Constellium SE
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good day, ladies and gentlemen. And welcome to the Constellium's Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Head of Investor Relations, Ryan Wentling, the floor is yours.

[Ryan Wentling:]

Thank you, operator. I would like to welcome everyone to our third quarter 2018 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.

[Jean-Marc Germain:]

Thank you, Ryan. Good morning, good afternoon, everyone. And thank you for your interest in Constellium. On slide five, you will see some of the highlights from our third quarter performance. Shipments were 379,000 metric tons, that's up 1% compared to the third quarter of 2017. We continue to successfully execute on our strategy of increasing shipments to the automotive markets. Auto shipments increased 14% compared to the third quarter of last year. Our revenue increased 12% to €1.4 billion. This was primarily due to higher metal prices, which as you know, we substantially pass through and improved price and mix. Our net income of €217 million compared to net income of €21 million in the third quarter of last year. Our net income for this quarter at significant one-time items, a gain related to the completion of the Sierre transaction and a gain on the amendment of the U.S. OPEB plan. Adjusted EBITDA was €114 million that is up 2% compared to the third quarter of last year. For the first nine months of 2018, our adjusted EBITDA increased 15%, which leaves us well-positioned to deliver on the guidance we gave last quarter of 11% to 13% adjusted EBITDA growth in 2018. Leverage was 3.8 times at the end of September but is down from 4.8 times at the end of the third quarter of last year. As we mentioned last quarter and as you can see now leverage figure to €200 million from the Sierre transaction was received in July. We continue to work toward our leverage target of below 3.5 times. Overall, I am pleased with our results. Our adjusted EBITDA was a record third quarter for the company and was in line with our expectations. Taking a step back, we continue to successfully execute on our strategy during the quarter, including higher automotive shipments and further project 2019 savings. However, we also have to, and we did overcome several transitory challenges that we highlighted last quarter. Higher planned maintenance spending across our businesses, manufacturing challenges in TID, and increased costs related to expanding our footprint in AS&I. Turning now to slide six. I'd like to share with you a few additional highlights from the third quarter. Top adjusted EBITDA was €60 million. Our automotive shipments increased 21% compared to the third quarter of last year on growth at both Neuf-Brisach and Muscle Shoals. Our CALP line at Neuf-Brisach in France is running well and we expect to ramp up this line through 2019 with full production in 2020. In the U.S. as you know we're currently focused on ramping up our automotive capacity at Muscle Shoals Alabama and well ramping up the CALP line in Bowling Green Kentucky. The ramp up of Bowling Green has been challenging but we continue to make progress. We expect to ramp up this line through 2019 with full production in 2020. Moving now to A&T. Adjusted EBITDA was €29 million. Narrow space, we are focused on maintaining our leadership positions with the major OEMs and expanding our relationships with business and regional jet manufacturers. During the third quarter, we announced a new multiyear agreement that further strengthens our long-standing partnership with Boeing. In transportation, industry and defense, we continue to target attractive niche markets. However, as we mentioned last quarter, we have temporary manufacturing challenges that limited our production during the quarter. Now let's move to AS&I. Adjusted EBITDA was €29 million in the third quarter. Both automotive and other extruded shipments grew year-over-year. Our major growth investments across automotive structures remain on track. Finally, there are a number of corporate initiatives to report. We increased our Project 2019 run-rate cost savings to €38 million as of the end of the third quarter. As I previously mentioned, we've received €200 million of proceeds from the sale of the Neuf-building assets at Sierre that we were leasing to Novelis. Lastly, during the quarter, we amended the U.S. post-retirement benefit plan which reduced our OPEB liability on the balance sheet and resulted in €39 million gain. With that, I will now hand the call over to Peter for further details on our financial performance. Peter?

[Peter Matt:]

Thank you, Jean-Marc and thank you everyone for joining the call today. Turning now to slide eight, you will find the change in adjusted EBITDA by segment for the third quarter and the first nine months of 2018 compared to the same periods of last year. For the third quarter of 2018, Constellium achieved €114 million of adjusted EBITDA, an increase of €3 million or 2% year-over-year. P&ARP adjusted EBITDA up €60 million was in line last year. A&T adjusted EBITDA fell by €1 million to €29 million. AS&I adjusted EBITDA of €29 million, increased €1 million year-over-year. Lastly, holdings in corporate was €4 million, a €3 million improvement compared to last year. We now expect agency cost of approximately €5 million per quarter, down from our previous expectation of €6 million per quarter. At the bottom of the page, we present the first 9 months of 2018. Constellium achieved €382 million of adjusted EBITDA, an increase of 15% compared to the first 9 months of last year. Now turn to slide nine and let's focus on the P&ARP segment. Adjusted EBITDA was in line with last year at €60 million. Shipments increased 1% as higher automotive roll product shipments were nearly offset by lower packaging shipments. Pricing mix was a tailwind of €5 million, largely driven by the 21% year-over-year increase in automotive roll product shipments. Cost were a headwind of €5 million compared to last year as we incurred incremental costs and the ramp up of our automotive programs and in our increased planned maintenance and reliability spending. Now turn to slide 10 and let's focus on the A&T segment. Adjusted EBITDA declined 3% or €1 million to €29 million. Higher aerospace shipments were offset by lower TID shipments. TID shipments were limited by manufacturing challenges we noted last quarter. Pricing mix improved by €3 million, benefiting from increased airway shipments during the quarter. Cost was a €4 million headwind during the quarter as we incurred higher maintenance spending and incremental cost related to the TID manufacturing challenges, I just mentioned. Now, turn to slide 11 and let's focus on AS&I segment. Adjusted EBITDA of €29 million increased 3% compared to the third quarter of 2017. Volume drove a €3 million on improvement as both automotive and other extruded product shipments increased. Pricing mix was a €4 million tailwind in the quarter driven by improvements across the business. And cost was a €7 million headwind compared to the third quarter of 2017 due to higher maintenance cost as well as cost related to new product launches and the expansion of our footprint in AS&I. Turning to slide 12, I'd like to touch on the progress we've made on our cash improvement initiative Project 2019. You will recall that there are three pillars to Project 2019 cost reduction, working capital improvement and capital discipline. On cost savings, we achieved an additional €6 million of annual run rate cost savings during the third quarter of 2018, bringing our total run rate to €38 million of savings. While we have made a lot of progress already, I'm confident there are significant opportunities remaining. Let me give you a few examples of cost reduction initiatives that we secured in the quarter. First, at one of our facilities we further optimized the metal inputs in our production process by finding new sources of scrap alloy to replace prime. Utilizing more scrap and various grades of scrap is a focus of our continuous improvement program as scrap is purchased at a discount to primary metal. Separately, we also found a new supply of alloy in materials for this facility at more attractive pricing. These actions result in annual savings of approximately €1 million. Second, we continue to focus on our corporate cost. The team renegotiated contracts in our European offices including cellphones, landline telephones and office maintenance for example. In total, these initiatives resulted in savings of €0.5 million. I'm proud of the success on the corporate side, which you can see is now coming through in our H&C cost of €5 million per quarter. You may remember just two years ago; our H&C cost were in excess of €7 million per quarter. Lastly, as Jean-Marc mentioned during the quarter, we renegotiated the retiree medical benefits for a portion of our over 65 population in the U.S. This included shifting both the provision and the administration of these benefits to a third-party healthcare network and resulted in a savings of €1.5 million per annum. Now, let's move to trade working capital. We continue to expect working capital to be use of cash during 2018. A significant portion of this use is connected to the substantial growth in our business. This is a good reason for investment and it will continue. We do however believe that working capital reduction represents a meaningful cash improvement opportunity for the company and we will be working to reduce our working capital overtime. We remain very confident in our ability to do so. With respect to capital spending, we expect spending in 2018 to reach our guidance of €275 million. As previously noted, we believe this level of spending strikes the right balance between maintaining our assets and investing in our future. The majority of the €100 million to €125 million of gross spending in 2018 is going to expand our leadership position in our AS&I business, where spending is linked to firm customer contracts. I want to stress that we remain very focused on capital discipline and that the projects we are investing in at attractive IRRs and payback. Turning now to slide 13 and moving to discuss the balance sheet. Our net debt position at the end of the third quarter was €1.8 billion, leverage of 3.8 times was down a full turn from the third quarter of last year. As you can see in our debt summary, we have no bond maturities until 2021 and our 2021 maturity is very manageable at under 0.7 times our LTM adjusted EBITDA. Our cash plus amounts available under our committed facilities was €714 million at the end of the third quarter. We are very comfortable with our current liquidity position and our debt profile. And I will now hand the call back to Jean-Marc.

[Jean-Marc Germain:]

Thank you, Peter. Turning to slide 15. Let me share a few end markets updates. I'll start with the automotive market which as you know is a very important growth driver for Constellium and we maintain our positive outlook for aluminum in this market. Over the long-term, we are confident that increased aluminum usage is a secular trend for the automotive market. Aluminums favorable strength to weight ratio in comparison to steel enables OEMs to lightweight vehicles thereby increasing fuel efficiency and reducing CO2 and other emissions. Aluminum also a superior energy absorption property as compared to steel. And as I've mentioned before, the electrification of vehicles had significant potential for aluminum, lightweight is absolutely critical for electric vehicles to extend their range. Further, the metallurgical characteristics I just noted make aluminum a superior solution for battery and closures. Constellium is well positioned to realize the benefits of this secular shift to aluminum in automotive. We will continue to closely monitor the market and we will remain prudent with our investments. We will not make incremental investments without firm customer commitments. Turning to the near-term trends, the North American automotive sales continue to be on track for a slight year-over-year decline in 2018. European auto sales are expected to grow slightly in 2018, continuing the trend of recent years. In the European market, new emissions testing has been a source of uncertainty in recent months. Despite this uncertainty, we have seen minimal impact and demand for our rolled or extruded products to-date. I would highlight again that light trucks, SUVs, luxury cars continue to be in high demand and I remind you that we have more exposure to these types of vehicles. Let's now turn to aerospace. Aerospace continues to be a steady market. We see sustained OEM build rates the backlog at the major OEMs remain near record highs. On packaging, we have a stable market in the U.S. We expect the continued growth of auto body sheet demand to help tighten the packaging market over the medium to long term. In Europe demand continues to grow based on substitution of aluminum for steel. We continue to execute on our strategy of expanding into niche products in markets including transportation industry and defense. We see continued strength in many of the TID markets that we serve including the North American transport market as well as defense in both the U.S. and Europe. In industry end markets in Europe, demand for our extruded products remains very strong. Global trade remains a source of uncertainty. On the U.S. tariffs and aluminum and aluminum products, we continue to believe that remedies would be targeted at China and must protect the relationships with our historical trade partners including Canada and Europe amongst others. I would note that most of the products we produce are sold in the geography in which they are produced. As a consequence, based on what we see today [indiscernible], we continue to expect a relatively neutral financial impact from these aluminum tariffs on Constellium. We will obviously continue closely to monitor this situation. So, turning to slide 16, we detail our financial guidance and outlook. We expect to deliver a range of 11% to 13% of adjusted EBITDA growth in 2018 and high single-digit growth in 2019 leading to over €500 million of adjusted EBITDA in 2019. We are very focused on free cash flow generation and continue to target positive free cash flow in 2019. Our targeted leverage ratio is below 3.5 times of adjusted EBITDA. Overall, I remain I am optimistic about our prospects for the future. We continue to execute on our strategy, and I am confident we are on the right coast. We remain focused on operational execution, harvesting the benefit of our investments, disciplined capital deployment and on shareholders' value creation. Before I open today's call up for Q&A, I would also like to remind everyone that we have an Analyst Day scheduled for December 13 in New York. The event will also be webcast on our website, constellium.com. And I look forward to seeing many of you in New York. With that, operator, will now open the Q&A session.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Matthew Korn with Goldman Sachs. Your line is now open.

[Matthew Korn:]

Hello, everyone and good morning, good afternoon to you.

[Peter Matt:]

Good morning, Matt.

[Matthew Korn:]

So, question. As you've acknowledged uncertainty on market growth is increased a lot, we've seen over the past few months seen into the market. How do we think about how much of next year's growth has is driving your EBITDA outlook, is market share penetration versus macro driven? For example, with P&ARP, how much would that be in new model launches? Were you assured versus the assumption of market growth or economic growth? Any clarity there will be great.

[Jean-Marc Germain:]

Sure, in a nutshell, all our assumptions are based on increased penetration of our products of aluminum, our products we sell to the customers and nothing realized on increased volume of cars or aircraft or packaging. So, we feel pretty good in terms of our outlook, in terms of committing to this high single-digit EBITDA growth in 2019.

[Matthew Korn:]

All right and let me ask on some of your organic expansions. Could you talk through any of those that you have in motion a little bit more whether this is a new capacity downfield. And then what that should mean like - what the new expansion should mean for your shipment growth over the next couple of years? And then following up on that, when you say firm commitments and when you're spending, when you're investing or growing, you're looking for your firm commitments. Can you define that? Do you have a general rule to say while we're going to bring on added capacity as long as we're 50% spoken for or 75%? How do you think about that quantification line?

[Jean-Marc Germain:]

That is very fair question, and especially given the moods in the market these days. So, we've got two major expansions, which we've talked about quite right individually. The CALP line, one in Europe and one in the U.S. And then we've got the expansions we're doing mostly in AS&I, which are smaller kind of back [ph] sized investment. So, talking about the two CALP lines, as I mentioned, doing very well in Europe. Catching up in Bowling Green and I'm pleased with the progress we've made in the past few months. I talked about it back in July and this first question has been a continuation of good trends. For those two investments, we have long term customer commitments. And there is a variety of legal platforms that run through those lines. And we are seeing a very healthy demand. And I'm not worried about our ability to fill the lines if anything in Bowling Green, we are, we have lot of work to do to be able to meet demand actually on our lines to going as we speak now. On the AS&I side of the business, when we talk about customer commitments - I'll backtrack. So, with regards to a further investment in a CALP line, it is not on the table today. I believe some day we will have another CALP line in the U.S. But to do that, we will need firm customer commitments, and firm customer commitments mean that on the base of commitments we have we get an IRR that is in excess of our hurdle rate, right. So, it's typically more than 50% of the line needs to be full under the customer commitment. So, moving to AS&I, when we invest in a new line at the AS&I, we want to be flying fully sold out on the basis of a firm customer commitment. We need to have a contract. We know we are going to make these parts or these specific vehicle platforms and we want that line to be 90% less pool on the basis of tax specific customer contract. That's how we think about it and we want to have the payback on this investment within the model life of that vehicle. How was the payback in the value creation, right? The Nexus of payback want to have the value creation over the life of these specific vehicle model.

[Peter Matt:]

The only thing I might add to that Matt when you've talked about kind of in motion and the pace of the growth. So, on the CALP line, they should kind of ramp up ratably more or less over the period from 2017, 2018 and 2019 and we've said that that'll be both full run rate in 2020. And then on AS&I what we've said is that, we expect to double the automotive structures business by say 2021 and I'd say, you can more or less ratably ramp that up over the period I mean it will be a little bit lumpy because you've got basically all these different expansion start-up and so forth, but more or less I think that's fair way to think about it.

[Matthew Korn:]

All right, great. Thanks Jean-Marc, Peter, it's very helpful.

[Jean-Marc Germain:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Craig Woodworth with Credit Suisse. Your line is now open.

[Craig Woodworth:]

Hey, good morning Jean-Marc and Peter.

[Jean-Marc Germain:]

Hi, Craig.

[Craig Woodworth:]

So, first question I have is just on P&ARP performance this quarter. Historically, if you look at where the sequential delta is in 2Q and 3Q, they're roughly similar in last few years, you were up and if you look at the volume performance this quarter, it was basically flat right down 6000 tons, but EBITDA went down 15 million which seems like a very big sequential move for that business, which usually is fairly stable, so can you just help us sect some of the moving pieces in the quarter between the higher maintenance and you talked about automotive right, but I think that was ongoing last quarter as well just to get a sense for the sequential delta. That's first question.

[Jean-Marc Germain:]

Yeah, sure. So, as we mentioned in July, we have significant maintenance and reliability spend going on there, mostly in our North American plant Muscle Shoals. The timing of these projects is such that Q3 was more heavily impacted than without benefiting evenly distributed over the year. And I think that's the main reason for the lack, the apparent lack of cluster in the financial outcome. But you need to look at each of the longer period of time. I mean our Q2 was very strong. We now expect due to the fact that we have a plan, right. We anticipate what's going to happen. We knew that Q3 would be weaker. We had actually guided everybody to weaker Q3 comparison to what we have been able to achieve and that's because we are anticipating a lot of the production and again back in Q2 right. So again, I mean you got to step back and look at nine months if you compare nine months there last year where do we stand and we are trying to manage the business in a way where when we got very significant maintenance outages, or other events that need time and cost and money that we anticipate and how that benefited before or after those so again step back and look at the longer period of side.

[Craig Woodworth:]

What was the incremental maintenance expense this quarter versus last quarter?

[Jean-Marc Germain:]

I wouldn't go towards specific there, but I would say also beyond the maintenance, we've got also a lot of [indiscernible] sheet development and ramp up at Muscle Shoals. So, as you know we've been using for the start of the CALP line in Bowling Green, but other feedstock from Neuf-Brisach, also from our Japanese colleagues in Agoda [ph]. So, all these are being transitioned to domestic production in the U.S. as you do that you've got to requalify, I mean you've got to run the process and your mills, make sure your requalify, that takes time the way from producing product you can sell, so this is also thoughts of the - what's happened in Q3 in Muscle Shoals.

[Craig Woodworth:]

That's helpful. And then just in terms of the manufacturing challenges in TID, can you sort of elaborate on progression there do you feel like you're going to be more at run rate level of production this quarter entering 2019.

[Jean-Marc Germain:]

Yes. There are two sets of manufacturing challenges that we've had to deal with. Some of them are due to you know what happens every so often in our plans which is an equipment break down or you know that can take away a few hours or a couple of days right. That's been one thing. The other thing is as we're expanding into the TID niches we're developing new products and again takes time to qualify, run tests having run tests before you're qualified or not qualified and sometimes you fail the qualification first and second and then you're qualified. So, there's been a lot of that happening both at the end of Q2 and also in Q3. We anticipate to continue to do some further development because there's plenty of attractive niches in TID. But I think by now and on the reliability issues we had we have been spending quite a bit of money on catching up maintenance and process parameters on our production line. So, I expect things to gradually improve, over the next few quarters.

[Craig Woodworth:]

Okay. And then in terms of sort of being free cash flow positive next year when you sort of think about capital allocation you have a [indiscernible] that get sold it nine times trailing EBITDA your stocks trading at five times EBITDA next year. Would you contemplate like buying back stock, I know you've always said you want a continue to delever but at some point do you think about the IRRs structures business for us I would think buying back your stock here at some point next year when you do get free cash would be something you'd entertain or you know how can we think about capital allocations.

[Peter Matt:]

Yes, Craig, so we pay a tremendous amount of attention to that and we're kind of highly focused. I think our - we do think that we've got some excellent opportunity in some of these growth projects. But again, to your point as we get to be free cash flow positive we will have a capital allocation decision to make with the access free cash flow. And I think our conclusion for the time being is that the best thing that we can do is continue deleveraging the balance sheet. So of course, we'll look at it. And you know maybe at some point in the future we put in place a share repurchase program. But again, what we hear from the various investors that we talk to is that delivering is still the top priority and where the biggest bang for the buck should be.

[Craig Woodworth:]

Okay. Thank you, guys.

[Jean-Marc Germain:]

Welcome.

[Operator:]

Thank you. And our next question comes from the line of David Gagliano with BMO Capital Markets. Your line is now open.

[David Gagliano:]

Great. Thanks for taking my question. Just on going back to the automotive side for a minute, can you just remind us again how much of your body and weight volumes for 2019 and 2020 are actually committed under fixed margin and fix volume contracts at this point?

[Jean-Marc Germain:]

So, it falls under fixed margin. It's not all in the firm volume, because each and every - most of our contracts are share of that fold. So, depending on how much that platform specific vehicle sales you know we can have more or less sales. But margins fixed, and volumes are fixed in terms of market share.

[David Gagliano:]

Okay. And can you put that into context in terms of specifically on the actual volume. I get that it's fixed in terms of market share, but just specific volume numbers of percentage or a range of percentage or something like that in terms of how much is actually committed under some sort of volume agreement?

[Jean-Marc Germain:]

Yes, all of it in that sense.

[Peter Matt:]

Yes, I mean, so David the way - maybe we're not understanding your question, but the way that works it's effectively a requirement for contract, right. So, we have a - we believe based on our expectation for the vehicle sales that the volume will be completely spoken for. However, if there is less demand for whatever reason then the auto maker is not required to take the volume.

[David Gagliano:]

Okay, all right. Thanks for clarifying. And just quick follow-up. As we go into 2019, year-over-year comps get obviously much tougher in the first half of '19. So, as we think about that full year target, should we assume a back end loaded here for next year?

[Jean-Marc Germain:]

Well, I really like you to join us for the Analyst Day. I don't think we're in a position to comment on this one just yet. We feel like the range for the year, high single digit range is a right one. And we'll see how it pans out.

[David Gagliano:]

Thanks, great.

[Peter Matt:]

Yeah, the only other thing to say is that again typically the first half is stronger for us from just a seasonality perspective.

[David Gagliano:]

Okay. Thanks for the help.

[Jean-Marc Germain:]

Sure.

[Operator:]

Thank you. And our next question comes from the line of Jeremy Kliewer with Deutsche Bank. Your line is now open.

[Jeremy Kliewer:]

Hey guys, good morning.

[Jean-Marc Germain:]

Hi.

[Jeremy Kliewer:]

There kind of plans to delever those, your pension or OPEB liabilities. Does that take presence [ph] over your typical or traditional debt?

[Peter Matt:]

I wouldn't say so. We look at the pension and OPEB I mean we're going to as you saw we took action on this in this quarter and we're going to continue to take those type of actions. But that was something that we did without that was not a capital allocation choice. We were able to just manage that liability lower. Our objective will be to first deleverage via the kind of the debt on the balance sheet. And then kind of longer-term, we'll opportunistically look at deleveraging actions around the employee related liabilities. But we tend to look at those as longer lived more flexible liabilities than our debt obligations.

[Jeremy Kliewer:]

All right. And then with most of your volumes as you've already spoken about contracted out through 2018. What can push your guys' results towards the high-end of your 13% growth range? About €100 million in 4Q versus the low-end of about €96 million?

[Jean-Marc Germain:]

So, Jeremy, the way I put it is for us to hit the 13%. We would need to pretty much have everything lined up perfectly. As we alluded, we've got significant expansion as Peter talked about it in his remarks. We've got significant expansion in automotive structures that is taking place. Remember the combinations will now reporting, we're winning at a rate of twice our historical sales. And this is causing us to expand our footprint quite a bit. And there is a lot of costs that are happening right as we speak in automotive structures to make that happen. So that is going to weigh on automotive structures and industry profitability in the second half of this year compared to the second half of last year. And we would expect it to be actually weaker EBITDA for the business than it was last year. So, we think of the guidance 11% to 13% as a realistic range. And again, getting to 13% means everything is lining up perfectively which we haven't yet.

[Peter Matt:]

But the quarter is not over.

[Jeremy Kliewer:]

All right, thank you. And one more if I may.

[Jean-Marc Germain:]

Sure.

[Jeremy Kliewer:]

Your volumes on packaging are dropping, but it looks like your kind of additional revenue above LME is actually increasing per ton. So, are those are more specialized products or are you guys switching between stock versus to have an end. Can you just kind of walk through what's going on there?

[Jean-Marc Germain:]

Yeah, I don't think there is much really going on. And that would certainly be, there would be certainly no trend right within packaging itself. And the fact that the volumes are going down again is consequence of two things. One is, as I mentioned more downtime and maintenance and development of automotive in the third quarter. The other one is so that is kind of what happened in the third quarter. The other one is overtime as we grow our automotive sales, we will slightly reduce our CAN [ph] sheet shipments to make room for automotive. Our constant effort to maximize the benefits we're getting from mixed management. And again, that we improve our retail and capital. So, you get those two forces at play, but I wouldn't read too much into - in one specific quarter within packaging.

[Peter Matt:]

Yeah, and the only thing to add to that is that in North America, we think ultimately with the work we're doing at Muscle Shoals, we should be able to accommodate the packaging shipment load and the growth in automotive. Right so we shouldn't have that's free opportunity we should be out of ship both our packaging shipments as we did before and the automotive as we grow the learning curve or grow on the learning curve.

[Jeremy Kliewer:]

All right, thank you. Good luck.

[Peter Matt:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Christian Georges with Société Générale. Your line is now open.

[Christian Georges:]

Yes. Thank you very much. The first question is the differentiation charge seems to have gone up quite a lot in the third quarter, I think 51 million, is that running right now or is that because you have all the investments you've made?

[Peter Matt:]

Yeah, I mean it is, we still expect depreciation kind of in the range of say 180-ish but yeah - given all the investments that we made, you are going to see depreciation creeping up for sure.

[Christian Georges:]

Okay. So that can be roughly 45 million third quarter, 1Q and 2Q which we move in gradually towards the 50 million mark in the next quarters?

[Peter Matt:]

Yeah, I think it's not a crazy number.

[Christian Georges:]

Okay. The second question is you are seeing a lot of trouble in the vehicle delivery, whether they were doing TP or regulation for emissions [indiscernible] manufacturers and thus created some better mix and so on. I mean to an extent even though you are obviously getting share in M&M and necessarily following the underlying gross of the automotive market, but to what extent are you also affected the bottom mix at the OEMs [ph]?

[Jean-Marc Germain:]

Yeah, we've got a few of our colleagues in Germany that are expecting their cars, they have made, but they're not tested yet. But seriously, we haven't seen any impact on the demand at all. So, we're still having a very strong backdrop for our protection in Europe.

[Peter Matt:]

But we're seeing - all the headlines you're seeing and we're obviously kind of watching it really closely.

[Christian Georges:]

Okay. But nothing to report from your end in terms of any delivery program?

[Jean-Marc Germain:]

No, I don't expect that to weight at all in Q4.

[Christian Georges:]

Cool, okay. And last thing just to clarify, a note to your question, so your target 3.5 times net debt to EBITDA, what you are saying is that once you have this target reached and [indiscernible] kept for occasion, what you're saying is that even when you reach a target you are still seeing ongoing deleveraging as more important and potential share buyback or gross investment, right?

[Jean-Marc Germain:]

Christian, our target is below 3.5 and then I'll let Peter comment.

[Peter Matt:]

Yeah, and I will say yes to your question I think we think the biggest bank for the buck is continuing to let the leverage come down. But we'll as we said we said earlier we'll watch this very carefully and we'll be looking at the models in terms of capital allocation to see what the best thing for the buck is.

[Christian Georges:]

Okay. So, it's below 3.5 and you'll keep it open, but just mildly open?

[Peter Matt:]

Yeah, I would say that's right. Most likely you'll see us continue to delever.

[Christian Georges:]

Okay, very clear. Thank you very much.

[Jean-Marc Germain:]

Double B.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from the line of Sean Wondrack with Deutsche Bank. Your line is now open.

[Sean Wondrack:]

Hi. Good morning and congrats on another good quarter.

[Jean-Marc Germain:]

Thanks Sean.

[Sean Wondrack:]

We talked a lot about TID and A&TID segment recently I've been hearing there is some improvements sort of going on in the aerospace market in terms of build rate I know you said sustained build rates, can you talk a little bit about what you're seeing that, and have you seen any kind of pickup in demand -?

[Jean-Marc Germain:]

No, I mean we continue to have this very people will describe it conservative outlook on the aerospace right, we say around 2% growth is a trend right. And nothing is leading to us to believe differently from what we are see in our order books. Now one quarter maybe better than the other like Q2 wasn't the bad quarter in terms of shipments, but again as I said back, and I look at the full year and now it compares to the prior year we'd looks for the following year, I'm seeing that kind of stable moderate very moderate growth environment for us.

[Sean Wondrack:]

Great. Thank you. And then just by virtue of year-end guidance for double digit EBITDA growth and free cash flow next year. Leverage should decline below 3.5 term. That sort of been hitting on your target. Sorry?

[Jean-Marc Germain:]

Sorry. It's high-single digit not double digit for next year.

[Sean Wondrack:]

Excuse me.

[Jean-Marc Germain:]

For the record.

[Sean Wondrack:]

But when you think about that and you think about sort of China be a double B. Do you think you could have an update there that you might trend even lower than that? And the fact that you want to use excess cash flow to sort to continue to delever to take some of the pressure off your stock?

[Peter Matt:]

Well, look, we're going to, obviously, we're pushing extremely hard on all these fronts. And it's hard to predict when the rating agencies actually make the moves. But we have a very close dialogue with them, where I think we're confident we're heading in the right direction. And again, we're going to get there as soon as we can, but it's hard to be more specific than that.

[Sean Wondrack:]

Okay. I can appreciate that. Thank you.

[Jean-Marc Germain:]

Okay. Yeah.

[Operator:]

Thank you. And I show no further questions at this time. I would like to turn the call back over to Jean-Marc Germain for any closing remarks.

[Jean-Marc Germain:]

Thank you, operator. Thank you everyone for participating today. Again, we are pleased with those results in Q3 and we look forward to seeing many of you on December 13th in New York. Thank you again. Bye-bye.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.