Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this fourth quarter earnings presentation for Grengis. My name is Jørgen Rosengren. I'm Grengis' CEO and President, and I'm joined here today by our CFO and Deputy CEO, Oskar Hellström, and together we will be taking you through our presentation of the fourth quarter result. But we will also speak about the full year 2021 and the outlook for this year 2022 and beyond. Speaking first about the fourth quarter, it has to be said that it was a challenging quarter. But it was also a quarter that concluded a year of recovery and of investment. The market was generally quite good, driven by a generally quite good economy. And the only negative in all of that was the automotive market, where, as I'm sure all of you are aware, there have been significant slowdowns in the production of automobiles in the second half of 2021 after a very good first half. driven by general component shortages and other supply chain difficulties, but most of all by the shortage of semiconductors. And that meant that we had a split development for Grengis where the total sales volume actually developed quite well. We had a 9% growth. of which 2% was organic growth then, adjusted primarily for the acquisition of Grenges Konin. But that was then despite a dramatic slowdown, in fact, in the automotive market, which then was more or less compensated for by growth in other segments. What was perhaps even more dramatic in the fourth quarter and something that we spent a lot of time on in our third quarter result update was the very sudden actually and dramatic cost increases that we experienced in various input costs, notably energy, alloying metals and other elements, freight, but also generally everything to do with manufacturing and transport in both the Americas, in Europe and also in Asia. And the total effect of these sudden and unexpected cost increases was something like minus 100 million SEC or so in the EBIT. We partly compensated for that with price increases and with other factors, but not fully. And that's the main reason why the EBIT declined from last year's 193 million SEC for the fourth quarter. to this year's 139 million six, 139. And the 139 is not a result that we can be proud of. And in fact, we're not even proud of the full year result either. But it has to be said in this context that it was nevertheless a record year 2021. We made the highest volume that we ever made and the highest operating profit that we ever made also. So that's why we say that this was a challenging fourth quarter, which concluded a year of recovery. On the positive side, we had a very, very strong cash generation in the fourth quarter. The cash flow increased from just over 200 million SEC to close to 500 million SEC. which is quite good because in the beginning of the year, our cash flow was burdened mainly as a result of the increasing aluminum prices in the world during that period. So it feels good to see that the cash is now coming in in such numbers. Finally, the board has reviewed the full year result and has resolved on a recommendation for a dividend, which obviously will be decided then by the annual general meeting later this year. And the proposal is an increase of the dividend to 2 SEC 25 per share, which is a strong increase from last year's dividend of around 1 SEC 110, I think, last year. We have Grengas, a very good starting point. And the starting point, for instance, is characterized by having a very strong position in what is now a very diversified set of markets. Automotive is and remains an important part of Grengas' sales, but it now accounts for no more than 40% of our total sales. In addition to that, we have over the past year built up a very, very strong position in the HVAC market, the heating, ventilation and air conditioning markets, which we are especially strong in the Americas. And that now accounts for over 20% of sales and also a very profitable market it is too. Then we have a perhaps even stronger position in specialty packaging, where we have both a position now in Europe since the acquisition of Grängers Konin. And that is a good market to be in because it is, of course, less volatile and less cyclical than some of the other markets on this page. So in years such as this, it is an asset really to compensate partly for the shortages in automotive that occurred in the last quarters. And then we also have a very strong position in various other niches. And that is also an area where we expect to generate growth going forward. For instance, in the segment of battery products that no doubt will come up also during this call. So like I said before, going through these segments one by one, we can say that we had a split situation where we had a very negative growth, in fact, in automotive, where Europe recorded, and these are sales numbers, not market numbers, but they reflect, of course, also the underlying markets development. where Europe recorded a 13% drop in automotive, and so did the Americas. In Asia, we had a slightly lower drop, but that also depends, of course, on the comparison with last year. By contrast, you can see an extremely strong growth in HVAC, and that has to be said then that that is a continuance of a trend that has been going on for quite some time. So it's not only a recovery, it's actually a continued good growth after a long period of good growth. And we believe also that the outlook in that segment is quite good also for the future. Then in specialty packaging, too, we had very good growth. The number in Europe is, of course, very high. But there, of course, the absolute numbers are smaller. But nevertheless, an important contribution and compensation for the negative arrow in automotive. And finally, in other niches, we have also recorded good growth rate. The total of all of this represents a minus six growth in Europe and a steady healthy growth in both Asia and America, netting out to the 2%, which we spoke about earlier. So generally, I think a good situation. But of course, under all of this, you also can no doubt imagine that this leads to quite a lot of work because all these swings up and down require a lot of work together with our customers, with our suppliers, and not the least in our manufacturing to meet the customer demands on time and on spec and so on. Turning then to the other challenge, which was especially pronounced in the fourth quarter, we have the various input costs that experienced a very dramatic development in the fourth quarter. and that development in some cases slowed down a bit but in other cases accelerated during the quarter and most dramatic of course are the development for various alloying metals and other additives where you see the very very dramatic development of magnesium during the fourth quarter which has abated and fell back fallen back a bit but still the numbers the absolute numbers are on a very very high level compared to anything that we've seen before And like I mentioned before, the total effect of all of this was about 100 million SEK negative in the fourth quarter, part of which was compensated for by price increases. Our focus, however, is to compensate not partly but fully for these cost increases and not partly but fully for volume deviations or volume fluctuations as well. And that actually is probably what has taken the most energy and work in the fourth quarter out of the organization and also, like I said, our customers and suppliers. And we have focused on strongly on actions in three areas. We have focused a lot of sales and also manufacturing and R&D resources on quickly shifting volumes to markets other than automotive to make up for the loss in that market. Those efforts have been largely successful, but have required, like I said, also a lot of work. Then we are naturally in such a situation we're also focusing very much on cost and productivity actions and as examples of that are the many technical and also commercial things we've had to do to see to what extent we can also compensate the additives cost adders by replacing those materials with other materials or replacing alloys that contain them with other alloys. And most of all, of course, we've had to focus on securing price increases. Grengis has a good position channel with a safe customer portfolio with long customer contracts and long pricing agreements. Generally, that is a strength. In a situation like this, of course, it requires a lot of discussions with our customers about what is the fair and the reasonable way to split these very, very high cost increases that have occurred for factors outside anybody's control. And we think, like I said, that these actions more or less have been successful. We expect to compensate the expected weakness, the expected continued weakness, I should say, in automotive in the first quarter by growth in other markets. And we will come back later as to what that means in absolute volumes, but it is nevertheless a result that we're very happy about. And we expect to compensate a large part, if not every last cent, at least a large part of the cost increases we have taken for energy, for freight, for additives and for other input costs. Pipe price increases, which are now largely negotiated and finalized with our customers already during Q1. leading then to recovery of the margin, which then we hope we will be able to continue all the way into the second quarter as well. And again, in summary, our position is that these changes and these swings have been rather dramatic. And there is, of course, some time lag before you can react to such things. But our position and ambition, certainly, is that grangas should compensate and should be able to compensate always for such fluctuations within a relatively short time span. And with that, that concludes my introductory remarks. And then I would like to turn over to Oskar to talk about the full year of 2021 and also to take you through the fourth quarter of financials. So, Oskar, please go ahead.

Thank you, Jörgen. And before drilling down in the fourth quarter there, I think we should spend a little bit of time on the full year and put this in perspective. And as Jörgen said, we are certainly not satisfied with our performance in 2021, especially not in the second half. But we should also not forget that 2021 is still a record year for Grengis. In fact, we've never sold more products and we've never had a higher adjusted operating profit than the 1 billion 8 million SEC that we delivered in 2021. So as you can see from this chart, we've managed to recover the profit drop we experienced in 2020 as a consequence of the COVID pandemic. Excluding the acquired growth and acquired 156 million SECO profits from Gränges Corning, the remaining Gränges business makes more or less the same operating profit in 2021 as in 2019, pre the pandemic. Still, this profit is generated on a higher volume level, and that means that the margins are not yet fully back to pre-COVID levels. If we leave the full year perspective and look at the fourth quarter, as Jørgen mentioned, we experienced a year-over-year growth of around 9%, but a sequential decline of about 5% from the third to the fourth quarter. If we look at the margin, the operating profit per ton decreased from 1.9 thousand SEK in Q4 2020 to 1.2 thousand SEK in Q4 this year. And as you can see from this chart, there are, however, some clear differences between the business areas. And this is to a large extent driven by to what end customer markets that each business area are serving. For Grengis Americas, with a lower exposure to automotive customers, operating profit per ton decreased from 2.0 to 1.3 thousand SEK. For Grengis Euroasia, excluding Corning, that has a relatively larger share of the auto business, The corresponding decrease is from 2.3 to 0.4 thousand SEK. Part of this development then is driven by the lower capacity utilization following the lower sales to the auto side. And capacity utilization is just above 65% for Grains Eurasia excluding Korn in the quarter compared to about 75% in Q4 2020. For the group the capacity utilization was about 80% in Q4 2020. In addition to the lower capacity utilization, the most important driver behind the margin reduction is the increasing inflationary pressure on energy freight and alloying elements in particular that Jörgen mentioned. And in total, external costs increased by about 100 million SEK in Q4 compared with last year, and only a part of this then could be offset with price increases in the quarter. From this perspective, I would say that Grengis Corning stands out positively in Q4. And as you can see on this slide, the Corning operating profit per tonne increased, both compared with Q4 last year, but also compared with Q3. And a relatively larger part of the Corning business is a spot and short-term contract business. And for this, the price lag for when price increases can have effect is typically shorter. So in Corning, we see the effects from price increases already in Q4, whereas price increases for other part of the business is then expected as to largely come into effect as of Q1, as Jörg mentioned earlier. If we look at the fourth quarter in more detail, we can see then the sales volume increase by the 9% to 112,000 tons and the net sales increasing by 54% to 4.9 billion SEK. Excluding Granges Corning, sales volume increased by 2% and net sales by 45%. And you might think it's a large difference here between the volume increase and the sales increase. The main reason for this is that the sales volume is also increasing with the higher aluminium price. Also the net impact of changes in foreign exchange rates and the positive impact here of 171 million SEC compared with fourth quarter last year. If we look at the earnings, the adjusted operating profit decreased to 139 million SEC in Q4, 54 million SEC lower than prior year. And of this, Corning contributes with an operating profit of 31 million SEC. As just mentioned, the significant inventory increase Inflationary cost pressure is the primary driver here behind the lower profit in the quarter. In addition to that, changes in foreign exchange rates was negative 10 million SEC in the quarter and depreciation and amortization increased within total 13 million SEC and 10 of those are related to Cornyn. The reported operating profit of negative 21 million SEC in the quarter, it includes also items affecting comparability of negative 159 million SEC. Of these, negative 158 refers to a write-down of intangible assets, mainly within IT, and negative 42 are restructuring costs for corporate and European organization, and both of these items are non-cash items. In addition to this, items affecting comparability also includes positive 40 million SEC of insurance compensation for the fire in Newport earlier in the year. Due to items affecting comparability, the profit for the period then was negative 23 million SEC and earnings per share was negative 0.21 SEC in the quarter. During the quarter the net debt decreased by 170 million SEK to 3.6 billion SEK and that's 2.2 times EBITDA. As you can see in this slide the reduced net debt is primarily driven then by the very strong cash generation in the fourth quarter. with the cash flow before financing adjusted for expansion investments of 463 million SEK. This is partly driven by the sequential business activity, and then it's further supported by slightly lower aluminium price, but also, I would say, by very good working capital management throughout the Grenges organisation. During the fourth quarter, we also continued to invest in total 171 million SEK in the expansion of Grengis to the ongoing strategic projects, primarily in Europe and Americas. For the full year, we had a total capital expenditure of 836 million SEK of this project. 380 is maintenance and upgrades of existing assets and 456 refers them to the expansion programs. Before leaving this page, I would just briefly like to touch upon how we currently view the capital expenditure for 2022. At current FX rates, we expect the full year capex to be about 1 billion SEC. It's also consistent with what we have communicated before. Of this, I would say that 60% is expected to be capex related to finalizing the ongoing expansion programs. Majority of that capex will be spent on the recycling and casting center in Huntington and the completion of the Conan expansion. The remaining 40% then will be maintenance type investments to maintain and improve existing assets. Looking then at the business areas and starting with Americas, we continue to experience a strong market activity in the fourth quarter, as Jörgen mentioned. As we've also highlighted before, we did do some more extensive maintenance activities in the Huntington plant, the biggest one in the Americas there, more so than what we would do in a normal year. And as a consequence of this, we had to close that plant for a longer period of time in December, and this led to 8,000 tonnes less available production capacity in the fourth week. But despite this lower capacity, our Americas team still managed to increase the sales volume by 4% year-over-year to 57,000 tons. And all the Americas assets have now been restarted after the maintenance, and all of them have reached a normal level of available capacity by the end of January. The adjusted operating profit for the fourth quarter decreased to 73 million SEC. This is primarily in effect then of cost increases not being fully offset by price increases in the quarter. Finally, a short comment on the status of our Newport facility, where we had a fire earlier in 2021. The rebuild of the mill that was damaged by the fire is progressing well, and we currently expect this to be completed by the end of the first quarter. And thereafter, commercial orders can start to gradually be ramped up during the second quarter. Also, Grengis Eurasia recorded a growth year over year, but a continued sequential slowdown compared with the third quarter, and then this is fully driven by the lower auto demand. The sales volume in the quarter reached 59,000 tons, 6% higher than last year, but excluding Grengis Corning, this actually represents a 9% decline. The adjusted operating profit decreased to 47 million, corresponding to an adjusted operating profit per ton of 0.8000 sec. And this decline is driven really by the lower capacity utilization in combination with increasing costs. On the more positive note, I would say, Grenges Corning improved its performance in the quarter. And this is twofold. It's so that Grenges Corning has a broader product portfolio and that's slightly less than impacted by the slowdown in automotive, which means that Corning delivered a sales volume of 22,000 tons. And as we talked about earlier, the ability to more rapidly compensate cost increases with price increases supported that the operating profit increased to 31 million SEK. This is also the last quarter where we will show the Corning business separately. Starting from 2022, this will be reported as an integrated part of the Grenges Eurasia business area. So summing up the fourth quarter, we can conclude that there has been a challenging market situation on the automotive side. At the same time, almost all other markets continue to show a strong growth in demand. And it's also to these markets that we are directing a lot of our sales efforts for the short term. We continue to experience a highly inflationary environment with increasing costs for primarily energy, freight and alloying elements. This has been battled with strong focus on cost productivity and price increases. Price increases and surcharges have to a large extent been agreed with customers, but due to the price lag we did only see a small effect of this in the fourth quarter. Cash generation was very strong with an adjusted operating cash flow of close to half a billion SEC in Q4. Part of this, the Grange's board intends to distribute to our shareholders and has proposed an increased dividend of 2.25 SEC per share. The strong focus we have on price and cost productivity is expected to have a large positive impact on the margins already from Q1 and then continue to drive a gradual margin recovery during the first half of 2022. With that, I will hand over back to Jörgen that will provide some perspectives on full year 2021 and also a more detailed outlook for the first quarter. Thank you.

Thank you, Oscar. Yes, so 2021, then in summary, as we said already in the beginning of the call, it was a year of recovery after the large disruptions that we saw in 2020 from the COVID pandemic, but also during the beginning of 2021. But it was also a year where we worked very, very hard on investments for the future. The COVID situation and everything that it has led to, including the very large disruptions to the global supply chains and the consequent and following demand swings and also cost swings for various things that we spoke about earlier, we hope now are largely behind us. But we do see, of course, continued weakness in the automotive market going forward. But we are nevertheless quite proud of the work that we've done to meet all these things. It looks easy, but it is hard. It requires a lot of work from everybody, from the operators at the mills, to the salespeople, to the R&D people, to the management, in order to make sure that we are always able to deliver to these, generally speaking, quite demanding customers, while at the same time making sure that we have something to make when the customers don't want product. So it has been a year of hard work in this area and I think largely very successful work. As a result of that, we have also recorded, as Oskar alluded to, a record all-time high volume or all-time high sales by a fat margin. And also by a small margin, an all-time high operating profit, which of course is also something to be proud of under such difficult circumstances. That being said, we're not really happy about the level of the profitability, especially in relation to the capital and especially in relation to the fact that we made a large acquisition last year. And that is then the backdrop to the work that we're going to do now and going forward to reach even higher numbers. What was very good and very nice to see during 2021 was the very, very good cooperation between the Konin team and the other Granges teams throughout the world, and the strong contribution that Konin was able to make to our volume, to our results, and also to developing our future. And part of that was the extremely hard work that has gone into Konin, Finspong, the Americas, and also in Shanghai, into various investments to increase our capacity and our productivity for the future. Most of that work goes unseen in the P&L because many of those new assets that we have acquired, new machinery, is not yet productive and is not yet contributing to our P&L, but it is certainly intended to do so during 2022 and fully from 2023 and on. And that work has also gone very well, and it has been nice to see, like I said, the cooperation between the various teams helping each other out to make those programs a success. And on top of that, we've worked commercially, but also technically to develop new solutions for the very, very exciting things that are happening in the electric vehicle market and in the battery market. Those things, of course, fit together. And there Grengis has a very interesting position, we think, because our expertise in these materials, our expertise in these customers in these end markets, and our expertise in heat management, thermal management solutions for automotive, that expertise is smack in the middle of what's needed for making new solutions for electric vehicles, new solutions for battery makers. And that has been a large focus area during the year, and we've recorded many secret successes, so to speak, in that field. It's also been nice to see that we have now made the first commercial deliveries, and I've also seen a very, very large interest from battery makers, automotive companies elsewhere. in our solution and our expertise, and also secured some contracts. However, this is a long-term project, and the biggest effects of these will be coming not this year, but later. But it is nevertheless very, very important to have this kind of activity going on to secure a long-term growth horizon for Grengis. Finally, sustainability. Sustainability is one of the areas that we're the most proud of in Gränges. And I can say that without boasting because I am new to the Gränges team. And if it's one thing that made me interested in joining Gränges, but also one thing that has... exceeded my expectations on Greng is it's the work that we're doing on sustainability. It is not only ambitious and very quantitatively governed, but it's also very, very integrated into the fabric of what we do day to day. And I think that is important. And one thing that really separates Greng is from the pack in our industry. We have various targets on this, and very important of course is our carbon emissions intensity, and there Grengis is one of the very few companies, very very few companies in our industry, that has had the courage to firstly measure, then set the target for, and finally communicate externally and even tie financing to the target for scope 3 emissions. That sounds easy, but it's a very, very hard thing to do. And we are quite proud of our achievement in this area. And then it's, of course, even more gratifying to see that the carbon emissions go down. In fact, our scope one and two emissions, that's roughly speaking our internally generated emissions, went down by 8%. But our scope three emissions, largely from the sourcing of aluminum from our upstream partners, went down 20% in the year. And that's quite dramatic. Most of that is because we have increased our activities in recycling, which we also believe will be a growth area for grains going forward. We have verified the product sustainability info for 35% of our products. You could ask, why not 100%? But then you have to imagine that every single piece of aluminum that leaves our factories and that is in the 35%, we can say to the gram how much carbon emissions that has led to all the way from the upstream partners that we have all the way through our factory and to the gates. And that's not a small piece of work, but we have, of course, higher ambitions. And by 2025, we believe that we will reach 100% of this. We have, like I said before, increased our source recycled aluminum. We have also, in our own facilities, both invested in expanding our capacity for this and have also used that capacity to a much larger extent in 2021 than before to recycle aluminum. And then we have also various certifications, and two that we want to lift up here is the ASI certification, which we are now going through in both Finspong and in Shanghai. And as part of that, the chain of custody standard, which has to do indeed with finding out exactly what goes where in all of our products in a secure way that can be audited by a third party. And there too, we have secured two out of our sites. Target, of course, is to do this in all of our sites in due course. This is not something that we only talk about internally. It's also something that we use and also invite external scrutiny of. I mentioned before that this is an area that our auditors look into, but it's also an area where various external rating institutes rate Grangos quite highly. Ecovodis is maybe the latest example and something we're extremely proud of that we are now in the platinum category among their companies, which relates to the top 1% of the companies in our industry that are using that platform. And those are many. And then we have also very favorable results from Sustainalytics, it should say. Sustainalytics, yes, it's correctly spelled even, MSCI and CDP. Turning then to the financial performance, we had good growth, as Oskar said. We actually had a bit of an uptick in the ROSI as well, but from a low level. Those who have followed us a longer time know that our target for the ROSI is a 15% to 20% ROSI. We have had that performance for a long time, quite consistently, and we aim to have that performance going forward for a long time, quite consistently. And that means that, of course, right now we're short between 5 and 10 percentage points. I'll get back to that in a moment. Our leverage right now is a trifle high, I guess. But this also contains, as you probably know, some assets that are associated, some debt, I'm sorry, that is associated with leasing and such things. But we think that, well, we still think it's a little high and we hope to get it back in the target range, of course. And we have now also recommendation from the board on the dividend 2.25, which is 40% of last year's net profit. So therefore squarely in the range of 30 to 50% that we have set ourselves for that. Finally, a bit of outlook then. We have started to make a growth plan for Grengis. We call this project Project Navigate. For that project, Grengis has a very, very good starting point, I feel at least. We have strong customer relations. We have very strong technical knowledge. We have a footprint that encompasses all regions, the industrial regions here with the Americas, Europe and Asia. And we have a very interesting portfolio of growth options to look into. As said now a couple of times, the starting point for profitability is unsatisfactory. Now, part of the reason for that and part of the reason for the low ROSI is that we've made very, very large investments over the past two, three years. with the acquisition of KONIN and the associated expansion programs, both in Americas, in Europe, and also in Asia, both in capacity, in productivity, and also in preparing the ground for new growth areas. And like I said before, not all those assets are productive as yet, but we certainly tend to make them productive, and that is part of our good starting point as well, although it's not visible right now in our P&L. We believe that there are some positive factors that influence Grengis' position positively then, of course, going forward. And those include the regionalization of the supply chain that has accelerated during the past two, three years, and not the least during the last year, where many of our customers in Europe, in Americas, and in Asia want a global partner like Grengis, but also want localized or at least regionalized supply of their components. like we can supply. So that's good for us. Sustainability has grown, of course, as a much, much more important factor for our customers now than just a little while ago, not to speak about five years ago. And we feel that we have a strong position there too. In Europe, we can provide probably the industry's best carbon footprint for heat exchanger products. And we are not finished yet, like I said before, with our aims in that area. And finally, we have the whole area of electric vehicles and battery technology, where, like I already explained, we have very many strengths that we can bring to bear. Now, our short-term focus is, of course, to replace the lost auto volume with other volumes and generally to grow our volumes because we have all these investments coming online. Further, to get the price increases out that we haven't yet gotten and, of course, cost productivity. But in parallel to this, we're also making longer-term plans. in all of our regions as well as as a group to get our ROSI back to the 15 to 20 percent target range that we have set ourselves but also to build a stronger and more sustainable company for the future with a very solid plan for profitable growth and we hope to be able to communicate all of this Sometime later this year, we'll see exactly when, either before the summer or after the summer or so, when we have finished our thinking activities on that. Now, more near term, the outlook for the first quarter is the following, that we expect the sales volume to actually increase sequentially quite significantly over the fourth quarter. and to reach about the same level as we had in the first quarter of 2021, which was, as you saw before, a very good quarter. And the main actions behind this is to offset the expected continued weakness in automotive with growth in other segments. We do expect to cover a large part if not exactly every last cent of the cost increases that we have seen with price increases during the first quarter and we do expect the margin to recover therefore and also to continue to recover during the first half year of 2022. And that concludes our prepared comments. So thank you for listening thus far. And now is a good time, if you have a question, to ask it. So please go ahead, anybody who has a question.

The first question we received is from Augustas Svein, Handelsbanken. Your line is now open. Please go ahead.

Yes, I'm Augustas Svein, Handelsbanken. I have a question. A few questions, perhaps we'll start a bit on the inflationary environment and the cost increases. If we look at Q1 over Q4, as you see it right now, do you see cost of inflation getting worse? And anyway, I'm sort of quantifying the quarter-over-quarter effect. That's my first one.

Yeah. Hi, Gustav Oskar. I can answer here. I think what we mentioned here already in the call is that year over year, the cost increases is about 100 million SEC on the P&L. I would say quarter over quarter, it's about half of that. So around 50.

I'm referring to forward looking. So Q1 over Q4, what are you feeling now? I think you said you had 60 million effect in Q3, right? So what's your prediction on Q1 or Q4?

Actually, the way we currently view Q1 is that the impact of the cost increases will be substantially higher because we will have a lot of costs that are, for instance, impacting. We had inventories, for instance, in Q4 that we have used up and so forth. On an overall level, we expect a much higher impact of the cost increases than in Q1 than in Q4. But as Jörgen mentioned earlier, the price lag, the lag for when price increases are coming through the P&L is basically also having a positive impact here. So the price increases are going to be substantial in Q1 as well. And the net impact of Of those two, it's going to be slightly negative still, is what we expect. But as Jörgen just mentioned here, not every cent will be covered, but we are certainly aiming as high as we can there. That said, I don't think I will provide you an exact number here at this point.

Gustav, if I can add to that, one reason that we don't want to provide an exact number is that there isn't an exact number, because part of these price increases that we have negotiated take the form of various kinds of surcharges. And they then float partly with the cost increases, right? So we don't know what the energy cost will be, for instance, in February or in March. And it would be silly to predict it, seeing how volatile it has been in the past. But we now feel that we have a better tool set of mechanisms to make the price float with cost increases also, right?

Okay. Yeah, because that was my follow-up. Because you say you've been... raising prices for a majority of clients. So basically, I mean, how have you gotten around longer contract structures? Is that the alloy surcharge part then? Put it this way, can you say that you have a more flexible pricing structure in general going forward, or is this more of a temporary effect because we've had this extreme inflationary pressure?

That's a good question. I mean, we have had talks, I guess you could say. Firstly, we've raised prices to thousands of customers, but we have had talks with hundreds of customers. And in some of those cases, it has been easy talks because there was more short-term arrangements in place and a flexibility. And in some cases, they have been very tough talks indeed. But in the majority of the cases, the customers see and understand that this is an extraordinary situation. And also, it's our impression that their customers see and understand that it's an extraordinary situation. And of course, the situation is also mirrored in the general inflationary pressure that you see as an everyday consumer now, right, on almost everything. So, there is some kind of understanding for this, but that doesn't mean, of course, that a customer is ever happy when you come to them with a price increase. And depending on the customer situation, sometimes, yes, we have made new contracts that are, in fact, long-term contracts, but at a higher level. In other cases, we've made various surcharge mechanisms, which have more of a temporary character. In other cases, again, we have just agreed for a short term to have other prices, right? So it varies quite a lot. I think, though, that we have still longer-term contracts that mature for renegotiation in every quarter, right, and every year. And some of those we've now made for the next three years with mechanisms then usually in place for such things then. Others will come up for renegotiation later this year. And then, of course, depending on what the situation is then, we have or do not have a stronger or weaker position. So the short answer to your question is we regard the stability of our pricing and our customer pricing as a strength generally in Grengas. But we and the customers both have had to show flexibility in this regard now. And that is not only a positive, but generally speaking, a positive, and we regard it as quite an achievement also of our teams.

Okay, that's helpful. So, I mean, looking forward, would you say that, I mean, generally you're less exposed to this extreme volatility in earnings because you have more flexibility in general?

Yeah. I would say that this has been a great learning experience for everybody involved, and we hope to draw conclusions from that for the future. But I also think that right now, everybody in the industry, I think, generally is reeling a bit from this and drawing their own conclusions. And exactly where that will land, I think, is a little bit too soon to say. But of course, it's our ambition to have flexibility when it comes to this. But it's also our ambition that we should not have too much flexibility because then we also have less protection, right? So there is still some work to be done on all of that.

Okay, very clear. Then two questions on the autos business. I think I ask this every quarter, but you look to continue outperforming lifecycle production in Q4. When you're talking about a continued week autos demand in Q1, do you expect that to reverse? Or are you sort of seeing similar growth to what IHS is forecasting for Q1?

This is the million-dollar question, right, Gustav? And I think we are not necessarily better than IHS and the likes of those to forecast this. But if we were, we would sit somewhere else and make a lot more money, maybe. I think we currently share the latest IHS indication. I think they expect a negative year-over-year 5% development or so in Q1 and then turn to a positive growth year-over-year in Q2. At this point in time, we don't have any other view than that, I would say.

Okay, okay. And then also related to that, if I look at the full year forecast for autos now, I think the forecast is just below 9%. Let's see where that ends up. But what are your thoughts on beating overall autos production this year due to mix change in the fleet of new cars?

Again, it will depend very much on what the automotive demand will look like. As we know before, when you talk about mixed change, I suspect that you refer to the share of electric vehicles and hybrids and so forth.

That's correct, yeah. Okay.

I mean, again, obviously, if there are more hybrids, for instance, there will be more heat exchangers. If there are more EVs, there will be not necessarily more heat exchangers, but heavier heat exchangers and so forth. It's very difficult, I mean, to forecast this year in relation to auto production. But that said, I think that the general trend there, Gustav, is that... With the higher penetration of electric vehicles, there is more opportunities for Grengels to sell aluminium products to those. So if the penetration is increasing more rapidly than we expected, there should be an upside for us and vice versa, obviously.

Okay, thank you. That's it for me.

The next question is from Victor Hansen with Mordea. Your line is now open. Please go ahead.

Yeah. Hi. Hope you are well. Victor here. So a follow-up on Gustav's question. So you already discussed a bit about energy prices, which have been rising gradually, and particularly at the end of Q4 all over Europe and the US. But I guess that you've had quite a bit hedged now in Q4, actually, and that you didn't see the full effect of this now in Q4. So how should we view this going forward? Will you Will you pass it through the energy cost to consumers and customers? Or will you continue to suffer from this and take the short-term hit before prices hopefully normalize?

Yeah, I think I can start and comment on the hedging and then Jörgen can add if there is anything else there on pricing and so forth. But I mean, we do hedge energy. It varies a little bit with the local market. In China, for instance, energy prices tend to be more stable because they are more state controlled, whereas in Europe we know it's rather the opposite, right? In terms of hedging, we had going into Q4, we had around 75% hedged. If you look forward now, going into 2022 full year, the hedging ratio is about 60% and 25% for 2023. So there will be a... some impact of this, of course. But in general, I mean, as Jörgen mentioned, we try to basically make sure that we cover cost increases with price increases and productivity improvements, of course.

And I mean, we don't regard the hedge as a margin protection. We regard it as a time lag protection. That goes for all hedges, by the way, aluminum and currencies as well. It's not possible to hedge your margin, but it is possible to gain the time that you need to move those costs onto the customers, right? So this ties together with our contract structures and our pricing structure and so on, right? That's not to say that those things have not been under strain lately, because surely they have. But our ambition, simply put, is to make sure that if we have an energy cost increase, that eventually the customers pay for that and the hedge is there to bridge that gap.

Great. And then on other niches, are there anything particular behind the strong volumes this quarter?

One of the reasons is that we have focused more on this, right? So we have basically filled up lost volumes with such products also. So that, I think, is the most driving factor there. But it's also interesting to see how we can do that. And there we have been. traditionally, of course, stronger in Konin, which has a more diverse mix than we have had in Finspung and in Shanghai. But part of the good thing about last year is that we have learned also to be more flexible, more agile and so on in working on this. So part of the reason that we're now fairly confident about the volumes for Q1 is exactly this, that we have worked so hard to benefit from such other niches as well. And there, it's also so that the market is very strong in Europe. It's very strong in the US also, but a lot of this is in Europe. It's very strong in Europe because of the supply chain regionalization that I spoke about before. And that goes both for demand and for price. So one of the things that has happened is that we're able to sell some products into some customer segments that we have not in the past been able to sell with profitability. Now we're able to sell them with very good profitability and there is also very good demand. So all of this, I think, creates a little bit more flexibility for us, at least in the year or two ahead, which we hope to use to indeed even out any future volume swings that we have not predicted. So it's a good learning and a good skill, and we're also very happy to be able to show such numbers.

All right. And a final one for me. So you mentioned IHS forecasts, but do you see any risk that automotive suppliers are building inventories which could then hamper your volumes recovery in 2022?

That they are building inventories? How would that hamper our volume recovery? I don't follow.

Since you have outperformed IHS, there's a potential that... They build inventories in Q4, you mean?

Is that what you're asking? Yeah, Q3 and Q4. No, our impression is rather that most of the tier 1s, at least, have taken this just-in-time thing to a very, very high level. So they are not shy to ask us to absorb any kind of swings up or down. So it's not our impression that there are large inventories downstream from us. However, all of our customers have also struggled, of course, with these very dramatic demand swings. You spoke about mix earlier, and one of the mixes is, of course, between internal combustion engine cars and EVs and hybrids. But there's also a lot of other mixed things going on, for instance, where the car makers are generally, of course, focusing their production capacity on models where they can make the most money. But every kind of planning change in an OEM, in automotive, has ripple effects all through the supply chain. So our customers, too, are having to adjust very quickly to demand swings, not only on the total, but also on every single product, every single SKU. So it's been a dramatic year, but we do not believe that as a tendency there has been a lot of inventory buildup downstream.

Just to add to that, Jörgen, I think that, again, if the inventory levels are high or not, I guess it depends very much on what the auto production will be going forward. And we don't know that for sure. But I can maybe just add some more flavor on development in Q4. And if you look at the sequential development there, that would indicate that actually inventories came down a bit at our customers' level. So we currently don't think that they are sitting with very high inventories going into 2022. But that said, it very much depends on which direction the auto production will take.

But to the extent you talk to them, you can pass on our advice that we think it's always a good thing to build inventory.

Understood. That's all for me. Thank you.

The next question is from Oscar Lindstrom, Danske Bank. Your line is now open. Please go ahead.

Oscar Lindstrom Hi, good morning, both of you. A couple of questions for me, and the first one is touching on something that we've discussed already, so I'm sorry for that. But you had a net negative impact of sort of cost price movements in Q1, sorry, in Q4 versus Q3. And then you now seem to be guiding for a further net negative from those two factors in Q1 versus Q4. By when, you know, could you say something what the sort of accumulated size of this, you know, net negative spread here will be at the end of Q1? And when do you expect to have closed that, you know, that spread through price increases.

Oscar, I can start and then Jörgen can add to that. But I think, Oscar, maybe we were not fully clear there in the comments, because I think if you compare sequentially, we expect the spread between cost and price to look much better in Q1 than in Q4. So what we said there, that comment, I think, was related to Q1 versus Q1 last year, where we say that we expect more or less... the same volumes, and we expect that price increases will offset a large part, if not every cent, of the cost increases, but that is from a year-over-year perspective. So Q1 is expected to look significantly better than Q4, I think is the main message there.

Great, then I misunderstood you, I'm sorry, and that makes me much calmer. My second question is on the shift to other end markets away from automotive to other end markets that you've been talking about. And I was wondering if you could explain sort of practically how this is being done and to which end markets and how quickly can this be done? And is there a risk that the sort of the price or the sales mix becomes less

attractive in terms of profitability uh yes this is jorgen speaking then oscar um i'll try to answer that and then you can follow up if you don't find it's a good answer i don't think we have said that we're trying to shift volumes out of automotive and if we have i would like to correct it now that's not at all our strategy our strategy is to continue to grow with all our customers including absolutely the automotive customers who are very important for us and very good customers generally. We've had them for a long time, decades often, and enjoy very, very good relations with them. And they also seem to like us. I've had many customer meetings since I started, and generally speaking, the tone of voice is a very positive one. So we intend to grow with those customers, and part of the reason for growing with them is that we believe that, as Oskar said before, that there will be more use for aluminum products in every car going forward as there is a shift to hybrid and electric vehicles. But it's also so that we've invested over the past years in a lot of new capacity. And that means that we have growth opportunities in many other market segments as well. And that has actually improved that situation quite a lot during 2021. So now we see a continued strong market in the U.S. for almost everything that we do there. And we see a strong market also in Europe in a variety of segments, right? A strong market in terms of demand, but also in terms of pricing. And that means that at least now, the pricing that we enjoy and the profitability that we enjoy in other segments than automotive is quite comparable with and very often higher. than the profitability that we have in automotive. So we don't regard this as something that should drive down mix. That being said, some of those products are rather exposed and are less, let's say, technically advanced and also less profitable. tied up in long-term contracts and long-term customer relations and so on. And therefore, we need to make the right choice there and provide the right mix, both for the short-term, but also, of course, to build up relations with customers, technology, maybe leverage the sustainability footprint that we have, which is very good, in order to get a similar structure, a good structure, I should say, a good mix of short-term and long-term contracts, so that we have short-term flexibility for volume, but also have long-term security when it comes to utilization and price. And that puzzle, that game, laying that or drawing that picture is an important part of this Navigate project that I spoke about before. Now we have higher capacity. We intend to raise it further by smart investments in the bottlenecking, by productivity and so on. And this new capacity, what is the best way to use it? That's part of the Navigate project to figure out.

Right, thank you. Then I understand that it's not you trying to shift sort of a bit unutilized automotive capacity into new segments, but rather the new capacity that you've created through your investments. Yes. My final question should be a quicker one. has Omicron led to a lot of sick leave here in Q1, and has that caused any problems for you in production?

Yes, Omicron has led to a lot of sick leave in Q1, and yes, it's causing problems. But we are, I guess, after two years of this heading into the third, we're kind of used to these problems. So we believe that we will be able to navigate that, and that is also a factor that's been weighed in in our volume estimate.

Wonderful. Thank you very much. Those were all my questions.

The next question is from Max Lise. Your line is now open. Please go ahead.

Yeah. Hi. Thank you. Can you hear me? Sorry.

Yes, Max. We can hear you.

Thank you. Just coming back to the sales performance area in the first quarter of 2022, I guess the NICS I mean, the volumes will be back, but I guess we should expect the states mixed with lower automotive to continue to dilute earnings and the margin somewhat, even if you have these price increases coming through.

Oscar, here you have to correct me if I say something that's not correct, but we don't regard negative mix as a major factor in Q4. A factor for sure, but not a major factor. The main factor in Q4 was insufficient coverage of cost increases by price increases.

And just to add to that, I think that the key item to sort of keep track of here is capacity utilization also, because even though automotive products are typically, and you're absolutely right there, Matt, that automotive products are typically more technically advanced, higher technical content, and typically higher margin products, therefore. But if we are running production of these type of products with a very, low capacity utilization, which we certainly did in the fourth quarter, the automotive products that we then run are not that profitable, basically. And that's what we also saw that for the Eurasia business in Q4, that is a large part automotive products, but the margins suffered from low capacity utilization. So I think from that respect, I think it's also fair to view this that the automotive products will be more profitable when we can add other products that can utilize the available capacity and increase our capacity utilization so if capacity utilization would be the same and you just change from an auto product to another product yes that would probably mean a slightly lower margin but if you can sort of adjust the capacity utilization and improve that you will probably have a better net effect if you understand what I mean yeah

And I guess the first quarter this year, 2022, compared to first quarter 2021, well, I guess last year you had, well, volumes are back, but you don't expect any dilution there. I mean, there are Proves and cons, but it sort of helps that you increase capacity utilization in a more efficient way.

Did we expect a sequential margin improvement, but not a year-on-year margin improvement? But Q1, however, last year was a very good quarter, as you know.

Yeah. Okay. And then secondly, I mean, you mentioned the ramp-up here of batteries. components. And I guess this is a long-term situation, but just remind me how you see the ramp-up there. Is it sort of following the ramp-up of electric vehicles, of course, and so on? So we see two, three years ahead volumes coming up gradually, but the main sort of impact will be beyond 2025, I guess.

First, for clarity, then let me separate two things. We have products that go into electric vehicles and electric battery-powered vehicles and also hybrid vehicles that are not associated directly with the battery but are ancillary to it, for instance, thermal management products and so on, right? And that's an area where we believe, as we've said before, that the need for aluminum products generally and also Grengels' products specifically will increase as the result of this shift. Then we have the battery products themselves, and that is quite a mix of different things, different new products that are associated with the battery, and there are a lot of aluminum products in there, and Grengis is playing in many of those fields, right? So as an example of some of those things, it's the thermal management, including the battery cooling plate and other components for it. But you also have battery cell casings and also then battery cathode aluminum foil. And we're playing in and investing in all of these segments. We regard this, we look at it from a macroscopic perspective as a very, very important growth opportunity for Grenges. But exactly like you said, we do not expect that that will be the majority of our growth in 2022 or 2023. We expect, however, to grow in 2022 and 2023, partly as a result of the capacity investments that we made in the past, and partly as a result of the other products that are, we hope, going to be driven by the shift to EV. And maybe even more importantly, we hope to grow as a result of good general market conditions in the Americas and in Europe. So, this is an important factor for us, battery EV. It is going to drive growth in the near term, mainly in our more traditional products, and we believe it is going to be a good growth opportunity for us long term in more battery-centric products. But the majority of the growth in 2022 and 2023 will come from other factors. Thanks. Very good answer there.

Just coming back to the auto segment once again, I mean, in the U.S., we have a lower market share in the auto segment, and I guess this change over to more electrified vehicles, I mean, previously we've been talking about you need the hot-roll capacity in the U.S. to increase market share further to the same level as in Europe and Asia. Will this change when cars become more electrified, or is it sort of a same-same situation?

Generally speaking, what we've been talking about is a shortage of casting capacity in the U.S., and that's also an area where we announced last year in May, I think, or at least during the spring, a major investment in that area, and we're also looking into further investment in that area. um the production technology that we used that we do use in the u.s um is something called continuous cast and it does not involve the hot rolling step that we have in our production facilities in finspong coning and in shanghai and we do not have at present any plans to invest in hot rolling capacity in the u.s yeah great uh

Thank you. And just a final one here on working capital. I mean, you've made quite a good contribution in the fourth quarter. Should we expect that to continue in the first half of this year, or have you sort of reached a balanced level?

Yeah, you're absolutely right there. I think from my perspective, the cash flow and the working capital release there is really one of the Q4 highlights. But looking ahead now, what we have in front of us, as we've indicated, we are expecting a sequential volume growth now from the fourth to the first quarter. And that itself will tie more working capital, everything else the same, right? In addition to that, we've also seen now in the beginning of this year, we've seen metal pricing coming up again, increasing. As we know, the aluminium price doesn't impact our profitability, but it impacts the fact that we have to carry more. The value of our inventory is more expensive and it impacts our working capital. So if you combine those factors, I would say going from the fourth to the first quarter, I would expect that we will build working capital in Q1.

Okay, thank you very much.

And the next question is from Julien Marteau, Pascal Advisors. Your line is now open. Please go ahead.

Hello, gentlemen. Just two quick questions. The first one would be if you could give us an example of customer news sales you talked about in the report. What can they be and how you can increase this this customer focus around new solutions. Second question is, would you, the low ROCE is, I mean, you acknowledge it. Can you say whether it's related to some low yielded assets? I mean, some units that would be really low. Or is it general across the board in the group? And the third question would be on the debt. It seems to me that free cash flow would be limited this year due to the high capex and maybe some more capital. Can you remind if you have any sensitivity to higher interest rates? Because the debt would remain probably the same, I guess. And could you end up paying a bit more financial expenses this year compared to last year? Thank you.

That's quite a portfolio of questions. I'm going to try to answer the first two if I can, and then I will leave, Oskar, to you the question about the debt and the interest rate. When it comes to new customers and growth, the growth that we used to compensate for the lower demand in automotive in Q4 and also in Q1, It comes from a variety of sources. It's so that we have some long-term things that are starting to grow in us. It's generally speaking so that we have a good market, for instance, in HVAC and specialty packaging and in many of the other niches as well. That creates good growth. And it's also so that we have actively gone out and found customers of a more, let's say, transitory nature or a more short-term nature. that had capacity needs that we could fill with the existing equipment at short notice. So it's a mix of things. Longer term, our growth plan is, of course, to find new growth segments, but we have already talked about those in this call. It has to do with the EV thing. It has to do with further penetrating the HVAC market. It has to do with the battery and so on and so forth. So it's a mix of short-term actions to meet the volume springs and long-term actions to develop, to keep the existing customers we have and develop the relationship with them, but also, of course, to find new customer categories.

My question was more, do you see customers where you basically do not get full share of wallets and that you could increase that?

You see customers where we don't, yes, we have almost all customers, we don't have a full share of wallet. But we are, it should be said, especially in based heat exchanger material, the world leader, right? So that we don't have a full share of wallet is something that the customer is not, I mean, most of these customers, they want dual sourcing, often triple sourcing. according to some scheme of their own, 50, 30, 20, or whatever they feel is the right mix to have, right? So that we don't have a full share wallet does not always mean that we can grow, but it is however so that our global scope, our strong performance, technical skills, and so on, presents many growth opportunities also with existing customers. Now, I'm sorry, you have to remind me, what was your second question?

The second question was on the low voucher, and is it due to some

uh assets in the group or is it really general across the globe the low row c in in 21 is due to two things mainly it's due to the fact that our profitability was not what it should be on the ebit level for reasons that we have gone into now for instance with this cost price lag and such things and also low utilization So that's one part of it. And the second part of it is that we have added quite some capital employed due to the expansion or the acquisition, of course, of Grängerskånen, but also the expansion program that we have now very ambitiously run. in our various regions and those assets indeed are not contributing to the EBIT but they are in the denominator of the ROSI equation or the ROSI formula and so they bring down the ROSI so the solution to bringing up the ROSI very simply is to make sure that we have full utilization that we have a better margin than we did on average in 21 and, of course, that these new assets start to contribute to the level that they should contribute to, right? And that will absolutely be our ambition to make happen during 2022 and 2023.

Can I just... There's a slide where you showed Ibid Peton, and the lowest Ibid Peton currently in the group is Cangas Aragia, which is, correct me if I'm wrong, though, oldest asset in the group. All the rest was added in the U.S. So that's why it doesn't, I mean, the low profitability doesn't seem linked to new assets. It's more like the old asset base that is not performing as well as it should or as it used to be.

Grengas Eurasia, generally speaking, is not performing as well as it should. You're absolutely right.

But that is two things also there. I mean, that's where we have the largest automotive exposure. So that is a very important factor there. And we are also in Eurasia. We're also running one major expansion project of the Finnspång facility that is not yet generating any value, I would say. And that's one of the reasons there. But that also ties to your third question on the debt level. And I can try to answer that. And typically, we don't provide forward-looking guidance on debt. But I think we can tie it together in a neat little package for you. I think what we've said here is that typically, Grengis is a business with a strong underlying cash generation. We don't expect that to be significantly different going forward. But I mentioned earlier in the presentation that we expect to invest a billion sec of CapEx. in 2022 to finalize the ongoing expansion projects in Konin and Finnspång in the Americas. And I think that's important to take into account and that a lot of the cash will be generated that we will generate will of course go into these finalizing these expansion investments if you then take a shorter perspective and look at going into q1 we've indicated that that earnings is expected to be slightly lower year over year we've also increased indicated that we have an increased metal price going into q1 if you add that together I think it's fair to say that net debt to EBITDA is probably, you can expect that to increase going into 2022 in the beginning of the year. But if you take a full year perspective, I would say that it's fair to assume that it would remain on more or less the current level when we sit here and talk again in 12 months time, something like that. As for the interest rate and so forth, I don't foresee any dramatic changes for that. I think our interest rate or finance net guidance for 2022 is that we expect to have a finance net of around 100 million SEC for the full year, which is ballpark the same level that we had for 2021.

Okay, excellent. Thank you and congrats for the good quarter, I think.

Thank you.

And we haven't received any further questions at this point.

Then, ladies and gentlemen, I would like to take the opportunity to thank you very much for following Grengis and for spending time with us today. And I wish you a nice day and a nice weekend when it comes. And take a lot of care. Thank you for today.