Constellium SE (CSTM) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Constellium Fourth Quarter and Full Year 2018 Results 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 follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference, Ryan Wentling, Director of Investor Relations. You may begin.

Thank you, operator. I would like to welcome everyone to our fourth quarter and full year 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. I would like to start by thanking the Constellium team for their efforts in making 2018 a success. In what was a very eventful year, with trade wars, tariffs, sales sanctions to name a few, our team remains focused in executing on our strategy and I am proud of the significant progress we’ve made in 2018. We delivered another year of double-digit adjusted EBITDA growth with each of our business units delivering record annual adjusted EBITDA. In July, we completed the sale of the North Building at Sierre to Novelis for EUR 200 million, which accelerated our deleveraging. In December, we announced the acquisition of Bowling Green, which provides us direct access to and a larger share of the attractive and growing North American Auto Body Sheet market. Lastly, I was pleased to have the opportunity to finish 2018 by spending time with many of you at our Analyst Day in December. I hope the Analyst Day helped you understand why I am so excited about the future of Constellium. Our team is focused on delivering the 2022 targets we set out of over EUR 700 million of adjusted EBITDA and leverage of 2.5x. Overall, I am proud of what we achieved in 2018 and I am eagerly looking forward to 2019. Now on Slide 5, you would see some of the highlights from our full year 2018 performance. Shipments were 1.5 million metric tons, that’s up 3% compared to 2017. We continue to successfully execute on our strategy of increasing shipments to the automotive market. Automotive shipments increased 16% compared to last year. Our revenue increased 9% to EUR 5.7 billion. This was primarily due to higher shipments, higher metal prices and improved price and mix. Remember, we substantially pass-through changes in metal prices. Our net income of EUR 190 million compares to a net loss of EUR 31 million in 2017. Our net income in 2018 includes a benefit from the gain related to the completion of the Sierre transaction. Adjusted EBITDA was EUR 498 million, up 11% compared to year – to last year and in line with the guidance we provided at our Analyst Day in December. Excluding the effects of the pension expense reclassification, our adjusted EBITDA was up 12% compared to last year well in excess of our initial high single-digit guidance. Leverage was 4.0x at the end of December, that is down from 4.2x at the end of last year and we remain committed to further deleveraging. We are maintaining our adjusted EBITDA and free cash flow guidance for 2019. We expect adjusted EBITDA growth of 8% to 10% and free cash flow in excess of EUR 50 million in 2019. Turning to Slide 6, you will see some of the highlights from our fourth quarter performance. Shipments were 370,000 metric tons, that’s up 6% compared to the fourth quarter of 2017. Our revenue increased 12% to EUR 1.4 billion. This was primarily due to higher shipments and improved price and mix. Our net loss of EUR 57 million compares to a net loss of EUR 80 million in the fourth quarter of last year. Our net income from the fourth quarter of 2017 included the effects of the refinancing in that quarter and the U.S. Tax and Jobs Act. Adjusted EBITDA was EUR 104 million, that is up 1% compared to the fourth quarter of last year. Project 2019 run rate cost savings increased by EUR 5 million to EUR 43 million. Our target for Project 2019 run rate savings, which we communicated at the Analyst Day, remains at EUR 75 million by the end of 2019. Lastly in the fourth quarter, we entered into an agreement to acquire UACJ’s 49% interest in the Bowling Green joint venture for $100 million plus the assumption of debt. This transaction closed in January 2019. With that, I’ll hand it over to Peter to discuss our financial results.

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 fourth quarter and the full year of 2018 compared to the same periods of last year. Before I begin, I’ll remind you that our adjusted EBITDA figures have been retrospectively adjusted to account for the change in pension accounting. The effect of this reclassification of pension expense was to increase adjusted EBITDA by EUR 17 million in 2017 and EUR 15 million in 2018. For the fourth quarter of 2018, Constellium achieved EUR 104 million of adjusted EBITDA, in line with the prior year. P&ARP adjusted EBITDA of EUR 55 million increased EUR 11 million compared to last year. A&T adjusted EBITDA of EUR 38 million increased by EUR 1 million. AS&I adjusted EBITDA of EUR 21 million decreased by EUR 7 million. And lastly, Holdings and Corporate was EUR 10 million, EUR 5 million higher than last year due to timing. At the bottom of the page, we present the full year of 2018. Constellium achieved EUR 498 million of adjusted EBITDA, an increase of 11% compared to last year. P&ARP adjusted EBITDA of EUR 243 million increased EUR 39 million compared to last year. A&T adjusted EBITDA of EUR 152 million increased by EUR 6 million. AS&I adjusted EBITDA of EUR 125 million increased by EUR 5 million. Lastly, Holdings and Corporate was EUR 22 million, flat compared to last year. And we expect agency cost of EUR 20 million in 2019. Now turn to Slide 9 and let’s focus on the P&ARP segment. Adjusted EBITDA increased 25% to EUR 55 million. Shipment performance was strong during the quarter with higher shipments above automotive and packaging rolled products. Price and mix was a headwind of EUR 8 million and was weaker across automotive, packaging and specialties. We view this as temporary and we would not expect this to continue to affect results in 2019. Costs were a tailwind of EUR 8 million compared to last year as good cost control and favorable metal costs were partially offset by higher maintenance and costs related to our automotive ramp up. Looking now at the full year bridge for P&ARP, it is clear the business performed well in 2018 with solid improvements across volumes, price and mix and costs. As you know, we are in the process of ramping up our CALP lines at Neuf-Brisach and Bowling Green. The FT3 line at Neuf-Brisach is running well. We are highly focused on integrating the Bowling Green – integrating Bowling Green into the Constellium family and we are very encouraged by the progress that the plant continues to make operationally. We continue to expect to ramp-up both of these lines through 2019 with full production in 2020. Now turn to Slide 10 and let’s focus on the A&T segment. Adjusted EBITDA increased 2% to EUR 38 million. Shipments increased 7% on solid operational performance with increases in both aerospace and TID rolled product shipments. As we noted last quarter, we expect TID shipments to gradually improve after the manufacturing challenges we experienced in 2018. Price and mix was a headwind of EUR 3 million due to a difficult comp with a strong aerospace mix in the fourth quarter of 2017. Cost was a EUR 2 million headwind during the quarter, largely due to increased labor costs. Turning to the full year bridge for A&T, 2018 volume increases were partially offset by slightly weaker price and mix. The team did a nice job controlling costs during the year, and as we expected, successfully consolidated the margin gains achieved in 2017. Now turn to slide 11, and let’s focus on AS&I. Adjusted EBITDA decreased 25% to EUR 21 million. Shipments increased 1%, despite a very strong fourth quarter in 2017, as we continued to ramp up – the ramp up of our investment in automotive structures and gained further operational efficiencies in industry. Price and mix was a tailwind of EUR 1 million. Cost was an EUR 8 million headwind due to higher costs related to new product launches, the expansion of our footprint and higher labor costs. For the full year of 2018, we experienced broad-based strength in volumes and improved price and mix. The cost headwinds during the year are related to the factors that I just noted. During 2018, we achieved EUR 1.3 billion of nominations in automotive structures. As we noted previously, 2019 will be a year of digestion and execution on the projects we have, therefore, we expect nominations to fall below the EUR 1 billion level, we experienced in 2019. While we highlighted last quarter that AS&I adjusted EBITDA would be down in the fourth quarter, we are not pleased with this result. We are committed to starting these operations up successfully, and we know what needs to be done. While we expect adjusted EBITDA to be lower year-over-year in the first quarter, we expect AS&I performance to improve over the year, and expect to show adjusted EBITDA growth for the full year of 2019. Turning to slide 12, I’ll update you on the cash improvement initiative project 2019. There are three pillars to project 2019, cost reduction, working capital improvement and capital discipline. On cost savings, we achieved an additional EUR 5 million of annual run rate cost savings during the fourth quarter of 2018, bringing our total run rate to EUR 43 million of savings. We remain confident in our ability to deliver on the EUR 75 million of annual run rate savings by the end of 2019. Let me give you a few examples of cost reduction initiatives that we secured in the quarter. First, at one of our European facilities, we reduced the percentage of primary ingot use in our cast house. This was the result of actions around process improvement, best practice sharing and the coordination between different parts of the plant. This action resulted in annual savings of slightly under EUR 1 million. Second, at one of our U.S. facilities, our procurement team negotiated better rates with some of our maintenance contractors. This action resulted in annual savings of roughly EUR 0.5 million. Now, let’s move to trade working capital. We continue to expect working capital to be a use of cash, much of this is connected to the substantial growth in our business. This is a good reason for investment and it will continue. We are, however, working hard to offset some of this growth with working capital reduction across the business and we believe this represents a meaningful cash improvement opportunity for the company. We are very confident in our ability to achieve this. Separately, you may notice that we reduced our factoring balance by EUR 25 million in the fourth quarter. We expect our factoring balance to return to the level, we have maintained for the past several quarters. And I want to assure you, that our free cash flow guidance of over EUR 50 million assumes our historical level of factoring. With respect to capital spending, we expect spending in 2019 of EUR 265 million, including Bowling Green. As previously noted, we believe this level of spending strikes the right balance between maintaining our assets and investing in our future. I want to stress, that we remain very focused on capital discipline and that the projects, we are investing in are linked to firm customer contracts and come at attractive IRRs and paybacks. Let’s turn now to slide 13 and discuss the balance sheet. Our net debt balance – our net debt position at the end of the fourth quarter was EUR 2 billion. Leverage of four times was down from 4.2 times at the end of last year. I will remind you, that due to the adoption of the new lease standard IFRS 16, our net debt balance will increase by EUR 100 million to EUR 125 million when we report our first quarter earnings. The approximately EUR 25 million to EUR 30 million of related incremental adjusted EBITDA will be recognized over the course of the year. The acquisition of Bowling Green will increase our net debt by approximately EUR 160 million and we expect leverage to return to four times or better by the end of 2019. As you can see, in our debt summary, we have no bond maturities until 2021 and our 2021 maturity is very manageable at 0.6 times our LTM adjusted EBITDA. Our cash plus amounts available under our committed facilities was EUR 669 million at the end of the fourth quarter. We are very comfortable with our current liquidity position and our debt profile. And let me now turn it back to Jean-Marc.

Thank you Peter. Turning now to slide 15, let me share a few end-market updates. I’ll start with the automotive market, which as you know is a very important growth driver for Constellium and we are confident for – the increased aluminum usage is a secular trend for these markets. Aluminum’s favorable strength to weight ratio in comparison to steel, enable’s OEMs to lightweight vehicles, thereby increasing fuel efficiency and reducing CO2 and other emissions. Aluminum, also a superior energy absorption properties as compared to steel. And as I’ve mentioned before, the electrification of vehicles has significant potential for aluminum. Constellium is well positioned to realize the benefits of the secular shift to aluminum in automotive. Turning to the near-term trends. The North American Automotive SAAR is expected to decline slightly in 2019. European auto sales are expected to grow slightly in 2019, continuing the trend of recent years. I would highlight that light trucks, SUVs, luxury cars continue to be in high demand and I’ll remind you that we have more exposures to these types of vehicles. As far as Constellium is concerned, we continue to experience strong demand across both our rolled products and our extruded products platforms. However, we continue to closely monitor the market. We have been and will remain prudent with our investments. As I have noted many times in the past and as Peter just said earlier, we will not make incremental investments without firm customer commitments. Let’s turn now to aerospace. Aerospace continues to be a steady and attractive market. The backlogs at the major OEMs remain near record highs and we see sustained OEM build rates. In packaging, we continue to have a stable market. In the U.S., we expect the continued growth of auto body sheet demand to help tighten the packaging markets over the medium to long term. In Europe, demand continues to grow based on continued substitution of aluminum for steel. We have also seen increased focus on sustainability. Aluminum cans are increasingly preferred solution over glass or plastic packaging. Remember, aluminum is infinitely recyclable, and keeps the same properties after recycling. Constellium is well positioned to benefit from this trend as a significant producer of can sheet, in both North America and Europe. We 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 and markets in Europe, demand for our extruded products remains very strong across markets like rail, transportation and industry. So turning to slide 16, we detail our financial guidance and outlook. We expect to deliver a range of 8% to 10% adjusted EBITDA growth in 2019. We are targeting over EUR 50 million of free cash flow in 2019. Our 2022 targets are over EUR 700 million of adjusted EBITDA, and the leverage ratio of 2.5 times. We remain focused on operational execution, harvesting the benefits of our investments, disciplined capital deployment and on shareholder value creation. I’m very optimistic about our prospects for the future and I’m looking forward to delivering another strong year in 2019. With that operator, we will now open the Q&A session.

Thank you. [Operator Instructions] Our first question comes from the line of Matthew Korn with Goldman Sachs. Your line is now open.

Hey, good morning everyone. Thanks for taking my questions.

Sure. Good morning Matt.

So on shipment growth – good morning – so expectations for shipment growth in 2019 what’s the reasonable expectation overall, given your contracts and given your capacity available? I think, previously you said to think linearly in terms of the ramp of the CALP lines as we move through 2020. Is that still valid? And then how should we think about capacity utilization levels across your whole platform today, ex those CALP lines? Thanks.

Yes. So yes, we continue to see steady demand and increases. So, in rolled products in CALP lines, specifically, we see there’s always a little bit of seasonality, right, in terms of our OEMs builder cost, but we see pretty linear and we are catching up in Bowling Green, we are seeing some good progress on the operation side. So, as you remember we said – absolutely said, Bowling Green a little bit behind, that gap is closing, and we will be at full production rates end of this year, early 2020. So, reasonably linear. In terms of – on the extrusion side, on the automotive structures side, the ramp up of our investment as you have noted, it’s a bit lumpy, so nominations come, but depending on when you have to start the plant or the line, it can be a little bit behind, a little bit ahead and not be exactly linear, and that’s what we’ve experienced in Q4 and that’s what Peter alluded to, we’re going to continue to experience in Q1, Q2 of next year. So, a little bit back end loaded on the auto structures, I would say in 2019. And finally to your question about capacity utilization outside of the CALP and lines, we are running pretty full. We actually saw some strong packaging shipments, for instance in Q4. We are running pretty full, but at the same time we’ve got as Peter Basten highlighted during the Analyst Day, quite a bit of potential to debottleneck our facilities, and increase the throughput and therefore the shipments. Given the fact that we see pretty strong markets ahead of us we’ll try to make – take as much benefit of the situation as we debottleneck and sell more.

Thanks. That’s super helpful. Let me try to squeeze in just one more. As to the growth spending – for the growth spending – the growth capital this year, outside of the CALP lines, is there anything notable about where you’re spending it? Anything notable across facility expansions, new plants in the near-term horizon that we could understand where that CapEx is going? Thanks.

Yes. I think the story is very much the same as what we’ve said in the past. So, the bulk of the gross spending is going into our AS&I segment – into a number of different projects there as we’ve described in the past. And then, there are some modest amount of gross spending going into the other two business units, but most of the growth spending is going into AS&I.

Yes. And that spending is moderated, right, EUR 275 million last year, EUR 265 million this year including the Bowling Green, which we didn’t have in the past. So, you’re seeing a 10%, 15% reduction in growth capital, and we don’t anticipate to open new plants. I mean, everything has been announced and it’s really about ramping up what we have already announced and delivering the goods.

Thank you, gentlemen. Good luck.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Josh Sullivan with Seaport Global. Your line is now open.

Good morning.

Good morning, Josh.

Just, one of the elephants in the room, one of your larger competitors is exploring some strategic actions. Is there any way, you can comment on your appetite at this point for any transformative combinations?

We see a lot of transformation available within our four walls with the execution of our strategy, and a lot of value creation. And as you know, the value creation that is within your walls is safer than big external endeavors. So that’s what we’re really focused on. Now, that’s – and that’s what the whole company is working towards. That said, we’ll do whatever is right for the shareholders at a point in time.

Okay. Fair enough. And just one on the sheet market. Looking at the North American sheet market, there have been some comments about sheet suppliers struggling to provide some quality metal in 2018. I guess one, did you have any issues or two is that an opportunity for your wise assets to step into that gap?

So, as I already said earlier, the very strong packaging shipments and we’re full, right. So that there is no opportunity for us. And in terms of claims and all that been – it’s a normal – it’s a normal aspect of life in business, right, you get claims. So, we were getting claims and nothing unusual this year, same as prior years. So, for us, we don’t see it as a threat or an opportunity.

Okay. Thank you.

Thank you. Our next question comes from the line of Martin Englert with Jefferies. Your line is now open.

Hi, good morning, everyone.

Hi Martin.

Have you developed or worked on any strategy in the event the U.S. administration would pursue an auto related 232 import tariffs against the EU I guess, do you have some optionality to qualify ABS and other auto products for U.S. platforms, in the event you see a shift in demand?

So, no, I mean, as you know, most of what we produce locally is sold locally, right, so we are not directly exposed to these 232 tariffs, right. If there is a – it’s very difficult to speculate what will happen out of the preliminary report that has been put on the President Trump’s desk, in terms of an action or any action will be taken. We are ramping up the CALP line in Bowling Green. We are full – well, we are full. As we’ll ramp up, we continue to being full and we will be full by 2020. So, no, there will not be additional opportunity for us to produce more out of the existing assets than what we already have in our plan.

Okay, thanks for that color there. And then, just quickly touching on the U.S. common alloy sheet market there, the margins have been fairly robust. I know the company has fairly minimal participation, but can you talk about your capability to participate there out of Ravenswood and whether you have any excess capability to be supplying from the euro assets and importing into the U.S. market?

Yes. So, we have a limited – as you point out, limited participation in these markets. We are very focused on making sure we develop – we maintain and continue to develop long-term valuable relationships with large customers, right, both, in packaging, in aerospace, in auto. So, even if there is a quick buck to make, to make it simple in one market, I will not budge from this tradition of really having solid, deep relationships with our customers. That being said, there can be opportunities at the margin, but as I said, we see pretty strong markets I mean in Aerospace, Ravenswood is pretty busy. The market is quite good. If you look at – I commented on the auto lines are quite good, they are quite full. Packaging is doing quite well, so Neuf-Brisach is quite full. So, at the margin, there may be 1,000 tons steel there that can be shipped extra into this market on an opportunistic basis, but that’s what it is. So, it doesn’t represent a big opportunity for us.

The only thing I would add, Martin is that we are seeing kind of the knock-on effect of the common alloy sheet pricing, impacting some of the TID pricing. So, some of that’s kind of trickling through into our TID pricing.

Okay. Thanks for all the color there, and congratulations on the strong results.

Thank you.

Thank you. Our next question comes from the line of Jeremy Kliewer with Deutsche Bank. Your line is now open.

Hi, guys. Good morning.

Hi, Jeremy.

With about 0.5 million tons of auto sheet to come online in the U.S. by 2020, how confident are you guys in the margins at Bowling Green to continue, once the original life of model contracts roll-off?

I am very confident, and without going into the specifics of commercial discussions. As I’ve mentioned, a number of times that we – I believe our pricing tends to be a bit on the low side, and I see the opportunity to renegotiate contracts, as a positive opportunity and not a threat for us.

All right. Thank you. And then regarding the European beverage can sheet market. It seems like the Chinese have come in there or they are planning to with the recent announcement of CP and CJV plant in Belgium. So, is there any, I guess concerns or anything about losing market share or imported can sheet kind of replacing some of your domestic supply?

I mean, you always have to be careful, right, about definitive statements about the future, right. I will just note the following few facts. Before the 232 tariffs, China had been exporting can sheet into North America for more than 10 years, maybe 12 years. And that remained a very small player maybe 2%, 3% of the market and the reason for that is, once you have to cross over the Rockies, they’re not competitive anymore. Despite all the subsidies that are given and it’s part of the OCG report by the way to the Chinese aluminum industry. So, going into Europe, which is just as far away, more fragmented in terms of market – regional markets than the U.S. with duties, there’s a 7.5% duty, by the way, to enter into Europe. I think it’s quite difficult. So, there will be some Chinese can sheet in Europe, for sure, it’s a very healthy market, it’s growing, we are busy. As we are ramping up auto body sheet, we have to give away some can sheet volumes. So, that will create some space for some competition, that is a fact, but I don’t think it fundamentally changes our outlook on the markets.

All right. Thank you for the color.

Sure.

Thank you. [Operator Instructions] Our next question comes from the line of Piyush Sood with Morgan Stanley. Your line is now open.

Hey. Good morning, guys.

Good morning, Piyush.

A couple of questions, first cancellation of the Airbus 380, should we expect some inventory destocking in the coming months that could become a drag of some kind?

Yes. So, I mean the destocking for the A380 has been going on for a while because you remember the build rates have been coming down year-after-year, sadly. So, for us, aluminum suppliers, I think most of the pain is behind us. It’s already happened. There is quite a bit of inventory – I think some of the unique parts that we have on the A380, I joined 2.5 years, it’s nearly three years ago. We haven’t had an older for some of unique parts for three years, right, meaning that there was enough in the system and therefore the pain has already gotten behind us to a larger extent. So yes, maybe it’s a little bit of a headwind going into 2019 and 2020, but at the same time, I’ll remind you that people will still fly and therefore the A380 – the capacities of the A380 will be reallocated to other aircraft and given a pretty wide presence in the aerospace market. But, we don’t – but we will not sell an A380 that will not be made, we may sell another A350s or others, that will be made in lieu of the – to continue to carry the passengers that want to fly from A to B.

Yes. And we – and the only thing I’d add to that is, as we’ve talked to you in the past, we’ve spent a lot of time and had a lot of success in building out the business in regional jet market. So, that’s a place, where the incremental volumes would substantially more than offset any impact of the A380.

That’s good to know. Switching gears to the U.S. packaging side, you’ve seen a substantial portion of can sheet capacity move over from – from can to auto, the last few years. So, in terms of the market, the way you’re seeing it right now. What’s the availability of the product at this point? And is it, as well supplied as it used to be? And if not, then is average selling price trending up or are we still a little early?

Yes. So, I think it’s still variable. We know that the Q4 of last year was actually very strong in terms of demand and caused some – a bit of scrambling to meet demand in Q4, but overall, the capacity is there and it’s available and can makers and beverage companies can rely on aluminum companies to supply can sheet. On a go-forward basis, you’re right to say that as the trend continues, it creates a bit of pressure and it is an opportunity over time potentially to raise pricing a little bit, but the reason I’m saying, a little bit is, remember these are long-term contracts, right. So, typically, contracts for three years, five years, and therefore, you need to wait for the maturation of these contracts and renewal – to new contracts to see an impact on pricing, and things may change two years, three years down the road, it’s difficult to project exactly what the supply demand situation will be. But overall, it’s a positive environment for us, which creates some opportunities in terms of both pricing and more shipments, but also some challenges in terms of being able to ramp up the productivity and throughput.

That’s helpful. And one more if I may. I wanted to ask the Section 232 question a different way. So, what you produce sells locally, but then the end-product may still be coming to the U.S.. So, any thoughts on what’s the exposure to your production that still gets indirectly exported to the U.S.?

So, you mean, for instance, we produce auto body sheet in Europe, deliver it to Germany. It’s a German car, comes to the U.S., is that your question?

Right. On those lines.

Okay. So that – there may be a bit, it’s very difficult to speculate what the impact would be for us. But again, most of the cars that are built in one geography are sold also in another geography. So, I – we haven’t seen any change in pattern of ordering from our customers, because of those trade issues. But we are watching carefully.

Yes. And again as Jean-Marc said on earlier calls, it is also really hard to speculate on kind of what the OEMs are going to do, because a lot of this will require dramatic changes to supply chains, which will have obviously big capital and significant cost implications. So, it’s just hard to know.

Thanks guys, and all the best.

Thank you.

Thank you. Our next question comes from the line of Sean Wondrack with Deutsche Bank. Your line is now open.

Hey guys, good morning. Just on AS&I, just a comment on that for a second. Jean-Marc, you had noted that you expect the results to be more back-end loaded this year. Is that from more a volume or price perspective for both? And then, just real quickly on that? Also, as the volume comes down a little bit in the backlog, do you expect that to be a higher margin going forward?

Yes. I think we’re saying is, so we’ll see volume growth for the year. The issue here is more about the ramp up of new programs, right. And you see that in Q4 where we got a substantial drop in EBITDA, right compared to the prior period of 2017 and a lot of that is due to the fact that we’re starting all these new lines, right, so we have built those facilities, incur the fixed cost, hire the people and we are just starting to produce, and we’ve got plenty of – all these nominations that we’ve been talking about north of EUR 1 billion for three years. As they start to incur quite a bit of startup cost and experience curve learning during the ramp-up. So, that’s what I’m referring to. That is what is – so I expect costs to continue to drag us down – a bit in Q1 possibly in Q2 as well. That’s kind of the color. And just to give you a bit of color in terms of cost, we’ve talked about all these new facilities we’ve opened, right. But, I was checking we hired more than 700 people last year in that division AS&I for a net increase in people of more than 500. So, that’s a lot of new people that come in, obviously that’s a lot of cost, these are productive people, right, they will produce products that are going to be sold to customers on which we’re going to make a margin, but there is a timing effect here in terms of how this ramps up and impacts our bottom-line.

Yes. And Sean, there’s no change, whatsoever to the story that we’ve been telling that the product is evolving into a richer mix product, right, so over time, you should see volumes grow and price and mix improve.

And margins.

Yes.

That’s very helpful. Thank you. And then Peter just on the point of CapEx, I think you said maintenance CapEx is somewhere in the range of EUR 150 million to EUR 175 million. Could you just comment – in the event, one of your markets were to turn, how easily could you pull back on that CapEx and what is your visibility to that?

I’ll throw in a few comments here. So the growth CapEx, we can shut off new growth CapEx easily, but a lot of the growth CapEx that we incur this year is on account of business we won in 2017, 2018 for which we have to deliver the products in 2020. So that you can cut, right, you’re committed and you’re going to have the business anyway. So, kind of within one year to two years, you can basically shut off all growth capital, right. So, maybe I’d say 20% in the first year, 60% in the second year and so today we’ll get 20% growth in 2019 and 60% in 2020 and the other 20% in maybe late 2020 or early 2021. And on the maintenance side, there’s a lot of things we can decide to postpone, but at the end of the day, if you postpone for too long, you pay the price, right. So, depending how big of a recession, we are confronted with. Now, if it’s really a big recession and the tools don’t work that much, they don’t wear that much, so you can definitely delay some of the maintenance. But, you can cut it also quite aggressively. This company, before the Wise acquisition was able, at times, to run with EUR 80 million of CapEx, you throw in a little bit more for Wise, sorry the Muscle Shoal facility, I mean, very quickly you go from EUR 275 million to EUR 100 million and EUR 120 million, right.

Right. And obviously, the cost reductions should help as you go through the year. And then just, one quick last one, can you talk about your thoughts on potentially redeeming and refinancing and the euro notes that come due in 2021?

Absolutely. Sure. So from looking at those bonds, those bonds are callable in May, at par. And so, as you can imagine, we’ve looked at – we are looking at all of our different options with respect to that. I think the key thing is, is that, obviously we have free cash flow coming in 2019, so –- and I think the other thing to note is that we are highly focused on debt reduction – absolute debt reduction, right so, again, we haven’t made any decisions yet, but that’s going to be high on our priority list.

Great. All right, thank you very much and good luck going forward.

Thanks, Sean.

Thank you. [Operator Instructions] Our next question comes from the line of Matthew Fields with Bank of America. Your line is now open.

Hey, everyone. Just a few from me. Can you just talk to us a little bit about the debt that’s at Bowling Green that you’re assuming, is it a customer prepayment that amortizes over time, or is it like a more kind of traditional piece of debt to a financial counterparty, plans to refight at a Constellium level, that kind of stuff?

Yes, it’s – there’s two sources of debt at the bowling Green level. One was a small, let’s call it an ABL, which we have folded into our broader ABL and so that is effectively refinanced. And then the other piece was in the form of three equipment leases and we are in the process of kind of refinancing those and expect to have those done certainly by the end of the first quarter.

Okay, thanks very much. And then sort of dovetailing with Sean’s question about kind of looking to potentially refi, it seems to me with the movements of consolidating the JV that’s going to be negative EBITDA, consolidating some debt – your leverage might spike in the first quarter, and maybe the second as that ramps up. Can you sort of give us your thoughts of trajectory – of leverage throughout the quarters of 2019 given the effect of the consolidation?

Yes absolutely. So, you know our EBITDA guidance for the year, so you can – if you use that, and then you know that from what I said in the prepared remarks that we have for IFRS 16, we have EUR 100 million to EUR 125 million of debt that will come on the balance sheet at the end of the first quarter, and you’ll also see at that time, the consequences or acquisition of Bowling Green, so that’ll be a EUR 160 million of incremental debt. So the two of those will be the slug of incremental debt, so you’re right, there should be a kind of a spike – and a peak in the EBITDA, debt-to-EBITDA in the first quarter and then it should come down, driven by two things. Number one, we get the benefit of the IFRS 16 over the course of the year, so that will kind of add to our adjusted EBITDA and obviously over the course of the year, as we grow our EBITDA through our operations that will also benefit us. And then lastly, as Jean-Marc said free cash flow, because this is a year that we expect to generate free cash flow, so that should accelerate the delevering that happens as a consequence of the top line growth. And as I said in the prepared remarks, our goal is to be by the end of the year – we will be back at four times or better. Four times debt to EBITDA or better.

Great. And that actually brings me to my last question about cash flow is the EUR 50 million guide, does that include that one can sheet customer contract that’s got the potential prepayment issue? Is there any...

Yes. It’s real money.

That includes the prepayment as you plan it not – it could be worse because they demand some kind of prepayment?

No. We got the utmost clarity on what’s happening, and therefore the bad news, we worked on them have been mitigated, offset and the EUR 50 million is EUR 50 million of free cash flow, including everything.

Okay, great, thanks very much everyone.

Welcome.

Thank you.

Thank you. And this concludes our question-and-answer session for today. I would now like to turn the call back to Jean-Marc Germain for any further remarks.

Thank you, operator. Well, thank you everyone for participating in this call. We are looking at 2019 with a fair amount of optimism, and a lot of excitement. It’s going to be a year of finally, free cash flow generation, in excess of EUR 50 million and we’re very committed to delivering on our commitments. Thank you again for your interest in Constellium, and I look forward to reporting on our Q1, sometime at the end of April. Have a good day.

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