Constellium SE (CSTM) Earnings Call Transcript & Summary

Good day, and welcome to the Constellium Second Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Jason Hershiser.

Thank you, Andrew. I would like to welcome everyone to our second quarter 2026 earnings call. On the call today, we have our Chief Executive Officer, Ingrid Joerg; 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 10-K. 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 GAAP disclosures. And with that, I would now like to hand the call over to Ingrid.

Thank you, Jason. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Before we start, I wanted to say we are very pleased with the second quarter performance, including record adjusted EBITDA. During the quarter, we benefited from strong operational focus, cost control and improved market dynamics. As a result, we achieved stronger financial performance across all of our operating segments compared to last year and compared to last quarter. Given our record performance in the quarter and in the first half and our improved outlook for the second half, we are raising our outlook for the full year. As we said previously, we expect 2026 to be a record year for the company, both in terms of adjusted EBITDA and free cash flow. Okay. Let's begin on Slide #5 and discuss the highlights from our second quarter performance. I would like to start with safety, our #1 priority. We delivered strong safety performance in the second quarter with a recordable case rate of 1.5 per million hours worked. This brings our year-to-date recordable case rate to 1.3 per million hours worked versus 1.9 in 2025. Despite the strong achievement, our safety journey is never complete, and we remain focused on this critical priority every day. Now turning to our financial results, which were ahead of our own expectations despite macroeconomic and geopolitical uncertainties. During the quarter, we benefited from current market dynamics, including an improved aerospace and TID environment, supply shortages of automotive rolled products in North America and strong recycling performance in both North America and Europe. Shipments were 381,000 tons in the second quarter as higher shipments in A&T were offset by lower shipments in P&ARP. Revenue of $2.7 billion, increased 31% compared to the second quarter of 2025 due to higher revenue per ton, including higher metal prices. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which reduces our exposure to metal price risk. Our net income was $148 million in the quarter compared to net income of $36 million in the second quarter last year. The main driver of the increase was higher gross profit in the quarter versus last year. Compared to the second quarter last year, adjusted EBITDA increased over 200% to $439 million in the second quarter this year. So this includes a positive non-cash impact from metal price lag of $129 million. If we exclude the impact of metal price lag, which, as you know, is the way we view the real economic performance of our business, we achieved an adjusted EBITDA of $310 million in the quarter. This represents an all-time record for the company and is up 88% versus the $165 million in the second quarter last year. Adjusted EBITDA was up in each of our operating segments in the quarter versus last year, including a new quarterly record for both A&T and P&ARP. Our free cash flow was $90 million in the quarter. And during the quarter, we've returned $20 million to shareholders through the repurchase of 623,000 shares. We ended the quarter with leverage at 1.8x. Earlier this week, we completed the $100 million partial redemption of the senior notes due in June 2028. Before turning the call over to Jack, I wanted to make a few comments regarding the expected impact from the conflict in the Middle East. In terms of metal supply, we do source some metal from the Middle East today, both slabs and billets, but they represent a small percentage of our overall needs. As such, we believe the impact of metal supply for us is limited at this stage, and we should be able to resource through a combination of internal and external metal flows. On energy, most of our energy costs are locked in for 2026. In other cost categories, we are seeing some inflationary pressures in freight, lubricants and coatings, but we expect the net impact from this to be manageable. We currently do not expect any impact on our supply chain from the lack of freight capacity. In terms of other indirect impacts from the Middle East conflict, we have not seen much end market disruption at this stage, so we continue to monitor it closely. To wrap up on this topic, the overall impact from the conflict in the Middle East appears digestible at this point. The longer-term impacts remain uncertain and difficult to predict, but we are confident in our ability to manage our business in any environment. With that, I will now hand the call over to Jack for further details on our financial performance.

Thank you, Ingrid, and thank you, everyone, for joining the call today. Please turn now to Slide 7. And let's focus on our A&T segment performance. Adjusted EBITDA of $135 million, increased 61% compared to the second quarter last year and represents a new quarterly record for A&T. Volume was a tailwind of $40 million due to higher shipments in both aerospace and TID. Aerospace shipments were up 14% in the quarter versus last year as a result of improved demand. TID shipments were up 26% versus last year due to an improved market environment, including increased demand from onshoring in the U.S. TID also benefited from automotive coil shipments from Ravenswood due to the supply disruption in automotive rolled products in North America. Price and mix was a tailwind of $16 million, mostly due to improved contractual and spot pricing in Aerospace and TID. Costs were a headwind of $7 million, primarily as a result of higher operating costs given higher activity levels. FX and other was a tailwind of $2 million in the quarter due to the weaker U.S. dollar. Now turn to Slide 8. And let's focus on P&ARP segment performance. Adjusted EBITDA of $165 million, increased 123% compared to the second quarter last year and also represents a new quarterly record for P&ARP. Volume was a headwind of $5 million in the quarter as higher automotive shipments were more than offset by lower packaging shipments. Packaging shipments decreased 9% in the quarter versus last year, though underlying packaging demand remained healthy in both North America and Europe. Automotive shipments increased 15% in the quarter as we benefited from the supply shortages in North America of aluminum automotive body sheet. Price and mix was a tailwind of $20 million as a result of improved pricing and favorable mix in the quarter. Costs were a tailwind of $74 million, which includes favorable metal costs given continued improvement in scrap spreads, significantly higher metal pricing environment in North America and higher throughput and improved productivity in our recycling operations in both North America and Europe. FX and other was a tailwind of $2 million in the quarter. Now turn to Slide 9. And let's focus on our AS&I segment. Adjusted EBITDA of $26 million, increased 44% compared to the second quarter last year. Volume was stable as shipments in both automotive and industry extruded products were flat compared to last year. Price and mix was a $5 million headwind in the quarter. Costs were a tailwind of $12 million, primarily due to lower operating costs. FX and other was a tailwind of $1 million in the quarter. It is not on the slide here, but our holdings and corporate expense was $16 million in the quarter. Holdings and corporate expense was up $4 million from last year, mainly due to higher labor costs and unfavorable foreign exchange translation. For the full year in 2026, we now expect holdings and corporate expense to run at approximately $55 million. It is also 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 primary aluminum, our largest cost input. Our other metal costs, which includes our recycling profits, we continue to benefit from the current market dynamics in the second quarter, including the highly favorable scrap and metal pricing environment. Looking to the second half of the year, our scrap needs are essentially locked in for the third quarter, and a large portion are locked in for the fourth quarter, both at favorable levels. We expect other metal costs to remain favorable in the second half of the year, though at a more modest level than the first half. From a year-over-year basis, we expect the benefit in other metal costs to taper off as we move through the rest of the year. It is important to bear in mind that recycling is core to what we do as it takes a significant amount of investments and know-how, and we're focused on making the best out of the current favorable conditions and delivering a strong return on our recycling investments for our shareholders. Now moving on from metal costs. Inflationary pressures continue today across multiple operating cost categories, including labor, energy, maintenance and supplies, albeit at more normal levels. As Ingrid mentioned previously, we're beginning to see some elevated inflationary pressures in other categories such as freight, lubricants and coatings as a result of the conflict in the Middle East, though we expect the net impact from this to be digestible at this point. Regarding tariffs, we have made progress on pass-throughs and other actions to mitigate a portion of our gross tariff exposure, and we believe at this stage, our direct tariff exposure remains manageable. The indirect positive impacts from the tariffs continue to ramp up, including higher demand for U.S. domestically produced aluminum products, a more favorable pricing environment compared to expensive imports and improved recycling profits in the U.S. Put it all together, we continue to believe that the current tariff and trade policies are a net positive for us. Based on our views, all of the known tariff impacts, both direct and indirect and all of our mitigation efforts to offset the direct impacts are included in our guidance today. Wrapping up on costs. We have demonstrated strong cost performance in the past, and we're confident in our ability to maintain a right-sized cost structure in any environment. Now let's turn to Slide 10 and discuss our free cash flow. We generated $90 million of free cash flow in the second quarter, bringing our year-to-date total to $95 million. The year-over-year increase in the first half is a result of higher segment adjusted EBITDA, partially offset by an unfavorable change in working capital, higher capital expenditures and higher cash taxes. Looking at 2026, we have increased our target for free cash flow generation to more than $300 million for the full year. We expect CapEx to be approximately $330 million, which is unchanged from prior -- previous guidance. As a reminder, CapEx this year includes approximately $100 million of return-seeking CapEx primarily related to key aerospace and recycling and casting projects we announced previously at Issoire, Muscle Shoals and Ravenswood. We expect cash interest of approximately $125 million, in line with prior guidance and cash taxes of approximately $105 million, up from prior guidance, mainly due to increased profitability. We expect working capital and other to be a larger use of cash for the full year than prior guidance, mainly due to higher metal prices. We expect to use the free cash flow generated this year for our share repurchase program and for debt reduction. As Ingrid mentioned previously, we continued our share buyback activities in the quarter. During the quarter, we repurchased 623,000 shares for $20 million, bringing our year-to-date total to 1.8 million shares for $48 million. Since we started the share repurchase program in 2024, we have repurchased 15.3 million shares for $241 million or around $15.75 per share. As of the quarter end, we have approximately $287 million remaining on our current share repurchase program that expires in December 2028. Now let's turn to Slide 11 and discuss our balance sheet and liquidity position. At the end of the second quarter, our net debt of $1.8 billion, was down $64 million compared to the end of 2025. We reduced our leverage to 1.8x by the end of the quarter, which is well within our target range. We expect leverage to trend lower in 2026 and to maintain our target leverage range of 1.5 to 2.5x over time. As you can see in our debt summary, the earliest bond maturity we have is the $325 million, 5.625% senior notes due June 2028. And earlier this week, we completed a $100 million partial redemption of those notes, leaving $225 million in aggregate principal outstanding. Our liquidity increased by $192 million from the end of 2025 and remains very strong at over $1 billion as of the end of the second quarter. And with that, I'll now hand the call over to Ingrid.

Thank you, Jack. Let's turn to Slide #13 and discuss our current end market outlook. The majority of our portfolio today is serving end markets benefiting from durable and attractive secular growth trends in which aluminum, a light and infinitely recyclable material, plays a critical role. Turning first to the aerospace market. Aerospace demand improved during the first half of the year and is running ahead of our expectations coming into the year. Commercial aircraft backlogs are at record levels today and continue to grow. Major aerospace OEMs remain focused on increasing build rates for both narrow and wide-body aircraft. This is evidenced by higher plane deliveries year-over-year and rising delivery ambitions in the near term. As such, we believe that aluminum destocking in the supply chain has and will continue to ease. Demand for high value-add products, which is one of our core focus areas, remains strong. We remain confident that the long-term fundamentals driving commercial aerospace demand continue to be intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In addition, demand remains stable in the business and regional jet market, whereas demand for space and military aircraft is robust. We believe we are a leading provider of proprietary aluminum solutions for those customers in the space and military aviation markets today. As you know, we are investing in additional capacities and capabilities such as our third Airware cast house in Issoire. I'm pleased to announce the cast house is up and running, and we have begun customer qualifications. We expect the cast house to ramp up in 2027, and it will further strengthen our leadership position in the future. Looking across our entire commercial and military aviation and space businesses, we believe our product portfolio is unmatched in the industry, and we have industry-leading R&D capabilities for aluminum aerospace solutions. Turning now to packaging. Demand remains healthy in both North America and Europe, and the long-term outlook for packaging continues to be favorable. This is supported by the growing consumer preference for the sustainable aluminum beverage can, capacity growth plans from the can makers in both regions and the greenfield investments ongoing here in the U.S. We continue to see aluminum gain share against other substrates in the beverage market, and the majority of new beverage products are launched in aluminum cans today due to its sustainable attributes. Aluminum cans are highly recyclable, and we are well positioned to capitalize on the benefits from recycling packaging materials at our facilities in Muscle Shoals and Neuf-Brisach. Packaging markets are relatively recession resilient with stable growth as we've seen in the past. Longer term, we continue to expect packaging markets to grow low to mid-single digits in both North America and Europe, providing a strong base-load for operations in both regions. Let's turn now to automotive, which continues to be a bit of a different story in North America versus Europe. In North America, demand is resilient despite an uncertain macro environment. Last year, a U.S.-based facility of another aluminum supplier was impacted by fire, a very unfortunate event and which created an interruption in the aluminum rolled product supply chain in North America. The entire industry mobilized to ensure we limit the impacts on our customers. In the second quarter this year, both P&ARP and A&T businesses continue to help our customers during this outage. On the automotive structure side, we are negatively impacted by the outage as some OEMs were forced to reduce production on certain platforms impacted by the disruption on the rolled product side. The overall impact in 2026 is a net positive on our results, which we expect to continue throughout the year, but starts to taper off in the third quarter. Automotive demand in Europe remains weak, particularly in the premium vehicle segment where we have greater exposure. European markets are seeing increased Chinese competition today on the BEV side and European OEMs are also facing stiffer competition in Chinese auto markets. Longer term, we believe electric and hybrid vehicles will continue to grow, but at a lower rate than previously expected. Secular trends such as lightweighting, fuel efficiency and safety will continue to drive the demand for aluminum products. As a result, we remain positive on this market over the longer term. As you can see on the page, these 3 core end markets represent over 80% of our last 12 months revenue. Turning lastly to other specialties. These markets are typically dependent upon the health of the industrial economies in each region, including drivers like the interest rate environment, industrial production levels and consumer spending patterns. Industrial market conditions in North America and Europe became more stable in the second half of 2025, and we believe the markets, particularly in Europe, have bottomed after a prolonged downturn. We believe TID markets in North America provide us with many opportunities today, given the current tariffs make imports less competitive compared to domestic production, and you see this in our results in the first half. These include opportunities in land-based defense, semiconductor and commercial transportation, among other markets. As you know, we are focused on niche high value-added applications in most industrial markets. 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 markets is an asset for the company in any environment. Turning lastly now to Slide #14. We detail our key messages and financial guidance. Our team delivered strong second quarter results that were ahead of our expectations despite ongoing macroeconomic and geopolitical uncertainties. We achieved record quarterly adjusted EBITDA, returned $20 million to shareholders with the repurchase of 623,000 shares and reduced our leverage to 1.8x. I want to thank each of our Constellium team members for their relentless focus on execution, which continues to drive our strong performance. Even though the current landscape remains volatile, we have a strong track record of navigating and executing in any environment. Based on our current outlook for 2026, we are now targeting adjusted EBITDA, excluding the non-cash impact of metal price lag in the range of $980 million to $1.02 billion and free cash flow in excess of $300 million. With this revised guidance, we now expect to achieve our 2028 targets 2 years ahead of schedule. Our guidance assumes the recent demand trends in our end markets that I described earlier will continue and the overall market economic -- macroeconomic environment will remain relatively stable. Looking ahead, we like our end market position, and we are optimistic about our prospects, which include harvesting the benefits from our previously announced return-seeking investments and capturing future market opportunities. To conclude, we are extremely well-positioned for long-term success. Our focus remains on executing our strategy and increasing shareholder value. With that, operator, I will now open the Q&A session.

[Operator Instructions] And our first question comes from the line of Corinne Blanchard with Deutsche Bank.

Congratulations on the very strong quarter and the EBITDA raise. A few questions. I mean maybe the first one, can you help us understand the gap or like the bridge to the second half of the year? You had very strong 1Q and 2Q. And even with the guidance and the outlook raise for the year, it does imply, I would say, a softer second half. So can you just try to bridge what are the key take and puts? And where could it get better actually than maybe the implied guidance?

Thank you very much, Corinne. I start and then I'll let Jack complete. So as you know, we always have some seasonality between the first half and the second half of the year. We have lower demand in summer and in December, particularly in our European operations. And we tend to schedule our planned outages and maintenance, major maintenance activities during these times, which is why we also have a little bit of a higher maintenance cost in the second half of the year. As you know, also last year, we had some positive one-offs in Q3 in our AS&I segment, and we had a particularly strong Q4 for our A&T segment. So if you think at the normal cadence between first half and second half, we are actually very, very close to historic proportion between first and second half of the year.

Yes. And I think Ingrid already alluded to this point. But remember, the metal and recycling market environment was quite adverse in the first half of 2025 and then the market stabilized in the third quarter of '25 and they improved significantly in the fourth quarter. So compared to '25, you would expect more benefits in the first half of this year and then in the second half with the incremental recycling benefits to begin to taper off.

Okay. Maybe the second question, and I know everyone is probably wanted to get an answer there, but can you talk about the scrap spread? I mean, obviously, it has been a tailwind for the first 6 months or even like late last year and I think it has already supported your share price. We have seen a compression recently in North America, how do you view the potential impact later this year? And then kind of coming with that question, how do we think about 2027?

So I'll start. On the scrap spreads, well, first of all, I think in terms of volume, as we mentioned, we're mostly locked in for the back half of the year and the spreads at which we have locked in are actually quite favorable and they're, believe it or not, similar to the first half of the year. I think the compression you're alluding to, Corinne is more of the metal price movement, the downward pressure on the metal price movement. I would say that looking at our guidance today, the market conditions with the metal price in the market has now moved closer to now our revised assumptions for the back half of the year. I think it's really important to keep in mind that -- look, I mean, we control what we can control and productivity and recycling is really, really important outside of the market factors. And that includes optimizing the most favorable types of scrap, enhance productivity, enhanced consumption, reducing metal loss. So we're focused on maximizing the returns on the recycling investments there. And then in terms of '27, I would say it's still a little early for us to comment on the '27, we're trying. But I would say the dealers are probably more on the wait -- in a little bit of a wait-and-see mode at the moment.

And our next question comes from the line of Katja Jancic with BMO Capital Markets.

Maybe starting on the fact you basically reached your '28 EBITDA target. And I know there are puts and takes, but can you maybe discuss some of those puts and takes when we look to '27 and '28 or how we should think about EBITDA moving forward from '26?

Thank you very much, Katja. Let me start and then I'll let Jack complement as usual. I think we gave a really strong outlook for 2026 today, and that includes, as you know, a very favorable scrap and metal environment in North America as well as automotive opportunities unrelated to the market performance. We are very confident with our 2026 guidance given that we have much better visibility now into the second half of the year, and we expect a record performance for the company in '26. Now if you think beyond that, the strategic development of the company remains unchanged, and 2028 was more of a milestone than a destination for us. So if you think in terms of future development for the company, we are continuing our strategy that we have laid out before. So we have our strategic pillars of returning to better operational performance in Muscle Shoals and Valais after the flooding, which I think we can say we have successfully achieved. And then we have our other pillars around investments, around markets and market recovery, and then execution and cost control with our Vision 2028 program. So if I start with the investment side, you know we have our recycling center in Neuf-Brisach that is ramping to full capacity in 2027. We'll have our casting complex in Muscle Shoals that is going to come online in 2027 as well. And then we have our 2 new casting complexes in Ravenswood with the first one coming online in 2028. So all of these investments are targeted to reduce the metal cost for the company and support as well our growth. We have our Airware cast house that, as I just explained, we have started up on time and within budget. We are currently doing customer qualifications, and we expect to ramp up this growth investment in 2027, which will help us to benefit from a market recovery that is happening right now in the aerospace segment. We have several debottlenecking activities in our pipeline. So no change here. These will support our continued growth in the markets where the markets are actually either growing or remaining stable or resilient, like, for example, automotive in the U.S. I think in terms of markets, aerospace, you have seen that the volumes have started to grow. We see a continued easing in the supply chain for both Airbus and Boeing. We see increased defense opportunities, and this is going to be a trend for several years in a row. Automotive is resilient in North America. Europe remains below our initial expectations. European industrial markets have bottomed out, and we are seeing some small improvements on the hard alloy extrusion side. TID markets are strong in commercial transportation in North America and semiconductor markets for plate, and packaging remains very stable with growth both in the U.S. and in Europe. So we intend to benefit from the market recovery and continued market growth in all our segments, and we feel we are very well placed to be successful in those core markets. And then last but not least, we are really targeting a step change in operational performance, efficiently load our assets and control our costs with our Vision 2028 program. So if we take everything together, we feel very confident with the strategy we've laid out, and we think we have lots of opportunities ahead of us to continue to grow the company.

And maybe just a quick one on the energy costs. I know you mentioned you're locked in for '26. Can you talk about how much of your energy costs are locked in for '27 at this point?

So Katja, yes, absolutely. We have a 3-year hedging program that's on a rolling basis. So at this point, more than 50% of the energy consumption forecasts are locked in for '27.

And our next question comes from the line of Bill Peterson with JPMorgan.

Nice job on the financial performance. Sorry to kind of beat a dead horse here, but is there a way you can kind of quantify the maximum headwind that you experienced on scrap spreads in '24 and early part of '25 versus maybe what might appear to be a maximum tailwind that you've had here in the first half, so investors can better understand sort of a snapshot of the company's true earnings power? And then scrap spreads aside, you've talked about all the qualitative things you have ahead of you, Airware cast house, Ravenswood, slab caster, maybe there's uplift from packaging contracts. But can you help us quantify what the benefits could be on those items into 2027?

So Bill, I don't think we will quantify the maximum headwinds or tailwinds. I would say, a way to sort of understand directional benefits is to take a look at the cost bucket for P&ARP in each of the quarters, and you'll see it's a large portion of that is driven by whether it's adverse headwinds or tailwinds from the additional recycling activities. And again, there is a market element to this, but then there are things within our control, and we're consuming more scrap that's more optimal for our operations. So I wouldn't discount the efforts we're putting into the recycling benefits either.

And then on the second question on what's under your control and how that could uplift through next year?

So we -- I think it was related to our investments, correct, Bill?