Constellium SE (CSTM) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Constellium's Second Quarter 2020 Results Call. [Operator Instructions] I would now like to turn the conference over to your host today, Mr. Ryan Wentling, Director of Investor Relations. Sir, please go ahead.

Thank you, Operator. I would like to welcome everyone to our second quarter 2020 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, and thank you for your interest in Constellium. Let's turn to Slide 5. At Constellium, the health and safety of our employees is our first priority. We have implemented many initiatives to protect our employees in response to the COVID-19 pandemic. We've have provided our personnel with personal protective equipment, increased cleaning and sanitation, allowed for an enforced social distancing, and work to raise awareness with our employees. I want to personally thank our employees for taking this seriously, and following the precautions we've put into place. As of last Friday, approximately one half of one percent of our employees have tested positive for COVID-19, and all of whom have recovered or are recovering. Needless to say, we must remain vigilant. During the second quarter, our plants operated well, despite the significant disruptions to customer demand from lockdown in both Europe and the U.S. As I'm speaking, all our plants are running now, and well. We're carefully monitoring COVID-19 hotspots, both for the health of our employees and any potential impacts on supply chain. The demand for our products gradually increased during the course of the second quarter, and this trend has continued into July. However, both levels of demand and visibility from our customers remain below historical levels. We took strong actions to combat the effects of the pandemic on our business. We aggressively reduced our costs, including flexing variable costs to match production levels, reducing fixed costs, and lowering our targeted capital expenditures. Over 40% of our workforce were on some type of partial unemployment of temporary layoff scheme during the quarter. Where appropriate, we have also implemented permanent headcount reduction. Our ability to flex costs was slightly better than the scenario we provided last quarter. This was a great achievement by the entire Constellium's team, and demonstrated our flexibility and resilience. Our liquidity at the end of the quarter was €949 million, an increase of over €300 million compared to the end of the first quarter. We added an additional €50 million of liquidity in July through credit facilities, supported by the German State, bringing our pro-forma liquidity to approximately €1 billion. In June, we accessed the debt market to refinance of 2021 bonds. This transaction removed our only near-term bond maturity at a very attractive coupon. In conclusion, with a significant actions we've taken, I'm am very confident in our ability to navigate through this crisis. On Slide 6, you will see some of our highlights from the second quarter of 2020. Shipments were 310,000 metric tons with a decrease of 25%, compared to the second quarter of 2019. Revenue decreased 33% to €1 billion. Of the roughly €500 million decline in revenue compared to the second quarter of last year, two-thirds was related to lower shipments, and one-third was related to lower metal prices. I remind you that while our revenues are affected by changes in metal prices, we operate a pass-through business model to minimize metal risk. Net loss of €32 million compared to net income of €17 million in the second quarter of 2019. Adjusted EBITDA of €81 million decreased 51%, compared to the second quarter of 2019. With a strong focus on cost control, we're able to offset a significant part of the volume headwinds to Adjusted EBITDA across each of our business units. I'm proud of what the team was able to achieve in a challenging environment. Constellium generated €228 million of adjusted EBITDA in the first half, the decline of 24%, compared to the first six months of last year. Our free cash flow was negative €33 million in the second quarter of 2020. This result would not have been possible without our strong actions to reduce costs and capital expenditures, and cash expenditures of all sorts. Our free cash flow for the first half of 2020 was €54 million. Based on our current view of market conditions, we expect to generate positive free cash flow in 2020. I will now hand over to Peter, to discuss our financial performance in more detail. Peter?

Thank you, Jean-Marc. And thank you everyone for joining the call today. Turning now to Slide 8, you'll find the change in Adjusted EBITDA by segment for the second quarter in the first half of 2020, compared to the same periods of last year. For the second quarter of 2020, Constellium achieved €81 million of Adjusted EBITDA, a decrease of €86 million or 51% year-over-year. P&ARP Adjusted EBITDA of €58 million, decreased by €21 million or 27% compared to last year. A&T Adjusted EBITDA of €31 million, decreased by €33 million or 51% compared to the second quarter of 2019. AS&I Adjusted EBITDA of negative €1 million, decreased by €31 million compared to last year. Lastly, Holdings & Corporate, costs of €7 million, were €1 million higher than last year. In the first six months of 2020, Constellium achieved €228 million of Adjusted EBITDA, a decrease of €74 million or 24% year-over-year. P&ARP Adjusted EBITDA of €124 million, decreased by €14 million or 11% compared to last year. A&T Adjusted EBITDA of €83 million, decreased by €33 million or 28% compared to the first six months of 2019. AS&I Adjusted EBITDA of €33 million, decreased by €26 million or 44% compared to last year. Lastly, Holdings & Corporate costs of €12 million, were €1 million higher than last year. We expect H &C costs of approximately €20 million in 2020. Now turn to Slide 9, and let's focus on the P&ARP segment. Adjusted EBITDA of €58 million, decreased 27% compared to the second quarter of last year. Volume was a headwind of €41 million in the quarter. Packaging shipments fell by 12% primarily as a result of the temporary shutdown in March of our Neuf Brisach plant in France due to COVID-19. Shipments to the North American can sheet market increased slightly year-over-year. Automotive shipments declined 54% compared to last year, as many of our automotive OEM customers curtailed production for April and most of May. Price and mix was a headwind of €2 million. Costs were a tailwind of €21 million due to strong broad-based cost control with labor and maintenance as important contributors. Metal costs were neutral in the quarter as we face difficult year-over-year comps, UBC supply chain challenges, and lower metal prices. FX translation was a tailwind of €1 million. Now turning to Slide 10, and let's focus on the A&T segment. Adjusted EBITDA of €31 million, decreased by 51% compared to last year. Volume was a headwind of €46 million on lower aerospace and TID shipments. Aerospace shipments fell 37% compared to last year, as Aerospace OEM and distributors began to reduce orders. TID shipments declined by 20% due to lower industrial activity in both Europe and the U.S. Price and mix was a €3 million headwind due to lower aerospace shipments. Costs were a tailwind of €15 million due to strong broad-based cost control with labor, metal, and maintenance as important contributors. Lastly, FX translation was a €1 million tailwind in the quarter. Now turn to Slide 11, and let's focus on the AS&I segment. Adjusted EBITDA of negative €1 million, decreased by €31 million compared to the second quarter of 2019. Volume was a €31 million headwind. Automotive shipments declined 52% compared to last year, due to customer shutdowns for a significant portion of the quarter. Industry shipments declined 16% due to lower industrial activity in Europe. Price and mix was a €9 million headwind partially due to price and mix as a consequence of weaker market conditions. Costs were a €9 million tailwind on strong cost control with labor, energy, and fixed cost as important contributors. Lastly, FX translation was a €1 million headwind in the quarter. Now turning to Slide 12, I want to highlight our very strong cost performance during the second quarter. In the second quarter, we managed to flex our cost by 83%, Cost Flex represents the change of cost over the change of revenues for the second quarter of 2020, compared to the second quarter of 2019. Effectively, for every dollar change in revenue, we're able to flex our cost by $0.83. This compares favorably to the 75% variable cost estimate we provided last quarter. At the bottom of the page, you can see that each of our businesses demonstrated strong cost control; with P&ARP at 92% Cost Flex, and A&T and AS&I at 75%. To put this in context, excluding metal and depreciation, we reduced costs by approximately €100 million compared to the second quarter of last year. These cost savings were driven by strong cost control across the businesses, including labor, maintenance, professional fees, subcontractors, and energy. I will note that our second quarter 2020 figures include approximately a €15 million benefit from European State employment aid related to COVID-19. I want to congratulate the team for the aggressive actions taken on cost. We will continue to maintain our strong focus on cost control, particularly given the uncertain demand environment. Now, let's Slide to 13, and discuss our balance sheet and liquidity position. At the end of the second quarter, our leverage was 4.4 times, and our net debt was €2.2 billion, slightly lower than our net debt position at the end of 2019. We remain very committed to capital discipline. We reduced our 2020 CapEx target to approximately €175 million, a €96 million reduction from 2019. Through the first half of 2020, we spent €32 million less in CapEx than in the same period of last year. Our free cash flow for the second quarter was negative €33 million. During the quarter as a consequence of lower activity, our factored receivables were lowered than the levels that we've maintained in recent quarters, and negatively impacted our free cash flow by €73 million. We would expect the reverse to occur as activity levels increase. Excluding the impact of factoring, the Company actually generated positive free cash flow in the second quarter, which is a very impressive outcome in my view. Our free cash flow for the first half of 2020 were €54 million. As Jean-Marc noted earlier, we expect to generate positive free cash flow in 2020 based on our current view of market condition. Generating free cash flow is a firm priority and 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 2024. During the quarter, we refinanced the remaining €200 million of our 4.625% notes due 2021 with $325 million of 5.625% percent notes due 2028. While we initially planned to repay the '21 with free cash flow, we felt it was prudent to remove this near-term maturity given the favorable debt market conditions. Notably, this was the lowest coupon dollar bond that Constellium has ever priced, a considerable achievement in the midst of a pandemic. As a result of our financing activities thus far in 2020, we now expect cash interest of €150 million to €160 million. Our cash plus amounts available under our committed facilities was €949 million at the end of the second quarter. As Jean-Marc noted, we added €50 million to this balance in July and we remain very comfortable in our liquidity position. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to Slide 15. I wanted to highlight something that is core to our business, sustainability. In early July, we published our 2019 Business and Sustainability Report, which you can find on our website. I'd like to point out a few highlights from 2019. Safety is our first priority, our target is to reduce our recordable case rate by 10% year-after-year. Between 2016 and 2019, our recordable case rate decreased by 27%, and we are trending very well this year. This means that more of our colleagues are returning home injury-free every day We also improved our energy efficiency by 6.4% compared to a 2015 baseline. That is the equivalent of a 100,000 metric tons of CO2 savings every year. Further, we introduced a 2025 target to reduce greenhouse gas emission intensity by 25% against the 2015 baseline, and we have a detailed plan to achieve this target. As many of you know, recycling is a core competency at Constellium. Aluminium is infinitely recyclable, with 75% of all aluminium ever produced still in use today. Muscle Shoals is one of the largest recyclers of aluminum cans globally with a capacity to recycle over 20 billion cans every year. At Neuf-Brisach, we also recycle the equivalent of 12 billion beverage cans every year. As a Company, Constellium recycled over 560,000 metric tons of externally sourced aluminum scrap in 2019. I am also proud that third parties are recognizing Constellium for our sustainability achievements. The Aluminium Stewardship Initiative, or ASI, is an industry led initiative to drive sustainability across the entire aluminum value chain from producers to customers. In 2019, we received ASI Certifications for Singen's casting and rolling operations, and we began producing ASI certified coils for our customers from Singen in 2020. We also received ASI certification of our Neuf-Brisach facility under provisional COVID conditions in 2020. We achieved the Ecovadis Platinum rating, which is awarded to the top 1% of companies assist worldwide. And we received an ESG rating of AA from MSCI, placing us in the top 5% of our sector. Overall, we had a very successful year on our sustainability objectives in 2019. And I look forward to continuing our progress on these very important initiatives. Now, let's turn to Slide 16 and discuss our end markets. We believe our balanced portfolio of products across end markets, geographies and customers is a competitive advantage during challenging times like these. I'll start with the packaging market. Packaging is a core market for Constellium and represented 38% of our LTM revenue. We continue to see strong demand in North America and stable demand in Europe, further evidence that this market is both recession-resilient and secular growth. We believe the packaging market has long-term secular growth tailwinds driven by customer preference for aluminum cans. Our customers continue to invest in new can lines with several additional investments in North America just announced in the last week. These additional lines should driving incremental demand for can sheet in the years to come. The consumer preference trend is only one of the tailwinds for can sheet. In Europe, the 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 supply to the packaging market over the medium to long term. Now, let's move to automotive. Over the long term, automotive remains a secular growth market for aluminum. Customers continue to prefer larger vehicles. With regulations aimed at increasing fuel efficiency and reducing emissions, the automotive market will need to continue to lightweight. In addition, we expect hybrid and electric vehicles to continue to gain share of the fleet. These vehicles are aluminum intensive due to the importance of light-weighting to achieve their range objectives. Constellium is well positioned to realize the benefits of this secular shift to aluminum in automotive and the electrification of the fleet. Moving to more recent trends, automotive OEMs began curtailing production in March and largely have resumed production in May. While demand from our customers increased significantly in June, we have experienced uneven demand for our products as a result of supply chain challenges and COVID-19 hotspots. While we are optimistic about automotive demand in the back half of 2020, the demand for our products will be dependent on the level of productions at the OEM. Let's turn now to aerospace. Aerospace represented 15% of our LTM revenues. The near-term outlook for aerospace remains uncertain due to the effects from COVID-19 and the 737 MAX. Aerospace OEMs have reduced build rates and it is unclear how long build rates will remain at these levels. We expect aerospace shipments in the third and fourth quarter of 2020 will be lower than the level in the second quarter of 2020. In TID, we expect to continue to expand in niche products in a diversified range of markets over the long term. In the near term, the defense and rail markets remain strong, but most industrial and transportation markets remain weak. These markets are dependent upon the health of the industrial economy in Europe and North America. It is unclear when and to what extent these markets will rebound. In closing, I again want to thank the Constellium team for their tireless efforts during this trying time. We remain committed to operational execution, harvesting the benefits of our investments, disciplined capital deployment, debt reduction and shareholder value creation. With that, Joanna, we will now open the Q&A session.

[Operator Instructions] Your first question comes from the line of Chris Terry from Deutsche Bank. Your line is open. Chris, if you are on mute, please unmute. Chris, your line is now open.

The first thing I wanted to start with was just the utilization rates and the comments from 1Q. You stepped through how you saw utilization in each of the divisions for 2Q, and then, perhaps for 3Q and 4Q. I appreciate you don't have guidance, but I wondered whether you could maybe conceptually talk through 3Q versus 4Q, and just versus 2Q or any comments you can make on the divisions as an update from last quarter? Thanks.

Sure, Chris. So I'll start with the markets and then kind of translate it into what it can meaningful the divisions, or the business units. So when you look at our second quarter of this year versus the second quarter of last year, you see packaging roughly 10% down, you see automotive 50% down, you see aerospace 40% down, roughly, and the other markets and each market is about 25% down. This has made a very different dynamics. So in packaging, what we are seeing now is 95% utilization. There was a bit of a drop, especially in April with all the lockdowns in Europe, reduction in can consumption and all that, but that has come back pretty strong. And the U.S. continues to be quite strong. So we look at packaging again recession-resilient, secular growth and we are pretty confident for the second half of the year and we look at Q2 as being an abnormal quarter because of all that happened in April, and a little bit in May. If I look at automotive, it has re-snapped back. I mean, I think when we talked on Q1, we're talking of 20% utilization as we were speaking and now we're at above 80%. And if you do the average of 20% and 80%, you get to 50, which is about what we experienced in the second half in terms of reduction in the shipments. It seems like it can be stronger than 80% going forward. We certainly are running very well in July, but we've seen that this restart has been with all kinds of fits and starts. So you've got hotspots, you've got supply chain disruptions, you've got difficulties in bringing products from Mexico, building trucks in Texas is challenging. So you've got all those operational issues that all of us in the supply chain have to deal with. But clearly the demand seems to be well in excess of 80% of where we were last year. So that's encouraging. And hopefully, COVID-19 doesn't throw too much of a wrench in that good trend. If I look now at aerospace, where we are running at around 60% in the quarter, we expect more pain in the second half of the year. And I think the reason for that is, it's a long supply chain and the customers move a little bit more slowly in terms of adjusting their orders, and that is creating a bit of a lag in terms of how much of pain we take. We are in very detailed discussions with our customers in a very collaborative fashion to look at what the second half ought to look like. And whilst contractually we could force some volumes on us, that's not our type. What they don't need, we don't want to force on them. So what we are working through is taking more pain now in the second half, so that 2021 will start with a clean slate. So we would expect some reduction in operating rates in aerospace in the second half of the year. So if you translate all that into what it means for the different BUs, I would expect P&ARP, packaging and automotive, to be better; I would expect AS&I, automotive structures, essentially, to be better in the second half; and I would expect A&T to be more challenged in the second half.

Thanks so much, and sorry…

No, go ahead.

I just had a follow up on packaging specifically, where the volumes are down around about 10% I think year-on-year. And you're saying Muscle Shoals is doing well, it seems like the U.S. is going well. I think Crown yesterday mentioned that Southern Europe was weak. Can you just comment a little bit further about packaging in the EU Region? Was it down in the quarter because of demand or because you had facilities offline and maybe you could quantify some of the EU impacts?

Yes. I think so the reason I'm saying more than 90% or 95%, whatever it is, let's say 100% is exactly because of some weakness in Europe, and I think it's got to do with both the reduction in activity in Southern Europe, I mean a lot of these countries have economies that are based on tourism and this is not the best year for tourism as we all know. And we are seeing - there is little clusters and hotspots, so everybody is a bit vigilant as it should be. So that is weighing down a little bit on the can consumption in Europe. Yes.

Okay. And just sorry I had one follow-up on working capital specifically. I just wanted - maybe Peter if you could talk through the 2Q moving parts? Obviously, you stepped through those waterfall charts and you're getting cost - doing a great job on the cost side. I just wanted, if you can comment a little bit further on the second half of the year, and what the opportunities are on working capital, you're saying positive for the full year, you've already obviously hit the positive number at the halfway point. So just wondering if you could talk through the moving parts of working capital?

Sure. Happy to do it. And just for context, so in the second quarter as we said last quarter, we would use working capital and we in fact burned €63 million of working capital in Q2. And for the first half, we are positive €24 million. So based on where we sit today, I think it's plausible to think that with auto ramping, with packaging continuing to ramp back up, that we could lose some ground in the back half of the year. So not a huge negative, but we could see working capital being a use in the back half of the year. But Chris, I would say that, we remain confident in spite of that that we can achieve a free cash flow position.

Your next question comes from the line of Josh Sullivan from The Benchmark Company. Your line is open.

Just a question, how are you thinking of any tariffs on Canadian aluminum, have you increased any inventory expecting that or just what should we be thinking on that front if that comes to fruition?

Yes. Well I mean, we believe it's a misguided measure if it happens. We've lobbied against it in the past, we got it removed, it may come back. We think it's misguided and it doesn't address the problem, which is over-capacity from China for the one market you got a need a dozen, that doesn't play by the same rules as we do. Now, that said, if it happens, it's got a very limited impact on us. So I'll remind you that we pass through the mill cost essentially to most of our customers. There may be a little section of the business where we cannot reprice immediately when it happens, but on the other side, we may gain a little bit more on scrap recycling as well. So not much of an impact for us. The reason we're against it is much more a matter of principles, because we believe in free and fair trade and really a problem for our finances or our economic outcome.

And then just on the can sheet front, can you remind us of when your larger contracts are up for renegotiation and then just any comment around pricing strength?

Yes. So we don't go into the details of exactly which contracts mature when, but you know that we've got few renewals coming in around the '22 horizon. We are making good progress and I think the pricing environment is, I would describe it as a mildly positive in the U.S. and mildly negative in Europe because of the specific situation now. I'll remind you that the contractual negotiations take a lot of time here. And whilst we - I'd say it's mildly positive here and mildly negative there, between now and whenever we actually ink a contract, things may change, but I think it's a pretty benign environment. And our product is in demand. I'll brag a little bit. Our quality and our service is very much recognized. Muscle Shoals has done a terrific job over the past five years and is a very strong player in the market now, very recognized for quality, service wise. Neuf-Brisach has always been. So we have a strong positions, and I'm looking at the future with a great deal of confidence.

Your next question comes from the line of David Gagliano from BMO Capital Markets. Your line is open.

First of all, I did have one question on the numbers for the second quarter. Did you say there was a $15 million one-time benefit included in the $81 million adjusted EBITDA line?

You're talking about for the labor benefits?

I thought it was a COVID-19 state aid benefit, is that included in…

Yes. That's included in adjusted EBITDA.

But it's not an one-off and it continues. Those programs are what is referred to as [indiscernible] short time work. And this government programs continue through 2020 and in some cases into 2021.

Okay. So we should assume about a $15 million quarterly benefit from those programs each quarter?

Well, no. Yes, no, because what will happen David is remember, so in the second quarter, we had a lot of people on the sidelines, right, but as we ramp up, then we're going to have substantially less of that. So I think you should assume that in the businesses that it's going to - so packaging for example where we had some benefit in Q2, we should have basically very limited if any benefit in Q3. And automotive where it should fade away and aerospace will have some continuing given the operating utilization rate there but it will be a much lower number.

To give you an indication, we mentioned about people being unemployed during the quarter, at the trough which is behind us, we had 6,000 people into some kind of unemployment benefit or temporary layoff, now we are at less than 2,000 so it's closed dramatically.

Yes. And David, just to put it in perspective, if you get to the fourth quarter, the number might be something like 25% of that, just based on utilization rate, just rough number.

And then just in terms of the individual end market commentary, on the aerospace side, obviously, that's or it has been the highest margin business. And just in terms of the outlook commentary, you framed obviously two segments up, one segment down, but the down segment is again the highest margin segment. I didn't really get a sense as to order of magnitude of the down number versus the up numbers. Can you just give us a sense of do you believe that aerospace will completely offset the recovery in auto and packaging in the second half or a bit more color on order of magnitude on the decline in aerospace would be helpful?

So it's very difficult to tell that, David, because we are, as we speak, in very active discussions with our customers and at the end of the day, it's a call that we have to make jointly with them. As I mentioned, we've got contracts whereby we can force them to take some products, which they will take and pay slow, but then they don't need it the following year. So they hold the inventory, they are holding it back. So we are looking collaboratively with them in terms of what is it exactly they need, which by the way, I don't think they fully know now. And it's no criticism of them. I mean it's very unusual times. And once we know what they need, and we look at what cuts do we take, then I could answer your question possibly. At this stage, I cannot. I would just say that, there will be, for sure, more pain in auto structures. And then - not auto structures, in aerospace - my apologies, aerospace. Now, the other thing too is, this is compounded by the fact that if you look at any period in the recent past, the second half is always weaker than the first half in aerospace. So that's something to factor in as well.

Okay. And just my last related question is on, I think you mentioned I think average utilization rates for aerospace related demand in the second quarter was around 60%?

Right.

At your facilities, is that right? What is that number now?

We're running still around that number, but I would expect it to go down maybe to 50%, that kind of range.

Okay. All right. That's helpful. Thanks very much.

Okay. Yeah. So it's important to say, we are not expecting it to go down to 30%, not on the horizon.

Your next question comes from the line of Curt Woodworth from Credit Suisse. Your line is open.

Peter, first question on the €100 million of cost reductions. How much of that would you view as structural? And then I guess just in general in terms of the amount of costs you think you could take out of the business this year on a permanent basis, can you give us an update on those efforts?

So if we look at the - I mean, so the biggest piece of that €100 million is related to labor. And labor is probably half of that €100 million. So what we are doing now is, we are really closely looking at the business and what it's likely to be like for the next couple of years and then trying to size our labor forces according to that. So in that regard, I think we would expect that there is going to be some kind of permanent savings, but remember, as we ramp up the operations, we do expect some of that cost is going to come back. So I'd say, it's hard to give a really precise number on that, Curt, it's a difficult one.

Okay.

Curt, if I may add. We have talked about horizon '22, and one of the strategic initiatives was to look at how do we lean our organization without losing competencies, capabilities, but how do we lean and make the organization stronger. And I think what COVID-19 is doing to us and I guess to many other companies out there is, accelerate the number of initiatives that may have taken more time to be implemented. So along the lines that Peter was saying, I think, we'll come out of this with some permanent cost reductions. And as we ramp up, we will not ramp up and inject back €100 million of cost. How much will remain to be seen, because we are really learning as we are doing and we are just in the middle of it now, but we will definitely emerge out of that leaner and stronger.

And there are certain categories, like for example, professional fees, subcontractors, where as we work without these because those are big categories of reduction, I think, we are able to live without a lot of that going forward. So yeah, I think there is definitely a piece of that that we can carry forward.

I mean those are examples that are not trivial, they are quite revealing. So we got a very strong R&D and technical support organization, which is people that are centrally located and go and help plants. And historically, a lot of the work was done by people going to the location. Now, obviously, in the past three months, nobody has been able to travel anywhere and a lot of that has been done through remote interaction, video conference. But even when you go to a to a plant and you look at - I got a problem and I need to improve the speed of this mill, we've had people interacting by the mill people on a FaceTime and going into - looking into the roller - the rolling mills via FaceTime with the technical adviser on the other side of the patent and that works actually fine, which we wouldn't have thought it would be possible. So in the future what you're gaining here is, well, you're saving travel time, which is not very good for the aerospace business, but also you are saying the cost, you're saving the time, which means that people can be on several interventions whilst historically within a week - it takes a week to get to the plant, where you get the job done. So I think we're going to discover a few new ways of doing business in our space that are going to be quite interesting in the future. And I think it's going to help us inject more brain and talent remotely with more act.

Yes. And Curt, as we go forward, we may be able to give you more color on this, but hopefully, it comes across that we're really looking hard at taking structural costs out. And in the short term, the objective is, we want to be kind of free cash flow positive through this crisis and so that we don't take on any incremental debt ideally. And in the longer term we want to emerge with a much stronger earnings power. So we're focused on exactly that and we'll have more to say as we progress.

Okay. That's helpful. And then in terms of the free cash flow dynamics, you mentioned I think it's $73 million impact from factoring this quarter or otherwise you would be free cash flow positive, which is pretty positive, given your utilization rate. And now you're talking about 95% utilization in packaging, over 80% in auto, and it seems like auto should move higher once supply chains get more normalized. So 75% of your businesses could be close to 90% utilization in a couple of months. I get that aero is weaker, but it would seem like from a free cash flow generation standpoint, unless working capital would be a major negative, you should be generating decent free cash in the back half of the year. Can you comment at all on free cash flow potential in the back half of the year?

Yes. Sure. And thanks for the question. So we won't put a specific number on it, but we're confident that we will generate free cash flow for the full year. And in the back half of the year, I think there is a very good chance that we can generate some free cash flow, but it depends a lot on what happens with trade working capital. As I said, we've got the ramp of these businesses. So we want to be a little cautious until we see the pace of the ramp and the consequences of the ramp, but again for the full year, we remain confident that we can generate free cash flow.

Okay. And then, just final question on aero. Jean-Marc, you had a comment on, I guess, working with the OEMs to create - you said a clean slate entering 2021. So is that statement reflecting the fact that the OEMs cut very quickly and I assume there is an excess inventory issue that they're dealing with or in general on supply chain and so hypothetically, your volumes would be below the actual build rate to help them clear inventories so that when you get into 2021, the supply chain is in a pretty good position? And contractually, you said you're not going to force it on them, but then if you're going to help them manage that, do you get anything in return, i.e., price benefit or is this kind of everyone helping each other? Just a little bit of understanding of what you meant by the clean slate comment.

Well, yeah, fair question. So I think I've commented in the past on the fact that I thought that the shipments we're making into the OEMs, into the supply chain, were actually higher than what the build rates were warranting at the time. And obviously, the build rates are going down, very significantly down now. So the pain we're going to take in the second half, I think, is not going to cure all the inventory buildup in the supply chain, first of all. But I think what that does is, it positions us for 2021 that doesn't show further deterioration. That's what we're into and we want to be in a place where overall supply is by and large consistent with what is being built. So that's what we're trying to do. Whether we get there fully, I don't know, but certainly, we are aiming to be better in '21 than in the nine months of post-COVID will be in A&T. That's one of the goals. In terms of what we are getting from OEMs. We've got very strong, deep, strategic relationships with them. I've commented also in the past on the fact that we are in it for the long haul. And I think it's evidenced by the 10-year contract we signed with Airbus. I mean 10 year is a long duration, never happened before. And we did it because it was the right thing to do for both companies, for both businesses and we didn't do it as a reaction to COVID or whatever. I mean that was really the desire to strengthen the strategic alignment between the two companies. So we are looking past the current crisis. The current crisis we're going to get all in the same boat or in the same aircraft and put us in the same place, work together to overcome the crisis and we are not talking about, if I do that, you give me a bit more price or whatever. I think it's just a relationship where we want to be in a win-win partnership and we do some things that help them and they will do something that helps us in the future which they have already done in the past and that's already happened, and that's continuing.

Your next question comes from the line of Matthew Fields from Bank of America. Your line is open.

Just one on the markets and then one on the balance sheet, please. So saw that can volumes were down about 11%, but Norsk reported can volumes up 11%. I think you guys faced relatively the same markets in Europe. Can you point to why maybe they are having more success on their can volumes? Was it enough for stock being down issue or a market issue or like what, can you just explain that discrepancy for us please?

Sure. It's mainly, I believe - I mean I cannot comment of their specific situation, but in our case, the main reason was that we had to take down Neuf-Brisach for full week and then ramp it up of gradually. I'll remind you that Neuf-Brisach was at the center of a hotspot, of the first real hotspot in France and there was a very serious, terrible conditions for the second half of March. So in March, we continued to ship out finished goods but then we had to replenish the finished goods and that really took down our shipments in the second quarter, but we are back to normal now.

Okay. Thanks. That's sort of what I expected. And on the balance sheet, it looks like you got a decent amount of funding from France and obviously Switzerland and Germany. You said it was partially guaranteed, but it's also secured. Can you just give us a better understanding of what it's secured by, is it inventory or is it PP&E? And then, to what extent is it guaranteed by the French Government?

Well, it depends on the facility, but the big one, the French one, is secured on PP&E. And in the case of the German ones, one of them is secured and one of them is unsecured and the Swiss one is unsecured. And the guarantees, the way they work is, they guarantee a certain percentage of the principal. So it's a normal syndicate of banks in the case of France I think the guarantee is for 70% of the - or sorry 80% of the - in the case of France, of the principal balances guaranteed by the French State. In the case of Germany, I think it's 80% too.

So just for our purposes as credit analysts, 80% of that French loan is non-recourse to you?

Well, again it is recourse to us. What I think the point is that, if you're a lender, so for example, if you are in the syndicate of banks and you are lending say €50 million, your responsibility is for €10 million of that. So it's the banks that benefit from the guarantee, not the Company.

Okay. So you still have to deliver on the commitments to the banks?

Yes, absolutely. But one thing - yeah, I'm sorry. Go ahead.

The government isn't back-stopping the loan for you, back-stopping the loan for the banks?

Exactly. But one thing to kind of - I think is a really important point is, our intent in putting this liquidity on the balance sheet was to remove any question about the fact that we had enough liquidity. As we said from the beginning and based on the performance in the second quarter, we do not anticipate using this. So the French facility we had to draw just by the terms of the agreement, but it just sits on our balance sheet as cash and the German facility that we've now signed up in July, we don't expect to draw that. The DD - the delayed-draw term loan we haven't drawn that, and the Swiss facility, we don't have that drawn in most instances. So --

And the way we benefit from this state guarantee is through very cheap interest rates.

Yes. That's right.

That is cheap money and that was important to us. We don't think we need the money, so we're not going to pay a lot of interest for it.

Yes. Exactly that and it obviously was an inducement for the banks to lend.

No. Fair enough. And that's I think the French facility is what 2.5% effectively at this point?

Yes. In that ZIP Code.

All right. So you don't really have an incentive to pay that off quickly given your bonds are kind of twice that, right?

No. That's right. Now, remember the use of the - there are some limitations on the use of the capital. So for example, we can't use that capital to go and buy back bonds in the market. So it's really meant to be for operating needs of the Company. But, yes, you're right, we don't have a strong incentive to repay that. But what we will do is, obviously, there is some cost to it, so as we emerge from the crisis and have a little more visibility, than we will unwind those facilities.

Your next question comes from the line of Sean Wondrack from Deutsche Bank. Your line is open.

Thanks for taking my questions. And really a great job on transparency and cost here, both very helpful.

Thanks, Sean.

Just when you think about big picture, if you look at the auto market, there are projections out in the market that we will have about 25% decline in new cars this year, mostly based on the fact that we weren't producing back in March, April. I mean if you look at the used auto market, it's been pretty strong as of late with used prices really rising even above last year. You talk about how production has been increasing and demand is increasing there. To get to down 25%, you'd have to have some pretty strong growth in 3Q and Q4. So I guess what I'm asking is, do you see that market as potentially inflecting soon with demand pulling through based on the lack of cars, if you can a little color what you're seeing there would be very helpful?

Yes. So I mean the order book is strong. There's no question. It's above the 80% that I'm mentioning. But we've been a little bit caught by customers just a few months ago telling us we need product tomorrow and then telling us the next day the plant is shut down. So we are very vigilant. So I hope - I think the end demand is there. And that's true in the U.S., that's true in Europe, right, the governments have injected a lot of money in the hands of consumers through the unemployment benefits of different shapes and forms that you see on both continents. And that is pretty good for end demand at the end of the day. So I hope it's going to materialize into - and the order book we have is going to be actually real orders and shipments in which case it should be better. But we've seen fits and starts. You see plants restarting and then shutting down because there is COVID infections or you see people having trouble staffing the full shift because there is too many cases in the hotspots. So I mean it looks quite good, but it's still fragile.

Thank you, Jean-Marc. And I guess it's a good lead into the next question. So when you think about your customers, we've had some shutdowns, we've had things come back online. Do you feel that your customers and their CEOs are getting more confidence in their ability to stay online or getting better in terms of protocols and advancing up the curve there?

Yes. I would think so. I think all of us have made tremendous efforts to provide the proper environment for our employees. I was commenting on the 0.5% of our employees have been affected by COVID confirmed. We have had no new case, confirm case in Europe since the middle of May. So I think this is saying something about the fact that when people take responsibility in their daily lives, because it goes beyond what they do within our factories or during the 8 hours or 10 hours, whatever that they work with this, you can have an impact. And I think if people wear masks when they interact with outside, with people they come across, I think it makes a tremendous difference. So I hope the reality will slowly or more than slowly, settle in and good practices will get that virus away from us sooner rather than later. And I think people are seeing the confidence building up. I mean it's human nature, you need to be affected to take steps and I think we're in the process where in many places, people are still being affected before they take steps. But if you look at China and China is growing extremely strong. It's a small operation for us, but we are above budget, above last year. You look at Europe, new cases are really on a downward trend, even though there are some clusters here and there, and we are seeing a strong rebound. And I hope this is coming to us throughout the U.S.

That's great. It's good to hear Jean-Marc and I hope everybody is safe and well over there. Thank you very much and good luck.

Thank you.

Speakers - go ahead, sir.

Go ahead, Joanna.

Yes, sir. I am showing no further questions at this time, I would like to turn the conference back to Mr. Jean-Marc Germain, CEO of Constellium. Go ahead.

Thank you, Joanna. So thanks everyone for participating in the call today. As you can see, we are very focused on facing the crisis, protecting our cash flow and building a stronger Constellium when things are behind us. Thank you very much and look forward to updating you on our progress in Q3. Take care. Stay well.

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