Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this presentation of Grengis' first half-year result for 2023. My name is Jørgen Rosengren, and I'm joined here by our CFO, Oskar Hellström. And we will try to take you through this morning the big picture, but also the details of our half-year results. So, starting with the big picture then, we had in the quarter now, a stable volume, slightly down from 122,000 tons last year to 120. And we think that this is kind of an achievement in itself in a very uncertain and volatile environment. Our good earnings in the quarter and also reduced working capital led to a good cash flow, which helps our balance sheet situation and creates flexibility, of course, for the future. Very good. I should mention that this happens periodically. despite the fact that we continue to invest rather heavily in our future and hope then, therefore, to have a very good future also looking forward.

Speaking of earnings, the price and productivity and new business actions that we undertook in the quarter and have been undertaking for a long time, than cost, mix, and demand challenges in the quarter. And also, for the longer term, we continued in the quarter as we have done now for some time. to progress relative to our navigated plan for sustainable growth. And in sum, then, the adjusted operating profit for the quarter was up 30% relative to last year. Last year was a record quarter. And therefore, this year is also a record quarter, and we reached a level now of $450 million in the quarter, compared to $350 million approximately last year, and an all-time high result.

Let's begin then to go over the market. We saw a market which in most segments was rather weak in the quarter. That goes for HVAC, so heating, ventilation and air conditioning customers, for packaging customers and for many other niches where Grengis is active. But we did see very stable and, in fact, good growth in automotive customers. This, of course, is related partly to the difficulties that the automotive industry experienced last year because of component shortages then. But it's also due to the fact that last year we had trouble in China and were suffering there from a COVID lockdown, which, of course, now we're recovering from. In total, for the group, then, we had very strong growth in automotive, and we had weak growth in other segments.

And this proves, again, I guess, the value of having a very diversified and widespread customer portfolio geographically and also over segments. In total, As I said before, the volume sales of Grengis were down by about 2% in the quarter. Sustainability is very important for Grengis, and we keep investing in it. and improving our processes for it, and also building partnerships for it. In this quarter, we had record high recycling volume. Actually, for the first time, over 40% recycling. That brings our total recycled volume in the vicinity, at least, of 200,000 tons, so 200 million kilos of recycling. So in fact, now recycling is a rather sizable business. It's very important also for our future. It also makes it easier to take new customer contracts, we can show that we are gradually moving to a much more circular business model, and in fact they're very often ahead of our competitors. This was driven by new partnerships, but also driven to a large extent by the now fully operational casting and recycling center in Huntington in the U.S. which contributed not only to good recycling but also to more favorable costs and also good cash flow in the quarter. However, our scope 3 mission and our total emissions, therefore, were negatively affected in the quarter by the phase out of low-carbon Russian material. This is, of course, a conscious decision prompted by the awful and terrible war in Ukraine, which started last year, but year on year we therefore have a negative comparison to this very low carbon material that we're phasing out. We are, however, undertaking actions, of course, to replace is new material with low carbon and that is where the partnerships that we're now building with players play a very significant role and we expect therefore to continue a very good performance also on carbon emissions going forward

and regard this as a temporary setback, but a necessary one. On other sustainability factors, we had a very good development of our own emissions, the so-called Scope 1 and 2 emissions. That was driven mainly by the fact that we now, this year, switched over entirely to renewable electricity in Asia. And it was also helped along a little bit by the... by us starting to use our new solar panel installation in our factory in Shanghai towards the end of the quarter, so that's also a good step forward. When it comes to the result, a very important factor this quarter was margin. Volume was down a little bit, but margin was up steeply. And this, in fact, is the culmination of actions that have taken place over the past two years now, since the second half of 2021.

And in that half year, we started to see a very, very negative effect on our costs from various things. First, it was magnesium, for instance, and energy freight, and then even more energy effects, right? And those negative cost effects have continued to impact us during the whole of 2022 and also during the beginning of this year. And as you can see on this chart, of course, the full year of 2022 represented the lion's share of those cost increases. We have, however, from the beginning said that we would offset all those cost increases with price increases and with productivity increases in partnerships with our customers. And that is also exactly what has happened. We now are, you could say, back on a level, having compensated all of them. And in the beginning, of course, there was a bit of a negative time lag in the sense that our price increases lagged, of course, the cost increases. And now in this particular quarter, we have a slightly positive time lag world. price increases are catching up with the cost situation. But in total, the net impact on Gregness is zero. We have, in fact, compensated entirely for the cost increases over the past years. This looks easy. Look at this picture. sure, maybe it sounds easy, I don't know, but it is a lot of work, and I'm extremely proud of the Greenhouse organization for having achieved this good result, and also very proud of our customer relations having worked through this, and continuing then to to order new business, for instance, after all this journey. For the long term, we have launched what we call the Navigate plan. The Navigate plan is a plan for sustainable growth. And its aim is that bringing us to a level where we can say that we're the worst, not the worst, I'm sorry, but the world's best aluminum technology company in our niche. And we also aim at the 15% ROC and year-on-year rolling

yearly operating profit growth of 10%. And we have also committed to climate neutrality in 2014. The plan has three steps. We call them restore, build, and invest. And we're now well into the restore phase, where we are basically finalizing the rather large capacity expansion steps we've been taking over the past years. Then we will move into the build phase, and that is now our main focus going forward. And finally, we will create room, we believe, to invest in sustainable growth in the areas that are on this picture. And that brings us to the question how we're doing against this plan and more in detail what happened in the second quarter. And there we'll turn over to our CFO, Oskar Ström. Thank you.

As we heard from Jörgen, we continued to improve the earnings to a new record level, despite the challenging market environment and lower sales volume.

Higher earnings generate lower volume. Of course, it also means improved margin. And in Q2, this is if we compare year on year and quarter on quarter. As you can see on this slide, the EBIT per ton improved by 900 SEC from 2.8 thousand SEC in Q2 2022 to 3.7 thousand SEC this year. As we heard from Jörgen, there are, of course, several drivers behind this improvement. But I would say that the most important ones in the second quarter are the ramp-up to full utilization of the new recycling and cost-saving center in America. It's improved productivity. It's the tailwind from F2C. And last but not least, an additional price increases. Connected to the price increases, as you know, we've put surcharge clauses in place in many of our customer contracts. order to efficiently pass on cost increases in the value chain as costs for for instance energy freight alloying elements have now started to come down the delay surcharge clauses is creating a positive timing effect in Q2. This effect was approximately 40 million seconds in the quarter. With the current outlook on the cost development we do not at this point in time expect to see a similar timing effect from certain sources going forward rather we expect this effect to be fairly neutral in the third quarter and Looking at the individual business areas, we can see that we are improving margins in both Americas and Eurasia. Again, both year-on-year and quarter-on-quarter. And what's worth noting when looking at this chart is that we have names. negative geographical mixed development in Q2. As you can see, we have growth in Eurasia that has a relative to the group average and lower margin, where in America with a higher than average margin, we see a declining volume. This shift impacts the group operating profit negatively in the quarter.

In terms of capacity utilization, which is an important profit driver for Grengis, we continue to operate below the optimal level for the group. The capacity utilization remained at about 80% in Q2. I will come back and talk more about the business areas shortly, but let's first go and look at the group financials for Q2 in a bit more detail. Starting with the sales volume, this decreased with about 2% to 120.5 thousand tons, whereas the net sales decreased by 13% to 6 billion SEC. And the development of net sales in Q2, it's the net effect of slightly lower sales volumes, increased fabrication prices, decreased aluminium price, and positive changes in foreign exchange rates compared with the second quarter last year.

Moving on to the earnings, the adjusted operating profit then increased by 30% to 450 million SEK, which then is the new record level for grains for an individual quarter. and the key drivers behind this is as i mentioned the improved pricing better productivity and reduced raw material costs from the new recycling center in america in addition then the net changes in foreign exchange rates was positive 85 million compared to the same quarter last year on the negative side the lower sales volume and the shift in geographical mix had a negative impact on the operating profit in the quarter Excluding the one-time effect in Q2 last year from the write-down of assets damaged in the fire in Koonin. Excluding this, the depreciation of the stations increased within a total of 23 million SEC. And the increase is primarily related to that we have completed the logistics improvement project in Svensbom and the recycling and costing center in Huntington and started to depreciate these. There are no items affecting comparability in Q2, as the reported operating profit is therefore the same as the adjusted operating profit in the quarter. Regarding the tax in the quarter, it includes some 1%. of items related to for instance tax credits in the US and Chinese withholding tax and the net of these are 18 million. It's positive. If you exclude these items the effective tax rates in the quarter would be about 8 The profit for the period increased to 316 million SEC and earnings per share increased to 2.97 SEC in the second quarter. the financial net debt remained stable at 3.9 billion SEC and the leverage remained at 1.8 times EBITDA. As you can see on this slide, the adjusted cash flow of was strong in the quarter, totaling 779 million SEK.

And in addition to the strong earnings, a key driver of the cash flow is the continued focus on reducing networking capital and then in particular the inventory. And in Q2, we got the working capital down by an additional 245 million SEK. At the same time, the sales volume remained sequentially stable. So in general, I think we have a good momentum here and I expect to see further results on our focus in this field in the second half of the year. In the quarter, we also continue to invest in total 145 million SEC in expansion of the group and in key areas, such as more sustainable and circular products. And the majority of the spend in Q2 relates to the expansion of capacity and capabilities for battery cathode foil in Europe and Americas, and to the second of the two recycling and casting centers that we are building in Americas. In the second quarter, we also distributed 266 million SEC to our shareholders.

And finally, I think it's worth to comment on the large currency translation effect that impacts the net debt in the quarter. And this is primarily related to our dollar-nominated debt and the strengthening of the US dollar against the SEC. But all in all, I'm very happy that we continue to have a strong operational cash generation and we managed to keep the leverage stable in the quarter when we also paid dividend to our shareholders if we then go back to the business areas starting to look at starting to look at America as you heard from Jörgen the market demand in America was significantly lower than last year and despite successful actions compensating for some of this the sales volume was down about 11% year on year Despite the challenges and the lower sales volume, the adjusted operating profit increased by 20% to 292 million SEC, which corresponds to an adjusted operating profit per ton of 5.2 thousand SEC. I would say that this is a very good move, level, given the fact that we're only operating at about 80% capacity utilization in America. We had some help from favorable currency that contributed to the operating profit compared to last year. But the majority of the year-over-year improvement is really related to improved pricing and productivity. And to lower cost of the material, thanks to the new recycling and costing standard that was running at the close to full utilization in the and here we continued to experience a mixed market development resulting in a total 6% year-on-year sales volume growth in the quarter and the growth was primarily driven by Asia where we had comparable as China was largely affected by the COVID lockdown in Q2 last year.

As we heard from Jörgen, it's really the demand from the automotive customers that remain strong here and fueled by the backlog and in total sales in Asia increased by 29% in the first quarter. The growth in Asia was then partly offset by 4% lower sales volume in Europe. And similar to the first quarter this year, this is really two things that drives this. First, there is a general negative market sentiment outside of automotive. And second, we still have high inventory levels downstream. at distributors, mainly for general engineering and building and construction products. The tight engineering and BNC market also reduces the possibilities for us for optimizing metal management, and that has a negative impact on the earnings. in the quarter. On the positive side, we saw reduced external cost pressure and we also continued to have tailwind from FX with net changes in foreign exchange rates impacting positively with 64 million SEC in the second quarter.

As a result, The adjusted operating profit increased by 16% to 199 million SEC, and that corresponds to an adjusted operating profit per ton of 2.8 thousand SEC. That's up to 200 SEC per ton compared with With that, I'll hand over back to Jörgen, who will provide you with an outlook for the third quarter and the summary of the second quarter. Thank you. Yes, and regarding the outlook, we write here on this picture that the market uncertainty remains high in all regions. It's becoming almost tedious now because this is, I don't know, we've for many quarters in a row spoken about this high uncertainty. It is high, but we've also, I think, proven that we can handle high uncertainty and still provide a good result development and good volume development also. Specifically for the third quarter, we expect stable demand in automotive we expect to continue to stop in other markets. In other words, we expect the quarter to be something like the quarter two. This translates into an expected decline year on year. by a mid to high single-digit percentage when it comes to sales volume. And that also corresponds then, of course, to a decline relative to the second quarter of this year, the one we just concluded. And this is a normal seasonal pattern for Grangis historically. And this normal seasonal pattern has not repeated itself in the last two years because of the very strong demand and pent-up order books and so on. that we saw after the Covid shutdowns in 2020. But this year we expect a normal seasonal pattern and that means lower volumes in Q3 than Q2. In addition the timing effect

that we saw, and I spoke about before, from the surcharge clauses in customer contracts that we had such a good effect of in the second quarter, that effect is not expected to recur in the third quarter because prices and costs are then expected to be in balance. But on the other hand, we also expect to continue to offset any cost challenges, and demand challenges with flexibility and productivity and price increases. And as a result of all of this, we expect the operating profit per ton to be weaker sequentially than the second quarter of this year, which is the normal pattern in Grengas. But we also expect it to be stronger than last year. So to continue, in fact, the pattern we've had now over many quarters to have a margin improvement year on year. And that is the outlook for the third quarter.

Now, in summary then, we feel that the second quarter of this year was a very good one. In fact, it was our best ever quarter. In fact, if you look at the result for all now at a level which in itself represents an all-time high. So the best ever rolling film on this ebit for programming is. We are making, we feel, very good progress with Navigate, and in this picture you can see also a clip from our Global Leadership Summit, which took place here just a few weeks ago in Poland. And there is a large engagement throughout this organization, a lot of energy in making this Navigate plans succeed. And we also feel good confidence that we'll will. And therefore, we have very high ambitions going forward. So accounted for in the quarterly report and hope to be able to show also continued good development for grain as its shareholders. And that concludes our prepared remarks about the second quarter. Now we can open up for questions.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad.

The next question comes from Gustav Schwen from Handelsbanken. Please go ahead. Good morning. be on the non-automotive segment in your HR, maybe especially the other category. I mean, it's growing year over year. It's clearly up quarter over quarter. This should be the whether on general industrial demand, construction, etc.

What is going on here quarter over quarter? Is there a restocking element after the destocking period you have been talking about previously? Because, I mean, when you talk about the weak demand situation outside autos, we can't really see that in the numbers. Yeah, that's the first one.

Yeah, maybe I can start to comment a little bit on the technical aspects of this also. Of course, when you look at Eurasia, you have two quite different market environments in Q2, right? You have the Asia environment where you have large year-over-year growth, also good developments with the first quarter. But whereas you have a weaker situation in Europe.

And of course, when we present the European numbers, that's a mix of the two. But in reality, right now, they are very different. These two markets. And that may distort the picture a little bit. It's a combination. I mean, if you look at the other businesses, of course, you have a very large pickup also in that business percentage wise increase in Asia but that of course is smaller smaller business than the one in But just to be very clear here, do you have higher volumes in Europe for the other category Q2 over Q1? And what is driving that specification? I understand your question also sequentially also the volumes in Europe improves a little bit in the other segments and the reason for that is that we've had a situation with high inventories and for quite a few quarters now really started third quarter last year and I mean the inventory levels are coming down sequentially and in the past We expected to see a normalization of the inventory levels of the second quarter. Unfortunately, we're not really there yet. But if you compare sequentially, you will see... Lower inventory levels consequently higher demand for Grengas products, but not as high as we have originally expected them to be. Sorry for misunderstanding your initial question there. I thought that was the reason for it. Okay, let's go.

And then coming back to your guidance, this is one of the areas I guess which presumably will be weaker in Q3, right? Because automotive still looks pretty good. Age track with the seasonality should be quite similar volumes to Q2. So we should have a positive mix effect also on the earnings for Q2, right?

We have both positive and negative mix effects, and we don't forecast, as you know, mix. But there are some strong negative factors. And firstly, it's that, of course, now America generally is a higher profit generator, so we have a negative geographical mix effect. in this second quarter and there's nothing that says that that will change in the third quarter and also we have other product related negative effects that counter that so we're not at least

is not guiding for any positive mix, neither sequentially nor year-on-year in the third quarter. And I noticed last day, I mean, I understand that, you know, I think you mentioned it here again, but normalcy. Yes, I think that's a good summary, that we don't have any reason suspect that the market will sequentially deteriorate but it is however so that last year we had a strong backlog situation which is not the case this year So that masked, I guess, the traditional seasonality in the third quarter of last year, and we can expect that now. For that reason, we expect this, let's say, high mid-to-high single-digit volume decline year on year, which is something like that also sequentially, right? That, if you look back, you will see it's similar to the ordinary seasonal pattern of growing as it has been historically. Thank you very much. The next question comes from Victor Hansen from . Thank you. Hi, I'm Victor from the FDA here. A couple of questions.