Gränges AB (publ)

Welcome to Grenges conference call for the fourth quarter of 2020 here in Stockholm. It's me, Johan Enkel, CEO of Grenges. And beside me, I have CFO Oskar Hallström. As usual, we will start this presentation with an update of Grenges performance during the last quarter and touch upon some important events. After that, Oskar will take you through the financial results. And then we will conclude the presentation with a short summary and a Q&A session. The fourth quarter of 2020 has in many ways been a productive and good quarter for Gränges. During the quarter, we continued to experience a recovery of our core markets and the activity in both the automotive and the HVAC industry were higher than in the fourth quarter of 2019. As a consequence of the strong demand of the HVAC market and our increase of the market share, our America business had a new record year in 2020, both in terms of sales volume and earnings, despite the COVID-19 pandemic. In November, we completed the acquisition of Aluminum Corning, adding important capabilities and new niche market to Gränge's portfolio. In the fourth quarter, we also entered the market for aluminum powder for additive manufacturing throughout the establishment of Grenges Powder Metallurgy. Following the improved market conditions in the fourth quarter, the sales volume, excluding acquisitions, increased by 14% year over year. whereas the total sales volume growth including Corning was 33%. The adjusted operating profit increased to 34% to 193 million SEK. The cash generation continued to be very strong and the adjusted cash flow before financing amounted to 232 million SEK in quarter four. Finally, our board of directors intends to resume the dividend and proposes a dividend of 1.10 SEK per share for 2020. During the quarter, we also updated our strategy and identified our priorities the coming five years. I will comment more about this later. The improved market conditions become evident when we look at the market statistics. Unlike the negative development we saw in especially the second and third quarter, all Granger's key markets show a positive year-over-year development in the fourth quarter. For the automotive market, the research firm IHS currently estimates a global increase in light vehicle production of 2% in the fourth quarter. This means a continued sequential increase from the third to the fourth quarter of 14%, and that the full-year light vehicle production is down 16% in 2020 compared with 2019. If we look at estimates by region, we can see that Asia is expected to have a year-over-year growth of 4%, followed by Europe at 1%. America shows a flat development in car production compared with last year. In Asia, inventory levels in the automotive supply chains have to a large extent been restored, fueled by the comparatively more rapid recovery from COVID-19 in China, than in many other countries. In Europe and Americas, we still see effects from inventory levels in the supply chain being increased, which generates a positive effect on demand for Grenges products on top of the light vehicle production increase. For the first quarter this year, IHS expects a continued recovery of the automotive production with a global year-over-year increase of 15%. There is, however, a potential downside risk associated with this forecast since there are signs of shortage of semiconductors in the automotive supply chains. This may lead to line stops at automakers and reduced production rates below forecasted levels. The most positive development in the fourth quarter is the Americas HVAC market that is expected to have grown by 61% compared with the same quarter last year. This may seem a lot, it is, but we also need to keep in mind that the fourth quarter typically is the seasonal low point for HVAC production. So the increase is from low levels. That said, there are two primary drivers behind this development. First, the summer season in the US has been unusually long and warm this year, which has a positive impact on sales of air conditioning units. Secondly, as many people are now working from home, Because of COVID-19, there is an increased need for a better indoor climate, which has increased the demand further. When looking at Grengel's sales volume development during the fourth quarter, we can clearly see the impact of the strong HVAC market and the continued recovery of the automotive market. Our sales volume grew organically by 14% year-over-year in the quarter, and when adding the acquired sales volume from the Corning, The total increase is 33%. With a total sales volume of 103,000 tons, the fourth quarter of 2020 is the first individual quarter for Gränges with a sales volume above 100,000 tons. If we look at the sales of automotive materials, we see a year-over-year increase by 4%. In Asia, sales volume was up 2%. In Europe, 5%. and in Americas, 8%. This largely follows the pattern of the development of light vehicle production in the quarter, but we see a slightly higher growth for Gragas in Europe and Americas. This is primarily the result of customers rebuilding inventory in their supply chains to adjust to a new and higher expected demand level going forward. For the HVAC and other business in Americas, we see a volume increase of 24%, There are three main reasons for this. First, we have contracted a market share increase as of 2020, as we have communicated earlier. Secondly, the HVAC market was very strong in the quarter. And thirdly, the demand for specialty packaging materials for food and pharmaceutical has increased as a consequence of the COVID-19 outbreak. Especially demand for materials for food containers for home delivery and takeaway has increased as a result of heavy restrictions in many US states. We are satisfied that our investments in new capacity has enabled us to capture this growth. In the fourth quarter, we have included two months of sales from Corning. In total, Corning contributes with a sales volume of 14.6 thousand tons in the fourth quarter, Of this, 13.6 thousand tons are sold in Europe and 0.9 thousand tons in Americas. In the beginning of November, we completed the acquisition of aluminum Corning, now renamed Gränges Corning. The acquisition strengthened our product offering and presence in Europe and contributes with the strong positions in new attractive niche markets. Gränges Corning also adds new capabilities and capacity to expand the offering for future transportation solutions, such as electrical vehicles. Following the completion of the acquisition, we have worked closely with our new colleagues in Poland to integrate KONIN into Gränges. The integration work progressed according to plan, and I'm very pleased with the development I've seen so far. Subsequent to the KONIN acquisition, we undertook a new share issue of approximately 1.7 billion SEK with preferential rights for existing shareholders. The share issue aims to finance the acquisition and future growth investments in line with our strategy. The interest to participate in the right issue was very high and resulted in an oversubscription of approximately 50%. It is very positive for Gränges with this strong support from both current and new shareholders. With the acquisition of Konin and the right issue completed, We have established an even stronger platform for Gränges in general and for Gränges in Europe in particular. Despite challenging market conditions following the COVID-19 pandemic, 2020 has been a productive and eventful year for Gränges in several ways. During the first half year, we spent significant time and effort mitigating the impact of COVID-19. We did that by activating our contingency plans and focusing on business continuity, cash and cost. Although we have continued to work in accordance with this throughout the year, we have during the second half of the year also taken important steps to position Gränges even better for the future. We have completed the acquisition of Gränges Kornil and entered the market for aluminum powder for additive manufacturing through the establishment of Grenges Powder Metallurgy. We have successfully ramped up the new production capacity in our Huntingdon facility, which contributed to that 2020 became a new record year for our America's business, both in terms of sales volume and earnings. Through the successful 1.7 billion SEK right issue, we have strengthened our balance sheet and secure capital for continued development of the Gränges Group. We have also continued to execute on Gränges' ambitious sustainability framework and targets, and I'm very satisfied to see continued good progress on many of our sustainability priorities for 2020. When looking at the sustainability performance for 2020 in more detail, We continue to see good progress on many of our prioritized sustainability topics and metrics. This demonstrates that the strength of our structured way of working when integrating sustainability aspects across our operations and value chain. The slide here covers four of our prioritized sustainability metrics and the arrows illustrate the direction of the performance versus 2019. As you can see, the metrics show a positive trend. Total carbon emission intensity has continued to decrease year over year, which we are very proud of. This is mainly driven by lower emissions from purchased materials, which in turn has been positively affected by increased sourcing of low carbon primary aluminum, as well as higher share of sourced recycled aluminum versus prior year. We have also, during 2020, taken important action to speed up the development of sustainable products. Our operation in Finsbom has developed and implemented a lifecycle assessment LCA tool, which enables declarations of environmental impacts on product level. Starting with the carbon footprint, I'm very satisfied that we can start to offer customers third-party verified carbon footprint certificates for products. Finally, we also see a positive trend when it comes to the share of women working at Gränges, both in the total workforce and among senior management. Improving the gender balance is a priority across the organization, and Gränges strives to offer an inclusive work environment which leverage employees' different perspectives and experiences. All detailed sustainability performance will be published in our annual and sustainability report, which will be launched in mid-March. When summarizing the year 2020, we can clearly see that the performance against our long-term financial targets are impacted by two things. The challenging market situation following the COVID-19 pandemic and the fact that we during the year have continued to invest according to our growth strategy. Even though we are not satisfied with the sales volume development in the year, Seeing an organic decline of 2% compared with 2019, when we exclude the impact of acquisition, we can note that this is much better than the growth of our end markets. In total weighted average growth, our end market is currently estimated to be negative 7% for 2020, making Granger's growth four percentage points better than the benchmark. The lower earnings following the challenging market situation in especially the second quarter in combination with an increased assets from the expansion investment, had a negative impact on return on capital employed in the year. For 2020, the return on capital employed was 8.1%. We ended the year with a net debt of 3.3 billion SEK, which correspond to 2.2 times EBDA. This is slightly outside of our target range, but we expect to see leverage rate to come down going forward as the new investments will be increasingly utilized. Our board of directors intends to resume the dividend and proposes a dividend of 1.10 SEK per share for 2020. Given that the AGM approves the proposal in May, it means that 32% of net profit will be returned to our shareholders. This is within our target range. As we conclude on 2020, we are also concluding on the last year of the current strategy period. Consequently, we have, during the year, spent time reviewing and updating our strategy and priorities for the coming five years. The foundation of our updated strategy is our purpose and promise to our stakeholders to develop lighter, smarter and more sustainable aluminum products. Based on current market trends, And with the Grenges competence, capabilities and global footprint in mind, we have identified four areas in which we will focus on growth efforts going forward. These are thermal management, electrified transportation, new road product niches and new materials technology. Grenges is the global leader when it comes to supplying materials for the heat exchanger industry. and this will continue to be an important part of Grenges future growth. We aim to use our knowledge and connections in the heat exchanger value chain to build new business in thermal management market within both existing and new end market areas. The increased focus on sustainability is driving the electrification of the transportation industry. This generates increased demand for rolled aluminum solutions, for instance, batteries and general lightweighting. In this area, Grenges aims to target select opportunities to have a good fit with Grenges know-how and production capabilities. This increased demand for structural aluminum parts will be able to serve to our new facility in Koning. We also have a clear ambition to continue to diversify our product portfolio and enter into new rural product niches where we can leverage and further build on our product and process know-how. An example of such initiative is our entry into the light-gauge aluminum foil area with our upgraded Newport facility, or the expansion of our specialty packaging offering through the acquisition of Gränges Corning. Finally, we aim to use our knowledge and competencies to expand in what we refer to as new materials technology. Although Granges today is very much associated with aluminum rolling, our competence within materials technology is much broader and can be used in areas also outside of rolling. This is something that we intend to capitalize on going forward. A very good example of a new materials business is the recently established powder metallurgy business unit where we target the market for aluminum powder for additive manufacturing. The realization of the updated growth strategy is supported by an increased focus on sustainability, innovation, digitalization, and continuous improvement. An increased focus on these business drivers, together with our strong company culture, committed employees, will further strengthen Grengel's profitability and competitiveness and ensure realization of our updated strategy. With that, I hand over to Oskar for the financials.

Thank you, Johan. As we already heard Johan talk about, we saw a continued positive development of the sales volume in the fourth quarter, both if we compare with last year and with the third quarter. With the close to 15,000 tons volume added from Corning, the 103,000 tons we delivered in the fourth quarter is the highest sales volume in an individual quarter so far for Grenges. From a 2020 full-year perspective, We do, however, see the impact of COVID-19 on both sales volume and operating profit in the earlier quarters of the year. And for the full year, we delivered a total sales volume of 351,000 tonnes and the adjusted operating profit amounted to 648 million SEK. If we look at the sales volume and margins on a quarterly basis, we can see that the group's adjusted operating profit per tonne remained stable at 1.9 thousand SEK year over year, but came down slightly compared with the third quarter. Excluding acquisitions, the profit per ton increased year over year to 2,000 SEC in Q4. For the automotive business, we can see a higher volume and a stable profit per ton in Q4 compared with Q3. On the positive side, we see the capacity utilization continue to increase and is now close to 75% for automotive business. The effect from this is partly offset by product and geographical mix changes between the quarters. If we compare the automotive margins in Q4 with Q4 last year, we see the positive effect from a higher sales volume and improved capacity utilizations. whereas unfavorable FX, slightly lower average conversion price and less optimal metal management, reduced the margins. For the HVAC and other business in Q4, it was very strong, as Johan mentioned earlier. If you compare with the third quarter, the operating profit per ton is negatively impacted by a seasonal mix shift, as Q4 typically has less HVAC and more specialty packaging volume. This year, we also see the effects from the reopening of the Salisbury facility in the second half of Q3 that increased the fixed cost base somewhat in the fourth quarter. That said, looking at the full year perspective, the profit per ton for the HVAC business has improved from 1.8 in 2019 to 2.4 for the full year of 2020. And this is, of course, something that we are very happy with. As you can see on this slide, the acquired business, which is Aluminium Konin, has a below average operating profit per tonne of 1,100 SEK in Q4. Here we do need to be a little bit careful when we make comparisons, as the two months including for Konin are November and December, where especially December is the seasonally weakest month of the year, whereas for Grenges, the full third quarter, including October. is included in the figures. To give an indication of what can be expected from Corning on a full year basis, I think it's worth to recall what we have indicated on Corning performance before. Gränges Corning is in the current market environment operating at close to the maximum capacity of 100,000 tons per year. And that is expected to generate an EBITDA of about 135 million Polish Zloty per year. The appreciation of conin assets as a part of Gränges is expected to be about 50 million Zloty per year, depending on the final purchase price allocation, which has not yet been concluded. And this means then that the operating profit per year would be about 85 million Zloty. And at current FX rates, this is approximately 190 million or 1.9 thousand SEK per ton for the full year. Any realized synergies or improvements would come on top of this. If we leave the sequential perspective and look at the fourth quarter compared with the same quarter last year, we can see that the sales volume increased by 33% to 103,000 tons and that the net sales increased by 17% to 3.1 billion. Excluding acquisitions, the sales volume increased by 14% and the net sales by 3%. The main reason for the net sales increasing less than the sales volume is FX translations. The net impact of changes in foreign exchange rates was negative 264 million SEC compared with the fourth quarter last year. Looking at the earnings, the adjusted operating profit increased to 193 million SEC in Q4, an increase of 49 million SEC, or 34% on prior year. Of this, the acquired Corning business contributes with operating profit of 17 million SEC. The positive impact from increased sales volume, slightly higher average conversion price and continued positive effects from cost reduction initiatives was partly offset by less efficient metal management. Metal management continued to be a very high focus for us at this point. The raw material represents a large part of our cost base and our ability to keep an optimal raw material mix can have a large impact on the profitability. When demand is unpredictable and rapidly changing, raw material optimization is more difficult. When comparing Q4 year over year, we should also mention the difference in absorption of fixed costs in inventory that has an impact of negative 12 million sec. In 2019, demand slowed down more than normal toward the end of the year. And as a result of this, we built inventory that absorbed some of the fixed costs. In 2020, demand was strong throughout the quarter and we reduced inventory, resulting in a lower absorption of fixed costs and a higher share of the fixed costs was taken directly in the result. This effect is primarily related to 2019, but of course has an impact on the year-over-year comparison. Depreciation increased within total 23 million SEC, of which 17 is related to Corning, and the remainder is related to the completed expansion projects in the US. Net changes in foreign exchange rates was negative 11 million SEC in the quarter. Items affecting comparability amounted to in total 27 million SEC in the quarter. Of these, 31 are related to the realization of the fair value step-up of the inventory that was acquired as a part of the Corning transaction. We expect an additional effect from fair value step-up of negative 16 million SEK in the first quarter this year. Further, we also carried one-time costs for the KONIN acquisition of 6 million SEK in the quarter. And finally, we had a positive effect of 11 million SEK, which is the net of a released restructuring provision in Sweden and restructuring costs in Americas. The reason for the released provision in Sweden is that the money reduction will be smaller than previously expected as a consequence of the stronger market environment. The reported operating profit for the fourth quarter increased to 167 million SEK. The profit for the period increased to 106 million SEK. Earnings per share has been calculated taking the dilution from the rights issue into account and amounts to 1.19 SEK in the fourth quarter. During the fourth quarter, the net debt increased by 480 million SEK to about 3.3 billion SEK. In terms of net debt to adjusted EBTA, this is, however, an improvement from 2.5 to 2.2 times, since we are now also including the 12-month rolling EBTA from Grenges Kornin. when we calculate this ratio. Starting from the left of this chart, we can see that we continue to have a strong underlying cash generation in the fourth quarter. And the cash flow before financing adjusted for the expansion investments and acquisitions amounted to 232 million SEK. As we've mentioned before, one of the areas we have increased our focus on as a response to COVID-19 is working capital management. And despite the sequential pickup in the business activity, we managed to maintain working capital on a stable level in Q4. And we end the year with 13 days less of working capital than what we carried a year ago. As Johan already mentioned, we made a capital raise in the form of a rights issue during the quarter. The net proceeds of this amounted to, in total, close to 1.7 billion SEK and reduced the net debt by the same amount. During the fourth quarter, we also made two acquisitions, the one of Getek in October and Aluminium Konin in November. The net cash consideration and acquired debt for these two acquisitions amount to 1.2 billion SEK and about 1.1 billion SEK, respectively. We've also continued to invest in total 102 million SEK in our expansion programs. Of this, 56 million SEK refers to the ongoing program in Konin and 46 million SEK to the expansion investments in Americas and Sweden. In total, net debt impact from acquisitions and expansion investments amount to close to 2.4 billion SEK in Q4 and 2.6 billion SEK for the full year. Given this and keeping the impact from the challenging market that we experienced earlier in the year in mind, I think that it's very positive that we end the year close to our leverage target. Before leaving this page, I would just briefly like to touch upon how we currently view the capital expenditure for 2021. At current FX rates, we expect the full year capex to be about 800 million SEC. Of this, about half is expected to be related to maintenance and upgrades of existing assets and half to expansion investments. The majority of the expansion capex is in turn related to the ongoing program in Konin. Finally, I would just like to highlight that Grengis has always been in business with a strong underlying cash generation and the fourth quarter of 2020 was no exception from this and nor was the full year. If we look at the cash flow before financing activities and exclude acquisitions and CapEx for expansion investments, this amount to more than 1.8 billion SEK for 2020, implying an operating profit to cash conversion of 182%. I believe that the continued strong cash generation is good evidence of the efforts made by the Grenges team in this year when it comes to cost savings and capital management. And this also shows the strength of the Grenges business model throughout the economic cycle. With that, I hand over to Johan that will provide an outlook for the first quarter and the summary of the fourth quarter. Thank you.

Thank you, Oskar. Although the COVID-19 pandemic continues to impact several of Gränge's end markets, the recovery is currently expected to continue going into 2021. For the first quarter in 2021, the research firm IHS currently assumes that the global light vehicle production will increase by 15% year over year. Still, we do see some downside risk here as the car production may be negatively impacted by shortage of electronics components that may lead to line stops. Based on what we see for Gränges now, we expect an organic increase in sales volume, excluding Gränges Corning, by low double-digit compared to last year in the first quarter. This includes a low double-digit growth for the automotive and a mid-single-digit growth for the HVAC and other business. Grengis Kornin is operating at close to full capacity and is under current market conditions expected to contribute with a sales volume of some 24,000 tons in the first quarter. The development of foreign exchange rate is expected to have a negative impact on the profitability in the first quarter. To conclude 2020 fourth quarter report, the fourth quarter was productive and good for Gränges. We have experienced improved market conditions in all regions, with HVAC in Americas representing the strongest demand. As a consequence of the improved market demand, and the completion of the KONIN acquisition in November, the sales volume increased by in total 33% year over year, and the adjusted operating profit increased to 193 million SEK in the quarter. The cash generation continued to be very strong, and the adjusted cash flow before financing amounted to 232 million SEK in quarter four. Our board of directors intends to resume the dividend and proposes a dividend of 1.10 SEK per share for 2020, given that the AGM approves the proposal in May. It means that 32% of net profit will be returned to our shareholders. This is within our target range. Leaving 2020 behind and looking further ahead, I conclude that we in the last five years have established a strong platform through organic growth, expansion, investments and acquisitions. With a strong commitment to sustainability, innovation, continuous improvements and digitalization, Gränges is well positioned to deliver sustainable and profitable growth for the coming years. Now we open up for questions.