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.