Constellium SE (CSTM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our conference call today. Today, we're going to run the format as a fireside discussion with Constellium. This is part of our 11th Annual Industrials Conference that's been running over the course of yesterday and today. It's going to be a 35-minute discussion with the company, where we're going to go over various end markets and company-specific questions. For the discussion today, I'd like to introduce Jean-Marc Germain, the CEO of Constellium; and Peter Matt, the CFO. We also have Ryan Wentling, the Head of IR of the company, on the call with us today.

I'll start straight into the questions, and then I'll hand across to the company after that. So I think we'll begin the discussion with the most topical area being the last few months and the impact of COVID-19. On the first quarter result, you spoke around the -- a potential 70% scenario for the remainder of the year and a potential EUR 100 million -- up to EUR 100 million cash burn. Since we last spoke, I wondered if you can give an update on how that's progressed and where we're at today now as we enter June.

Sure. Good morning, Chris, and good morning, everyone. Before I answer, I want to turn you over to Ryan, who's got a few words to say.

Yes. So before we begin, we'll just remind everyone that some of the comments that the company will make today are going to be forward-looking, and they're subject to risks and uncertainties and could differ materially. So I encourage you to review our recent earnings release, 20-F and other SEC filings that are available on our website. And I'll hand it over to Jean-Marc.

Thanks, Ryan. So Chris, back to your question. So clearly, I mean, the impact of COVID was very sudden for us, like for many, many other companies out there in the market who commented on it in April when we're really at the bottom as we see it from now. And whilst we were running very strong in the first quarter up until mid-March, we fell precipitously to levels that we have started to recover mildly from since that point in time. So on average, if I look at Q2, I'd say that in our P&ARP segment, we're running about 70%, 75% of capacity. And with a distinction between Europe and the U.S., I mean, Muscle Shoals in the U.S. is running 95% plus the big exposure to packaging is certainly helping. Europe, enough more [indiscernible] around the 60%, 65% range, again, very penalized by the slowdown in automotive, obviously, as well as a little bit of weakness in the can sheet market. In A&T, we're running in Q2 around 70% utilization. And in Auto Structures & Industry, it's at 50%, which is an average of industry doing reasonably well, given the circumstances, 60%, 60%, 70% plus and auto structures being around 20%. So all in all, still low utilization rates but mildly improving, and we're looking at the rest of the quarter and as getting certainly better than the beginning of the quarter was.

Thanks, Jean-Marc, for stepping through the different business lines there, I mean, in terms of that -- the numbers you provided on the 1Q call, there was obviously a lot of uncertainty, not just for 2Q but for the second half of the year. Do you have any more clarity on that? Or is it at the moment you want to sort of stick to 2Q and the current trends?

Well, so Chris, it's Peter. I'll take that one. So as you know, we don't give guidance on quarters. And we obviously removed our guidance for the full year. But what we did say on the first quarter call is that we thought the second quarter was going to be a difficult quarter for us and was going to be kind of our more -- our most difficult quarter in the year. The other thing that we said at that time was we made this scenario, which, remember, was not guidance but was meant to give you a sense for the cash flow generation capability of the company. And while I wouldn't say -- we don't have an update for that, I think what we would say is we'd reiterate the case and say that we think it's a strong point about the cash flow generation of the company in a difficult situation.

Yes. And I think, Chris, if you kind of average the utilization rates I was describing earlier that we see in the different plants given the markets we're in, you see that we are about where the scenario was at the moment. And hopefully, it's going to get a little bit better, but we'll see.

Great. That all makes sense. Thank you for the comments. I'd like to move across to -- sorry.

Maybe -- Chris, sorry, maybe what we can tell, too, is we acted very quickly and decisively on the cost structure. And I'm pleased to see that we have seen those actions actually take root, and we are going to be extremely cautious as business conditions improve to bring costs back up. So I think that's something that, to Peter's point, about the ability of this company to generate free cash flow when things are good and withstand a very severe crisis, I think we're seeing the benefit of that right now as we speak. Sorry, Chris.

I think now, just to get -- flesh out some of those ideas a little bit more, if we just step through the divisional end markets being autos, aeros and then packaging. Maybe if we start with the auto market, there's been differences between Europe and U.S. We've seen a pretty rapid increase in the U.S., in particular, of production facilities coming back online. From your side, have you been seeing that roughly 1:1? Or is there inventory that needs to be considered? Just wondered if you could comment broadly on the European and U.S. auto markets through your lens.

Sure. So Chris, as you know, the auto supply chain, there are inventories, but they are actually reasonably short, right? You're talking about a few weeks of inventory in between the different steps in the process. So we are seeing a pickup in activity, and we all look at the statistics on the pickup trucks, on the dealers lots and all that, and that's all trending in the right direction, which means it signals that the recovery could be quite quick. But what we're seeing as well, and so -- I'm sorry, and we're seeing our customers place orders as for releases at rates that are increasing. However, it is very inconsistent. And you may be in a situation where you ramp up a line and you start producing for a customer, and all of a sudden, they got a few COVID cases in their plant, they shut it down for another week or 2, and you have a lot of stop and go. So I remain cautiously optimistic. It's true that America seems to be recovering a bit faster than Europe. But even in Europe, we're seeing some good signs on the horizon. But again, whether that's going to really happen quickly or whether it's going to be more inconsistent, at the moment, it's more inconsistent than anything. So that's overall, good, but we -- again, I think the world is cautiously optimistic at this stage.

And I'd like to move on to the aerospace market. You announced a significant contract last week with Airbus over 10 years. Given that there's not a lot of players in that market to get that contract, looks significant for the company. I just wondered if you could comment firstly on that. And then the broader aerospace market, I guess most of the questions we've been getting are about the front end. So how does the next year or so look but also the backlog changes? And appreciate it's a very fluid situation, but just any comments you can make on the aerospace market.

Sure. So I'll start with the Airbus contract. I am really pleased that we were able to sign this new contract. And this new contract is really a testimony to the significant work that has been done by the Constellium teams to further the relationship with Airbus -- gain or regain leadership status with the customer. And that has been exemplified by the awards we've gotten several years in a row. First, best improver; then best performer; and then you get this contract. This contract has nothing to do with COVID-19. I mean we've been -- these are long cycles, and we've been negotiating it for more than 2 years. So it's really good to see it come to fruition and to strengthen, deepen the relationship -- the strategic relationship with this customer. And that allows us to focus on serving them the best we can, developing new products, improving our service, improving the level of value added we're giving to them and help them be competitive and successful. So that's all very, very good. When it comes now to the aerospace market, it is very uncertain, to say the least. What we have commented upon in the last earnings call was because, again, of the long cycle and the visibility we have into our orders for a period of 6 months, right, typically, we expect Q2 to still be a good quarter, right? But over time, the reduced build rates will translate a need for less aluminum products and composite products and everything, right? So I expect the second half of the year to be weak, and I expect the weakness to continue into 2021. There's been a lot of orders that continue to be delivered in terms of products to make aircraft, right, but the aircrafts are not being made or not being delivered. And therefore, you will have, at some point, the bullwhip impact of this slowdown that is going to have repercussions along the supply chain. So I expect the second half to be challenging. I expect 2021 to be challenging as well. Now to what extent? I think it's very, very difficult to tell. And that's one of the reasons we are -- we've pulled our guidance.

Okay. So just to wrap that together, the Airbus contract that you've recently won, while encouraging over a 10-year period, you're saying it doesn't necessarily assist your volumes, say, in second half of this year or into 2021. You're still very much dependent on the overall market conditions. It's certainly positive from a bottom-up perspective but still quite weak for the overall market.

Yes. So yes, and typically those contracts in aerospace are -- what they do is they set the pricing. They set the mechanisms by which we manage pricing over time, but they are requirement-based contracts, right? So they are going to buy what they need from us, give us a certain market share. And obviously, if they build fewer planes, they give us less volume. If they build more planes, they give us more volumes. So that's what it is. But again, we got to look at it over a period of 10 years. And that's, I think, a very significant achievement for us. And 10 years is much longer than any other long-term contracts we've got in that space. So needless to say, we're very happy we've got 10 years.

Great. I'd like to move now to the packaging market. I guess some of the topical areas have been the general strength and resilience within the U.S. market under a COVID situation. So just if you could comment firstly on how the U.S. has been from your side and whether you're still seeing that resilience. And as part of that comment on the U.S. specifically, just whether -- normally, there's a seasonal element as we head through 2Q and into the summer months, we normally get that sort of strength in the market. So just wondering if you could comment on that. And then the second part of the question is around some pockets of weakness in other markets that we've seen in Brazil. I think you mentioned in the opening remarks that Europe hasn't been as strong. Do you think that, that ultimately has an impact back on the U.S. market as more of a global phenomenon? Or do you think the U.S. itself remains strong?

Yes. So North America, U.S., we continue to see can sheet demand as being strong, and we're heading into the summer season with record production levels out of Muscle Shoals. By the way, I was commenting on Muscle Shoals being at 95%. Remember, Muscle Shoals makes auto as well, product, right? So -- and we've improved the capacity quite a bit. So actually, if you look at can sheet, it's doing very, very well in the U.S. And I expect that to continue. The difference we're seeing, so we are not exposed to Brazil, but in Europe, we have seen a bit of weakness in can sheet. And I think it's got to do a lot with consumption patterns. The can is a very prevalent package in the U.S. You go to the store and load up a few packs of 12s, of 24 or 6s in your truck or SUV. It's much less so in Europe, right? And the confinement, very strict confinement that's been taking place in many countries in Europe has led to a little bit of erosion of at-home consumption as well of cans. And when people are restricted to go shopping for 1 hour, I mean, they've got to choose what they're going to be, for 1 hour a day, they're going to choose what they're going to put in their car or in their carts. So that's what's been happening. I don't -- I think that will be passing. I don't think that's a long-term signal for the can sheet market in Europe. And therefore, I don't think it'll flow back as an overall slowdown in consumption. I think the trends we're seeing around consumer choices and beverage companies, the packages they choose to use, the sustainability attributes, the pollution by plastic bowls, all the things continue. And it's very interesting. I mean the sensitivity of people to pollution or environment, I think, is getting heightened in this crisis of COVID-19, right? And people complain about masks being thrown in the ocean. There's a lot of discussion around this is -- this pandemic has been caused in part by our way of living -- unsustainable way of living and all that. So I think in the general mind, sustainability is going to come out of this crisis as something reinforced in how consumers and, therefore, companies need to look at the world. And I think that's good for the can at the end of the day.

Yes. That all makes sense. So basically, to paraphrase, you don't see -- the thesis around the U.S. market remaining reasonably tight hasn't changed. Despite pockets of weakness in other countries, you still see the U.S. strength remaining and the consumer trends pushing more towards that side. That's what you're saying?

Yes. Correct. And I think Europe is a little bit weaker this year but will resume growth going into '21, for sure.

Okay. And just to round out the end markets, and then I'll cross across into some of the more financial questions for the company. Any other pockets or surprise areas you've seen where there's some bright spots? Maybe comment on the defense market that you have there. But is there anything else that you wanted to highlight on end markets or products that have been maybe surprisingly strong or have changed patterns as a result of COVID-19?

Yes. So I mean, defense continues to be strong for us. I was on a video with a customer in aerospace defense just on Friday, and the message was, how are you doing? Are you sure you can deliver? No problems with your factories? Can you operate? We need you. So that's a good sign. The -- one other segment that has been pleasantly good is -- everything has to do with electronics, semiconductor. And I think the stay-at-home phenomenon has certainly led to more needs for big screens and that kind of stuff, right, as people gather some -- on Netflix or others. So I don't want to make any special advertising for any kind of brand, but we're seeing a lot of demand in those sectors. Now transportation remains weak. Anything that has to do with pleasure boats or those recreational activities are weak as well, right? They are in segments where a lot of it has to do with disposable income and highly discretionary items. And these, we see weakness in those segments. So it's a mixed bag. But again, that's consistent with our strategy of having many niches to play from. We're seeing some good pockets and some not-so-good pockets of demand out there.

Maybe just one other one to highlight that's been a really positive end market for us is rail. So anything around these kind of high-speed rail systems are super positive. And we can -- anything we can make, we can sell into those markets as well

Yes.

That's very clear. I might shift across for now just on to the financial side. Peter, you talked about, I think on the opening question around the -- some of the free cash flow, et cetera. I just wanted to give you an opportunity if you wanted to discuss working capital, any updates within the business on the ability to generate free cash flow. And I guess, as part of that more broadly, do you have any thoughts on how far through the year we need to get before you'd be comfortable maybe reinstating 2020 guidance? Or is that still a work in progress?

Yes. So on trade working capital, we said on the call that trade working capital could be a kind of modest positive. But I think as we look at this, trade working capital depends on a lot of things. We're -- as you know, from what Jean-Marc said, we're starting and stopping operations. And so there's a -- when you're stopping operations, obviously, there's a release. When you're starting, there's a rebuild. So that number can swing quite significantly. So I guess we would maybe slightly adjust our -- what we said on the Q2 call to say that it could be -- you could have a situation where our trade working capital is a use in the back half of the year, for sure. And by the back half -- well, sorry, in the back 3 quarters of the year. In terms of guidance, so we are very focused on getting back to a place where we can give guidance. We think it's super important. As you've seen from our kind of performance in the past, we take the guidance very seriously, and we use it as a guidepost that we're intent on hitting. But I think at this point, the way we see the market, there's just so much uncertainty. We need a little more clarity on where our end markets are going and how our businesses are performing in these end markets to really get comfortable with putting guidance out. So it's a goal. We're going to do it as soon as we can. But I think what we don't want to do is put guidance out before we're ready and then not be able to achieve it.

Okay. And I assume that's also in terms of the long term. I mean are you -- when would you maybe be in a position to talk about the original '22 guidance and then whether that's the same guidance just on a delayed basis or whether that guidance changes. I assume that's the same comment. You're going to wait to get more clarity through 2020, reinstate 2020 at some stage. And then maybe give an update on sort of the long-term aspirations of the company. Is that fair?

Yes. I think, Chris, we'll have to see how things emerge. Again, our intent is to -- as soon as we have clarity, to kind of put new guidance out there. So it's our objective. But again, I want to be a little flexible on, number one, the timing. And we did like the format of both the near-term guidance and long-term guidance. So I think assuming that we can provide it, I think it's -- our inclination would be to do something like that in the future.

But I think, Chris, what we certainly want to emphasize is that we like the 2.5 net leverage target. That's where we want to be headed. The question is when. And that's why we need a bit more clarity, as Peter was saying, in terms of where the markets are going and will the recovery be -- I was hearing this morning, V, a swoosh, a L, a W and all those alphabet letters you can use, make it very difficult to ascertain when can we hit that number. We are very committed to, over time, whatever that time period needs to be, bring down our leverage and get to a place where our target leverage is 2.5x.

And one of the things about this, I mean, obviously, it's a difficult period for the company, but one of the things about this period is that it's also a period of learning because you get to see how the costs are flexing. And so far, we've been kind of pleased with our ability to flex our cost, as Jean-Marc said. So as we come out of this, I think, hopefully, we'll be in a better position vis-à-vis cost, and we'll be able to give guidance that is more precise even and be more confident in achieving it over time. So...

Great. And then just to talk a little bit more about the current position. Wondered if, Peter, if you could go through current state of the balance sheet and the additional liquidity measures. I know you'd spoke about these on the 1Q, but then you've solidified some of those extra liquidity measures, I think, in the last month or so. Could you just step through the state of where you're at and all the flexibility that the company has at this stage?

Definitely. Thanks, Chris, for the question. So as you know, we announced we had liquidity of EUR 616 million at the end of the first quarter. And then we also, in the period between when we ended the quarter and when we announced earnings, we put in place this delayed draw term loan, which added basically EUR 150 million of liquidity, $166 million. Since then, we've put in place the -- a facility with the French -- with a French government guarantee that's EUR 180 million. And we've also put in place a facility with a Swiss government guarantee that is about CHF 20 million. And we're working on 2 other loans that are backed by kind of a German state bank. So we feel very comfortable that we're going to be able to get these in place. And when you add it all together, it's about EUR 400 million of incremental liquidity. So when we look at the liquidity position that we have, we look at the liquidity position -- the liquidity that we've added, and we look at the scenario that we posited with the cash burn that we're expecting, it leads us to feel very confident that we have more than adequate liquidity. The other thing that I would emphasize is that this financing that we've put in place is all at really attractive rates. So it's not like we're going to burn up the income statement with a lot of additional interest charges. And in fact, most of these -- 3 of the 4 facilities are undrawn facilities. So they're kind of standby liquidity, right, for the company. So in any event, I think we feel really comfortable with the balance sheet. The -- now if we look at the balance sheet more broadly, we do have the '21 still outstanding. Those are due in May of '21. We feel like we've got lots of options in that regard. You've got -- with the liquidity -- liquid resources that we have on the balance sheet, we could pay them down. Obviously, they're capital markets options. So we're looking at all of those very carefully and will, in good time, take care of that maturity. And then after that, the next maturity we have is a 2024 maturity. So a lot of time on that one.

That's clear. And then I just had -- just in the interest of time, I think we've got 5, 6 minutes left. I wanted to touch on the environmental question, just dig into that a little bit more. But just to wrap together the introductory comments around the current utilization rates, one thing I just wanted to square up. I think the scenario that you gave on 1Q was around a 70% utilization for the remaining 3 quarters. Given that you're saying also the second quarter is potentially your worst quarter and you're at around that 70% level, can you sort of square it all or imply that the second half is that 70%, it's just a scenario, but maybe the second half is higher than that number? Or are you not really willing to do that because of the potential weakness in the aerospace markets?

Yes -- no, I think I would love to be able to do that, but I don't think I will do that. I'm an optimist by nature. But if we have a W or an L, it's a different story. So at the moment, I feel good. We'll see how it goes.

Okay. And then on the environmental question, I wanted to ask, you talked a little bit about heightened sensitivities of consumers that you're seeing. There's obviously, with the business 40% or 50% levered towards packaging, auto rolled products that have got the thematic of lightweighting and electric cars using aluminum, et cetera, there's a lot of opportunities within the business to really go into the environmental side. I think from memory, you're about 20% of can recycling. Forgot that number in the U.S., or we've got that number correct. Just wondered if you could comment a little bit on -- a little bit more on the details of what you're seeing and how Constellium can position for that going forward.

Yes. So I think it is definitely a trend that is here to stay. And you see it, as I mentioned, with the consumers, you see it with governments. And especially in Europe, with the Green Deal, the European Green Deal, the fact that the U.K., French now are legislating towards carbon neutrality by 2050. That may seem a long way away, but you need to start taking actions now. And that's all going in that direction of making sure that sustainability is at the forefront of everything that businesses and consumers do and the choices we make. So in this context, I think aluminum broadly has a very nice card to play because it's infinitely recyclable, as we know. Besides, you may have seen that the LME is planning to introduce low-carbon aluminum trading, right, so whereby the distinction between aluminum that takes a lot of CO2 emissions to be produced, because of the power plants, it is -- or the grid it's connected to will be traded differently from low-carbon aluminum. And if I look at Constellium, most of what we buy in terms -- so we do a lot of recycling, but most of what we buy in primary aluminum comes from hydroelectric or nuclear power plants, which means virtually zero emissions or very, very low emissions on the upstream side. So I think we've got 2 inherent profiles that we'll have to leverage as a company, 2 inherent benefits from the profile we have as a company. One is a lot of recycling. The other one is when we use primary aluminum, it tends to be clean aluminum, very clean aluminum in terms of the power sources. And we will build on that. We'll continue to run our factories very responsibly. We've got aggressive goals to reduce the intensity of emissions for our own manufacturing. And all that, I think, as we put all that together into a long-term strategy is going to position us well because aluminum is well positioned. And because Constellium is contacted landscape of all the aluminum producers, is well positioned. So we'll -- more to come. We're publishing our annual sustainability report, and we'll make -- I think I alluded to that during the year, some of the -- one of our earnings call, we'll be developing a 10-year strategy with a 5-year milestone around what we want to do around sustainability. I'm very excited of the opportunities that this will afford us.

Thanks for the color. We've got probably 1 to 2 minutes left. So I'll hand back across to give any wrap-up comments that you want to give. But I'd like to conclude from our side by thanking Jean-Marc, Peter and Ryan. We do have one-on-ones today with the company. If you have any follow-up questions, let us know or contact, obviously, Ryan Wentling directly in IR. I'll hand back across to Jean-Marc and Peter to give any concluding remarks. And thanks again for joining our call.

Well, thanks a lot, Chris, for this opportunity. I'll just say we are really pleased with the progress we've made over the past 3, 4 years and really excited when the year started at what would be a fantastic 2020. It's turned out to be a little bit different. And clearly, COVID-19 is a setback to our progress, but it's also taught us a few things about how we bring the company together. I mean we've had, I think, 25 cases of COVID cases, and they were very well contained. The way we run our operations now is really much safer. And I think we get lots of comments from employees saying they feel more comfortable being at work than being at the supermarket doing their groceries. And we've also learned really how much there is of potential within the company to really mobilize people around getting the cost structure right, making sure we can adapt to the environment. The significant [ CapEx ] cuts we did were not painless, but we've done it. And we've got teams that are really motivated to make the most with what we have. And I think as the economy improves, as our markets turn around, as sustainability develops as one of the key themes going forward for the economy, I think we're going to be emerging well positioned for that. And I have no doubt that we'll be emerging well positioned for that because of all the fantastic work that's been done on the cost structure and the liquidity that allows us to weather that storm. I mean when we say free cash flow neutral for 2020 under a scenario of 70%, that with EUR 800 million, EUR 900 million of liquidity, it means we can take it on the chin for a long time before we really feel a lot of pain. So we feel good about emerging from that. We'll see when it happens. Thanks a lot.

Thank you.