Constellium SE (CSTM) Q2 2021 Earnings Report, Transcript and Summary

Good day. Thank you for standing by, and welcome to the Constellium Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ryan Wentling, Director of Investor Relations. Please go ahead.

Thank you, operator. I would like to welcome everyone to our second quarter 2021 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.

Thank you, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. Let's turn to slide 5 and discuss the highlights from our second quarter results. Shipments were 406,000 tons. That's up 31% compared to the second quarter of 2020. Revenue increased 47% to €1.5 billion. This was primarily due to higher shipments and a higher metal prices. Remember, while our revenues are affected by changing in metal prices, we operate a pass-through business model, which minimizes our exposure to metal risk. Our net income of €108 million compared to a net loss of €32 million in the second quarter of 2020. Adjusted EBITDA was a record €170 million, a 110% above the second quarter of 2020, and 2% above our previous record from the second quarter of 2019. PARP and AS&I each reported record adjusted EBITDA. As a result of our strong first half performance and our outlook for the second half, we are increasing our 2021 guidance or adjusted EBITDA to a range of €545 million to €560 million that is up from our previous guidance of €510 million to €530 million. We extended our track record of free cash flow generation with €35 million in the quarter bringing our first half total to €81 million. We now expect free cash flow in excess of a €125 million in 2021. Moving now to leverage. As you can see in the chart on the right, our leverage declined to 3.7 times at the end of the second quarter, down nearly a full turn from the first quarter and back to our pre-COVID low. We remain committed to deleveraging and we expected to deleverage further in the back half of the year. Lastly, Constellium was included within the Russell 2000 Index in June. We believe index inclusion is very important and are excited to be included in this benchmark index. Overall, I am extremely proud of our second quarter performance and the tremendous performance of all of our teams. We delivered strong adjusted EBITDA, solid free cash flow generation and substantial deleveraging. This performance is a clear validation of our business model and our strategy. Now, let's turn to slide 6 to discuss our ESG highlights of the first half. At Constellium, the health and safety of our employees are priority. At Constellium these are the recordable case rate of 1.8 in the first half of 2021 in line with our record low performance in 2020. Our safety results are among the best in the industry and we remain committed to continuous improvement. In the first half of the year, we should do sustainability linked bonds, our February issuance was the first SLD in the metals industry. Now, approximately 40% of our outstanding bonds now has a sustainability linked future. Over the course of 2021, we will be developing our 2030 sustainability strategy, which will establish a new set of sustainability targets and the steps to achieve them. I can say with confidence that aluminum will be an important part of the solution given its unique characteristics. Constellium is very well-positioned compared to global competitors on the basis of it’s current carbon footprint. The key aspects of our strategy will be delivering on our investment to increase our recycling capacity in Europe. These projects will lower our costs, generate an attractive return on investment and help further reduce our overall carbon footprint. Constellium is also dedicated to gender diversity across the organization. I am proud to say that our Board of Directors reflects this commitment, with two additional female directors added to our Board at our 2021 AGM, women now comprise over 40% of our Board members. 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. Let's turn to slide 8. For the second quarter of 2021, Constellium achieved €170 million of adjusted EBITDA, an increase of 110% compared to the second quarter of 2020. Compared to the second quarter of last year, PARP adjusted EBITDA of €94 million increased by €36 million. A&T adjusted EBITDA of €42 million increase by €11 million, and AS&I adjusted EBITDA of €41 million increased by €42 million. Holdings in corporate costs of €7 million were comparable to last year. For the first half of 2021, Constellium achieved €291 million of adjusted EBITDA, a 27% increase compared to the first half of 2020. PARP and AS&I adjusted EBITDA increase compared to prior year on strong performance, while A&T adjusted EBITDA decline due to weaker aerospace shipping. Now, let's focus on our segment performance. Turning to slide 9 for the PARP segment. Adjusted EBITDA of €94 million increased 63% compared to the second quarter of 2020. And as Jean-Marc noted it was a record quarterly performance. Volume was a €42 million tailwind, as shipments increased 29%, compared to the second quarter of 2020. Packaging shipments increased 13% while automotive shipments more than doubled. While we saw some temporary weakness in automotive demand from the semiconductor shortage this was largely offset by strong packaging demand. Price and mix was a tailwind of €7 million on a greater share of automotive shipments partially offset by a weaker packaging mix. Costs were a headwind of €8 million on higher cost, due to increased activity notably, maintenance, freight, and labor costs due to the state aid received in 2020 and not in 2021. FX translation which is non-cash was a headwind of €4 million in the quarter, due to a weaker U.S. dollar. Now turn to slide 10 and let's focus on the A&T segment. Adjusted EBITDA of €42 million increased 34%, compared to the second quarter of 2020. Volume was a tailwind of €11 million. TID shipments increased 51% on strong broad-based demand in both North America and Europe, while aerospace shipments declined 31%. Price and mix was a headwind of €6 million due to a lower share of aerospace shipments relative to TID. Costs were a tailwind of €8 million on solid cost control and favorable metal costs. Lastly, FX translation was a €2 million headwind in the quarter. Now turn to slide 11, and let's focus on the AS&I segment. Adjusted EBITDA of €41 million increased by €42 million compared to the second quarter of 2020. And as Jean-Marc noted was a record quarterly performance. Volume was a €25 million tailwind with automotive shipments increasing 93% and industry shipments increasing 37%, on strong broad-based demand. Our automotive shipments were impacted by the semiconductor shortage, resulting in a moderate negative effect on adjusted EBITDA in the quarter. Price and mix was an €18 million tailwind, due to the increased share of automotive shipments and cost was a €1 million headwind on solid cost control. Turn now to slide 12. Given the unique nature of the second quarter of 2020, we felt it was helpful to compare our adjusted EBITDA in the second quarter of 2021, to the second quarter of 2019. On the left side, you will find our adjusted EBITDA Bridge by Segment. PARP adjusted EBITDA increased by €15 million on continued improvement across the business and notably at, Bowling Green. A&T adjusted EBITDA declined €22 million on lower aerospace shipments partially offset by higher TID shipments and strong cost performance. AS&I adjusted EBITDA increased by €11 million on improved operational and cost performance in automotive structures. On the right-hand side of the slide you'll find our adjusted EBITDA Bridge by driver. Volume was a headwind of €19 million, while most of our end markets are at or above 19 levels including packaging, automotive, and specialties, aerospace remains well below. Price and mix was a headwind of €52 million, primarily related to lower contribution from aerospace. Costs were a tailwind of €80 million, which reflects the costs we have taken out of the business through the pandemic and the ongoing success of Horizon '22. We are committed to retaining as much of this cost reduction as possible. And lastly, FX translation was a €5 million headwind as a consequence of a weaker US dollar. As the slide demonstrates we have made substantial progress on reducing our cost base and have significant earnings leverage to an aerospace recovery. Now turn to Slide 13 where I want to highlight our progress on Horizon '22 and our continued strong performance on costs. As of June, we have nearly achieved our €75 million structural cost reduction target. We are investigating further opportunities to reduce our structural costs and are confident we can find them. In addition to structural cost reductions, we believe there are substantial opportunities through a number of initiatives across the company, including metal cost savings operational excellence cost savings, procurement cost savings and interest cost savings. On the top right of the slide, you can see our cost flex was 82% in the second quarter. In other words, our costs only increased $0.82 for every €1 increase in revenue. Each segment contributed to these strong results, notably A&T at 70% and AS&I at 66%. This focus on cost helped us double our adjusted EBITDA year-over-year while our shipments increased by only 31% and our revenue increased by only 47%. There's a lot of talk about inflation in the economy. And while we are seeing inflationary pressures in some areas notably labor and freight thus far inflation has been manageable. And remember that many of our contracts include inflation provisions that allow us to pass-through some of this risk. We remain laser-focused on limiting increases in our costs. Now let's turn to Slide 14 and discuss our free cash flow. We generated $35 million of free cash flow in the second quarter bringing our first half total to €81 million. As you can see on the top right of the slide, we have delivered on our commitment to generate consistent strong free cash flow. Since the beginning of 2019 we have generated over €400 million of free cash flow. Looking forward, we expect to generate in excess of €125 million of free cash flow in 2021. We expect CapEx of approximately €225 million cash interest of approximately €125 million and cash taxes of €five million to €10 million. We remain committed to significant and sustainable free cash flow generation. Now turn to Slide 15 and let's discuss our balance sheet and liquidity position. At the end of the second quarter, our net debt of €2 billion declined slightly compared to the end of the year as free cash flow generation was partially offset by €35 million of FX translation. Our leverage returned to our pre-COVID low of 3.7x. This is a remarkable achievement considering the contribution from our aerospace business remains far below the 2019 level. We expect our leverage at the end of the year to be at or below 3.5 times. As you can see in our debt summary we have no bond maturities until 2026. Our refinancing in the first half of 2021 are expected to save €30 million of annualized interest expense. We continue to target cash interest of less than €100 million per annum and I am pleased to say that we are rapidly approaching this goal. Our liquidity was strong at €887 million as of the end of the second quarter. We expect to gradually reduce our excess liquidity over the course of 2021 and 2022 as the risk of COVID received. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to Slide 17. Secular growth trends are creating opportunities across our portfolio, and we are taking actions to capture this opportunity. Aluminum is a contributor to the circular economy. Aluminum is infinitely recyclable and does not lose properties when recycled unlike paper or plastic. Each of our businesses benefit from this competitive advantage. But the focus on the circular economy, is currently most pronounced in packaging, where cans of the beverage packaging material of choice. Aluminum cans are infinitely recyclable and can return to shelf at 60 days. We are currently working on a number of initiatives to increase the can sheet capacity of our Muscle Shoals and are exploring other opportunities across our packaging platform to further increase our capacity to serve this growing market, through debottlenecking and additional investments. In addition, to being a major producer of can sheet, we are one of the largest recyclers of aluminum cans globally. We are planning to build on the recycling advantage of aluminum for our investment to substantially increase our recycling capacity in Europe, both for cans and auto. Aluminum is also inherently lightweight, strong and corrosion resistant. These trades provide a strong value proposition for transportation application, notably for light-weighting and for the electrification of the automotive fleet. In addition to our autobody sheet capabilities, our recent extrusion price and automotive structured investments position us well to capture this growing demand. In addition, we believe that our recent investments in Ravenswood to unlock TID volumes are timely and will meet customer demand in nonautomotive transportation application. We expect the regulatory environment to accelerate the electrification of the utility fleet. As I have noted in the past, electric vehicles contain substantially more of the aluminum products that we produce, like autobody sheet, crash management system and battery boxes that internal combustion engine vehicles. We are already seeing this shift in our order books with electric vehicles increasingly represented in our customer portfolio in both PARP and AS&I. One notable example is our recent announcement that we are supplying the Audi e-tron with Auto Body sheet and extrusion-based structure including parts for the battery enclosure. I would also like to highlight, our diverse and balanced portfolio of end market exposures. On the bottom left, you can see our LTM revenue as compared to our 2019 revenue. Our portfolio has remained well balanced. And as Peter, mentioned earlier, we have significant earnings growth potential when aerospace rebounds. Now let's turn to Slide 18 and discuss our outlook for our end markets. The packaging market is strong in both North America and Europe, we expect mid-single-digit demand growth in the medium term. This growth is underwritten by new can lines announced by our customers in both North America and Europe. The can sheet market has continued to improve and we have secured multiple long-term agreements with customers both current and new over the past few quarters. These agreements reflect the value that we bring to these markets as one of the largest domestic suppliers in both Europe and the United States and I am pleased with the outcome. Moving now to automotive. Automotive demand has remained resilient, despite the semiconductor shortage. Underlying consumer demand remains strong, especially for light trucks, SUVs, and luxury vehicles where Constellium has greater exposure. We continue to experience disruption from the semiconductor shortage with new shutdowns announced just last week. We expect these fixed staff to continue into the second half of 2021. However, we expect the financial impact to be manageable due in large part to the strong underlying demand in packaging. Let's turn now to aerospace. Despite demand remaining at low levels in the near term we remain confident that the long-term fundamentals driving aerospace demand growth remain intact including growing passenger traffic and greater demand for new more fuel efficient aircraft. This is supported by commentary from our customers around their plans to increase output of single eye aircraft. In the near-term optimism in the aerospace supply chain is increasing, but increased passenger traffic and recent aircraft orders from airlines. We expect this optimism to turn into increased orders for aerospace plate and sheet in the coming quarters. In other specialties, we continue to execute on our strategy of expanding in niche products in a diversified range of markets. In general, these markets are dependent from the health of the industrial economy in Europe and North America. Specialties markets are generally very strong across both Europe and North America. Turning now to slide 19, we detail our key messages and financial guidance. I'm very proud of Constellium's second quarter performance. We reported record adjusted EBITDA, extended our track record of free cash flow generation, and de-levered by nearly a term. We are committed to completing our deleveraging journey. I am also very optimistic about our future. Demand in virtually all of our end markets is strong. Importantly this recovery feels durable with an aerospace recovery still to go. I believe there are many opportunities for Constellium to benefit from secular megatrends. Aluminum is part of the solution to a more sustainable world. And Constellium is well-positioned to be a winner. We have already taken actions to capture some of these opportunities and we will continue to plant the seeds for future growth in a disciplined manner. For 2021, we are targeting adjusted EBITDA of €545 million to €560 million and free cash flow in excess of €125 million. We remain focused on operational performance, cost control, free cash flow generation, and shareholder value creation. With that operator, we will now open the Q&A session.

[Operator Instructions] Our first question comes from the line of Curt Woodworth from Credit Suisse. You may begin.

Yes, thanks. Good morning, Jean-Marc and Peter.

Hi Curt.

Hi.

First question is just with respect to the free cash flow outlook for the rest of the year and also some of the moving pieces year-to-date. When we look at the impact of metal lag, the adjusted EBITDA reconciliation is about an $85 million headwind year-to-date. And then also look like there are some losses on hedges or derivatives of another $45 million, $44 million. So, I'm just curious to the degree that impacted free cash flow. I don't know, if some of those hedges physically settled. And then, in terms of going forward, would you expect -- or what is your expectation around working capital or potential continued overhang of metal lag on the business? Is my first question.

So Curt, maybe I'll take those in slightly reverse order. But -- so on hedges, remember the hedges are -- these are -- this is mostly metal. And it relates to hedges that we have on fixed-price sales contracts. So, as metal prices rise, the derivative is in the money and a positive value and that's offset by kind of the commercial transaction underneath. So, it's -- we're completely hedged and it's just a one off that's the other. So it's kind of an accounting adjustment. So on hedges, I think it should be kind of neutral for us. On metal lag, remember, metal lag, what we're doing in metal lag is, we're just making the adjustment between the fact that our IFRS accounts are on a weighted average cost basis and EBITDA is stated on a LIFO basis. So, it's just that adjustment. And lastly, on working capital for the full year. So, this is something that we talked about in prior quarters that we hadn't seen working capital expand. But that as the business expanded, we'd start to see it. And we did see that in the second quarter and in the first half of the year. So, as we go through the full year, we expect working capital to be a use for the full year and the extent of that use, we’ll really depend on the extent to which there's any pickup in aerospace or any incremental pickup in the business from where we are today.

And I would just add that, if you look at working capital days, actually we're doing pretty well. So it's really, because of increased metal prices and more business coming to us, but the teams are doing a fantastic job at managing working capital on a day-to-day basis.

Okay. Got it. That makes a lot of sense on the metal lagging issue. I guess that the packaging market has been topical and it seems like last quarter, you talked about how most of your 2021 and '22 deals have been completed and now the negotiation is more on a '23 basis. But I was wondering, if you could help provide a little bit more context around sort of what you're doing in packaging. Can you comment on the amount of contracts that have reset? Can you give any sort of transparency around, how pricing compares this cycle versus last cycle? And with respect to the debottlenecking at Muscle Shoals over 75,000 tons, I think the potential is more like 100. Can you comment on exactly where that stands? How much of that debottleneck is now in the market? Or would you expect to get into the market next year? Thanks.

Yes. So Curt, on the packaging market conditions, we've seen them gradually improved over the past year, 1.5 years. And I started with being mildly optimistic, now I'm very optimistic. And that translates into pricing going up, which if you remember when we did the long-term €700 million of EBITDA guidance for 2022 pre-COVID, we said we were not expecting pricing improvement. We are seeing that now. Remember, these are gradual resets because typically those contracts are five years, sometimes you have a little bit more renewing in one year than the other. But typically you would renew 20% of contracts every year or thereabouts. And therefore, a 10% price increase is only a 2% pricing is in any given year but it adds up over time. So we are seeing over the course of – we're seeing some improvements in pricing this year already. You can see a little bit of that in the variance analysis. We'll see more of that in 2022, more of that in 2023, more of that in 2024 and I'm very optimistic about the trend. What's really telling that the discussions we have with our customers are more and more and more strategic in nature about our ability to accompany them over the long-term. And we see that – we saw that in aerospace, right where we had – we moved from historically a five-year contract with Airbus to a 10-year contract, which obviously is a much more meaningful, sizable and complicated contracts but we're seeing also some of that trend with can makers saying we're making all these investments. The beverage companies are really shifting their packaging mix. We want to be sure we are supplied and there are economies that can be gained by all of us by having more of a long-term view. So all that is very positive, very conducive to higher pricing and also set the stage for more capacity expansion. I mean the more visibility we have in our business, the happier we are about committing to some capacity expansion. As I mentioned in the prepared remarks, we are looking at what we can do in Muscle Shoals also in – because the markets are strong in both sides of the ocean. People want to depend more and more on onshore supply as opposed to imports. And we're getting to price levels that justify making some incremental investments in our facilities. That's what we are studying. And it's too early to tell but I hope in the next six months or so, we should be able to have more visibility around what additional capacity we can unleash in both Europe and the US. Now you remember in Muscle Shoals we had announced 75,000 tons more of capacity. We're well on track to deliver on that. But beyond that we will need a little bit more time to fine-tune our numbers and our engineering.

And how do you think about balancing capital spending with respect to packaging when you have also very strong secular growth across automotive sheets and structures. And I think on your flat-rolled auto business, it seems like you're getting pretty close to full utilization. So I was just kind of curious, do you plan to try to grow auto sheet more? Can you also discuss kind of the nomination dynamics within the structures business? I know that you took some time to digest, what you have on the last 18 months but it seems like that also is now heating up again. Thanks and congrats on a great quarter, very impressive.

Thank you. Well, all good questions, Curt but I would be remiss not to mention again that we are firmly committed to deleveraging. We are really happy with the progress we've made this quarter, 3.7 but our long-term target is 2.5 and we'd like the long-term to not be too much in the long term. So, that's priority number one, right? Get to that 2.5 leverage, which has been a target of ours for a few years now. On this path to 2.5, we will invest and we have the capacity to invest beyond maintenance capital, right, to get to profitable returns on growth projects. But we will make choices, as you point out, because we want to make sure we do not compromise that fast trajectory to 2.5 leverage. Within that, we think packaging has excellent opportunities. We're very pleased with the investments we've made in TID. And you remember, at the first Investor Day that Peter and I did back in 2017. We talked about Constellium not only being packaging aerospace and automotive but having a lot of specialties, right, TID being one of them. And it is very important that we take care of that quarter of our business that has a very good product, very good applications, where we got some good customer connections directly to OEMs, and you see that translate to the margin we see A&T today despite the very low aerospace. So, we'll keep on investing in that segment too. In terms of Auto Body Sheet, I think we are quite happy with where we are today. And given the prospects elsewhere, I am not seeing a second calp line in the US or a third one in Europe in the near future. We will continue to optimize our mix, and make sure that we deliver the differentiated products to our customers and that's going to be our focus. So, that's how we think about growth. Peter, anything you want to add?

Maybe just -- so Curt, as we said in the past, we've looked at kind of our capital spending and forecasted it out for several years. And in that forecast we have kind of various growth initiatives that we hope to undertake. And then we've prioritized them, right? So, we're going to be very focused on where we start to spend on growth initiatives that we are super disciplined about the capital we're spending. And that we're targeting high returns. And then, the only other thing that I would supplement is that you asked about auto structures. And there I would say, our path on auto structures is we'll probably -- you'll probably see us moderate the growth relative to what it was just a couple of years ago, but specifically focused on kind of very high-return margin optimization initiatives.

Great. Thanks. Makes lot of sense.

And our next question comes from the line of Josh Sullivan from The Benchmark Company. You may begin.

Hey, good morning. Great quarter here. Can you just talk a little bit about the inflationary pressures and how you're able to pass a lot of those through? Is there any dichotomy between maybe some of the inflationary pressures in your European operations versus your US operations at this point?

Sure. So, let me just kind of step back a little bit and talk about inflation. So, we have a couple of mitigants to inflation. So, one is in a number of our cost areas, we have our costs committed on a forward basis. So for example, energy is the best example of that where we've kind of bought our energy forward for -- in the case of energy, it's about a year forward. So, we do have some mitigants in that case. We also have the mitigant in some of our contracts where we have the ability to pass-through kind of inflationary cost pressures. And that's not everywhere, but it is across a number of our contracts. And as a company, we are kind of focused on increasingly building in these inflationary pass-through clauses into our contracts. And I will say, in recent contract negotiations, we're succeeding in getting them. So we feel kind of positive about that. Now as to kind of specific areas of inflation, we talked about labor a bit, we talked about transportation. So we are seeing some inflationary pressures in those areas. I think we feel, we can still kind of keep it under control for the time being, but we definitely are seeing it there. And then lastly, with respect to your question on Europe versus the U.S., I would say, we're seeing kind of -- it depends on the topic and the spend area. But I would say, in general, slightly more inflation in the U.S. than we are in Europe.

And maybe just to add on this. On labor inflation, we have contracts bargaining -- with the bargaining units. They give us quite a bit of visibility over many years. So we don't see inflationary pressure where we have that. On all salaried work for this year raises have been zero, right, as a consequence of the COVID crisis. And as Peter was mentioning, many of our contracts have inflation protection clauses. In addition, the best protection we have against inflation is actually our margin. The higher our EBITDA margin, we’ve got a light inflation and EBITDA margin, right? That's a good thing. So we -- by balancing all that, we're looking at it in a -- we're very -- as Peter said, we're laser-focused on containing costs, but we are quite sanguine about what we see in the market when it comes to inflation these days.

I appreciate all the detail. Maybe just one on the general engineering market. Can you talk about some of the structural differences that can keep this cycle going long term? I mean, do you see competitors raising production? It does seem to be a little bit of a relief valve for the market, that how long can that cycle continue?

So, I think, there's a number of factors that are in play here, some of them are external to us and some of them are internal. On the external side, you see the recovering economies in Europe and North America. You see the trend towards onshoring and shorter supply chains and you see antidumping duties, in extrusions, in roll products, in Europe, in the U.S. and all that is creating a very good and very favorable environment. You're right, that some competitors are increasing capacity as well in this space. But quite frankly, it's very needed, given the trend towards onshoring. And specifically to us, we've had a very deliberate strategy over the past five years to focus sales teams, product development engineers, application engineers on these markets, building relationships with OEMS. So we are not very dependent on distribution markets, right, kind of, the last variable to adjust, we're really deepening our relationships with customers and finding the products that are -- that give them the best total cost of ownership. So that's helping us also justify higher prices and higher margins. So I do think this recovery and our place in it, as a long leg and should be quite sticky. And you see that in the margins, we're reporting both AS&I where we've got quite a bit of specialties. You see it certainly in aerospace and transportation, where the margins you see today are higher than what aerospace margins were five years ago and that's because we've been very good at focusing on where we really provide differentiated products in TID. And even in a PARP, there's quite a few niches there, where we're doing a pretty good job at optimizing what markets were after. But customers will bring real value to. And that's a constant work of optimizing our assets and our production capabilities to best meet customers that have a need for products we can deliver and offer a better margin. So I think it's got a long leg.

Okay. And if I could just sneak in one last one on the aerospace side. Can you just talk about any indications of progress in the market at the distributor OEM levels, the Airbus production announcement help at all? Thank you.

Yeah. So we are hearing the same things and we are hearing it directly from our OEM customers. So there is anticipation for recovery. And our customers are telling us to be ready. We are not yet placing the orders, but I think the momentum is building, it feels like destocking is getting close to its end. It depends I mean its complicated as you know even better than we do Josh, it's a very complicated supply chain. There's many different parts in play here, but it feels like destocking is getting towards the end. So we stand ready to -- for demand to pick up.

Thank you.

The next question comes from the line David Gagliano from BMO Capital. You may begin.

Hi. Thanks for taking my question. I just wanted to drill down a little bit on the numbers themselves in the quarter. And I think on a recurring basis, there's so much volatility in EBITDA per ton in the A&T segment. And I realize the volumes are relatively low and it can move around mix. I'm wondering if you can bridge 2Q versus 1Q as long as we're the same 48%, 49%, but EBITDA per ton went from €396 to €794. I'm just wondering or something like that. I'm just wondering, can you break down that jump between for example metal price-related gains versus mix shift and other major buckets?

Sure. Happy to do it. So a couple of things. Let me just start by saying the quarter as you know was very strong in TID and that gives us some leverage on costs. Secondly, kind of our cost performance in the A&T segment in general I think has been very good. And we're remaining -- we're able to maintain kind of a cost structure that's helping us maximize that leverage. Thirdly, I would say that there are some timing impacts in the quarter which is just -- these are kind of mix related timing effects that are benefiting the quarter as well. So David, as we step back from this, we still think if we go back to the kind of aerospace margin -- A&T margins of €700 to €800 per ton on a normalized basis. That's still probably a decent place to be. But kind of -- I think that the performance in the quarter in the absence of an aerospace recovery is a very strong performance. And I wouldn't expect it to be kind of recurring in the third and fourth quarters without an aerospace recovery, particularly given the fact that remember in aerospace most pronounced the second half is weaker, given the kind of shutdowns in the middle of the year and the shutdowns at the end of the year.

And I think what helped as well is you see TID volumes picking up, as Peter was mentioning in the second quarter. We still have costs extremely well controlled. And any – on that basis, any increase in volume as a disproportionate effect on EBITDA. And we had a few as Peter was mentioning a very high-margin aerospace sales, which would be rounded up in the tonnage, but that are actually extremely contributive that took place in Q2 as opposed to being spread over Q2, Q3, Q4.

Okay. So I didn't quite get the breakdown specifically, but I understand. I understand your point about non-recurring. And so I guess, maybe another way to ask the question is how much of the jump that we saw quarter-over-quarter in 2Q versus 1Q is expected to really be non-recurring on a forward basis?

I mean, it's a – I mean, I'd say, if you put that number at something around kind of, I don't know, mid-single digit, but it's hard to put your finger exactly on it, but I'd say something around that range would be okay.

Okay. So – or maybe another way, I mean, so we had EBITDA?

Well, David, actually just one other thing to say. It's not non-recurring isn't the right word to use here, because there's some timing impacts, but it's not like – it's not non-recurring. Right? In other words as Jean-Marc said, you had some aerospace shipments that came in the quarter that were very remunerative tons that benefit the quarter, but that's just the timing difference between we expected them maybe in Q3 and they came in Q2 and things like that adjustments like that.

Okay. And then just real quick shifting gears two other quick questions here. Just on the CapEx, it seems to be heavily weighted to the back half of the year, I believe. And I'm just wondering, is there anything specific on second half of the year versus first half?

Yeah. No, it is very back-end weighted. I mean, I think we spent – we've given guidance for $225 million, and we spent $67 million. So there's a lot to be spent in the second half. I think it's a consequence of a couple of things. One is every year, the second half is more prudent to CapEx, because that's when customers shut down both in the summer, in automotive, and in Europe, specifically where most of the industrial companies shut down for two three weeks in August. And then you got the holidays around the Christmas time. So that's when we will be spending our CapEx on a major maintenance, where we got to take the mill down for a week or two. You want to do it in the off-season as opposed to the peak season, like where we are in the second quarter. The other aspect too is we were quite unsure of feel about what the recovery from COVID would look like back in November, December. So we constrained capital at the beginning of the year, as we got more and more confident going into March, April, we decided to release some of the capital. And that obviously has a bit of a lag before it happened. So for these two reasons, we got quite a hill to climb. And obviously, when we talk about our cash flow guidance for the full year, we're very happy with the first half. We've got to recognize in the second half, there will be quite a bit of CapEx spent. But all to productive uses, obviously, so that's quite exciting.

Okay. That's helpful. And my last question just a slightly bigger picture, again, just on the numbers. As we look out to 2023, obviously aerospace is still – is still kind of treading water a bit, but likely to improve. And the other businesses are really humming with some potential upside on auto, I guess. So the question is really, it looks to us like €700 million of EBITDA in 2023 is not easily attainable, but within sight here and that was the guide prior to COVID. I'm wondering what are your views towards the 2023 outlook and how it compares to what you thought it was going to be pre-COVID?

I think we agree with all your statements. David except that we will stop short of giving guidance for 2023. I would just add that packaging is actually getting strong and stronger and is even better than what we thought it would be, both on volumes, but certainly on pricing. So that's very helpful. So as we've said a number of times, we're ahead in every respect on the business side, right? So the markets are good. Our position in the market so is strengthening, automotive strong can sheet is strong, specialty is super strong. Aerospace is still an unknown as you point out and our cost performance is excellent as we see it and we're very committed to keeping the cost through. So we still like the €700 million target, but we'll stop short of saying exactly when it happens.

Okay. Thank you very much. That's helpful. Thanks.

Thank you, David.

Our next question will come from Corinne Blanchard from Deutsche Bank. You may begin.

Hey, good morning guys.

Hi, Corinne.

Hi. Very impressive quarter. I just have two questions as most of them have already asked, and so but could you just give a little bit more clarity on the guidance for the full year. So you rise it between €545 million and €560 million, but that's implied I would say relatively lower EBITDA in the second half versus the first half. Is it -- can you just give us the main driver? Is it seasonality? Is it also some impact from the semiconductor shortage? That would be helpful.

Sure. I'll try it. So, we're assuming continuation of what we've seen in the first half of the year strong end market, no recovery in aerospace, but strong in markets otherwise. We're assuming that the microchip shortage is continuing to penalize us like it has in the first half. And we're expecting cost performance to continue at a high level. Now as you point out, it means the second half is not as good as the first half. But again, we've got seasonality as I mentioned earlier where there's much more shutdown at our customers and much more maintenance in our plants, which means less revenue more cost. That's a recipe for not as good EBITDA in the second half. And I think if you go back to where we were in 2019 pre-COVID, you see that kind of seasonality, right? So that's a good kind of benchmark or template for what normal could look like for us. So I think that's how would answer it. And obviously, whenever we give guidance, we're very committed to meet for exceed guidance. So at the moment we're giving the guidance that we see is the best we can get given the market conditions.

Okay.

Yes. No. I mean, the only thing I'd add Corinne is that you still do have some COVID hangover going on and who knows what that translates into in the back half.. But that's the only other factor I'd add in.

Yeah Jean. That’s a good product and it's going to be partly my next question. We're seeing obviously, I think COVID risk increasing everywhere in the US and also in Europe with countries started lockdown and et cetera again there. As you started to look into it, like when you release that guidance so like, how do you see it for the aerospace in in the second half? Should you expect in to see an impact?

Yes. It's difficult to tell. It's true that the headlines may seem a bit worrisome at times. But we are not seeing it in our order book. And quite frankly, when you travel around and you see a airport pack, you see a flight pack. You see people going about leaving their lives, in a pretty kind of business as usual way. So, it doesn't feel like a catastrophe is upon us. But obviously, we didn't think a catastrophe was upon us in January or February of 2020. So we've got to be handled. So as Peter said, there may be a little bit of caution here but it doesn't feel like we are up for the fourth wave or fifth wave that would be the same as the first one by far. So that's not embedded in our guidance, a return of the first wave.

Yes. And I'd say I mean it seems like Corinne, it seems like the governments around the world are committed to staying open. So, when we think about guidance as Jean-Marc says, it's definitely not -- we don't have a shutdown embedded in our guidance at all. And what -- where it might manifest itself is in slightly longer supply chain or slightly greater supply chain challenges in certain instances or some things like that but manageable, manageable effects.

Okay. Thank you. Just a last one quickly. On the semiconductor shortage I think in 1Q you had said about €3 million impact for EBITDA. I don't think you've mentioned any number for 2Q. Was it in the same range? Is that current to be as well around that range €5 million to €5 million going forward?

Yes I think that's the right range going forward. I mean -- so there's different impacts from the different businesses. And one of the things that we love our diversified model. And in this instance, PARP is a great example of how that diversification really helped us because you clearly see in some kind of shutdowns on the automotive side related to semiconductor. But the demand on the packaging side is so strong. We're able to kind of basically divert every ton that we can't ship into auto into packaging right? So, it's a very -- very mild effect in PARP. And then in auto structures, even there we're able to divert some of our shipments. So -- but I think 3% to 5% is a good number to use going forward.

Great. Thank you. that’s it from me.

Our next question will come the line of Christian Georges from Societe Generale. You may begin.

Thank you very much. Jean-Marc just to clarify something you said a bit earlier about the CALP line. You said no CALP lines in Europe or the US did you mean required? Or did you mean announced?

What I meant is we are not planning actively on building another CALP line in either the US or Europe. We believe that some will be needed overtime, but it's not like we are actively planning to build a new one. And that's again looking at allocation of capital and where do we get the best return for our investment.

But I mean in terms of what the market may need as the semiconductor shortage in particular perhaps moved on and we continue to see a ramp-up of electricals lightweight requirements. What's your take on what is right now available for automotive companies to be able to rely on sufficient supply?

Yes. I think we said that historically as soon as 2023, the market would be needing more capacity. So maybe it's 24 with the typical. So it's reasonably close. But again for us the conditions to invest are substantial demand, real demand strong contracts with very favorable prices and the absence of another alternative which would be even better. And that's the factors we're balancing. And as I sit now I don't see us investing more in Auto Body sheet. We're very happy with what we have. We're very happy with what we can do with the assets we have and we're really focused on optimizing in this sector as opposed to growing. That may change in a six months time we'll see.

Okay. Very clear. And the second thing is when you mentioned your target leverage still very much at 2.5 times as soon as possible. Should we read this also as that being when you will contemplate paying a dividend? Or is that not associated with it?

Yes. I think it's a good question, Christian. So we are -- for the time being we're very focused on bringing the leverage down. We think that's the highest impact item on our share price. So we'll focus on that in the short-term. As we start to have visibility on that 2.5 times I think it's very fair to say that the broader capital allocation discussion will come on the table and we'll address it at that time. But for the kind of immediate future I think we're going to focus on delevering.

Okay. Very clear. And totally different thing. On the part division if I look at last year the second half 2020 you did an EBITDA of 167 million. I mean you had some pretty good shipments as well after the difficult first half. You're looking to the second half of this year is there any big difference between the second half of this year to the second half last year?

Well, I think, the markets are a bit better and the recovery is more advanced than the second half. And we're seeing and especially -- I mean as usual right out of the crisis the US rebounded much more quickly than Europe. So we had the rebound last year in the US already in the second half. We didn't have as much of it yet in Europe. So we should see Europe stronger in the second half of this year than it was in the second half of last year.

So PARP should look pretty good in the second half right?

I think all our businesses are looking pretty good, Christian.

That’s fair point. Okay. Just one last question. On the aluminum we know there's some strain on the upside right now with issues about supply from China and so on. But looking at the Midwest premium I think it's now at a historical high. The last time that happened there was a lot of about this very high price of the premium in the US. I mean is this in any way impact? I know you passed on. But they can't this in any way affect you financially on a given quarter?

Not in a material fashion. And we've learned our lesson from the past and we've done a pretty good job at shielding ourselves from the volatility in regional premiums in both the US and Europe. So it kind of a timing effect but nothing really economical and material over six months or one-year period.

Okay. And [indiscernible] as a whole independently obviously premiums continues to strengthen say towards the 3,000. I mean – and we get that for a prolonged period. Do you see that as a possible headwind for some of your end markets? Or is it really not a source of major concern for you?

It is historically customer choices around what material they use. Have been largely unaffected by mail prices. We've been in a – I think back in 2007, 2008 LME reached 3,300 3,500. And we didn't see a change in what packaging material customers were choosing. And when one commodity rises the other ones also rise, right? So I think if you look at still today at pretty high level, isn't it? So I'm not even sure that when you look at aluminum versus other commodities I'm not even sure that the volatility of aluminum is greater than the actual volatility of other commodities that may not be quoted but that are still moving up and down quite a bit. So it doesn't change. It doesn't impact us.

Okay. That’s been very clear. And very last question on your A&T because you're running your TID and other specialty at 40,000 ton, right? And aerospace was about 30,000 ton before the long-term. So 70 – I mean is 70,000, 80,000 tons overall capacity something that you can take in your existing facilities?

Yes, yes. We can make everything we make in TID plus everything we used to make in aerospace. We look forward to that day when it comes back. And we're still lagging €100 million of adjusted EBITDA in aerospace, right only because of the downturn in the aerospace market. So we look forward to these good times coming back.

Okay. Sure. I am always looking for a great quarter. Thank you very much.

Thanks.

And our last question will come from the line of Sean Wondrack from Deutsche Bank. You may begin.

Hey, good morning, Jean-Marc, Peter and team.

Hi, Sean.

Hi, Sean.

Just to follow-up on the metal premium question. Am I thinking about this right in that it's basically excluded from EBITDA but it might have a transitory impact on cash flow that should even out over time?

Well the – maybe the way to think about this is that -- so just in terms -- more specifically on metal premium, what Jean-Marc was saying before is generally speaking like the metal price itself, we're passing it through, right? So in our customer contracts we're passing it through or using financial markets to hedge it, okay? So for the vast, vast majority of it we pass-through what Jean-Marc was referring to is there are some isolated incidents, where we have customer contracts that don't allow us to pass it through, right? But typically those contracts are short duration, so they might be six, maximum 12 months contracts. And so what happens typically is that okay, we have to absorb the Midwest premium change in the short term. But then when the contract comes up for renegotiation, we go back and we kind of embed an improved price to reflect the higher premium. So that's why was saying, it's a timing impact in our financials.

Okay. No. That makes a lot of sense. Okay, great. And then, on the can side, between North America and Europe, have you seen a greater relative increase in pricing across maybe North America, given that Europe has lagged a bit? Or are you seeing sort of stable across the board?

No. We're seeing the trends, across the board. I mean, there is a need for more can sheet, in both, Europe and North America. And that is creating a very favorable environment for pricing, on both sides of the ocean. Maybe North America started a little bit earlier. And Europe is catching up to North America.

Right. Okay. And have you considered entering any new, geographies in packaging?

We have, for instance…

We have. And we are very focused on what we have. And are constantly optimizing what we have and the increasing our capacities in the most capital-efficient manner, and entering a new geography is not the best way to manage your return on investment.

Yeah. And Sean, if you look at the growth profile in both North America and Europe, it's a very exciting growth profile right now.

All right. And we've been hearing the same. And then the last one for me, just looking back, you've been an early mover in terms of instituting some accountability around our ESG goals. Investments in recycling seem attractive, considering the line with your ESG initiatives. Do you see some more investments in recycling going forward? And is there any potential for M&A there? Or do you think it will all be organic? Thank you.

Yeah. So we're committed to organic investment. We're doing it in Europe. And we have partnerships in the U.S. as well. So we believe recycling has great potential is good for the planet. And it's good for our financials. So we like it very much. And we'll keep on exploring new opportunities. But again, we want to be very responsible, in managing all our growth projects. And make sure that deleveraging continues to the 2.5 target. And any projects or additional projects we would undertake, organic or M&A whatever in recycling or other, needs to keep us on that trend line towards deleveraging. So that's what we're focused on.

Okay, great. Thank you for answering my questions.

Thanks, Sean.

Thank you. We have no further questions in the queue. I'd like to turn the call back over to, Jean-Marc Germain, for any closing remarks.

Well thank you very much all for attending the call. We're very excited with our progress this quarter. Very excited about the deleveraging that is happening fast. And also very excited about all the great market conditions and that are ahead of us. So we look forward to continuing on our journey and updating you further, after the end of Q3. Thank you again, everyone. Bye-bye.

This concludes the conference call. Thank you for participating. You may now disconnect.