Constellium SE (CSTM) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Constellium First Quarter 2021 Results Conference Call. (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, Head of Investor Relations. Please go ahead.

Thank you, operator. I would like to welcome everyone to our first 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, and good morning, good afternoon, everyone. Thank you for your interest in Constellium.

I'd like to turn to Slide 5 and discuss the highlights from our first quarter results. Shipments were 385,000 tons. That's down 2% compared to the first quarter of 2020. This decline was primarily as a result of lower aerospace shipments and lower packaging shipments from the strike and adverse weather in Muscle Shoals.

I want to highlight that our automotive shipments increased 10% year-over-year, and both rolled and extruded automotive shipments reached record levels despite the automotive shutdowns in the quarter resulting from the shortage of semiconductors.

Revenue decreased 7% to EUR 1.3 billion. This decline was primarily due to weaker price and mix and lower shipments in aerospace, partially offset by higher metal prices. Remember, while our revenues are affected by changes in metal prices, we operate a pass-through business model, which minimizes our exposure to metal risk.

Our net income of EUR 48 million compares to a net loss of EUR 31 million in the first quarter of 2020. As you can see in the bridge on the top right, adjusted EBITDA was EUR 121 million, a decline of EUR 26 million, driven by lower results at A&T from weak aerospace demand, partially offset by stronger performance at AS&I and P&ARP. These results include more than EUR 10 million of negative impact from a combination of the strike at Muscle Shoals, adverse weather in the U.S. Southeast and the effect of the semiconductor shortage on automotive production.

Free cash flow was strong at EUR 46 million in the quarter. As you can see in the chart at the bottom right, we have delivered significant and consistent free cash flow over the past 2 years. We look forward to extending our track record in the coming quarters and years.

Now let's turn to Slide 6, and let's look at our sustainability performance in 2020. At Constellium, the health and safety of our employees is our top priority. Our safety results are among the best in the industry, and we remain committed to continuous improvement. Constellium achieved a record low recordable case rate of 1.82 incidents per million hours worked in 2020. While this is something to be proud of, we will continue to push for further improvement.

I also want to highlight our 33% reduction in waste sent to landfills compared to 2015 and specifically call out our team at Muscle Shoals for an excellent job. Despite showing improvements in energy efficiency, our result was significantly negatively impacted by lower levels of production due to the COVID pandemic. We look forward to getting back on track toward our target of a 10% reduction from 2015 levels.

Constellium continues to receive external recognition of our sustainability efforts. We received AS&I (sic) [ASI] certifications at our plants in Singen, Neuf-Brisach, Dahenfeld and Gottmadingen. Further, we achieved the Ecovadis Platinum rating, a AA rating from MSCI and Prime from ISS.

Next, I would like to provide our 2020 results for the 2 Sustainability Performance Targets, or SPTs, contained within our landmark Sustainability-Linked bond. For greenhouse gas emissions intensity, we reached 0.732 tons of CO2 equivalent per ton of sales. This improvement was despite lower operating levels at our plants that negatively impacted our results.

For recycled input, our use of recycled aluminum declined roughly 6% from 2019 to 586,000 tons. This was due to lower activity and shipment levels in 2020 from the COVID-19 pandemic. As we announced in February, we expect to achieve our target of 685,000 tons of recycled input primarily through an investment in recycling capacity in Europe. We remain on target to hit each of these SPTs at the relevant measurement date. Over the course of 2021, we will develop our 2030 sustainability strategy, which will establish a new set of sustainability targets and the steps to achieve them.

With that, I will now hand the call over to Peter for further details on our financial performance.

Thank you, Jean-Marc, and thank you, everyone, for joining the call today. As Jean-Marc noted, group adjusted EBITDA for the first quarter of 2021 was EUR 121 million.

Turning now to Slide 8. Let's break down these results, starting with the P&ARP segment. Adjusted EBITDA of EUR 68 million increased 3% compared to the first quarter of 2020. Volume was a EUR 3 million headwind as shipments decreased 1% year-over-year. Packaging rolled product shipments declined 5% due to the onetime event at Muscle Shoals that Jean-Marc mentioned. Automotive rolled product shipments increased 11% to a record 63,000 tons. Costs were a tailwind of EUR 8 million, primarily due to favorable metal costs, improved recovery and reduced labor costs. FX translation, which is noncash, was a headwind of EUR 3 million in the quarter due to the weaker U.S. dollar.

Now turn to Slide 9, and let's focus on the A&T segment. Adjusted EBITDA of EUR 19 million decreased 62% compared to the first quarter of 2020. Volume was a headwind of EUR 32 million on 57% lower aerospace shipments year-over-year. In contrast, TID shipments increased 23% on strong demand in both U.S. and Europe.

Price and mix was a headwind of EUR 28 million due to a lower share of aerospace shipments relative to TID. Costs were a tailwind of EUR 28 million primarily related to lower maintenance and labor costs and favorable metal costs. Lastly, FX translation was a EUR 1 million headwind in the quarter.

Now turn to Slide 10, and let's focus on the AS&I segment. Adjusted EBITDA of EUR 38 million increased 10% compared to the first quarter of 2020. Volume was a EUR 6 million tailwind on strong demand. Automotive extruded -- excuse me, extruded shipments increased 9% to a record 34,000 tons, while industry extruded shipments increased 6%. Price and mix was a EUR 5 million headwind, primarily from the industry business. Costs were a EUR 3 million tailwind on strong cost control, notably lower labor costs. I want to highlight our EUR 540 per ton of adjusted EBITDA, which is back to our historical levels of profitability.

Now turn to Slide 11 where I want to highlight our continued strong performance on costs across each of our businesses and at corporate. P&ARP delivered strong cost performance despite several extraordinary events. A&T continues to manage costs very well despite lower levels of aerospace shipments. And AS&I also performed well despite higher levels of activity.

In the first quarter of 2021, we flexed our cost by 73%. Cost flex, you will recall, represents the change of costs over the change of revenues. Excluding metal and depreciation, we reduced costs by approximately EUR 55 million compared to the first quarter of 2020, notably on lower labor costs, maintenance costs and professional fees. We continue to work on reducing costs of our capital structure. Our February refinancing reduced our run rate cash interest by approximately EUR 20 million. We will continue to evaluate opportunities to further optimize our capital structure costs, and I want to commend the entire Constellium team for its continued discipline around cost.

Now I'd like to provide an update on Horizon '22. Horizon '22 is actually a number of strategic business optimization initiatives. On our structural cost savings initiative, we now expect to deliver our EUR 75 million target by the end of 2021, a full year earlier than targeted. With COVID-19 hopefully moving into the background, we have reinvigorated our efforts around a number of initiatives, including metal savings, operational excellence and procurement savings. We strongly believe that each of these initiatives provide years of cost improvement opportunities. We look forward to continuing to update you on our progress, and I remain excited about the significant opportunities that are in front of us.

Now let's turn to Slide 12 and discuss our balance sheet and liquidity position. At the end of the first quarter, our net debt was EUR 2 billion. This was flat compared to the end of 2020 as unfavorable noncash FX translation offset EUR 46 million of free cash flow generation in the quarter.

We remain committed to deleveraging. At the end of the first quarter, our leverage was 4.6x compared to 4.3x at the end of 2020. This increase in leverage is primarily due to a lower adjusted EBITDA contribution from aerospace and unfavorable FX translation due to the weaker U.S. dollar in the first quarter of 2021 compared to the first quarter of the prior year. We expect to resume our deleveraging in Q2 2021 as we replace a heavily COVID-impacted second quarter of 2020 with a stronger result in the second quarter of this year. We expect leverage to be well below 4x by the end of 2021. And finally, we do remain committed to our long-term leverage target of 2.5x.

As you can see in our debt summary on the bottom left-hand side of the page, we have no bond maturities until 2024. I would also like to highlight that we recently completed the extension of the maturity of our Pan-U.S. ABL to 2026.

Our liquidity was very strong at EUR 982 million as of the end of the first quarter despite deploying approximately EUR 150 million towards gross debt reduction during the February refinancing. As the threat of COVID subsides, we expect to gradually reduce our liquidity balance to more normal levels over the course of 2021 and 2022. We remain firmly committed to free cash flow generation and gross debt reduction.

And I'll now hand the call back to Jean-Marc.

Thank you, Peter. Let's turn to Slide 14, please. I want to highlight our diverse and balanced portfolio of end market exposures. Approximately 80% of our LTM revenue targeted markets with secular growth characteristics. This secular growth is largely driven by sustainability mega-trends, including lightweighting in transportation, the electrification of the automotive fleet and the development of a circular economy. We continue to believe that this aspect of our investment story is underappreciated by investors.

So turn now to packaging. Packaging is a core market for Constellium and represented 41% of our LTM revenue. Demand from our can customers remains strong in both North America and Europe. Cans are convenient, marketable and sustainable, and consumers increasingly prefer cans. In order to meet this demand, our customers have announced new lines in both the U.S. and Europe. These new lines are expected to drive demand growth for can sheet for years to come.

Now let's move to automotive. Automotive represented 28% of our LTM revenues. Constellium is well positioned in both sheet and extrusions to realize the benefits of the secular shift to aluminum in automotive and the electrification of the automotive fleet. We expect continued efforts to lightweight will drive demand for our automotive products, including Auto Body Sheet, Crash Management Systems and battery enclosures.

In the near term, demand from our automotive customers remains strong, and we have thus far seen only a limited impact from the shortage of semiconductors. Where possible, OEMs are prioritizing the production of light trucks, SUVs and luxury cars where end consumer demand remains strongest and where Constellium is most present. Based on our current visibility of the semiconductor shortage, we expect to have an impact in the second quarter similar to what we experienced in the first quarter. We will closely monitor automotive market trends.

Let's turn now to aerospace. Aerospace represented 9% of our LTM revenues. We remain confident that long-term fundamentals driving aerospace demand growth remain intact, including growing passenger traffic and greater demand for new, more fuel-efficient aircraft.

Aerospace OEMs have maintained reduced build rates. Our aerospace shipments continue to be at levels below build rates, which suggests the supply chain continued destocking. While we are seeing encouraging signs, including increased passenger traffic in the U.S., this has not yet translated into more orders in our order book. But this can change quickly, and we are prepared to meet higher demand.

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 upon the health of the industrial economy in Europe and North America and are benefiting from a strong post-COVID economic rebound and recent trade actions.

In TID, markets are strong in both North America and Europe. In European extrusions, demand is very strong across most end markets.

Turning now to Slide 15, we detail our key messages and financial guidance. Constellium delivered solid performance in the first quarter of 2021. We exceeded the adjusted EBITDA guidance range that we provided in February. We continue to deliver strong cost performance across each of our businesses. We also extended our track record of consistent and significant free cash flow generation.

As I mentioned earlier, I believe there are many opportunities for Constellium to benefit from very real sustainability-driven mega-trends. These trends can provide demand growth in our end markets for years to come. I remain optimistic about our prospects for 2021.

We are now providing full year guidance for both adjusted EBITDA and free cash flow. For the full year of 2021, we expect adjusted EBITDA of between EUR 510 million and EUR 530 million and free cash flow in excess of EUR 100 million. As a result, we expect to make substantial progress on our deleveraging objective in 2021. As always, we remain committed to the safety of our people, operational execution, free cash flow generation, disciplined capital deployment and shareholder value creation.

With that, operator, we will now open the Q&A session.

(Operator Instructions) Our first question comes from Curt Woodworth with Crédit Suisse.

I was wondering if you could quantify some of the headwinds you experienced in the first quarter between [this crisis] and some of the impacts on auto and the chip shortage. And it seems like with respect to the guidance, you're assuming at least at this point, not much change in order entry in aerospace and I assume some continued maybe challenges on auto with respect to semiconductors. So I was wondering if you could also just provide a little bit more granular detail, if you could, on the guidance as far as [those things go].

Yes. So Curt, I can start and then maybe Jean-Marc can jump in. So in the first quarter -- sorry. Can you hear me? Okay. In the first quarter, the headwind that we've talked about is about kind of EUR 10 million plus, it's somewhere in that range, as a result of the challenges at Muscle Shoals, the bad weather at Muscle Shoals and then also the chip issue, which affects obviously kind of our auto businesses in P&ARP and in AS&I.

The other thing, too, to highlight in terms of headwinds, if you think about this on a year-over-year basis, is A&T, right? Because when you look at the delta year-over-year, obviously, the aerospace business was way down relative to last year. And I think that kind of articulates really the biggest delta in the year-over-year change that we have.

Yes. And I think, Curt, when you look forward, the 2 issues in Muscle Shoals, the weather and the strike, are behind us obviously. And we said EUR 10 million plus, so we didn't break down the 3 elements but 1/3, 1/3, 1/3 is the best way to not be wrong.

So on a go-forward basis, we think in Q2, we should be exposed still to the semiconductor outage. So maybe 1/3 of them would be the best way to kind of put a number around it. So it's not really material. I mean we're explaining it because there's a lot of talk, obviously, in the press. We see production lines going down. The impact that we see for Q2 for us is that amount and I think over time, the situation will improve. So not a material amount, but it is baked in our guidance.

And can you talk a little bit about your expectations for aerospace in the back half of the year? And I think it's a little surprising that order entry hasn't picked up given we've had some pretty significant destocking. And then Airbus has been pretty clear about going to take the build rate up in the back half of this year. So just curious what your...

Yes. No. Yes. It's absolutely true that the sentiment is improving. I mean we see it in passenger traffic. We see it with our customers, trying to ramp up or planning to ramp up production. We don't see it yet in the order book.

Now our order book, depending on specs and all that, is 3 to 6 months. So it's very difficult to call any inflection, right? I would say it's difficult to see it in the next 3 to 6 months for us, but it doesn't take us until the end of the year. So it could happen at any time. And I'll stop short of calling the inflection point. We'll -- we're ready when it comes, and it's going to be very good for us. But we certainly do not see a further deterioration in our aerospace segment.

Okay. And then with respect to packaging, can you comment on progress you're making with respect to some of the contract renegotiations? I believe for (inaudible) or next year.

Yes. So we're -- yes. So we're in very good shape. I've commented over the past few quarters that I was becoming more and more optimistic about pricing, and I continue to be. And now we're looking at what happens in '23, '24. That's really what we're focused on at the moment. And I see a continued trend towards a better sharing of the value creation in the can sheet, the can making and supply chain. So that's good for us on a go-forward basis.

And do you see scope to increase your rolling capability there? I know that some of the debottlenecking at Muscle Shoals will get impacted. But have you evaluated any longer-term potential upgrades to the mill to really increase output?

Yes. So we see continued opportunity for debottlenecking and increased shipments. Now substantial debottlenecking, which would require substantial investment, will be conditional upon the execution of fully satisfactory contracts for that increased capacity with customers. So we're working on it. But even absent substantial step-up, we see a very nice, gradual trend of improved pricing and improved volumes over the next 3, 4 years.

Okay. And then just final one for me. Any updates on some of your EV initiatives with respect to either battery box, the development partnerships or just, in general, your penetration rate in that market?

Yes. So as you know, we're very pleased with the progress we are seeing now firmly in the numbers in our AS&I segment. And Peter was highlighting that we are back to the historical levels of profitability. And that has come on the back of quite a bit of tightening of our operations and a focus on what projects we select and go after. So we have been very selective.

As I mentioned in the past, the battery technology, not only the battery themselves, right, but the casings, the boxes, right, how to assemble them, how to make them is still nascent or emerging. So we have a couple of projects going on, but they are not yet a substantial part of either our -- certainly not our results year-to-date and not even of our outlook. But we are planting the seeds, and we'll see how it grows.

Our next question comes from Christian Georges with Societe General.

Can I just keep going on the -- what you were saying about the packaging debottlenecking? Because the outlook seems to be improving steadily with regards to demand in Europe and the U.S. with some of the new age drinks and indeed the new lines which are being installed. At what point does the market need to find some more supply, additional capacity to satisfy the demand?

Yes. It already does need more supply. And as you saw, Arconic is going back into can sheet from their mill in Tennessee, so it's a substantial increase in capacity in the North American market. And you've got overseas competitors emerging from different places in the world. So the market is not in a place where demand cannot be met, but all of us have a role to play at different times in the cycle and depending on how the investments ramp up to continue to meet that demand, which you look at on a global basis, you could have a 50% growth in can sheet in the next 5, 7 years. So all of us will be at different stages, at the right time for each of us, will contribute to this expansion in can sheet.

And Chris, again, as we said in the past, the returns have got to be there for us to do it, right? So we're definitely not going to build, and they will come. We're going to build in connection with kind of solid contracts and good visibility on the returns we can generate.

Great. And if you please, some questions to your automotive grades. Because obviously, at the moment, there's been a bit of a slowdown with the chips availability. But let's say we go back to normal underlying rates, which seem to be quite impressive now with evidence of the German carmakers coming about on electric cars and so on. Here, again, at what point -- we saw that Aleris -- so Novelis was going to be 60% of the U.S. market with Lewisport. Are we looking here again at some needs in the medium term, short term for more capacity for automotive rolled products?

Yes, Christian, that's a good question. I mean the same answer applies that Peter gave for can sheet. We will expand our capacities when we are sure we get the right returns and they are underwritten by very strong customer contracts.

We are not there yet. If you look at our current shipments, 63,000 tons, in the first quarter of automotive sheets. We've got 300,000 tons of capacity globally, right? So we are not fully saturated. And for us, profitability, returns come before revenue. So we want to make sure we maximize that.

And then, as you know, there is a trade-off between how much can sheet, how much auto sheet we want to make, again, to optimize the overall return on capital for the company. And then after that, once all that is optimized, then we can ask ourselves, okay, are we ready to go for a significant expansion? We are not there yet, and we're really focused now on getting the returns from the investments we've made in maximizing the free cash flow generation and the returns to shareholders.

Okay. Great. And then my last question is, I thought there were some more tariffs, which were implemented, I think March in the U.S. for aluminum imports of variety of kinds, in particular in Germany, I think. I mean is there any impact on you for this? Is there any impact of any on your -- of your shipments going left or right? Or is that neutral?

Yes. No. So there is an impact. And we're shipping from Germany to the U.S., so we're subject to tariffs even though we are not dumping, but that's the law. But those volumes and this capacity was very much needed in Europe. So we're able to redeploy the capacity in Europe.

And conversely, those antidumping duties were really targeted against some actors that were dumping, and this has created a more level playing field. So our operations in the U.S., especially out of Ravenswood, have benefited from it because we are now competing against people that play by the same rules. And you see some of that in our TID performance with higher pricing and higher volumes. So antidumping duties are a good thing for Constellium because they level the playing field, they are selected, targeted, and they tend to benefit those that play by the rules in the continent where they operate. And that's us.

So the positive -- because those tax came about, I think, in March. So the positive impact would be more present in your U.S. operation in Q2, Q3, Q4?

Yes, there is a process for these antidumping duties before they are levied. That is quite public. So the beginning of the possibility of antidumping duties surfaced mid last year. So at this point in time, when an investigation is launched and then there's the first determinations, the supply chains adjust, right, and the customers look at it and say, oh, if I continue to buy there, I'm at risk. The suppliers also start reallocating their production to other geographies. So it's a continual process. By the time they are actually levied, the market has already adapted.

Our next question comes from David Gagliano with BMO Capital Markets.

I just wanted to ask a bit of a longer-term question in terms of the pre-COVID target, EUR 700 million, which was, I think, a target for 2022. Now that we're -- where we are in this process, and obviously, packaging seems to be doing better and auto, semiconductor issues aside, it sounds like it's probably back to where it was historically. So really, the question is, what do you think it will take to get back to that EUR 700 million target, say, for example, by 2023?

Yes. So David, that's a good question. So as we mentioned, and I'll reiterate and I'll confirm what we mentioned in the prior calls, we -- vis-à-vis our EUR 700 million target, we are ahead in about every category, except for aerospace. As we discussed earlier, knowing when the inflection happens and when aerospace goes back to a more normal level is -- we feel impossible to tell. Certainly, it's hard to tell right now. So is it possible in 2023? Will all hinge on when aerospace starts to pick up.

But as we said, we don't need aerospace to fully return to pre-COVID levels like we had in 2019 where our profitability in the segment was north of EUR 200 million because, again, of the progress we've made. Our cost progress is very spectacular. And Peter was saying, we're ahead of our target a full year, by a full year. At the end of '21, we'll have EUR 75 million of fixed cost reduction locked in. We're ahead on can sheets, and I'm more -- the EUR 700 million in can sheet didn't include some pricing benefits, which we will have going into 2022.

Automotive, as you said, we've got to be a bit careful with the chip shortage and all that, but we're pretty much on track to better. So -- and TID is also better now than we were expecting it to be. So all in all, I'm very confident about most of the ingredients to the EUR 700 million. I just don't know when we get enough of aerospace to push us over the EUR 700 million mark, but it will be there.

Okay. That's helpful. Not to press you on it too much, but I'm going to do it a little bit anyway. Just I mean given -- a lot of this is pointing in the right direction, except aero. The hesitancy to go back to that EUR 700 million target by 2023, for example, is there anything else that's there that we should be thinking about? Or is it just a matter of when you start to see it forming in the order books in aero, then we'll get a reinstatement of that target?

I think it's clear to all of our investors that we tend to be cautious on guidance, and we take it very seriously. So the fog has dissipated, okay? The COVID fog has dissipated, that's why we started giving quarter -- next quarter guidance. Now we feel more comfortable giving full year guidance. .

We don't feel comfortable yet giving 2-, 3-year guidance we were used to giving. But we very much want to go back to that situation, and I just cannot tell you when that's going to be the case. So I hope the visibility continues to improve. It certainly seems to be, but I can't make a promise in terms of when we'll be able to reinstate long-term guidance, David.

Our next question comes from Corinne Blanchard with Deutsche Bank.

I just wanted to come back quickly on the guidance. And just trying to clarify, you mentioned like about EUR 10 million headwind for 1Q and expected in 2Q. Does your full year guidance include that headwind only for 2Q? Or do you have anything unbated into the guidance for 3Q and 4Q?

Yes. So the EUR 10 million of headwind in Q1 is actually less of that in Q2 because we don't have the strike anymore. We don't have the bad weather anymore. So it's just a fraction of that, right? I think mentioned...

EUR 2 million or EUR 3 million, yes.

EUR 3 million maybe in Q2. And I think that's why we have a range of EUR 510 million to EUR 530 million, right? So there may be a little bit of that still in the second half of the year, but not much. .

Okay. I mean so you -- I mean if you look into the industry, I think there is a lot of data obviously coming out in the past week or so. And with all the OEM closing some of the facility for May and some -- I think the -- overall, the view is the impact could be lagging into 3Q, 4Q and potentially 2022. Would you mind just like maybe giving your view on this? Or is it too early for you to comment on this?

Yes. So I think the closures that we know about that we've seen in the press, all that is accounted for in our guidance. Now if a specific line ends up being shut down for 9 months, obviously, that's not included in our guidance, but we don't think it's highly probable. So that's where I would leave it.

I mean the kind of disruptions we're seeing now, if they were to continue and -- so lines shut a couple of weeks every quarter, I think that's embedded within the range we've given.

Definitely.

Okay. Okay. I just have one more question, and then that's more on the cost. Just trying to -- I know you mentioned the EUR 75 million, and that would be by this -- realized by this year, 1 year in advance from what you had initially thought. But just how much of those cost improvement are permanent? Is that something that we can just take into account going forward? Or is there anything else that you can add in 2022 or 2023, which coming back to the previous question, would maybe bring you closer to the target of EUR 700 million?

Yes. So the EUR 75 million that we talk about, these are structural cost reductions. So they're either fixed cost reductions or they're variable cost reductions where we're kind of structurally changing something. So it's a sustainable cost reduction.

Hopefully, one thing that you've gathered from what we've said so far is that this is a target that we've achieved. But we'll be kind of putting together additional targets, and we do think we've got a long runway of other kind of cost savings initiatives to layer in over time that are going to, as I said in my prepared comments, are going to help us for years to come here.

So we don't -- so yes, you should assume they're permanent. And I mean there are some inflationary pressures in the business in different places, but they're really fairly limited at this point. So we feel pretty good about the ability to sustain them.

Okay. I mean if I may, just one last, and it's on the free cash flow. I know you guys guided EUR 100 million or above. But any clarification on like the timing throughout the year? I mean if you look in 1Q, you already achieved about half of this with EUR 46 million. Do you expect 2Q and 3Q to maybe be like minimal free cash flow? Or would you expect to be like well above the EUR 100 million target for the year?

Well, I think, again, our guidance is EUR 100 million, right, so -- or more than EUR 100 million. So I think you should assume that it's spread more or less evenly over the time for the time being. As we kind of work hard over the course of the next several quarters, we're going to try to beat that number, obviously. But today, we wouldn't commit to more than kind of greater than EUR 100 million.

And Corinne, you'd have noted our capital expenditures in the first quarter are pretty low compared to our full year guidance. And that's usual, right? I mean you tend to have more shutdowns, outages, maintenance, big projects being done in the summer months and the holidays break, right? So you would -- we benefited from that on the free cash flow in the first quarter. We won't have that benefit in -- because we'll be catching up on our CapEx in the second part of the year.

Our next question comes from Josh Sullivan with The Benchmark.

Can you just update us on the investments with the UBC recycling you previously outlined? And just how does that expansion into recycling play into overall capacity? Does it help with some of the bottlenecks in expanding can sheet at all?

Yes, Josh. So it's not only UBC recycling. It's also an automotive recycling project. We are in the final stages of the detailed engineering. So we should be able to announce the location and all that well before the end of the year, no doubt about it.

It will not help the can sheet volumes, but it will lower the cost base for can sheet as the recycled metal is less expensive than primary metal. It will also help us on the automotive side secure more business, make the business more sticky with customers.

Because more and more, customers in automotive are looking for closed-loop recycling where they can send back their processed scrap to the original mill. And you think of it, we send them doors or blanks, and they stamp the door out of a blank. Obviously, you've got processed scrap here. You come back, you create a circular closed-loop recycling, and it's good for everybody.

So we expect that to help us be less -- lower cost, lower carbon footprint, obviously, because we're displacing primary metal, and closer connectivity relationship with our customers. All that helps with the revenues, but it does help mostly with the cost side.

Got it. And then just can you talk about -- sorry.

Go ahead.

Can you just talk a little bit about the recovery in AS&I? Was that mostly driven by industrial recovery Europe, overhead absorption costs, new auto programs? Just some more color there just on the recovery. It was a little better than we had expected.

Yes, all of the above, Josh. I mean we were -- I was very happy a year ago, March of -- just before the 7th of March, I guess, with the progress made at AS&I. And quite frankly, if it hadn't been for COVID, those numbers we're seeing now, we would have seen much sooner, right, 6, 9 months sooner.

So yes, it's good execution on the programs, on the new projects, good executions on the existing business, reduction in waste, improvement in speed and efficiency, better mix of projects as well. But that plays only to a small extent. As you know, most of these projects are 5, 7 years in duration. So in any given year, you only renew 15% or 20% of the business. So it's -- the team is covering now all the bases, delivering strong performance. And I believe that margin can continue to expand in the future.

Got it. And then just one last one on A&T. You noted some strength in European defense and I guess defense in general. Can you just highlight some of your programs there that are showing some strength?

It's really across the board. I mean defense is strong, and we've commented on it being strong through the crisis, from before crisis. But we're seeing a lot of activity in -- also in the industrial space, in the mold space, in the engineered plates for very advanced machinery like semiconductor manufacturing and all that. So we provide plates that -- of which the machinery that makes the semiconductors are made. We see strength in recreational segments in the U.S., like pleasure boats. We see strength in transportation around tractor trailers. And so it's really across the board. It's a very wide and broad recovery we're seeing on both sides of the Atlantic.

And Josh, just to remind you, the defense tons, they're small tons, but they're highly remunerative, right? So it's...

Our next question comes from Sean Wondrack with Deutsche Bank.

Nice quarter and congrats on moving up your Horizon a year early. That's great. A couple questions for me. We've been hearing many companies have been having a difficult time rehiring or hiring labor. So are you seeing that anywhere in the U.S. or elsewhere in your markets?

Yes, we have. It's put a little bit of a constraint on some of our operations. We have lost some sales but on a very sporadic basis because we couldn't rehire quickly enough or train people quickly enough. It's not a massive headwind. It's really more of the anecdotal at this stage, but we are watching it very carefully. And we are being a little bit more prudent, and we're trying to hire even if we don't need it right now, so that we have -- the resource is secure because we're quite optimistic about what's coming at us for the rest of the year.

Right. That makes sense. And are you only seeing that in the U.S.? Or are you also seeing that in other markets?

It's more pronounced in the U.S. definitely, but there is some evidence also in Europe. And there's also an element, which is with all the welfare benefits and all that, that we see on both sides of the Atlantic, for some people, it's better to stay unemployed than to go back to work, quite frankly. So that's also a bit of a challenge that happens on both sides of the ocean.

Well, it's good to hear you're aware of it and keeping an eye on it, so that's good. And then just one more, if I could, on the recycling. Are there opportunities for you guys to expand recycling through tuck-in acquisitions in conjunction with your organic growth, which would, I guess, increase your internal consumption as you grow? Or are you focused solely on greenfields at this point?

Yes. So it's brownfields really for us. Like we want to have it next to a plant where we got the casting and molten metal competencies. But yes, acquisitions can be looked at. It's all a matter of what makes the most sense from a capital deployment standpoint.

And obviously, when you buy something that's already working, you accelerate the ramp-up. But at the same time, it's got to be a facility that allows us -- you to -- or allows us to make the products we need to make, which are more sophisticated than what you see in a lot of recycle-only shops, right, where you got the -- the specs are not as tight as what we are looking for. But we will -- we're keeping our ears to the ground. And should an opportunity arise, we'll look at it and benchmark it against what we need to do internally how much is possible.

Our next question comes from Karl Blunden with Goldman Sachs.

You've spoken a lot about aerospace, and we're seeing some travel return. But the order rate is still relatively low. I guess the question is, have you changed your long-term assumptions about that end market? Or have you changed the amount of capital that you'd like to commit to that end market relative to the strong opportunities you're seeing in can sheet and autos? .

Yes. So Karl, we were not putting a tremendous amount of capital in aerospace. We have a very good industrial setup. We have very established positions with the OEMs. We've got a strong IP portfolio. So we were well tooled for aerospace. And we certainly want to continue to take care of our assets and maintain them, but we were not in need to put a lot of capital in the ground for expansion or new products in aerospace. We've got everything we need.

So regarding the first part of your question, which is does it lead us to reevaluate our long-term outlook on aerospace, not yet. I mean we are in the process of working on our strategic plan now, and we'll have discussions with our Board by the end of the year.

But we -- at this stage, we continue to see aerospace as a secular growth market from us, and it's easy to say that given where we're started from, right, which is 50% down compared to where we were. But I do think aluminum has a lot of potential in -- as a material of choice. And I do think that we'll see our travel resume growth.

There is a lot of debate about whether business travel will come back to the same levels as in the past, and maybe it's going to be a longer recovery, but there is more and more economic activity. There is still the need for people to meet. There are more and more business people in the world. And maybe each of us will travel a little bit less, but there will be many more of us. And when you take the 10-year view, I think we still have a very favorable market for aerospace and for aluminum in aerospace. But again, that's our thinking at this stage, and quite frankly, doesn't have dramatic implications for us because, as I mentioned, we have what we need to be able to see the opportunities when they come back.

Just want to revisit. You mentioned Arconic with the noncompete rolling off, cannot compete with some contracts in can sheet. It sounds like it's not impacting the pricing or margin opportunities in this space at this point in time. Is that something that you'd expect to continue just given the well-balanced supply and demand or these tight conditions? Or are there any risks to that outlook we should be aware of?

I mean things are never linear, right? So there's always bumps in the road. But I think Arconic is a very disciplined organization. They are very focused on the capital allocation and shareholder value creation I'm sure as well. So there's a price at which it makes sense to make can sheet, and there's a price at which it doesn't make sense. And we all operate under basically the same rules.

Just finally, maybe this one is more for Peter. On the balance sheet, I think you've done well with the liability management transactions, accessing different parts of the debt market. But as you look at it today, there's quite a bit of callable debt. Where does that fit in, in terms of priorities? Do you want to put a couple of stronger quarters behind you first? Or do you find capital market conditions to be attractive as they are today?

Yes. Thanks. So you're right, we do have quite a bit of callable debt outstanding. The way we look at it is we've got a lot of tools to potentially use, and we're going to be opportunistic. And I think one of the nice things that we've done as a company is we've kind of put ourselves in a position to be opportunistic. Those -- the nearest maturity we have is in 2024. So as we expect to be free cash flow positive, we're going to use some portion of that to repay debt. We will, from time to time, look at liability management transactions where we can create significant savings.

And one of the things we're really focused on is bringing our cash interest down to a number that's less than EUR 100 million . And so that's something we'll continue to chip away at through some of these opportunities and some of the debt repayments. But we don't have any definitive plans right now to access the markets.

Our next question comes from Curt Woodworth with Crédit Suisse.

Yes, can you hear me? Can you hear me?

Hey, Curt?

Yes, can you hear me?

Now we can.

We can now, yes.

Okay. Sorry. Just a question on metal pass-through. When you look at LME premiums, they're obviously up pretty significantly, but on top of that, shape premiums, billet premiums up as well. I'm just -- is there any timing issue with respect to potential margin squeeze on that? Or do you have full pass-through as you look forward?

Yes. So generally speaking, remember, as Jean-Marc said in his prepared remarks, we pass through the cost of metal. So higher metal prices typically mean for us, assuming stable scrap spreads, that they mean slightly kind of better profitability falls to EBITDA. So we have a benefit there.

We do have some instances in the kind of short term because they tend to be shorter contracts where we don't have the ability to pass through premiums, but these tend to be kind of 6- to 12-month contracts. And when we go back to renegotiate the contracts, we tend to get all or some of that back. So again, from a base kind of metal standpoint, we feel we're in pretty good shape from that vantage point and should be able to avoid margin squeeze.

With respect to billet premium, you are right, billet premiums are higher. In most of our businesses, we can pass through the billet premium. Though we do have some instances where we cannot, and that's a negotiation that we have with our customers. But generally speaking, we can pass that through.

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

Well, thank you, everybody, for attending the call. And again, we look forward to updating you on our progress towards our newly issued guidance in July. Thank you so much. Have a good day.

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