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Constellium N.V. (NYSE:CSTM)
Q2 2020 Earnings Call
Jul 22, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Constellium's Second Quarter 2020 Results Call. [Operator Instructions] I would now like to turn the conference over to your host today, Mr. Ryan Wentling, Director of Investor Relations. Sir, please go ahead.

Ryan Wentling -- Director of Investor Relations

Thank you, operator. I would like to welcome everyone to our second quarter 2020 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

Thanks, Ryan. Good morning, good afternoon everyone, and thank you for your interest in Constellium. Let's turn to Slide 5. At Constellium, the health and safety of our employees is our first priority. We have implemented many initiatives to protect our employees in response to the COVID-19 pandemic. We have provided our personnel with personal protective equipment, increased cleaning and sanitation, allowed for an enforced social distancing, and worked to raise awareness with our employees. I want to personally thank our employees for taking this seriously and following the precautions we have put into place. As of last Friday, approximately one half of one percent of our employees have tested positive for COVID-19, and all of whom have recovered or are recovering. Needless to say, we must remain vigilant.

During the second quarter, our plants operated well, despite the significant disruptions to customer demand from lockdowns in both Europe and the U.S. As I'm speaking, all our plants are running now and well. We're carefully monitoring COVID-19 hotspots, both for the health of our employees and any potential impacts on supply chain. The demand for our products gradually increased during the course of the second quarter, and this trend has continued into July. However, both levels of demand and visibility from our customers remain below historical levels.

We took strong actions to combat the effects of the pandemic on our business. We aggressively reduced our costs, including flexing variable costs to match production levels, reducing fixed costs, and lowering our targeted capital expenditures. Over 40% of our workforce were on sub-type of partial unemployment or temporary lay-off scheme during the quarter. Where appropriate, we have also implemented permanent headcount reduction.

Our ability to flex costs was slightly better than the scenario we provided last quarter. This was a great achievement by the entire Constellium team and demonstrated our flexibility and resilience. Our liquidity at the end of the quarter was EUR949 million, an increase of over EUR300 million compared to the end of the first quarter. We added an additional EUR50 million of liquidity in July through credit facilities, supported by the German State, bringing our pro forma liquidity to approximately EUR1 billion. In June, we accessed the debt market to refinance our 2021 bonds. This transaction removed our only near-term bond maturity at a very attractive coupon. In conclusion, with significant actions we have taken, I am very confident in our ability to navigate through this crisis.

On slide 6, you will see some of our highlights from the second quarter of 2020. Shipments were 310,000 metric tons, a decrease of 25%, compared to the second quarter of 2019. Revenue decreased 33% to EUR1 billion. Of the roughly EUR500 million decline in revenue compared to the second quarter of last year, two-thirds was related to lower shipments and one-third was related to lower metal prices. I remind you that while our revenues are affected by changes in metal prices, we operate a pass-through business model to minimize metal risk. Net loss of EUR32 million compared to net income of EUR17 million in the second quarter of 2019.

Adjusted EBITDA of EUR81 million decreased 51% compared to the second quarter of 2019. With a strong focus on cost control, we're able to offset a significant part of the volume headwinds to adjusted EBITDA across each of our business units. I'm proud of what the team was able to achieve in a challenging environment. Constellium generated EUR228 million of adjusted EBITDA in the first half, a decline of 24% compared to the first six months of last year.

Our free cash flow was negative EUR33 million in the second quarter of 2020. This result would not have been possible without our strong actions to reduce costs and capital expenditures and cash expenditures of all sorts. Our free cash flow for the first half of 2020 was EUR54 million. Based on our current view of market conditions, we expect to generate positive free cash flow in 2020.

I will now hand over to Peter to discuss our financial performance in more detail. 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 8, you'll find the change in adjusted EBITDA by segment for the second quarter and the first half of 2020 compared to the same periods of last year. For the second quarter of 2020, Constellium achieved EUR81 million of adjusted EBITDA, a decrease of EUR86 million or 51% year-over-year. P&ARP adjusted EBITDA of EUR58 million decreased by EUR21 million or 27% compared to last year. A&T adjusted EBITDA of EUR31 million, decreased by EUR33 million or 51% compared to the second quarter of 2019. AS&I adjusted EBITDA of negative EUR1 million, decreased by EUR31 million compared to last year. Lastly, Holdings & Corporate costs of EUR7 million were EUR1 million higher than last year. In the first six months of 2020, Constellium achieved EUR228 million of adjusted EBITDA, a decrease of EUR74 million or 24% year-over-year. P&ARP adjusted EBITDA of EUR124 million, decreased by EUR14 million or 11% compared to last year. A&T adjusted EBITDA of EUR83 million, decreased by EUR33 million or 28% compared to the first six months of 2019. AS&I adjusted EBITDA of EUR33 million, decreased by EUR26 million or 44% compared to last year. Lastly, Holdings & Corporate costs of EUR12 million, were EUR1 million higher than last year. We expect H&C costs of approximately EUR20 million in 2020.

Now turn to Slide 9, and let's focus on the P&ARP segment. Adjusted EBITDA of EUR58 million decreased 27% compared to the second quarter of last year. Volume was a headwind of EUR41 million in the quarter. Packaging shipments fell by 12%, primarily as a result of the temporary shutdown in March of our Neuf Brisach plant in France due to COVID-19. Shipments to the North American can sheet market increased slightly year-over-year. Automotive shipments declined 54% compared to last year, as many of our automotive OEM customers curtailed production for April and most of May. Price and mix was a headwind of EUR2 million. Costs were a tailwind of EUR21 million due to strong broad-based cost control with labor and maintenance as important contributors. Metal costs were neutral in the quarter as we face difficult year-over-year comps, UBC supply chain challenges, and lower metal prices. FX translation was a tailwind of EUR1 million.

Now turning to Slide 10, and let's focus on the A&T segment. Adjusted EBITDA of EUR31 million, decreased by 51% compared to last year. Volume was a headwind of EUR46 million on lower aerospace and TID shipments. Aerospace shipments fell 37% compared to last year, as aerospace OEM and distributors began to reduce orders. TID shipments declined by 20% due to lower industrial activity in both Europe and the U.S. Price and mix was a EUR3 million headwind due to lower aerospace shipments. Costs were a tailwind of EUR15 million due to strong broad-based cost control with labor, metal, and maintenance as important contributors. Lastly, FX translation was a EUR1 million tailwind in the quarter.

Now turn to Slide 11, and let's focus on the AS&I segment. Adjusted EBITDA of negative EUR1 million, decreased by EUR31 million compared to the second quarter of 2019. Volume was a EUR31 million headwind. Automotive shipments declined 52% compared to last year, due to customer shutdowns for a significant portion of the quarter. Industry shipments declined 16% due to lower industrial activity in Europe. Price and mix was a EUR9 million headwind, partially due to price and mix as a consequence of weaker market conditions. Costs were a EUR9 million tailwind on strong cost control with labor, energy, and fixed cost as important contributors. Lastly, FX translation was a EUR1 million headwind in the quarter.

Now turning to Slide 12, I want to highlight our very strong cost performance during the second quarter. In the second quarter, we managed to flex our costs by 83%. Cost flex represents the change of cost over the change of revenues for the second quarter of 2020 compared to the second quarter of 2019. Effectively, for every dollar change in revenue, we're able to flex our costs by $0.83. This compares favorably to the 75% variable cost estimate we provided last quarter.

At the bottom of the page, you can see that each of our businesses demonstrated strong cost control with P&ARP at 92% cost flex and A&T and AS&I at 75%. To put this in context, excluding metal and depreciation, we reduced costs by approximately EUR100 million compared to the second quarter of last year. These cost savings were driven by strong cost control across the businesses, including labor, maintenance, professional fees, subcontractors, and energy. I will note that our second quarter 2020 figures include approximately a EUR15 million benefit from European State employment aid related to COVID-19. I want to congratulate the team for the aggressive actions taken on cost. We will continue to maintain our strong focus on cost control, particularly given the uncertain demand environment.

Now, let's turn to Slide 13 and discuss our balance sheet and liquidity position. At the end of the second quarter, our leverage was 4.4 times, and our net debt was EUR2.2 billion, slightly lower than our net debt position at the end of 2019. We remain very committed to capital discipline. We reduced our 2020 capex target to approximately EUR175 million, a EUR96 million reduction from 2019. Through the first half of 2020, we spent EUR32 million less in capex than in the same period of last year.

Our free cash flow for the second quarter was negative EUR33 million. During the quarter, as a consequence of lower activity, our factored receivables were lowered than the levels that we have maintained in recent quarters and negatively impacted our free cash flow by EUR73 million. We would expect the reverse to occur as activity levels increase. Excluding the impact of factoring, the Company actually generated positive free cash flow in the second quarter, which is a very impressive outcome in my view. Our free cash flow for the first half of 2020 was EUR54 million. As Jean-Marc noted earlier, we expect to generate positive free cash flow in 2020, based on our current view of market condition. Generating free cash flow is a firm priority, and 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 2024. During the quarter, we refinanced the remaining EUR200 million of our 4.625% notes due 2021, with EUR325 million of 5.625% notes due 2028. While we initially planned to repay the '21 with free cash flow, we felt it was prudent to remove this near-term maturity, given the favorable debt market conditions. Notably, this was the lowest coupon dollar bond that Constellium has ever priced, a considerable achievement in the midst of a pandemic. As a result of our financing activities thus far in 2020, we now expect cash interest of EUR150 million to EUR160 million.

Our cash plus amounts available under our committed facilities was EUR949 million at the end of the second quarter. As Jean-Marc noted, we added EUR50 million to this balance in July, and we remain very comfortable in our liquidity position.

I will now hand the call back to Jean-Marc.

Jean-Marc Germain -- Chief Executive Officer

Thank you, Peter. Let's turn to Slide 15. I want to highlight something that is core to our business, sustainability. In early July, we published our 2019 business and sustainability report, which you can find on our website. I'd like to point out a few highlights from 2019. Safety is our first priority. Our target is to reduce our recordable case rate by 10% year-after-year. Between 2016 and 2019, our recordable case rate decreased by 27%, and we're trending very well this year. This means that more of our colleagues are returning home injury-free every day.

We also improved our energy efficiency by 6.4% compared to 2015 baseline. That is the equivalent of 100,000 metric tons of CO2 savings every year. Further, we introduced a 2025 target to reduce greenhouse gas emission intensity by 25% against the 2015 baseline, and we have a detailed plan to achieve these target.

As many of you know, recycling is a core competency of Constellium. Aluminum is infinitely recyclable, with 75% of all aluminum ever produced still in use today. Muscle Shoals is one of the largest recyclers of aluminum cans globally, with a capacity to recycle over 20 billion cans every year. At Neuf-Brisach, we also recycle the equivalent of 12 billion beverage cans every year. As a Company, Constellium recycled over 560,000 metric tons of externally sourced aluminum scrap in 2019.

I am also proud that third-parties are recognizing Constellium for our sustainability achievements. The Aluminium Stewardship Initiative or ASI is an industry-led initiative to drive sustainability across the entire aluminum value chain from producers to customers. In 2019, we received ASI certification for Singen's casting and rolling operation, and we began producing ASI-certified coils for our customers from Singen in 2020. We also received ASI certification of our Neuf-Brisach facility under provisional COVID conditions in 2020.

We achieved the Ecovadis Platinum rating, which is awarded to the Top 1% of companies assessed worldwide. And we received an ESG rating of AA from MSCI, placing us in the Top 5% of our sector. Overall, we had a very successful year on our sustainability objectives in 2019, and I look forward to continuing our progress on these very important initiatives.

Now let's turn to Slide 16, and discuss our end markets. We believe our balanced portfolio of products across end markets, geographies, and customers is a competitive advantage during challenging times like these. I'll start with the packaging market. Packaging is a core market for Constellium, and represented 38% of our LTM revenue. We continue to see strong demand in North America and stable demand in Europe, further evidence that this market is both recession-resilient and secular growth. We believe that packaging market has long-term secular growth tailwinds, driven by customer preference for aluminum cans. Our customers continue to invest in new can lines, with several additional investments in North America just announced in the last week. These additional lines should drive incremental demand for can sheets in the years to come.

The consumer preference trend is only one of the tailwinds for can sheet. In Europe, the demand for can sheet continues to grow based on substitution of aluminum for steel. In the U.S., we continue to expect the growth of auto body sheet demand to tighten supply to the packaging market over the medium to long term.

Now let's move to automotive. Over the long term, automotive remains a secular growth market for aluminum. Customers continue to prefer larger vehicles. With regulations aimed at increasing fuel efficiency and reducing emissions, the automotive market will need to continue to lightweight. In addition, we expect hybrid and electric vehicles to continue to gain share of the fleet. These vehicles are aluminum-intensive due to the importance of lightweighting to achieve their range objectives. Constellium is well-positioned to realize the benefits of this secular shift to aluminum in automotive and the electrification of the fleet.

Moving to more recent trends, automotive OEMs began curtailing production in March and largely resumed production in May. While demand from our customers increased significantly in June, we have experienced uneven demand for our products as a result of supply chain challenges and COVID-19 hotspots. While we're optimistic about automotive demand in the back half of 2020, the demand for our products will be dependent on the level of production at the OEM.

Let's turn now to aerospace. Aerospace represented 15% of our LTM revenues. The near-term outlook for aerospace remains uncertain due to the effects from COVID-19 and the 737-MAX. Aerospace OEMs have reduced build rate, and it is unclear how long build rates will remain at these levels. We expect aerospace shipments in the third and fourth quarter of 2020 will be lower than the level in the second quarter of 2020.

In TID, we expect to continue to expand in niche products in a diversified range of markets over the long term. In the near term, the defense and rail markets remain strong, but most industrial and transportation markets remain weak. These markets are dependent upon the health of the industrial economy in Europe and North America. It is unclear when and to what extent these markets will rebound.

In closing, I again want to thank the Constellium team for their tireless efforts during this trying time. We remain committed to operational execution, harvesting the benefits of our investments, disciplined capital deployment, debt reduction, and shareholder value creation.

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

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Your first question comes from the line of Chris Terry from Deutsche Bank. Your line is open. Chris, if you are on mute, please unmute. Chris, your line is now open.

Chris Terry -- Deutsche Bank -- Analyst

Hi, Jean-Marc and Peter. Can you hear me?

Jean-Marc Germain -- Chief Executive Officer

Yes, we can. Good morning, Chris.

Chris Terry -- Deutsche Bank -- Analyst

Okay. Good morning. Thanks for taking my question. The first thing I wanted to start with was just the utilization rates and the comments from 1Q. You sort of stepped through how you saw utilization in each of the divisions for 2Q and then perhaps for 3Q and 4Q. Appreciate you don't have guidance, but I wondered whether you could maybe conceptually talk through 3Q versus 4Q and just versus 2Q, any comments you could make on the divisions as an update from last quarter. Thanks.

Jean-Marc Germain -- Chief Executive Officer

Sure, Chris. So I'll start with the markets and then kind of translate it into what it can mean for the divisions, right, or the business units. So, when you look at our second quarter of this year versus the second quarter of last year, right, you see packaging roughly 10% down, you see automotive 50% down, you see aerospace 40% down, right, roughly, and the other markets and each market is about 25% down. This is made of very different dynamics, right? So, in packaging, what we're seeing now is 95% utilization. There was a bit of a drop, especially in April with all the lockdowns in Europe, reduction in can consumption, and all that, but that has come back pretty strong, and the U.S. continues to be quite strong. So, we look at packaging, again, recession-resilient, secular growth, and we're pretty confident for the second half of the year. And we look at Q2 as being kind of an abnormal quarter because of all that happened in April and a little bit in May.

If I look at automotive, it has really snapped back. I think when we talked in Q1, we're talking of 20% utilization as we were speaking, and now we're at above 80%, right? If you do the average of 20% and 80%, you get to 50%, which is about what we experienced in the second half in terms of reduction in our shipments. It is -- it seems like it can be stronger than 80% going forward. We certainly are running very well in July. But we've seen that this restart has been with all kinds of fits and starts, right? So, you got hotspots, you got supply chain disruptions, you've got difficulties in bringing products from Mexico, building trucks in Texas is challenging. So, you got all those operational issues that all of us in the supply chain have to deal with. But clearly, the demand seems to be well in excess of 80% of where we were last year. So, that's encouraging and hopefully COVID-19 doesn't throw too much of a wrench in that good trend.

If I look now at aerospace, where we are running at around 60% in the quarter, we expect more pain in the second half of the year. And I think the reason for that is, it's a long supply chain and the customers move a little bit more slowly in terms of adjusting their orders, and that is creating a bit of a lag in terms of how much pain we take. We are in very detailed discussions with our customers in a very collaborative fashion to look at what the second half ought to look like. And while contractually, we could force volumes on us, that's not our type. What they don't need, we don't want to force on them. So, what we're working through is taking more pain now in the second half, so that 2021 we start with a clean slate. So, we would expect some reduction in operating rates in aerospace in the second half of the year.

So, if you translate all that into what it means for the different views, I would expect P&ARP, packaging and automotive to be better, I would expect AS&I, automotive structures, essentially, to be better in the second half, and I would expect A&T to be more challenged in the second half.

Chris Terry -- Deutsche Bank -- Analyst

Thanks. Thanks so much. And -- sorry?

Jean-Marc Germain -- Chief Executive Officer

No, go ahead.

Chris Terry -- Deutsche Bank -- Analyst

All right. I just had a follow-up on packaging specifically where the volumes are down around about 10%, I think, year-on-year. And you're saying Muscle Shoals is doing well. It seems like the U.S. is going well. I think Crown yesterday mentioned that Southern Europe was weak. Can you just comment a little bit further about packaging in the EU region? Is it -- was it down in the quarter because of demand or because you had facilities offline and maybe you could quantify some of the EU impacts?

Jean-Marc Germain -- Chief Executive Officer

Yeah. I think -- so the reason I'm seeing more than 90% or 95%, whatever, not 100% is exactly because of some weakness in Europe, right? And I think it's got to do with both the reduction in activity in Southern Europe. I mean, a lot of these countries have economies that are based on tourism, and this is not the best year for tourism as we all know. And we are seeing there's real clusters and hotspots, so everybody is a bit vigilant as they should be, right? So that is weighing down a little bit on the can consumption in Europe, yes.

Chris Terry -- Deutsche Bank -- Analyst

Okay. And just -- sorry, I had one follow-up on working capital specifically. I just wanted maybe, Peter, if you could talk through the two key moving parts. Obviously, you stepped through the waterfall charts, and you're getting cost -- doing a great job on the cost side. I just wondered if you comment a little bit further on the second half of the year, and what the opportunities are there on working capital in terms of you saying positive for the full year, you've already obviously hit the positive number at the halfway point. So, just wondered if you could talk through the moving parts of working capital.

Peter Matt -- Executive Vice President and Chief Financial Officer

Sure, happy to do it. And just for context, so in the second quarter as we said last quarter, we would use working capital. And we, in fact, burned EUR63 million of working capital in the -- in Q2. And for the first half, we're positive EUR24 million. So based on where we sit today, I think it's plausible to think that with auto ramping, with packaging kind of continuing to ramp back up, that we could lose some ground in the back half of the year. So, not a huge negative, but we could see working capital being used in the back half of the year. But, Chris, I would say that we remain confident in spite of that, that we can achieve a free cash flow position.

Chris Terry -- Deutsche Bank -- Analyst

Thanks. Thanks, Peter. That's it from me. Thank you.

Peter Matt -- Executive Vice President and Chief Financial Officer

Okay, good.

Operator

Your next question comes from the line of Josh Sullivan from The Benchmark Company. Your line is open.

Josh Sullivan -- The Benchmark Company -- Analyst

Hey, good morning.

Jean-Marc Germain -- Chief Executive Officer

Good morning, Josh.

Josh Sullivan -- The Benchmark Company -- Analyst

Yeah, just a question here. How are you thinking any tariffs on Canadian aluminum? Have you increased any inventory expecting that? Or just what should we be thinking on that product that comes to fruition?

Jean-Marc Germain -- Chief Executive Officer

Yeah. Well, we believe it's a misguided measure if it happens, right? We've lobbied against it in the past, we got it removed. It may come back. We think it's misguided, and it doesn't address the problem, which is overcapacity from China from an end market economy that doesn't play by the same rules as we do. Now, that said, if it happens, it's got a very limited impact on us. I remind you that we passed through the metal cost essentially to most of our customers. There may be a little section of the business where we cannot reprice immediately when it happens. But on the other side, we may gain a little bit more on scrap recycling as well. So, not much of an impact for us. The reason we're against it, it's much more a matter of principle, because we believe in free and fair trade and really a problem for our finances or our economic outcome.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then just on the can sheet front, can you remind us of when your larger contracts are up for renegotiation and then just any comment around pricing strength?

Jean-Marc Germain -- Chief Executive Officer

Yeah. So, we see -- so we don't go into the detail of exactly which contracts mature when, but you know that we've got few renewals coming in around the '22 horizon. We are making good progress, and I think the pricing environment is I would describe it as mildly positive in the U.S. and mildly negative in Europe because of the specific situation now. I remind you that the contractual negotiations take a lot of time here. And while we -- I'd say it's mildly positive here and mildly negative there, between now and whenever we actually ink a contract, things may change, but I think it's a pretty benign environment. And our product is in demand. I'll brag a little bit. Our quality and our service is very much recognized. Muscle Shoals has done a terrific job in -- over the past five years, and is a very strong player in the market now, very recognized, their quality service wise; Neuf-Brisach has always been. So, we have a strong position and I'm looking at the future with a great deal of confidence.

Josh Sullivan -- The Benchmark Company -- Analyst

Great. Thank you. Thanks for your time.

Jean-Marc Germain -- Chief Executive Officer

Thanks, Josh.

Operator

Your next question comes from the line of David Gagliano from BMO Capital Markets. Your line is open.

David Gagliano -- BMO Capital Markets -- Analyst

Great. Thanks for taking my questions. First of all, I did have one question on the numbers for the second quarter. Did you say there was a EUR15 million one-time benefit included in the EUR81 million adjusted EBITDA line?

Peter Matt -- Executive Vice President and Chief Financial Officer

You're talking about for the labor benefits?

David Gagliano -- BMO Capital Markets -- Analyst

I thought it was a COVID-19 state aid benefit. Is that included in EUR81 million...

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah. That's included in the adjusted EBITDA.

Jean-Marc Germain -- Chief Executive Officer

But it's not a one-off and it continues. Those programs are what is referred to as [Indecipherable] short-time work, and these government programs continue through 2020 and in some cases into 2021.

David Gagliano -- BMO Capital Markets -- Analyst

Okay. So, we should assume about EUR15 million quarterly benefit from those programs each quarter?

Peter Matt -- Executive Vice President and Chief Financial Officer

Well, no -- yes. No, because what will happen, David is, remember, so in the second quarter, we had a lot of people on the sidelines, right? But as we ramp up, then we're going to have substantially less of that. So, I think you should assume that in the businesses it's going -- so packaging, for example, where we had some benefit in Q2, we should have basically very limited, if any benefit, in Q3, and automotive, it should fade away and aerospace will have some continuing, given the operating utilization rate there, but it'll be a much lower number.

Jean-Marc Germain -- Chief Executive Officer

To give you an indication, we mentioned about people being unemployed during the quarter. At the trough, which is behind us, we had 6,000 people under some kind of unemployment benefit or temporary lay-off. Now, we're at less than 2,000, so it's closed rather dramatically.

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah. And, David, just to put it in perspective, the -- if you get to the fourth quarter, the number might be something like 25% of that, right, just based on utilization rate, just a rough number.

David Gagliano -- BMO Capital Markets -- Analyst

Okay. That's actually helpful. Thank you. And then, just in terms of the individual end market commentary, on the aerospace side, obviously that's the -- or it has been the highest margin business. And just in terms of the outlook commentary, you framed obviously two segments up, one segment down. But the down segment is again the highest margin segment. I didn't really get a sense as to order of magnitude of the down number versus the up numbers. Can you just give us a sense as to do you believe that aerospace will completely offset the recovery in auto and packaging in the second half? Or a bit more color on order of magnitude on the decline in aerospace would be helpful.

Jean-Marc Germain -- Chief Executive Officer

Yeah. So, it's very difficult to tell, David, because we're, as we speak, in very active discussions with our customers. And, at the end of the day, it's a call that we have to make jointly with them. As I mentioned, we've got contracts whereby we can force them to take some products, which they will take and pay for, but then they don't need it the following year, right, so they hold the inventory, they are holding it back. So, we are looking collaboratively with them in terms of what is it exactly they need, which by the way, I don't think they fully know now, and it's not criticism of them. I mean, it's very unusual time. And once we know what they need and we look at what cuts do we take, then I could answer your question possibly. At this stage, I cannot. I would just say that there will be for sure more pain in auto structures. And then, not in auto structures, in aerospace, my apologies, aerospace. Now, the other thing too is, this is compounded by the fact that if you look at any period in the recent past, the second half is always weaker than the first half, right, in aerospace. So that's something to factor in as well.

David Gagliano -- BMO Capital Markets -- Analyst

Okay. And just my last related question is, I think you mentioned, I think average utilization rates for aerospace-related demand in the second quarter was around 60%...

Jean-Marc Germain -- Chief Executive Officer

Correct.

David Gagliano -- BMO Capital Markets -- Analyst

At your facilities, is that right? What is that number now?

Jean-Marc Germain -- Chief Executive Officer

We're running still around that number, but I'd expect it to go down maybe to 50% that kind of range.

David Gagliano -- BMO Capital Markets -- Analyst

Okay. All right. That's helpful. Thanks very much.

Jean-Marc Germain -- Chief Executive Officer

Okay. Yeah. So it's important to say, we're not expecting it to go down to 30%, right? That's kind of not on the horizon.

Operator

Your next question comes from the line of Curt Woodworth from Credit Suisse. Your line is open.

Curt Woodworth -- Credit Suisse -- Analyst

Yeah. Hi, Good morning.

Jean-Marc Germain -- Chief Executive Officer

Hey, Curt.

Peter Matt -- Executive Vice President and Chief Financial Officer

Hey, Curt.

Curt Woodworth -- Credit Suisse -- Analyst

Peter, first question on the EUR100 million cost reductions. How much of that would you view as structural? And then, I guess just in general in terms of the amount of costs you think you could take out of the business this year on a permanent basis, can you give us an update on those efforts?

Peter Matt -- Executive Vice President and Chief Financial Officer

So, if we look at the -- I mean, so the biggest piece of that EUR100 million is related to labor, right? So -- and that's probably -- labor is probably half of that EUR100 million. So, what we're doing now is, we are really closely looking at the business and what it's likely to be like for the next couple of years. And then trying to size our labor forces according to that. So, in that regard, I think we would expect that there's going to be some kind of permanent savings. But remember, as we kind of ramp up the operations, we do expect some of that cost is going to come back, right? So, I'd say, it's hard to give a really precise number on that, Curt, as it's a difficult one.

Curt Woodworth -- Credit Suisse -- Analyst

Okay.

Jean-Marc Germain -- Chief Executive Officer

Curt, if may add. We've talked about Horizon '22, right? And one of the strategic initiatives was to look at how do we lean our organization without losing competencies, capabilities, but how do we lean and make the organization stronger? And I think what COVID-19 is doing to us and I guess to many other companies out there is accelerate the number of initiatives that may have taken more time to be implemented. So, along the lines that Peter was saying, I think we'll come out of this with some permanent cost reductions, and as we ramp up, we will not ramp up and inject back a EUR100 million of cost. How much will remain to be seen because we are really learning as we are doing and we are just in the middle of it now, but we will definitely emerge out of that leaner and stronger.

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah. And there are certain categories like, for example, professional fees, subcontractors, where kind of as we work without these, because those are kind of big categories of reduction, I think we were able to kind of live without a lot of that going forward. So, yeah, I think there's definitely a piece of that that we can carry forward.

Jean-Marc Germain -- Chief Executive Officer

[Indecipherable] examples, there are not trivial, they are quite revealing, right? So, we've got a very strong R&D and technical support organization, which is people that are centrally located and then go in the health plans. And historically, lot of the work was done by people going to the location. Now, obviously in the past three months, nobody has been able to travel anywhere and a lot of that has been done through remote interaction, video conference. But even when you go to a plant and you look at I got a problem and I need to improve the speed on this mill, we've had people interacting by the mill pulpit on a FaceTime and going into -- looking into the roller -- the rolling mills by FaceTime with the technical advisor on the other side of the plant. And that works actually fine, which we wouldn't have thought it would be possible.

So, in the future, what you are gaining here is, well, you are saving travel time, which is not very good for the aerospace business, but also, you're saving the cost, you're saving the time, which means that people can be on several interventions while historically within a week, it takes a week to get to the plant where you get the job done.

So, I think we're going to discover a few new ways of doing business in our space that are going to be quite interesting in the future, and I think it's going to help us inject more brain and talent remotely with more impact.

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah. And Curt, as we go forward, we'll -- we may be able to give you more color on this, but hopefully, it comes across but we're really looking hard at taking structural cost out. And in the short-term, the objective is, we want to be kind of free cash flow positive through this crisis, and so that we don't take on any incremental debt ideally. And in the longer term, we want to emerge with a kind of much stronger earnings power. So, we're focused on exactly that, and we'll have more to say as we progress.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. No, that's helpful. And then in terms of the free cash flow dynamics, you mentioned I think it's EUR73 million impact from factoring this quarter, otherwise you'd be free cash flow positive, which is pretty positive, given your utilization rate, and now you're talking about 95% utilization in packaging, over 80% in auto, and it seems like auto should move higher once supply chains get more normalized. So, 75% of your businesses could be close to 90% utilization in a couple of months. I get that aero is weaker. But it would seem like from the free cash flow generation standpoint, unless working capital would be a major negative, you should be generating decent free cash in the back half of the year. Can you comment at all on free cash flow potential in the back half of the year?

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah, sure. Thanks for the question. So we won't put a specific number in it, but we're confident that we will generate free cash flow for the full year. And the back half of the year, I think there's a very good chance that we can generate some free cash flow, but it depends a lot on what happens with trade working capital. As I said, we've got to ramp up these businesses. So, we want to be a little cautious until we see the pace of the ramp and the consequences of the ramp. But again, for the full year, we remain confident that we can generate free cash flow.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. And then just final question on aero. Jean-Marc, you had a comment on, I guess, working with the OEMs to create, you said, a clean slate entering 2021. So, is that statement kind of reflecting the fact that the OEMs cut very quickly? And I assume, there is sort of an excess inventory issue that they're dealing with or in general the supply chain, and so, hypothetically, your volumes would be below the actual build rate to help them clear inventories. So then when you get into 2021, the supply chain is in a pretty good position. And contractually, you said you're not going to force it on them. But then, if you're going to help them manage that, do they -- do you get anything in return, i.e., price benefit or it's just kind of everyone helping each other? Just a little bit better understanding of kind of what you meant by the clean slate comment.

Jean-Marc Germain -- Chief Executive Officer

Well, yeah. No, fair question. So, I think I've commented in the past that I thought that the shipments we're making into the OEMs, right, into the supply chain were actually higher than what the build rates we're warranting at the time. And obviously, the build rates are going down very significantly down now. So the pain we're going to take in the second half, I think, is not going to cure all the inventory buildup in the supply chain, first of all. But I think what that does is it positions us for 2021 that doesn't show further deterioration. That's what we're into, right? And we want to be in a place where we supply by and large consistent with what is being built, right? So that's what we're trying to do. Whether we get there fully, I don't know. But certainly, we are aiming to be better in '21 than what the second -- the nine months of post-COVID will be in A&T. That's one of the goals.

In terms of what we're getting from the OEMs, we've got very strong, deep strategic relationships with them. I've commented also in the past the fact that we're in it for the long haul. And I think, it's evidenced by the 10-year contract we've signed with Airbus. I mean, 10 years is a long duration, never happened before. And we did it because it was the right thing to do for both companies, for both businesses and we didn't do it as a reaction to COVID or whatever, right? That was really the desire to cement the strategic alignment between the two companies. So, we are looking past the current crisis. The current crisis we've got to get all in the same boat or in the same aircraft, and put us in the same place, work together to overcome the crisis, and we are not talking about if I do that, you give me a bit more price or whatever. I think it's just a relationship where we want to be in a win-win partnership, and we do some things that help them, and they'll do some things that help us in the future, which they have already done in the past and that's already happened, and that's continuing.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Matthew Fields from Bank of America. Your line is open.

Matthew Fields -- Bank of America -- Analyst

Hey, Jean-Marc, hey, Peter. Just one on the markets and then one on the balance sheet, please. So, saw that can volumes were down about 11%, but Norsk reported can volumes up 11%. I think you guys faced relatively the same markets in Europe. Can you sort of point to why maybe they're having more success on their can volumes? Was it a Neuf-Brisach being down issue or a market issue or like what? Can you just explain that discrepancy for us please?

Jean-Marc Germain -- Chief Executive Officer

Sure. It's mainly I believe -- I mean, I cannot comment on their specific situation, but in our case, the main reason was that we have to take down Neuf-Brisach for a full week and then ramp it up gradually. I remind you that Neuf-Brisach was at the center of a hotspot, of the first real hotspot in France, and there was very terrible conditions for the second half of March. So, in March, we continue to ship out of finished goods, but then, we had to replenish the finished goods, and that's really took down our shipments in the second quarter. But, we're back to normal now.

Matthew Fields -- Bank of America -- Analyst

Okay. And that's sort of what I expected. And on the balance sheet, it looks like you got a decent amount of funding from France and obviously, Switzerland and Germany. You said it was partially guaranteed, but it's also secured. Can you just give us a better understanding of sort of what its secured by? Is it inventory or is it sort of PP&E? And then, to what extent is it guaranteed by the French government?

Peter Matt -- Executive Vice President and Chief Financial Officer

Well, it depends on the facility. But the big one, the French one, is secured on PP&E, and in the case of the German ones, one of them is secured and one of them unsecured, and the Switzerland is unsecured. And the guarantees, what the way they work is, they guarantee a certain percentage of the principal. So, it's a normal syndicate of banks with -- in the case of France, so I think the guarantee is for 70% of the -- or sorry, 80% of the -- in the case of France of the principal balance is guaranteed by the French state. In the case of Germany, I think it's 80%, too.

Matthew Fields -- Bank of America -- Analyst

So just for our purposes as credit analysts, 80% of that French loan is sort of non-recourse to you?

Peter Matt -- Executive Vice President and Chief Financial Officer

Well, again, it's -- it is recourse to us. What I think the point is, is that if you're a lender, so, for example, if you are in the syndicated banks and you are lending, say, 50%, your responsibility is for 10 -- sorry, 50% -- EUR50 million, your responsibility is for EUR10 million of that, right? So, it's the banks that benefit from the guarantee, not the Company.

Matthew Fields -- Bank of America -- Analyst

Okay. So, you still have to deliver on the commitments to the banks?

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah, absolutely, absolutely.

Matthew Fields -- Bank of America -- Analyst

Okay.

Peter Matt -- Executive Vice President and Chief Financial Officer

But one thing -- yeah, I'm sorry.

Matthew Fields -- Bank of America -- Analyst

The government isn't backstopping the loan for you, it's...

Peter Matt -- Executive Vice President and Chief Financial Officer

No.

Matthew Fields -- Bank of America -- Analyst

Backstopping the loan for the banks?

Peter Matt -- Executive Vice President and Chief Financial Officer

Exactly. Exactly. But one thing to kind of I think is a really important point is our intent in putting this liquidity on the balance sheet was to remove any question about the fact that we had enough liquidity. As we said from the beginning and based on the performance in the second quarter, we do not anticipate using this. So, the French facility we had to draw just by the terms of the agreement, but it just sits on our balance sheet as cash. And the German facility that we've now signed up in July, we don't expect to draw that. The DD, the delayed draw term loan, we haven't drawn that. And the Swiss facility, we don't have that drawn in most instances.

Jean-Marc Germain -- Chief Executive Officer

And the way we benefit from the state guarantee is through very cheap interest rates.

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah, that's right.

Jean-Marc Germain -- Chief Executive Officer

That's very cheap money and that was important to us. We don't think we need the money, so we're not going to pay a lot of interest for it.

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah, exactly. That -- and that obviously was an inducement for the banks to lend, right?

Matthew Fields -- Bank of America -- Analyst

No, fair enough. And that's I think the French facility is what 2.5% effectively at this point?

Peter Matt -- Executive Vice President and Chief Financial Officer

Yeah. In that ZIP Code.

Matthew Fields -- Bank of America -- Analyst

All right. So you don't really have an incentive to pay that off quickly, given your bonds are kind of twice that, right?

Peter Matt -- Executive Vice President and Chief Financial Officer

No, no. That's right. Now remember, the use of the -- there are some limitations on the use of the capital, right? So, for example, we can't use that capital to go and buyback bonds in the market. So, it's really meant to be for kind of operating needs of the Company. But, yeah, you're right, we don't have a strong incentive to repay that. But...

Matthew Fields -- Bank of America -- Analyst

Okay. And then...

Peter Matt -- Executive Vice President and Chief Financial Officer

What we will do is, obviously, there's some cost to it, right? So, as we kind of emerge from the crisis and have a little more visibility, then we'll unwind those facilities.

Matthew Fields -- Bank of America -- Analyst

Okay. That's very helpful. Thanks for all the color and good luck in the back half.

Peter Matt -- Executive Vice President and Chief Financial Officer

Thank you.

Jean-Marc Germain -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Sean Wondrack from Deutsche Bank. Your line is open.

Sean Wondrack -- Deutsche Bank -- Analyst

Hey, guys. Thanks for taking my questions, and really great job on transparency and costs here, both very helpful.

Jean-Marc Germain -- Chief Executive Officer

Thanks, Sean.

Sean Wondrack -- Deutsche Bank -- Analyst

Just when you think about big picture, if you look at the auto market, there are sort of projections out in the market that will have about 25% decline in new cars this year, mostly based on the fact that we weren't producing back in March, April. If you look at the used auto market, it's been pretty strong as of late with used prices really rising even above last year. And you talked about how production has been increasing and demand is increasing there. To kind of get to down 25%, you have to have some pretty strong growth in 3Q and Q4. So, I guess what I'm asking is, do you see that market as potentially inflecting soon with demand pulling through based on lack of cars? If you can provide a little color what you're seeing there, it'd be very helpful.

Jean-Marc Germain -- Chief Executive Officer

Yeah. So, I mean, the order book is strong. There's no question. It's above 80% that I'm mentioning, right? But we've been a little bit caught by customers just a few months ago telling us, we need product tomorrow and then telling us the next day, the plant is shut down, right? So, we're very vigilant, right? So, I hope -- I think the end demand is there. I think that's true in the U.S., that's true in Europe, right? The governments have injected lot of money in the hands of consumers, right, through the unemployment benefits of different shapes and forms that you see on those continents. And that is pretty good for end demand at the end of the day. So, I hope it's going to be a -- it's going to materialize into and the order book we have is going to be actually real orders and shipments, in which case, it should be better. But I've -- we've seen fits and starts. You see plants restarting and then shutting down because there's COVID infection or you see people having trouble staffing the full shift because there're too many cases in the hotspots. So, it's still fragile -- I mean, it looks quite good, but it's still fragile.

Sean Wondrack -- Deutsche Bank -- Analyst

All right. That's helpful. Thank you, Jean-Marc. And I guess that's a good lead into the next question. So, when you think about your customers, we've had some shutdowns, we've had things come back online, do you feel that your customers and their CEOs are getting more confidence in their ability to stay online or getting better in terms of protocols and sort of advancing up the curve there?

Jean-Marc Germain -- Chief Executive Officer

Yeah, I would think so. I think all of us have made a tremendous effort to provide the proper environment from -- for our employees. It's very interesting, I was commenting on the half of the percent of our employees have been affected by COVID, confirmed, we have had no new case, confirmed case in Europe since the middle of May.

Sean Wondrack -- Deutsche Bank -- Analyst

Wow.

Jean-Marc Germain -- Chief Executive Officer

So, I think this is saying something about the fact that when people take responsibility in their daily lives, right, because it goes beyond what they do within our factories or during the eight hours or 10 hours, whatever they work with us, you can have an impact. And I think if people wear masks when they interact with outside, with people they come across, I think it makes a tremendous difference. So, I hope the reality will slowly or more than slowly, settle in and good practices will get that virus away from us sooner rather than later.

And I think people are seeing the confidence building up. It's human nature, you need to be affected to take steps. And I think we're in a process where in many places, people are still being affected before they take steps. But if you look at China, China is going extremely strong. It's a small operation for us, but we are above budget, above last year, right. You look at Europe, new cases are really on the downward trend, even though there are some still here and there, and we're seeing a stronger rebound. And I hope, this is coming to us in the U.S. -- throughout the U.S.

Sean Wondrack -- Deutsche Bank -- Analyst

That's great. It's good to hear, Jean-Marc, and I hope everybody is safe and well over there. Thank you very much and good luck.

Jean-Marc Germain -- Chief Executive Officer

Thank you.

Ryan Wentling -- Director of Investor Relations

Well...

Operator

Speakers -- go ahead, sir.

Ryan Wentling -- Director of Investor Relations

No, go ahead, Joanna.

Operator

Yes, sir. I am showing no further questions at this time. I would like to turn the conference back to Mr. Jean-Marc Germain, CEO of Constellium. Go ahead.

Jean-Marc Germain -- Chief Executive Officer

Thank you, Joanna. So, thanks everyone for participating in the call today. As you can see, we are very focused on facing the crisis, protecting cash flow, and building a stronger Constellium when things are behind us. Thank you very much and look forward to updating you on our progress in Q3. Take care. Stay well.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Ryan Wentling -- Director of Investor Relations

Jean-Marc Germain -- Chief Executive Officer

Peter Matt -- Executive Vice President and Chief Financial Officer

Chris Terry -- Deutsche Bank -- Analyst

Josh Sullivan -- The Benchmark Company -- Analyst

David Gagliano -- BMO Capital Markets -- Analyst

Curt Woodworth -- Credit Suisse -- Analyst

Matthew Fields -- Bank of America -- Analyst

Sean Wondrack -- Deutsche Bank -- Analyst

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