Constellium SE (CSTM) Q1 2015 Earnings Report, Transcript and Summary

Hello, and welcome to the Constellium Reports First Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Now, I’d like to turn the conference over to Paul Blalock. Mr. Blalock, please go ahead.

Thank you, Keite. Good day, everyone, and welcome to Constellium’s first quarter 2015 earnings call. On the call today is our Chief Executive Officer, Pierre Vareille; and our Chief Financial Officer, Didier Fontaine. 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 financial timings. 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 publicly 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 support our IFRS disclosures. I would now like to hand the call over to Pierre Vareille, our Chief Executive Officer.

Thank you, Paul, and thank you all for joining us today. Constellium achieved solid results in the first quarter of 2015. All key metrics are up sharply due mainly to the acquisition of Wise Metals in Muscle Shoals, Alabama. During the first quarter, Constellium shipments were 381,000 metric tons representing an increase of 41% compared with one year ago. Revenue was €1.4 billion for the first quarter representing an increase of 58% over last year. Adjusted EBITDA was €95 million in the quarter, representing an increase of 34% over last year. The Packaging and Automotive Rolled products segment where we have reported the results of Muscle Shoals, revenue more than doubled compared with last year. In the first quarter, our Automotive Rolled products shipments increased 19%, and our Automotive extruded products shipments increased 12%. Our automotive expansion projects, which I will discuss in a few minutes, are on track. Lastly, positive foreign exchange rate impact increased our first quarter adjusted EBITDA. This was partially offset by the negative effect of slightly higher premiums as compared with last year. Turning now to slide number 6. Total P&ARP shipments of 266,000 metric tons increased 71% over last year. We had very strong volume in Muscle Shoals, while our European packaging operations had a slight reduction in shipments due to softer demand for closures and foilstock. The Body-in-White expansion project in Neuf-Brisach, France, and in Bowling Green, Kentucky are both proceeding on track to being production next year in 2016. Lastly, we recently announced our decision to add a second finishing line in U.S. due to continued strong customer demand. Turning now to slide number 7, the Aerospace and Transportation segment continues to have solid demand with the majority of aerospace business contracted under long-term basis. However, for the segment, shipments were 59,000 tons, down 3% from last year. This was driven in part by softer demand in the transportation and industry markets, as well as continued capacity constraints in our aerospace operations. Overall, in Q1, A&T improved on time deliveries as our recovery plan continues to make progress. We are working hard to recapture and expand our aerospace capacity and the addition of new pusher furnace at Ravenswood remains on track for 2016. Q1 results were positively impacted by €12 million due to favorable exchange rates, partially offset by unfavorable impact from higher metal premiums of $2 million. And now turning to slide number eight, the Automotive Structures and Industry Segment. Demand for the Automotive Structures market remains very strong. The industry market has less growth and continues to become more competitive. During the quarter, total shipments grew 5%, as compared with last year to 50,000 metric tons, and we continue to add new capacity to keep up with the growing demand for automotive extrusions, which grew 12% as this last year. The planned expansion capacity expansion in Van Buren, Michigan was officially commissioned in April. Our North American Automotive customers are increasing their demand and we look forward to continuing to several markets. And our planned expansion in Germany and China are also on track. In January, we announced that Constellium is now one of the largest suppliers of high-strength structural parts of the Ford F-150, which is the bestselling vehicle platform in North America. Lastly, in Q1 2015, adjusted EBITDA was negatively impacted by €1 million, due to the revaluation of the Swiss Franc by €2 million from higher billet premiums when compared with 2014. I will now hand it over to Didier to further discussion discuss our financial results.

Thank you Pierre and welcome everyone. On slide 10, we thought it might be helpful for you to see Q1 2015 segment adjusted EBITDA compared to last year. As Pierre already mentioned it, the inclusion of Muscle Shoals has increased automotive roll products though adjusted EBITDA in P&ARP higher by $26 million. Now when we turn to slide 11, the increase in metal premiums negatively impacted the adjusted EBITDA by £4 million while FX rate positively impacted adjusted EBITDA by €15 million. I should also point out that a significant portion of the FX impact in adjusted EBITDA is expected naturally to reverse itself when the related edges mature. In addition, we now expect that our legacy business will be positively impacted by reduced metal premiums. On slide 12, you can see our segment performance as compared with first quarter last year. Starting with be P&ARP adjusted EBITDA increased 98% to reach €53 million, and the adjusted EBITDA per ton increased 16% to €119 per ton. Legacy Constellium P&ARP results increased slightly in adjusted EBITDA and adjusted EBITDA per ton, but decreased slightly in shipments due to softer demand for Ford stock and closures. In A&T adjusted EBITDA improved 13%, but was held by the FX impact, which also improved A&T’s adjusted EBITDA per ton by 16%. Removing the FX and the premium impact from A&T we wouldn’t have produced an EBITDA and EBITDA per ton in-line with our previously communicated target. In AS&I, the adjusted EBITDA decreased €2 million or 8%; and the adjusted EBITDA per ton decreased 13% to reach €220 per ton. Results for AS&I were impacted by the Swiss Franc revaluation and increased billet premiums, as compared with last year. Adjusting for these two items AS&I would have improved adjusted EBITDA per ton to reach €260, despite soft economic conditions in the industry and the soft alloys [ph] market. In Automotive Structures, we continue to experience strong double-digit growth throughout operations in North America, Europe, and China. Now turning to slide number 13, you will see Q1 2015 adjusted free cash flow as compared with last year. Cash flow from operating activities, after margin calls, improved by €27 million, while capital expenditures increased by €51 million as planned. Therefore the improved cash flow from operating activities was more than offset by the increase in capital expenditures, funding our growth initiatives. Now turning to slide number 14, for the last two years, our relentless focus on reducing net trade working capital has continued to pay off despite increases in LME and metal premiums. With the consolidation of Muscle Shoals, our trade working capital has moved higher and provides significant room for future improvement. In many aspects, Muscle Shoals is comparable to our Neuf-Brisach plant in France. When we benchmark Muscle Shoals to what we have done in Neuf-Brisach over the past three years, we see ample opportunity to reduce trade working capital, specifically inventory levels. We also expect to make significant progress as we implement best practices to flatten the curve and reduce seasonality, particularly in Q1. On next slide, the slide 15, you can see that the net debt and leverage increased due to the consolidation of the Wise Metals debt, including a non-cash foreign exchange translation impact of €100 million in Q1. We have a free cash position of €352 million and a strong liquidity position of €700 million. I will now turn the call back to Pierre.

Thank you, Didier. In summary, Constellium achieved another solid quarter, with very strong growth rates in all key metrics, particularly in P&ARP, driven by the Wise Metals acquisition. I would also like to take a moment to update you on our progress in the integration of Wise Metals. We have fully completed the re-branding of the Muscle Shoals plant into Constellium and we are very pleased with the management team that has agreed to stay with us in transforming this plant into world class packaging facility. In addition, we are laser-beam focused on adding state-of-the-art automotive finishing capacity which includes many separate processes required to produce high value automotive body sheet specifications our customers require. In production, Muscle Shoals is doing very well. We have now completed a packaging capacity expansion that was started prior to the acquisition. Going forward, we still have some work to do to move Muscle Shoals into Constellium’s commercial policies and standards, including contract anticipation [ph] activities. This includes metal purchasing, premium pass through and financial hedging procedures. So, we are satisfied with the initial phase of our activities which are being the integration. We’re also very excited at the prospect of transforming this facility into world class automotive facility. Automotive expansion is progressing well with long time schedules for our key projects in Europe, the U.S. and China. We currently expect our Body-in-White expansion project in Europe and the U.S. to being production next year. We are in discursions with our global customers and we are quite satisfied that we are attracting more that our share of new customer contract. In conclusion, we remain committed to our strategy and our focus on our targeted market in packaging, aerospace and automotive. Thank you listening today and thank you for your interest in Constellium. Operator, we’ll now open up to the lines for questions.

Yes, thank you. We will now being the question and answer session. [Operator Instructions] And the first question comes from David Gagliano with Bank of Montreal.

Alight. Thank you for taking my questions. My first question is actually tied to the April announcement on the mill expansions. The second line, do the numbers, just want to clarify one thing, do the numbers in that press release, the €160 million of CapEx and 100,000 metric tons. Is that your ownership interest? Is that a 100% basis? And does this assume obviously the JVs involved or is this on your own?

So it’s 100% CapEx. We are discussing with our partner right now to decide how we will invest and where we put the line. But €150 million is for the totality of the CapEx.

Okay. And then the 100,000 metric tons is a 100% as well right.

Yeah, that’s right.

Okay, alright. Perfect, thank you. And then just on the operating side, couple of quick questions, the A&T business, the commentary at the end of the slide decks is down year-over-year, still if I look at the Q1 number and obviously that implies Q2 to Q4 is going to be down a fair amount versus Q1. I’m wondering what’s behind that?

You have to restate the EBITDA taking into account the FX and taking into account the premiums, it should be your basis to see how they will pan out for the quarters to come.

So, the $27 million number reported, obviously that include the benefit from FX at that time, but if the FX does not change from here, I would think that that $27 million would be the run rate moving forward. Does that not the right way to think about that?

I think, it’s interrupting [ph] on the positive side to be frank, if you take into account the FX impact into operating analysis.

Okay, all right. And then my last question. So how did the Wise assets contribute to the packaging of rolled products EBITDA in the first quarter? I missed that.

We are reporting the [indiscernible] segment as a unique segment. That’s what we have decided to do.

All right.

I think what we said is that excluding Wise, the [indiscernible] progress is – and it’s likely. So by making the difference, you should be close to the number.

Okay. Perfect. Thank you.

Thank you. And your next question comes from Brian Yu with Citi.

Thanks, guys. First question is goes back to what Dave has asked a little bit early, with the A&T business, the FX impact of €12 million seems to be outsized relative to the overall profit that the business segment is generating. Can you discuss why that’s the case? Just percentage wise, it’s a lot greater than the FX movement. Is there a profit mix? There were – substantially all of it or more than that is actually coming from the U.S. and that’s why the FX impact is so large?

Well, I think – Didier Fontaine, I think you have to understand that the best measure we take for long-terms contracts and the best [ph] contract is a contract in there. So a big chuck of the A&T business or the aerospace business is denominated in dollar.

And you said it’s how many million?

I would say that in aerospace 80% of the business is denominated in dollar.

Okay. But €12 million on a profit base, excluding FX is a lot more than the underlying euro movement versus dollar, I’m wondering why that’s the case?

So, it’s basically the difference as well it’s a variance versus what it was last year. And also, last year, you were running over 155 at the rate where you were running, you were running probably 10% or 15% better. Percentage [ph] is 15% Q1-over-Q1, so that explain the impact.

Okay. And also on the A&T and the pressure, you talked about how the shipments were down because of the decrease in transport industry and other rolled products, but then it also talks about essential negative mix impact. I’m wondering wouldn’t that imply there is greater aerospace shipments, if transportation in others declined?

Aerospace is flat, but within aerospace as well, you might have – within the transportation of [indiscernible] shale gas, the related business, in aerospace as well, you have mix effect. But basically transportation is down 3% and aerospace is flat.

All right. Okay, thank you.

Thank you. And the next question comes from Matt Murphy with UBS.

Hi, two income statement questions. Can you give any guidance on what you expect your net finance cost would be on a go forward basis? And same with SG&A, as you continue to integrate Wise, can we expect some reduction from €65 million?

Just on the P&L side, the charge should be around €130 million for the year, a little bit lower due to the higher – essentially the higher [indiscernible] because we still carry the Wise debt. On the cash, we expect a cash charge of around €120 million over the year. And regarding SG&A, I think we are progressing well with the reduction of the acquisition [ph] of the synergies at Wise. What we said is that we have to reach those synergies, we will need two to three years, but we will be marginally going down in the coming quarters.

Okay. Thanks.

Thank you. And the next question comes from Tony Delserone with Federated Investors. Please go ahead Mr. Delserone, your line is live.

Gentlemen, could you speak to your plans for the Wise Metals bond issues?

Actually, there is no planned specific. We are keeping all options open. The bonds are callable in mid-June – mid-2016 and then actually in 2018 and 2019. So, we are just assessing and we are raising all options. They are all upon at that stage.

Are you suggesting that you would not move before the call, given the high coupon of the bonds and the low interest rates out in the market today?

We are not guessing anything at this stage. Frankly, we are – as we said, we are looking at all options. We don’t need to anything at this stage considering our balance sheet in our view. So we are just looking at plan what we can do.

[Operator Instructions] And the next question comes from Josh Sullivan with Sterne, Agee.

Good morning

Good morning

Just given where you were a year away from the opening at the Kentucky facility, do you think you can give us some detail on customers, maybe end products coming out of that facility in 2016? You know, what I’m trying to understand is outside of the F-150 we really haven't had any major announcements in the North America market, so is the Kentucky capacity at least initially going to serve existing aluminum trunk and hood markets or are there any new yet to be launched programs in there outside of the F-150 in 2016?

As we always said that the F-150 was an exception in the U.S. market. Florida started to move to [indiscernible] it’s a very bold move as you know they are taking out lot of weight through aluminum, and the other OEMs are more cautious so far. So something is very interesting that the first line and part of the second line is already committed with the branch of many, many others, many OEMs, all the names you can think of are our customers, but for quantities which have nothing to do with F-150. So, one OEM will give you the door, the other OEM with only a change of track, and another one which has a route [ph], so that’s the way it works. So, we don't have massive order, we don't have a massive customer, we are dealing with again other names, which you can think of.

Okay and then just kind of to follow that up, where is backlog for the second line, as it stands today?

Backlog you mean?

Yes.

So, the part of the second line is already committed. We expected to be a free committee pretty soon actually, which is very interesting when you think of the fact that this line will only be up and running in more than three years from now.

Okay. Thank you.

Thank you. And the next question comes from Joy Yoon [ph] with Share Value [ph].

Hi, thank you very much to take my call and – so the first question will be your first quarter CapEx is €84 million and I remember before you guided for the full year 2015 CapEx will be around €400 million and €450 million. So, can I ask whether, are you planning to accelerate CapEx spending in the following quarters, and also the second one will be for the aerospace division? I remember in the full-year 2014 guidance, you were saying you are targeting around 300 EBITDA per ton for full-year 2015, and for the first quarter result you reached 460 EBITDA per ton, can I ask, can you imagine the EBITDA per ton improved in the following quarters?

So, the guidance still [indiscernible] for CapEx, we are ramping up, and a of course quarter after quarter it will increase until we [indiscernible] equipment acquired. As far as the EBITDA per ton of A&T is concerned again you have to do the math with the FX impact and premium to look at the EBITDA per ton and as I said before for 2016, which is what we have right now is on the upper side obviously.

Okay. Thank you and one last question for the trending working capital. I think you might give guidance like after this combined group you are targeting flat working capital for the full-year?

Yes, it was – the flat working capital for this year, it was before the acquisition of Wise and obviously since we announced the acquisition of Wise on October 6 of last year things have changed.

Okay. So, for the last three years you have a positive working capital and so this will combine with metal and improvement for other metal would you expect to be positive or flat working capital going forward?

No, what we're seeing is that we think that there is opportunities with white metals, we're saying that if we benchmark white metals with the plant, which we have in France which is very similar to Wise. We know that there is ample room to improve the working capital for Wise metals.

Okay, thank you very much for the questions.

Thank You. [Operator Instructions] And our next question comes from Naveed Mukhtar from [indiscernible].

Hi guys. Thanks for the presentation. Just a quick one, just on page 21 of your presentation when you look at the net debt number, can you just tell me what is the LTM EBITDA performance for the Wise acquisition now at Q1 and what you were calculating your leverage to be now?

I think we were using Q1 last year destroy the three quarters that represented Q2, Q3, and Q4 of White and a total of 317 million of last 12 month EBITDA.

Okay, thank you.

Thank you. And the next question comes from Paretosh Misra from Morgan Stanley.

Thank you. Hi, how much Body-in-White volumes do you expect to ship this year in 2015?

We’ve said that – capacity was fully booked. For the time being, we only ship from Neuf-Brisach, France and Singen, Germany because our Body-in-White is not – we have not yet started in the U.S. as you know. You can look at the very significant increase compared to last year figures. So I think you could look at something both, at or above 60,000 tones.

Got it. And then – thank and then second question on the Wise Metal side of your business. Given the very large decline we have seen in the mid-west premiums, how should we think about the impact on that part of the business? We understand the legacy business will start seeing benefits, but what about the Wise Metal side?

It’s a very good question and to be very frank with you, we don’t know yet. We are, as we said during the presentation, we are working a lot about understanding all the effect of the premium in the Wise Metals look at different contracts and so on. It’s a study which is not yet finished, obviously because it’s very complicated. We have had – so at this stage, we prefer to be pushers and not to mention any impact on the – coming from the premium.

What’s the – again on the Wise Metal side, what typical inventory size in thousand of tons, do you have any sense on that?

Paretosh, I cannot give you the tons but I can give you the value. The value over €200 million and I think it is over 80,000 tones, so which is significantly higher than what we have in our plant. We don’t have to call that but it is a plant in France. So that’s the reason why we believe there is – when you compare the two, there is an opportunity to reduce significantly the inventory dollar.

If you come back to what we’re presenting out to the Street, we gave a figure for the trade working capital decrease in Muscle Shoals, which we are very comfortable with.

Alright guys. Thanks so much.

Thank you. And we have a follow up question from David Gagliano with Bank of Montreal.

Great, thank you. Previously you mentioned that part of the second line is now committed under contracts and you also mentioned there is – obviously, there is a lot of different OEMs and customers tied to those contracts. I was wondering if you give a little more color. How much of the 100,000 tons of annual capacity is actually committed under contract and since it’s committed under a broad base of customers, can you give us a sense at to a range on the margin per ton of those commitments?

So first, it’s not firm contract because it’s not the way our industry works. We are working, the OEMs ask us for capacity and then we discuss with them to see what part we take, what part we don’t take and actually they are taking capacity ASAP because obviously there is a lack of capacity on the market. And for these capacity, there are upside and downside, so they’ll say okay we’ll buy 10,000 tons plus or minus 10% and of course we are looking at the downside case when we announce anything to the market to be on the safe side. So the work of our commitment by customers are 10,000, 20,000 tons, I would say that would be the average size of the order and so we have many orders of this sort and the margin is inline with our expectations and what we already said to the market. So very good margin experience.

Okay, okay. So 10,000 to 20,000 tons per contract and again but we’re talking about a 100,000 tons of capacity in total?

Yeah, but we have 20 orders. So we have orders coming from everywhere. So I got to repeat myself. Line one is fully committed, line two is partially committed. We expect line two to be fully committed very soon.

Okay

And again, you have to have in mind that this line will come start to producing three years from now.

Right, sounds like it’s….

So, it tells me that if we were able to start before, it would be already full.

Okay. Okay, got it. Thank you very much and then, just one more follow up. Just to clarify on the near-term, I didn’t quite understand the answer on the A&T margin per ton question earlier or the total. You are saying we should adjust for currency and premiums, which I completely understand, but if currency doesn’t change, what I’m trying to get my head around is if currency doesn’t change, why would the margin per tone or the $27 million number that was reported in Q1 change much at all in the next few quarters.

So it’s part of the gain we’ll – part of the gain as a counterpart as annualized and will reverse

Okay, so how much of the €27 million will reverse.

It depends on the evolution of the dollar, but what we are saying is that the FX impact related to transactional and translation effects. If the euro-dollar rates stay exactly as it is right now, then we would reverse significant part of the €12 million which we mentioned in Q1? But it will be older time, you always compare to one year before so…

Okay. Alright, that’s helpful. Thank you very much.

Thank you. And as there are no more questions, this does conclude today’s conference call. So the conference has now concluded, thank you for joining today’s presentation, you may now disconnect your lines.

Thank you.