Gränges AB (publ)

Good morning, ladies and gentlemen. My name is Jørgen Rosengren. I'm the CEO of Grengis, and I'd like to welcome all of you to this earnings call for the third quarter of 2023. With me here I have our CFO, Oskar Hallström. So let's start with the comments on the third quarter, which was in many, many respects a very good quarter. Most of all, we're proud of the strong profitability and the record cash flow in the quarter. We saw in the third quarter stable sales volumes of 115,000 tons compared to 120,000 last year. This is slightly down, as you can see, and that's more or less in line with the market development we've had and sales development that we've had earlier in this year of 2023. The background to that is that in automotive we see stability in the demand, but in the large HVAC segment we see a return to the normal seasonality in that segment, which is, of course, weaker in the fall and stronger in the spring. And in the past years, that seasonality has been masked by the supply chain difficulties that we've had in the past in the world and by other factors. But now we're back to the normal seasonality. And this presents a year-on-year decline in that particular segment, also exacerbated by the stocking. As we have done now for many quarters in a row, we have been able to offset the price with price and with productivity improvements, the cost increases that we're seeing generally in the world now with the return of inflation in a very good way. which then also helps the profitability to be very strong despite the hesitant markets. So it's in fact up 40% to 439 million. And the last 12 months rolling profitability is the highest that Grange's has ever presented, both on the operating profit level and also on the net profit level. We have in the quarter also a point of pride, our good sustainability performance. I'll speak a little bit more about that in a moment. And finally, we've used a good profitability and also an excellent cash flow in order to strengthen our balance sheet, which is good because we're now very well within our target range for our financial gearing, our leverage. And all of this, in fact, we see as proof positive that the Navigate plan that we set out about a year ago is continuing to deliver good results. Looking at the market, it's a bit of a mixed picture. If we start with Granus Americas, we're down there in the quarter relative to the strong level in 2022. That is, inside the segment, also a mixed picture. Automotive is stable, not to say strong. But as I mentioned before, we have the destocking and seasonality effects in HVAC. Partly offset by a good result in specialty packaging. Eurasia is flattish, up a bit in fact. And there we have good development in both parts, in fact both in Europe and in China. But China had a very tough comparable because of an excellent third quarter last year. So all in all we have to say that 2% up in grains Eurasia is a good result. All in all, the group has stable but slightly down volumes of minus 4%. And as you can see here, the automotive is a very stable part of our business, whereas HVAC right this quarter is negative year on year due to mainly a return to normal seasonality. All in all, minus 4%, which is exactly in line with what we have for the first nine months of the year. Sustainability. We have very, very high recycling volumes. They are, in fact, all-time high. And in the last 12 months, we have recycled 39% of the purchased raw material has been recycled raw material. So we're now actually up against almost 200,000 tons of recycled aluminum as an input. So recycling is starting to become a very important business for Grengis. This also is part of the explanation for our record low emissions. Our last four months emissions now are down to 8.6 tons per ton product sold, which is indeed a record level, and in the quarter we were even lower at about 8 tons per ton. So a very good development there. Also, the 8.6 number is about 25% down from our starting point in 2017. So you could say that we're about a quarter on the way from where we were in 2017 to our target of climate neutrality in 2014. We think that's good performance. This has happened despite the phase out that is now complete since a while back of Russia produced low carbon primary aluminum. We're happy that we have completed that transition, but we're even happier that we're able to continue the good carbon footprint development despite it. And very positive is that we have reached a long-term target to have all of our production sites certified by the organization called the Aluminum Stewardship Initiative, ASI. And this is because we communicated last week that we have completed the certification of our latest large acquisition, the site in Konin. These certifications mean a lot of work, but they also mean that we can guarantee traceability and can guarantee transparency of our sustainability efforts in accordance with the highest industry standards. And therefore, we're proud to reach this milestone. Turning to Navigate for a moment, we set out a very simple but also very ambitious plan about a year ago, which has three steps in it, restore, build, and invest. And in this quarter, we feel, and also, in fact, in the year to date, 2023, we feel that we're showing very good results, not the least of the restore initiative. The strategy as a whole is intended to build, in fact, the world's best aluminum technology company to achieve 15% ROCE, to achieve 10% yearly operating profit growth, and to continue our already very good progress towards climate neutrality in 2014. Some examples of the build part of the strategy, I guess we can see on this picture here, where you see to the left, in fact, recycling. So we have, as you know, invested quite a bit in remelting and recycling operations in the Americas and also in Europe, in fact. And we are continuing that investment because we believe, firstly, it's a good investment from a business perspective, but it is also a very good investment from a sustainability perspective. In this picture, you can see some of the recycled aluminum that we're going to use then in producing new high-tech products in our facility in Huntington in Tennessee. Top right, you have some happy colleagues of ours in Poland who are celebrating the certification of the facility in Konin against the Illumina Stewardship Initiative that I spoke about before. And bottom right, you can see an example of something very important for a long-term strategy, namely partnerships. So our strategy is very focused on partnerships because we believe in a circular world, partnerships both upstream and downstream are going to become much more important in order to be able to create circular flows. And in the picture, you can see the customer conference that we had recently in Shanghai with 400 attendees, where we're also devoting a large part of the conference to the partnerships that we want with our customers and that they also want with us in order to achieve circularity and to work together towards carbon neutrality, as said before. These are all examples of what we're doing in the build part of our strategy. But I know that many participants on this call are very interested in the quarterly numbers, and therefore I'm going to turn it over now to Oskar, who's going to take us through some of the details on that.

Thank you, Jörgen. As we just heard from Jörgen, we continued to improve the earnings in the third quarter, despite the challenging market environment and the slightly lower sales volume. And higher earnings generated on the lower volume, of course, also means an improved margin. And as you can see on the right hand side on this slide, the EBIT per ton improved by 1.1 thousand SEC from 2.7 thousand SEC in Q3 2022 to 3.8 thousand SEC this year. There are, of course, several drivers behind this improvement, but I would say that the most important ones in Q3 are the full utilization of the new recycling and casting center in Americas, which together with improved metal management had a very positive impact on our raw material costs in the quarter. We also continue to see higher average fabrication prices, improved productivity, and also improved In many instances, lower inflationary pressure on costs for, for instance, energy and freight. In terms of geographical mix, though, that had a negative impact on the operating profit in the quarter, as we experienced the largest decline in demand in Americas, where we currently also have the highest margins. On a positive note, we have received a compensation for high energy costs in Sweden related to the years 2021 and 2022. And this totals 22 million SEK. This is a one time amount, I should say. So this will not be recurring in the fourth quarter. Excluding the energy cost compensation, the Q3 adjusted operating profit per ton would be 3.6 thousand SEK, so slightly below the Q2 level of 3.7, but still a very good level for a third quarter. In terms of capacity utilization, which you know is an important driver for profits for Grengis, we continue to operate below the optimal level. For the group, the capacity utilization declined to about 75% in Q3. I will come back and comment more on the individual business areas shortly, but let's first look at the group financials for the third quarter. Starting with the sales volume, this decreased with about 4% to 114.9 thousand tons, while the net sales decreased by 10% to 5.6 billion SEK. The development of the net sales in Q3, that's the net effect of the lower sales volume, decreased aluminium price, increased fabrication price and positive changes in foreign exchange rates compared with the third quarter last year. During the quarter, we've also settled and closed the insurance case related to the fire that occurred in Konin in May last year. As a consequence of this, we have additional revenues of 106 million SEK in Q3 related to insurance compensation. This does, however, not have an impact on the adjusted operating profit in the quarter. as this amount is matched by write downs and additional expenses related to the fire. But the insurance settlement does impact the reporting operating profit, which we will see shortly. Moving on to the earnings then. The adjusted operating profit increased by 38% to 439 million SEK, which is the second highest level in an individual quarter for Granges. And the key drivers behind this are, as I mentioned, the reduced raw material costs. And that, of course, relates a lot to the new recycling center in Americas, but also then improved pricing, better productivity and reduced inflationary cost pressure. Lower sales volume and the shift in geographical mix, together with changes in foreign exchange rates, had a net negative impact on the operating profit in the quarter. The additional write-downs that I mentioned, that relates to the assets then damaged by the fire in Kornim, amounted to 47 million SEK in Q3 this year. Excluding this, as well as then the write-down of assets made a year ago for the same reason, The underlying depreciation increased by 12 million SEK year on year in the third quarter. And this increase is primarily related to that we've completed the logistics improvement project in Finnspång and the recycling center in Huntington. And we started to depreciate these. The reported operating profit of 479 SEK. million SEK in the quarter, further than includes items affecting comparability of positive 40 million SEK, and this is fully related to the insurance compensation for the fire in Konin. The profit for the period increased to 332 million SEC and earnings per share increased to 3.12 SEC in the quarter. Also, the return on capital employed continued to increase and reached 11.2% by the end of September. That's up 1.7 percentage points compared to the year before. Now, moving on to one of the highlights of the quarter there. During Q3, we reduced the financial net debt by about a billion SEK to 2.9 billion SEK. And this, together with improved earnings, led to that the leverage came down to 1.3 times EBTA in September. This means that the net debt to EBITDA ratio is now comfortably within our target range of between 1 and 2 times. As you can see on this slide, the adjusted cash flow before financing activities was strong in the quarter, totaling 1.1 billion SEK. In addition to the strong earnings, the key driver of the strong cash flow is the continued focus on reducing net working capital, and in particular then the inventory, and this continued to have a positive effect on cash generation also in the third quarter. In addition to this, the cash flow in the quarter includes received insurance compensation of in total 293 million SEK related to the firing Conan. We also continued to invest in total 94 million SEK in the expansion of Granges and then in key areas such as more sustainable and circular products. And the majority of the spend in Q3 relates to the expansion of capacity and capabilities for battery cathode foil production in both Europe and Americas, and also to the second of the two recycling and casting centers that we're building in Americas. I would say that all in all, I'm very happy that our focus on reducing networking capital continues to pay off and that we continue to see a strong operational cash generation and leverage reduction. The strong cash generation will lead to that we can reduce also our gross debt and therefore also the financing cost for the Grenges Group. And consequently, I foresee that the financial net will continue to come down going forward, further improving the earnings per share ratio. Moving on to the business areas, looking first then at Grengis Americas. As you heard from Jörgen earlier, the market demand in Americas was significantly lower than last year. Despite some successful actions then compensating for some of this, the sales volume was down about 10% year on year. And even with the lower sales volume, the adjusted operating profit increased by 33% to 302 million SEC. And this corresponds to an adjusted operating profit per ton of 5.3 thousand SEC. This is a very good margin level given that we are only operating at about 80% capacity utilization in Americas in the third quarter. The by far most important profit driver from a year-over-year perspective is the new recycling and casting center in Huntington that was operating at full utilization during the quarter. In addition, good metal management with a high share of recycled material had a further positive impact on the raw material cost. And finally, improved pricing and productivity continued to impact positively also in the third quarter. Leaving Grains Americas, moving on to Eurasia. Here we continued to experience a mixed market development in the third quarter, as you saw from Jörgen's slide earlier. And this resulted in a total 1% year-on-year sales volume growth. This growth was primarily then driven by Europe, where we experienced an increased demand coming from gradual normalization of the downstream inventory levels in combination with a stable demand from automotive. And this led to a 3% year-on-year sales volume growth in Europe. In Asia, we met very strong comparables as sales volume in Q3 last year was positively impacted by backlogs that was built up during the COVID lockdown one quarter earlier. And as a consequence, our sales volume in Asia was 3% lower than in Q3 last year. The adjusted operating profit continued to increase and reached 122 million SEK in the third quarter, up from 87 million SEK in the same quarter last year. The adjusted operating profit includes the 22 million SEK of energy cost compensation in Sweden that I mentioned earlier, but it also includes a negative effect from net changes in foreign exchange rates of minus 17 million SEK compared with last year. So if we adjust for these two things, we see an underlying operating profit improvement of around 34% or about 500 sec per ton year on year. And this improved profit is primarily driven by higher sales volume, improved productivity and more efficient metal management. From a capacity utilization perspective, this remained below the optimal level. It was slightly above 70% in the quarter for Eurasia. With that, I hand over back to Jörgen then, who will provide you with an outlook for the fourth quarter and the summary of the third quarter.

Thank you, Oskar. The outlook for the fourth quarter is, I guess you could call it stable. There is, of course, a weaker market than we had last year. And it also remains a very hard market to predict, especially concerning the inventory reduction that is inevitable, but hard to time and downstream from Gregorius. however we generally have a very relatively good view of the near-term demand and based on that and on our plan to have slightly longer maintenance stops than usual in the fourth quarter we expect the sales volume in the fourth quarter to be roughly in line with the same quarter of last year that also reflects our ambition to continue to take market share in this very volatile market so as to partly offset market weakness. We have a very high ambition and also we believe now a very strong track record in flexibly meeting the market fluctuations with new sales, but also in protecting our margins against any cost variations. And in the past two years now almost we have been able to completely offset any cost changes with productivity improvements and with price adjustments. And that of course is our ambition also going forward. Then, to summarize this report, we feel this is a very strong quarter. It is a strong quarter financially, and we're especially proud of that as it happens despite some hesitancy in the markets. We improved our profit. We improved our profitability. Both, in fact, look at the last 12 months' numbers to record levels. And we did so while generating an excellent cash flow. And this excellent cash flow helps reduce our net debt. It helps to reduce our gross debt. It helps to reduce the negative impact of our financial costs. And it strengthens our balance sheet and finally also reduces our risk as measured, for instance, in our financial leverage. For the longer term, it may be even more important perhaps with the very strong sustainability performance that we've had now for quite a long time. And I mentioned already the 25% reduction of our carbon intensity numbers since 2017 and the all-time high recycling numbers in the quarter and year-to-date. And what's not visible in this report, but is equally important, is the operational performance. This looks easy when it looks good, but it isn't easy, in fact. These results are made possible by the very hard work of the Granges teams in our regions in Asia, in Europe, and in Americas, and also by the very good operational performance that they deliver. which is, of course, critical to be able to maintain, for instance, the strong customer relations that we have and enjoy and intend to continue to have also in the future. In the quarter, we've continued our systematic work on executing our Navigate plan that we launched about a year ago, which aims at sustainable growth and the targets that I mentioned before. And we believe that the quarter is a very good proof of how that work is starting to pay off. And although the outlook is uncertain, our ambition remains the same, a very high one. And we feel some confidence in our ability to be able to deliver on that also going forward. And with that, we have concluded our prepared remarks on the quarter. And operator, we're then therefore opening up for any questions that the audience may have. Please go ahead.