Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this presentation of Grenges' third quarter results for 2021. My name is Jorgen Rosengren. I'm the CEO for Grenges since the 1st of October this year. And with me here I have also Oskar Hellström, our CFO and Deputy CEO. And together we'll be taking you through this presentation today, which if you're on webcast, you can see on your screen. And if you are not on webcast, it's available on our investor relations external web page. The agenda for today is to go through first the Q3 results in terms of performance and important events, and then to dig a little bit deeper into the financials. After that, we'll speak about the outlook for the fourth quarter, and after that, we'll open up for Q&A, which you can ask over the telephone lines here. So Q&A at the end. Turning then to the first page of the presentation and summarizing the third quarter, we saw that Good growth. We saw a good profit increase. We saw very good progress in our strategic initiatives. But we also saw a very challenging environment and we're expecting a challenging outlook for the fourth quarter of this year. In terms of demand, there was generally, as most people know, quite a good economic environment and good demand throughout. But we also saw a rapid slowdown in the demand for automotive products relative to earlier this year, which we'll talk a lot about later during the call. In total, though, we still had growth. Sales volume increased by a full 37%, which is due partly to the growth in demand and also partly to our recent acquisition of Grenges Konin. Adjusted for that acquisition, we had 11% organic growth year on year. But that then is compared to a relatively weak third quarter of 2020, where we still were seeing effects from the COVID pandemic and the demand picture. If, however, we compare with the second quarter of 2021, it was a negative sequential growth of approximately 10%, which we will go into full detail about in a moment, but has to do again with the automotive slowdown and also some other factors. The operating profit, however, rose to 219 million SEK, a relatively strong result. But in that number, we are also seeing some rather severe cost effects on prices for raw materials and other things. And they are now starting to impact our cost base. And here I'm not speaking about aluminum because the aluminum price is passed through to our customers, although it does, of course, influence our revenue figure and our cost of capital and our working capital and therefore our cost of capital. But I'm more speaking about the prices for energy and for freight, which had a large impact in total on our profitability in the quarter. And we expect this cost pressure to continue also into the fourth quarter. Very positive, however, is to see the progress that we're making on our strategic initiatives, and there I'm speaking both about the capacity and productivity investments that we're making in most of our units, but also about the progress on sustainability initiatives, where we have some good things to report for the third quarter. As most of you know, Greng has a very strong position in four key end customer market markets. And also actually quite strong customer relations in all of these markets that we can now benefit from. Starting with the largest one, that's automotive. And in automotive, as you know, the short-term demand is very tightly tied to the production of light vehicles in our case mostly. But longer term, we see good growth opportunities in this segment, for instance, due to the shift from gas or gasoline or diesel powered light vehicles to vehicles that are driven by hybrid drive or by battery drive. Second largest segment is HVAC and there the short-term growth is dependent on customer confidence of course and also on construction and there in this segment we see now quite good demand and quite good also outlook. In this segment we're mainly focused on Americas and in those customers and in that end market there is right now a very good demand. In fact we could probably sell a bit more than we do if we had more capacity. Then we have specialty packaging, which is a very stable market segment and much, much less cyclical than our other market segments. So that's good because it brings some stability to our base. And finally, we have other niches accounting for about 20%, which grows or shrinks as the general economy grows or shrinks. Right now it's growing, but also has some very, very interesting growth opportunities in it. For instance, in the area of battery for a battery application, for instance, for cars. And across these market segments and across our various regions where we're active, you see on this picture here that the growth was good generally. And it was actually good more or less all over. But again, this is in comparison to relatively weak third quarter of 2020. Looking at the regions, there are some clear differences between them. On this picture, you can see that the strongest growth is in Europe, but then you have to take into account that Europe was also the hardest hit of our regions last third quarter in 2020, because we were still then in Europe battling through the end effects of the COVID pandemic on our industrial base. Whereas in the other regions, there was less of an effect of COVID in the third quarter of 2020, and therefore the growth figures look weaker this year because of a stronger base than relatively speaking. However, if we look across the regions and talk more in absolute terms, the strongest demand we're seeing right now is in Americas and again in HVAC and also other segments there. And whereas in Europe and Asia, we're hit harder by the slowdown in automotive than in Americas. And globally, as you can see, we had an 11% growth year on year. Looking at the end customer markets, it's also different. The HVAC, as I spoke about, very strong demand. Other niches, very good growth, specialty packaging quite stable. Whereas in automotive, we also saw growth, actually, 8% year on year. But automotive is the segment that was the hardest hit last year by COVID-19. And this 8% growth is growth over a week quarter. But if you, on the other hand, compare it with the second quarter of this year, it's in fact a shrinking market. It shrank by about 13% relative to the second quarter of 2021. And why is automotive shrinking? It's shrinking because our volumes are shrinking because we're shipping less and we're shipping less because our customers are canceling orders and because they're postponing orders to Q4 later. And they are doing that because the automotive production has gone from a very strong growth in the second quarter to a very weak, in fact, negative growth in the third quarter. And that's happening, as most of you no doubt know, because of the generally global shortage of semiconductors and also other components. That's hitting our end market, which in this case is light vehicle manufacturing. And we expect, like we said before, this to remain at this level also during Q4. So if we take all these factors together, we saw a sequential volume decline from the second to the third quarter. And there were a couple of factors that influenced it. One was this auto decline that I've now mentioned several times. And there you can compare, for instance, with the IHS forecast for Q3, which came in at something like minus 12% or so. So that's more or less the same order of magnitude that we had in our volume decline. Positively, though, good demand in other markets and other segments. But on the other hand, we also had temporary production disturbances in our Americas unit. And because that unit is now running at very, very high utilization levels, very near to its capacity ceiling, such disturbances are then hard to pick up on during the quarter. And that volume then needs to either be postponed or in some cases maybe lost. And also, of course, it's so that the third quarter generally is a seasonally weaker quarter than the second quarter. All these taken together then led to this minus 10% sequential volume decline from the second to the third quarter. On a very positive note, however, we have made in the quarter very, very good progress on many of our strategic initiatives. And on this page, you can see some of the investments that we're making into increasing our capacity, increasing our productivity, but also increasing efficiency. or decreasing, rather, our environmental footprint in our different sites. So in Grengeskonen, we reached a very important milestone when we rolled the first coil in our new cold rolling mill there during September, in fact. And we also cast for the first time in our new casting complex there. And these investments will both lead to more capacity and the fullness of time, but they will also lead to better control of our scrap flow and better ability to control the alloys and the scrap content of our product, which is an important strategic sustainability target for us. In Finnspång, we are overhauling the entire implant logistics in a very dramatic way. And there we reached our first milestone by finalizing the first phase of this project, which will continue throughout 2022 before it's completed. And when it is completed, it will have added something like 20 000 tons of capacity if you assume at least the same mix and it will have improved our productivity significantly and it will have reduced our environmental footprint by for instance reducing the amount of or eliminating the need for diesel truck traffic in the in the plant And in Huntingdon, we broke ground, as you can see on this cheerful picture, for our new casting center there, which is wholly needed, not because it will so much increase capacity, but because it will make us less reliant on supply of cast semi-finished goods that we now procure at relatively high cost. and often from overseas. So this too helps us control the scrap flows much better and helps us improve productivity and also our cost level quite a bit. So in total, these things constitute quite a solid platform for continued growth and productivity increase. And it's very pleasant as a new CEO to see the competence and the dedication with which the Grange's team completes these actions under also otherwise quite tough conditions. And it's also really good to see that there is yet, I haven't met anybody who is not super confident about the outlook for our various units, partly as a result of this crisis. long-term commitment to growth and to further productivity improvements that's manifested in these investments. So really quite encouraging I have to say. Turning then to another very important area for growing is quite a strategic one, in fact, is sustainability. And we made good progress in the quarter, for instance, also on things like scrap. But maybe externally most visibly is this sustainability-linked bond that we launched in the third quarter. In fact, I was given the pleasure of announcing or starting the trading of the bond on the 1st of October, my first day at work. We're the first Swedish company to launch a sustainability-linked bond on Nasdaq. And this particular bond then of 600 million is part then of a new framework that we've also launched for green bonds and sustainability-linked bonds and financing in general, which is quite a big work item that we're quite happy to have concluded now. The interest rate of this bond is a case of us putting our money where our mouth is as the saying goes. So if we do not reach our sustainability targets, then we will pay a higher interest rate on this bond than otherwise. And that shows our commitment to reaching those targets in 2025 that we now communicated earlier this year externally. It was also quite encouraging, I have to say, to see the investor confidence in this bond and therefore also the confidence in us reaching those targets. The bond was heavily oversubscribed. And it was a case then of picking the investors, of distributing the volume that we have over the investors that showed interest. And especially we got positive feedback on the fact that we are linking this bond to our scope three target. carbon or carbon emission or carbon equivalent emissions which not many companies do and where we really are a leading company in the materials industry so that felt good also and those were my comments on the operational let's say more strategic issues that we had in the third quarter and there i would like to turn over to you oscar to take us through the financials for the third quarter before we turn to the outlook

Thank you, Jørgen. As Jørgen mentioned, we did improve both sales volume and operating profit in the third quarter if we compare with the same quarter last year. Still, if we look at the margin, the operating profit per ton decreased from 2.3 thousand SEK in Q3 2020 to 1.8 thousand SEK in Q3 this year. And as you can see on this chart, the year-over-year margin decrease is partly due to geographical mix changes and the impact of Grenges-Konin. If we look at the two business areas, the Eurasia margin, excluding Konin, increased from 0.5 in 2020 to 1.1 in 2021. And the corresponding increase for Americas is from 2.6 to 2.7. I will come back and comment more on the two business areas later. Looking at Gränges Konin, it currently has a below average operating profit per tonne of 1.2 thousand SEK and in Q3 this distorts the comparison somewhat. If we exclude Gränges Konin, the adjusted operating profit per tonne was about 2.1 thousand SEK for the group in Q3. If we leave the year-over-year perspective and instead compare the third with the second quarter this year, we can see a reduction in both sales volume with about 10% in operating profit and in margin. This quarter-to-quarter development, it really follows the regular seasonal pattern for the graying business. And I would say that in a normal year, this would not stand out as unusual in any way. But that said, I don't really think we can consider this year to be fully normal in that sense. So it's worth to look at the sequential development as well, especially since it will also have an impact on the outlook for the fourth quarter that Jorgen will come back to later. An important driver behind the lower margin in Q3 than in Q2 is the lower capacity utilization following the lower sales volume in the automotive part of the business. Capacity utilization is just about 80% for the group in the quarter compared with 90% in Q2. In addition to the lower capacity utilization, the most important driver behind the margin reduction is the increasing inflationary pressure on, for instance, energy and freight costs. And as you may recall, we did see effects on this also in the second quarter, but this has increased further during the third quarter. And we currently expect to see this continue going into the fourth quarter as well. If we look at the third quarter in more detail, we can see that the sales volume increased by 37% to 119,000 tons and that the net sales increased by close to 80% to 4.6 billion SEK. Excluding acquisitions, sales volume increased by 11% and net sales by 51%. The main reason for that the net sales increased so much more than the sales volume is the increasing aluminium price. net impact of changes in foreign exchange rates was on the other hand negative 14 million compared with the third quarter last year if we look at the earnings the adjusted operating profit increased to 219 million sec in q3 16 million sec higher than prior year of this the acquired coin in business contributes with an operating profit of 27 million sec and the operating profit was positively impacted by increased sales volume higher average conversion price and positive effects from metal management. As just mentioned, though, significant inflationary cost pressure related to primarily energy and freight had a negative impact on the operating cost development in the quarter. Cost for strategic projects amounted to about 10 million SEK and net changes in foreign exchange rates had a negative impact of 16 million SEK in the quarter. Depreciation and amortizations increased within total 73 million SEK and of this 27 million SEK are related to KONIN. And important to point out, it also includes 40 million SEC that relates to a write-off of assets damaged by the fire in Newport earlier this year. But those 40 million SEC are fully met by revenues for insurance compensation. And the net impact on the operating profit is therefore zero from this item. It's a one-off item for the third quarter. There are no items affecting comparability in the third quarter. The net profit for the period increased to 153 million SEK and earnings per share remained stable at 1.44 SEK per share in the third quarter. During the third quarter, the net debt increased by 280 million SEK to 3.8 billion SEK, corresponding to 2.2 times EBITDA on a rolling 12-month basis. As you can see on this slide, the increasing net debt is primarily driven by the negative cash generation in the third quarter, with the cash flow before financing adjusted for expansion investments of negative 135 million SEK. But what you can also see is that this is driven by a working capital increase and that in turn is fully related to the increasing aluminium price. The aluminium price has increased further by 25% during the quarter and is now at the level of 3,200 US dollar per tonne. And this is a level we haven't seen since 2008. And this further increase will continue to have an impact on Grange's working capital, also in Q4, and will partly offset the expected seasonal working capital release. During the third quarter, we've continued to invest in total 85 million SEC in the expansion of the Grange's business through the ongoing strategic initiatives or programs that Jörgen mentioned earlier. If we look at the grain is America's business area, we continue to experience a strong market activity in the third quarter. We did, however, also experience temporary production disturbances impacting the bottlenecks in primarily the Huntington plant. And when we are running at close to maximum utilization, as we're doing in Americas right now, it's very difficult to make up for time lost in production. And that means that reduced or lost capacity is immediately translated to lower sales. And in Q3, we lost about 4,000 tons of sales due to these production disturbances. Despite these issues, the sales volume in the third quarter increased by 8% to 64,000 tons. The adjusted operating profit for the third quarter increased to 172 million SEK, which corresponds to an adjusted operating profit per tonne of 2.7 thousand SEK. And the improvement in operating profit was driven by the increased volume further supported by higher average conversion prices. Also in Americas, the operating costs increased due to the inflationary pressure, but also partly related to the higher maintenance costs due to the production issues that we faced in the quarter. The fourth quarter is typically the seasonally lowest quarter for Granges, and this is also when we schedule most of our major maintenance activities. And 2021 will not be any different in that respect. This year, we will, however, need to do more extensive maintenance activities in the Huntington plant than what we would do a normal year. As a consequence of this, we will need to close part of the Huntington operation for a longer period of time in December. And this will lead to about 8,000 tonnes less available production capacity in the fourth quarter. Also, Grengis Eurasia continued to experience a positive demand development year over year in the third quarter, but with the sequential slowdown compared with the second quarter, then driven by the lower auto demand. The sales volume in the third quarter reached 61,000 tonnes, which represents an organic 22% increase over the third quarter last year, but a 14% decline over the second quarter this year. The adjusted operating profit for the third quarter increased to 69 million SEC, corresponding to an adjusted operating profit per tonne of 1.1 thousand SEC. And the improvement in profits was primarily driven by the increased volume in combination with some favorable effects from improved metal management. Operating costs increased due to the inflationary pressure on energy, but primarily on freight for the Eurasia business. And the reason for this is that in Eurasia is... where we have the overseas export business and and that is then the one that is most impacted by the higher uh freight costs that we see in the world right now net changes in foreign exchanges at a negative impact of 13 million sec in the quarter on a more positive note the integration of granger's corning continued to move forward according to plan And since Grenges Corning has a broader product portfolio, slightly less impacted by the slowdown in automotive demand in the quarter, and Corning delivered a sales volume of 22,000 tonnes. On the more negative side then for Corning, we do see a large impact from increasing central European energy prices. And as we mentioned earlier, the adjusted operating profit for the quarter reached 27 million SEK. As we heard from Jörgen earlier, we did also reach two important milestones in the expansion of Corning in September. The first coil was successfully rolled in the new cold rolling mill and the first metal was melted in the new casting furnace. With that, I hand over back to Jörgen for the outlook and a summary of the third quarter.

Yes, okay, so starting with Outlook, then, we have mentioned automotive several times during this call, and as you can see on this graph, the forecast automotive production, in this case, the sources, IHS, is that the negative organic growth of automotive production light vehicles will prevail also during Q4, which, of course, impacts our sales. And as a result of that, we're forecasting a 10% negative organic sequential growth in the fourth quarter over the third quarter. I'll get back to you soon with some more details on that. We're also seeing some very sharp cost increases. This is familiar information for most of you, I assume. For us, the energy and freight are the two most important components in the short term, at least in the third quarter. And there we saw throughout the third quarter, but also into the fourth quarter, continued increases, especially of natural gas. And natural gas is important for us in all of our sites, but especially important in Konin. And there we have also the highest effect of the natural gas price in the third quarter. So on this background, then turning to the outlook for the fourth quarter, We have to say it's challenging. Sorry, I'm a little bit lost here. So we have to say it's challenging because the sales volume in total is expected to be about 10% lower than in the third quarter. There are a couple of factors behind that. One is that the demand continues to be good for many end customers. But on the other hand, like we said, there's going to be a low demand for automotive customers. And also volume in the fourth quarter will be influenced by reduced capacity because we're planning to have a more extensive maintenance stop in the Americas. And because again of the high capacity utilization there, we're not expecting to be able to make up for that in other days than when the factory is shut down. Most of that will happen during December. We're also then expecting the cost pressure to continue and even increase during the fourth quarter. And we're, of course, attempting to mitigate that with price increases and we will increase prices, but we do not expect those price increases to fully mitigate the cost impact during the fourth quarter already. And in this context, we have to mention the additives. Now, Grengs, as you know, is a highly technical company, and we have highly technical and very specialized products that are made up mostly of aluminum, but also contain a variety of additives, mostly metals, but also some other elements that help them make the very special technical characteristics of our products the right ones. And for granules, the most important ones are silicon and manganese, but also zinc and iron and magnesium and other metals and other elements. Now, some of these elements, unfortunately, have been experiencing some very, very dramatic cost increases recently. And in the third quarter, for sure, but also well into the fourth quarter. And the most dramatic of those is magnesium. And it serves as a good example then because like many of these other elements, the cause of this very high price increases is dramatic and very sudden supply shortage. And it in turn then has to do with other bottlenecks. And in the case of magnesium, then it has to do with the shortage of energy and especially electricity in China, which has then influenced the output of the Chinese magnesium industry. And the Chinese magnesium industry is by far the biggest producer of magnesium in the world market. And that has led to very low inventories of magnesium in Europe, and therefore also price increases. Now, these price increases, but also the shortages, are a problem for Grange's in the short term. But they're also a big problem, actually, for the aluminum industry as a whole, and also for the automotive industry as a whole. So where this will end, it's hard to say. It will be for sure a topic for these calls, but also for many other companies throughout the fourth quarter and into 2022. Who knows? Of course, we all hope that this bottleneck will be resolved and that more normal levels will prevail because this kind of volatility is not really good for anybody. Our focus, meanwhile, is on putting in place a long list of mitigating actions. And the most important of those are, of course, price increases, because when our costs go up, we have to increase our prices. And that's also what we're doing. But we can also do other things. And our customers, of course, require that we do what we can to mitigate this cost effect. So, for instance, we're working a lot on improving our recycling so that we can reuse scrap that has these elements in them. For instance, in the US, we're working quite hard to recycle more of manganese holding aluminum so we can use that instead of virgin manganese, so to speak. And we're adjusting, of course, or attempting to adjust and substitute these alloys with other alloys that have the same characteristics or nearly the same characteristics, but do not require exactly these metals then. And that requires, of course, a very tight cooperation with our customers and our suppliers and our operations to make sure that all these things mesh. So a lot of work, in fact. Now, turning to the summary then of the third quarter and the outlook, we can say that we have in fact a pretty good demand picture and for sure a very, very strong recovery from last year's very tough situation with the COVID pandemic. But we are also experiencing a severe slowdown actually of the automotive sector in particular relative to earlier in this year. Nevertheless, we saw in the third quarter increased sales volume and we saw an increased profit, all good. Even though the sales volume was quite significant, 37%, I believe, total growth, it was, however, then negative sequential growth relative to the second quarter of 10%. We are seeing an increased effect of the general inflationary environment that we're experiencing in most of the places where we're active. And that is now starting to impact our cost base. We're offsetting that with price increases, but we have not yet succeeded to offset it completely. Positively though, we're making very good progress on our strategic initiatives, and I spoke about some of them here. Maybe most interesting for the external world are the things that we are doing on the sustainability front, which is becoming an increasingly important topic for us and for our customers and investors. But internally, we think quite a lot about the efforts that we're putting into increasing our capacity, our productivity, and to reduce our own sustainability-related carbon footprint. And there, as I said, we're seeing good progress. The near-term outlook is challenging, and for that we need to take action. And the actions we need to take are in the near term to intensify our efforts, to increase our prices to the customers, to work on, as always, on cost efficiency and to work on productivity. And longer term, we're taking this opportunity to review the strategies of both of our business areas so as to make sure that we are going to be able to meet our long-term target of having a 15% to 20% return on capital employed. but also to meet the strategic targets that we set out for sustainability and have now also committed to in economic terms to reach by 2025. Now, given our very stable and global customer base, which carries within it a lot of very interesting growth opportunity, given Greg's strong team and given the strong efforts we're putting into this, we have, in fact, every opportunity to succeed, both short-term and long-term. And that's also what I think will happen. I mentioned the team finally, and I think that's good to end on that note. Grengis has a strong team, and in my experience now, short experience, I should say, in Grengis, also a very competent team and a very committed team. And I think that team is showing now what it can do because we're battling at the same time some short-term volatility in cost and in demand. which requires a lot of work internally to reschedule, to talk to suppliers, to work with customers, to work through these things. And at the same time, we're working on our long-term strategic projects in an exemplary way, I think a really impressive way. And for that, I'd like to thank the whole team and say, keep it up. We're going to need a bit of an effort in the short term. But if we make that effort, we're also going to be successful in the long term, I have no doubt. So thank you for that, and also thank you, ladies and gentlemen, for listening, because now then it's time for questions, if you have any. And operator, we are now ready then to take questions.

Thank you. And if you have a question, please press 01 on your telephone keypad and you will enter a queue. Our first question comes from the line of Gustav Schwerin from Helensbanken. Please go ahead.

Yes, good morning, everyone. A couple of questions. If we start with your Q4 guidance, looking at your auto volumes in Q3, they grew 8% organically, so you clearly continue to outperform light vehicle production. Looking at Q4, then I guess you expect that to revert in order to get to your volume guidance. Basically, what I'm looking for is how much autos is expected to contribute to the 10% lower volumes for the group. That's my first one.

Yeah, Gustav, thank you for joining. Your line was a little bit bad, so it was not entirely clear to me exactly what the question was, but I understood it to be how much of the 10% is due to Otto. Yeah, do you want me to repeat? No, no, no, no, please. No, I heard you well, but it was a bit scratchy there. And I think it's like so that, of course, we don't give details on exactly what comes from where, but the main factors influencing the sequential decline are, number one, auto, number two, capacity relative to the Americas in particular. And those two factors together make up that 10%. Now, of course, we're seeing year-on-year a negative auto-expected production volume of 20%, but that's a year-on-year effect, not a quarter-and-quarter effect, right? So those numbers are not entirely comparable, and that's why maybe that question arises.

But at least if I look historically, I mean, rolling quarters, you've correlated very well with electrical production. And I mean, the first three quarters of this year, there has been a clear outgrowth. And I mean, I guess that implies some sort of restocking in the customer chain. So I mean, just to get to your Q4 volume guidance, I need to apply more than the IHS forecast on light vehicles, if I assume that you have these production restraints in the US as well. Based on my question, should we be closer to global LVP in Q4 than we've seen so far this year?

It's Oskar here. I think the effect that will have a bit of an impact here also that we see already is that there are inventory ahead of us in the supply chain. So basically, many of our customers have fairly high inventory levels of Grange's products going into the fourth quarter. And even though there may be a sequential pickup in auto production, let's hope for that, it means that there is still some inventory that sort of can be reduced before increasing orders from Grangis again. And this, in combination with it being a fourth quarter towards year end, the typical pattern for year end is that many of our customers are focusing on reducing inventory levels for the year end close. And the combination of this leads to a slightly more softer outlook for our sales than to automotive, maybe than what the auto production itself has in hand for fourth quarter at this point. But also it is an uncertain environment. So to some extent, I guess we have to wait and see a little bit here.

Yeah, okay, fair enough. Just finally on that topic, if we look at your HVAC, demand Q4 and Q3. I mean, seasonally adjusted, do you see a sequential improvement in HVAC for Q4?

We see that we could probably sell more than we do if we had the capacity. So for us, the issue right now in HVAC is not so much the demand development, but rather our ability to supply the demand. And right now in Q4 then, specifically, we have an issue because of this quite necessary maintenance activity that we're planning, especially for Huntington. But longer term, we're quite positive about the outlook for HVAC. Because when we have the capacity, we expect to be able to sell it not only in Q4, but also in the beginning of next year.

Then secondly on cost inflation, if we look at the profitability per ton year over year, can you quantify how much the direct dilution effect was from cost inflation and how much was the slower utilization level. And then if you can say anything about how much worse you expect this to be in Q4.

It's a good question. I would say like this, that if you look at the external cost increases that we've faced quarter three versus quarter three last year, adjusting it for FX and volume and so forth, we're looking at some 60 million SEC that the costs are increasing due to external costs. drivers and it's primarily energy and freight that we are talking about them

Regarding the outlook for Q4, I guess the jury is out also, right? I mean, we're working ourselves through some very, very volatile times here with both energy and freight, but also now these alloying metals being so volatile, it's really hard to know what the cost pressure is going to be during Q4. But right now, where prices stand now, it's not going to be better, but worse.

Okay. And then just lastly, if you can remind us how much of your contract basis is up for renewal by year, and I'm thinking to offset cost inflation.

Firstly, I don't think we should completely look at it on a contract-by-contract basis because the situation is so volatile and so unusual also that we need to work with other means than only the contracts, right? So we are working, of course, on surcharges for freight and surcharges for energy, and potentially we'll also have to work on surcharges for these shortages. And I think generally in the industry right now there is a good understanding that the situation is unusual and that unusual measures are... Then when it comes to the contract base, we have, especially with the acquisition of KONIN, we have there a large portion of the sales are actually not contracted longer term, which is sometimes a negative, but today a positive, because that means we can affect the price increases quicker there. In the Americas, we have mostly long-term contracts, but those are also constructed so. And also because of the big demand picture, good demand picture there and shortages, we have been able to pass on price increases there. So the most difficult situation we have with the automotive customers in Europe and also what we export then to the Americas is And there we're in close contact with each of those customers. And our basic idea is that we are going to have to pass the cost increases on to them one way or the other. But you're right to point to it because it is, of course, a factor there that we have generally long-term contracts and that those contracts do not always provide for this situation that we're now in.

Okay. Thank you very much.

And the next question comes from the line of Victor Hansen from Nordea. Please go ahead.

Thank you. Hope you can hear me. So I saw in your annual report that you used just about 20% of your aluminum, that that is recycled. And that means that about 80% is new metal. And you also alluded to the recycling to mitigate some of the magnesium effect and other additives. So I'm wondering, basically, How much can you change this mix and how will it help you to mitigate the negative effects on your output from the additives impact?

Yeah, and the latter part of the question, we don't know. That's something that's a work in progress right now from the additives because it's such a recent development. But when we say 20% scrap, then we mean external scrap, right? And external scrap is something that we buy in externally, whereas we also have quite a big portion of our metal management has to do with managing internal scrap in a good way. And there, the more we cast ourselves and the more we can be efficient and smart in how we plan our production and also our portfolio of products that we sell to the portfolio of customers that we have, then we can manage that more efficiently. And that then means that we don't have to sell scrap externally that can be other usefully employed in our operations. But specifically on these alloys, then we have to hunt down exactly the right type of scrap and then close that loop. And that's quite an effort. And it will be possible to some extent, but we don't know now to what extent. And it may influence our total external scrap usage then also.

Yeah, okay. But if you don't find the correct additives... then I would assume that you can't produce. Please correct me if I'm wrong. And are there any meaningful ways for you to mitigate the additive impact on your output?

Well, there are many meaningful ways. First and simplest is, of course, to raise the price. And when it comes to magnesium, most of the magnesium or almost all the magnesium we use, we use in Klonin. And there it's used for products that go to customers with whom we do not have these long-term contracts. So there the price is going to have to go up. And not only we, but everybody else in the industry is going to have to raise the price on everything that contains magnesium. End of story, so to speak. But nevertheless, we can do things to mitigate there too, because there we can try at least to replace those alloys and those products with others that are similar in nature but do not contain magnesium. Manganese in the U.S. is a bit of a different story. There the question is more one of very close cooperation with our customers to make sure that we can recycle their scrap back. which now has become, of course, much more valuable because it contains manganese, and to recycle it back into our production. So the story is complicated and a little bit different for each customer and each alloy, but the whole team is working on it, and we think that we have good mitigating efforts and actions in place. Nevertheless, a challenge.

Yeah, okay, understood. But I'm more worried about the actual supply of additives rather than price for magnesium, for instance. And just to clarify also, the additives are not indexed in the contract as the aluminum price is. So you are actually impacted by this short term.

We're generally speaking, wherever we have long-term contracts, generally speaking, there is not protection. But it should be noted in the context that magnesium is not subject to long-term. I mean, our magnesium alloys that we sell are not subject to long-term contracts. So there we have complete liberty instead of when it comes to the price. And then you asked about supply. And of course, yes, everybody who is trying to get magnesium right now will have their hands full and so will Grange's. And then we'll see how that plays out. We're actually more worried because we have inventory of most of these metals. We're more worried when it comes to magnesium in particular. We're more worried about its impact on the automotive production longer term. because that can be then something where we cannot really control and where we don't have the team to deal with that. Somebody else has to deal with that. And there, of course, we could be impacted by a further decline in the automotive industry. But I'm also generally, I think, you know, you have to be positive in life, and I think that somebody will solve this problem one way or the other.

Okay, great. It's good to know that you have some inventory, at least. And then a final one from me. So, Oskar, in your previous answer, you mentioned external cost inflation and you mentioned the number 60 million due to energy and freight. Is this the full year impact or the quarter impact in Q3? Thank you.

Yeah, 60 million is the quarter three impact versus quarter three last year. So it's not the full year, it's the quarterly impact. And it's basically all external cost increases. So it's not only energy and freight, although energy and freight are the two by far largest items in there.

Thank you very much. That's all for me.

And the next question comes from the line of Oscar Lindstrom from Denske Bank. Please go ahead.

Yes, hi. Three questions from my side. Some of them may be touching on what's been discussed already. The first one is on Americas and the nature of the production disturbances that you had in the quarter, and could they sort of continue, or have those issues been resolved? And is there any link between the production, problems in the third quarter and the more extensive planned maintenance stop in the fourth quarter? And yeah, that's my first question.

Okay, let me try and answer that then first, and then we can get back to question two and three in a moment.

That would be great.

Thank you. So the temporary production difficulties that we had in the Americas in Q3 were twofold. Firstly, we had a planned maintenance stop, which was extended a few days because of some things that were discovered during maintenance. This is quite a normal thing. to happen, but the situation where we are running so close to our capacity ceiling makes those few lost days, lost days. And that then influenced the total volume with something like, I think, 4,000 tons in the quarter that we could not then make up for because of the capacity utilization. And on top of that, we're experiencing difficulties in the Americas to source what we call re-roll. And re-roll is a semi-finished product that we use to input into our downstream operations. And the reason we have to supply that from overseas and at very high cost right now is because of the bottleneck that we have in casting. And that's the exact bottleneck that we're now hoping to resolve with this new casting complex that we broke ground for in the Q3. So those were the two factors there. And the answer to your second part of the question is no, the Q4 maintenance has nothing to do with the Q3 thing. It's just maintenance. And we make maintenance every year, and sometimes it's a little bit more and a little bit less, and this year it's a little bit more. It has to be done because we're running at such high levels that we can't take any risk with the equipment. But once it's done, you close it back up again, and then it runs. So we don't see it as a risk, but it is something that we wish everybody to be aware of ahead of the fourth quarter. Let's go to your second and third question, if that was the answer to the first one.

Thank you. Yes, that was a very clear and good answer to my first question. My second question is on the price increases. I mean, you seem to be indicating that you're not going to be able to compensate for the cost inflation, you know, in the fourth quarter. But when do you believe that you would be able to sort of compensate for price increases, at least the price increases you're seeing now through, sorry, for the cost increases that you're seeing now through price increases? Is this something that we should expect you to achieve? early next year, mid or late next year? What's your best sort of estimate?

It's a good question, of course. In general terms, firstly, Grengis, I think, has a very good history of being able to maintain good profitability levels, good margins, which we measure then mostly as profit per ton over many, many years and through a lot of volatile situations, both when it comes to input costs for materials to energy Of course, we have currencies and the aluminum price and so on. So generally, we have a good track record, we feel, of being able to pass such things on to our customers. Right now, in this volatile situation and with the swings that we have in volume, it's a hard-to-forecast kind of thing. And what we're doing right now is working through each of our customers in each of our units and making sure that we have the price increases in place or getting them in place to offset these cost increases. And some of those will hit already during Q4, others during Q1. And then there may be one or two customers who are very tough customers and who will hold out longer. Who knows? But there, of course, we also have to then almost argue a kind of a force majeure kind of situation, right? So this is very much work in progress. We expect to see good effects of our price increases in Q1. But as you know, we're not guiding for margin that far out in time. And the recent development has also shown, I guess, that it's wise to not guide for margin that far out in time. But we expect to see good effects of price increases in Q1 and whether they will offset the cost situation, then we will report on in Q1.

Great. And then my final question is on, you mentioned something now about reviewing strategies of the business areas. Could you say a little bit more about what that could entail? What kind of a review are you thinking about?

Yes. I mean, we're now in a quarter where we have generally good economic conditions, but we have some short-term issues that we're battling through. And in this quarter, our rolling rosy number is something like 11% or thereabouts. But we have a long-term target of 15% to 20%, and that's also levels that we know we can reach because we reached them for many years, many subsequent years in the past. But since 2019, we've had a kind of a fall off on that, and that's partly due to some profit issues and also partly due to large investments that we've been making. and which have not yet paid off. And what we're now doing is simply going through the plans for each of the units and making sure that there is a good solid plan for coming back to the financial targets which we have communicated externally to the markets. So at least in my book, that's nothing dramatic, but it's something that I think it behooves us to do in the current situation. And it's not so that there is a playbook for that or that we're looking into selling something or buying something or anything like that. This is mostly a question of which customer segments do we play in? What do we do about price? What do we do about innovation? What do we do about sustainability? What do we do about productivity? the exact things that we've already communicated in our strategy. So our strategy framework is fine and now we're just making sure that each of our units has a good plan in place inside that strategy framework to reach the targets that we've set out for it.

Thank you. And when do you think you would be ready to communicate to shareholders some of the details or more concrete actions?

We need to communicate anything because we have a good strategy in place and good targets. But I guess in the natural course of our events, we will get at some points to something like a capital markets day or so. But we have not yet made plans for that. But in the past, I think we've made capital markets days almost yearly, right? Is that the case, Oskar? By yearly, at least. By yearly, at least. So I guess it's time now, I guess, but we'll see.

All right, super. Thank you. Those were my questions. I'm satisfied.

And the next question comes from the line of Kenneth Tull from Carnegie. Please go ahead.

Yeah, so many of my questions have been asked, but a final one then. With the production expansions and the investments you are doing in Conan and Finspong, I was wondering if there have been some delays there. You reported that you've taken important steps, but when can we expect commercial deliveries coming out from the new capacity in Conan and in Finspong?

Yeah, the answer to the first part of your question is yes, there have been delays. And there have been delays primarily because of COVID and because of the staff and the technical people from the suppliers of the equipment and the software and everything that we're using in those places have had difficulty to travel to the places and doing the work they're supposed to do. So in both cases, there have been delays for sure. And the delays are after we have mitigated the delays with a lot of hard work and clever and innovative solutions for managing the projects in the very difficult circumstances. But we expect... In terms of capacity increases, we expect a little of capacity increase in the U.S. already next year in our Newport plant. And it has been delayed. This capacity increase has been delayed by the fire that we had in Newport in the second quarter of this year. That fire is now, we have everything we need to do to mitigate that, but it has put the capacity that was affected by the fire, of course, is now lost for a while while it's being rebuilt. And the new capacity is coming online, but it's making up for the lost capacity rather than adding to capacity. But we do expect a capacity increase in the U.S. starting next year. And when it comes to the large projects in Finnspång and in Koning, we expect full effect from those projects from the start of 2023 and during the year, then a gradual ramp-up.

Okay, great. Yeah, so that's all for me. Thank you.

The next question comes from the line of Carl Bokrist from ABG. Please go ahead.

Thank you. Hi, Jörgen. Hi, Oskar. My first one is just if you could provide some guidance on what you're seeing in terms of maintenance and expansion capex for the next three years would be helpful if it's changed by any kind of amount.

Maybe I should take that one, Carl. It's Oscar here. That was a big question you just asked there. But I will for sure try to answer it. I mean, speaking about CapEx, we've said that what can be sort of expected over time that we have to invest in order to sustain the business or maintain the business, if you wish, is that we need to reinvest some 75% to 80% of depreciation. But that also would include smaller upgrades, smaller capacity expansions and so forth. So that, I think, is a rule of thumb for what can be expected over the years to come. Then, I mean, if you have a three-year perspective, it will very much depend on what actions we would take on and additional sort of investments to make on top of what was already in plan. And that, I think, is impossible to comment on at this point. What we can comment on, though, is that, OK, we have the ongoing investment that Jörgen just commented on. And for those programs, we have around 600 million left to spend before they are all completed. That 600 million, the bulk of that will be spent in 2022. I think that we can... add as well and there will be a little bit of capex from ongoing initiatives left to spend in in 2023. if you take a longer view than that it's it's going to depend very much on sort of what additional investments we may or may not take understood i did just seem to recall that in an earlier conference call we we were talking a bit about you know perhaps expansion capex

close to half a billion for this year and then for next year maybe something like 300 and a bit of spillover in 2023 also considering the battery materials investment you recently announced. Is that the correct way of thinking about it now or how would you look at it?

If you look at 2021, half a billion of expansion capex is more or less what we expect for this year. And then, I mean, if you take, as I said, you have 600 left on existing projects. And if you take the bulk of that, let's say that's half a billion as well for next year, given the pace and sort of the plan that we have for those projects at this point in time.

All right, thank you. And then just to understand a bit of dynamics here, I think you mentioned, Jörgen, that you noted that your customers had a fairly good level of grayness products in their own inventory. Do you think that for the industry as a whole that inventory levels are improving? Or is it just particularly for your products and your competitors' products?

I think the comment was made by Oskar, not me. This is Jörgen. But the comment was referring specifically to the automotive industry. I think not to any other of our industries. And our customers, as you are well aware, no doubt, are the tier one customers who then, in turn, supply the automotive makers. And they have to have inventory because they have to meet production. But now production has shut down in a very... very rapidly, and therefore the inventory that they were supposed to deliver in September is still in their factories. And that means that they don't take out inventory from us, A, because they don't want to pay for it, and B, because they don't have any place to store it. So there is inventory in the automotive tier ones now, which is due to the rapid slowdown of the automotive production. If the production remains on a low level, that inventory will remain there, so to speak. And when the production goes up again, the experience from dealing with automotive customers is that then they suddenly will swing for inventory because they don't have a lot of it. So when we have a corresponding rapid increase in automotive production, then this inventory will burn up very quickly and then Granges will be back on solid growth numbers when it comes to automotive. But the comment was specifically about automotive. When it comes to HVAC, it's rather a question of shortages throughout the supply chain. And when it comes to the industry in general, in Europe and in the US, it's also generally speaking a question of shortages of nearly everything. And these recent spikes in magnesium and so on will just aggravate that situation. So generally, the industry does not have a lot of inventory, but in automotive tier ones, absolutely yes.

All right. My final question is on, we talked now a bit about headwinds going potentially into next year on cost inflation and everything. But if we look on the other side, what kind of factors or dynamics do you see supporting earnings for next year? I seem to recall, for example, in Q420, just looking at the next quarter, you had like 30 million in negative earnings. headwinds related to metal price management. I'm just thinking, should we expect this kind of, you know, plus 30 year-over-year in Q421? And then for 2022, of course, just to understand, will it mainly be about recovering volumes? Will you have any, you know, benefits from improved productivity or any savings? Any color on that would be helpful.

I can take one comment first, just on the metal effect there in Q420. That was primarily the metal management effect between 2020 and 2019. Of course, it's very important to highlight that when you comment on 20 versus 19. But when we look at 2021 versus 2020, okay... Metal management is, as we have talked about many times, always difficult when you have uncertain environments to operate in because it's much more difficult to optimize your metal mix in the cast houses and so forth and so forth. But that said, I think that what we are, of course, striving for is to have a fairly sort of neutral metal impact between the third quarter and fourth quarter this year, if we look sequentially. And if there were any other comments there on the additional sort of, I don't know, Jörgen, if you want to comment on tailwinds.

I think there will be major tailwinds, I think, but many of them will come in 2023. And referring back to Kenneth's question before. And many of the real effects of the capacity increases that we're making and productivity investments that we're making will have most of their effect in 2023. But then that effect is expected to be major. Then we're talking about a significant decrease in our total ability to produce. And if the market is there, we will also be able to sell those at a good price. Right now, when it comes to tailwinds, we're mostly focused on getting price increases out to the customers. That is not necessarily a tailwind because it also corresponds to cost increases, but it's a super important thing for us when we try to manage the result for 2022. to actually get those price increases out there and get them as soon as possible and as high as possible so that we fully mitigate the cost effects that we have. So that's our main focus there. But of course, we will also have to focus on productivity and on general cost efficiency and so on and so forth. But price increases is the biggest swing factor, I think, in the P&L year on year. But it's necessary, unfortunately, also because of the cost increases that it corresponds to. I don't know if it answers your question, but...

Yeah, it does. Thank you. My super quick final one is just on Trillium. I think you mentioned a year ago or so that it might have been a few percentage points of total sales. I was just curious about the development on Trillium products and any indication of how much it is today.

No, it's a good comment there. And we don't have specific sort of comments on exactly how much it is. But I can mention one thing, which I think is very positive. And that is that the Trillium products are coming to very good use in our powder metallurgy business unit that we set up basically last year. that's showing very good and prospective developments in that field. But there are many applications for these, and we are still positive on the future outlook for these type of products.

I visited myself this rather small business unit, which we call GPM, Grengens Part of Metallurgy, and they're also a super competent team and some really interesting growth projects. opportunities there and also interesting businesses also good profitability in fact but of course we're talking there about a relatively small unit compared to the large units that we have and that make up most of our sales and most of our profit as well today so our focus right now is to let that unit continue its growth plan and contribute to growth and earnings in its own way but to make sure that the large units get their full price mitigation effects in place

All right, thank you.

And we have one final question from Matt Fliss from Cadro Chevrolet. Please go ahead.

Yeah, I thank you. Just a couple of quick ones. First, I mean, you have this export of automotive volumes from Europe to U.S., and I was just a bit wondering about the competitive situation in U.S. Are there domestic, U.S. domestic suppliers there that sort of or not detected by freight to the same extent as you are.

First of all, when we say North America, we also include North America, Mexico. And so that we have customers in Mexico to whom we supply and where the same rules do not apply as they do in the U.S. Otherwise, most of our automotive business in the U.S. is our customers that we serve elsewhere in the world, but that we also then export into North America then in general. I don't know if that answered your question. Otherwise, please specify it.

I think the question was also if there is local supply that is not impacted by the overseas freight inflation. And I can just add then that there is a scarcity of domestic suppliers in this field in North America. There is primarily only one domestic supplier of size. That is the supplier that is the market leader for the automotive products in the US. And we are number two in this market. And that player has several other strategic focus areas as well. They're not doing only automotive heat exchanger materials. So it is a business or a market that is in a bit of a scarcity of supply at this point.

Okay, great. The second one was that you mentioned, Oskar, the concentration in the third quarter year of the year. And I got the impression that it will be somewhat higher in the fourth quarter. Was that right?

We do see, of course, that if you look at gas prices or energy prices in general and so forth, the upward trend is continuing to increase. So we are seeing a higher price level going up. out of the third quarter into the fourth quarter than what we saw going basically into the third quarter. So we expect this price trend to continue into the fourth quarter. What will happen during the fourth quarter, it's of course a lot of uncertainty around, but this is at least what we see right now.

I guess we should also say that our expectations here may not be worth so much because of the volatility of the situation. I mean, we did not expect, to be honest, the price development that we've seen on manganese or magnesium a few weeks back, right? We did not expect that now. And we're not macro analysts, right? We're just business people. And what we're trying to do is to make sure our cost increases that we have to take are matched by price increases that we want to deliver. Good.

And just to find out about the magnesium there, I mean, China is a large supplier there, and you're almost seen as a domestic producer in China. And do you think that the supply of magnesium will stay in China? And will you be sort of preferred as a... of a buyer of that magnesium or... Will Granges be preferred?

No, I think the magnesium issue is such a large issue that it's not a question of will Granges be preferred or not. It's a question of how much magnesium will be imported into Europe as a whole. And there I think your crystal ball is at least as good as mine. So we don't know what will happen to magnesium, but we do know that we have mitigating actions in place for our small portion of the magnesium consumption in Europe. And we do know, on the other hand, though, that if something is not done to solve it, then there will be issues in the automotive production downstream. But, I mean, it came quickly, and who knows, it can also go away quickly. At least I do not know.

Okay, thanks a lot.

And as there are no further questions, I'll hand it back to the speakers.

Then I'd like to thank everybody for joining this conference for the Q3 result of Grenges and for the many very good questions that helped us clarify our message further. So thank you for that and enjoy your days. Bye.