Gränges AB (publ)

Welcome to Gränge's conference call for the first quarter of 2021. Here in Stockholm, it's me, Johan Menkel, CEO, and beside me, I have our CFO, Oskar Hellström. As usual, we will start this presentation with an update of Gränge's performance during the last quarter and highlight some important events. After that, Oskar will take you through the financial results, and then we will conclude the presentation with an outlook and a Q&A session. When summarizing the first quarter of 2021, it is clear that this is the best quarter so far for Grenges. We experienced strong market across all regions and end customer markets during the quarter. This contributed to an all-time high sales volume and operating profit. In total, sales volume reached 127,000 tons, which represents a 41% growth quarter on 2021. last year. Excluding the acquired sales volume from Gränges Corning, the first quarter sales volume was up 14% compared with the same period last year and 16% compared to the sales volume in the fourth quarter of 2020. The adjusted operating profit increased by 63% to a new record level of 342 million SEK, largely driven by the higher sales volume supported by continued good cost performance. During the quarter, we have also continued to execute on our growth strategy. We have now finalized to upgrade our new port facility in North America, and we have taken a decision to expand our casting capacity in Huntington. This to keep up with increasing customer demand. I'm also happy to see that the integration of Grengas Corning progresses according to plan, despite the challenges imposed by COVID-19. I will come back and talk more about this shortly. As I've mentioned several times before, sustainability is a strong driver and enabler of our long-term competitiveness and value creation. In 2019, we launched a set of sustainability targets, and since then, good progress has been achieved towards many of these. To reflect a stronger than anticipated development in the sustainability performance, as well as the increased interest and expectations from customers and other stakeholders, we are now upgrading selected sustainability targets. Grenges' successful growth initiatives have resulted in a larger production footprint and a more diversified product portfolio, and we now see an opportunity to further increase efficiency and transparency by grouping the different businesses based on their respective characteristics. As a consequence of this, we have established two business areas. From now on, we will be presented separately in the external financial reporting, Grenges Eurasia and Grenges Americas. Oskar will come back and describe this in more detail shortly. In addition to the new business areas, we will also, as of quarter one this year, refine the reporting of our performance in our core and customer markets. automotive representing 44% of our sales volume in Q1, HVAC with 21%, specialty packaging with 15%, and other niches with 21% of our sales volume in Q1. Short-term, sales to the automotive industry is primarily driven by the number of vehicles produced. Longer-term, the increasing share of hybrid and electrical vehicles will have a further positive impact on demand for Grenges products. Sales to the HVAC industry is short-term driven by consumer confidence and the general activity within building and construction. Whereas increased requirements on energy efficiency of HVAC units is expected to have a further positive impact on the demand for Grenges products in the longer term. The demand for materials for specialty packaging is relatively stable in its nature and reduces some of the cyclicality and seasonality in the product portfolio. Sales to other niche applications are largely driven by the general economy activity. That said, in this product category, there are also several very interesting applications with very high growth potential that may be new core markets for Grenges in the future. Good examples of these are, for instance, our products for renewable energy electrical vehicle batteries and green transformers. As I mentioned earlier, all our key markets developed very positively in the first quarter. If we start by looking at the geographical dimension, we can see that demand for Granger's products increased the most in Asia. This is driven by that Asia, and in particular China, was the first to face COVID-19 already in January last year and is consequently the first region to also recover. Year over year, the demand for our products increased by 39% in the Asian market. Also, the European and South American markets show clear signs of recovery, growing by 12% and 8% respectively in the quarter. Demand for our automotive products increased by 22%, globally compared with last year. This was driven by increased light vehicle production and continued restocking activities at customer level. For comparison, IHS estimate that the global light vehicle production increased by 14% in the first quarter. The semiconductor shortage currently experienced in the automotive industry did not have a material impact on our sales in the first quarter, but we expect it to impact the second quarter to a larger extent. Demand for HVAC product increased by 11% in the first quarter, driven by a continued increase in HVAC unit production and an increased market share for Grenges. Demand for specialty packaging material remained stable on the same level as in previous years, whereas demand for materials to other niches increased by 16% in the first quarter. Those of you who listened to our year-end presentation may recall that we, despite COVID-19, did a record year in Americas in 2020, and that quarter three was our best quarter so far for our American business. That record is now broken. In quarter one, we achieved an all-time high sales volume of 63,000 tons, a record operating profit of 191 million SEC, and the highest margin ever with an operating profit of 3,000 SEK per ton. We established ourselves with own production in North America market in 2016 through the acquisition of Noranda. On the chart to the right, you can see how we have managed to grow and improve the business since. Our America's team has so far managed to grow the sales volume by 25% and double the margin since the time of the acquisition. This is quite an achievement. and we are highly determined to continue on this route. At the end of March, the upgrade of the third and final rolling mill in Newport was completed, and the first coil was successfully rolled on April 20. Commissioning of the mill will take place during the second quarter, and commercial volumes of thin-gauge foil are expected to start ramp-up as of third quarter. This means that both the investments undertaken to increase the rolling capacity in Newport and Huntingdon have now been successfully completed. To meet the continuously increasing demand from North American customers, we have, during the first quarter, taken a decision to invest 33 million USD to expand our aluminum casting operations in Huntingdon. When completed within two years, this investment will enable us to increase the capacity utilization in our rolling and slitting operations even further. At the end of April, Gränges Corning will have been part of Gränges Group for six months. During these months, we have worked closely with our new Gränges colleagues in Poland to integrate Corning into Gränges. The integration work progresses according to plan, despite the challenges and travel restrictions due to COVID-19. And I'm very pleased with the development I've seen so far. From a financial perspective, Gränges Corning delivers as expected in the first quarter with a sales volume of 24,000 tons and an adjusted operating profit of 49 million Swedish kronor. As you know, we are currently investing in a further expansion of the production capacity in Gränges Corning. The expansion project will further strengthen our capabilities and increase the annual capacity by 40% to 140,000 tons. The investment will enable growth within current niche market, such as automotive hex, but also electrical vehicle application, as well as specialty packaging. But it will also add new capabilities for rolling and finishing of hard aluminum alloys used, for instance, in automotive structured products. The investment project is expected to be completed by the end of 2022. and we expect a gradual ramp-up of production capacity going into 2023. Aluminum has an important role to play in the transition towards a circular and sustainable economy. We work to leverage the unique properties of aluminum to develop sustainable products and solutions which aim to improve customers' and end-users' sustainability performance. Our materials are, for example, used in lightweight vehicles, energy-efficient buildings and resource-efficient packaging, which are all vital applications for the future. Grenges' strategic priority is to offer customers sustainable product and solution, which have three important characteristics. One, our offering should have a low climate impact and help to reduce climate impacts along the aluminum value chain, for example in customers' manufacturing process or in the use of the end product. Two, our offering should be designed to maximize the use of recycled material as well as eliminate waste in our own operations. And third, our offering should also be purchased, manufactured and used in an ethical, responsible and safe way. To enable the development of sustainable products and solutions, we work through a structured sustainability framework to integrate sustainability into our business and value chain. In the beginning of 2019, we launched sustainability targets to 2025. Since then, good progress has been achieved towards many of these. To reflect the strong performance and to meet the increased requirements from our stakeholders, we have now made upgrades to a few of these targets. We have raised the target for having third-party verified sustainability information available for our products from 80% to 100%. We have quantified the target for renewable energy from a directional target to a target of 20%. We have increased the target for sourced recycled aluminum from 20 to 30%. This confirms our focus on circularity and resource efficiency. We have also quantified the reduction target for carbon emission intensity from sourced metal inputs scope 3 versus baseline in 2017. to minus 30%. This target complements our existing climate target for own operations and purchase energy scope one plus two, which is a minus 25% target. Lastly, we have added a target to have all our sites certified in accordance with ASI's sustainability standards. I'm very proud that we have achieved good progress on our sustainability priorities and that we are now further raise our ambition level. With that, I hand over to Oskar for the financials. Thank you, Johan.

As Johan mentioned earlier, we have from the first quarter this year introduced two new business areas, Grenges Americas and Grenges Eurasia. And the reason for doing this is that we have grown a lot in recent years and we have now a much larger production footprint and a more diversified product portfolio. In order to improve transparency and increase the efficiency, we see that there is an opportunity to group our different businesses based on the production technology and end customer markets. If we start with Gränges Eurasia, it consists of the three rolling mills we have with direct chill casting and hot rolling technology in Finnspång, Kornlinn and Shanghai. In addition to this, it also includes the newly established Gränges powder metallurgy business in Sainte-Avold, France. The largest end customer market for Grengis Eurasia is heat exchanger material for the automotive industry, which represents 71% of the business area's sales volume in the first quarter of this year. Continuing with Grengis Americas, it includes three US rolling mills in Huntington, Salisbury and Newport with continuous casting technology. The largest end customer markets for Grengis Americas is heat exchanger material for the HVAC industry that represents 42% and specialty packaging material which represents 23% of the sales volume in the first quarter of 2021. Grengis Americas also serves as a distributor of heat exchanger material for the automotive industry from Grengis Eurasia on the North and South American market through the Grengis International Business Unit. Starting with the first quarter this year, we will provide breakdowns showing the financial performance of these two business areas. And this replaces the earlier used and less precise split of the Grenges Group into automotive and HVAC and other businesses. That said, to a large extent, Grenges Eurasia matches the previous automotive business, whereas Grenges America is fairly similar to what we referred to as HVAC and other. Worth to point out, though, is that There is automotive business in Grengis Americas and non-automotive business in Grengis Eurasia. Since we have internal sales between the business areas, we have to make eliminations when consolidating the group. These are represented together with some unallocated group costs on the row called other and eliminations in our financial statements. If we look at the sales volume and margin development, we can see a clear improvement on a year-over-year as well as on a quarter-over-quarter basis in the first quarter. In terms of the margin, the groups adjusted operating profit per tonne increased from 2.3 thousand SEC in Q1 2020 to 2.7 thousand SEC in Q1 this year. If we look at the two business areas, the Eurasia margin, excluding Grängerskornen, increased from 1.9 in 2020 to 2.9 in 2021, and the corresponding development for Americas is 2.6 to 3.0. An important driver behind these improved margins is the improved capacity utilization that is approaching 90% for the group in the quarter. And this is true for both the Americas and the Eurasia businesses. In addition to the higher capacity utilization, the most important drivers behind the positive development are slightly higher average conversion price, improved metal management, and continued good cost performance. And this is, of course, a good development in itself. But I would still like to highlight two important items that have a significant negative impact when comparing the year-over-year margin development. First, as you can see on this slide, Grenges Corning has a below average operating profit per ton of 2,000 SEC in Q1. This is a good representation of the performance that can currently be expected from Corning operating in a Grenges context. As you may recall, we have previously guided for a full year operating profit per tonne of 1.9000 SEK for Grengeskornen. If we exclude Grengeskornen, the adjusted operating profit per tonne was 2.9000 SEK for the group in Q1. Second, as we also mentioned in our guidance for the first quarter, we have a large negative impact on operating profit from unfavourable currency development if we compare with Q1 last year. In total, the net impact on changes in foreign exchange rates was negative 62 million SEC in the quarter, and this corresponds to 0.6 thousand SEC per tonne on the margin. If we exclude the impact of corn and of currency to get a better understanding of the underlying performance of the business, the adjusted operating profit per tonne would have been 3.5 thousand SEC in Q1. And that's an improvement by more than 50% from the situation a year ago, and I think that's quite an achievement by the Grenges team. If we look at the first quarter in more detail, we can see that the sales volume increased by 41% to 126.7 thousand tons, and that the net sales increased by 32% to 4 billion SEK. As Johan mentioned earlier, this is a new record level for Grenges. Excluding acquisitions, the sales volume increased by 14% and the net sales by 10%. The main reason for the net sales increased less than the sales volume is FX translation. The net impact of changes in foreign exchange rates was negative 449 million SEC on the net sales compared with the first quarter last year. Looking at the earnings, the adjusted operating profit increased to 342 million SEC in Q1, an increase of 132 million SEC or 63% on prior year. Of this, the acquired Corning business contributes with an operating profit of 49 million SEC. Drivers of this positive development are the increased sales volume and capacity utilisation, Slightly higher average conversion price, improved metal management and continued good cost performance. Depreciation increased within total 22 million SEC, primarily related to corn. As I mentioned earlier, net changes in foreign exchange rates was negative 62 million SEC in the quarter. Items affecting comparability amounted to in total 16 million SEC in the quarter, and this is fully related to the realization of the fair value step-up of the remaining part of the inventory that was acquired as a part of the calling transaction. Including the items affecting comparability, the reported operating profit for the first quarter increased to 326 million SEK. The profit for the period increased to 239 million SEK and corresponds to earnings per share of 2.24 SEK in the first quarter. During the first quarter, the net debt increased by close to 400 million to 3.7 billion SEK. In terms of net debt to adjusted EBITDA, this corresponds to an increase from 2.2 to 2.4 times. Starting from the left, we can see that the cash flow before financing activities adjusted for the expansion investments and acquisitions was negative 55 million SEK in the first quarter. And this is primarily driven by the increase in working capital of 471 million SEK. Of this, about 300 million is a consequence of the sequentially increased business activity that we experienced in the first quarter, and the remaining 170 million is driven by the higher aluminium price that increases the value of our working capital. That said, we're continuing to focus on working capital management and we ended the quarter with nine days less working capital than what we carried a year ago. We've also continued to invest in total 195 million SEK in the expansion of the Grengis business. This 64 million SEK refers to the final payment of the purchase price for the Getek and Disbal acquisitions made in 2020. 14 million SEK is related to the final purchase price adjustment for Kornin, and 117 million SEK refers to the ongoing expansion programs in Kornin, Finnspång and Newport. Before leaving this page, I would just briefly like to touch upon how we currently view the capital expenditure for 2021. Those of you who listened at our year-end presentation may recall that we at that time guided for a full-year capex of around 800 million SEK. With the recent decision then to invest 33 million US dollars over two years in expanding the costing capacity in Huntington, we have to add about 100 million SEC to the 2021 figure. And the new CapEx guidance for full year 2021 is consequently about 900 million SEC at the current FX rates. If we look at the Grengis Americas business area, Johan has already given us some of the most important highlights for the quarter. What we can add here is some more detailed comments on the earnings development. First, the comment I made earlier on the net impact on FX being negative for the group is true for the Americas business as well. 31 million SEC, or half of the total FX impact, is related to Grengis Americas. With the same FX rates as last year, the Americas operating profit would have been 222 million SEC or 3.5 thousand SEC per ton. Worth to mention here also that the favorable market conditions in especially the US continues to have a positive impact on the pricing side and we see a slightly higher average conversion price in the first quarter. In Eurasia, we saw the largest organic sales increase, 27% year over year in the first quarter. And this is driven by two things. First, this is the part of our business with the largest sales to automotive applications. And the automotive industry was one of the industries that was most impacted by COVID-19 in 2020. And second, China was impacted earlier than most other markets by COVID-19. And this is also where we've seen the most rapid recovery in the first quarter. When we add the 24,000 tons delivered by Konin, we get a total growth for grain ratio of 89% over prior year. Similar to Americas, we have the same negative 31 million sec FX impact in Eurasia. And with the same FX rate as last year, the Eurasia adjusted operating profit would have been 224 million sec or 3.1 thousand sec per ton. So a very strong underlying improvement in the Eurasia business as well in the first quarter. With that, I hand over to Johan that will provide an outlook for the second quarter and the summary of the first quarter.

Thank you, Oskar. Although the COVID-19 pandemic continues, some of the uncertainty has cleared and the market demand is currently expected to remain on a healthy level in the coming quarter. For the second quarter of 2021, we currently expect a similar sales volume for Grenges products as in the first quarter. And this goes for all businesses. Grenges Corning is expected to contribute with a sales volume of about 24,000 tons in the second quarter. As I mentioned earlier, we did not experience any material negative impact on our automotive sales in quarter one from the current semiconductor shortage. We do, however, expect this to a large extent in the second quarter, and this has been considered in this guidance. That said, a potentially larger impact from the semiconductor shortage poses a downside risk to this outlook. Moreover, the development of foreign exchange rate is expected to have a negative net impact on profitability when comparing the second quarter to the first quarter this year. Looking further ahead, I strongly believe that we will be able to capitalize on the strong platform we have established for Gränges. With a strong commitment to sustainability, innovation, digitalization, and continuous improvement, Gränges is well positioned to deliver sustainable and profitable growth for the coming years. To conclude, 21 first quarter report. The first quarter was a record quarter for Grenges with a strong market and the all-time high sales volume and operating profit. In total, we delivered a total year-over-year growth of 44%, of which 14% was organic. During the quarter, we have also continued to execute on our growth strategy. We have finalized the upgrade of our Newport facility in America, and we have taken a decision to expand our casting capacity in Huntingdon. The integration of Gränges Corning progresses according to plan. Sustainability is a strong driver and an enabler of our long-term competitiveness and value creation, and we have now upgraded several of our sustainability targets and raised our ambition levels further. Following the recent year's successful growth initiatives, that have resulted in a larger production footprint and a more diversified product portfolio. We have now divided Gränges into two business areas that we will follow separately going forward. Finally, looking into the second quarter this year, we expect healthy market conditions and currently anticipate that the sales volume in the second quarter will be similar to the one in the first quarter. Thank you, and now we open up for questions.