Constellium SE (CSTM) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to Constellium's Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And I would now like to turn the call over to Mr. Ryan Wentling, Director of Investor Relations. Sir, you may begin.

Thank you, operator. I would like to welcome everyone to our second quarter 2018 earnings call. On the call today are our Chief Executive Officer, Jean-Marc Germain; and our Chief Financial Officer, Peter Matt. After the presentation, we will have a Q&A session. A copy of the slide presentation for today's call is available on our website at constellium.com and today's call is being recorded. Before we begin, I'd like to encourage everyone to visit the company's website and take a look at our recent filings. Today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, future events and expectations and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20-F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law. In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which supplement our IFRS disclosures. I would now like to hand the call over to Jean-Marc.

Thanks, Ryan. Good morning, good afternoon, everyone. Thank you for your interest in Constellium. On Slide 5, you will see some of the highlights from our second quarter performance. Shipments were 397,000 metric tons. That's up 4% compared to the second quarter of 2017. We continue to successfully execute on our strategy of increasing shipments to the automotive markets. They increased 20% compared to the second quarter of last year. Our revenue increased 7% to €1.5 billion. This was primarily due to higher metal prices, which as you know, we substantially pass through and higher shipments. Our net income of €55 million compares to net income of €15 million in the second quarter of last year. Adjusted EBITDA was €151 million that is up 19% compared to the second quarter of last year. Each of our business segments reported record quarterly adjusted EBITDA. For the first half of 2018 our adjusted EBITDA increased 22%. This is a great result and our team continues to build on our positive momentum. As a result of our strong first half performance and our current outlook we are increasing our 2018 adjusted EBITDA growth guidance to a range of 11% to 13%. As you may remember in March 2017, at our Analyst Day we introduced our target of over €500 million of adjusted EBITDA in 2020. I am pleased to announce that we are pulling forward this target to 2019 a full year ahead of our previous guidance. I want to take a moment now to thank the entire Constellium team, as this impressive progress would not have been possible without them. However we have much left to do on our journey of executing our strategy and increasing shareholder value. So I look at the future with excitement and confidence. Moving on, leverage was 4.3 times at the end of June. That is down from 5.1 times at the end of the second quarter of last year. In addition pro forma for the recently completed CR asset sale, our leverage at the end of June would have been 3.8 times. We remain committed to further reducing our leverage. To that end we are updating our leverage target to below 3.5 times from our previous target of below 4 times. Turning to Slide 6 now. I'd like to share with you a few additional highlights from the second quarter. P&ARP was a significant contributor to our improved results compared to last year delivering a 30% improvement in adjusted EBITDA. A major driver of this performance was higher automotive rolled product shipments which were up 27% compared to the second quarter of last year, driven by growth of both Neuf-Brisach and Muscle Shoals. Our CALP line at Neuf-Brisach in France is running well and we continue to expect to ramp up this line through 2019 with full production in 2020. In the U.S., as you know, we are finishing an investment program to expand our automotive capacity at Muscle Shoals, Alabama and we are ramping up the CALP line of Bowling Green, Kentucky. As we have mentioned in each of the last few quarters, the ramp up of Bowling Green has been challenging. However, we are making progress and we continue to expect to ramp up through 2019 with full production in 2020. Moving now to A&T, the team continues to deliver. In aerospace we remained focused on maintaining our leadership positions with the major OEMs, and expanding our relationships with business and regional jets manufacturers. In transportation, industry and defense we continue to grow our exposure to attractive niche markets. I believe there is still more we can achieve in penetrating the TID markets. Now, let's move to AS&I. AS&I reported strong adjusted EBITDA in the first quarter and continues on its growth trajectory. Both automotive and order extruded shipments grew year-over-year. Our major growth investments across automotive structures remain on track. Our automotive structures team secured nominations of over €750 million in the first half of the year. While I remind you that these nominations can be lumpy, this is nevertheless and very clearly a great achievement for the team. This result puts us well on track to reach over €1 billion of nominations again in 2018, which should mark the third consecutive year at that level. Finally on the Corporate side, we increased our project 2019 total run rate cost savings to €32 million as of the end of the second quarter. We also completed the sale of the North Building Assets at Sierre that we previously leased to Novelis. The €200 million received are expected to be used for deleveraging and increasing our financial flexibility. With that I’ll now hand the call over to Peter for further details of our financial performance.

Thank you, Jean-Marc and thank you everyone for joining the call today. Turning now to Slide 8, you will find the change in adjusted EBITDA by segment for the second quarter and the first half of 2018 compared to the same period last year. For the second quarter of 2018, Constellium achieved €151 million of adjusted EBITDA, an increase of €24 million or 19% year-over-year. P&ARP third adjusted EBITDA of €75 million was €18 million higher than last year. A&T increased adjusted EBITDA by €2 million, to €43 million. AS&I adjusted EBITDA of €39 million increased by €6 million year-over-year. Lastly, Holdings Inc. was €2 million higher than last year due to timing, but in line with our expectations of Agency costs of approximately €6 million per quarter. At the bottom of the page we present the first half of 2018, Constellium achieved €268 million of adjusted EBITDA in the first half of 2018 an increase of 22% compared to the first half of the year -- of last year excuse me. While not on the slide net income for the quarter was €55 million as compared to net income of €15 million in the second quarter of last year. Now turn to Slide 9 and let’s focus on the P&ARP segment. Adjusted EBITDA increased 30% to €75 million. A 3% increase in shipments drove a €4 million increase in adjusted EBITDA as higher automotive shipments more than offset lower packaging volumes. Price and mix was a tailwind of €8 million. This improvement results notably from the 27% year-over-year increase in automotive rolled product shipments. In addition, we benefited from favorable metal costs in the quarter. Costs, improved by €7 million compared to last year on good cost controls partially offset by incremental costs from the ramp up of our automotive programs and lastly foreign exchange translation was a headwind of €2 million during the second quarter. Now turn to Slide 10 and let's focus on the A&T segment; adjusted EBITDA increased 8% to €43 million. Higher volumes drove a €2 million increase in adjusted EBITDA on higher aerospace shipments. TID shipments were limited by manufacturing challenges during the quarter, which we expect to negatively affect third quarter shipments as well. Weaker price and mix and unfavorable metal costs were €6 million headwind. Costs improved by €8 million compared to last year on solid operating performance. And lastly foreign exchange translation represented a €1 million headwind during the quarter. Now turn to Slide 11, and let's focus on the AS&I segment. Adjusted EBITDA of €39 million increased 19% compared to the second quarter of 2017. Volume drove a €7 million improvement as automotive extruded product shipments increased 11%, and other extruded product shipments increased 5%. Price and mix was a €2 million in the quarter, largely driven by our automotive structures business. Costs was a €3 million headwind compared to the second quarter of 2017 primarily due to higher prototyping costs and increased labor costs. Turning now to Slide 12, I'd like to touch on the progress we have made on our cash improvement initiative, Project 2019. You'll recall that there are three pillars to Project 2019; cost reduction, working capital improvement and capital discipline. In cost savings we achieved an additional €7 million of annual run rate savings in the second quarter of 2018, bringing our total run rate to €32 million of savings. While we have made a lot of progress already, I’m confident there are significant opportunities remaining. Let me give you a few examples of cost reduction initiatives that we secured in the second quarter. First at one of our facilities, we identified the potential to optimize the energy management system. The team installed a new smart metering system that allows for better monitoring of energy usage at the site. This action resulted in an annual savings of approximately €0.5 million. Second at another facility the team on site identified a number of smaller initiatives to reduce costs at the plant. These included encouraging recycling and reuse of personal protective equipment, a plan to reduce the consumption of and cost of basic consumables, and the simplification of the wooden frames used to package our finished products. These initiatives resulted also in over half a million of annual savings. Moving now to working capital, as you'll notice our working capital performance was weaker in the first half. Higher metal prices, increased inventory due to security of supply concerns notably around [Rusal] and the continued startup of several operations contributed to this working capital increase. While these are good reasons for working capital to build, we need to do better. We remain confident in our ability to improve our working capital turns. However, we continue to expect working capital growth for the full year of 2018. With respect to capital spending, we expect spending in 2018 to be backend weighted and to reach our guidance of €275 million. We believe this level of spending strikes the right balance between maintaining our assets and investing in our future. The majority of the €100 million to €125 million of growth capital spending in 2018 is going to expand our leadership position and our AS&I business where our spending is linked to firm customer commitments. I want to stress that we remain very focused on capital discipline and that the projects we are investing in come at attractive IRRs and paybacks. Turning now to Slide 13 and moving on to discuss the balance sheet. Our debt position as of the end of the second quarter was €2 billion. Leverage of 4.3 times was down from 5.1 times at the end of the second quarter of last year. Pro forma for the sale of the North Building at Sierre, our leverage at the end of June would be 3.8 times. As you can see in our debt summary, we have no bond maturities until 2021 and our 2021 maturity is very manageable at under 0.7 times our LTM adjusted EBITDA. Our cash plus of amounts available under our committed facilities was €561 million at the end of the second quarter. We are very comfortable with our current liquidity position and our debt profile. I will now hand the call back to Jean-Marc.

Thank you, Peter. Turning to Slide 15, let me share a few end market updates now. On top of the automotive market which as you know is a very important growth driver for Constellium and we maintain our positive outcome for this market. In the long-term we remain confident that increased aluminum usage is secular trend for the automotive market. Aluminum's favorable strength to weight ratio in comparison to steel enables OEMs to lightweight vehicles, thereby increasing fuel efficiency and reducing CO2 and other emissions. Aluminum also a superior energy absorption as compared to steel. And as I've mentioned before, the electrification of vehicles has significant potential for aluminum. Light weighting is absolutely critical for electric vehicles to extend their range, further the metallurgical characteristics I just noted make aluminum a superior solution for battery enclosures. Constellium is well-positioned to realize the benefits of the secular shift to aluminum in automotive. We will continue to closely monitor the markets and will remain prudent with our investments. We will not make incremental investments without firm customer commitments. Turning to the near-term trends in the second quarter of 2018 we still improve total sales year-over-year in the U.S. and in Europe, I would highlight that light trucks, SUVs and luxury cars continue to be in high demand. And I will remind you that we have more exposure to these types of vehicles. Let's now turn to aerospace. Aerospace continues to be a steady market. We continue to see sustained OEM build rates. The back logs of the major OEMs remain near record highs. Just last week I was at the Farnborough Airshow and had constructive meetings with many of our aerospace customers we highlights of our continued strong performance and the importance of continuing our strategic relationship in the face of strong demand in aerospace. On packaging it’s a stable market. In U.S. we expect the continued growth of automotive sheet demand to help tighten the packaging markets over the medium to long-term. In Europe, demand continues to grow based on substitution of aluminum for steel. We also continue to execute on our strategy of expanding into niche products and markets, including transportation, industry and defense. We see continued strength in many of the TID markets that we serve, including the North American transport market as well as defense in both the U.S. and Europe. In the industry end markets in Europe demand for our extruded products remain very strong. On the first quarter earnings call in April, I specifically highlighted uncertainty around global trade. This uncertainty has not abated. On the U.S. types of aluminum and aluminum products, we continue to believe that remedies should be targeted at China and must protect the relationships with our historical trade partners, including Canada and Europe, amongst others. I would note that most of the products we produce are sold in the geography in which they are produced. As a consequence based on what we see today in our best for business model, we expect a relatively neutral financial impact from these aluminum tariffs and from Rusal. More recently and certainly and also a reason in the automotive supply chain. It is far too early to try to predict the outcome. Importantly I would remind you that we work with a wide range of OEMs both in Europe and North America. Further our geography footprint allows us to be local providers to our customers while our breadth means we can support our OEM customers also on a global basis. Overall, I'm confident that Constellium is well placed to continue supporting our customers in their changing environment. We will obviously continue to closely monitor the situation. Turning to Slide 16, we detail our financial guidance and outlook. We expect to deliver a range of 11% to 13% adjusted EBITDA growth in 2018 and from there high-single digit growth in 2019 leading to over €500 million of adjusted EBITDA in 2019. We are very focused as Peter mentioned on free cash flow generation and continue to target targeted free cash flow in 2019. Our targeted leverage ratio is below 3.5 times adjusted EBITDA. Overall I remain optimistic about our prospects of 2018. We continue to execute on our strategy I'm confident we are on the right course. We remain focused on operational execution harvesting the benefits of our investments, disciplined capital deployment and shareholder value creation. With that operator we are ready to open the Q&A session.

[Operator Instructions] And our first question will come from the line of Matthew Korn from Goldman Sachs. You may begin.

Question on P&ARP if I could. P&ARP had a tremendous per ton increase year-over-year and sequentially and going over Peter's chart I see the changes. Are there any onetime effects from mix or other adjustments that provide a particular gain in that quarter? And then as we think about the continuing shift in business towards automotive there is the result you see this quarter is that at a high end of the per ton earnings range? Is that towards the middle? How would you best suggest we kind of build our expectations there going forward?

We are very pleased with the progress we've made in P&ARP 2017 was a year of transition and we're seeing we had a very strong Q1 we're having a very strong Q2 and there is always a bit of give and take in terms of how the business operates. The short answer to your question is no. There is no one off really, I mean and if there is a one off in one direction there is a one off in the other direction. So we feel quite comfortable that if you look at where we are so far in the year in terms of EBITDA per ton we are at a good range that is representative of our current mix. And again as we are ramping up automotive shipments, we know automotive shipments have more EBITDA per ton than canned sheet shipments. They are additive and they are replacing some of them. So overall you should see a [direct step] of our EBITDA per ton.

And Matt the only thing I would add to Jean-Marc's comment is that in that price mix bucket we do have the favorable metal costs there and kind of similar to last quarter that was less than half of that bucket. And the other point to note is hopefully you noticed when I mentioned that you had an offsetting headwind in metal costs in A&T.

Got it, thanks. That helps a lot. Let me just follow-up then on the trade commentary. And Jean-Marc I appreciate your commentary. You guys have been consistent in calling for a fairly -- as far as you can see a neutral effect. Has there been any frictions that you’ve actually so far felt of any substance from the increased trade policy whereas for example is there a meaningful cost drag on shipments you’re bringing into the U.S. from Canada? Are any customers putting in any contingencies as they watch and see on tariffs, is there anything that you are feeling today?

No, not really of note. I mean we do have some shipments from Europe and from Canada. We have got a press in Canada, that's an extrusion press that sell into the U.S. So we have been hit by the tariff. We got some shipments from Europe for some specialty aerospace products. We’re hit by the tariff. We are trying to recover that from customers. It’s going to take a bit of time. We haven’t seen customers really changing their patterns of building and buying and trading. So I think it’s pretty quiet on the western front so far and I think as we go through the year we will be able to offset progressively the little negativity we have felt on trade. So again, that’s why I am calling it neutral because really within six months I think all that will be washed away.

And our next question comes from the line of David Gagliano from BMO Capital Markets. You may begin.

I just have one clarification. As I just look at the full year numbers, high end of the range implies a pretty significant slowdown in terms of the year-over-year growth, I mean it's down about 4% as we have seen at the high end of the range. [indiscernible] I am just wondering what the main reason is for that, for the second half this year?

Hey David fair question, thanks. Well, if you step back, one of the reasons we are implying a slower second half in terms of progression against the prior year is because the first half was so good, right. And I think that’s a pattern that we have seen. If you go back two years, I have been in the job two years, right. EBITDA has been up, if you look at the LTM of two years ago from now 35%, right. So we are really focused on improving this business and we look forward with confidence. But there is a number of things when we have made progress, I think those progress stick is actually a very good thing, right. So everything we have built up is very sustainable and we are looking at the second half of the year as the second half we will be consolidating our gains. Now I will draw your attention to a couple of facts. The first one is we got a very strong A&T performance in terms of EBITDA per ton, right. That performance is higher than what normal level ought to be, right, it should be around a 550 number. So bear that in mind, when you project out in the second half. The other aspect is last year the comparable is quite difficult because last year it’s not a massive amount, right, but it was extremely strong. We produced through November and December at rates that were unprecedented. All of this was to make sure that we could deliver on shipments we had to make to our customers for the end of last year but also some of that was pre-production, so the beginning of the year was so strong, right. So we are not planning for the end of the year to be as strong as what was a pretty strong year at the end of the year. So you add up all these factors and that leads to a commitment we make in the 11% to 13% range.

I am just going to add to what Jean-Marc said that, in our P&ARP business we are also, as we have said, we have completed the capital elements of the automotive readiness program but now we’re kind of ramping up the shipments and there is some kind of cost drag as we ramp up the shipments at Muscle Shoals, which I think we think will weigh on the second half results there.

And finally I mean as I mentioned earlier, in answer to Matt's question about trade, we do have some flows that we need to reorganize to try to minimize impacts of duties that’s going to take us a few months and duties come into effect June 1, July 1 with Canada and all that. So that's going to be a little bit of drag in the second half but very, very modest.

Okay that’s helpful, so just as a sort of a modeling question. As we think about the moving parts here. How should we be thinking about year-over-year volumes in each of your segments in the second half of this year? Margins per ton part that’s more relevant there.

We try to be little bit discreet on these. We have got forecasts from some customers. We got commitments from others, we’re still exposed to spot sales. So given all that I think the common scene you're seeing about us is we are very disciplined in terms of how we use our capacity. And if you look at what we've been doing over the past few years, is we’re not trying to chase every ton, every pound of that, we really want to get paid for the good products we make by customers who appreciate our offer right, product, knowhow, technology, service levels. And we’re trying to increase the value add we’re making, we’re having on top of our products and not materialize that through pricing. So I don’t have a target for shipments, okay. I'm really looking at how do we make the best use of our product for equipment and how do we get the best mix we can on our equipment.

And the only thing I would add there David is if you think about the CALP lines that we are ramping up there we've given you some guidance on the pace at which they will grow so that can give you some sense on that and it's been kind of at a fairly steady pace right. So, those give you at least some of the beginnings of it but I completely agree with what Jean-Marc is saying, this is really about, value-added tons -- or the value add not just the tons.

Okay. Thanks. Appreciate it. Just real quick last related question, how much of your volumes for the second half are actually committed under contracts at this point? Probably all of them right is that fair to say or.

We still have a little bit of few openings in October, November and December if you're interested. But place your order quickly.

And our next question comes from the line of Jeremy Kliewer from Deutsche Bank. You may begin.

Just a question on your '19 guidance, it remains unchanged in the high single digits, but net-net on the 2018 growth that's about €15 million to €20 million tailwind. So can you just walk us through how much of that is at risk or contracted or how you want to play them? Just wondering what the [indiscernible].

Just to make sure I understand your question, because we are raising the bar in 2018 and we’re keeping the high single digits into 2019 mechanically makes the 2019 guidance go up?

Correct, and how much of that is at risk just because of possible sales versus contract?

So there’s some spot sales opportunity for us in 2019, it’s reasonably limited, and we’ve a history of putting out a guidance that we meet, so we feel very confident about the guidance we’re giving.

And then Peter if I heard you correctly you had some headwinds from industrial [rates] in the quarter, could you quantify those headwinds and how much of that…?

No actually -- yes what I said is that we had some headwinds in A&T on the metal side, and so it was really about -- it was that I think you’re referring to.

And could you quantify those and how much is going to bleed over into 3Q?

And I think Jeremy is referring also to the comments you made about industrial issues in one of our plants where we had a little blip like those things happen and one way to look at it, if you look at our TID shipments in the quarter, they’re slightly up. But they’re less up then what historical performance would have suggested, by maybe 2,000, 3,000 tons. So maybe -- so if you apply an EBITDA per ton and a little bit more because it’s contributing right at the margin you’re talking of a couple of median of headwinds in -- due to that industrial issue. Now when I look at it, those things happen, when you always have in large companies like ours a piece of equipment that fails and it’s costing you a little bit of sales during few weeks. But the bright side to it is this is an area of the systems -- the considered systems which we’ve identified for upgrade capsule, that is going to happen in the next couple of years which over time will make us much more reliable in that plant. And I think that’s part of the story about Constellium in the future, continuing to well maintain our assets, restore them to a state-of-the-art capability and that will help us avoid those blips in the future.

And our next question comes from the line of Piyush Sood from Morgan Stanley. You may begin.

A couple of questions for me. So the year-over-year is still high single digits for next year, but you run into tougher comps into the first half of the year in 2019. So based on the ramp ups and the year-to-date performance would it be fair to say that next year's growth will be more heavily weighted towards the second half of 2019?

Mathematically I see why you are asking the question. I think at this stage, I will stick to an overall guidance for the full year and not break it down by quarter. But -- so that's the best answer I can give at this time, Piyush.

Okay, cool. And Peter in your comments you have talked about costs in the quarter. So I think in the press release there is something around favorable metals costs in I think in the P&ARP segment and unfavorable metals costs in the A&T segment. I just want to understand the drivers of this difference.

Yes, so, again, I’ll just start by saying remember we pass through the metal virtually all of our sales right. But we do have certain instances where we do benefit and we have certain instances where there is a cost. And in P&ARP as we said in the past kind of the increased scrap spreads and the ability to use more UVCs and so forth led to some incremental profit in our P&ARP segment. On the A&T side, we had a different situation where some of our sales in the A&T we don't have the ability to pass through the Midwest premium. So that created a bit of a headwind on the metal side. While the two don’t perfectly offset each other they are quite close, and hence draw us to the conclusion that we've consistently said that you know, when you factor in recycling profit less melt loss, it's not a big driver of our overall improvement in profitability.

And last one from me. You touched on working capital a bit but just looking for a few more details. So the build in both inventories and receivables and seems like the payables have been increasing at the same time. Just want to understand the moving pieces here. And if you would expect them to revert anytime soon?

So I’d say that in this quarter and in this half by far the biggest driver of our increase in working capital is around inventory right. So there's been some movement around the margins on the payables and receivables. But so it acknowledges that, but in general I think most of the move is around inventory and for the reasons that we had commented before. And I think looking at it we know why we did it right. And we think we can take some action, in fact we've already started taking actions to bringing the inventory back into line with what we think is an appropriate level.

And our next question comes from the line of Josh Sullivan from Seaport Global. You may begin.

Just the recent C series guess also known as the A200 now or is at Farnborough. What does the supply chain of aluminum-lithium look like? The outgoing Airbus CEO, sees a scenario where both Canadian and Alabama A200 lines are eventually full capacity. So just trying to get a sense of the potential pull-through on aluminum lithium for Constellium and maybe what the state of the supply chain is right now?

Yes, Josh I mean it's good news for us. We are in discussions with Airbus to evaluate what it means. We believe we are well-placed to supply Airbus, the A220 needs as we see them now. We are -- obviously this is strategic supply for Airbus and for us as well a strategic relationship. So I think we are in good shape on a go forward basis. If you're question is about do we need further investments in [airway] it's too early to tell. But it's good news for us.

And then can you just update us on the progress of the Bowling Green CALP line, I think last quarter maybe give us some utilization levels any update on that?

Yes, so I'll be quite additive. We still are seeing a difficult ramp up it's been improving over the quarter and June was actually our best months ever, so we are making some progress but it's two steps forward one step backward so we are still not stable.

And then just one last one, I think you mentioned in the prepared comments I think about higher prototyping costs. Are you guys going after some type of new work or what's driving that?

This is good news right and the more prototypes we make the more business we win and it is actually the story. So yes that's in our AS&I segments where we make [thoughts] and very often prototyping is a way to demonstrate to the customers that we can come up with a better engineered solution that what their blue prints call for. And so that's also a way to justify or not justify but showcase the value add we bring to these customers and that's also a big reason why we are getting all those nominations €760 million in the first half is really a great number for us. So we are very pleased with it and by the end of the day we get that perhaps win contracts we get with the customers so we are very pleased with it.

And our next question comes from the line of Christian Georges from Societe Generale.

The first one on this automotive U.S. market you were referring to earlier and I'm reading that companies like BMW are considering potentially [indiscernible] to at least reduce production of SUV for instance and even move that production potentially here away from the U.S. And whether your analysis that could be penalizing for you or whether it could be offset by all the production there and so that forward that we should worry about is? That's my first question. And my second question is in your efficiency costs we saw I think back to back $9 million. That has gone down in the first quarter, actually your [indiscernible] and I'm just wondering is that amount supposed to be falling rapidly or should we expect that there are less remain sometime.

So on the first question and Peter will address the second one. I think it's very difficult to know what the automakers will do because they don’t even have -- nobody has a actually clear picture of what the U.S. trade or the tariffs could look like. So I think it is way premature to try to build scenarios around what could happen and then what our reaction would be. I think I go back to the fundamentals which is that if there are trade barriers then there will be more incentive for local production and we are a local company or a local company in Germany or Europe and I think that gives us some kind of shield from what could happen on the trade side. But again we were in a close connection with our customers, anything in terms of decision that we they have made or orientations that they are taking, so I can’t comment further on your question. Peter?

And on your second question, so I would say you should expect the losses to continue at about the pace that they been out in the second quarter. First quarter, which you made reference to we did some debt restructuring at the joint venture which resulted in a gain at the joint venture and as a consequence, the share of the loss for Constellium was a lower number. And that's why it was lower in the first quarter.

Because we maintained the same pace in H2 but contractually over time these losses should weaken or disappear or are they structural?

No absolutely so, as Jean-Marc said in prior calls we are working really hard to get the joint venture on track. And I think we feel like we're on the right path here. So, over time they should definitely diminish. And then at some point turn positive but as Jean-Marc said we’re not declaring victory yet.

Because if you’re looking at profit out of that JV within your P&ARP right there is proportional JV gain that goes directly to the P&ARP division and then you suggest you’re thinking that profit that accounts as a joint venture?

Well remember the joint venture is not consolidated, so we may get dividends from the joint venture. But it's not consolidated into our -- any of our business units.

And Christian we are selling the feed stock the [coil] to the joint venture and we get paid for it. So there is a profit on that sale that is in part and comes in EBITDA right and then you got the JV results and which that gets consolidated.

Of course this is what I meant when I said there is a profit from the business in your P&ARP division.

I am sorry.

As we ramp up those shipments it's all P&ARP [indiscernible] but the JV is still making a loss at the moment as we ramp it up. Which should begin effectively three year ramp, we said we’re behind the curve, so now at the year and half of the three year ramp, we would be anyway less than 50% utilized and you can’t make money on the line that is 50% utilized. So I mean it's all normal, it’s not pleasant but it's completely normal and flat. We are just a little bit behind but we will be catching up between now and 2020.

And our next question comes from the line of Martin Englert from Jefferies. You may begin.

Just a quick question here on second-half implied EBITDA and you already touched on this quite extensively on some of the puts and takes here. But any seasonal maintenance that you're expecting in the back half of the year that could be weighing on EBITDA across your segments?

Yeah, Martin that's a good question, there is seasonality and which we didn't have much of last year and as you know and our plan today is to take advantage of this seasonality to do more maintenance at the end of the year. So obviously, as we do more maintenance we ship less, we have more cost. So that's part of the reason why the growth year on year seems a bit slow. So that is correct observation.

Okay. So any [goalposts] on about how many millions may be that could be weighing on second half?

I think, well, last year -- I will go about this in a second related fashion. Last year when we gave guidance for the full year in October we were very close to the end of the year. We saw that demand was strong but we hadn’t pulled out all the stuff to meet all the demand we could. We gave guidance and then we ended up higher than guidance. So maybe that delta between the guidance we gave and what the end of the year ended up being is may be a proxy for what could be or not be this year.

And our next question comes from the line of Sean Wondrack from Deutsche Bank. You may begin.

Just a couple of quick follow-ups for you. Peter I guess this one is for you. You said inventory is the biggest mover in working capital, obviously operating cash flow before working capital has really been strengthening lately. The increase in inventory is this a function of sort of getting ahead of some of the tariff -- potentially tariff related liabilities or does it have to do with moving any of your product from Europe to the US, can you just touch on that a little bit more please?

I will start and Peter will correct me. So the inventory ramp up, there’s three main reasons. In terms of dollar value, with LME and premiums going up, it goes up, right, that’s mechanical. Then there is uncertainty around trade not because of tariffs so much but because of sanctions that are enacted against Rusal. When they got enacted in April, it was going to be so sudden that all of a sudden we clearly and we made the point, right, we are not going to run out of metal, to reiterate and the Rusal is 2% or 3%, we wanted to cover all the bases and make sure that whatever happens we’re not going to run out of metal. That has caused us to buy more, buy more at a higher price as well to make sure that we would ensure continuity of supply to our customers. So that issue seems to be going away and certainly with the delay of the presentation after the sanctions through October that has helped the supply chain globally to readjust. So we don’t see a problem anymore. But yes, we do have more metal as a consequence which we will slowly process through our facilities. And then the other big reason which we’ve commented on a number of times is we are ramping up substantial investments, right. If you think of it from 2016 to 2020, we will be tripling our automotive shipments for auto body sheet, right, from 60 to 80 to 280. We are -- we used to have €500 million business in auto structures, we are winning €1 billion of business and more every year. So that business is doubling. And as those facilities, production lines ramp up, we are building up inventory, which is a good [problem] to have. So these are the main drivers behind it. One of them, the Rusal situation will go away progressively over the year. But the ramp up of our lines continues into 2019 and will continue into 2020 and 2021 because again we are investing every year now €100 million, €125 million of growth capital. And as we invest growth capital now, it starts paying off two years from now and that’s when you start ramping up working capital again, and inventory. So that’s a different thing that play in our working capital situation. Now that being said, Peter isn’t happy with it and we got to plan to work on it.

And then just transitioning just for one second when you think about the proceeds from facilities of €200 million, I think you commented in the press release it's going to strengthen the balance sheet. Does that mean paid down any ABL in cash or the ability to proactively redeem some of them, sort of?

So, we’re very happy with this transaction, we’re very happy to close and we get the money and we’re going to be super, super disciplined with the use of this money. It’s going to go towards deleveraging the company and reducing our debt. The details of which Peter can shed some light and we have not fully decided in what we do, but we do want leverage to come down lower than 3.5 times, so that’s the path we’re on.

Absolutely just in terms of -- we haven’t made any final decisions in terms of kind of what we’re going to do. We’re going to kind of look at the whole capital structure stack and figure out kind of where the best application is. I think it's reasonable to assume in the immediate term, we will use the proceeds to reduce our revolvers and then we’ll kind of selectively look at other places in the capital structure where we can kind of cost effectively use the capital.

And then the last one I am sure you thought you’d be getting this question, is there any update on the second CALP line in the U.S.?

Well I wasn’t expecting this one Sean. We -- ideally there will be a need for other CALP lines further to the ones that Novelis has announced, [got three in] Kentucky there would be a need for further CALP lines in the early 2020, so I think 2021, 2022 that kind of the timeframe. We are interested in building of second CALP line, that’s our plan but we’ll do that only if we’ve proper margins, substantial customer commitments in terms of volumes so that we can anchor the CALP line on through profitable derisked business. Under those conditions we’ll put a second CALP line, and obviously that by that time the first CALP line will be running brightly everyday and generating a lot of EBITDA for us.

And have you seen more interest in these -- in the CALP line, or has it been stable as the months have kind of progressed?

I think I’ll stick to my answer, I mean we’re progressing but it's kind of two steps forward, one step backward. We’re very focused on getting it up and running, at capacity levels and that’s what we’re watching out.

And our next question comes from the line of Matthew Fields from Bank of America Merrill Lynch. You may begin.

I just wanted to press on working capital a little bit, just because I know you have talked about inventory build and those are great reasons to use cash. But the receivables use of cash is actually double that of the inventories. Are auto companies or your customers sort of withholding payments because they're nervous about trade or tariffs, or what not or what's going on there?

No, Matthew, so [indiscernible] we are watching our delinquent payments very closely and we got a surprisingly low level of delinquent payments. You got to look at it also in light of the payables right, I mean again when metal prices go up those payables and receivables go up. And lastly, as you know we got some contracts in can sheet which have automated increases in our payment terms is our legacy contracts that’s when they will get freed up. But that has driven also some increase and will drive some increase in '19.

And the last thing is we have also reduced factoring in the half. So that’s also kind of led to an increase in receivables that are on the balance sheet.

Okay, great. That's helpful. I think some people look at those factoring liabilities as a head towards your EV. So that might help your equity value. Also aside from the fact that you [flew] past it with the 200 million influx from Sierre, why the reduction in the net leverage target to 3.5 from 4?

Because we believe we need to be lower leverage as a company. We want to be a BB. And we believe this company -- once we can operate there is no problem at total times right. We have demonstrated it. We want to be in a place where we have got utmost financial flexibility, and we will be a sweet spot for our shareholders is leverage in the 3 times to 3.5 times.

Once you get to that 3.5 times leverage which may be next year or the year after. Do you like your portfolio where it stands? Are there any holes that you might like to fill by buying any businesses in whole or in part?

Well, fair question. I think we have a plethora of opportunities organically and these tend to be under our control. They don’t come with an acquisition premium. They are much less risky because we know what we are investing in. So we got a strong bias towards organic growth putting all [caps] in a very discreet fashion into our factories, making our factories stronger, better, more resilient downturn, more capable in terms of the product range they make, the reliability of their operations and that's where we see the best return on investment. So I’m not saying there is nothing that could be of interest as of, never say never, but I think we've got a pretty substantial portfolio of activities. Again, we want to be focused on high value added products. We are one of the few that have both extrusions and rolled products, we think it's a very attractive combination with automotive growth. And we want to be focused on what we do well and again, the opportunities are plentiful within our four walls, we will keep on harvesting them.

And our next question comes from the line of [indiscernible] from Credit Suisse.

You talked a little bit about the plans to pay down debt and obviously with the lower leverage target you'll get there in part with EBITDA growth and in part with this absolute debt reduction. But can you talk a little bit more in terms of how much more debt on an absolute basis you would want to take off as balance sheet and how you think about leverage over the course of the cycle?

Yes, I mean look I think we've been fairly consistent in saying we want to be a double BB type of credit, I think that's the right spot for a company of our size. I think to get there, we're going to probably have to be somewhere in the low 3s and you know I would suspect that we will end up kind of when times are good and we are generating robust cash flow we will drift down probably below 3 and then we will probably be capped on the high end that we will try to keep at somewhere around 3.5. So I think that's kind of the right range that we would shoot to stay at.

And then with the asset sale pro forma I think you guys are in the high 3s at this point. Given where your ratings are today have you guys had any updated discussions with the rating agencies towards getting some positive ratings actually?

We maintain a very regular dialog with the rating agencies, but we have nothing to report on this call in terms of any changes. But we talk to them all of the time both Moody's and S&P.

All right. Well, thank you, everyone for your interest in Constellium. I'm very pleased with the quarter and I'm very pleased with the half year and as I mentioned earlier in my remarks, we've got plenty of opportunities. We are half way through our cycle of significant investment [Indiscernible] to name just one, continuing to deliver on that. We will continue to improve our financial performance and our increased story. So I look at the future with a lot of excitement and confidence and I thank you very much for your attendance today and look forward to reporting on Q3 at sometime in October. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.