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.