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.