Q1 2024 Constellium SE Earnings Call

Participants

Jason Hershiser; Investor Relations; Constellium SE

Jean-Marc Germain; Chief Executive Officer, Executive Director; Constellium SE

Jack Guo; Senior Vice President, Chief Financial Officer; Constellium SE

Curt Woodworth; Analyst; UBS Equities

Bill Peterson; Analyst; JPMorgan

Tim Thomas; Analyst; Wolfe Research

Josh Sullivan; Analyst; The Benchmark Company LLC

Sean Wondrack; Analyst; Deutsche Bank

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Constellium first-quarter 2024 results call. (Operator Instructions)
I would now like to turn this conference call over to our host, Jason Hershiser, Director of Investor Relations. Please go ahead.

Jason Hershiser

Thank you, Candice. I would like to welcome everyone to our first-quarter 2024 earnings call. On the call today, we have our Chief Executive Officer, Jean-Marc Germain; and our Chief Financial Officer, Jack Guo.
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. 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 to today's slide presentation, which supplement our IFRS disclosures.
Before turning the call over to Jean-Marc, I wanted to remind everyone that beginning this quarter, we have revised the definition of adjusted EBITDA at the consolidated level based on discussions with the SEC. The new definition wll no longer exclude the non-cash impact of metal price lag.
We will continue to provide investors and other stakeholders with the non-cash metal price lag impact as it is necessary to get a true assessment of the economic performance of the business. Our segment adjusted EBITDA will continue to exclude the impact, and we will continue to provide guidance for adjusted EBITDA that excludes the impact.
And with that, I would now like to hand the call over to Jean-Marc.

Jean-Marc Germain

Thank you, Jason. Good morning. Good afternoon, everyone, and thank you for your interest in Constellium. Let's begin on slide 5 and discuss the highlights from our first quarter results. I would like to start with safety. Our number one priority. While we delivered strong safety performance in the first quarter, our recordable case rate of 2.2 per million hours worked is higher than our target performance. This is a humbling reminder that while we always strive to deliver best-in-class safety performance, we all need to constantly maintain our focus on safety to achieve the ambitious targets. We have set it is a never-ending task for our company and one we take very seriously.
Turning to our financial results. Shipments were 380,000 tons, down 2% compared to the first quarter of 2023, mainly due to lower shipments in AS&I, partially offset by higher shipments in power. Lower shipments in AS&I were largely a result of the German extrusion business we sold last year. Revenue of EUR1.7 billion decreased 12% compared to last year, primarily due to lower metal prices and lower shipments. Remember, while our revenues are affected by changes in metal prices. We operate a pass-through business model, which minimizes our exposure to metal price risk. Our net income of EUR17 million in the quarter compares to net income of EUR22 million in the first quarter last year. Adjusted EBITDA was EUR137 million in the quarter. So this includes a negative noncash impact from metal price lag of EUR13 million. If you exclude this impact of metal price lag, as Jason mentioned earlier, which you must if you want to have the real economic performance of the business. The adjusted EBITDA reflects EUR160 million in the quarter compared to EUR166 million last year.
Looking at segment adjusted EBITDA and delivered record quarter performance and was up EUR7 million compared to last year, but decreased EUR12 million in the quarter, and SNI was down EUR10 million. As we mentioned on our earnings call back in February, the pulp segment was impacted in the quarter as a result of the extreme snow and cold weather event at our Muscle Shoals facility in January. The weather event caused a full week of closure of the facility and then difficult to ramp back up once employees were able to return to work looking across our end markets, aerospace demand continued to grow in the quarter. Packaging shipments were also up in the quarter, including can stock automotive demand remained healthy in North America, while softer demand continued in Europe. Demand in most industrial and other specialty markets remained weak in both regions during the quarter.
Moving now to free cash flow. Our free cash flow in the quarter was negative EUR8 million. We continue to expect to generate positive free cash flow this year of greater than EUR130 million. I am pleased to report that we launched our share repurchase program in March and repurchased 330,000 shares for around USD7 million. Our leverage at the end of the quarter was 2.4 times and remains within our target leverage range. Overall, I am quite happy with our first quarter performance. And with that, I will now hand the call over to Jack for further details on our financial performance. Jack?

Jack Guo

Thank you, Jean-Marc, and thank you, everyone, for joining our call today. Please turn now to slide 7, and let's focus our park segment performance. In the first quarter of 2024, ARC generated segment adjusted EBITDA of EUR43 million, which was down 21% compared to the first quarter last year. As Jean-Marc mentioned earlier, Harper experienced significant weather related impacts during the quarter. Despite these impacts as well as continued operational challenges at Muscle Shoals. Harp volume was a tailwind of EUR4 million with higher shipments in packaging and Automotive Rolled Products. Packaging shipments increased 2% in the quarter versus last year. Within packaging cans stop shipments were up in the quarter versus last year, partially offset by lower shipments of specialty packaging in Europe. Automotive shipments increased 1% in the quarter with healthy demand in North America, mostly offset by softness in Europe. Price and mix was a headwind of EUR9 million, mainly as a result of weaker mix in the quarter. Costs were a headwind of EUR7 billion as a result of unfavorable metal costs, partially offset by lower operating costs.
I now turn to slide 8 and let's focus on the A. and T cells. Adjusted EBITDA of EUR80 million increased 10% compared to the first quarter last year. And as a new first quarter record for a key volume was a headwind of EUR4 million as higher aerospace shipments were offset by lower t. i. d. shipments in the quarter. Aerospace shipments were up 6% versus last year as the recovery in aerospace markets continues. Shipments in TID. were down 8% versus last year, reflecting a slowdown in most industrial markets. Price and mix was a tailwind of EUR8 million, mainly as a result of mixing the quarter with more aerospace Costs were a tailwind of EUR3 million, primarily as a result of lower operating costs.
Now turn to Slide 9. Let's focus on the AS&I segment adjusted EBITDA of EUR33 million decreased 23% compared to the first quarter last year. Volume was a EUR6 million headwind as a result of lower shipments in automotive and industrial extruded products. Automotive shipments were down 9% in the quarter versus last year as a result of softness in Europe and the timing impact between certain programs switches. Industry shipments were down 28% in the quarter versus last year, primarily as a result of the sale of our German extrusion business. While the market conditions and cross industry provisions in Europe remained weak. Price and mix was a EUR10 billion headwind, primarily due to a softer pricing environment in industry and weaker mix in the quarter. Costs were a tailwind of EUR8 million lower operating costs, FX and other was a headwind of EUR2 million in the quarter. It is not on the slide here, but I wanted to make some quick comments on Holdings and Corporate. In the first quarter, our holdings and corporate expense was EUR6 million. We continue to expect Holdings and Corporate expense to run at approximately EUR40 million in 2024, with the increase primarily driven by additional IT spending with the upgrade of our ERP system. It is also not on the slide here, but I wanted to summarize the current cost environment we're facing. As you know, we operate a pass-through business model, so we're not materially exposed to changes in the market price of aluminum, our largest cost inputs throughout 2022 and most of 2023, we were faced with broad-based and significant inflationary pressures. Although the pressure began to ease in some categories in the fourth quarter last year. Labor and other nonmetal costs continue to be higher this year. As for energy, our 2020 forecasts are secured at moderately more favorable levels compared to 2023. Although energy prices remain well above historical averages, we remain confident in our ability to offset any future inflationary pressures with top-line actions and our relentless focus on profitable trucks as we've demonstrated in the past.
Now let's turn to Slide 10 and discuss our free cash flow. Our free cash flow was negative EUR8 million in the first quarter, which was in line with our expectations and better than last year. The year over year change is a result of less cash used for working capital and lower capital expenditures, partially offset by lower adjusted EBITDA.
Looking at 2024, we expect to generate free cash flow in excess of EUR130 million for the full year, which we expect to be weighted more towards the second half. As we noted last quarter, we expect CapEx to be around EUR370 million this year, which includes higher spending on return-seeking projects such as our recycling and casting center in the frac facility is expected to start-up on time and on budget in the fourth quarter this year we expect cash interest of approximately EUR125 million, which includes the impact from higher interest rates. We expect cash taxes of approximately EUR55 million and we expect working capital and other, it should be a modest use of cash for the full year with the expected free cash flow generation of over EUR130 billion. We intend to use a large portion of the free cash flow this year for our share repurchase program. As Jean-Marc mentioned previously, we launched the share repurchase program in March and repurchased 330,000 shares for USD6.9 billion. We have approximately USD293 million remaining on our existing share repurchase program.
Now let's turn to Slide 11 and discuss our balance sheet and liquidity position. At the end of the first quarter, our net debt of EUR1.7 billion increased slightly compared to the end of 2023, mainly as a result of our favorable USD translation impact. Our leverage was 2.4 times at the end of the quarter were down 0.4 times versus the end of the first quarter of 2023. And within our target leverage range, we remain committed to maintaining our target leverage range of 1.5 to 2.5 times. As you can see in our debt summary, we have no bond maturities until 2026, and our liquidity remains strong at EUR789 million as of the end of the first quarter. I'm also pleased to report that Moody's upgraded our credit rating earlier this month to be a three with a stable outlook. As a reminder, we received an upgrade from S&P in November last year to double B minus with a stable outlook. We're extremely proud of the progress we have made on our capital structure and have the financial flexibility we're building, including the ability to begin returning capital to our shareholders.
I will now hand the call back to Jean-Marc.

Jean-Marc Germain

Thank you, Jack, let's turn to Slide 13 and discuss our current end market outlook. The majority of our portfolio today is serving end markets currently benefiting from durable sustainability driven secular growth in which aluminum lights and Infinity recyclable material plays a critical role.
Turning first to packaging, inventory adjustments in can stock appear behind us in both North America and Europe. Gamestop shipments have increased the last few quarters, though demand is still relatively low in the current environment. The long-term outlook for this end market continues to be favorable, as evidenced by the growing consumer preference for the sustainable aluminum beverage can capacity growth plans from car makers in both regions and the greenfield investments ongoing here in North America, we are expecting growth in can stock in 2024. Longer term, we continue to expect packaging markets to grow low to mid-single digits in both North America and Europe. I am pleased to report that the recycling and casting center we are building at our newest resort facility is well underway and both on time and on budget. As Jack mentioned earlier, the project is still expected to start-up in the first quarter of this year and ramp up quickly in 2025. As I mentioned before, Muscle Shoals was impacted in the quarter by the extreme cold weather in addition, the plant continues to face some ongoing operational challenges. We are encouraged by the improved performance we have seen there recently, and we expect operations to continue to improve as the year progresses.
Turning now to automotive, automotive, OEM sales and production numbers globally have increased the last few years but remain below pre-COVID levels. Demand remains healthy in North America. Today, so the weaker demand in Europe that we experienced in the fourth quarter of last year has continued into the first quarter and will likely persist into the second quarter in both regions. Demand for EVs is continuing to grow, albeit at a slower pace than expected in the past. Consumer demand for luxury cars, light trucks and SUVs remains steady. Vehicle electrification and sustainability trends will continue to drive demand for lightweighting and use of aluminum products in the long term. As a result, we remain positive on this market longer term.
Let's turn now to aerospace. The recovery in aerospace continued in the current quarter, though demand in this market also remains below pre-COVID levels. Major aero OEMs remain focused on increasing build rates for both narrow and wide-body aircraft despite ongoing supply chain issues and recent safety concerns. Commercial Aircraft backlogs are healthy today, and we remain confident that the long-term fundamentals driving aerospace demand remain intact. Including growing passenger traffic and greater demand for new more fuel-efficient aircraft. Demand remains strong in the business and regional jet markets and the defense and aerospace markets. In addition, we continue to experience strong demand for our Airwear family of products. Very excited about the future opportunities to continue our growth in aerospace and related markets, which I will touch on more in a minute as the chart on the left side of the page highlights, these three core end markets represent 80% of our last 12 months revenue.
Turning lastly, to other specialties, we have experienced weakness across most markets for several quarters in a row now these markets are typically dependent upon the health of the industrial economies in each region. While the US economy remains healthy today, the economy in Europe continues to be weaker. More specifically, our expectations of recovery in European industrial and automotive markets are somewhat tempered versus last quarter as we are seeing little improvement in economic indicators in this region.
In summary, we like the fundamentals in each of the markets we serve, and we strongly believe that the diversification of our end markets is an asset for the Company over the longer term.
Let's turn now to Slide 14. I want to spend a few minutes on two exciting investments we are making in our aerospace assets in order to further strengthen our market leadership position. As you all know by now, our first strategic focus is to grow our value at the two investments I'm about to discuss do just that in a most exciting segment for us, Aerospace. First, as we announced in March, our aerospace and DoD facility in Ravenswood, West Virginia was recently selected by the U.S. Department of Energy to received an investment of up to USD75 million to deploy low to zero carbon technology. The total size of the project is expected to be around USD150 million inclusive of the U.S. Department of Energy Investment. And it is split 50 50 between maintenance CapEx and return-seeking CapEx.
In terms of project details, we are looking to replace three legacy testing centers in Ravenswood with two new modern state of the art casting centers dedicated for aerospace and TAD products. This investment will support the installation of low-emissions smart melt furnaces that can operate using a range of fuels, including clean hydrogen, paving the way towards a zero-carbon cast house in addition to reducing carbon emissions to project is expected to help maximize the recycle scrap intake and equipment efficiency, reduce our reliance on external suppliers by increasing our internal slab casting capabilities, improve worker safety with introduction of our entry casting process and contribute to local communities around Ravenswood. In terms of timing, the projects will be staged, and we expect the first testing center to ramp up in 2026 with a second casting center ramping up in 2028. We are extremely honored and proud to have been selected for this investment, and we express our gratitude to the Department of Energy for the support of Constellium and the aluminum industry.
Moving on to the second investment, I'm excited to announce today that we are adding a third casthouse at our facility in East who are friends dedicated to our AIRWARE products. The total size of this investment is close to EUR40 million of return-seeking CapEx, plus working capital to get the casthouse up and running. The project is expected to significantly increase our capacity and production of our products, which will be critical to respond to seeing increased demand in the years to come. There's not through over 20 years of research and development and where big brings together a unique combination of benefits. It provides low density strengths, thermal stability corrosion resistance, lightweighting and other attributes aware is already used today across several major aircraft platforms and space programs, and we are excited about the future growth potential for this unique solution in these markets.
In terms of timing, we expect to complete the cast house by the end of 2025 and to ramp up the cast house in 2026 and beyond, as I mentioned, the investment in Europe in reference to the split between maintenance and return-seeking CapEx, while the project is what is return-seeking CapEx, we expect the return-seeking spending on aerospace investments to well exceed our target IRR of 15%. Also, we expect both projects to be funded without an increase to our overall CapEx levels.
Our NT. segment is delivering record performance today, and these investments will create new growth opportunities in 2026 and beyond.
Turning now to slide 15, we detail our key messages and financial guidance our team delivered solid performance in the first quarter of 2024. Despite the mixed end market demand environment we faced and the significant weather related impacts at our Muscle Shoals facility. Pnc delivered record first quarter segment adjusted EBITDA. And importantly, we also launched our share repurchase program in March. As we look ahead like many others, we are continuing to face uncertainties on the macroeconomic and geopolitical fronts. At Constellium, we like our end market position and we are optimistic about our prospects. Based on our current outlook. We are maintaining our guidance for 2024, we are targeting adjusted EBITDA, excluding the noncash impact of metal price lag in the range of EUR740 million to EUR770 million and free cash flow in excess of EUR130 million.
To give some more color on earnings cadence for the year, our guidance assumes sequential improvements in adjusted EBITDA in the second quarter. So we do expect the second quarter of 2024 to be below the record the record quarter we achieved last year. This is driven primarily by persisting weakness in European automotive, industrial and specialties end markets, as well as scheduled maintenance outages planned in the second quarter this year.
I also want to reiterate our long-term guidance of adjusted EBITDA, excluding the noncash impact of metal price lag in excess of EUR800 million in 2025, and our commitment to maintain our target leverage range of 1.5 to 2.5 times.
To conclude, let me say again that I'm proud of our results and very excited about our future. We are extremely well positioned for long-term success, and we remain focused on executing our strategy and creating value for our shareholders.
With that, Candice, we will now open the Q&A session.

Question and Answer Session

Operator

(Operator instructions) Curt Woodworth, UBS. Your line is now Please go.

Curt Woodworth

Yes, thank you. Good morning, Jean-Marc and Jack. I just wanted to drill down some and some of the moving pieces affecting part, but seems like there's kind of a variety issues going on between some operational challenges at Muscle Shoals as well as you highlighted, negative mix in the quarter. But when we look at your unit profitability year on year or in such a sequential basis, pretty significantly depressed relative to, I think, broader expectations for mixed benefits, you would see in auto and obviously, a lot of the efforts the Company has made to reposition some of the contracts in the can sheet. So can you kind of just give us a sense for maybe what what the Muscle Shoals kind of headwind was in this quarter? And then as you think about 2Q in part part, can you talk about what your margin expectations are and how we should think about it going into the remainder of the year?

Jack Guo

Sure, Kurt. Good morning. So I'll start and then Jean-Marc can help me. So when you look at the top results in the in the first quarter, um, you know, mix was unfavorable and that's because we've had more packaging volume come into them relative to some proportion of the mix. And so that's one thing to keep in mind from as we kind of look forward some on the cost side, you know, HARP actually had a substantial amount of impact on the cost side from Muscle Shoals, weather events in the first quarter, but obviously that's a adverse result compared to a first quarter of last year. So now if we can have some look forward on in terms of margin assumption, I mean this is something we are you also mentioned in the past that this business unit with the recovery in packaging and strong automotive, we should see margin returning to over EUR300 per tonne. We didn't see that in Q4 and to get to the over EUR300 per tonne level down. We're looking at improved performance at Muscle Shoals. We're looking at, yes, more recycling benefits, and that will be coming up. That will be helped out by the FD. six zone where the net present construction investment there, which is ramping up starting in the fourth quarter this year. And also, you know, with the continued focus on pricing and cost discipline. But if you look at those buckets and looking at what that results in the first quarter, 2024 will continue to be a year in transition from a margin perspective.

Curt Woodworth

Yes. Okay. And then I guess with respect to some of the new greenfield mills there planning to come up and delay 25 and 26 and obviously, there's been some delays at one of the mills. I'm just wondering, are you seeing any change in kind of your customers looking to come to you to secure any more volume as a potential hedge against delays and some of these projects.
And then just given there's been a little slower ramp-up in the can sheet market and you talked about industrial what's your confidence level that this capacity can be absorbed? And do you have a strategy to trying to extend contract duration on within your mix to kind of hedge against potential oversupply?

Jean-Marc Germain

Yes. So sure, there's plenty, no question here. So on the can sheet side, as we communicated, we are sold out through 27 and nearly 28. So there is no possibility for us to increase our sales in this period. But we do see customers wanting some more possibly as a hedge against a ramp up because they are questioning the ramp-up of these new mills, and we are trying hard to meet their needs. But it's extremely difficult because again, we've built a very solid position with long-term contracts, which we like and that's where we are. So I think the capacity of the market to absorb the volumes, I think on a macro basis, we've always said there needs to be more capacity in North America. So these two greenfields are needed to meet the needs of the market in Canada and in auto and also specialties, which is more cyclical, but also in specialties where we don't participate ourselves. And we are seeing the evidence of it in our discussions with our customers where we are sold out and the he would like a bit more if we could make it. So I think that's how I would answer your question.
Yes, okay.

Curt Woodworth

On and then maybe just lastly on the guidance for 2Q to be down, would you expect that to be primarily functional around the park segment? And then can you give us any kind of magnitude of how much it could be down year on year? I'll turn it over, if Thank you.

Jack Guo

And so we won't go into the specifics here current, but just term, the when you look across the business unit, I think unit some keep in mind what you know, the second quarter of four E. and T. last year was a record quarter from. So that's a tough comp on number one. And then when you look at volume expectations. As you know, we do expect the trends we've seen in the first quarter to continue into the second quarter at Part B. and AS. and I. And And also keep in mind. And in the second quarter of this year, as we mentioned in the script, we do have some planned outages in preparation for a stronger back half of the year, and that will have some impact on volume second, yes.

Jean-Marc Germain

Thank you.

Operator

(inaudible)

Hi. Thank you for taking my questions. I think you mentioned that you expect to use a large portion of your free cash flow for share buybacks in the second half can you talk a bit about what percent of free cash flow you would you would be comfortable and using for share buyback as well?

Jack Guo

We won't be too precise here. Culture But thank you for the question. I know we are expected to generate over EUR130 million free cash flow. So when we say a large percentage mean you can imagine it's more than half, but it's not 100%.

Okay. And maybe I missed this, but and on the new. Yes, sorry.

Jean-Marc Germain

So I catch it. Good volumes to co-market. I just wanted to add that we wanted to stay within our target leverage range, even though we may not be as specific as to, you know, any given quarter, but overall, we want to stay within our target leverage.

And just one more point of clarification. Tom, you mentioned about second half on PM.

Jack Guo

I don't think we'll be too will be quite hands off, Ray. So, you know, I think and just leave it with the 10b5 program to its execution throughout the year.

Okay. And then on the new airway casthouse is there a volume increase that you can talk about? I might have missed. Yes.

Jean-Marc Germain

Yes, get yes, there is a volume increase. We are not going to talk about it because it's commercially extremely sensitive to Light Materials. So you will not see a big increase in tons, but you will see a significant increase in value add for Constellium over time. And that's what is very exciting for us.
Maybe if I can think of normal, yes, you can think of these two investments are talking about us. If you think of the CapEx dollars to do EBITDA return. We're getting out of them. They are the same kind of ratio as what we are observing with the upcoming IFT. six in this project. So really attractive investments for us.

Perfect. And on the A&T segment, the EBITDA per ton margin is up year over year, but it was down sequentially. How should we think about it in the rest of the year.

Jack Guo

So Kochi, I wouldn't read too much into the quarterly margin, but I think Kim, for the business units, we have momentum in this business unit with aerospace, right? So the margin will stay high and those stay well above 1,000 per tonne guidance that we've provided before too long to long term.

Yes. Okay. Thank you so much.

Jack Guo

Thank you, Patrick.

Operator

Bill Peterson, JPMorgan.

Bill Peterson

Okay, hi, good afternoon. Good morning, Jean-Marc. To inject some kind of taking a higher level view for the full year, you reiterating your EBITDA guidance you have given the weaker starting point. You talk about a quarterly improvement, but can you provide a bridge and how we should think about the EBITDA growth for the remainder of the year? Like what visibility do you have to support the reiteration of guidance? What's in your control and what needs to happen in the various end markets to to achieve that and especially in the context of the macro headwinds you spoke to in the prepared remarks, I guess I'm looking for is what's going to be driving that back half step-up in profitability?

Jean-Marc Germain

And a Good morning, Bill. I'll start and then Jack, will it help me as well. So I think it's important to note that, you know, if you look at can sheet to grow growing again, if you look at automotive in the U.S., it's extremely strong. So a little bit disappointing in Europe, but it's extremely strong in the U.S. and aerospace is a exceptionally strong for us and continues to show strength. So that's 70% of our sales that are actually experiencing tailwinds. And we've got quite a bit of visibility because of our long-term contracts. So we don't know for sure what the second half of the year will be, but we've got pretty good visibility so that that's a number one, very important element in the backdrop for our guidance.
The second element is the weather event. I hate to come back to it that we experienced in the in January in Muscle Shoals was extremely significant. That's a significant drag on EBITDA and on costs and on volumes. And obviously, we're not forecasting that to happen again for the remainder of the year. So you take these two elements and you already have a good view into the into the projection for the rest of the year. So it will mean that the second half will be back-end loaded. The second half will be quite strong under the current environment. We are not betting on an improvement in European industrial and European industrial outlook, but the strength in the other markets should carry us through the rest of the year.
Jack, anything you want to add? Did I answer your question, Bill,

Bill Peterson

But yes, thanks for that color. Coming back to packaging. And I guess on the multiyear view, I think you've talked about the need for additional North American capacity. You obviously see a lot of imports in the market. But I guess the question is we look out over the over a multiyear period with this additional capacity coming online in the U.S., what happens to the volumes that are being imported? Do you see any potential for these imports to compete with your European businesses in that in that and that side of the pond? Or how should we think about the competitive landscape universally within your packaging group with this new of North American editions?

Jean-Marc Germain

Yes. So you're right to point out in the US today, the imports are high, abnormally high end. As you've seen, there's some trade actions that are ongoing and developing So beyond the fact that they tend to not be very competitive delivered to customers. In addition, they're likely to face more duty. So where would they go in the future? Europe is a possible destination, but you have also to remember that can sheet is growing. Not only cans are growing not only in America and Europe, but they're growing, although the world. So there is more need for these products the industrial economies in Asia are also recovering, even though China is a little bit weak these days, there's also a significant dynamism in Asia and other regions in the world. So there is a think these exports will find other homes. And specifically for us when it comes to Europe, I mean it's still a fragmented market is difficult and more complicated to do business in Europe than it is in North America for somebody who comes in from a far away. And we are seeing also some less Navy T, let's say, from the Europeans about to competitors dumping from overseas into the European market. So we don't feel like there isn't much of a risk in Finally, and it is it isn't clear to me how imports from faraway places can be competitive in Europe given the logistics.

Bill Peterson

Okay. Fair enough. And if I can sneak in one more. Just the you mentioned AS. and I. And both and some mix, some pricing mix headwinds, but I guess can you elaborate I know you spoke so like you said the competition, I guess I'm wondering what's changed in this market? And I guess maybe more importantly, one, when can we think that some of the fundamentals will bottom in the industrial side?

Jean-Marc Germain

Yes. So S & I's most exposed of our three segments to the European because just of the geography right to the European economy, all our industry sales are in Europe and protection is in Europe and a lot of our auto structures businesses in Europe. So the geography mix is weighing quite heavily on a on the S&I performance. So that's really the main driver.

Jack Guo

Yes, Bill, I would just add you know, when you look at the bridge for AS&I, you know, the volume headwind and the you know, the price index, we that's it as a result of lower automotive for the most part in Europe. And and that's because our performance is consistent with the industry production build rates in the first quarter and into the second quarter. But of that, that is expected to improve according to industry forecasters.

Jean-Marc Germain

And finally, just one note, again, on the volume side, if you look at our shipments in tons, most the vast majority of the decline is due to the sale of the German extrusion business, which we had in the first quarter. I mean, we added for the first three quarters of last year, and we sold it. So when you look at the volume level, it looks like a dramatic decline, but it's really because we sold the business, it looks like those are markets you have for the three and such. Thank you, Bill.

Jack Guo

Thank you, Bill.

Operator

Tim Thomas, Wolfe Research.

Tim Thomas

Good morning. Thanks for the detail. I wanted to ask first off on Muscle Shoals, if you could, if I missed them, I apologize. But did you quantify the impact of the heavy snow in the first quarter? And can you discuss a bit more of the lingering challenges that you referred to?

Jack Guo

And so maybe I'll start and I think in terms of the impact, we did not quantify. But one way to think about it is if we didn't have the the usual event weather event in the first quarter in January at Muscle Shoals Park would have achieved a better performance relative to the first quarter last year.

Tim Thomas

Okay. Thanks. And that lingering challenges you mentioned?

Jean-Marc Germain

Yes. So we have expectations of growth. So I'll backtrack a bit. The markets in North America for can sheet and for automotive are growing. So over the course of the next several years and even a few years, we've been raising our expectations of output from Muscle Shoals, and we are constantly running a little bit behind. We we're making progress, but we are constantly running a bit behind our own expectations, and that's reflected in our guidance by the way, and that's really what we're talking about, right? So making some progress, but not at the rate at which we were hoping. And we continue to be very focused on improving both the seniority and the knowledge of our teams and then the reliability of our equipment. It's a daily grind in industrial operations that we continue to be very focused on.

Tim Thomas

Okay. Got it. And then my other question was just really a higher level question about the recent announcement by President Biden to about to add to aluminum tariffs. Obviously, we also know that on the Trump is reelected, he would also add to it tariffs broadly. So can you remind us how you feel positioned vis-a-vis those potential increase in import tariffs, and thank you to Nick.

Jean-Marc Germain

So it's a broad question, and tariffs can take all kinds of shapes and forms, and they have a different impact depending on how they're implemented So with that said, antidumping tariffs essentially are good because they focus on, you know, players that don't play by the rules and the level the playing field. So that's good because it's focused and specific at the other end of the spectrum, you've got the two 32 tariffs, for instance, that impose a blanket tariff on anything from certain geographies, what it does is essentially raise price domestically. But if you start granting exemptions to a different players will then essentially you've created some competitive advantage for some of these imports. So some imports are at a penalty. Some imports are at a competitive disadvantage advantage and it becomes very murky to interpret how it's going to impact the industry. I think the discussion on the fuel and tariffs that I think you're alluding to our in the category of the blankets tariffs. So we'll have to see how they're effectively implemented what circumvention or exemptions there may be before we can assess, you know how much of a positive impact it will have. It should have some positive impact, but I'm kind of doubtful it will have a massive impact.
I think the other thing that was in the news very recently, I guess was just yesterday yesterday was potential tariffs in Mexico, and that has a potential to be a nice positive for the industry because Mexico has been used as a gateway or circumvention route for imports into North America. So that all is being closed apparently. So I'm I think that will have more impact than the CEO and an announcement of President Biden. But we'll see these things I think, are developing and suspected ways at times fees won't be a negative, but a material positive, we'll have to see.

Tim Thomas

Got it. Okay. Thanks for the help. I'll leave it there. Yes.

Operator

John Jonathan, The Benchmark Company.

Josh Sullivan

Good morning, Philip. Josh, with the with one of your OEM aerospace customers here announcing a change in narrow-body production, have you seen any change in demand for aerospace plate leading into that announcement? You mentioned plate inventory is still recovering still strong. It's thought that suppliers that are delivering that build rates will be paced and those that are catching up, but we'll continue to see some good growth.
Can we infer from your comments you're in that second bucket?

Jean-Marc Germain

Yes. So we have not seen any impact on I remind you that we are much less exposed to the cilia and then to the other one, a one. So our exposure is very limited that we are not seeing nor are we anticipating any decrease in demand for our products as a result of this reduction in rate.

Josh Sullivan

And then just kind of relatedly, given the negotiations with Boeing Airbus Spirit on the European operations, would any potential change in ownership from Spirit for those Airbus related assets fall under the Airbus contract? And could that mean any pickup or changing to Tellium content there?

Jean-Marc Germain

I don't think so, Josh, I don't think this will have any impact, positive or negative on us.

Josh Sullivan

Okay. And then and then just lastly on that, third casting house for AIRWARE. I think you mentioned some more value added work you're going to be doing there. What does that mean? Is that a new alloy or vertical move or anything can you just expand on that?

Jean-Marc Germain

So so AIRWARE is now well established alloy and specialty alloy in the aerospace applications. And we are seeing increased demand for this alloy and you know, the products made out of it out of a tried and these command a very nice price because it's very high value for customers, right? The properties that you achieve are extremely interesting in sophisticated applications, especially in space where you do weights and cryogenic resistance are super important. So we are seeing now after many years of development, commercial development in the market more and more aircraft and more and more platforms in space adopting AIRWARE. As a consequence, there is a need for more of that product and that will that will be very positive for our A. and D. segment in the 26 and for the next 10 years after that is not there anymore.

Josh Sullivan

Yes, yes. Well, I think it's a time, but we're very excited about these investments. Thank you.

Operator

Sean Wondrack, Deutsche Bank.

Sean Wondrack

Your line is sorry, go ahead and guys, congratulations on the ratings upgrade long overdue. And you know, Mark, I had a couple of you and I appreciate your guidance some very thorough here. And when I think about some of your larger cost buckets like energy costs and labor costs on, I guess on the energy side, can you talk about sort of what your assumption is for this year? And just as it relates to labor? And do you have any unions resetting their contracts this year? Is there anything there that could potentially push costs up a little bit?

Jack Guo

Yes. So thank you for the question. Sean. So I think, um, you know, knows the answer on the labor side. We look at the cost of them pressure, um, you know, we own the energy for specifically. We've said, the energy cost has crested in the second half or more in the fourth quarter of last year. And as we mentioned, the our hedge cost is at more favorable levels compared to it 2023, but still remain well above historical averages. But you know that well, that could be a tailwind, continue to be a tailwind for us from a cost perspective into the rest of this year.
On the other hand, though, labor cost has continued to be high. Remember, labor is the second largest category from for cost behind behind metal and inflation, there is really locked in for this, so that can continue to contribute.

Sean Wondrack

Okay, great. And also, you've pursued a balanced strategy of growing EBITDA and reducing debt on an absolute basis? I mean, clearly you're several innings into this on. Should we expect any permanent debt reduction going forward? Or do you think it will mostly be through EBITDA growth to the extent you're comfortable? Thank you.

Jack Guo

I think for the most part, we will I mean we will naturally de-lever and from a free cash flow perspective, a large portion will be going towards share buyback, but then we're keeping a little bit to enhance our financial flexibility, if you will, or mostly come from natural deleveraging.

Sean Wondrack

All right. I appreciate that. And then the last one for me. As you think about your share repurchase program and it's likely you generate more of your cash and back half of the year and you weigh it against sort of M&A opportunities? Is there anything out there, especially in Europe now that we've had a depressed environment for a period of time that could be attractive here in the near to medium term? Or do you think you're just going to continue along with your organic plan of repurchasing shares?

Jean-Marc Germain

Yes. So we were very committed to the share buyback program is number one to buy, and we're very committed to financial discipline.
Then strategically on the M&A side, we if that happens, we'll be highly selective. It's got to meet our internal rate of return, it's going to be to allow us to stay within our target leverage or does it change? It must be very quickly rectified and back to target leverage within a year and it's got to be synergistic.
And finally, we talked about our priority being on recycling. We want to increase our recycling, want to increase our autonomy vis a vis the primary producers. That's why we're doing the investment in a in France. That's why we're doing the investments in Ravenswood, and we'll continue to do that to increase our recycling capacity organically and potentially there's an attractive acquisition opportunity externally. But again, that's just one tool in the toolbox and it's going to be employed strategically selectively. And with respect of the target leverage rate.

Sean Wondrack

That's great. Great job this year. And last, I appreciate it all. Thanks very much.

Jean-Marc Germain

Thank you, Sean.

Jack Guo

And thank you, Charles.

Operator

As there are no additional questions at this time, I'd like to hand the conference call back over to Jean-Marc. Germain. See, I can tell you closing remarks.

Jean-Marc Germain

Thank you very much. Thank you very much, everybody, for your for listening in today and for your questions. And we look forward to updating you on our progress in a few months. So have a good day. Bye-bye.