Constellium SE (CSTM) Q4 2022 Earnings Report, Transcript and Summary

Hello. And welcome to today’s Constellium Fourth Quarter and Full Year 2022 Results Call. My name is Bailey, and I will be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to, Jason Hershiser, Head of Investor Relations. Please go ahead.

Thank you, Bailey. I would like to welcome everyone to our fourth quarter and full year 2022 earnings call. On the call today, we have our Chief Executive Officer, Jean-Marc Germain; our Chief Financial Officer, Peter Matt; and Jack Guo, our Chief Financial Officer designated. After the presentation, we will have a Q&A session. A copy of the slide presentation for today’s call is available on our website at constellium.com and today’s call is being recorded. Before we begin, I’d like to encourage everyone to visit the company’s website and take a look at our recent filings. Today’s call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company’s anticipated financial and operating performance, future events and expectations, and may involve known and unknown risks and uncertainties. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the factors presented under the heading Risk Factors in our annual report on Form 20-F. All information in this presentation is as of the date of the presentation. We undertake no obligation to update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. In addition, today’s presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today’s slide presentation, which supplement our IFRS disclosures. Without further ado, I’d like to turn the call over to Jean-Marc.

Thank you, Jason. Good morning. Good afternoon, everyone, and thank you for your interest in Constellium. Let’s begin on slide five. I want to start by thanking each of our 12,500 employees for their relentless focus on safety. Safety is our number one priority and a key pillar of our sustainability strategy. I am pleased to report that we delivered again, best-in-class safety performance in 2022, reducing our recordable case rate for the year to 1.8 per million hours worked. I would like to specifically recognize several of our sites for their excellent safety performance. Our Changchun joint venture in China completed 3 million hours without a recordable case in 2022. Muscle Shoals, Neuf Brisach, Ravenswood, Singen and the Valais operations, all completed 1 million hours without a recordable case. Finally, 12 of our sites completed 2022 with zero recordable cases. Our safety journey is never complete, though, and we all need to remain focused on this critical priority every day. We remain fully committed to achieving our safety targets to reduce our recordable case rate to 1.5 per million hours by 2025. Now let’s turn to slide six and discuss the highlights from our fourth quarter performance. Shipments were 368,000 tons, down 5% compared to the fourth quarter of 2021. Revenue increased 8% to €1.8 billion as a result of improved price and mix, partially offset by lower metal prices and lower shipments. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal price risk. Our value-added revenue, which reflects our sales, excluding the cost of metal was €696 million, up 18% compared to the same period last year. Our net income of €30 million in the quarter, compares to net income of €7 million in the fourth quarter of 2021. As you can see in the bridge on the right, adjusted EBITDA was €148 million, slightly above the fourth quarter of 2021 and in line with our prior guidance. Also, we extended our track record of consistent free cash flow generation with €22 million in the quarter. Looking across our end markets, aerospace demand was very strong with shipments up around 50% compared to last year for the third quarter in a row. Automotive shipments were up double digits in the quarter versus last year, with new platform launches driving our growth. Packaging shipments were down in the quarter due to inventory adjustments across the channel at most can makers and operating challenges at our plants in Muscle Shoals, which, as we discussed last quarter, were in large part due to a shortage of experienced engineers and operators. While we are seeing signs of weakness across certain industrial markets, our industrial business overall performed well. The combination of improved mix, pricing power and solid execution by our team in overcoming significant inflationary pressures drove our strong results, which Peter will discuss later in more detail. Now let’s turn to slide seven for the full year highlights. For the full year, shipments were 1.6 million tons or up slightly compared to 2021. Revenue increased 32% to €8.1 billion. This was primarily due to higher metal prices and improved price and mix. Our net income of €308 million, compares to net income of €262 million in 2021. Adjusted EBITDA was €673 million or up 16% compared to last year. This performance is a record for the company and a record for our A&T and AS&I segment. We delivered our fourth consecutive year of positive free cash flow with a total of €182 million in 2022, which was also a record for the company. As many of you recall, in April last year at our Analyst Day, we began reporting our return on invested capital or ROIC, and said we would update our ROIC at the end of each calendar year. For 2022, we achieved an ROIC of 11%, up 120 basis points from 9.8% in 2021. As you can see on the bottom right of the slide, we demonstrated our continuing commitment to deleveraging, ending the year at 2.8 times or down 0.6 times from the end of 2021. Overall, I am very proud of our fourth quarter and full year 2022 performance. We demonstrated our pricing power by delivering record adjusted EBITDA and record free cash flow in 2022 despite significant inflationary pressures. 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. Please turn now to slide nine. Value-added revenue or VAR was €696 million in the fourth quarter, up 18% compared to the same quarter last year. Looking at the fourth quarter, €134 million of this increase was due to improved price mix in each of our segments. €35 million of this increase was due to favorable FX translation tied to a stronger U.S. dollar. Volume was a headwind of €27 million due to lower shipments in PARP. Finally, metal impacts were a headwind of €37 million as inflation and input costs such as hardeners and alloying elements more than offset our scrap performance in the quarter. For the full year of 2022, VAR drivers were similar, except for volume, which was a positive contributor. There are two important takeaways from this slide; first, we grew our value-add revenue by 21% compared to last year; and second, we continue to have pricing power. Price and mix and price specifically is the biggest increment of our year-over-year variance and helped us to offset inflationary pressures. Now turn to slide 10 and let’s focus on our PARP segment performance. Adjusted EBITDA of €71 million decreased 20% compared to the fourth quarter of 2021. Volume was a headwind of €13 million with higher shipments in automotive more than offset by lower shipments in packaging and specialty rolled products. Automotive shipments increased 20% in the quarter versus last year as new platforms began to ramp up and demand generally appeared stronger. Packaging shipments decreased 12% in the quarter versus last year due to short-term inventory adjustments from our can sheet customers in both North America and Europe, and production challenges at Muscle Shoals. Price and mix was a tailwind of €33 million, primarily on improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of €42 million as a result of higher operating costs due to inflation across PARP and higher maintenance costs at Muscle Shoals related to the shortage of experienced engineers and operators that Jean-Marc mentioned previously. Our Muscle Shoals team is highly dedicated and we are working hard to recruit and train new hires, but this will take some time. FX translation, which is non-cash, was a tailwind of €5 million in the quarter due to a stronger U.S. dollar. For the full year 2022, PARP generated adjusted EBITDA of €326 million, a decrease of 5% compared to 2021. The drivers of the full year performance were similar to those in the fourth quarter. Now turn to slide 11 and let’s focus on the A&T segment. Adjusted EBITDA of €56 million increased 87% compared to the fourth quarter of 2021. Volume was a tailwind of €1 million with higher aerospace shipments offsetting lower TID shipments. Aerospace shipments were up 50% versus last year as the recovery in aerospace markets continues. Shipments in TID were down 18% versus last year, reflecting a slowdown in certain industrial markets, partially offset by strong demand in defense and semiconductors. Price and mix was a tailwind of €64 million on improved contract pricing, including inflation-related pass-throughs and a stronger mix with more aerospace. The price and mix bucket in the fourth quarter of 2022 included a customer payment of €8 million related to a contractual volume commitment. Costs were a headwind of €38 million on higher operating costs due to inflation. For the full year 2022, A&T generated record adjusted EBITDA of €217 million, an increase of 96% compared to 2021. The drivers of the full year performance were similar to those in the fourth quarter. As a reminder, the price and mix bucket for the full year included customer payments of €18 million related to contractual volume commitments. One last point on A&T, in the past, we have said EBITDA per ton for the segment should be in the €700 to €800 range. Based on our contractual positions and the performance of the business, we now expect EBITDA per ton to be €800 to €900. Now turn to slide 12 and let’s focus on the AS&I segment. Adjusted EBITDA of €31 million was flat compared to the fourth quarter of 2021. Volume was a €2 million tailwind, with higher shipments in automotive, partially offset by lower industry shipments. Automotive shipments increased 8% in the quarter versus last year, as we experienced some improvement in activity levels. Industry shipments were down 3% in the quarter versus last year. Price and mix was a €15 million tailwind, primarily due to improved contract pricing, including inflation-related pass-throughs. Costs were a headwind of €18 million on higher operating costs, mainly due to inflation. For the full year 2022, AS&I generated record adjusted EBITDA of €149 million, an increase of 5% compared to 2021. The drivers of the full year performance were similar to those in the fourth quarter. It is not on the slide, but I want to provide a quick comment on Holdings and Corporate. In the quarter, Holdings and Corporate was a headwind of €8 million. The result was mainly due to timing and a number of one-off adjustments in the quarter. For the full year 2022, our Holdings and Corporate expense was €19 million, and we continue to expect Holdings and Corporate expense to run at approximately €20 million per annum. Now turn to slide 13, where I want to give an update on the current inflationary environment we are facing and our focus on pricing and cost control to offset these pressures. Throughout 2022, we were faced with broad-based and significant inflationary pressures and we currently expect this to continue throughout 2023. As you know, we operate a pass-through business model, but we are not materially exposed to changes in the price of aluminum, our largest cost input. That said, metal and alloy supply remains tight today given smelter shutdowns and supply disruptions. We were able to resource our needs in 2022 and we currently expect to do so again in 2023, but at incremental costs. Labor and other non-metal costs will also be higher again this year, particularly European energy. I will go into more detail on energy in just a moment. Given these cost pressures, we are working across a number of fronts to mitigate their impact on our results. Our businesses delivered strong cost performance in 2022 and we continue our relentless focus on cost in 2023. Our recently announced Vision ‘25 initiative is helping. Across the company, we are working to increase our efficiency, reduce our consumption of expensive inputs and lower our fixed costs. On the commercial side, many of our contracts have inflationary protections, such as PPI inflators or surcharge mechanisms, and where they do not, we are working with our customers to include them. As we have mentioned in the past, these surcharge mechanisms typically have a lag impact, but they do provide an effective mechanism through which we can recoup our costs, where we are signing new contracts, they are coming at better pricing and a range of inflation -- and with a range of inflationary protections. As you can see in the bridge on the right, in 2022, we were very successful with price and mix, the largest increment being priced in offsetting inflationary pressures. 2022 was very challenging -- was a very challenging year from the standpoint of inflationary cost pressures that ran close to €300 million. Looking forward to this year, we expect the inflationary pressures in 2023 to be comparable to 2022. We continue to believe that we will be able to offset most of this cost pressure in 2023 and the rest in future periods with a combination of the tools we noted and our relentless focus on cost control. The net impact of inflation and other cost increases and actions we are taking to offset them are included in our guidance for 2023. Now turn to slide 14, where I want to give an update on energy. Our total energy costs over the 2019 to 2021 period averaged around €150 million per annum. In 2022, our total energy costs were around €275 million and we expect total energy costs to be materially higher in 2023. As previously noted, we purchased energy on a multiyear rolling forward basis, which has helped us to mitigate some of the energy cost pressures and helped us to smooth out some of the steep increases in costs. As of today, our 2023 energy costs are largely secured, but at higher average prices. As you can see in the chart on the right side of the slide, both electricity and gas forward prices in Europe have come down from their 2022 peaks, but still remain at 3 or more times historical averages. As we previously noted, we are in active dialogue with our customers on passing through these costs and have made very good progress across all of our end markets. During 2022, we initiated an energy call to action across our entire organization, and I am happy to say that as a result, we have uncovered numerous opportunities to reduce our own consumption. More recently, several governments in Europe have discussed potential initiatives that could bring some relief to help offset higher energy prices. These initiatives are still under development, and at this stage, eligibility is uncertain and any potential benefit is difficult to quantify. Longer term, we, like others, see that structural solutions for European energy markets should be in place by 2025, including the restoration of existing energy sources, alternative source countries for natural gas, LNG imports and increased use of renewable energy sources. We will continue to update you on developments impacting our total energy costs and our ability to recover or offset these higher costs. Let’s now turn to slide 15 and discuss our free cash flow. We generated record free cash flow of €182 million in 2022, including €22 million in the fourth quarter. As you can see on the bottom left of the slide, we have continued to deliver on our commitment to generate consistent, strong free cash flow. Since the beginning of 2019, we have generated €650 million of free cash flow. Looking at 2023, we expect to generate free cash flow in excess of €125 million for the full year, though this will be weighted more towards the second half. We expect CapEx to be between €340 million and €350 million this year, which includes higher spending on cost savings and growth projects that Jean-Marc will talk more about in a few moments. We expect cash interest of approximately €120 million, which includes the impact of higher interest rates. We expect cash taxes of approximately €30 million. And lastly, we expect working capital to be a use of cash in the first half and a source of cash in the second half and based on our current forecast, roughly neutral for the full year. Now let’s turn to slide 16 and discuss our balance sheet and liquidity position. At the end of the fourth quarter, our net debt of €1.9 billion declined slightly compared to the end of 2021 as free cash flow generation was partially offset by unfavorable non-cash FX translation of €64 million with the strengthening of the U.S. dollar. Our leverage reached a multiyear low of 2.8 times at the end of 2022 or down 0.6 times versus the end of 2021. We remain committed to achieving our leverage target of 2.5 times and maintaining our long-term target leverage range of 1.5 times to 2.5 times. As you can see in our debt summary, we have no bond maturities until 2026 and our liquidity remained strong at €709 million as of the end of 2022. We are very proud of the progress we have made on our capital structure and of the financial flexibility we are building. I will now hand the call back to Jean-Marc.

Thank you, Peter. Let’s turn to slide 18 and discuss our current end market outlook, starting with packaging. In packaging, we have experienced some short-term inventory adjustments at can makers in both North America and Europe, but we believe this would be largely complete during the first half of the year. The focus on sustainability is driving increased demand for infinitely recyclable aluminum cans, and we are confident in the long-term outlook for this end market, given can maker capacity additions in both regions, as well as recent announcements of greenfield investments here in North America. We will participate in this growth in both North America and Europe as we announced at our Analyst Day last year. As Peter noted, the company is highly focused on stabilizing the operating challenges we have been experiencing at Muscle Shoals, so that we can take advantage of these end market dynamics. Our issues at the plant stem primarily from the labor shortages you have read about. We are very confident in our ability to restore the plant’s profitability over the course of 2023. Turning now to automotive. OEM sales and production numbers globally are still at a low base compared to pre-COVID levels, with uncertainty continuing as a result of the semiconductor shortage and other supply chain challenges. However, we remain very positive on this market and increased demand in both PARP and AS&I gives us reason for optimism. Automotive inventories are low, consumer demand remains high, vehicle electrification and sustainability trends will continue to increase the demand for lightweighting and low CO2 recycled content. Let’s turn now to aerospace. The recovery in aerospace continued in the quarter, with shipments up 50% versus last year for the third quarter in a row, though still well below pre-COVID levels. Major OEMs have announced field rate increases in the short-term and the desire for further increases in the medium-term. We remain confident that the long-term fundamentals driving aerospace demand remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft. In addition, demand is strong in the business regional jet segment, defense and space markets as well. As a chart on the left side of the page highlights, these three core end markets represent 76% of our LTM revenue. We like the fundamentals in each of these markets, and as I have said previously, we like our hand. Turning lastly to other specialties. While we do see some weakness in segments like general engineering plate and building and construction, early 2023 demand remains solid in many of our specialties end markets. Demand has been more resilient in North America than in Europe. In general, these other markets are dependent upon the health of the industrial economies in each region. In TID rolled products, demand remains strong in markets like semiconductors and defense and in transportation in North America. In industry extrusions, demand is still strong in sectors like solar and rail. It is also of note that many of the sustainability trends supporting growth in our core markets are very much at play here as well in other specialties. In summary, we continue to like the prospects for the end markets we serve and strongly believe that the diversification of our end markets is an asset for the company. Let’s turn to slide 19, where I want to provide more details on our plans to invest organically in our future. As we outlined previously, we are increasing our growth CapEx for the next few years to invest in a highly strategic, high return cost savings and growth projects. As Peter mentioned before, our total CapEx this year should be around €350 million and includes roughly €150 million for these attractive growth investments. Our performance over the last several years across varying business conditions, coupled with our strong financial position today, give us confidence to continue investing. We expect to continue to generate strong free cash flow through this investment cycle. The strategic investments we are making today are important contributors to our adjusted EBITDA target of over €800 million by 2025. Lastly, I want to mention that in a sharply deteriorating environment, the pace of investment could be slowed. While we are not planning for this outcome today, we will continue to monitor the situation and make any necessary adjustments to the timing of these investments. Let’s turn now to slide 20. But before I wrap up, I would like to thank Peter, who will be leaving Constellium at the end of March for an exciting opportunity at Commercial Metals. I will miss you, Peter. We have been a very good partner and I also want to congratulate Jack Guo on his promotion to Senior Vice President and Chief Financial Officer. Peter has been a great partner and has made significant contributions to our company, including building a strong team from which we were able to promote Jack. Jack has been with the company for over six years and most recently has done a tremendous job running our strategy function. Prior to this, he had already two decades of finance experience that included investment banking and operational finance. It brings to the role exceptional intelligence, strong knowledge of the company and the industry, and a well-rounded set of finance experiences. I have worked very closely with Jack on numerous projects and I am very excited to welcome in into this new role, and I look forward to working even more closely with you, Jack. Turning back to Constellium. Our team achieved a very strong performance in 2022. We delivered record adjusted EBITDA of €673 million and record free cash flow of €182 million. Importantly, we also further deleveraged our balance sheet to a multiyear low of 2.8 times. I am very proud of our entire team has delivered solid operational performance and strong cost control despite a number of challenges, including significant inflationary pressures. Looking forward, 2023 will be another challenging year, given the extraordinary inflationary pressures we are facing, but we are used to it. As Peter noted, we are currently expecting comparable inflationary pressures in 2023 to those we experienced in 2022, but we remain confident in our ability to pass-through most of these costs in 2023 and the rest in future periods. Based on our current outlook for 2023, we are targeting adjusted EBITDA of €640 million to €670 million and free cash flow in excess of €125 million. We do not give quarterly guidance, but given the destocking in packaging, the operating challenges in Muscle Shoals and the timing of inflationary impacts on our business, we do expect adjusted EBITDA in the first quarter of 2023 to be weaker than the same period last year and free cash flow to be negative in the quarter. These expectations are obviously included in our full year guidance that I just provided. As inflationary pressures subside, we believe we will emerge an even stronger company. Our business model provides a strong foundation for long-term success and we believe we have substantial opportunities to grow our business and enhance profitability and returns. We have a diversified portfolio and our end market positioning will enable us to take advantage of sustainability driven secular growth trends, such as consumer preference for infinitely recyclable aluminum cans, lightweighting in transportation and the electrification of the automotive fleet. The Constellium team has demonstrated its resilience and ability to execute across a range of different market conditions and I am confident we will continue to do so. I also want to reiterate our long-term guidance of adjusted EBITDA in excess of €800 million by 2025 and our target leverage range of 1.5 times to 2.5 times. And let me add, this guidance is based on the current energy positions that we have, including higher forward energy prices as of today. We remain focused on executing our strategy, driving operational performance, generating free cash flow, achieving our ESG objectives and shareholder value creation. In conclusion, I remain very optimistic about our future. And with that, Bailey, we will open the Q&A session.

Thank you. [Operator Instructions] The first question today comes from the line of Emily Chieng from Goldman Sachs. Please go ahead. Your line is now open.

Good morning, Jean-Marc and Peter. Congratulations on the new opportunity there. My first question is just around the EBITDA guidance that you have provided for 2023, the €640 million to €670 million, I think, is down only slightly below 2022 levels, which I think was a little bit more of an improvement versus the guidance that was talked to at the last quarter call. But maybe, Jean-Marc, if you could help bridge, what has changed versus your prior quarter’s expectations there? Has there been anything from the energy cost side coming down that you might see flowing through into the back end of this year that’s been helping out?

Yeah. Good morning, Emily, and thanks for your question. The -- so, yes, we feel more comfortable now and there’s a number of reasons for that and it is true that we believe our prospects are brighter than what we believe they would be back in October. The reason for that is, number one, we have more clarity in our order book for the year. Number two, we have also much more clarity in terms of pricing. There’s obviously a contract season in the fall. In October, we are kind of halfway through it. Now we are complete. So we have got much better visibility on our pricing for the year. And number three, as you pointed out, we got a little bit lucky with energy prices. They came down with a mild winter in Europe, so that’s helping as well. So these three are helping us converge towards that range of guidance we are giving today and we feel, again, more comfortable today than we did back in October.

Great. That’s very helpful, Jean-Marc. And a follow-up, if I may. I know you have talked about a little bit of additional capital that will be spent to help support some of the operations there, some -- and with some of the growth CapEx there. But you also mentioned that, that pace could be slowed in a more adverse operating environment. Perhaps could you define what that adverse environment could look like and what the flex would be on capital spending?

Sure. So, and clearly, it’s a remote possibility, but I want to highlight that there is we have got quite a bit of flex in our ability to flex CapEx and we have demonstrated it in the COVID times when we brought down capital expenditures by €100 million, while COVID hit really in March of 2020, right? So already a lot of projects are already launched, and despite this, we are able to reduce our capital expenditures by €100 million in the year. So I think that gives you a little bit of an idea of how much flex there is, 12 months out, you can reduce by €100 million and then possibly even more if it’s for longer. But I think what we -- I mean what we have demonstrated in the past is our ability to thrive in very different environments, right? When there is a sharp reduction in demand like in a COVID times when there is a strong pickup when the business is more stable. This is a business that generates substantial and consistent free cash flow. And we think we are -- the fundamentals of our business are strong and that’s why we want to continue to invest to the extent we can and our balance sheet allows it in the future of the business. So it would take a very significant downturn in the economy for us to change our plans regarding CapEx deployment. Again, we are in it for the long run and 2025 is nearly across -- around the corner and we want to make sure that we are able to see the opportunity, the many opportunities we have ahead of us. And finally, I will add that a lot of the investments we are talking about, some that are going to contribute to our negative free cash flow in the first quarter are the investments we are making in recycling, especially in Neuf Brisach, France and these are defensive investments at the same time as they expand our margins, they make us more independent from primary suppliers. It’s better for the planet. We want to do those things from shallow or high water, I would say.

Understood. That’s very clear. Thank you.

Thank you.

Thank you. The next question today comes from the line of Curt Woodworth from Credit Suisse. Please go ahead. Your line is now open.

Yeah. Thank you. Good morning, Jean-Marc and Peter. Peter, congratulations for the new role.

Thank you.

Good morning, Curt.

Hi. So I was wondering if you could unpack the guidance a little bit. I think you did say you are still expecting over €100 million of energy inflation. And I think in the past, you noted at least €100 million, I think, of labor and other sort of consumable related inflation. So what are you assuming in terms of price cost delta for the year and then do you also have a view of how much productivity or cost down you could achieve as well?

So as we look at inflation for the full year, Curt, what we said in the prepared remarks was that we expected it to be similar to what we saw this year and -- or, sorry, last year in 2022 and that was in the order of €300 million. So we are expecting that order of magnitude. And that includes, as you noted, higher energy costs, that includes higher metal costs and that’s really kind of alloying costs. It does include higher labor cost, labor is up more than it was in 2022 and then supplies in general across the portfolio. And all of that will add up to roughly a €300 million-ish increase. We believe that we are going to be able to pass-through most of that, as Jean-Marc said, and I said in the prepared remarks, we have pricing power. And one of the things that’s been gratifying to Emily’s question on why we are more conservative in October, we are right in the front end of this discussion around energy with customers and we have had very good success through the contract season. And I think what becomes clear is that our customers, they want us to be their suppliers because we are reliable and they need the material. And so, therefore, they are willing to work with us on this. And so we have had good success and as we did in 2022, we expect to pass-through most of that to our customers in 2023 or beyond, right? There are some instances where we said there’s a lag and that remains the case. In terms of our cost, I think, we continue to grind our costs down and we will continue to do that. In Muscle Shoals, clearly with some of the challenges there, our costs are elevated relative to where they would be, but I think that’s temporary. And we feel like the programs we have in place, the productivity improvement targets that we have in place are going to lead us to a very competitive cost position. So we will continue to work on costs. And maybe just to conclude, we -- on the Analyst Day, we talked about a €50 million cost opportunity and we continue to see that as very viable.

Okay. Makes sense. And then a follow-up, I guess, with respect to PARP profitability and margins and it definitely came in weaker than we had anticipated in the back half of the year, roughly, I think, 290 metric ton. And in the past, we have discussed auto profitability, I believe, in kind of the 500 to 600 level and I thought that packaging with the contract resets is kind of moving more up to definitely above 300. So can you kind of talk to what you think margin per ton in PARP could look like this year on a more normalized basis, obviously, it’s great to see you take the A&T margin target up by €100 million. But just curious what’s going on in part, if you could unpack that a little bit?

Sure. I will start and Peter will continue. So the -- on the auto side, in PARP, we are very comfortable with the level of margin we discussed in the past and that’s what’s happening right now. So we are good there. The shortfall, which I pointed to is mainly on the packaging side, comes from the packaging side. But remember that in packaging, we have had difficulties at Muscle Shoals, as we have discussed. But also we have been squeezed last year. There is a lag in terms of our ability to pass-through inflationary pressures. A lot of that has to do with the way the PPI works, where you look at the prior year and you increase your price the following year. And also, as we discussed a couple of years ago, the alloy surcharges started being implemented only this year, but only partially -- sorry, last year, but only partially. So there has been a margin squeeze also in packaging because of those two factors, allowing cost and the PPI fundamentals. Looking forward, the PPI and the inflation are pass-through in 2023, the alloys are pass-through in 2023 and the lag should be largely resolved. That said, we still have to restore operating performance at Muscle Shoals and that is what we are working on this year. As I mentioned, it’s mostly because of lack of experience resources and that takes time to build and we believe that over the course of 2023, we will restore profitability at Changchun and Muscle Shoals [ph], and therefore, in packaging. And those three causes, right, the PPI, the alloys and the inexperienced labor should be resolved by the end of 2023.

The only thing I’d add to that is that, remember, we talked about this inventory correction across packaging that’s going on among our customers. And you can imagine with the reduction in the tonnage across the business unit, it reduces our ability to leverage our fixed costs.

And what do you think a more normalized margin level is? I think in the past, you have talked about, I think, closer to €400 million, but could you update us on what you think a more fully economic level would look like for that division or is it too difficult to say right now?

So I think maybe we should -- so, certainly, north of €300 million, we should be able to be north of €300 million. I think maybe something in the order of €325 million to €350 million is a good place to start. And then if you have automotive pulling at full strength, maybe there’s some opportunity beyond that. But we would leave it there for now.

Okay. Got it. Thank you, guys.

Thank you, Curt.

Thank you. The next question today comes from the line of Corinne Blanchard from Deutsche Bank. Please go ahead. Your line is now open.

Good morning, Jean-Marc and Peter. First question from me…

Hi, Corinne.

…would be -- hi -- would be on EBITDA guidance. Do you expect a higher seasonality to happen this year, especially in 1Q and maybe going into 2Q because of packaging versus private care?

Yeah. Well, so what you should expect to see is that Q1 is going to be weaker than it usually is and so that would be contrary to the seasonality that we usually see. Usually, our first two quarters are the strongest and we should see a weaker Q1 recover in Q2 and then, obviously, Q3 and Q4, hopefully, we are back on track.

And remember, typically, PPI adjustments take place very often on the 1st of April. So we are still pricing in some segments, but prices that yet do not reflect, yet the spike in the inflation of last year, but they will start in April.

Thank you. And then maybe two quick follow-ups. The first one on aerospace margins, so cementing to the previous question, if you can unpack or if you can give a little bit more color on, I think you mentioned, like €800 million to €900 million. Is that truly coming just from aerospace or is it also like transportation or TID impact for that?

Yeah. I think it’s based essentially on better performance in our plants and better pricing as well and we look at it across the cycle, right? So securing a time when aerospace is very strong and the rest of TID is lower than drifting up. And if it’s the other way around, TID is strong, but aerospace is at a bottom and it’s drifting a little bit lower.

Okay. Thank you. And just the last one from me, can you remind us on the energy contract. Most of it is lock and you would renegotiate in September, October. How much of the energy cost is kind of export exposed? Is that 25%, 20%?

How much is? What was that?

Yeah. So I am not sure we fully understood the question. We try to answer. So going into 2023 today, about 90% of our energy needs are locked in, hedged, okay, essentially physically or through supply contracts, some derivatives as well. And then since we do it on a rolling three-year basis, we have to renew 25% roughly, 25%, 30% of our needs over the course of the year and split of the hedges for 24% and 25%.

Okay. Great. Thank you.

Thank you. The next question today comes from the line of Timna Tanners from Wolfe Research. Please go ahead. Your line is now open.

Hey. Great. Good morning and congrats on the opportunity. Peter will talk to you on the other side. I wanted to ask a couple of questions. One, maybe this is a dumb question, but inventory adjustments, is that -- it just seems like a euphemism for something? Like what exactly does that mean? Do you not have protection from context? Is that something more onerous in terms of underlying demand? I’d just love to get some more color on that on the packaging side?

Yeah. Hi, Timna. Yeah. I will take this one. So there’s excess inventory of cans and coils in the system compared to demand. There’s a number of reasons for that, like in the summer, the lack of promotion activities that the beverage companies, which typically there is and people start to stock up and then it doesn’t happen, so then the supply chain slows down. There’s been also a period of high growth after 20 years of markets being essentially flat. You have three years at plus 5%. People expect that the following year is going to be also a plus 5% that you have got a war, you have got inflation, people spend less money, buy less product, you expect have promotions, you don’t have promotions. So all of a sudden, the supply chain gets full with metal and it takes time to resolve that. Our contracts typically provide for a fixed amount of tons, but there is some variation around it and I will not go into the specific details, but let’s say, plus 5%, plus 10% or minus 5%, 10%. So when everybody is pulling below, then you can have -- and that happens that variance is, say, over the course of one year, but it materializes over the course of six months, and obviously, that creates a big swing in what demand is and people are still within their contracts. So I think that’s what we are seeing. And that’s why also, fundamentally, this is a reasonably stable market. There is not that much floor space on the shelves or in the warehouses to have full cans or empty cans, so it will resolve reasonably quickly and that’s why we believe in our -- through our discussions with our customers, we are confirming that, that by the end of the first half of this year, things will be back to normal.

No. That’s helpful. I guess I am wondering if this is a sign of just slowing demand after very strong COVID activity. I mean, do you see anything structurally weaker in the packaging outlook? Just obviously, there’s more cans and adoption of greater cans, but maybe the market get ahead of itself and needs to adopt maybe a slower growth outlook?

Well, I wouldn’t revise the growth outlook, but I think that, the COVID spike in consumption took everybody by surprise and people got maybe a little bit too excited about it. But fundamentally, you see more and more categories moving to cans. I mean, I don’t know if you have noticed in your -- going to the grocery store or your travel, you start to see flat water in cans and bottles and that’s a very good sign for us, because there’s a tremendous amount of plastic displays. So when things grow, it’s never linear, but I do believe that the growth trends for -- in favor of metal against plastic are going to stay on for many, many, many years.

And Timna, just one maybe to add to what Jean-Marc is saying. So as we look at our forecast for packaging demand in 2023, we expect it’s going to grow. It’s going to grow at kind of low-single digits, probably, zero to 2% type of thing -- type of range. And then longer term, I think, we are in line with what the can makers are saying, which is somewhere in the range of kind of 2% to 5% is probably the right way to bracket it and that feels right to us.

Okay. That’s great. And if I could squeeze one more in, just how good is your visibility on Europe? I am asking kind of, if things were to start to recover there, when would you start to see it, how well locked in are you and kind of more color on what you are seeing in Europe would be great? Thank you.

Yeah. So, I mean, depending on the products, our lead times are six weeks to six months, right, in aerospace, there’s some that take a long time to products that take a long time to make. I think we have got pretty good visibility for 2023 for over 75% of our business there. I mean aerospace is pretty locked in. Automotive, I mean, the signs are quite encouraging. And packaging, even though it’s flattish, as Peter mentioned, I think we have got a pretty decent visibility, because those inventory corrections really are not going to last longer than the first half of the year. So I think we have got decent visibility in Europe for 75% of our business perfect. I don’t know if I am answering…

Okay. Great.

… your question, feel free to follow up, if not...

No. That’s -- what -- when you say decent visibility, you mean for the full 2023 timeframe?

Correct. Yeah.

Okay. Great. Thank you.

Thank you, Timna.

Thank you. The next question today comes from the line of Karl Blunden from Goldman Sachs. Please go ahead. Your line is now open.

Hi. Thanks very much for the time and congratulations to Peter and Jack on the new roles. I wanted to talk just about the 2025 guidance and then certainly good to hear the reiteration there of over €800 million. Is it fair to say that can demand and energy costs have come in more challenging and perhaps the outlook is a bit more challenging than when that guidance was initially adopted. And I’d be interested to hear what the offsets are giving you confidence on that longer term guide presumably a few things going better than expected and love to hear what those are?

Sure. So, Karl, if I go back to what we thought in April of last year when we gave that €8 -- more than €800 million guidance. I think can is a bit challenged now, but I don’t think it is that much by 2025, and if anything, the volumes may be a bit lower, but the pricing is better. So, overall, in can, I’d say it’s even. Energy prices are definitely higher. We offset that by increased pricing and better efficiencies in our plants as well and I am quite encouraged by the early progress we are making. There’s nothing like lighting a fire under us to get us moving for sure. And then in aerospace, we are -- we were really at the beginning of the recovery last year. It’s come stronger. Maybe there is some upside in aerospace on our 2025 guidance and automotive is steady compared to of projections of last year. Finally, on the cost side, I mean, it’s -- our costs are much higher because of inflation, obviously, than what we thought they would be. But at the same time, we think our productivity and our progress in Vision 2025 gives us good confidence. So since the inflation is pass-through and our productivity could be better, I think, we got some upside. So, all in all, can in the same place, automotive in the same place, aero may be some upside and on the productivity cost side, maybe some upside.

That’s really helpful. Thanks. Just a quick one on the balance sheet. We have done a lot of good work there in deleveraging and approaching the high end of that target range. Should we think of Constellium is interested in notional debt reduction or should we think about your leverage target being achieved primarily through EBITDA growth from here?

We want to pay down debt also.

It will be both. It will be both. We want to reduce…

Okay.

… gross debt and our EBITDA is going to grow, too.

Great. Thank you.

Thank you. [Operator Instructions] Our next question today comes from the line of Richard Phelan from Deutsche Bank. Please go ahead. Your line is now open.

Hello. Yeah. Thanks, and Peter, good luck in the new role. You have touched on this multiple times here. So, but let me just a little clarification on the lower packaging volumes, I think, you said, 12% in Q4, that’s going to contribute to the lower EBITDA performance in Q1. You still think that where you stand today, that continues into Q2 as well and are they similarly double-digit sorts of declines in terms of volumes in that end segment?

Yeah. So I think -- so, yes, on Q1, it will be lower in Q1, and then as we get into Q2, we think we should be starting to recover. So we are kind of calling the trough somewhere around where we are today.

We think the full year should be about the same or maybe a bit better than last year.

Great. Thank you. And then, again, you have already partially addressed this, but the higher cost, roughly €300 million in total. There was some mention of -- in one of the questions about energy comprising over €100 million, but you didn’t attach a specific figure to the breakdown between energy, labor, the higher material, allowing or supply costs. It’s fair to say, though, that energy will still be the largest component of that €300 million basket year-on-year above the sort of €275 million expense that the group spent in 2022?

That is fair. That is fair. And we -- and remember, we have a piece of our energy that’s still open. So, hopefully, that will continue to be an opportunity for us.

Okay. And related to that on -- just in terms of supply, access to metal, no problems at all in terms of that at this point?

No. We are no problem with access to metal. I mean we...

We are going to work [ph].

Yeah. It’s…

But it’s so far so good and we don’t see a problem.

Understood. Thank you very much.

Yeah.

Thank you. There are no additional questions waiting at this time. So I’d like to pass the conference back over to Jean-Marc Germain, CEO of Constellium. Please go ahead when you are ready.

Thank you, Bailey. As you can tell, we are very happy with our performance in 2022 and we look forward with a lot of confidence to our performance of 2023. I want to wish good luck to Peter, perhaps, not his last day with us, far from it. We still have the benefit of his presence for quite a few weeks. And I look forward to updating you on our progress at -- when we release our Q1 results at the end of April. Thank you and have a good day all.

This concludes today’s conference call. Thank you all for your participation. You may now disconnect your lines.