Gränges AB (publ)

Welcome to Gränge's conference call for the second quarter of 2021. Here in Stockholm, it's me, Johan Menkel, CEO, and beside me, I have our CFO, Oskar Hellström. 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'll conclude the presentation with an outlook and a Q&A session. When summarizing the second quarter of 2021, we can look back on another very good quarter for Gränges. We continue to experience strong market across all regions and end customer markets during the quarter. This contributed to an all-time high sales volume of 131,000 tons, which represents an 86% growth over quarter two last year. Excluding the acquired sales volume from Gränges Corning, the second quarter's sales volume was up 51% compared with last year. Here we do need to keep in mind that quarter two in 2020 was heavily impacted by COVID-19 and that comparables therefore are very weak. The adjusted operating profit increased to 309 million SEK, largely driven by higher sales volume supported by continued good cost performance. Cash generation was very strong in the second quarter, and we delivered a cash flow before financing, excluding expansion investment of 334 million SEC. This contributed to that our net debt is now back in the target range at two times EBITDA. During the quarter, we have also continued to execute on our growth strategy. We reached an important milestone in our Finspång expansion project when the first coil was rolled in the new cold rolling mill in the beginning of June. We have also increased our focus on new materials for battery applications and have decided to increase our capabilities in two of our production facilities to meet the increasing customer demand. I will come back and talk more about this shortly. Following the efforts we have made to grow and diversify Grange's product portfolio, we today have leading positions in four key end customer markets. Automotive, representing 42% of our sales volume in 2021. HVAC, with 22%. Specialty packaging, with 16%. And other niches, with 20% of our sales volume. 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, as well as the general lightweighting trends, will have further positive impact on demand for Grengas products. Sales to the HVAC industry in short term driven by consumer confidence and the general activity within the building and construction. The increased requirements on energy efficiency of HVAC unit is expected to have a further positive impact on demand for Grengers 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 economic 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 this are, for instance, our products for renewable energy, green transformers and electrical vehicles batteries, which we'll talk more about later today. As I mentioned earlier, all our key markets developed very positively in the second quarter. If we start by looking at the geographical dimension, we can see that the demand for Granger's product increased the most in Europe. This is driven by that Europe was part of our business where we saw the largest negative impact of COVID-19 in quarter two last year, partly due to the comparatively large automotive business. In total, year over year, demand for our products increased 78% in the European market. Also, the North and South American and Asian market continues to recover, growing by 50% and 41% respectively in the quarter. Demand for our automotive products increased by 75% globally compared with last year. Here we experienced a very strong development of sales in the beginning of the second quarter, but a slowdown in the second half of the quarter. The slowdown is a result of customers cancelling orders or ordering lower quantities as the semiconductor shortage has led to line stops and lower production rates in the automotive industry. We currently expect the semiconductor shortage to have an impact on our automotive sales in the third quarter as well. Demand for HVAC products increased by 51% in the second quarter, driven by a continued increase in HVAC unit production, low comparables and an increase in market share for Grenges. Demand for specialty packaging material increased by 29% in the second quarter. Although the year-over-year increase is lower than for automotive in HVAC, this is actually a better performance since packaging demand did not drop much in Q2 last year. Demand for materials to other niches increased by 29% in the second quarter. As you probably know, we are currently running an expansion and logistic improvement project in our Finspång facility in Sweden. This project has a dual purpose. First, to improve the efficiency, which will reduce both the production cost and the environmental footprint, which will be very important in order to sustain competitiveness going forward. Finnspång is an old facility, and it was not originally built for the type of production that we are running there today. It is a well-managed site, but the production flow is not as efficient as in other Gränges locations. The product we are running will improve the flow and reduce the internal transportation by 80%. We will also replace all diesel trucks used to move products in the plant to modern electrical trucks and automotive vehicles. Finally, we will install new fully automated and energy-efficient annealing furnaces. Once completed, this will be a game changer for the Finspång plant. The second purpose of this project is to expand the current production capacity by 20% or 20,000 tons. This new capacity will target growth in materials for heat exchanger as well as for other products, like for instance battery applications. Unfortunately, we had to put this project on hold in 2020 due to the COVID-19, but we are now back at full speed. And we have reached a very important milestone in this project in early June, when the first coil was successfully rolled on the new coal rolling mill. This is actually the first new coal rolling mill to be installed in Finsbong since the 1960s. And the design and installation is a collaboration between our Chinese and Swedish engineering teams. The investment project is expected to be completed in the second half of 2022 with benefits materializing in 2023. As we have talked about before, Grenges works actively to support the green transition and the electrification of the transportation industry. So far, we have worked primarily in the field of efficient cooling for battery using our leading expertise in heat exchanger material and design. The electrification also creates additional opportunities for Grenges outside of the current product portfolio. For instance, rolled aluminum is used to produce both the cathode and the cell casing for lithium-ion batteries. And the demand for this material is expected to increase significantly over the coming years. With its global footprint of aluminum ruling mills, Grengels has the unique capabilities to serve emerging battery value chains in all geographical regions with high-quality aluminum materials. In terms of market potential, recent estimates suggest that the increased EV penetration will drive the demand for our current core products in the automotive hex, from current about 800,000 tons per year to more than 900,000 tons in 2025. The demand for rolled aluminum products for battery foil and casing is estimated to be at a similar level in 2025, indicating the size of this opportunity for Grenges. We are already today producing test material for battery casing, which we are able to supply using our existing asset base. To capture additional growth in battery market, we have made a decision to invest 100 million SEK over two years to add capabilities for commercial production of initially 10,000 tons of cathode foil in the production sites in Shanghai and Finspong. Over time, we expect battery applications to be a very attractive new market niche for Grenges. Grenges has also recently announced a new collaboration with the primary aluminum and energy company Hydro to reduce the climate impact in the automotive industry, both for heat exchanger and battery applications. Through the initiative, Grenges sourced primary aluminum from Hydro, which has a certified carbon footprint that is less than a quarter of the global average. With the global transformation into a more circular and resource-efficient economy, our customers are increasingly recognizing the importance of using sustainable materials. We see clearly that Tier 1 and OEM customers are focusing on not only reducing their own carbon footprints and emissions from the use phase of the application, but also on reducing the emission upstream the value chain, especially in relation to materials and metals. Sourcing low-carbon primary aluminum produced using hydropower is one of the key priorities in our sustainability and climate strategy, since emission from sourced metal accounts for more than 90% of our total carbon footprint. The collaboration with Hydro reinforces our focus to reduce climate impact along the value chain. And we strongly believe that building close relationships with our customers, suppliers and other business partners is key to support the automotive industry and other end markets to become more sustainable. With that, I hand over to Oskar for the financials.

Thank you, Johan. And as Johan mentioned earlier, we made a strong second quarter and we saw both the sales volume and the operating profit recover compared with the second quarter last year. In terms of the margin, the group suggested operating profit per tonne increased from 0.6000 SEC in Q2 2020 to 2.4000 SEC in Q2 2021. If we look at the two business areas, the Eurasia margin, excluding Grengis Cornyn, increased from negative 0.9 in 2020 to positive 1.9 in 2021. And the corresponding development for Americas is 1.9 to 3.2, which is also the highest margin to date for Grengis Americas. An important driver behind the improved margins is the improved capacity utilization. This is around 90% for the group in the quarter. And in addition to this, the most important drivers behind this positive development are slightly higher average conversion price and continued good underlying productivity and cost performance. This is, of course, good development, but I would still like to highlight some important items that have a negative impact when comparing the year-over-year margin development. First, as you can see on this slide, Gränges Corning has a below average operating profit per tonne of 2,000 sec in Q2. This is a good representation of the performance that can currently be expected from Corning. And as you may recall, we have previously guided for a full year operating profit per tonne of 1,900 sec for Gränges Corning. If we exclude grains corning, the adjusted operating profit per ton was closer to 2,500 SEC for the group for Q2. Second, as we also mentioned in our guidance for the second quarter, we have a large negative impact on operating profit from unfavorable currency development if we compare with Q2 last year. And in total, the net impact of the FX changes was negative 36 million SEC in the quarter. And thirdly, the second quarter is also impacted by extraordinary cost items of 10 million SEK related to fire in our facility in Newport and 7 million SEK related to repayment of COVID-19 associated government grants in Sweden. If we exclude the impact of corning, currency and extraordinary cost to get a better understanding of the underlying performance of the business, the adjusted operating profit per ton will be closer to 3,000 SEC in Q2. If we then look at the second quarter in more detail, we can see that the sales volume increased by 86% to 131,000 tons and that the net sales more than doubled to 4.6 billion SEC. As Johan mentioned earlier, this is a new record level for Grenges. Excluding acquisitions, sales volume increased by 51% and net sales by 74%. And the main reason for that net sales increased more than sales volume is the increasing aluminium price. The net impact from changes in foreign exchange rates was on the other hand negative 429 million SEK compared with second quarter last year. Looking at the earnings, the adjusted operating profit increased to 309 million SEK in Q2, 267 million SEK higher than in prior year. Of this, the acquired Corning business contributes with operating profit of 48 million SEK. And drivers of the positive development are, as I mentioned before, the increased sales volume and capacity utilization, slightly higher average conversion price, and continued good underlying cost performance. That said, we do see some increased inflationary pressure in the quarter in, for instance, the cost for packaging material and transportation. Depreciation increased within total 19 million SEC, and that's primarily related to Grengis Cornyn. Net changes in foreign exchange rates was negative 36 million SEK in the quarter. There are no items affecting comparability in the quarter, and the profit for the period increased to 226 million SEK, and earnings per share increased to 2.12 SEK in the second quarter. During the second quarter, the net debt decreased by 160 million SEC to 3.5 billion SEC. And in terms of net debt to adjusted EBTA, this corresponds to a decrease from 2.4 to 2.0 times. And that means that we are now back into our target range of between one and two times EBTA on a rolling 12-month basis. As you can see on this slide, we had a strong underlying cash generation in the second quarter and the cash flow before financing adjusted for the expansion investments amounted to 334 million SEK. That corresponds to an operating profit to cash conversion of 108%. We have continued to invest in total 94 million SEK in the expansion of the Grenges business through the ongoing programs in Kornin and Finnspång. During the quarter, we also distributed 117 million SEK to our shareholders. Needless to say, I'm very pleased that we are now back to a debt level within our target range. And I'm also happy that we managed to get there in a quarter where we also paid the dividend to our shareholders. If we look at the Grengis Americas business area, we continue to experience a strong market activity in the second quarter of 2021, driven by a strong underlying market demand combined with a continued market share increase. In total, the sales volume in the second quarter increased to 69,000 tons, which is 10% above the volume in the first quarter. And this is also the highest sales volume in an individual quarter so far for Grengis Americas. The adjusted operating profit for the second quarter increased to 219 million SEK, which corresponds to an adjusted operating profit per ton of 3.2 thousand SEK. The improvement in operating profit was driven by increased sales volume in combination with a slightly higher average conversion price, whereas additional cost of 10 million SEK related to the Newport fire had a negative impact. Net changes in foreign exchange rates were also negative by 27 million SEC in the quarter. And without the cost for the fire and the same FX rates for last year, the Americas operating profit would have been 256 million SEC or 3.7 thousand SEC per ton. I think this indicates that our Americas business has a very strong momentum right now. That said, we also had some challenges in Americas during the quarter. And as you know, we recently finalized the upgrade of the third and final cold rolling mill in our Newport plant. And we were just about to start the second phase of the sales volume ramp up. In late May, the second rolling mill in Newport that has been in operation since early 2020 was damaged in a fire. Luckily, no people were hurt, but the damaged mill is expected to take between six and nine months to rebuild. And during this time, the Newport facility will once again operate with two instead of three mills. And this means that the current production level in Newport can be sustained again. but that the volume ramp-up originally planned to take place in the second half of 2021 will be delayed into 2022. The mill rebuild will be covered by insurance, and currently no further cost for this, in addition to the 10 million SEC that we've already taken in the second quarter, is expected going forward. Also, Grengis Eurasia continued to experience a strong market activity in the second quarter of 2021, although not as strong as in the first quarter. As Johan talked about earlier, the demand from the automotive industry was initially strong, but softened towards the end of the quarter due to increasing impact of the semiconductor shortage. The sales volume in the second quarter reached 70,000 tons, which represents an organic 65% increase over the second quarter last year, but a 10% decline over the first quarter this year. The adjusted operating profit for the second quarter increased to 136 million SEK corresponding to an adjusted operating profit per tonne of 1.9 thousand SEK. The operating profit includes cost of 7 million SEK related to the repayment of the COVID-19 associated government grants in Sweden and net changes in foreign exchange rates was also negative with 8 million SEK in the quarter. In addition to the year-over-year performance, I think it's also worth to briefly look at the development from the first to the second quarter. As you can see on the right on this slide, the margins is coming down slightly from 2.6 thousand sec per ton in Q1 to 1.9 in Q2. And key contributors to this are obviously the sequentially lower sales volume, the grant repayment and the FX that we mentioned. But in addition to this, the Eurasia business is where we see the largest effect of external cost increases on transportation and packaging material due to that this is where we have the overseas export business. On a more positive note, the integration of Grengis Corning continues to move forward according to plan. And since Grengis Corning has a broader product portfolio, it was less impacted by the softening automotive demand in the quarter. And we continue to deliver a stable sales volume of 24,000 tons and an adjusted operating profit of 48 million SEK. And we expect to see a similar performance from Grengis Corning in the third quarter. With that, I hand over to Johan who will provide an outlook for the third quarter and a summary of the second quarter.

Thank you, Oskar. Although the COVID-19 pandemic is still ongoing, the market demand is generally anticipated to remain on a healthy level in the coming quarter. Typically, the third quarter is a seasonably weaker quarter than the second quarter, and we do expect to see this pattern also this year. Given the still somewhat unusual market situation, it is however not really possible to say if what we see is seasonality or if it's an effect of the sequential slowdown in the automotive sales due to the impact of the semiconductor shortage. That said, we currently expect the sales volume in the third quarter to be lower than in the second quarter by low to mid single-digit percentage. Moreover, increased cost for strategic projects will have a negative impact on the profitability when comparing the third quarter to the second quarter this year. Looking further ahead, I strongly believe that we will be able to capitalize on the strong platform we have established for Grenges with a strong commitment to sustainability, innovation, digitalization and continuous improvement. Grenges is well positioned to deliver sustainable and profitable growth for the coming years. To conclude the 2021 second quarter report, the second quarter was a record quarter for Gränges with a strong market, all-time high sales volume and solid increase in operating profit. In total, we delivered a year-over-year growth of 86%, of which 51% was organic. Cash generation was very strong in the second quarter and this contributed to that our net debt is now back into the target range at two times EBITDA. During the quarter, we have also continued to execute on our growth strategy. We have reached an important milestone in our expansion and logistic improvement project in Finsbom and have taken a decision to invest to increase our capabilities for production of cathode foil for batteries. Sustainability is a strong driver and enabler of our long-term competitiveness and value creation. The recently announced collaboration with Hydro on low-carbon aluminum is a good example of how we are helping our customers to reduce their carbon footprint from sourced materials. Finally, looking into the third quarter this year, we expect a healthy market condition to remain. As most of you know, this was my last presentation as Grangell's CEO. And it has been fantastic 18 years for me at Gränges. I've had the opportunity to work in several roles and different parts of the Gränges global organization. Starting in Finnspång as a global key account manager for Gränges Japanese customers. Then I moved to Shanghai for heading Gränges Asia, a very important and expensive phase for the company. In 2012, I moved back to Sweden to become the CEO of the company. And during the last eight years, Gränges has achieved a lot. And I just wanted to mention a few important accomplishments. In 2014, Gränges returned to the stock market at Nasdaq Stockholm and received several long-term shareholders. In 2016, we did the acquisition of the US-based company Noranda, which was important as we broadened both our geographical position and our product portfolio. Then I also want to highlight our latest acquisition, Aluminum Corning, which suits us very well. Together, we create a strong platform for optimizing the product mix and for sustainable, profitable growth in Europe. We have also expanded and upgraded our plants in Finspong and Shanghai with new capacity and capabilities. And during the years, we have strengthened our automotive and HR core markets and broadening the portfolio by creating new core and customer markets. And throughout the years, Grenges has tripled capacity and sales. We have also developed new products and deliver high value products and services to our customers around the world. One future product is our aluminum powder that will be used for 3D printing products. Finally, Grenges success depends on our strong company culture and company values, but most importantly on our great people. My colleagues throughout the whole organization, you have been very instrumental for the success of Grenges and where we are today, and you will continue to be. I would also like to thank our customers and shareholders for your trust and support. And with this, I leave the floor open for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, you have to press 01 on the telephone keypad. We have a first question from Gustav Sverin from Handelbank. Please go ahead.

Yes, thank you very much, operator. Hello, Johan and Oskar. If we start with your automotive volumes in the quarter, when you say that this is weakening a bit towards the end, can you say anything about... sort of exit rate versus the quarter as a whole and and perhaps related to that when we look at your volume guidance for q3 should we view that as fully explained by lower auto volume so relatively flat a track or is there you know still some lower seasonality in q3 that's my first one

Good morning, Gustav. It's Oscar here. I think it's a very valid question there. I think when we look at automotive in second quarter, it started off very strong. It ended fairly strong as well, although not as strong as it started. I think that's maybe the... way to look at it but of course if we look sequentially how it developed we see some 5-6% decline sequentially in automotive from quarter 1 to quarter 2 and of course that's the net of the full quarter. Looking ahead a little bit into the third quarter, I would say that the automotive product segment is really where we do see the big changes quarter to quarter. We expect basically all the other market segments to remain fairly stable and that the underlying demand remains fairly strong. So we have a guidance. for the full quarter of a low to mid single digit percent on sort of overall sales volume. And if you look at how to get there and back calculate, I think that the automotive impact and assuming everything is fairly stable, I would say that you have a mid single digit decline for the automotive there from a sequential perspective.

Perfect, very clear. The second, if we look at profitability, America is looking very strong again, but I'm a little bit surprised on the margin contraction in Eurasia sequentially, even though we have lower auto volumes. Conor is now on par with sort of the old Genghis, and again, yeah, auto volumes are done, but for Eurasia, you look to have lower FX headwinds versus Q1, and mix looks better than Q4 when we had sort of similar EBIT per tonne. You mentioned this lower conversion price. Perhaps you could mention a few words on how much that is impacting, how much is cost inflation, and is there anything on top of these $7 million that is disturbing the picture in Q2?

I think that the most significant, I mean, if you look at the cost base and how that develops, let's start with the sales. Obviously, the largest impact quarter to quarter there in terms of profit comes from the lower volume. And as you clearly point out, Gustav, it's largely automotive related because it's in Eurasia where we have the largest automotive business. If you look at the cost structure, It is fairly similar quarter to quarter, but there are some differences. And in addition to the one-off items and the FX there that I highlighted, we also do see some inflationary pressure here quarter to quarter. From a good viewpoint there for Grenges, of course, our largest raw material cost is for aluminium. That's a pass-through by contract to our customers. So it's still sort of a fairly limited impact, but we do see higher costs for transportation and packaging material specifically. And that's a driver sort of when you look at the quarter-to-quarter performance in Eurasia as well.

If we look at your earnings in Q3 sequentially, just to be very clear, we should, of course, have this negative mix impact on EBIT per ton due to the auto volume. But on top of that, these strategic extra costs that you're referring to, could you just say a bit more on what that refers to and perhaps the size of those as well?

to time you will do larger strategic type of projects and and we have in the past had these type of costs as well for graying us we typically don't say exactly what it is but but to give you a little bit of flavor what this project specifically is about it's very much connected to our sustainability agenda and i think the cost to expect here It's around 10 to 15 million SEC and you should certainly view that as a one-off cost item for Q3.

Perfect. And then lastly on this 100 million investment you're making in the oil business. You mentioned the market size of 900,000 tons by 2025. I'm a bit curious to hear your ambition in terms of market share here. And I didn't quite get the timing. Did you say this is supposed to be up and running within two years?

I can give you some more flavor on this, Johan, here. Yes, I mean, the whole opportunity for Grengis within the battery segment is fairly big, actually. And as you said, around 900,000 tons of demand in 2025 in a market where we basically are not in today. So it's basically the same size as the... other market our core markets for heat heat exchange materials and we are very active here and and we are working with basically all large battery producers globally to deliver test material in casing and also we are developing this cathode foil which is actually the most demanding material and the cathode foil will really be the heart of the battery production and Grenges has very unique capabilities to serve these products to these global customers in all regions. So, of course, looking forward, we see that Grenges has a very good opportunity to reach a similar market share that we have in Europe. in the heat exchange metal for combustion engine. And so that gives you maybe some more flavor. I mean, it's overall we are entering into a growing market here, which requires really demanding products with high technical expertise.

Yeah, and just to add to that, to your question on timing there also, I mean, this is 100 million that we have sort of dedicated over a two-year time period to the battery foil segment. And we do expect to start to have some of these capabilities available already early next year. And then we build additionally throughout 2022 on this as well.

Okay. Okay, great. Thank you. Good luck in the future, Johan.

Thank you. Next question from Eric Palten from Nordia. Please go ahead.

Yes, hi there. I'm hanging on to Gustav's question there regarding the increased costs, et cetera, and you mentioned there 10 to 50 million, I guess. for the one of cost items for the Q3. And is it so then that we shouldn't look upon this in terms of sequential EBIT development going down in Q3? It's just those costs that are incurred in the actual quarter. Is that correct?

I think, yes, those costs are to be viewed as a one-off item in third quarter. And I think in terms of guidance, of course, we are guiding for a little bit of a softer market on the automotive side, a little bit lower sales volume, although a fairly normal seasonal pattern, if you wish. And then you can always argue if there is a seasonality in 2021 or not, as Johan said earlier. In terms of cost structure, excluding this very specific one-off item that we are guiding for, I think it's fair to assume a similar cost structure in the third quarter as in the second quarter. We do expect to have some. additional negative effects as well, but not as much as we have seen in Q1 and Q2 this year. So I think in terms of cost, Q2 is a fairly good sort of starting point for your Q3 estimate.

So then we can expect still a sequential improvement in Q3. Do you expect that?

You mean in terms of earnings, or?

Yes, adjusted EB.

Well, we do expect to see the sales volume coming down. And of course, that is the largest driver of the earnings. So based on that, I wouldn't necessarily expect to see earnings increase sequentially. But I would say probably rather quite stable.

Okay, and my final one is on the current available maximum capacity now in North America, which you have. How many kilotons is that at the moment, actually, and what is your current capacity utilization?

No, I think in... In North America, I think you should view it as that we have 200 in Huntington, 40 in Salisbury. We should have had 20 in Newport, but unfortunately then due to the fire, Newport should currently be viewed as around 10,000 tons of capacity, which adds to a total of 250. And... In terms of capacity utilization, we have an average of around 90% in the group in the second quarter. US or Americas is above the average, and Eurasia is slightly below the average.

All right. Great. Thank you very much, Johan. Good luck. Thank you.

Thank you. Next question from Oskar Lindström from Danske Bank. Please go ahead.

Yes, hello. This is Oskar Lindström at Danske Bank. First off, Johan, just thank you for taking Gremius on a very impressive journey. And I think, you know, especially the Conan acquisition has been, seems to be very well executed and also well-timed expansion. So best of luck in the future as well. A couple of questions for me. The first one here is on the automotive volumes, where you're saying now that you're not only sort of, as I understand it, a slowdown in the market, but actually you mentioned cancellation of orders. And my question is, is this slowdown accelerating or has it accelerated also, you know, obviously throughout Q2, but also going into Q3 or is it more of a drop and now we've seen it and you feel confident about where the volumes will end up for the third quarter and I presume also we'll see these lower volumes in the fourth quarter. Could you say a little bit more about that? How deep, how long and kind of what confidence level do you feel around this automotive market?

It's Oscar here. I can start a little bit, and then Johan can add to that from a more commercial perspective. But if we just look at the developments we have seen, we saw a slowdown, as we said, in the second quarter. Some customers cancelling orders, and that happens from time to time, of course. But when we do look into the third quarter, We see the automotive market continuing to decline from the second quarter, but not necessarily from the demand level that we saw in the second half of the quarter. So from that perspective, it's more stable. Whether or not it will be stable. stable going into the fourth quarter or not, I think it's a little bit early to say here. It's not necessarily easy to have that type of visibility at this point because there are so many different things impacting here in terms of shortages of semiconductors as well as other components for the automotive industry there. So But looking into the third quarter, we expect to see more or less the same demand levels that we saw in the second half of the second quarter. So fairly stable from that perspective.

Yeah, I can just add on comment to that. I mean, it's really the cancellations are very much due to the shortage of the semiconductors. But you can also say that there are a lot of activities on the customer side in validation for new programs, etc. So there you see a sign of a healthy market, more you mean mid to long term. But right, short term, of course, there are some cancellations.

And are you able to shift volumes which were initially intended for the automotive market to other segments, or that doesn't work?

Yes, I mean, we can do that. Of course, they always required some lead time, very much depending on what kind of product there is. But of course, for some parts of the product, we can shift to other markets if the automotive market should be a little bit weaker for short term. So we have that flexibility and we also historically have been doing that successfully. So I think that is one of the strengths in our capability and it's also in our global footprint.

Because other markets seem to be rather strong, so that's why I was wondering if you could use this free parity, so to say, for these markets. Finally, I just want to ask about the synergies in the Conan acquisition. You say there are synergies, but you haven't given us any numeric guidance. what's related here on synergies from the common acquisition?

No, that's a good point, Oskar, and there are certainly many different types of synergies there, and I think we have talked about the types of synergies before, but the synergies that we do see short-term and expect to see short-term are primarily synergies on the sourcing side, and there we have started to implement those, but In terms of timing there, it was a little bit unfortunate for us that we closed the acquisition so late in the year, because as we also talked about a little bit earlier, metal is our largest sort of input and it's primarily metal. there that we can get the large scale effects. But due to that we closed so late in the year, a lot of the metal contracts for 2021 were already negotiated. So many of the synergies that we have sort of negotiated now and so forth will come into play in 2022 and onwards on the sourcing side. But that said, there are realized synergies already, but they are a little bit smaller to the nature.

And sorry, those synergies should show up in the Corning results primarily?

Show up both in the Corning result as well as in our Finspong result, because synergies are impacting both ends here, right? It's basically the European footprint that we are trying to optimize here.

the comment there I mean sorry the synergies are also maybe Oskar mentioned that but it's also related to productivity synergies but also later on to more of a sales synergy where we have the ambition to basically slightly change the customer portfolio of the Corning plant to address more high-end products going forward right thank you very much yeah that's I'm fine thank you thank you

Thank you. Next question from Carl Boswick from AVG. Please go ahead.

Thank you and good morning. First question, have you seen any differences between the electric vehicle automotive side and the internal combustion engine automotive side, if that is possible for you to distinguish if we look at the sort of core legacy products?

Hi Carl, it's Oskar here. I'm not fully sure what your question is about. Are you thinking more like demand is higher for EV and that type of production is keeping up better?

Yes, that's my question. I understand semiconductors have an impact on both drivetrains, but still it would be interesting to hear if you have any thoughts about differences in demand development.

That is a good point. I don't personally, I must admit, I don't know if you, Johan, have any comments on this.

No, but I think it's the same pattern as we've seen before. There are a large, you know, many activities on the OEM side to, you know, develop the new platform, Volkswagen and PSI and the others, Daimler, and they're all related to EV. So that we are part of that. And we also be part in delivering to some of these platform. And most of them will come into play, you know, from 2022 and onwards. Uh, but also there are, um, expected to be over time, uh, quite good. I mean, or a decent demand on the combustion engine as, as well, actually. So, so we, we foresee quite good, you know, market for, for both bits, but of course, long-term the, the growth, high growth as is really within the EV. Hmm.

And just a brief reminder here, but you have your own global market share, but would it be fair to assume that the kind of overall how the motor market is split now between electric vehicles and ICE is sort of also reflecting your own business exposure? I know you're talking about the increased content per vehicle in the electric drivetrains, but just would be interesting to hear if If you have a rough estimate of the split within automotive going to the different drive chains.

But we have a good question. Basically, we have the ambition and target to have the similar market share for EV as we have for combustion engines. And there is no reason to believe that we should not be able to do that, actually. We have very good capabilities globally and all the customer relations. And, of course, on top of that, we have the new customer segment in terms of the battery producers.

I think it's worth to point out there also, Carl, that if you look at what it looks like today, right, and the current market, the heat exchanger producers to the ICE cars and the EV cars, it's the same type of, and it's the same companies producing the heat exchangers for both types of cars. And it's our customers, basically. So from that respect, it's, at this point in time, at least, not very much of a difference to Gränges if it's an EV car or ICE car from a customer perspective.

Understood. And about the rolling mill and the unfortunate fire, is it one of the, you mentioned Newport, but I mean, is it the new mill that you were about to install that also unfortunately caught fire? Or is it sort of old equipment that had this mishap, which has impacted the overall expansion?

No, I would say yes and yes. There are three rolling mills in the Newport facility, and all of them are originally from the late 1950s. No, they're probably a little bit newer. The plant is from the late 1950s, but these are slightly newer than that. But it's old mills. What we have done in our expansion and project here is that we have refurbished all three mills. And we had just finished the refurbishment of the third and final mill. And then one of the two earlier refurbished mills, unfortunately, then caught fire. So it's old equipment, but it was basically very recently refurbished. Was that the answer to your question there, Karl?

Yeah, exactly. If it was sort of at the time you were about to install the new one, then this accident happened, or if it was the sort of mill that was fully up and running.

It was a mill that was up and running, but if you want to be a little bit positive here, you can say that the third and final mill that we just finalized the upgrade of has the same capabilities as the mill that was damaged in the fire. So basically what happens from a practical perspective is that the third mill will just replace the second mill and we will continue to produce at the same volume level as we did before. The difference is that since we only have two out of three mills in operation, which was the case also prior to the upgrade of the third mill, we will not be able to sort of get that final growth ramp up to happen in the short term. It will happen next year after we have basically repaired the damaged mill and... So you can sort of view this as the business will be stable, the final ramp-up will be delayed some six to nine months while we repair the mill.

Understood. And about partly this aspect and also the 10 kilotons in cathode foil expansion, how should we think about timing during next year? Will both of them be sort of impacting volumes towards the second half for the Newport fire situation? Can you mitigate that already during the first half?

I think that we should be able now, depending a little bit on how quick we can rebuild the Newport mill. But I see no reason why it shouldn't be rebuilt and finalized by the end of the first quarter. And then, of course, you need some time to sort of commission it and so forth. What we know right now, I would say it's fair to assume that the ramp-up that we plan to take place now in the second half of this year, it will probably be able to start in the second quarter of next year. In terms of timing of the battery foil... This has of course to do with adding capabilities to be able to produce this and this is something that happens. right now and then we will gradually of course bring these new capabilities into production but then of course this is also an area where we will need to do a lot of validation similar to what we do with our heat exchanger material and so forth and we're validating new customers so I think it's a little bit early to say when exactly we can start to see commercial volumes ramp up here but I would certainly hope that we can see some commercial volumes from primarily from our Shanghai facility then that is sort of the ones that are furthest ahead here and that that would come in next year. But I think it's a little bit early to say once we are sort of ready with customer qualifications and so forth.

Understood. And just to sort of recap your comments on Q3 profitability, if we look at EBIT per tonne, EBIT per ton Q3 compared to Q2 what do you think will be the main drivers? Just a sort of brief recap would be very helpful.

I think there are four items there, right? I think you do expect to see a slightly lower sales volume, which we all know is a very important driver of the EBIT. I think that you can say that we do see some negative year-over-year effects as well, although not as big as in first and second quarter. I think in terms of the cost base in general, if you exclude one-off type items both in Q2 and in Q3, I think it's fair to assume that the cost base will look fairly similar in the third and the second quarter. And then finally, we do guide for these strategic project costs in the range of 10 to 15 million. That will be a one-off type item in Q3. And then... I think if we add all that up, it's something that everyone can do for themselves, I guess, and come up with an impact. But these are the four main drivers I think it's worth taking into account when looking ahead in the third quarter.

Understood. Thank you. And Johan, thank you for the interaction and best of luck going forward. Thank you.

Thank you. And last question actually registered from Matt Smith from Kepler Chevrolet. Please go ahead.

Yeah, hi. Thank you. A couple of questions there. Coming back to this automotive guidance, I mean, demand for new cars and so on and inventories are low at car producers. And do you have this shortage of semis? Would you say that there is a sort of, could you say something about the inventories in your part of the value chain? Are there sort of a concern also, or is it more that you have seen some sort of production stoppage impact and so on?

It's a very good question there, Matt. And I think that, I mean, obviously, we are not an automaker. We are a tier two supplier, typically. So we are, I mean, there is a little bit of delay between the demand for Grengel's products and the automotive production. I think that... We have talked about automotive in slightly negative words today and say that, okay, we do expect to see the slowdown into Q3. But to your point there on inventories and so forth, I mean, if you look at the year-over-year sales forecast for light vehicle production forecast, latest IHS numbers, it's more or less stable compared with Q3 in 2020. Whereas if you look at our guidance saying that we expect the the Q3 numbers to be slightly lower than Q2, that means still that we expect to have a year-over-year growth in automotive demand for Gränges in the range of 20% or so. So, of course, that indicates that... there is something happening with, with the inventory here, maybe in the supply chain and, and, uh, that there might be either, uh, some kind of restocking activities expected in, in Q3, uh, here. Uh, but I think it's also worth to point out here that, that sort of from a year over year perspective, we expect to grow more in automotive than, than the underlying light vehicle production is expected to grow.

Okay, great. And then, uh, I mean, you have this new customer segment of battery producers, and do you see the same sort of market share opportunity there compared to what you have with the heat exchangers producers going to the automotive segment?

I mean, we are starting from a very low level and for some of the components like for casing and cathode foil over time, we can expect that, but not for all the parts of the battery. But I mean, we have to bear in mind that this is basically a market that we are not at today. So we are very optimistic in that sense. But we are also just to give you some more flavor. I mean, in several of these battery products, we are passing different test steps here. So we are passing different at the customer side with good results. So we're also learning, you know, with this new customer type, what is the requirement, et cetera.

And I think it's... Just to add to what Johan said there and indicate, of course, that there are different types of rolled aluminium products for batteries and the cathode foil and casing are the ones that we believe are fitting Grenges capabilities the best, right? And there we think we will have the largest market share potential in the medium to long term.

Do you see new competitors there or is it sort of a new area of growth?

No, we don't see really new competitors. Of course, some of the existing players are also working with this. But I think one more time to stress out the opportunity we see within casing and cathode foil. I mean, cathode foil really suits our global footprint very well in terms of the mill size and width. And in terms of casing, we have a good sustainability offer, which is very important for these products. I think in that respect, Grenges has a very good position to capture growth.

Okay, great. And then about HVAC, I mean, in the US, you saw a pretty good, surprisingly strong market last year, gradually during the quarter. Is it sort of too early to say that you will see a similar development this year, or are there other issues like capacity and so on that hinders you from making the same, well, serving from the same positive performance as last year?

No, I think the HVAC market in general is performing very well. And looking into third quarter, we expect to see a continued strong market. And all jokes aside here, it's certainly not a disadvantage to Grengis that it seems to be very hot in North America right now. And that typically drives growth. consumers to upgrade air conditioning equipment and so forth and that of course everything else the same that's positive for the HVAC demand so we expect that to have a positive development I mean it was positive in second quarter and we expect it to continue to be positive in the third quarter Okay great alright thank you very much and Johan good luck with your new

new work at Latour. Thank you for your help.

Thank you very much. All right. If there are no more questions, I would like to conclude this session. And thank you, everyone, for participating today. As usual, we received good and interesting questions. And for those of you who would like to listen to our presentation of the third quarter report for 2021, it will take place on the 21st of October. In the meantime, I would like to wish you all a great summer. Thank you and goodbye, everyone.