Constellium SE (CSTM) Earnings Call Transcript & Summary

All right. Well, good morning, everyone, and welcome to the Crédit Suisse Annual Basic Materials Conference. I'm Curt Woodworth, I cover metals and mining here at CS. Very pleased to have the management team of Constellium with us this morning for a virtual NDR. If you do have questions, feel free to e-mail me directly, it's curt.woodworth@credit-suisse.com. And then I can layer in those questions during the course of the fireside chat. So with us today is Jean-Marc Germain, CEO of Constellium; Peter Matt, CFO; as well as Ryan Wentling, Head of IR.

So let's get started. Jean-Marc, I think it's been a pretty dynamic time in the market. Your business has performed arguably relatively well given some of the casual attributes you mentioned last quarter. So just can you give us an update on kind of demand trends, sort of what you're seeing globally? Give us a sense for how the operations are running, if there's been any other additional COVID-related disruptions in the business? And we'll go from there.

Sure. Thank you, Chris -- Curt, and good morning, good afternoon, everyone. Yes, so it has been interesting time for sure, and we had certainly the impact of COVID, most pronounced in April, which was really a trough for us. And then we came back better and better as the months progressed. At the moment, as we are looking at it, we're running at -- in our different markets, right? We're running at more than 90% utilization compared to last year, right, in packaging. We're doing better than we thought we would back in -- when we published Q2 in automotive. We're also in the 90% plus range. So it has snapped back very quickly and strongly. And it doesn't seem like just a flash in the pan so far. So let's touchwood. Aerospace continues to be depressed. You saw a very significant reduction in volumes in Q2. And we're still running at 50% of where we were in the aerospace business. And then industry is a mixed bag with 80% roughly compared to last year. And we're seeing a few green shoots in industry, but it's still uncertain. So overall, we look at packaging to remain strong and going to 95% plus. We look at auto to stabilize at high levels, more than 90% of where we were. We expect aerospace is going to continue to be depressed for a while, especially because there was such a strong year in 2019 and even in the beginning of 2020, I think I commented on it during the Q2 earnings release. The supply chain has built quite a bit of stock, and that's going to take time for the stock to wash out and for shipments to reflect actual build rates. And I think that's going to last well into the first half of 2021. And with that, what we're seeing is the value of -- at Constellium, the portfolio of businesses we have, where, yes, aerospace is not too good and is not going to be good for a little bit of time, but packaging is strong, automotive is strong, and industry, we're seeing a few green shoots, as I mentioned. So the diversification of the portfolio is certainly helping us navigate through the crisis and generate given the circumstances, good cash flows.

And from an operational basis, this was going to be a pretty material year for the automotive business, both when you look at the structure segment as well as on the sheet side with further optimizations at Neuf-Brisach and Bowling Green. Could we kind of go through some of the assets? And could you give us a sense for how the ramp-up is going? I know that the CALP line at Neuf-Brisach was a little bit ahead of Bowling Green. And then kind of update us on how Muscle Shoals is progressing with some of the debottleneck -- debottlenecking efforts as well?

Yes. So from the operational standpoint, I'm actually super happy, and it's expected -- it's exceeded my expectations. So Neuf-Brisach is running very well, both on the can and the auto side. And the bottleneck here is much more demand than capacity. If I look at Bowling Green, Bowling Green is now, in many respects, ahead of Neuf-Brisach in terms of industrial performance, which is really saying something about the turnaround we've been able to accomplish there, where we've got very good productivity, very good uptime, very good recovery through the system, which makes for lower costs of producing auto sheet. And you remember, Curt, this year was an important one in terms of us turning EBITDA positive in Bowling Green, and I'm very happy to see that we are EBITDA positive now in Bowling Green, despite the auto market being substantially down in Q2, as we know, and still not where it was last year throughout the U.S. So really impressive performance, both technically and financially out of Bowling Green. And Muscle Shoals is breaking one record after the other. So we don't give details on each and every of our locations. But I'm really proud of what the teams at Muscle Shoals have accomplished. And this is very important because we're looking at a market in can sheet that is growing. It is important that we are able to supply more to the can sheet market over time. And obviously, we'll do that with good margins. Otherwise, we wouldn't. So it's very good to have both aspects of the equation working well, both on the production capacity standpoint in Muscle Shoals and on the pricing side and the volume side on the market end.

Curt, just to add something kind of from the operational perspective, I think the other thing that's been a nice outcome for us is that we've done a lot of work on the auto structures business over the past several quarters. And that work is really paying off, and it's paying off in time to kind of benefit from the resurgence on the auto side. So auto structures is kind of really back in the game.

Yes. I think 6 months ago or 9 months ago, we were saying that we could see ourselves turning the corner on the operations side. And as Peter mentioned, we have turned the corner on the operations side, and we're seeing that, in the not-too-distant future, to get our margins back to where they were just a couple of years ago before we undertook all the significant expansion programs at auto structures.

So I think for structures, it was roughly maybe $50 million of some productivity cost headwinds last year, maybe isolated to 3 plants, if I recall. Is it safe to say that the problem plants or the products, you think those have largely been totally fixed by now, and it's more a question of getting the pull-through from the auto side?

Yes. So Curt, largely, yes. Totally, no. We still have some room to grow. And yes, you're right that the auto demand is driving what we're shipping out of these plants, right? And so we are nominated on some platforms. If those platforms sell 20% less than last year, well, our shipments are going to be 20% less. So we have to see how the recovery pans out. But overall, we're in a good space in terms of our ability to benefit from the growth in automotive from a sound base now.

And within structures, there is a sizable backlog that I think I provided pretty good visibility out to '21 for that segment. Obviously, COVID disrupted it a little bit, but as you were kind of monetizing the backlog and working through some of the productivity challenges, you purposely took nominations down significantly below where you had been over $1 billion the prior couple of years. Do you have bandwidth to -- as auto comes back to get nominations back up to those levels again? Can you kind of talk about how you see that business performing in the next 12 to 18 months?

Yes. So the -- we started tapering down the nominations we're going after in early 2019. And when you think of it, what you win in '19, our sales, you're making a little bit in '21, a little more in '22 and really full run rate in '23. So the actions we took are going to have an impact on our level of sales in '22 and '23, but not in '21, right? So most of our growth plans in '21 is going to be impacted by what the actual demand for cars is, not so much by the decisions we made about which nominations to go after. So '22, '23, do we have bandwidth to resume growth? Yes, we do, but we'll do it only to the extent that we've got, again, firm, signed contracts with guaranteed profitability and so forth and so on. And we'll be, again, very disciplined in how we deploy capital.

And one of the...

As a company -- sorry, as a company, I see it as an opportunity. I don't see a risk that our sales would go down and the business would go away, not at all. It's really an opportunity for us when and if we choose to resume winning more nominations because these are going to be good nominations in terms of financial returns.

And I guess more broadly speaking, about the trends in EVs, and it seems like '24, '25, '26, you're going to see a lot more mass production of electric vehicles, which typically do have higher aluminum content than current cars. So the battery box is obviously a big piece of that as well as just the enclosures. Can you talk to work you're doing on the EV side? How important do you think that is to the company, maybe not in the next 2 years, but 5 to 10?

Yes. So I think in the next 2 years, it's a nice addition to our growth. I think the real impact is going to be 5 to 10 years out, as you mentioned, Curt, in terms of becoming sizable volumes. So what we're doing is a number of things. One is making sure we got plants that run well so that we can really sweat the assets and get as much product out of the existing footprint we have. That is super important, if you want, which we want, retail and invested capital. So that's item number one. Item number two is, as I mentioned a number of times, we're present on a number of electric vehicles, and we are developing with customers solutions, whereby we integrate the design of the battery box, for instance, as part of the structure of the vehicle. And what we found is that when we have proprietary designs, we can offer to customers, we tend to make a good living. If the customers come to us and ask us to do a build-to-print, then that's not a very attractive opportunity for us. So investing in technology, knowing how to really maximize the benefits of the knowledge we have from metallurgy, all the way to component fabrication and integrate all that in a superior design is where we put our effort technology-wise. And we hope to have enough customers willing to engage with us, we have some, such that we sell more of these products. But again, there's a lot of fluidity in the technologies in the field, and it's early to tell how much of an opportunity really this will be for us. But we are making some very nice strides. And I think I mentioned a big project in the U.K., where we've gotten a significant governmental grant to tune of GBP 15 million to develop new technologies in conjunction with 2 OEMs. So that's the kind of thing we do so that then we have proprietary designs, superior products that we can make a good living on. This is still a little bit in the venture side of things. But overall, when you step back, as you pointed out, aluminum is a light metal, it is providing a lot of benefits in terms of fuel efficiency, emissions or range for electric vehicles. It's going to continue to grow in the automotive applications. That's good for us overall. That's the first horse we've got to make sure we're on. The second one is the technology front, where we are also investing.

Okay. That's helpful. So I guess in terms of the near term, probably one of the more bigger opportunities over time is the packaging industry, right? So I mean there's been clear evidence of deficits in the North American can sheet substrate market. The growth rates have been very strong. You have a dominant position in that market. I don't know what your market share is, maybe 40% in the U.S., something like that. So can you just update us on kind of your strategy to improve margins in packaging? I know there's debottlenecking going on at Muscle Shoals to where that capacity could also, I would think, come into the can sheet market relatively quickly. Just give us a kind of frame the opportunity set in the near term?

Yes. So, yes, packaging is very important to us, makes 40% of our business, and we are more exposed in North America than we are in Europe. So as you point out, I mean, North America happens to be the stronger market now because of all the new product introduction in cans, the preference away from plastic towards other packaging, first and foremost, can being very sustainable. And we're seeing that with all the investments that the can makers are making in new can lines, which is really a departure from just 5 years ago. So that is all very exciting. So I will beg to differ with you. We do not have a dominant position. It's a very competitive market, and we have less than 40% market share. I won't go more into the details. But again, that's a significant opportunity for us. So yes, we're expanding our presence in can. And to the extent that we get good pricing, we're very happy to make more can, sheet for the can makers and the beverage companies. And I'll just remind everybody that the can sheet market in North America is 1.8 million tons, a little bit more maybe. And so even a small percentage change, it's quite a few tons for us, right? And that at our profitability levels per ton, this can become very meaningful very quickly. That's what we are after. And I'm very encouraged by the developments in these markets.

And then with respect to the capacity creep at Muscle Shoals, I think it was roughly targeted of 75,000 tons over -- through maybe 2021. Did you slow that at all during COVID? Can you give an update on timing of when you think some of that...

No, no, we didn't slow it. I mean we look at COVID hopefully as a temporary event. It's a very painful one, but it's a temporary event. So we're not going to change our strategy around that. So we continue to be very determined to grow capacity at Muscle Shoals. And again, when we said 75,000 tons, we meant it, so it's going to happen. And we're looking at what can we do next because as we are seeing it, there's -- there is more demand for automotive and aluminum -- sorry, for aluminum in automotive, and there is more demand for cans in addition. So we have to step up our game. We have opportunities to further expand. And again, we'll do that as long as we get good return on capital.

And Curt, one of the things, just to jump in here, that we really love about Muscle Shoals is that now that we have the asset, expanding the capacity is something we can do on a capital-light basis. So we don't have to invest lots of incremental capital to get those tons. So that makes them obviously much more valuable to us.

So in a nutshell, we look at 75,000 tons are a bare minimum.

Okay. And any update on the timing of when those tons would be commercially available?