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Constellium N.V. (CSTM -2.58%)
Q3Â 2019 Earnings Call
Oct 23, 2019, 12:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Constellium Q3 2019 Results Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Ryan Wentling, Director of Investor Relations. Please go ahead, sir.
Ryan Wentling -- Director, Investor Relations
Thank you, operator. I would like to welcome everyone to our third quarter 2019 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 statements as a result of new information, future events or otherwise, except as required by law.
In addition, today's presentation includes information regarding certain non-GAAP financial measures. Please see the reconciliations of non-GAAP financial measures attached in today's slide presentation, which supplement our IFRS disclosures.
I would now like to hand the call over to Jean-Marc.
Jean-Marc Germain -- Chief Executive Officer
Thank you, Ryan. Good morning, good afternoon, everyone, and thank you for your interest in Constellium. On Slide 5, you will see some of the highlights from our third quarter performance. Shipments were 395,000 metric tons, that's 4% compared to the third quarter of 2018. Our revenue increased 2% to EUR1.5 billion, this was primarily due to the consolidation of Bowling Green, partially offset by lower metal prices. I want to remind you that we substantially pass through metal prices.
Our net income of EUR1 million declined compared to a net income of EUR217 million in the third quarter of last year. You will recall, our net income in the third quarter of last year including gains on the sale of the North Building at Sierre, and an OPEB plan amendment. Adjusted EBITDA was EUR139 million. That is an 18% increase compared to the third quarter of last year.
PARP had an excellent quarter with solid operational performance and the benefit of favorable metal costs. A&T delivered another strong quarter, thanks to good aerospace demand and solid operational performance. AS&I results were weaker than expected as we continue to experience higher costs related to our footprint expansion and operational challenges on some of our newer automotive programs.
In the first nine months of 2019, Constellium generated EUR441 million of adjusted EBITDA, a 12% improvement compared to the first nine months of last year. Based on our current outlook, we expect adjusted EBITDA to grow by 12% to 14% in 2019. While slightly below our previous guidance of 13% to 15% growth, this is an impressive performance considering the more challenging than expected end-market conditions in the second half of the year, and weaker than expected performance by AS&I. We remain well-positioned to deliver on our EUR700 million adjusted EBITDA target in 2022.
Free cash flow was a positive EUR31 million in the third quarter and EUR157 million in the first nine months. We deployed our free cash flow toward our gross debt reduction objective with the repayment of EUR100 million of our 2021 bonds in August. We continue to expect free cash flow of EUR125 million to EUR175 million in 2019.
On Project 2019, we increased our run-rate cost savings to EUR73 million as of the end of the third quarter. This brings us very close to our target of EUR75 million by the end of the year. So overall, I am very pleased with our third quarter and first nine months results. We remain focused on executing on our strategy and delivering on our 2022 objectives.
With that, I will now hand the call over to Peter for further details on our financial performance. Peter?
Peter Matt -- Executive Vice President and Chief Financial Officer
Thank you, Jean-Marc, and thank you, everyone, for joining the call today. Turning now to Slide 7, you will find the change in adjusted EBITDA by segment for the third quarter and the first nine months of 2019 compared to the same periods of last year. For the third quarter of 2019, Constellium achieved EUR139 million of adjusted EBITDA, an increase of EUR21 million or 18% year-over-year.
PARP adjusted EBITDA of EUR72 million increased by EUR11 million. A&T adjusted EBITDA of EUR43 million increased by EUR12 million. AS&I adjusted EBITDA of EUR26 million decreased by EUR3 million. Lastly, Holdings and Corporate costs decreased by EUR1 million to EUR2 million.
In the first nine months of 2019, Constellium earned EUR441 million of adjusted EBITDA, an increase of EUR47 million or 12% year-over-year. PARP adjusted EBITDA of EUR210 million was up 12% compared to the first nine months of last year. A&T adjusted EBITDA of EUR159 million increased by 39% year-over-year. AS&I adjusted EBITDA of EUR85 million decreased by 19% year-over-year. And Holdings and Corporate costs increased by EUR1 million to EUR13 million. We continue to expect H&C costs of approximately EUR20 million for the full year of 2019.
Now turn to Slide 8, and let's focus on the PARP segment. Adjusted EBITDA of EUR72 million increased 18% compared to the third quarter of last year. Volume was a tailwind of EUR9 million as shipments increased by 7%. Packaging rolled product shipments increased 6% on strong demand and solid operational performance. Automotive rolled product shipments were up 12% in the quarter and 21% for the year, benefiting from the consolidation of Bowling Green shipments and the continued ramp-up of our automotive capacity.
Our two new calp lines in Neuf Brisach, France and in Bowling Green, Kentucky are running well and the ramp-ups are on track. We continue to ramp up these -- we will continue to ramp up these lines over the course of 2019 with full production in 2020. Price and mix was a headwind of EUR3 million. Costs were a tailwind of EUR6 million due to favorable metal costs and good overall cost performance. Bowling Green generated negative EUR4 million of adjusted EBITDA in the quarter. We expect the plant to generate approximately negative EUR15 million of adjusted EBITDA in 2019.
FX translation was a tailwind of EUR2 million and the application of IFRS 16 was a EUR1 million tailwind.
Now turn to Slide 9, and let's focus on the A&T segment. Adjusted EBITDA of EUR43 million increased 35% compared to the third quarter of last year. Higher aerospace shipments were offset by lower TID shipments due to weaker TID end markets. Price and mix improved by EUR20 million in the third quarter due to good mix in both aerospace and TID, and improve TID pricing. Costs were a headwind of EUR8 million in the quarter largely related to lower scrap usage and higher labor costs. Lastly, FX translation and the application of IFRS 16 were each a EUR1 million tailwind in the quarter.
Now, turn to Slide 10, and let's focus on the AS&I segment. Adjusted EBITDA of EUR26 million decreased 10% compared to the third quarter of 2018. Volume drove an EUR8 million improvement. Costs increased by EUR12 million compared to the third quarter of 2018 due to our footprint expansion and operational challenges on some of our newer automotive programs. Lastly, the application of IFRS 16 was a EUR3 million tailwind.
We have highlighted the challenges we have been facing in Automotive Structures on recent calls.
As we have noted before, the difficulties we are experiencing are largely limited to a few project platforms. In some cases, we have underestimated the cost associated with the start-up. In a few other cases, we have been affected by delays in the timing of customer launches. As we have said before, predicting the exact timing of an inflection is difficult, and clearly this is taking more time than we initially anticipated. But we know what we need to do and we're confident that we're on the right path.
Now turn to Slide 11, and I will update you on the progress we have made on our cash improvement initiative Project 2019. By now, you know, there are three pillars to Project 2019, cost reduction, working capital improvement, and capital discipline. On cost savings, we achieved an additional EUR5 million of annual run-rate savings during the third quarter, bringing our total run-rate to EUR73 million of savings. We remain confident in our ability to deliver our project goal of EUR75 million of annual run-rate cost savings by the end of 2019.
Now let's move to trade working capital. We are proud of our much-improved trade working capital performance through the first nine months of 2019, where we managed to more than offset the working capital growth associated with our growth initiatives. Over time, we continue to expect trade working capital investment related to our substantial growth in our business. We will work hard to offset some of this growth with working capital reduction across the business and remain confident in our ability to do so.
With respect to capital spending, we continue to expect spending in 2019 of EUR265 million. We believe this level of spending strikes the right balance between maintaining our assets and investing in our future. I want to stress that we remain very focused on capital discipline and at the projects, we are investing in are linked to firm customer contracts and come with attractive IRRs and paybacks.
As we indicated in our Analyst Day in December of 2018, there will be a successor project to Project 2019. We are currently working with the team on a number of initiatives to further underrate -- underwrite our long-term targets. We are confident that there are significant cost and capital improvement opportunities across the Company.
Now, let's turn to Slide 12, and discuss the balance sheet, our liquidity position, and our free cash flow. Our net debt at the end of the third quarter was EUR2.2 billion, which included a sequential increase of approximately EUR50 million due to the non-cash translational impact associated with the stronger dollar. Our leverage was 4.1 times at the end of the third quarter, and as you know, we remain committed to deleveraging.
As you can see in our debt summary on the bottom left-hand side of the page, we have no bond maturities until 2021. In August, we redeemed EUR100 million of our 2021 bond. As a result, our 2021 maturity is now less than 0.4 times our LTM adjusted EBITDA. Our cash plus amounts available under our committed facilities was EUR516 million at the end of the third quarter. We remain comfortable with our current liquidity position.
We generated free cash flow of EUR157 million in the first nine months of 2019. We are very proud of our free cash flow performance and are looking forward to building a track record of consistent and substantial free cash flow generation. Our priority for deploying this free cash flow continues to be deleveraging and gross debt reduction.
I will now hand the call back to Jean-Marc.
Jean-Marc Germain -- Chief Executive Officer
Thank you, Peter. Let's turn to Slide 14. I want to start by highlighting our balanced portfolio of end market exposures. Three of our four key end markets packaging, automotive and aerospace are secular growth markets for aluminum. Those secular growth markets represent over 75% of our LTM revenue. We believe this is an exciting and under-appreciated aspect of our story.
Now, let's move on to the specific end market updates. I'll start with the packaging market. Packaging is a core market for Constellium and represents 37% of our LTM revenues. We remain committed to the can sheet market in both the U.S. and Europe. We currently see a stable market, but we are closely monitoring positive developments in the market.
Aluminum cans are the most sustainable beverage packaging container, especially when compared to glass or plastic. Remember, aluminum infinitely recyclable and retains its properties after recycling. Well, at this point, we have not seen significant evidence of conversions from other substrates to aluminum, we are optimistic on the trend, and believe this represents a meaningful opportunity for can sheet demand over time.
In addition to the sustainability trend, in Europe, demand for can sheet continues to grow based on the substitution of aluminum for steel. In the U.S., we continue to expect the growth of Auto Body Sheet demand to tighten the packaging market over the medium to long term. Constellium is very well positioned to benefit from these positive trends as a significant producer of can sheet in both North America and Europe.
Now, let's move to Automotive. We continue to observe pockets of weakness in auto. Our platform mix which leans toward light trucks, SUVs, luxury cars has helped to mitigate this weakness. We will continue to closely monitor automotive market trends. Now, over the long term, automotive remains a secular growth market for aluminum. We are confident that OEMs will continue to lightweight vehicles to increased fuel efficiency and reduce CO2 and other emissions. Further, electrification of vehicles a significant potential for aluminum. Aluminum allows for light-weighting in order to increase the range of the vehicle and is a preferred material to make strong but light battery enclosures. Constellium again is well-positioned to realize the benefits of this secular shift to aluminum in automotive.
Let's turn now to Aerospace. Aerospace demand continues to exceed our expected long-term growth CAGR of 2%. We expect these demand strengths to continue through the remainder of 2019, and we are optimistic about demand in the first half of 2020. Over the long term, we expect aerospace to continue to be an attractive market, driven by sustained OEM build rates and healthy backlogs at the major OEMs. We will remain focused on strengthening our leadership positions with the major OEMs and expanding our relationships with business and regional jet manufacturers.
In transportation, industry, and defense, we have experienced weaker-than-expected demand in some of our industrial end markets in both North America and Europe. The transportation market in North America continues to suffer from weaker demand and excess supply from imports. We expect the weakness in these markets to persist into the fourth quarter and potentially into 2020. Over the long term, we expect to continue expanding into niche products and markets in the transportation, industry and defense segments.
Turning to Slide 15, we detail our financial guidance and outlook. We expect to deliver a range of 12% to 14% adjusted EBITDA growth in 2019. We are targeting EUR125 million to EUR175 million of free cash flow in 2019, of 2022 targets are over EUR700 million of adjusted EBITDA and a leverage ratio of 2.5 times. I'm very proud of our third quarter performance. Our team delivered another strong quarter of EBITDA growth and free cash flow generation. We remain focused on operational execution, harvesting the benefits of our investments, disciplined capital deployment, debt reduction, and shareholder value creation.
With that operator, we will now open the Q&A session, please.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from Matthew Korn with Goldman Sachs. You may proceed with your question.
Matthew Korn -- Goldman Sachs -- Analyst
Good morning, Jean-Marc. Good morning, Peter.
Jean-Marc Germain -- Chief Executive Officer
Good morning.
Peter Matt -- Executive Vice President and Chief Financial Officer
Hi.
Matthew Korn -- Goldman Sachs -- Analyst
Thanks for taking my questions. Hey. A question for you. Can you provide any additional granularity on the particular strength in aero demand that you've been experiencing all year now? It seems like this has been a major pillar for you as other areas like you pointed out and transportation have been a little bit weaker?
Jean-Marc Germain -- Chief Executive Officer
No, it has. And as I mentioned, it's been above our expectations. We continue to be enroll in assessing where it's going. And it's been very healthy all over the world. I don't -- I think about every OEM we're in business with, which is about any OEM on the planet is a strong for us, and we are seeing also in the more distribution-related segments of aerospace some good trends. So we are very positive about the developments in 2019 and into 2020 as well. At least for the beginning of -- first half of 2020, it's pretty broad based .
Matthew Korn -- Goldman Sachs -- Analyst
And then on the other side of things, it sounded as though in your discussion of AS&I, outside of the cost issues that you've been discussing for a few quarters that there are some delays, perhaps on the customer side, that it's not just Constellium operating issues at play there. First, is that correct? Are you seeing any kind of customer destocking that's emerging in that particular field?
And then secondly on that have the challenge is there or the shakiness in certain markets? Have they prompted any shift -- any consideration shift in your investment plans? For example, would you consider slowing growth capital spending for the near-term shifts a little bit more toward debt into 2020 as you wait for these things to settle out?
Jean-Marc Germain -- Chief Executive Officer
Okay. That's many questions in one. I will try to not forget anything, but if I do, please remind me. So on the first point, that is correct. There is some delays in operational ramp-up at our customers for new platforms. But I will not deflect the responsibility here. We were -- we have our own operating issues. We are not impacting customers at all, but we've got our operational challenges that we need to overcome. And it's taking as Peter mentioned, and I mentioned a little bit longer than what we expected.
In terms of are we seeing any slowdown in the markets stocking on -- in this specific segment, not really on the platforms we are on. We don't see that. I mean, some are doing a bit better; others are doing a bit worse, right. So on balance, it's kind of even. The overall market slowdown is not helping, but it's not very material. And we wouldn't be sorting it out if that was the only issue out there.
And finally, in terms of how we look at our capex plans, we have invested very heavily in these segments, as we mentioned. I mean we have basically laid the foundation and more than the foundation, we've got the buildings and the equipment in now to a large extent to double the size of the business from what it was in 2016 to 2021. That's a lot to and digest. As I mentioned, it's taking a little bit more time, so we have made a conscious decision, and you saw that when we reported on the nominations rates in the first half of this year, we've made a conscious decision to slow down our investment, so that all hands are on deck in this organization to really fix what needs to be fixed, ramp up way is being ramped up, and get to a place where we deliver the returns, we -- we're expecting from all the investments we've made.
So that's really our priority. That's what we are focusing the teams on. We'll get there. And over time as the nominations we have registered in the first half of this year and again for the full year, are lower by a factor 5 to 10 times lower than what they were in the past, you will see some capex reduction. But remember that there is -- if we win business this year, we start spending the full year and the year after, so there is a tail, right. So it will gradually moderates over the next two, three years.
Matthew Korn -- Goldman Sachs -- Analyst
Got it. Thanks, gentelmen. I'll pass it on.
Jean-Marc Germain -- Chief Executive Officer
Thanks, Matt.
Operator
Thank you. Our next question comes from Curt Woodworth with Credit Suisse. You may proceed with your question.
Curt Woodworth -- Credit Suisse -- Analyst
Hi. Good afternoon.
Jean-Marc Germain -- Chief Executive Officer
Hi, Curt.
Curt Woodworth -- Credit Suisse -- Analyst
So Jean-Marc, you talked about the can sheet market being stable but a lot of end-users are talking about a deficit. And I guess one of the ways of the deficits being mitigated as by significant increases in imports from different sources. So I guess my question is, do you think that you're going to get to a pinch point in the market over the next one to two years where end-users will feel the need to either reinvest or partner with domestic suppliers to get a more stable domestic source of can sheet supply?
Jean-Marc Germain -- Chief Executive Officer
Yes. No, that's definitely a fair question. And it's difficult to assess exactly supply demand dynamics over the next four, five years. But in the short-term, what we are seeing is a healthy market, right. So it's growing a little bit faster than it used to in the past. Actually, in the U.S., it used to be a declining market and now it's a growth market. But we're talking a couple of first and takes a point here.
So it's not yet the kind of growth rate that would absolutely need additional capacity. And I think we as an industry, provide enough capacity to the market that they are neutral to increase of can sheet product [Indecipherable] Over the long run, if we continue to see these budding growth we are seeing with more and more beverage is being brought to market in the cans, if that continues, retake, sold, and still water catches up in cans, if plastic really goes down in terms of package of choice for a bunch of beverages, then that will create a need for more capacity.
So we will think about it. It is we are in close partnership with our customers. We are talking and discussing strategy and what their needs could be and maybe. We are not yet at a point where there is any decision for us to make. I'll remind you that we've got quite a bit of latent capacity within [Indecipherable] as we improve the operations of this plant, for instance.
So we believe we can in the short, medium tem meet the needs of the market. Longer term, we may decide to invest. But we will only when we get a fair return on the investments we already have, and we get a fair return on the investments we would need to make through good pricing, guaranteed volumes over the long run.
So we are watching. We're monitoring. We're in close discussion with our customers. But it's a healthy market, but I'm very optimistic about the future, but I don't think anything to bank yet.
Curt Woodworth -- Credit Suisse -- Analyst
Okay. No, that makes sense. And then just a follow-up on the battery box opportunity. Is there any way you could help frame sort of the medium term expectations around battery box opportunity set for you? Have you partnered with any OEMs at this point? And is it -- I think the battery box is roughly equivalent amount of weight on kind of the existing aluminum content in the cards, just curious sort of how you see that market playing out for Constellium specifically? Thank you, guys.
Jean-Marc Germain -- Chief Executive Officer
Sure. So -- yes. The battery box and weight and you're talking anything from 60 kilos to 100 kilos, right? That's the rough order of magnitude. So it's quite significant, right, in terms of aluminum content in a car. Yes, we have partnered with different customers on the battery boxes and we have three commercial projects under way that are different stages of development.
It is still the nascent technology. There are different options. And therefore, our approach has been, we want to be technologically advanced who want to bring solutions to the market, but we want to make sure also we manage our risks. And therefore, we have carefully selected again a total number of commercial projects. That's the ones we're speaking with. That's the ones we want to bring to success. And as we learn with our customers about what is the best solution for them, what is a best technology, we will bring a product to market that, then we can harvest in the future. But I don't see -- the big opportunity here is certainly more two, three years down the road that it is next year or of the following year.
So again cautious deployment of capital continues to strengthen our technological prowess and will be planting the seeds for longer-term.
Curt Woodworth -- Credit Suisse -- Analyst
Great. Thank you very much.
Jean-Marc Germain -- Chief Executive Officer
Sure.
Operator
Thank you. Our next question comes from Josh Sullivan with Seaport Global. You may proceed with your question.
Josh Sullivan -- Seaport Global -- Analyst
Hi. Good afternoon.
Jean-Marc Germain -- Chief Executive Officer
Hi, Josh.
Peter Matt -- Executive Vice President and Chief Financial Officer
Hi. Josh.
Josh Sullivan -- Seaport Global -- Analyst
Just the delays in the customer launches at AS&I, can you say geographically, if that's driven by Europe or North America?
Jean-Marc Germain -- Chief Executive Officer
We had one issue in Europe, one in America. The one in Europe is kind of behind us now, and the one in America is we're still a little bit into it.
Josh Sullivan -- Seaport Global -- Analyst
And just looking at the recent strike at GM, I mean, did you -- was that an impact for you guys, or is that a smaller customer at this point?
Jean-Marc Germain -- Chief Executive Officer
Yes. So -- as you know, we're quite diversified, right, in our portfolio of platforms and the customers and projects. So that's the beauty of our approach to market, which means we're not overly dependent on one platform or one customer. In the specific case of GM, it's nothing material. It's not helping. But we wouldn't be talking about it.
Josh Sullivan -- Seaport Global -- Analyst
And then just on the Aerospace outlook with Boeing change in the production outlook here for the 787. Is that a large program for you guys? Do you think that's included in kind of your outlook at this point?
Jean-Marc Germain -- Chief Executive Officer
We -- yes, we're not commenting on specific programs or aluminum constant supply [Phonetic] and all that, Josh. Yes, it's included in our overall outlook, right. So we do -- we look at all the forecasted orders we get from all our customers and the [Indecipherable] models, and we look at the -- with some pretty good visibility, six, nine months out and that's what leads us to say, we see a healthy aerospace demand going into the first half of 2020.
Josh Sullivan -- Seaport Global -- Analyst
Okay. Thank you.
Jean-Marc Germain -- Chief Executive Officer
Sure.
Operator
Thank you. And our next question comes from Martin Englert with Jefferies. You may proceed with your question.
Martin Englert -- Jefferies -- Analyst
Hi. Good afternoon, everyone.
Jean-Marc Germain -- Chief Executive Officer
Hi, Martin.
Peter Matt -- Executive Vice President and Chief Financial Officer
Hi, Martin.
Martin Englert -- Jefferies -- Analyst
So on Automotive Structures continues to provide the headwinds, you've already highlighted and discussed much of this and also touched on the broader market challenges in TID. But what I understand you're trying to address some of these issues, and navigate through the market based on what you're seeing today. Is it more likely that some of these headwinds persist for several quarters or maybe through the first half of '20?
Jean-Marc Germain -- Chief Executive Officer
Yes. I mean, Peter will jump in. And I say it's difficult to tell, right. I mean we -- when we look at what's happened current -- between July and now, it looks like a sharp deceleration in the outlook for quite a few of our specialties, right, in all three of our business units, in PARP, A&T, and AS&I. We've got some specialty or niche right that we supply. And in quite a few of these segments, there has been a very significant slowdown between the outlook we went in July and the one we have now in September. And others are actually stronger, so that [Indecipherable] right. There may be an element of that which is the end of year of caution from some of our customers, and managing inventories, making sure that people have the adequate supply, but certainly not more.
So whether this is a driving factor or whether there is more of a slowdown, there is more systemic, is difficult to tell. But just to give you a few examples, right. In semiconductor, we provide plates for the devices that the machinery that is used to make semiconductors it's really down. It's really not looking good. You look at -- we make hard alloy profiles to do the control -- to make the control unit for ABS, anti-lock system, right, so brakes. That is very diffuse in the auto industry, right, and virtually we got our eyes that, this is slowing down. So that's the kind of thing where we see a slowdown.
On the other side, we see rail is really strong and we are struggling to make everything we need to make. So it's a mixed factor of signals. What we're seeing now, as we sit now is slow orders, short lead times for a lot of segments in a -- between now and the end of the year.
Martin Englert -- Jefferies -- Analyst
Yes.
Jean-Marc Germain -- Chief Executive Officer
So -- and what it means for 2020 is a difficult to ascertain right. So we're watching, very difficult to tell.
Peter Matt -- Executive Vice President and Chief Financial Officer
Yes. And what I'd add Martin is just with respect to AS&I because I think that was a piece of your question.
Martin Englert -- Jefferies -- Analyst
Sure.
Peter Matt -- Executive Vice President and Chief Financial Officer
So we are working diligently on that. We've made a number of moves to help correct the situation. We feel like we're on the right path, as I said in the prepared remarks. And it's a little bit -- it's hard to call the turn. If you think about Bowling Green and the experience that we had there, it was, we were struggling, struggling, struggling and then all the sudden things start to fall in place. And as Jean-Marc said, we can see in some of the non-financial metrics that we're making strides, so we're going to kind of keep at it. But we're kind of super-focused on getting this back on track.
Martin Englert -- Jefferies -- Analyst
Okay. Thanks for all the detail there. That's very helpful. And then, kind of circling back on Bowling Green here. Can you remind us of the cadence of the Bowling Green substrate shift from externally sourcing and kind of how that will shift inwards -- toward Muscle Shoals there over the coming years here, more so over the medium, longer term?
Jean-Marc Germain -- Chief Executive Officer
Yes. So the agreement that we have as part of the transaction was that at the outset that our former partner will provide kind of 49% of the substrate and then that will wind down over the next several years. So by '24, we are -- we will be supplying all of that substrate.
Martin Englert -- Jefferies -- Analyst
Should I think of that is like a linear shift, or is there anything within that agreement that would suggest it's different than that? And then is this more of an annual reset, or do you have the option to be shifting this kind of quarter-to-quarter?
Jean-Marc Germain -- Chief Executive Officer
Yes. No. So it's a -- what I would say is, it would be -- it's more or less linear, but I would assume on the front end that we were assuming we need a little bit more help in terms of the supply, so maybe it declines a little bit more slowly on the front end and then more rapidly on the back end. And then obviously by negotiation, depending on where we are, we can kind of negotiate, take less from them, if we're prepared to. But that's a separate negotiation.
Martin Englert -- Jefferies -- Analyst
Okay, excellent. Thank you again for all the color there. And congratulations on the results in a challenging market .
Jean-Marc Germain -- Chief Executive Officer
Thank you.
Peter Matt -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from Christian Georges with Societe Generale. You may proceed with your question.
Christian Georges -- Societe Generale -- Analyst
Yes. Thank you and good morning.
Jean-Marc Germain -- Chief Executive Officer
Hi, Christian.
Christian Georges -- Societe Generale -- Analyst
Just a few -- hi. Just a few accounting questions. So net debt that you're highlighting for the quarter, that now includes IFRS 16, I think which was EUR100 million? [Phonetic]
Peter Matt -- Executive Vice President and Chief Financial Officer
It does. Yes.
Christian Georges -- Societe Generale -- Analyst
Okay. And the other quarters that you've been reported so far in terms of the EBITDA you highlighted, as a impact on -- analysis EBITDA [Phonetic] per division, they all reflect IFRS impact as well?
Peter Matt -- Executive Vice President and Chief Financial Officer
They do.
Christian Georges -- Societe Generale -- Analyst
Okay. Second question is...
Peter Matt -- Executive Vice President and Chief Financial Officer
Starting with -- sorry, Chris, just to be clear, starting with the first quarter of 2019.
Christian Georges -- Societe Generale -- Analyst
Okay. That's clear. Also, the depreciation at EUR66 million in the third quarter, is that the running rate? Or is there some kind of like unusual item in that?
Peter Matt -- Executive Vice President and Chief Financial Officer
No. I think that's -- it may be slightly a little. I mean, we think probably 230 to 240 [Phonetic] is probably not a bad number for depreciation now given the level of investment that we've been making. So that's -- it's not a crazy run rate. There is nothing particularly unusual in the number.
Christian Georges -- Societe Generale -- Analyst
Okay. That's good. And also on your financial cost as EUR46 million, I mean obviously, the net debt has been relatively stable, but there is an element of IFRS in it. I mean, is that reflecting some higher cost of financing, or is that just a running rate of the current basis?
Peter Matt -- Executive Vice President and Chief Financial Officer
No. I wouldn't say it's reflecting higher cost of financing. I mean, a couple of things going on there. One is -- I mean IFRS 16 on the cost side, which is in that interest expense number is running a little bit higher. And then the other thing that we're being impacted by is FX. And those two factors are leading us to run at -- kind of the higher end of our guidance. But in terms of -- we haven't done any new debt financing, so we haven't taken on any incremental funded debt per se in the Company, right. We're paying down debt. But I think...
Christian Georges -- Societe Generale -- Analyst
Okay. Thank.
Jean-Marc Germain -- Chief Executive Officer
...yes. But as we said in the prepared remark, remember, you've got this translational impact of EUR50 million in the quarter, that's impacting debt too.
Christian Georges -- Societe Generale -- Analyst
Great. Because of the other currency, right?
Peter Matt -- Executive Vice President and Chief Financial Officer
Exactly.
Christian Georges -- Societe Generale -- Analyst
Okay. All right. Thank you very much. That's it. Thank you.
Peter Matt -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from Matthew Fields with Bank of America Merrill Lynch. You may proceed with your question.
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
Hey, guys. Perfect lead and I guess on the debt reduction. Appreciate you're going after a EUR100 million sort of partial redemption on the 4 and 5a zero [Phonetic] notes. Can you just give us little rationale about why you picked that instead of maybe the ABL? And what other parts of your capital structure you may want to target next?
Peter Matt -- Executive Vice President and Chief Financial Officer
Sure. So -- well, first of all, we have the cost of the bond is callable at par, and the cost is slightly higher than the ABL. So that's probably the number one driver. And in terms of other pieces of the capital structure that we would target, I mean we know we have the ABL that we can repay at any point in time, so that's obviously a logical candidate. And then as we get closer to the rest of the debt stack, that debt becomes callable at par, so we'll have a lot of opportunities to take some of that out as well.
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
And then as you presumably generate more free cash flow next year, do you think you will continue with some level of debt reduction in 2020?
Peter Matt -- Executive Vice President and Chief Financial Officer
I would fully expect so. Free -- as Jean-Marc said in his remarks, and I think I said in mine also the free cash flow that we're generating, the priority is to use it for deleveraging and gross debt reduction as we said.
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
Okay, great. And then a different area. So some of your peers are sort of trying to get a big merger finalized and it looks like they're going to have to be some forced divestiture. Can you talk about your appetite for any acquisitions in that context, and kind of what your priorities might be?
Jean-Marc Germain -- Chief Executive Officer
Yes. So -- I mean it's our job to look at what's happening in the competitive landscape, so we do those things. I think any -- the deployment of capital is something that we take very seriously. We look at the opportunities we have within our four walls, they are quite exciting. We've commented a number of times that we have more opportunities than what we can finance within our four walls, right. That's good because we're selective.
Debt reduction is we are very focused on it. It's nearly an obsession. So we want to make sure that whatever we do, it doesn't impact the goal of reducing our leverage over time, and certainly meeting that 2.5 leverage target by 2022. So when all that is said and done, we may look at things, but our appetite is moderate.
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
Or is there like a size guideline that you're willing to give like something that we're not looking for X hundred million of dollars or euros?
Peter Matt -- Executive Vice President and Chief Financial Officer
Well, I think, what Jean-Marc is telling you is that we -- if we were to do something and it's a big if because we've got -- as you said, we've got lots of priorities internally that we -- that will generate kind of very attractive returns for us. But if we were to do something, we would want to fit within the parameters of what we've given you for guidance. So, therefore, continuing debt reduction, so we can't go out and do a big debt-financed acquisition in that -- on that front. And we get to the -- still to the 2.5 times by 2022.
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
Okay. That's helpful. Thanks so much. Thanks, Peter.
Peter Matt -- Executive Vice President and Chief Financial Officer
Yes.
Jean-Marc Germain -- Chief Executive Officer
Sure.
Operator
Thank you. [Operator Instructions] Our next question comes from Sean Wondrack with Deutsche Bank. You may proceed with your question.
Sean Wondrack -- Deutsche Bank -- Analyst
Hey, guys.
Jean-Marc Germain -- Chief Executive Officer
Hi.
Peter Matt -- Executive Vice President and Chief Financial Officer
Hi.
Sean Wondrack -- Deutsche Bank -- Analyst
Most of my questions have been answered. And I apologize if this has been asked before but. Do you see any potential impact or concern related to how Brexit could end up?
Jean-Marc Germain -- Chief Executive Officer
Yes. No. It's a very typical question these days. We don't know exactly, still where Brexit will end up. But we know it was -- we've known it was a possibility for the past three years. So we've worked hard with our teams to understand what potential operational, commercial implications it could have for us. And I think to the best of our knowledge, both from a supply standpoint because we're buying stuff from the U.K., and from a sales standpoint because we're buying some -- we're selling some of our products to the U.K., we've got contingency plans. We're in good shape. And I don't anticipate it to be a -- any kind of an impact on our business.
Just -- I think it's a couple for -- it's 2%. I don't remember the exact number, but it's around 2% of our sales that are into the U.K. So we are really not exposed, and we make sure that in our commercial arrangements, we don't -- do not there any risk related to duties or delays at customs or those kinds of things.
Sean Wondrack -- Deutsche Bank -- Analyst
That's great. It sounds like you sometimes thinking about it. I appreciate that. And then just with regard to your credit ratings, I know you've said in the past, you want to be more like a BB company. Look at certain peers like Arconic that are a little investment-grade rated, and I kind of wonder if you're sort of trending in that direction. And what is your feedback sort of have been from the rating agencies, and what would they really like to see out of you?
Peter Matt -- Executive Vice President and Chief Financial Officer
Yes. Well, I think it's fair to say and I think I've mentioned this on the last call, it has been very positive. In terms of the approach that we're taking to the balance sheet and reducing our debt over time -- our gross debt over time and free cash flow generation has been very positively received. So I think the dialog is very fruitful right now.
I think if you've watched the rating agencies over time, you know, they move up more slowly than they move down. So I think we have a kind of clearly positive momentum. But we need to show as we will that we're going to be consistent free cash flow generators, and that we're going to be consistent free cash flow generators, and that we're going to continue to use that free cash flow to deliver. But I think we're in a -- kind of a really good spot.
Sean Wondrack -- Deutsche Bank -- Analyst
That's great. Okay. Thank you very much.
Peter Matt -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Thank you. Our next question comes from Karl Blunden with Goldman Sachs. You may proceed with your question.
Karl Blunden -- Goldman Sachs -- Analyst
Yes. Thanks very much for taking the question. I was just -- really a follow-up on some of the earlier questions on M&A and balance sheet. I understand the goal of still hitting your leverage targets. Should we interpret that to mean that large M&A is something that you would hesitate to pursue? Or is it just something that if it's attractive enough, you'd find the right financing package to still hit your targets of the balance sheet? You have previously, I guess a couple of years ago issued should some equity when you're issuing some debt as well. So maybe is [Indecipherable] that we should think about going forward?
Jean-Marc Germain -- Chief Executive Officer
Well, again I will come back to -- I mean, it's a fair question, but I will come back and emphasize what we said. We've got plenty of opportunities within our four walls. We think deploying capital toward debt reduction is really good for our shareholders, and that's what we're focused on. If something really attractive shows up, we'll study it. But we also know that equity is very expensive, so that is something I want to really emphasize, whatever we do is for shareholder value creation. And we'll see what shapes up to be. And finally, I will say that most acquisitions fail, 70% of them fail for the buyer at least, so I guess our success 70% we're a thankful seller, but anyway. And so we're very cautious of the fact that we do not want to take any undue risk. We want to do things that have work for the shareholders and that create shareholder value over time.
I don't know if Peter wants to -- go ahead, please, more thoughts on this.
Peter Matt -- Executive Vice President and Chief Financial Officer
Yes. I just jump in to say, if you look at the M&A that succeeds, it's the M&A that happens when kind of things are not as good generally. So the prices are typically lower, right. And so the strategy that we've taken internally is that we want to be in a position to be opportunistic, if and when kind of the opportunities -- the situations arise. And to do that, we think that the best thing that we can do is to fix our balance sheet.
So hence kind of the drive on free cash flow, hence the drive on debt reduction, hence the drive on kind of getting our ratings to a level where kind of regardless of the situation, we're well-positioned to take advantage of opportunities when they arise. But we're not -- we don't feel in any rush for the reason that Jean-Marc said, we've got just a lot to do within the four walls that we have.
Karl Blunden -- Goldman Sachs -- Analyst
Thanks. I appreciate the clarification. Thank you.
Peter Matt -- Executive Vice President and Chief Financial Officer
Welcome.
Operator
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Jean-Marc Germain, CEO of Constellium for any further remarks.
Jean-Marc Germain -- Chief Executive Officer
Yes. Well, thank you, operator. Thank you, everyone. I just want -- in closing say again that I'm very proud of our achievements so far this year. And going into Q4, I think the free cash flow generation is really -- a good milestone for us to have achieved, and we're very focused on getting that rates of about EUR150 million of free cash flow that we need to achieve our deleveraging targets for 2022.
So that is something, we're really focused on. We know we have to work on the execution Auto Structures, we're focused on it. And we also know that going forward we've had three, four years at substantial EBITDA growth, right, 12% to 14% for three years in a row, I guess, we will keep our nose to the grindstone. There's a lot of grinding to do to get us to our target, do not expect any significant jump. We haven't made our life going into 2020 easier with some very strong comps that we achieved in 2019. But we'll keep working at it, chopping at it and we'll -- we are very focused again on delivering out to -- toward our 2022 objectives.
With that, thank you very much for your attention today. Have a good day, and look forward to updating you on our Q4 results in February. Thank you.
Operator
[Operator Closing Remarks]
Duration: 51 minutes
Call participants:
Ryan Wentling -- Director, Investor Relations
Jean-Marc Germain -- Chief Executive Officer
Peter Matt -- Executive Vice President and Chief Financial Officer
Matthew Korn -- Goldman Sachs -- Analyst
Curt Woodworth -- Credit Suisse -- Analyst
Josh Sullivan -- Seaport Global -- Analyst
Martin Englert -- Jefferies -- Analyst
Christian Georges -- Societe Generale -- Analyst
Matthew Fields -- Bank of America Merrill Lynch -- Analyst
Sean Wondrack -- Deutsche Bank -- Analyst
Karl Blunden -- Goldman Sachs -- Analyst
