Constellium : Second Quarter Report 2023

Constellium SE Second Quarter Report 2023

INDEX

	Page
Management's discussion and analysis of financial condition and results of operations	3
Constellium SE Unaudited Interim Condensed Consolidated Financial Statements at June 30, 2023 and
December 31, 2022 and for the six months ended June 30, 2023 and 2022	F-1

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following discussion and analysis, or MD&A, is based principally on our unaudited condensed interim consolidated financial statements as of June 30, 2023 and for the six months ended June 30, 2023 and 2022 and should be read in conjunction with our Annual Report on Form 20-F for the year ended December 31, 2022 and our unaudited condensed interim consolidated financial statements as of June 30, 2023 and for the six months ended June 30, 2023 and 2022 which are included in this quarterly report.

The following discussion and analysis includes forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from those expressed or implied by our forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in this quarterly report and in our Annual Report on Form 20-F for the year ended December 31, 2022 (see in particular "Special Note about Forward-Looking Statements" and "Item 3. Key Information - D. Risk Factors").

Overview

We are a global leader in the development, manufacture and sale of a broad range of highly engineered, value-added specialty rolled and extruded aluminium products to the packaging, aerospace, automotive, other transportation and industrial end-markets. As of June 30, 2023, we had approximately 12,500 employees, 28 production facilities, 3 R&D centers and 3 administrative centers.

We serve a diverse set of customers across a broad range of end-markets with different product needs, specifications and requirements. As a result, we have organized our business into three segments to better serve our customer base:

• Our Packaging & Automotive Rolled Products segment produces aluminium sheet and coils, which primarily includes beverage and food can stock, closure stock, foil stock and automotive rolled products.
• Our Aerospace & Transportation segment produces technologically advanced aluminium products, including plate, sheet and other fabricated products with applications across the aerospace, defense, transportation and industrial sectors.
• Our Automotive Structures & Industry segment produces technologically advanced structures for the automotive industry (including crash-management systems, body structures, side impact beams and battery enclosures), soft and hard alloy extrusions and large extruded profiles for automotive, rail, energy, building and industrial applications.

For the three and six months ended June 30, 2023 our segments represented the following percentages of total Revenue and total Adjusted EBITDA:

		Three months ended June 30, 2023		Six months ended June 30, 2023
(as a % of total)	Revenue		Adjusted		Revenue		Adjusted
	EBITDA			EBITDA
P&ARP	54 %		38 %		53 %		36 %
A&T	23 %	46 %	23 %	45 %
AS&I	23 %	19 %	24 %	22 %
Holdings and Corporate	- %	(2 %)		- %	(3 %)
Total		100 %		100 %		100 %		100 %

Key Factors Influencing Constellium's Financial Condition and Results from Operations

Russian War on Ukraine

Although we do not have operations in Russia or Ukraine, the conflict and the related sanctions imposed on Russian institutions, companies and individuals continue to generate volatility and disruption in the global economy, including issues with supply chains and fluctuating commodity and energy prices. It remains difficult to predict the length and impact of this crisis on the global economy and on the price and availability of metal and energy. We continue to monitor the situation closely and to develop contingency plans and counter-measures as necessary to address adverse effects or disruptions to our operations as they arise. However, further consequences of this conflict and its impact on our business and results of operations as well as the global economy cannot be predicted.

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Economic Conditions and Markets

We are directly impacted by the economic conditions that affect our customers and the markets in which they operate. General economic conditions such as the level of disposable income, the level of inflation, the rate of economic growth, the rate of unemployment, exchange rates and currency devaluation or revaluation influence consumer confidence and consumer purchasing power. These factors, in turn, influence the demand for our products in terms of total volumes and prices that can be charged. We attempt to respond to the variability of economic conditions through the terms of our contracts with our customers and cost control.

In addition, although a number of our end-markets are cyclical in nature, we believe that the diversity of our portfolio and the secular growth trends we are experiencing in many of our core packaging, automotive and aerospace end-markets will help the Company weather these economic cycles. In each of our three main end-markets of packaging, aerospace and automotive:

• Historically, can packaging has not been highly correlated to the general economic cycle. Despite a relative recent softening in demand, we continue to believe can sheet has an attractive long-term growth outlook due to increased consumer preference for cans as a package and the sustainable attributes of aluminium.
• The automotive markets were recently impacted globally by supply chain disruptions. However, longer-term demand for aluminium has been increasing in recent years triggered by a light-weighting trend for new car models, which increases fuel efficiency, reduces emissions and increases vehicle safety. We expect this to continue and be enhanced by increased demand for electric vehicles.
• While aerospace demand had been adversely impacted following the COVID crisis, it has more recently bounced back significantly. We continue to believe the longer term trends including increasing passenger traffic and fleet replacements with newer and more fuel efficient aircraft support a positive long-term demand trend.

Aluminium Consumption

The aluminium industry is cyclical and is affected by global economic conditions, industry competition and product development. Aluminium is increasingly seen as the material of choice in a number of applications, including packaging, automotive and aerospace given its lightweight high strength-to-weight ratio, corrosion resistance and infinite recyclability. Due to these qualities, the penetration of aluminium in a wide variety of applications continues to increase. We believe that long- term growth in aluminium consumption generally, and demand for those products we produce specifically, will be supported by factors that include growing populations, greater purchasing power and increasing focus on sustainability and environmental issues, globally.

Aluminium Prices

Raw materials and consumables, where aluminium is the largest component by a wide margin, represented 70% and 75% of our cost of sales in the six months ended June 30, 2023 and 2022, respectively. Aluminium prices are determined by worldwide forces of supply and demand and are volatile. We operate a pass-through model and therefore, to the extent possible, avoid taking aluminium price risk. In case of significant sustained increases in the price of aluminium, the demand for our products may be affected over time.

The price we pay for aluminium includes regional premiums, such as the Rotterdam premium for metal purchased in

Europe or the Midwest premium for metal purchased in the U.S. The regional premiums have been volatile in recent years. Like LME prices, we seek to pass-through this regional premium price risk to our customers or to hedge it in the financial markets. However, in certain instances, we are not able to pass through or hedge this cost.

We believe our cash flows are largely protected from variations in LME prices due to the fact that we hedge our sales based on their replacement cost, by matching the price paid for our aluminium purchases with the price received from our aluminium sales, at a given time, using hedges when necessary. As a result, when LME prices increase, we have limited additional cash requirements to finance the increased replacement cost of our inventory.

The average LME transaction price, Rotterdam Premium and Midwest Premium per ton of primary aluminium in the three and six months ended June 30, 2023 and 2022 are presented below.

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		For the three months ended June 30,		For the six months ended June 30,
(Euros per ton)		2023		2022		2023		2022
Average LME transaction price	2,074	2,703	2,155	2,811
Average Rotterdam Premium		297		567		289		503
Average all-in aluminium price Europe	2,371	3,270	2,444	3,314
Average LME transaction price	2,074	2,703	2,155	2,811
Average Midwest Premium		500		756		536		729
Average all-in aluminium price U.S.	2,574	3,459	2,691	3,540

Product Price and Margin

Our products are typically priced based on three components: (i) the LME price, (ii) a regional premium and (iii) a conversion margin.

Our risk management practices aim to reduce, but do not entirely eliminate, our exposure to changing primary aluminium and regional premium prices. Moreover, while we limit our exposure to unfavorable price changes, we also limit our ability to benefit from favorable price changes. We do not apply hedge accounting for the derivative instruments entered into to hedge our exposure to changes in metal prices and the mark-to-market movements for these instruments are recognized in Other gains and losses-net.

Our results are also impacted by changes in the difference between the prices of primary and scrap aluminium. As we price our products using the prevailing price of primary aluminium but purchase large amounts of scrap aluminium to manufacture our products, we benefit when primary aluminium price increases exceed scrap price increases. Conversely, when scrap price increases exceed primary aluminium price increases, our results are negatively impacted. The difference between the price of primary aluminium and scrap price is referred to as the "scrap spread" and is impacted by the effectiveness of our scrap purchasing activities, the supply of scrap available and movements in the terminal commodity markets.

Volumes

The profitability of our businesses is determined, in part, by the volume of tons processed and sold. Increased production volumes will generally result in lower per unit costs. Higher volumes sold will generally result in additional revenue and associated margins.

Personnel Costs

Our operations are labor intensive. Personnel costs include the salaries, wages and benefits of our employees, as well as costs related to temporary labor. During our seasonal peaks and especially during the summer months, we have historically increased our temporary workforce to compensate for staff on vacation and increased volume of activity. Personnel costs generally increase and decrease with the expansion or contraction in production levels of operating facilities. Personnel costs also generally increase in periods of higher inflation.

Energy

Our operations require substantial amounts of energy to run, primarily electricity and natural gas. The direction of energy costs depends on the energy supply demand relationships in the regions we operate in and will likely continue being impacted by the effects of the war in Ukraine and related sanctions. The current geopolitical instability resulting from the war in Ukraine continues to expose us to the risk of energy supply disruptions. In addition, sustainability trends are expected to put upward pressure on energy costs over time. A significant increase in energy costs or disruption of energy supply could have a material adverse effect on financial position, results of operations, and cash flows.

Currency

We are a global company with operations in France, the United States, Germany, Switzerland, the Czech Republic, Slovakia, Spain, Mexico, Canada and China. As a result, our revenue and earnings have exposure to a number of currencies,

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primarily the euro, the U.S. dollar and the Swiss franc. As our presentation currency is the euro, and the functional currencies of the businesses located outside of the Eurozone are primarily the U.S. dollar and the Swiss franc, the results of the businesses located outside of the Eurozone must be translated each period to euros. Accordingly, fluctuations in the exchange rate of the functional currencies of our businesses located outside of the Eurozone against the euro have a translation impact on our results of operations.

Transaction impacts arise when our businesses transact in a currency other than their own functional currency. As a result, we are exposed to foreign exchange risk on payments and receipts in multiple currencies. In Europe, a portion of our revenue is denominated in U.S. dollars while the majority of our costs incurred are denominated in local currencies. We engage in hedging activities to attempt to mitigate the effects of foreign currency transactions on our profitability. Notably, where we have multiple-year sales agreements in U.S. dollars by euro-functional currency entities, we have entered into derivative contracts to forward sell U.S. dollars to match these future sales. With the exception of certain derivative instruments entered into to hedge the foreign currency risk associated with the cash flows of certain highly probable forecasted sales, which we have designated for hedge accounting, hedge accounting is not applied to such ongoing commercial transactions and therefore the mark-to- market impact is recorded in Other gains and losses -net.

Results of Operations for the three and six months ended June 30, 2023 and 2022

		For the three months ended June 30,		For the six months ended June 30,
(in millions of Euros and as a % of revenue)		2023			2022			2023			2022
Revenue	1,950			100%	2,275			100%	3,906			100%	4,254			100%
Cost of sales	(1,737)			89%	(2,060)			91%	(3,532)			90%	(3,822)			90%
Gross profit		213			11%	215			9%	374			10%	432			10%
Selling and administrative expenses	(80)			4%	(75)			3%	(151)			4%	(143)			3%
Research and development expenses	(13)			1%	(10)			-%	(26)			1%	(21)			-%
Other gains and losses - net	(41)			2%	(134)			6%	(56)			1%	(24)			1%
Income / (loss) from operations		79			4%		(4)			-%		141			4%		244			6%
Finance costs - net	(35)			2%	(32)			1%	(70)			2%	(62)			1%
Income / (loss) before tax		44			2%		(36)			2%		71			2%		182			4%
Income tax (expense) / benefit	(12)			1%	4			-%	(17)			-%	(35)			1%
Net income / (loss)		32			2%		(32)			1%		54			1%		147			3%
Shipment volumes (in kt)	398			n/a	424			n/a	787			n/a	825			n/a
Revenue per ton (€ per ton)	4,894			n/a	5,366			n/a	4,966			n/a	5,157			n/a

Revenue

For the three months ended June 30, 2023, revenue decreased by 14% to €1,950 million from €2,275 million for the three months ended June 30, 2022. This decrease reflected a decrease in shipments and lower revenue per ton. For the three months ended June 30, 2023, sales volumes decreased by 6% to 398 kt from 424 kt for the three months ended June 30, 2022. This decrease reflected a 7% decrease in volumes for P&ARP, an 8% decrease in volumes for AS&I and stable volumes for A&T. For the three months ended June 30, 2023, revenue per ton decreased by 9% to €4,894 from €5,366 for the three months ended June 30, 2022 primarily reflecting lower metal prices, partially offset by improved price and mix.

For the six months ended June 30, 2023, revenue decreased by 8% to €3,906 million from €4,254 million for the six months ended June 30, 2022. This decrease reflected a decrease in shipments and lower revenue per ton. For the six months ended June 30, 2023, sales volumes decreased by 5% to 787 kt from 825 kt for the six months ended June 30, 2022. This decrease reflected a 7% decrease in volumes for P&ARP and a 3% decrease in volumes for AS&I, partially offset by a 2% increase in volumes for A&T. For the six months ended June 30, 2023, revenue per ton decreased by 4% to €4,966 from €5,157 for the six months ended June 30, 2022 primarily reflecting lower metal prices, partially offset by improved price and mix.

Our revenue is discussed in more detail in the "Segment Results" section.

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Cost of Sales

For the three months ended June 30, 2023, cost of sales decreased by 16% to €1,737 million from €2,060 million for the three months ended June 30, 2022. This decrease in cost of sales was primarily driven by a decrease in raw materials and consumables used due to lower volumes and lower metal prices partially offset by increases in labor costs and energy costs mainly due to inflation.

For the six months ended June 30, 2023, cost of sales decreased by 8% to €3,532 million from €3,822 million for the six months ended June 30, 2022. This decrease in cost of sales was primarily driven by a decrease in raw materials and consumables used due to lower volumes and metal prices, partially offset by increases in labor costs and energy costs mainly due to inflation.

Selling and Administrative Expenses

For the three months ended June 30, 2023, selling and administrative expenses increased by €5 million to €80 million from €75 million for the three months ended June 30, 2022. The increase reflected primarily increases in labor costs and other operating expenses, partially offset by a decrease in professional fees.

For the six months ended June 30, 2023, selling and administrative expenses increased by 6% to €151 million from €143 million for the six months ended June 30, 2022. The increase reflected primarily increases in labor costs, lease expenses, other operating expenses and professional fees.

Research and Development Expenses

For the three months ended June 30, 2023, research and development expenses increased to €13 million from €10 million for the three months ended June 30, 2022. The increase reflected primarily an increase in labor costs partially due to inflation. Research and development expenses are presented net of research and development tax credits received in France for each of the three-month periods ended June 30, 2023 and 2022, respectively.

For the six months ended June 30, 2023 and 2022, research and development expenses increased to €26 million from €21 million for the six months ended June 30, 2022. The increase reflected primarily increases in labor costs partially due to inflation and in other operating expenses. Research and development expenses are presented net of research and development tax credits received in France for each of the six-month periods ended June 30, 2023 and 2022, respectively.

Other Gains and Losses, net

		For the three months ended June 30,		For the six months ended June 30,
(in millions of Euros)		2023		2022		2023		2022
Realized (losses) / gains on derivatives	(19)	8	(23)	62
Unrealized losses on derivatives at fair value through	(20)	(141)	(28)	(85)
profit and loss - net
Unrealized exchange losses from the remeasurement of	(1)	(2)		-	(1)
monetary assets and liabilities - net
Losses on disposal	-		-	(6)	(1)
Other	(1)	1	1	1
Total other gains and losses, net		(41)		(134)		(56)		(24)

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The following table provides an analysis of realized and unrealized gains and losses by nature of exposure:

		For the three months ended June 30,		For the six months ended June 30,
(in millions of Euros)		2023		2022		2023		2022
Realized gains / (losses) on foreign currency derivatives	5	(2)	9	1
Realized (losses) / gains on commodity derivatives	(24)	10	(32)	61
Realized (losses) / gains on derivatives		(19)		8		(23)		62
Unrealized losses on foreign currency derivatives	(6)	(5)	(4)	(7)
Unrealized losses on commodity derivatives		(14)		(136)		(24)		(78)
Unrealized losses on derivatives at fair value through		(20)	(141)	(28)	(85)
profit and loss-net

Realized gains or losses relate to financial derivatives used by the group to hedge underlying commercial transactions. Realized gains and losses on these derivatives are recognized in Other Gains and Losses, net and are offset by the commercial transactions accounted for in revenue and cost of sales.

Unrealized gains or losses relate to financial derivatives used by the group to hedge forecasted commercial transactions for which hedge accounting is not applied. Unrealized gains or losses on these derivatives are recognized in Other Gains and Losses, net and intend to offset the change in the value of forecasted transactions which are not yet accounted for.

Changes in realized and unrealized (losses) / gains on derivatives for the three and six months ended June 30, 2023 as compared to the three and six months ended June 30, 2022 primarily reflected the fluctuation in metal prices.

For the six months ended June 30, 2023, losses on disposal included a €5 million loss relating to the sale of Constellium Ussel which was completed on February 2, 2023.

Finance Costs, net

For the three months ended June 30, 2023, finance costs, net increased by €3 million to €35 million from €32 million for the three months ended June 30, 2022. This increase primarily reflected higher interest costs as a result of the increase in interest rates.

For the six months ended June 30, 2023, finance costs, net increased by €8 million to €70 million from €62 million for the six months ended June 30, 2022. This increase primarily reflected higher interest costs as a result of the increase in interest rates.

Income Tax

For the three months ended June 30, 2023, income tax was an expense of €12 million compared to a benefit of €4 million for the three months ended June 30, 2022.

Our effective tax rate was 27% of our income before income tax and 11% of our loss before income tax, respectively compared to a statutory tax rate of 25.8% for the three months ended June 30, 2023 and 2022.

For the six months ended June 30, 2023 and 2022, income tax was an expense of €17 million and €35 million, respectively.

Our effective tax rate was 25% and 19% of our income before income tax, respectively compared to a statutory tax rate of 25.8% for the six months ended June 30, 2023 and 2022.

Our effective tax rate was lower than the statutory rate in both periods, primarily due to the geographical mix of our pre- tax results, and the impact of non-recurring transactions.

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Net Income / Loss

As a result of the foregoing factors, we recognized net income of €32 million in the three months ended June 30, 2023 and a net loss of €32 million in the three months ended June 30, 2022. We recognized net income of €54 million and €147 million in the six months ended June 30, 2023 and 2022, respectively.

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Segment Results

Segment Revenue

The following table sets forth the revenue for our operating segments for the periods presented:

		For the three months ended June 30,			For the six months ended June 30,
(in millions of Euros and	2023			2022			2023			2022
as a % of revenue)
P&ARP	1,049			54 %	1,348			59 %	2,079			53 %	2,516			59 %
A&T	464			23 %	461			20 %	916			23 %	846			19 %
AS&I	443			23 %	501			21 %	926			24 %	960			23 %
Holdings and Corporate	-	- %		-	- %	1			- %		-	- %
Inter-segment eliminations	(6)			n.m.	(35)			n.m.	(16)			n.m.	(68)			n.m.
Total revenue		1,950			100 %		2,275			100 %		3,906			100 %		4,254			100 %

n.m. not meaningful

P&ARP

For the three months ended June 30, 2023, revenue in our P&ARP segment decreased 22% to €1,049 million from €1,348 million for the three months ended June 30, 2022 primarily as a result of lower shipments and lower revenue per ton. P&ARP shipments were down 7%, or 20 kt compared to the three months ended June 30, 2022 on lower shipments of packaging and specialty rolled products, partially offset by higher shipments of automotive rolled products. For the three months ended June 30, 2023, revenue per ton decreased by 17% to €3,853 per ton from €4,616 per ton for the three months ended June 30, 2022, primarily driven by lower metal prices, partially offset by a more favorable price and mix.

For the six months ended June 30, 2023, revenue in our P&ARP segment decreased 17% to €2,079 million from €2,516 million for the six months ended June 30, 2022 primarily as a result of lower shipments and lower revenue per ton. P&ARP shipments were down 7%, or 37 kt, compared to the six months ended June 30, 2022 on lower shipments of packaging and specialty rolled products, partially offset by higher shipments of automotive rolled products. For the six months ended June 30, 2023, revenue per ton decreased by 12% to €3,916 per ton from €4,430 per ton for the six months ended June 30, 2022, primarily driven by lower metal prices, partially offset by a more favorable price and mix.

A&T

For the three months ended June 30, 2023, revenue in our A&T segment was relatively stable at €464 million compared to €461 million for the three months ended June 30, 2022. A&T shipments were stable with higher aerospace rolled product shipments, offset by lower transportation, industry and defense rolled product shipments. For the three months ended June 30, 2023, revenue per ton was stable at €7,694 per ton compared to €7,683 per ton for the three months ended June 30, 2022, primarily reflecting a more favorable price and mix, partially offset by lower metal prices.

For the six months ended June 30, 2023, revenue in our A&T segment increased 8% to €916 million from €846 million for the six months ended June 30, 2022, due to higher shipments and higher revenue per ton. A&T shipments were up 2%, or 3 kt, from higher aerospace rolled product shipments partially offset by lower transportation, industry and defense rolled product shipments. For the six months ended June 30, 2023, revenue per ton increased by 6% to €7,757 per ton from €7,328 per ton for the six months ended June 30, 2022, primarily reflecting a more favorable price and mix, partially offset by lower metal prices.

AS&I

For the three months ended June 30, 2023, revenue in our AS&I segment decreased 12% to €443 million from €501 million for the three months ended June 30, 2022, primarily due to lower shipments and lower revenue per ton. AS&I shipments were down 8%, or 6 kt, on lower other extruded product shipments, partially offset by higher shipments of automotive extruded products. For the three months ended June 30, 2023, revenue per ton decreased by 3% to €6,724 per ton from €6,958 per ton for the three months ended June 30, 2022, primarily driven by lower metal prices, partially offset by a more favorable price and mix.

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