: Thank you, Nadia. I would like to welcome everyone to our third quarter 2023 earnings call. On the call today, we have our Chief Executive Officer, Jean-Marc Germain; and our Chief Financial Officer, Jack Guo. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at constellium.com, and today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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. 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. 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 IFRS disclosures. I would now like to hand the call over to Jean-Marc.
Jean-Marc Germain: Thank you, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's begin on Slide 5 and discuss the highlights from our third quarter results. I'd like to start with safety, our number one priority. Our recordable case rate was higher in the third quarter, leading to a rate of 2.1 per million hours worked for the first nine months of the year. While the safety performance puts us among the best in manufacturing, the rate is higher than where we want it to be, and we have done better in the past. This is a humbling reminder that while always we strive to deliver best-in-class safety performance, we need to constantly maintain our focus on safety to achieve the ambitious target 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 369,000 tons, down 5% compared to the third quarter of 2022 due to lower shipments in each of our segments. Revenue of €1.7 billion decreased 15% compared to last year as improved price and mix was more than offset by lower shipments and lower metal prices. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our value-added revenue, which reflects our sales, excluding the cost of metal, was €704 million, up 5% compared to the same period last year. Our net income of €64 million in the quarter compares to net income of €131 million in the third quarter last year.
As a reminder, the third quarter of last year included €142 million related to the recognition of deferred tax assets that were previously unrecognized. As you can see in the bridge on the top right, adjusted EBITDA of €168 million in the quarter was up 5% compared to last year, and it is a new third quarter record for the company. A&T adjusted EBITDA is a new third quarter record as well and increased €34 million compared to last year. P&ARP adjusted EBITDA decreased €11 million and AS&I adjusted EBITDA decreased €9 million in the quarter compared to last year. Holdings and Corporate was a headwind of €6 million in the quarter. Looking across our end markets, aerospace demand remained very strong with shipments up over 20% compared to last year.
Automotive demand decelerated slightly during the quarter but remains above prior year levels. Packaging shipments were down in the quarter, though can stock demand appears to have stabilized following the last several quarters of destocking. We continued to experience weakness in most industrial markets, especially in Europe. We continue to face significant inflationary pressures, which Jack will discuss in more detail. But thanks to our pricing power, contractual protection, 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 €78 million. This does not include the proceeds, which were received from the sale of our soft alloy extrusion business in Germany, which I am very pleased was closed at the end of September.
As you can see on the bottom right of the slide, our leverage at the end of the quarter was 2.5x, which is an important milestone for the company. Our free cash flow generation and EBITDA growth allows us to naturally delever further over time. And over the long term, we look to have a more balanced approach to capital allocation. Overall, I'm very proud of our third 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. Looking at the balance of 2023, macroeconomic and geopolitical risks remained elevated, and we expect inflationary pressures to continue. While we were not impacted by the UAW strike in the third quarter, we do expect some impact in the fourth quarter.
Despite these pressures as well as continued weakness across several of our end markets, we are maintaining our prior guidance. We expect to finish 2023 with adjusted EBITDA in the range of €700 million to €720 million, which would be a new record for the company, and we continue to expect free cash flow in excess of €150 million in 2023. We also remain confident in our ability to deliver our long-term target of adjusted EBITDA of over €800 million in 2025. With that, I will now hand the call over to Jack for further details on our financial performance. Jack?
Jack Guo: Thank you, Jean-Marc, and thank you, everyone, for joining the call today. Please turn now to Slide 7. Value-added revenue was €704 million in the third quarter of 2023, up 5% compared to the same quarter last year. Looking at the third quarter, €102 million of this increase was due to improved price and mix in each of our segments. Volume was a headwind of €30 million due to lower shipments in each of our segments. Metal impacts were a headwind of €17 million compared to the same period last year. The balance of the change was largely due to unfavorable FX translation of €24 million due to the weakening of the U.S. dollar. There are two important takeaways from this slide. First, we grew our value-added revenue by 5% compared to last year.
And second, we continue to have pricing power. Price and mix and price specifically continues to be the biggest increment of our year-over-year variance and helped us offset significant inflationary pressures. Now turn to Slide 8, and let's focus on P&ARP segment performance. Adjusted EBITDA of €67 million decreased 14% compared to the third quarter of last year. Volume was a headwind of €4 million with higher shipments in automotive, more than offset by lower shipments in packaging and specialty rolled products. Automotive shipments increased 6% in the quarter versus last year as we continue to benefit from higher build rates and penetration of aluminum in automotive. Packaging shipments decreased 5% in the quarter versus last year due to inventory adjustments across the supply chain in both North America and Europe and lower demand at the consumer level Price and mix was a tailwind of €40 million, primarily on improved contract pricing, including inflation-related pass-throughs.
Costs were a headwind of €43 million as a result of higher operating costs due to inflation, operating challenges at Muscle Shoals, though the situation is continuing to improve and unfavorable metal costs. FX translation, which is noncash, was a headwind of €4 million in the quarter due to a weaker U.S. dollar. Now turn to Slide 9, and let's focus on the A&T segment. Adjusted EBITDA of €79 million increased 76% compared to the third quarter last year. Volume was a headwind of €5 million as higher aerospace shipments were more than offset by lower TID shipments in the quarter. Aerospace shipments were up 21% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 17% versus last year, reflecting a slowdown in most industrial markets, particularly in Europe.
Price and mix was a tailwind of €58 million of improved contract pricing, including inflation-related pass-throughs and a stronger mix with more aerospace. Costs were a headwind of €15 million as a result of higher operating costs, mainly due to inflation. FX translation was a headwind of €4 million in the quarter. Now let's turn to Slide 10, and focus on the AS&I segment. Adjusted EBITDA of €26 million decreased 27% compared to the third quarter last year. Volume was a €13 million headwind with lower shipments in both automotive and industry. Automotive shipments decreased slightly in the quarter versus last year due to the timing impact between certain program switches and some short-term supply chain disruptions tied to certain programs which we serve, but the overall demand remained healthy.
Industry shipments were down 22% in the quarter versus last year as a result of weaker market conditions in Europe. Price and mix was a €16 million tailwind primarily due to improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of €11 million on higher operating costs, mainly due to inflation. It's not on the slide, but I wanted to conclude with a quick comment on Holdings and Corporate. In the quarter, Holdings and Corporate was a headwind of €6 million, as Jean-Marc noted. The negative result was related to a number of one-off adjustments in the third quarter of last year that did not repeat this year. Now turn to Slide 11, where I want to give an update on the current inflationary environment we're facing and our focus on pricing and cost control to offset some pressures.
In the third quarter and as expected, we continued to experience 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 the changes in the market price of aluminum, our largest cost input. While we remain confident about the security of supply, some of it does come at a higher cost. In addition, labor and other nonmetal costs continue to be higher this year, particularly European Energy. As previously noted, we purchased energy on a multiyear rolling forward basis, which has helped us to mitigate some of the energy cost pressures and helped us to smooth out some of the steep increases in costs. As 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, including continued execution on our previously announced Vision 25 initiative. Across the company, we're working to increase our efficiency, reduce our consumption of expensive input and lower our fixed costs. As we previously noted, many of our existing contracts have inflationary protections, such as PPI inflators or surcharge mechanisms, where they do not, we're 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 the first 9 months of this year, we were very successful with price and mix, the largest increment being price in offsetting inflationary pressures. As of today, we still expect inflationary pressure to remain significant. 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 our relentless focus on cost control. The net impact of inflation and other cost increases and the actions we are taking to offset them are included in our guidance for 2023. Before turning to the next slide, I also want to point out the FX impacting our results.
As you can see in the bridge, FX was a headwind of €10 million in the first 9 months of this year, given the weaker U.S. dollar, of which €9 million was in the third quarter. Now let's turn to Slide 12 and discuss our free cash flow. We generated €78 million of free cash flow in the third quarter, bringing our year-to-date total to €112 million. As you can see on the bottom left of the slide, we continue to build our track record of generating consistent and strong free cash flow. Looking at 2023, we continue to expect to generate free cash flow in excess of €150 million for the full year, which is in line with our previous guidance. Now let's turn to Slide 13 and discuss our balance sheet and liquidity position. At the end of the third quarter, our net debt was €1.8 billion.
This is down approximately €140 million compared to the end of 2022 and down €100 million compared to last quarter as a result of strong free cash flow generation and the proceeds we received from the sale of our soft alloy extrusion business in Germany in the quarter. During the quarter, we used the cash on the balance sheet to reduce our short-term borrowings and to redeem $50 million of our 5.875% U.S. dollar bonds due in 2026, further strengthening our balance sheet. Our leverage reached a multiyear low of 2.5x at the end of the third quarter, which is down 0.5x versus the end of the third quarter last year and now at the upper-end of our target leverage range. We remain committed to maintaining our target leverage range of 1.5 to 2.5x.
As you can see in our debt summary, we have no bond maturities until 2026, and our liquidity remains strong at €746 million as of the end of the third quarter. We're extremely proud of the progress we have made on our capital structure and of the financial flexibility we're building. I will now hand the call back to Jean-Marc.
Jean-Marc Germain: 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 sustainability-driven secular growth. The important takeaway here is that aluminum is a catalyst behind this secular growth, given its sustainable attributes. Aluminum is infinitely recyclable and does not lose its properties when recycled. As a result, aluminum will play a critical role in the circular economy and will be a driver of growth in lightweighting, electrification and sustainable packaging. Turning first to packaging. Inventory adjustments continued across the supply chain in both North America and Europe early in the quarter, but now appear largely behind us and can stock demand has stabilized.
We are still 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. Even in today's environment, where we are seeing weaker demand in packaging markets, aluminum cans continue to outperform and win share against other substrates like plastic and glass. We are confident in the long-term outlook for this end market, given capacity growth plans from both can makers in both regions, the greenfield investments ongoing here in North America and a growing consumer preference for the sustainable aluminum beverage can. Longer term, we continue to expect packaging markets to grow low to mid-single digits in both North America and Europe.
We will participate in its growth in both regions as announced at our Analyst Day last year. We are encouraged by the improved performance we have seen recently at Muscle Shoals, and we remain confident in our ability to restore the plant's profitability heading into next year. I'm also pleased to report that the recycling center we are building at our Neuf-Brisach facility in Europe is well underway in both on time and on budget. Turning now to automotive. Demand decelerated slightly during the quarter but remains above prior year levels. As I mentioned before, we were not impacted by the UAW strike in the third quarter, but we do expect some impact in the fourth quarter. OEM sales and production numbers globally have increased the last several quarters, but remain well below pre-COVID levels.
Automotive inventories are low. Consumer demand remains steady and vehicle electrification and sustainability trends will continue to drive the demand for lightweighting and use of aluminum products. As a result, we remain very positive on this market. Let's turn now to aerospace. The recovery in aerospace continued in the quarter, with shipments up over 20% versus last year, though still well below pre-COVID levels. Major OEMs have announced deal rate increases in the short term and the desire for further increases in the medium term. We remain confident that the long-term fundamentals driving aerospace demand remained intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. Demand remains strong in the business and regional jet market and the defense and space markets.
In addition, we continue to experience strong demand for our Airware family of products. As the chart on the left side of the page highlights, these three core end markets represent 77% of our last 12 months' revenue. We like the fundamentals in each of these markets. And as I have said in the past, we like our hand and the options it affords us. Turning lastly to other specialties. We expect weakness to continue in most industrial markets, and in general, these markets are dependent on the health of the industrial economies in each region. Overall, demand has been more stable in North America than in Europe. In TID rolled products, demand remains generally healthy in markets like defense and North American transportation. In industry extrusions, demand remains weak across industrial markets in Europe.
Constellium is well positioned today with our diverse and balanced portfolio to capture the secular growth fueled by sustainability. In summary, we continue to like the prospects of 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. Constellium delivered strong performance again in the third quarter. I'm very proud of our entire team as they achieved solid operational performance and strong cost control despite a number of challenges, including significant inflationary pressures. We generated strong free cash flow in the quarter, and we reduced our leverage to 2.5x, which is an important milestone for the company.
As we look ahead, we like our end market positioning, and we are optimistic about our prospects for the remainder of this year and beyond. Looking at the balance of 2023, macroeconomic, geopolitical risks remain elevated, and we expect inflationary pressures to continue. While we are not impacted by the UAW strike in the third quarter, we do expect some impact in the fourth quarter. Despite these pressures as well as continued weakness across several of our end markets, we are maintaining our prior guidance. We expect to finish 2023 with adjusted EBITDA in the range of €700 million to €720 million, which would be a new record for the company, and we continue to expect free cash flow in excess of €150 million in 2023. I also want to reiterate our long-term guidance for adjusted EBITDA in excess of €800 million in 2025 and our commitment to maintain our target leverage range of 1.5 to 2.5x.
To conclude, let me say again that I'm very proud of our results and very excited about our future. We have demonstrated over and over again that we have the right strategy, the right teams and the right products in the right markets. Our business model is flexible and resilient. Our diversified portfolio allows us to always have options in very different market conditions. We have built the balance sheet we need to both weather prices and seize opportunities and our high-value, recyclable and sustainable products respond to the growing needs of our customers and society. We're extremely well positioned for long-term success, and we remain focused on shareholder value creation. With that, Nadia, we will now open the Q&A session, please.
Operator: [Operator Instructions] And our first question today goes to Katja Jancic of BMO Capital Markets. Katja, please go ahead, your line is open.
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