Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this second quarter earnings call with Grengis. It's a pleasure to have you here. We're going to be referring to our presentation that you can see on the screen. And if you're only listening, the presentation is also available on our investor relations web page. Starting in the beginning, we had a strong result in the second quarter. We achieved that result in what we consider a very challenging environment. Safety is always first forward in Gränges, and unfortunately we have to report two serious setbacks in this quarter. We had a very serious fire in our Gränges cone implant, and tragically we also lost a colleague in a fatal workplace accident in the U.S. in Salisbury. This is, of course, not acceptable. We need clearly to step up our efforts in this area. We are taking such actions accordingly. Looking at our sales results, the volume was down quite a bit from 131,000 tons last year to 123,000 tons this year, so about 7%. And there were several reasons for this. Demand actually was good across, but it was weak in automotive. And of course, there's a general dampening effect on all markets caused by the war in Ukraine. But we also had reduced output in our plants in Shanghai and our plants in Salisbury for the reasons mentioned, especially in Shanghai, of course, related to the

COVID lockdown that we had there despite this very or rather negative volume development we had a very very strong profit development and that's because of an increased margin mainly due to pricing which more than compensated or at least fully compensated for our cost increases that were quite large in the quarter.

And this together with the volume development then led to an all-time high operating result. We also had, in fact, an all-time high I'll get back to that in a moment. In the quarter, we finalized making a long-term plan, which we call Navigate. And we put it in place, communicated it internally, externally, and also communicated external targets for the long term connected to that plan. I'll get back to that also. These good results, they don't happen by accident. They happened as a result of very strong work across grangists. And there are many good examples of that. But maybe one of the strongest examples is the work and the efforts that were made in China and Shanghai to keep our customers supplied, to keep deliveries going, despite the very severe, very draconic, actually, lockdown situation. that were in place in Shanghai. So an extraordinary team effort, which kept the plant operating due to the personal efforts of more than 200 employees who volunteered to work in the factory during the lockdown, but also to live there in that time. Fortunately, we've been able to return to normal operations since last month. in Shanghai and the net result of all this is, in my opinion, an extraordinarily low negative impact of this very, very severe situation with a reduction of only 4,000 tons of the volume in the second quarter, approximately 20% of the normal volume in Shanghai. So extremely well done. Turning to sustainability, one of the longer-term ambitions that we have communicated in the quarter is our ambition to become climate neutral in 2040, or latest, 2040. That is some time away, but it's a very, very... tough targets and a very strong commitment on our side and requires a lot of improvement over the next couple of years to get to that goal. Part of that effort and part contributing factor to that target is our increased recycling. and the increased circularity that we can achieve, for instance, by having closed-loop agreements with our customers. And we measure that in several different ways, but one way to measure it is the volume of recycling that we have. And there we have set the target to have increased it tenfold by 2030 relative to the reference year, which is 2017. Further on the sustainability area, we have launched a new brand for our most sustainable products called Grains Endure. And that brand is reserved for products that are especially good in helping our customers decarbonize, helping our customers meet their demands of climate-conscious end-users. and that offer our customers the highest quality with the lowest sustainability impact. And more in detail, it requires our products to have a carbon footprint of a maximum of four tons, carbon dioxide equivalents per ton of product. Cradle to gate, and Grengas is among the few companies who can have a, measurement of that of the carbon footprint of our products all the way from the box it from the aluminum from the alumina all the way to the finished product what we call cradle to get them all our products will also then have a third-party verified carbon footprint and be responsibly sourced and produced again with a third-party verification Now we're going to turn to the numbers and starting then with sustainability performance. Because in sustainability, we don't only have long-term ambitions, we also have short-term performance. And that was very evident in the quarter where the carbon emissions intensity was reduced quite dramatically by 14%, in fact, year on year. and was now at 8%, an all-time low, relative to the 11, not 8%, but 8 tons per ton, of course. In the best ever result and quite a bit down from the 11.4 in our baseline year of 2017. And also the recycling rate, the amount of sourced aluminum scrap that we use is up quite a bit in the last quarter to 35%, again, an all-time high record, and quite a bit up from the reference year also in that case. Volume then, we had general demand, as I said, but we did have three effects that went in the other direction. And one of them, of course, is something that goes across, and that's the general weakness we've seen and have seen now for quite some time in the automotive industry. And that impacts both Grangus Americas and also Grangus Eurasia. But we also had two regional specific things affecting volumes. In Grangus Americas, we had a close down of the salt spray plant as a result of that accident, which impacted volumes there. And in Grains Eurasia, as mentioned, we had the COVID lockdown. And these two things then in the quarter specifically go, of course, across all segments. And that's why you see a lot of red arrows on this page. In total, a 7% volume reduction in the quarter. On the other hand, as mentioned already, the margin went the other way. We measure margin in a couple of different ways, but an effective measure is, or an efficient measure is, operating profit per ton, which you can see on this page. And it recovered further from the lows that we had in the second half of last year as a result of cost increases, which we then had not fully compensated for by price increases, but now have fully compensated for by price increases. And as you can see in the quarter, this measure, the operating profit per ton was up from 2.4 last year to 3.1, a very solid improvement. Now, these two factors together, the volume and the margin, of course, boil down to our profit. And Oskar, our CFO, will now speak about our profit in the quarter and also some other measures. So I turn it over to you, Oskar.

Well, let's see if I can provide you with some more details there on the financial development in the quarter. If we start with the sales volume, we can see that this decreased by close to 7% to 122,500 tons, as you just heard from Jörgen. The net sales, on the other hand, increased by 49% to 6.9 billion SEK. And the main reason for the net sales increasing where the sales volume decreased is the higher year-over-year aluminium price. and increased average fabrication price. In addition to this, the net impact of changes of foreign exchange rates was positive 697 million SEK compared with the second quarter last year. I should also mention that the net sales include revenues of 107 million SEK related to insurance compensation for the fire in Konin. And this does not have an impact on the operating profit in the quarter as the assets that was damaged by the fire are impaired with the same amount. Continuing on the earnings side, maybe we should again start by saying that this 374 million SEC in adjusted operating profit in Q2 is the highest we've seen in an individual quarter so far. And we're, of course, very happy about that. The adjusted operating profit per tonne increased, as Jörgen mentioned, to 3.1 thousand SEK in the quarter. And the key driver behind the strong earnings increase is the continued margin recovery as price adjustments are now fully compensating for the significant external cost increases. On that topic, we continue to see almost all cost items increase year over year, with the largest increases related to energy and freight. And in total, external costs increased by more than 300 million SEK in Q2 compared with last year. I should also say that this does not include the increased cost for aluminium that is directly passed on to the customers. In addition to the improved balance between price and cost, net changes in foreign exchange rates had a positive impact of 22 million SEC in the quarter. primarily due to the effect from the US dollar appreciating against the SEC in the first half of the year. Depreciation, amortization and impairment charges increased with in total 130 million SEC. Of this, 107 million SEC relate to the impairment of the assets damaged by the firing and cooling projects. Reported operating profit of 436 million SEK further includes items affecting comparability of positive 62 million SEK and this is fully related to the insurance compensation for the fire in Newport that occurred last year and This case has now been closed. The profit for the period increased to 295 million SEK and earnings per share increased to 2.78 SEK in the second quarter. During Q2, the financial net debt remained stable at 4.4 billion SEK Driven by the earnings improvements, the leverage did, however, come down to 2.3 times EBITDA on a rolling 12-month basis. As you can see on this slide, the adjusted cash flow before financing activities was strong in the quarter, totaling 722 million SEG. As you may recall, we saw a very large build-up of working capital in the first quarter due to the dramatically increasing aluminium price on the back of the Russian invasion of Ukraine. With metal prices now coming down again, we've started to see the reverse effect of this. and lower aluminium price contributed about 350 million SEK to the working capital release of 177 million SEK in the quarter. Provided that the metal prices remain on the current level, we expect to see further positive effects on the cash flow in the second half of the year. We continued to invest in total 147 million SEK in the expansion of the Grengis Group and the majority of the spend in the quarter relates to the two new recycling centers that we are currently building in Americas. And we also distributed 239 million SEK to our shareholders. And finally, I think it's also worth the comment on the quite large currency translation effect that impacts the net debt in the quarter. And this is primarily related to our dollar denominated debt and the strengthening of the US dollar against the SEC in the quarter. But all in all, I'm very happy that we are back to a strong operational cash generation and that we managed to reduce the leverage in a quarter where we also paid dividend to our shareholders. Let us now move on to the business areas and we start with Grengis Americas. In Americas we continued to experience a strong market demand from all segments except in automotive which was negatively impacted by continued supply chain disruptions as well as high inventories at our customers level. The temporary stop of the Salisbury facility in the month of June following the accident there had a negative impact on the sales to non-automotive markets with about 3,000 tons in the quarter and in total the sales volume decreased by 8% compared with last year. The adjusted operating profit increased to an all-time high level of 270 million SEK, which corresponds to an adjusted operating profit per tonne of 4.2 thousand SEK. Net changes in foreign exchange rates had a positive impact of 40 million SEK in the quarter. Continuing with Grengis Eurasia, also here we continue to experience a slowdown of demand from automotive customers in the second quarter. And this was due to a continued shortage of components and further supply chain disruptions driven by the outbreak of COVID-19 in China primarily. Demand in other end customer markets remained fairly good, and the decline in automotive sales was partly offset by increased sales to other markets in Europe. Another consequence of the COVID-19 outbreak in China was that we had to... Our production facility in Shanghai was in lockdown, basically. during April and May, as Jörgen mentioned earlier. But thanks to the fantastic effort by the team there, we limited the volume loss to about 4,000 tons in the quarter. And in total, the decline of grain saturation sales volume was limited to 6% year over year in the quarter. The adjusted operating profit per ton increased to 172 million SEC corresponding to an adjusted operating profit per ton of 2.6 thousand SEC.

Here we see negative changes in foreign exchange rates impacting 18 million SEC year over year.

As we communicated earlier, there was a fire in the new cold-rolling mill and the commissioning in the coning facility in May. We currently estimate that this will take about a year to rebuild or replace, and that means that the ramp-up of production capacity that was originally planned for the second half of 2022 will be delayed with at least a year. In terms of financial impact of the fire, the damage to the mill is covered by insurance and we currently expect no further cost for this. Looking ahead, I think we can just acknowledge that the short-term market outlook is highly uncertain. Impacts of COVID and war in Ukraine leading to further supply chain disruptions, price increases, increasing interest rates, increased inflation expectations. I think it would be fair to believe that this at some point will influence consumer demand negatively. And this would then in turn impact most industries, including Grenges and our customers. But that said, we have as of yet seen few concrete signs of sequentially weakening demand from our customers. And the negatives we have seen may short term be balanced by positives, like a large order backlog in May. a large part of the Chinese industry after the recent COVID lockdown. Obviously, this is assuming that there will be no further major lockdowns in China, which could absolutely happen given the recent developments there. But all in all, I would say that we remain relatively optimistic about the demand situation going into the third quarter. We're also very determined to continue to defend margins by balancing cost increases with improved pricing. And we have a clear ambition to continue to further reduce leverage over the coming quarter. With that, I'll hand over back to Jörgen, who will give you an overview of our new long-term Navigate plan for sustainable growth.

Yes, and like I said, in the second quarter, we also, apart from just keeping our customers supplied and battling all these different headwinds, we also managed to communicate internally, externally, the result of the Navigate work, which has produced a long-term plan for Grangitz and also some long-term targets. The background to this work is twofold. Firstly, we've seen historically a very strong value creation trend In this chart here measured as the difference between a positive row C and cost of capital. But we have to be honest and say that in the past few years that has tapered off to a low level. And that, of course, is something that we want to do something about. The other part of the background is the very strong external trends that we see for regionalization, for sustainability, and also for electrification of all industries, in fact, but not least, of course, the vehicle industry. And these three trends impact Grengis in a fundamental way, but also create a lot of possibilities for us. So with those two inputs, we've made a plan. which is very simple and has three steps. The first step is to restore a strong value creation, and also, of course, we have to mention in this context safety. The second step is to build the world's best aluminum technology company, focusing on three parts of our business model, recycle, improve, and grow, and two differentiators, which we think set Grengas apart from the crowd in our industry, namely people and sustainability, and to do so in partnerships with our customers, with suppliers of measured metal and energy in order to create a circular and sustainable supply chain for aluminum products and customers and the third phase which we will enter a little bit later than the first two after we have proven that we're on the right direction is to invest in sustainable growth, in things like recycling, optimizing our business in new markets, and also, of course, in a continued successful acquisition and partnership agenda for Grengis. Taking together these three steps correspond to a very high innovation level, in fact, so After Restore, Build and Invest, we intend to have a good development program going forward. And more specifically, we intend, like I said, to build the world's best aluminum technology company to achieve a sustainable 15% return on capital employed. to get back to previous levels of an average operating profit growth per year of 10%. And we have also, as I said before, communicated our firm intention to reach climate neutrality by 2040 and in the near term to continue already good progress towards that goal. To make this a little bit more formal, we have also revisited and announced new financial targets for the medium and long term. And those are to return to a return on capital employed of 15%. And as you can see in this chart, Grengis has been at that level for a long period of time. But as I said, we have in the past few quarters for a few years, I guess, fallen off that green part of the chart. And our ambition is to restore that as soon as possible. We intend to have an average operating profit growth of 10%. And there we've had negative growth in the past years. They're relatively 2019 and 2020. And that's, of course, caused by the COVID pandemic and the subsequent crises. But we intend in the near term to exceed this target and then to maintain our profit growth over 10%. And when it comes to the capital structure, Grengis has a good cash generation in its core business, but we have also invested quite a lot. And that means that in the past quarters, especially now during times of a high aluminum price, we've had a higher leverage than is good for the long term. And there our ambition, as Oskar referred to earlier, is to gradually normalize the leverage into the area of one to two times EBTA, which we think is a sustainable level for the future. And dividend is something that we have always been good at in Grengas. The only year that we didn't pay a dividend was 2019 for well-known reasons. But we intend to, of course, maintain this level also going forward. So to summarize today's presentation, I'd like to say that we're making good progress on many fronts. We've made some really important steps forward on sustainability in the near term with our performance, but also in the long term with our commitments. We have a very strong interest for that, especially for sustainable offerings to the electric vehicle industry and sustainable offerings to the battery industry, but also many other industries like HVAC. We're making good headway on our announced existing investment programs, and we have also announced a new program for a $52 million investment in recycling in the Americas. The battery cathode foil program that we've talked quite a lot about is taking form, and we have already made our first deliveries in Asia this year, and we intend to go to market in Europe in 2023 and in the Americas in 2024. As mentioned, we've communicated a new Navigate long-term plan and targets to go with it. And the objective of that is sustainable growth. And we have in the last quarter, and actually also in the first half year, communicated our best ever financial results and our best ever sustainability results. And that really concludes our prepared remarks on the second quarter. So now I would like to turn to the operator and open up for questions and answers. Operator, please.

First question comes from Gustav Schwerin at Handelsbanken. Please go ahead.

Yes, hello. A few questions. Starting with your guidance, I understand the uncertainty, but maybe if you could give some indication on what kind of volume development you're planning for year over year or sequentially, I assume it should still be up year-over-year, given the easy-to-comment Q3 last year. And also related to that, when you say things, some weakening them, I understand, mainly in Europe, America, I suppose, and in any specific segment. That's my first one.

or continue. We have manufacturers impacting the demand in every given quarter, right? In the third quarter, we have... Of course, seasonal effects and sequential effects. But as we say in the report, we haven't yet seen any concrete signs of weakening demand from our customers in the third quarter, or at least very few such signs. That being said, it would be strange if longer term the macroscopic development and the end customer demand would not over time impact demand also for our products. What counters that a little bit is that in several of our large customers and the large industries of automotive in HVAC, we also have a pent-up demand. And specifically, we also have, of course, a pent-up demand in Asia because of the lockdowns that preceded the third quarter. So as you can hear, lots of pluses and minuses. Overall, we are fairly confident for the third quarter, but we're not going to give you more precise volume guidance than that. Nevertheless, Oscar, if you would like to add to that, I think that could be helpful.

Yeah, but I think you said it in a very good way, Jörgen, there. I think there are some minuses, but there are also some pluses, and I mean, it boils down to, I think, a fairly stable view of the demand for Grengis products from a sort of sequential perspective.

Right. Secondly, on your earnings per ton in Eurasia, you're saying in the report that they're increasingly compensating for inflation. At the same time, it's not significantly. You're on lower volumes. You have a higher cost. China was messy. I assume that comes with extra cost as well. Mix doesn't look better. You have negative effects. So, I mean, it looks like you're much more than compensated for inflation. And when we look at this going forward now, how do you see earnings per ton developing? Do you have more price increases to push through, or is some raw materials coming down now preventing that to happen?

Yeah, I mean, the price increases contain both price increases but also surcharges, right? So the picture is a bit complex. In Europe, we also have ordinary list prices and even spot prices. So it's not so simple a picture to say that only price increases. But what we have committed to and are still committed to is that we will compensate fully for all cost increases that we take. As you know, though, there are some costs that are working maybe now in the right direction, especially some of the raw materials that we use, right? But also costs where there will cause for concern, primarily in Europe energy and maybe also globally energy. but not least in Europe energy because, of course, you are aware of the natural gas dependency on the European industry generally and also at Grenges. So those factors together make the cost picture a bit uncertain for the third and fourth quarter, and that is why we are reiterating our commitment to compensating fully for the cost increases in the third and fourth quarter. It's nice that you say that our margin is good in Europe. We're not unhappy about it ourselves, but this is not a one-quarter thing. I mean, this is a long-haul thing, and for that we intend to fully compensate for any cost increases that we've had.

Yeah, okay, fair enough. Just on Salisbury, I didn't quite hear what you said Oscar, but did you say you lost 3,000 tonnes in Q2, implying that HVAC could actually have been up the over here if you didn't have that salt?

Basically, as you probably know, automotive in America, those products are to a very large extent manufactured overseas and shipped in. So domestic production in America, which the Salisbury facility is a part of, that facility production is primarily serving HVAC packaging and other niche segments domestically in the US. So we stopped the Salisbury facility for the month of June before we could determine that it was basically safe to start to operate that again. That impacted these three other segments, HVAC packaging and other niches, with about 3,000 tons negatively in the quarter.

Okay, perfect.

Just lastly, on the quantum expansion program, I believe the wording here is a bit different from previously. Now you're saying that it's going to be delayed at least one year. versus 2023 previously. Should I read into this? Is it because you're holding back given the demand outlook, or are you not getting all the stuff you need for... Has something changed here?

No, but we're still... The early stage is, of course, of making a plan for rebuilding that thing. You know, when there's a fire, there's a mess. So if we have not been 100% consistent on the wording, that's probably because of that. There's going to be a delay in that order of magnitude. It's not a month-by-month thing. It's a big delay. All right. Thank you.

The next question comes from Victor Hansen at Nordea. Please go ahead.

Yes. Hi, Jörgen and Oskar. First question here. You mentioned one client in specialty packaging that was affected by the war. Would you be able to quantify the volume impact from this?

We had a strong volume impact of that previously, but that is not a significant thing. I think that's by way of example. The war in Ukraine, though, impacts Ukraine in many ways. Firstly, our staff, of course, in Poland primarily. But then, of course, everything else that happens in the industry now, it's a bit messy, as you know, right? So we have the energy prices, we have the supply of various things out of Ukraine to our customers and so on. So the war is a big impact, but the actual direct impact on our sales to our customers is small.

that particular customer was overrun at an early stage of the war but that site has now been reconquered actually quite dramatically by by ukrainian forces and the production has started again okay that's helpful and then it would be interesting to know your your construction exposure within other niches because i know that you've grown here to to mitigate some of the weaker automotive volumes Maybe you can mention the split and how it has developed over time.

I think that's right, Victor. Other niches is a combination of many different product segments. A large part of this is to the general engineering applications. Part of it is to building and construction and so forth. But I think the good thing with this is that it's relatively, speaking, It's easier products that can be shifted between these various segments. So in the beginning of this year, we have increased sales to building and construction, that's for sure. But I won't be able to provide you a further split of the other niche segments because we don't communicate that externally.

That has to do with the outlook. And that, I guess, the comment on that is the general comment that we gave, that, of course, a general weakening economy, if such a thing would come about, will, of course, impact Rangnäs as it will all other boats that float on this ocean, so to speak. And construction is a part of that, for sure.

Yeah, understood. And my final question here. It would be interesting to hear the margin impact from your higher aluminum scrap ratio year on year. if there's been a margin impact from this.

Let me see now. You mean from the increased recycling?

Yes.

I mean, typically, you source scrap, at least still, and this might change over time, of course, as demand for recycling and recycled products is increasing. getting larger but typically you can still source scrap at a discount to lme and i guess that that is probably what you're after so i think that that we don't provide a specific number for this but but I mean, if you look at the totality, everything else equal, typically there is a little bit of margin improvement from increased sourcing of scrap instead of sourcing primary metals. Yes. Great.

Thank you.

The next question comes from Oscar Lindström at Danske Bank.

Please go ahead. Hi. Good morning. Three questions from my side. First one, I'd like to pick up a little bit on that previous question about where you comment in your report about offsetting the automotive weakness with sales to other segments. Could you say if this was sort of part of a trend or was it more of a one-off reaction to weakness in automotive during the quarter?

And, you know, also, did this have a positive or negative impact on EBITDA relative to having, you know, sold these volumes to the automotive segment?

that would be my first question. Would you like me to go on with the other questions as well?

Take this one first, otherwise we have such short memories. The offset was not some kind of accident or so. It's definitely a result of a very conscious effort, especially during the fourth quarter of last year, to set that up and to sell it, right? Does it have a positive or negative impact on EBIT per ton? It has a super positive impact relative to not selling those volumes. Relative to automotive, that depends. Right now, we have okay pricing for these other niche products that we're talking about here, but that varies a bit over time. But, of course, very, very positive relative to not selling the products, and that's what we're looking at.

All right. Thanks. Thanks. My second question then is more specific. We saw the 6% volume drop in Eurasia. Was that due to sort of lockdown effects in China or was it more weakness in the automotive segment? I mean, you know, even if you'd not had the lockdown in China and the negative effects that it still had, would there still have been, you know, minus 6% volume because of weakness in the automotive segment?

I can say, Oskar, that the development here is very much tied to the lockdown in Shanghai and the consequences that had on the automotive industry. And of course, it has a direct consequence for us because we were actually in the lockdown ourselves. but it has sort of an indirect impact on the automotive demand also because these further disruptions of supply chains and component shortages stemming from the fact that there was an additional lockdown in China. And to give you a little bit of more flavor on it, if you sort of look at the demand levels in general on splitting it on sort of the geographical regions, we could say that in Europe... we actually compensated the auto decline with sales to other markets. So Europe is fairly flat in terms of sales year over year, whereas the decline is related fully to Asia and lockdown-driven to a very large extent.

Okay, super. Thank you. My final question is on... energy supply to your operations, and in particular, natural gas to your Kornin plant in Poland. We've heard a little bit about, in Germany, some preparations for rationing and continuous threats from Russia about cutting supply, etc., How would that impact your corn implant in terms of production? Any preparations that you can do ahead of the winter residential heating season? Do you have any contracts which assure supply to you? Anything related to that, how that could impact sort of

Well, I mean, gas supply in Europe, I think nobody really knows what will happen, of course. It's an uncertain area and an area with many risks. I think it's fair to say that the risks are higher in Germany as a country than in Poland as a country. But having said that, however, we are 100% entirely dependent for the longer term on supply of natural gas from the Polish grid. And the Polish gas grid does contain Russian gas and also German gas, right? So gas flows in every direction. We are not primarily concerned about a complete shut-off or even a rationing of natural gas supply, although it's best to be prepared for everything. We are primarily concerned with the cost level that that will result in. And there is, of course, a significant risk of dramatically increasing natural gas prices in central Europe, including Poland, in the third and fourth, maybe in the first quarter, depending a little bit on what happens to supply and what happens to the weather and what happens to industrial production. So it's something to watch for sure. Can we prepare well? We can build a little bit of inventory, but... a complete shutdown of gas supply in Poland or in Germany even more in Germany actually would be a super dramatic thing for the entire industry and would impact us also in that way so it's something that we all have to hope will not happen and something that we can prepare for in small ways but cannot completely mitigate but also having said all that not something that worries us over much

Thank you. Just to follow up on that, do you have any price contracts with your customers in place, energy surcharges basically, to enable you to quickly compensate for higher natural gas prices?

The price increase work that we've done in the past two quarters has been related to installing such clauses, surcharges, and so on. They are, as I said a bit earlier, different for every customer and different also between the different segments. And we also have many customers where the pricing is set on a shorter time period and so on, right? But it's quite clear that an increase in gas price in Europe Europe, a dramatically increasing gas price or electricity price for that matter, will have an impact on aluminum and on everything that's made of aluminum and on everything that uses energy, right? So it will impact also the market price level up then, right? Which is in itself a mechanism that makes it easier to raise prices. Short answer is, yes, we have such mechanisms, but it's a complex picture with many complex mechanism with many moving parts, which depend on the customer and on the segment.

Of the 300 million in external cost increases, excluding metal, in this quarter, year on year, how much was energy?

It was about a third of that number. So by far the largest single cost item, or largest increasing cost item, for sure.

Thank you very much for your answers.

The next question comes from Carl Bokvist at ABG Sundal Collier. Please go ahead.

Thank you. Good morning. My question is, first one is on Asia, the lockdown effect that you saw in the second quarter and how this has recovered during the quarter and what you see in terms of production capability now for the rest of the year.

Yeah, the lockdown effect was 3 or 4,000, negative 4,000 in the quarter, right? That's, of course, an approximation because it's a relative number, but something like that, 4,000 tons in the quarter, too. We restored more or less normal production in the beginning of June and have produced normally since then. As you probably know, the situation with COVID generally in the world and also in China is uncertain because of the very infectious new strains that come out. So it's very hard to predict what will happen with production in China or indeed demand in China during the fall. But I think the team there has proven fantastic resilience, fantastic flexibility. So our ambition clearly is to roll with it and produce no matter what. Right now we're producing at quote-unquote normal levels, although with a lot of mitigation and complications as a result of the supply chains both up and downstream being disturbed, of course, by these shut lockdowns. but right now at normal levels.

All right, understood. And price increased, one thing, and you hope to continue doing this, but despite automotive, which has historically been a good margin business for you, it seems like the mix effect effort you are doing still helps support positive improvement in EBIT per ton. Is that correct? Is that a correct assumption that EBITDA is improving despite potentially negative main

I don't know what to say about potentially negative mixed effects. I mean, the mixed price effect is positive in the amount that you can see here. Adjusted, of course, for the volume, right? So if we had the same volume, the margin would have been even higher, meaning that there is a positive mixed price. Mixed price net here relative to last quarter. Now, Oskar looks worried, so he's going to have to comment on that.

Yeah, I know. But I think the question, I think what we should comment on to answer this question, Carl, is also capacity utilization, because I think this is really what it is about in this case. I mean, we have a cost structure with a fairly large fixed cost, right? And as a consequence of that, we have fairly large operational leverage, which means volume through our assets is an important driver of profitability. And automotive products typically have a slightly more or higher technical content and everything else the same. We would typically have a higher margin on the automotive products. But in this case, I think it's more about making sure we have a high capacity utilization of our assets. And if the question is about selling a non-automotive product or selling no products at all, obviously, it's a given thing that with decent pricing, you should, of course, sell that non-automotive product. And that will be helpful for your overall operating profit. Because keeping a high capacity utilization is really key for our profitability. I think that's an important add-on to this.

Understood. Thank you. That was what I was after. And then just the first quick one. So China, roughly, the lockdown effect you said was four kilotons. And then the Salisbury accident or stop, that was three kilotons. Was that correct?

I should add to my earlier answer on China also that, of course, we're producing right now at normal levels. But the positive thing, so to speak, is that we have a backlog from the second quarter there, which we're now doing our best to work on. So that is, of course, also something that we have in the back of our demand for Q2 also. Q3, I mean, sorry.

All right, but the numbers you highlighted was three kilotons in China and, sorry, four in Asia and three in Salisbury during Q2, roughly. Yes. Okay.

And then just this tragic accident, was it related directly to the production process and thereby you...

had to stop production during the entire month to ensure a safe return to production or what was it related to?

It was a forklift accident so on the production floor And we didn't shut it down for any specific production process, but to ensure that the plant in its entirety was safe to work in, which we ascertained, and then were able to say for sure that it was so on July 5th, and on that date we resumed production.

Understood. That is all for me. Thank you. Thank you, Carl.

The next question comes from Kenneth Tal Johansson at Carnegie. Please go ahead.

Yeah, thank you. Two questions, please. I continue with accidents and fires.

There have been quite a few fires in your operations. So is that normal for your type of operations and what can you do to limit those fires?

Well, normally, it's unacceptable to have two fires in two years, Kenneth, and that is something we all feel keenly in Granges, and from the top management down to the people who operate this equipment, and something we need to do something dramatic about. We have, of course, looked deeply into the root causes and the Contributing causes also for the fires, both in Newport and in Collingwood, and have action programs in place there. But of course, we're also looking into what we can do in the other sites to bring those lessons to bear, to draw the conclusions from those lessons also in the other sites. But short answer is it's not acceptable to have two fires in two years.

Great. The other thing I was talking about that the other analyst asked about as well is the product mix, where you have sort of had less and less automotive exposure. If we look into the third quarter now, those forecasting institutes like LMC and those guys, they expect a very strong recovery in automotive production with growth rates year over year, globally over 20%. And some of that is catch up from COVID lockdowns in China. But some of that is also better availability of other components that have been in shortage for two years or so now. So will you manage to deliver much higher automotive volumes in the third quarter? Is it easy for you to just switch over from general engineering and building and construction products back to automotive again to fill those waters?

Well, first of all, I think it's so that we're very much hoping that these institutes and forecasting people are right in their forecasts. But that's not at all a given, of course, as you are well aware, having looked at these forecasts now over the past two years, swinging wildly up and down. That said, when our automotive customers want to buy more, they are welcome back to Grengas and we will supply them.

So it's no sort of technical changes you need to do to change the product mix in that way?

Well, it's super hard work and requires many difficult judgments and also changes of all kinds throughout the production process. Not reinvestment or anything like that, but just a change of the schedule and of the… alloys and the supply chain upstream and so on. So it requires a lot of hard work and it's absolutely not easy. But I've at least been quite encouraged in the past two quarters by the extreme ability, or extreme, but the very strong ability of the Grengis organization to display flexibility in the face of very, very strong demand swings between our industries and between our regions. So I have high confidence that we'll manage it also in the third quarter.

Great. And then we assume that those forecasts are close to being right in the forecast.

I mean, we're looking at quite significant higher deliveries in the third quarter. It also highlighted that we have some backlogs both in China and the Salisbury incident. So it looks like production volumes in Q3 could be very good.

And in your outlook, you're not as specific as you usually are. But you talk about a few signs of slowdown, but isn't the Q3 outlook very good, actually?

I mean, you have to read into it what you like. The Q2 outlook, we tried actually to give a good Q2 outlook. Sorry, Q3 outlook, I apologize. And it is exactly like we said, that there are many signs generally in the economy that point toward lower consumer demand. which will eventually impact Grengas. But there are also positives, notably the industrial backlogs in those two segments that we talked about. But then there are again negatives to do with the seasonality. And all these things boil down to the generally positive outlook we have for Q2. summarized in the sentence that we have not yet seen any signs of negative sequential demand change.

It will be exciting as always. Thank you very much.

Thank you, Kenneth.

And as a reminder, it's 01 on your telephone keypad if you have a question. The next question comes from Mats Liss at Kepler Kyvra. Please go ahead.

Yeah. Hi. Thank you. A couple of follow-ups from previous questions. I guess coming back to the auto segment there, I guess previously or previous years you have been talking about supply chain inventories that affect the sort of volumes that you experience. Do you have any sort of feel about that? that there are inventories in the supply chain that could sort of delay the potential improvement now that the forecast institutes see in the second half of this year.

I can start there and comment, and then Jörgen can add maybe. But I think we state specifically here now in this report that if you talk about automotive, we experienced that, especially in Americas, customers or our customers have unusually high or higher than usual inventory levels. So there we certainly see that. In Asia, it's a little bit maybe the opposite. The picture is maybe a little more difficult in Asia, given that we have this COVID lockdown-related backlog. And depending a little bit on where in China you have had the supply chains, parts of it has been in lockdown, parts not, and so forth. So the picture is a little bit more differentiated there in terms of who sits on inventory and so forth. But typically, the clear sign is that in America, it's high inventory levels at our customers.

Great. Well, coming into the HVAC segment, it's normally a strong quarter in the US, the third quarter. Is there any reason to believe anything else?

No, I think the answer is no. There's no reason for that. No.

And finally, just about the... You mentioned the insurance compensation you expect to see coming, and I guess that compensation is

due to the replacing of lost machinery and so on, and potentially lost commercial volumes and the impact of those. That, I mean, loss of commercial volumes, I mean, that is insured as well?

But, of course, that will always be a discussion with the insurer. I think when you have a damaged piece of equipment, that discussion is typically much easier. And the effects we've seen now in this quarter related to insurance compensation and impairment of assets, that's significant. only due of course to the assets that have been damaged we are not including any sort of business interruption insurance in the financials in this quarter But that said, if you look at the Newport fire, when we settled the claim with the insurance company in this quarter, the 62 million we received there is fully related to exactly this, what you're asking about, right? It's the business interruption compensation. So we expect to see some of this for Kona as well, but I think it's at the too early stage to to say exactly what this number is, because we also don't know yet when we will be able to restart this equipment.

And the compensation is sort of a similar amount as in Newport, or is it too early to say?

It's far too early to say, right, because this depends when we will be able to restart. Our current estimate is that it will take about a year to rebuild or replace this damaged equipment. then you could argue that you have 12 months or a year of lost sales. But maybe it's much quicker or maybe it takes longer time and then the result will be something different. I think this type of discussions typically come at a much later stage with the insurer as well. And that's why you see this settling in the Newport case a year or more than a year after the actual incident. to come back on this when we know more.

Yeah, thank you.

And as a reminder, it's 01 on your telephone keypad if you have a question. There are no further questions at this time, so I'll leave it over to the speaker.

Okay, then, ladies and gentlemen, thank you so much for attending this. Ernest Folfo Granges for the second quarter of 2022. I wish everybody a nice summer, and I welcome you back when we have, hopefully, then good results to communicate for the third quarter of 2022. Take care. Bye now.