Constellium SE (CSTM) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Constellium Q3 2019 Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ryan Wentling, Director of Investor Relations. Please go ahead, sir.

Thank you, Operator. I would like to welcome everyone to our third quarter 2019 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 statements 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.

Thank you, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. On Slide 5, you will see some of the highlights from our third quarter performance. Shipments were 395,000 metric tons, that's up 4% compared to the third quarter of 2018. Our revenue increased 2% to €1.5 billion. This was primarily due to the consolidation of Bowling Green, partially offset by lower metal prices. I want to remind you that we substantially pass through metal prices. Our net income of €1 million declined compared to a net income of €270 million in the third quarter of last year. You will recall our net income in the third quarter of last year included gains on the sale of the Neuf building at Sierre and an OPEB land amendment. Adjusted EBITDA was €139 million. That is an 18% increase compared to the third quarter of last year. SOP had an excellent quarter, with solid operational performance and the benefit of favorable metal cost. E&P delivered another strong quarter thanks to good aerospace demand and solid operational performance. The AS&I results were weaker than expected as we continue to experience higher costs related to our footprint expansion and operational challenges on some of our newer automotive programs. In the first 9 months of 2019, Constellium generated €441 million of adjusted EBITDA, a 12% improvement compared to the first 9 months of last year. Based on our current outlook, we expect adjusted EBITDA to grow by 12% to 14% in 2019. While slightly below our previous guidance of 13% to 15% growth, this is an impressive performance considering the more challenging than expected end market conditions in the second half of the year and weaker-than-expected performance by AS&I. We remain well positioned to deliver on our €700 million adjusted EBITDA target in 2022. Free cash flow was a positive €31 million in the third quarter and €157 million in the first 9 months. We deployed our free cash flow towards our gross debt reduction objective with a repayment of €100 million of our 2021 bonds in August. We continue to expect free cash flow of €125 million to €175 million in 2019. On Project 2019, we increased our run rate cost savings to €73 million as of the end of the third quarter. This brings us very close to our target of €75 million by the end of the year. So overall, I am very pleased with our third quarter and first 9 months results. We remain focused on executing on our strategy and delivering on our 2022 objectives. With that, I will now hand the call over to Peter for further details on our financial performance. Peter?

Thank you, Jean-Marc, and thank you, everyone, for joining the call today. Turning now to Slide 7. You will find the change in adjusted EBITDA by segment for the third quarter and the first 9 months of 2019 compared to the same period of last year. For the third quarter of 2019, Constellium achieved €139 million of adjusted EBITDA, an increase of €21 million or 18% year-over-year. P&ARP adjusted EBITDA of €72 million year-over-year increased by €11 million. A&T adjusted EBITDA of €43 million increased by €12 million. AS&I adjusted EBITDA of €26 million decreased by €3 million. Lastly, Holdings and Corporate cost decreased by €1 million to €2 million. In the first 9 months of 2019, Constellium earned €441 million of adjusted EBITDA, an increase of €47 million or 12% year-over-year. P&ARP adjusted EBITDA of €210 million was up 12% compared to this first 9 months of last year. A&T adjusted EBITDA of €159 million increased by 39% year-over-year. AS&I adjusted EBITDA of €85 million decreased by 19% year-over-year. And Holdings and Corporate cost increased by €1 million to €13 million. We continue to expect agency cost of approximately €20 million for the full year of 2019. Now turn to Slide 8, and let's focus on the P&ARP segment. Adjusted EBITDA of €72 million increased 18% compared to the third quarter of last year. Volume was a tailwind of €9 million as shipments increased by 7%. Packaging rolled product shipments increased 6% on strong demand and solid operational performance. Automotive Rolled Products shipments were up 12% in the quarter and 21% for the year, benefiting from the consolidation of Bowling Green shipments and the continued ramp up of our automotive capacity. Our two new CALP lines in Neuf-Brisach, France and in Bowling Green, Kentucky are running well and the ramp ups are on track. We continued to ramp up these -- we will continue to ramp up these lines over the course of 2019 with full production in 2020. Price and mix was a headwind of €3 million. Costs were a tailwind of €6 million due to favorable metal costs and good overall cost performance. Bowling Green generated negative €4 million of adjusted EBITDA in the quarter. We expect the plant to generate approximately negative €15 million of adjusted EBITDA in 2019. FX translation was a tailwind of €2 million, and the application of IFRS 16 was a €1 million tailwind. Now turn to Slide 9, and let's focus on the A&T segment. Adjusted EBITDA of €43 million increased 35% compared to the third quarter of last year. Higher aerospace shipments were offset by lower TID shipments due to weaker TID end markets. Price and mix improved by €20 million in the third quarter due to good mix in both aerospace in TID and improved TID pricing. Costs were a headwind of €8 million in the quarter, largely related to lower scrap usage and higher labor cost. Lastly, FX translation and the application of IFRS 16 were each a €1 million tailwind in the quarter. Now turning to Slide 10, and let's focus on the AS&I segment. Adjusted EBITDA of €26 million decreased 10% compared to the third quarter of 2018. Volume drove an €8 million improvement. Costs increased by €12 million compared to the third quarter of 2018 due to our footprint expansion and operational challenges on some of our newer automotive programs. Lastly, the application of IFRS 16 was a €3 million tailwind. We have highlighted the challenges we have been facing in automotive structures on recent calls. As we have noted before, the difficulties we are experiencing are largely limited to a few project platforms. In some cases, we have underestimated the costs associated with the startups. In a few other cases, we have been affected by delays in the timing of customer launches. As we have said before, predicting the exact timing of an inflection is difficult, and clearly, this is taking more time than we initially anticipated. But we know what we need to do and we're confident that we're on the right path. Now turn to Slide 11, and I will update you on the progress we have made on our cash improvement initiative, Project 2019. By now, you know there are 3 pillars to Project 2019: cost reduction, working capital improvement and capital discipline. On cost savings, we achieved an additional €5 million of annual run rate savings during the third quarter, bringing our total run rate to €73 million of savings. We remain confident in our ability to deliver our project goal of €75 million of annual run rate cost savings by the end of 2019. Now let's move to trade working capital. We are proud of our much improved trade working capital performance through the first 9 months of 2019 where we managed to more than offset the working capital growth associated with our growth initiatives. Over time, we continue to expect trade working capital investment related to our substantial growth in our business. We will work hard to offset some of this growth with working capital reduction across the business and remain confident in our ability to do so. With respect to capital spending, we continue to expect spending in 2019 of €265 million. 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 with attractive IRRs and paybacks. As we indicated in our Analyst Day in December of 2018, there will be a successor project to Project 2019. We are currently working with the team on a number of initiatives to further underrate our long-term targets. We are confident that there are significant cost and capital improvement opportunities across the company. Now let's turn to Slide 12 and discuss the balance sheet, our liquidity position and our free cash flow. Our net debt at the end of the third quarter was €2.2 billion, which included a sequential increase of approximately €50 million due to the noncash translational impact associated with the stronger dollar. Our leverage was 4.1x at the end of the third quarter. And as you know, we remain committed to deleveraging. As you can see in our debt summary on the bottom left hand side of the page, we have no bond maturities until 2021. In August, we redeemed €100 million of our 2021 bond. As a result, our 2021 maturity is now less than 0.4x our LTM adjusted EBITDA. Our cash plus amounts available under our committed facilities was €516 million at the end of the third quarter. We remain comfortable with our current liquidity position. We generated free cash flow of €157 million in the first 9 months of 2019. We are very proud of our free cash flow performance and are looking forward to building a track record of consistent and substantial free cash flow generation. Our priority for deploying this free cash flow continues to be deleveraging and gross debt reduction. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to Slide 14. I want to start by highlighting our balanced portfolio of end market exposures. 3 of our 4 key end markets, packaging, automotive and aerospace, are secular growth markets for aluminum. Those secular growth markets represent over 75% of our LTM revenue. We believe this is an exciting and underappreciated aspect of our story. Now let's move on to the specific end market update. I'll start with the packaging market. Packaging is a core market for Constellium and represents 37% of our LTM revenues. We remain committed to the can sheet market in both the U.S. and Europe. We currently see a stable market, but we are closely monitoring positive developments in the market. Aluminum cans are the most sustainable beverage packaging container, especially when compared to glass or plastic. Remember, aluminum is infinitely recyclable and retains its properties after recycling. While at this point we have not seen significant evidence of convergence from all the substrates to aluminum, we are optimistic on the trend and believe this represents a meaningful opportunity for can sheet demand over time. In addition to the sustainability trend, in Europe, demand for can sheet continues to grow based on substitution of aluminum for steel. In the U.S., we continue to expect the growth of auto body sheet demand to tighten the packaging market over the medium to long term. Constellium is very well positioned to benefit from these positive trends as a significant producer of can sheet in both North America and Europe. Now let's move to automotive. We continue to observe pockets of weakness in auto. Our platform mix, which leans towards light trucks, SUVs, luxury cars, has helped to mitigate this weakness. We will continue to closely monitor automotive market trends. Now over the long term, automotive remains a secular growth market for aluminum. We're confident that OEMs will continue to lightweight vehicles to increase fuel efficiency and reduce CO2 and other emissions. Further, electrification of vehicles has significant potential for aluminum. Aluminum allows for lightweighting in order to increase the range of the vehicle and is the preferred material to make strong but light battery enclosures. Constellium, again, is well positioned to realize the benefits of this secular shift to aluminum in automotive. Let's turn now to aerospace. Aerospace demand continues to exceed our expected long-term growth CAGR of 2%. We expect this demand strength to continue through the remainder of 2019, and we are optimistic about demand in the first half of 2020. Over the long term, we expect aerospace to continue to be an attractive market driven by sustained OEM build rates and healthy backlogs at the major OEMs. We will remain focused on strengthening our leadership positions with the major OEMs and expanding our relationships with business and regional jet manufacturers. In transportation, industry and defense, we have experienced weaker-than-expected demand in some of our industrial end markets in both North America and Europe. The transportation market in North America continues to suffer from weaker demand and excess supply from imports. We expect the weakness in these markets to persist into the fourth quarter and potentially into 2020. Over the long term, we expect to continue expanding into niche products and markets in the transportation industry and defense segments. Turning to Slide 15, we detail our financial guidance and outlook. We expect to deliver a range of 12% to 14% adjusted EBITDA growth in 2019. We are targeting €125 million to €175 million of free cash flow in 2019. Our 2022 targets are over €700 million of adjusted EBITDA and a leverage ratio of 2.5x. I am very proud of our third quarter performance. Our team delivered another strong quarter of EBITDA growth and free cash flow generation. We remain focused on operational execution, harvesting the benefits of our investments, disciplined capital deployment, debt reduction and shareholder value creation. With that, operator, we will now open the Q&A session, please.

[Operator Instructions]. Our first question comes from Matthew Korn with Goldman Sachs.

A question for you. Can you provide any additional granularity on the particular strength in aero demand that you've been experiencing all year now? It seems like this has been a major pillar for you as other areas, like you pointed out transportation, have been a little bit weaker.

No. It has. And as I mentioned, it's been above our expectations. We continue to be wrong in assessing where it's going. And it's been very healthy all over the world. I don't -- I think about every OEM we're in business with, which is about any OEM on the planet is strong for us. And we're seeing also in the more distribution-related segments of aerospace some good trends. So we are very positive about the developments in 2019 and into 2020 as well, at least for the beginning of the first half of 2020. It's pretty broad-based.

But then on the other side of things, it sounds as if though in your discussion of AS&I, outside of the cost issues that you've been discussing for a few quarters that there's some delays perhaps on the customer side that it's not just Constellium operating issues at play there. First, is that correct? Are you seeing any kind of customer destocking that's emerging in that particular field? And then secondly on that, have the challenges there or the shakiness in certain markets, have they prompted any shift, any consideration shift in your investment plans? For example, would you consider slowing growth capital spending for the near term shift a little bit more towards debt into 2020 as you wait for these things to settle out?

Okay. That's many questions in one. I'll try to not forget anything. But if I do, please remind me. So I mean, first of all, that is correct. There is some delays in operational ramp up at our customers for new platforms. But I will not deflect the responsibility here. We're -- we have our own operating issues. We are not impacting customers at all, but we've got our operational challenges that we need to overcome. And it's taking, as Peter mentioned and I mentioned, a little bit longer than what we expected. In terms of are we seeing any slowdown in market destocking in any specific segment, not really on the platforms we're on. We don't see that. I mean, some are doing a bit better, others are doing a bit worse, right? So on balance, it's kind of even. The overall market slowdown is not helping, but it's not really material. And we wouldn't be calling it out if that was the only issue out there. And finally, in terms of how we look at our CapEx plan. We have invested very heavily in each segment. As we mentioned, we basically laid the foundation and molded the foundation with the buildings and the equipment in -- now to a large extent, to double the size of this business from what it was in 2016 to 2021. That's a lot to chew and digest. As I mentioned, it's taking a little bit more time. So we have made a conscious decision, and you saw that when we reported on the nominations rates in the first half of this year, we've made a conscious decision to slow down our investment so that all hands are on deck in this organization to really fix what needs to be fixed, ramp up what is being ramped up and get to a place where we deliver the returns we're expecting from all the investments we've made. So that's really our priority. That's what we're focusing the teams on. We'll get there. And over time, as the nominations we have registered in the first half of this year, and again, for the full year, are lower by a factor of 5 to 10x lower than what they were. In the past, you will see some CapEx reduction. But remember that there is -- if we win business this year, we start spending the following year and the year after. So there is a tail, right? So it will gradually moderate over the next 2, 3 years.

Our next question comes from Curt Woodworth with Credit Suisse.

So Jean-Marc, you talked about the can sheet market being stable, but a lot of the end users are talking about a deficit. And I guess one of the ways the deficit is being mitigated is by significant increases in imports from different sources. So I guess my question is do you think that you're going to get to a pinch point in the market over the next 1 to 2 years where end users will feel the need to either reinvest or partner with domestic suppliers to get a more stable domestic source of can sheet supply?

Yes. No, that's definitely a fair question. And it's difficult to assess exactly supply/demand dynamics over the next 4, 5 years. But in the short term, what we are seeing is a healthy market, right? So it's growing a little bit faster than it used to in the past. Actually in the U.S., it used to be a declining market. Now it's a growth market. But we're talking a couple of percentage points here. So it's not yet the kind of growth rate that would absolutely need additional capacity. And I think we, as an industry, provide enough capacity to the market that there are no shortages of can sheet for our customers. Over the long run, if we continue to see this is spreading growth, we're seeing with -- more and more beverages being brought to market in a can, if that continues, really takes hold and still water catches us in cans, if plastic really goes down in terms of package of choice for a bunch of beverages, then that will create a need for more capacity. The way we think about it is we're in close partnership with our customers. We are talking and discussing strategy and what their needs could be and may be. We are not yet at a point where there is any decision for us to make. I'll remind you that we've got quite a bit of latent capacity. We did no such [indiscernible] as we improve this -- the operation of this plan, for instance. So we believe we can, in the short, medium term meet the needs of the market. Longer term, we may decide to invest, but we will only when we get a fair return on the investments we already have and we get a fair return on investments we would need to make through good pricing, guaranteed volume over the long run. So we are watching. We are monitoring. We're in close discussions with our customers, but it's a healthy market. But I'm very -- I'm optimistic about the future, but I don't take anything to the bank yet.

Okay. No, that make sense. And then just a follow-up on the battery box opportunity. Is there any way you could help frame sort of the medium term expectations around battery box opportunity set for you? Have you partnered with any OEMs at this point? And is it -- I think the battery box is roughly equivalent amount of weight on kind of the existing aluminum content in a car. Just curious sort of how you see that market playing out for Constellium specifically.

Sure. So yes, the battery box in weight, and you're talking anything from 60 kilos to 100 kilos, right? That's the rough order of magnitude. So it's quite significant, right, in terms of aluminum content in a car. Yes, we have partnered with different customers on battery boxes, and we have 3 commercial projects on the way that are different stages of development. It is still a nascent technology. There are different options. And therefore, our approach has been we want to be technologically advanced, we want to bring solutions to the market but we want to make sure also we manage our risk. And therefore, we have carefully selected, again, a certain number of commercial projects. That's the ones we are sticking with, that's the ones we want to bring to success. And as we learn with our customers about what is the best solution for them, what is the best technology, we will bring the product to market. So then we can harvest in the future. But I don't see -- the big opportunity here is certainly more two, three years down the road than it is next year or the following year. So again, cautious deployment of capital, continue to strengthen our technological prowess and we're planting the seeds for longer term.

Our next question comes from Josh Sullivan with Seaport Global.

Just the delays in the customer launches at AS&I, can you say geographically if that's driven by Europe or North America?

We had one issue in Europe, one in America. The one in Europe is kind of behind us now, and the one in America is we're still a little bit into it.

And just looking at the recent strike at GM, did you -- was that an impact to you guys? Or is that smaller customer at this point?

Yes. So as you know, we're quite diversified, right, in our portfolio platforms and customers and projects. So that's the beauty of our approach to market, which means we're not only dependent on one platform or one customer. In the specific case of GM, it's nothing material. It's not helping but we wouldn't be talking about it.

Got it. And then just on the aerospace outlook. With Boeing changing the production outlook here for the 787, is that a large program for you guys? Do you think that's included in your kind of outlook at this point?

Yes. We're not commenting on specific programs or aluminum content on a plane and all that, Josh. Yes, it's included in our overall outlook, right? So we do -- we look at all the forecasted orders we get from all our customers and massage all that into models. And we look at the -- with some previous visibility 6, 9 months out, and that's what leads us to say we see a healthy aerospace demand going into the first half of 2020.

And our next question comes from Martin Englert with Jefferies.

So on automotive structures continues to provide the headwinds you've already highlighted and discussed much of this and also touch on the broader market challenges in TID. But while I understand you're trying to address some of these issues and navigate through the market based on what you're seeing today, is it more likely that some of these headwinds persist for several quarters or maybe through the first half of '20?

Yes. Peter will jump in on this. It's difficult to tell, right? I mean, we -- when we look at what's happened kind of between July and now, it looks like a sharp deceleration in the outlook for quite a few of our specialties, right? In all 3 of our business units, in P&ARP, in A&T, in AS&I, we've got some specialty or niches, right, that we supply. And in quite a few of the segments, there has been a very significant slowdown between the outlook of the one in July and the one we have now in September. And orders are actually stronger. So it's a mixed bag, right? There may be an element of that, which is the end of year caution from some of our customers. And managing inventories, making sure that people have the adequate supply that's certainly not more. So whether this is a driving factor or whether there is more a slowdown that is more systemic is difficult to tell. But just to give you a few examples, right? In semiconductor, we provide the plates for the devices that -- to the machinery that they use to make semiconductors. It's really down. It's really not looking good. You look at -- we make -- have alloy profiles to do the control -- to make the control units for ABS, antilock system, right, for brakes. That is very defusing the auto industry, right? And that's really -- we're very clear on that. This is slowing down. So that's the kind of thing where we see slowdown. On the other side, we see rail is really strong and we we're struggling to make everything we need to make. So it's a mixed bag of signals. What we're seeing now, as we sit now, is slow orders, short lead times for a lot of these segments in -- between now and the end of the year. So -- and what it means for 2020 is difficult to ascertain, right? We are watching, but it's difficult to tell.

Yes. And what I'd add, Martin, is just with respect to AS&I because I think that was a piece of your question. So we're working diligently on that. We've made a number of moves to help correct the situation. We feel like we're on the right path, as I said in the prepared remarks. And it's a little bit -- it's hard to call the turn. If you think about Boeing Green and the experience that we have there, it was we were struggling, struggling, struggling. And then all of a sudden, things start to fall in place. And as Jean-Marc said, we can see in some of the non-financial metrics that we're making strides. So we're going to kind of keep at it, but we're kind of super focused on getting this back on track.

Clear. That's very helpful. And kind of circling back on Bowling Green here. Can you remind us of the cadence of the Bowling Green substrate shift from externally sourcing and kind of how that will shift inwards towards Muscle Shoals there over the coming years here more so over the medium, longer term?

Yes. So the agreement that we have as part of transaction was that at the outset, that our former partner will provide kind of 49% of the substrate. And then that will line down over the next several years. So by '24, we will be supplying all of that substrate.

Should I think of that as like a linear shift? Or is there anything within that agreement that would suggest is different than that and then is this more of an annual reset? Or do you have the option to be shifting this kind of quarter-to-quarter?

Yes. No. So it's a -- what I would say is it would be -- it's more or less linear, but I would assume on the front end that we were assuming we need a little bit more help in terms of the supply. So maybe it declines a little bit more slowly on the front end and then more rapidly on the back end. And then, obviously, by negotiation, depending on where we are, we can kind of negotiate, take less from them if we're prepared to. But that's a separate negotiation.

Our next question comes from Christian Georges with Société Générale.

Just a few accounting questions. The net debt that you had, I think, for the quarter, that now includes IFRS 16, I think, which...

It does. It does. Yes.

Okay. And the other quarters that you've been reporting so far in terms of the EBITDA, you highlighted the impact on the EBITDA per division. They all reflect IFRS impact as well?

They do. Starting with -- sorry, Chris, just to be clear, starting with the first quarter of 2019.

Okay. That's clear. Also, the depreciation of that €66 million in the third quarter, is that the running rate? Or is there some kind of like unusual item in that?

No. I think that -- it may be slightly a little. I mean we think probably 230, 240 is probably not a bad number for depreciation now given the level of investments that we've been making. So that's -- it's not a crazy run rate. There's nothing particularly unusual on the number.

Okay. Good. And also, on your financial cost at €46 million. I mean, obviously, the net debt has to be stable but there's an element of IFRS in this. I mean, is that reflecting some higher cost of financing? Or is it just again a running rate of the current basis?

No. I wouldn't say it's reflecting higher cost of finance. I mean, a couple of things going on there. One is, I mean, IFRS 16 on the cost side, which is in that interest expense number, is running a little bit higher. And then the other thing that we're being impacted by is FX. And those 2 factors are leading us to run at kind of the higher end of our guidance. But in terms of we haven't done any new debt financing, we haven't taken on any incremental funded debt per se in the company, right? We're paying down debt. But I think -- yes, but as we said in the prepared remarks, remember, you've got this translational impact of €50 million in the quarter that's impacting debt, too.

Great. Because of the currency, right?

Exactly.

Our next question comes from Matthew Fields with Bank of America Merrill Lynch.

Perfect lead-in, I guess, on the debt reduction. Appreciate you going after €100 million sort of partial redemption on the [indiscernible] euro notes. Can you just give us a little rationale about why you picked that instead of maybe the ABL? And what other parts of your capital structure you may want to target next.

Sure. So well, first of all, we have the cost of the bond. It's callable at par and the cost is slightly higher than the ABL. So that's probably the #1 driver. And in terms of other pieces of the capital structure that we would target, I mean, we know we have the ABL that we can repay at any point in time. So that's obviously a logical candidate. And then as we get closer to the rest of the debt stack, that debt becomes callable at par, so we'll have a lot of opportunities to take some of that out as well.

And then as you presumably generate more free cash flow next year, do you think you'll continue with some level of debt reduction in 2020?

I would fully expect so. Free -- as Jean-Marc said in his remarks, and I think I said in mine also, the free cash flow that we're generating, the priority is to use it for deleveraging and gross debt reduction, as we said.

Okay, great. And then in a different area, some of your peers are sort of trying to get a big merger finalized and it looks like there's going to have to be some force divestitures. Can you talk about your appetite for any acquisitions in that context? And kind of what your priorities might be?

Yes. So I mean it's our job to look at what's happening in the competitive landscape. So we do those things. I think any -- the deployment of capital is something that we take very seriously. We look at the opportunities we have within our 4 walls. They're quite exciting. We've commented a number of times that we have more opportunities than what we can finance within our 4 walls, right? That's good because we're selecting. Debt reduction is -- we're very focused on it. It's nearly an obsession. So we want to make sure that whatever we do doesn't impact the goal of reducing our leverage overtime and certain meeting at 2.5 leverage target by 2022. So when all that is said and done, we may look at things but our appetite is moderate.

Right. Is there like a size guideline that you're willing to give? Like something that -- we're not looking for X hundred million dollars or euros?

Well, I think what Jean-Marc's telling you is that we -- if we were to do something, and it's a big if because we've got -- as we said, we've got lots of priorities internally that will generate kind of very attractive returns for us. But if we were to do something, we would want it to fit within the parameters of what we've given you for guidance. So therefore, continuing debt reduction. So we can't go out and do a big debt-financed acquisition in that -- on that front. And we get to the -- still to the 2.5x by 2022.

[Operator Instructions]. Our next question comes from Sean Wondrack with Deutsche Bank.

Most of my questions have been answered. And I apologize if it's been asked before, but can just give any potential impact or concern related to how Brexit could end up?

Yes. No, it's a very topical question these days. We don't know exactly still where Brexit will end up, but we've known it was a possibility for the past 3 years. So we've worked out with our teams to understand what potential operational, commercial implications it could have for us. And I think to the best of our knowledge, both from a supply standpoint because we're buying stuff from the U.K., and from a sales standpoint because we're buying stuff -- we're selling some of our products to the U.K., we've got contingency plans. We're in good shape, and I don't anticipate it to be any kind of an impact on our business. Just, I think, it's a couple of our -- it's 2%. I don't remember the exact number, but it's around 2% of our sales that are into the U.K. So we are really not exposed. And we make sure that in our commercial arrangements we do not bear any risk related to duties or delays at customs, all those kinds of things.

That's great. It sounds like you -- I'm thinking about it. Appreciate that. And then just with regard to your credit ratings. I know you said in the past you want to be more like a BB company. I look at certain peers like Arconic that are a little investment grade rated and I kind of wondered if you're sort of trending in that direction. What is your feedback sort of from the rating agencies? And what would they really like to see out of you?

Yes. Well, I think it's fair to say, and I think I mentioned this from the last call, it's been very positive in terms of the approach that we're taking to the balance sheet and reducing our debt over time, our gross debt over time. And free cash flow generation has been very positively received. So I think the dialogue is very fruitful right now. I think if you watch the rating agencies over time, you know they move up more slowly than they move down. So I think we have kind of clearly positive momentum. But we need to show, as we will, that we're going to be consistent free cash flow generators and that we're going to continue to use that free cash flow to delever. But I think we're in kind of a really good spot.

Our next comes from Karl Blunden with Goldman Sachs.

This is just really a follow-up on some of the earlier questions on M&A and balance sheet. I understand the goal of still hitting your leverage targets. Should we interpret that to mean that large M&A is something that you'd hesitate to pursue? Or is it just something that if it's attractive enough, you'd find the right financing package to still hit your targets for the balance sheet? I know you have previously, I guess a couple of years ago, issued some equity when you're issuing some debt as well. So maybe -- is that a template that we should think about going forward?

So again, I will come back to -- it's a fair question, right, but I would come back and emphasize what we said. We've got plenty of opportunities within our 4 walls. We think deploying capital towards debt reduction is really good for our shareholders. And that's what's we're focused on. If something really attractive shows up, we'll study it. But we also know that equity is very expensive. So that is something I want to reemphasize. Whatever we do is for shareholder value creation. And we'll see what shapes up to be. And finally, I will say that most acquisitions fail, 70% of them fail for the buyer, at least. So I guess our success, 70% of the time full seller. But anyway -- and so we're very conscious of the fact that we do not want to take any undue risk. We want to do things that work for the shareholders and to create shareholder value over time. I don't know if Peter wants to jump in.

Yes. I just jump in to say, if you look at the M&A that succeeds, it's the M&A that happens when kind of things are not as good generally, so the prices are typically lower, right? And so the strategy that we've taken internally is that we want to be in a position to be opportunistic if and when kind of the opportunities, the situations arise. And to do that, we think that the best thing that we can do is to fix our balance sheet. So hence, kind of a drive on free cash flow. Hence the drive on debt reduction. Hence the drive on kind of getting our ratings to a level where kind of regardless of the situation, we're well positioned to take advantage of opportunities when they arrive. But we're not -- we don't feel in any rush for the reason that Jean-Marc said, we got just a lot to do within the 4 walls that we have.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Jean-Marc Germain, CEO of Constellium, for any further remarks.

Yes. Well, thank you, operator. Thank you, everyone. I just want, in closing, say again that I'm very proud of our achievements so far this year and going into Q4. I think the free cash flow generation is really a good milestone for us to have achieved, and we're very focused on getting that rate of about €150 million of free cash flow that we need to achieve our deleveraging targets for 2022. So that is something we're really focused on. We know we have to work on execution in all our structures. We're focused on it. And we also know that going forward, we've had 3, 4 years of substantial EBITDA growth, right, 12% to 14% for 3 years in row, I guess. We'll keep our nose to the ground soon. There's a lot of grinding to do to get us to our target. Do not expect any significant jump. We haven't made our life going into 2020 easier with some very strong comps that we achieved in 2019. But we'll keep working at it, chopping at it. And we'll -- we are very focused again on delivering towards our 2022 objectives. With that, thank you very much for your attention today. Have a good day, and I look forward to updating you on our Q4 results in February. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.