Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this interim result presentation for the full year result of Grenges for the year 2023. I'm here together with our VP of Communications, Investor Relations, Orlando Hyllén, and also with our CFO, Oskar Hellström. And Oskar and I will together take you through today's material, which has been distributed also on Grenges' homepage and is available there. So 2023 is a year that we're quite proud of, and it also ended in a good way. So we think that the fourth quarter is a very strong finish to what is in fact a record year. Some highlights from the fourth quarter itself. is that we had stable volumes, slightly down, in what must be characterized as a hesitant market. I'll get back to the regional split in a second. And we saw, according to the customer segments, we saw stable automotive demand, but an HVAC market that was characterized by destocking a return to a normal seasonality. And right now, of course, it's winter. in the Northern Hemisphere and therefore not so much HVAC sales. As we have now in the last, I suppose, eight quarters or so, we were able in the fourth quarter of 2023 to continue to offset cost increases with price improvements and productivity improvements. in a good way, which also then helped us post a very strong operating profit, which is up 61% to 245 million SEC over 153 in the fourth quarter of 2022. We also had in the quarter good sustainability performance and also many other good points, for instance, a good cash flow. And we will highlight all those points as we go through this call today. If we zoom out to the full year of 2023, you can see in this picture the development in the various segments.

Market in automotive.

And as we are the strongest or as the largest portion of our business in Eurasia, that has a beneficial impact. effect also on Grengis' group volumes, so of 7% then. But we had, like I already alluded to, a very weak volume development in the HVAC market, which largely is driven partly, of course, by hesitant end customer demand, but mostly by the stocking in the entire HVAC value chain, including distributors and other downstream stockholders. which follows, of course, an equivalent strong upturn in restocking in 2022, right? So first we had COVID, then stock was built after COVID, and now stock has been depleted or hopefully normalized during 2023. But the effect on our volume, as you can see, is 18% for the whole group. But in total, these two effects plus effects in other segments sort of level out, and the whole group had a shrinking volume of about 3% last year. If we zoom out even further and look at some years in succession, We have on page four here the long-term development of Grenges since 2011. And as you can see, we've had since 2021, which was a strong restocking year after the COVID pandemic, had a relatively weak volume development. But we have also at the same time had a very strong EBIT development, which of course then corresponds to also a strong margin development. And that is during the years of 2021, 22, and also 23. Something firstly, that we're quite proud of. And secondly, is a strong sign, I think, of the value that Gragas delivers to our customers. Because without that value, we would not have been able to have the strong pricing performance and also the strong productivity performance that is evident in these numbers. Now, I know that many of you are very interested in the more detailed walkthrough of the Q4 results. And there I will turn over to Oskar Hellström, our CFO. So go ahead, Oskar. Thank you, Jörgen.

So maybe before we move into the fourth quarter, it might be worth commenting a little bit more on the full year. I mean, it's after all a new record year for Grengis. And as you can see on this slide, and also on the long-term chart that Jörgen just showed, we generated our highest operating profits so far, more than 1.5 billion SEK of EBIT there, on a 3% lower volume than last year. And this, of course, means that the margin continues to improve year on year as well. And the 2023 full-year adjusted operating profit per tonne of 3.3 thousand SEK, that you can see on the right-hand side here, is on par with the best full-year margin we've had so far. Now then, leaving the full-year perspective and looking at the fourth quarter, as Jörgen promised me that I should do, then we continued to improve the earnings, despite the challenging market environment and a 2% lower sales volume. Now Q4 is typically the weakest quarter of the year, and as you can see on this page, we experienced a normal seasonal decline, both the operating profit and of the operating profit per ton in the quarter. Looking from a year-over-year perspective, we do, however, continue to see a very positive development, and the EBIT per ton improved by 900 SEC from 1.4 thousand SEC in Q4 2022 to 2.3 thousand SEC in 2023. There are of course several drivers behind this improvement, but the most important ones in Q4 are the full utilization of the new recycling and casting center in Americas, which together with good metal management had a very positive impact on our raw material costs. Second, we continue to see a normalization of costs for, for instance, energy, but also increasing wage and salary inflation. In terms of geographical mix, that had a negative impact on the operating profit in the quarter, as we experienced the largest volume decline in Americas, where we currently have the highest margins. If we look at capacity utilization, which is also an important profit driver for Granges, we continue to operate below the optimal level. For the group, the capacity utilization remained at about 75% in Q4. I will come back and comment more on the individual business areas shortly, but let's first look at the highlights of the group financials for the quarter. Starting with the sales volume, this decreased with about 2% to 107.7 thousand tons, while the net sales decreased by 7% to 5 billion SEK. And the development of the net sales in Q4, that's the net of the lower sales volume, decreased aluminium price and then positive changes in foreign exchange rates compared with the fourth quarter last year. Moving on to the earnings, the adjusted operating profit increased by 61% to 245 million SEK. And the key drivers behind this improvement are, as I mentioned, the reduced raw material cost from good metal management and the new recycling centre in Americas. Its lower sales volume, increased wage inflation and the shift in geographical mix had a negative impact on the operating profit in the quarter. On a positive note, we received additional compensation for high energy costs in Poland related to 2022 and that totals 12 million SEK in Q4. Also changes in foreign exchange rates was favorable in Q4 with a net impact of 24 million SEK compared with last year. Depreciation increased by 15 million SEK year on year in the fourth quarter. The increase is primarily related to that we have completed the logistics improvement project in Finspång and the recycling and casting center in Huntington and started to depreciate these. There are no items affecting comparability in the quarter and the reported operating profit is therefore the same as the adjusted operating profit in Q4. The profit for the period increased to 108 million SEK for the quarter and for the first time also to more than 1 billion SEK for the full year. That's another record for Grenges in 2023. Earnings per share increased to 1.01 SEK for the fourth quarter and to 9.48 SEK for the year. And the Grenges Board of Directors proposed an increased dividend of 3 SEK per share, For the year, and provided that this is approved by the annual general meeting, it means that 32% of the profit is distributed back to our shareholders in line with our dividend policy. Also, the return on capital employed continued to increase and reached 12.2% by the end of the year, up 2.8 percentage points compared with the year before. Not yet at our target level of 15%, but certainly a large step in the right direction. Now moving on to the balance sheet that continued to strengthen during the quarter. So in Q4, we continued to reduce the financial net debt by about 200 million to 2.7 billion SEK. And this together with the improved earnings led to that the leverage came down to 1.1 times EBITDA by year-end. And this means that we during 2023, full year, reduced our net debt with more than 1.1 billion SEC and the leverage by 0.8 times EBTA. That I think is quite an achievement given that we during the year also reinvested in total 1.2 billion SEC in maintaining and expanding our production facilities. And as a consequence, the net debt to EBTA ratio is now at the bottom of our target range of between one to two times. Looking then specifically at the fourth quarter, as you can see on this slide, the adjusted cash flow before financing activities was strong, totaling 693 million SEK. So in addition to the strong earnings, a key driver of the strong cash flow is the continued focus on reducing net working capital. which combined with the normal seasonal effect, continued to have a positive impact on the cash generation also in the fourth quarter. We also continued to invest in total 318 million in the expansion of the group. And the majority of the spend in Q4 relates to the expansion of capacity and capabilities for battery cattle foil production in Europe and Americas, and to the second of the two recycling and casting centers that we're building in Americas. In Q4, we also made a capital injection of 223 million SEK into our joint venture for recycling and green aluminium production in the Yunnan province in China. So all in all, I'm very happy that our focus on networking capital reduction 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 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 and positively impact the earnings per share ratio. Before leaving this page, I would also just briefly like to touch upon how we currently view the capital expenditure for 2024. And during the year, we plan to finalize all ongoing expansion programs for battery materials and recycling. And we expect the full year CapEx to be about 1.2 billion SEC at current currency rates. Of this, approximately 70% is expected to be CapEx related to the expansion programs. Moving on to the business areas and first looking at Grengis Americas. As you heard from Jörgen earlier, the market in Americas was, the demand was significantly lower than the last year. The main reason behind this is a return to normal seasonality combined with significant year-end destocking in the HVAC market. Despite actions taken to compensate for some of the lower demand, the sales volume was down 19% year-on-year in Americas. But even with the lower sales volume, the adjusted operating profit increased by 68% to 166 million SEK. And this corresponds to an adjusted operating profit per ton of 3.6 thousand SEK. I would say that this is a very good margin level, given the fact that we are only operating at about 75% capacity utilization in Americas in the fourth quarter. The by far most important profit driver from a year-on-year perspective here is the new recycling and casting centre in Huntington that was operating at full capacity during the quarter. In addition to that, good metal management in general with a high share of recycled material had a further positive impact on the raw material cost. And finally, improved pricing and cost productivity continued to impact positively also in the fourth quarter. When it comes to net changes in foreign exchange rates, they were fairly neutral in the quarter. Leaving Reince Americas, moving on to Eurasia, where we continued to experience the mixed but generally positive market development in the third quarter, resulting in a total 13% year-on-year sales volume growth. So in Europe, where we experienced an increased demand coming from a gradual or continued gradual normalization of the downstream inventory levels. And this in combination with stable demand from automotive customers led to that we had a 10% year-on-year sales volume growth in Europe. In Asia, we continue to see a positive development in especially the automotive market with increasing sales to new EV applications. And this resulted in that our sales volume in Asia increased by 16% compared with Q4 last year. The adjusted operating profit continued to increase and reached 103 million sec in the fourth quarter. That's up from 55 million SEK in the same quarter last year. The adjusted operating profit includes 12 million SEK of energy cost compensation in Poland that I mentioned earlier, but also positive effects from net changes in foreign exchange rates of 21 million SEK compared with last year. In addition to these effects, the improved operating profit is primarily driven by the higher sales volume, improved cost productivity and good metal management. With that, I hand over back to Jörgen, who will provide you with a summary of 2023 and an outlook for the first quarter of this year. Thank you.

Okay, thanks, Oskar. And as a reminder to the audience here, Grengis has a long-term plan, which we call Navigate, and it aims at building the world's strongest aluminum technology company in our niche, but it also aims at a 15% return on capital employed, a 10% average year-on-year operating profit growth, and also aims, like I've already mentioned, at climate neutrality in the year 2014. The plan has three steps, and the first of those steps is called Restore and aims at restoring a strong enough return on capital to earn us the right to continue to grow. And we took, I think, a good step forward in the Restore plan in 2023, as evidenced in a strong uptick in the operating profit, but also a significant improvement of the return on capital employed to around 12% then. Then we have a step in the plan that's less visible in the figures, which we call build, and aims at building stronger processes, a stronger team in Grenges, stronger systems in various areas, such as innovation, growth, recycling, continuous improvement, but also aims at strengthening our people, generally speaking, and our work on sustainability. And then we have a step called invest. And also in the invest step, we took some important steps forward in 2023. We are continuing to invest in recycling and casting in the Americas and are now sort of halfway with our last project there, which is a more green metal oriented casting operation, which we hope to finalize, as Oskar said, during this year, 2024. We also created a new joint venture in the Yunnan province in southern China. And you can see in this picture here that the building has come up. Now we just need to fill it with good stuff and then after good equipment and then after that with green aluminum also. And this too is a process that will continue during 2024. And the bottom right-hand picture is a picture from our manufacturing of battery cathode foil, an important product for us also, we believe, in the future. We also got an approval of our long-term ambition from the Science-Based Targets Initiative to become carbon neutral in 2014. We again got the Ecovados Platinum Award, which places us in the top one percentile of our industry worldwide. And we managed to conclude the Aluminum Stewardship Initiative certification of our project. of all, in fact, our production sites with the certification of our sites in Poland in 2023. So good progress there. But we also have a quantitative and fact-based approach to sustainability in Grängis and can also show the outside world how we're doing there. And we're doing well. In particular, I guess, the very strong development of recycling to a full rolling 12 months number of 42% is, I think, a very strong step forward. It's kind of an abstract number, 42, but it corresponds to something like 200 plus million kilos of aluminum recycled that otherwise would have to be produced new. So it's a strong step forward in circularity and is becoming an important business for Grenges. If you wonder how much 200 million kilos of aluminum is, I believe it corresponds approximately to one and a half billion beverage cans. So we're talking about a lot of aluminum here that Grenges is now recycling and making into new, hopefully also sustainable products. This also helps reducing our carbon emissions to the lowest level ever in Europe. relative terms and also very low emissions in absolute terms. And as I said, the institutes that look at us from the outside give us high ratings and also approve our long-term plan for net zero in 2014. The financial targets, I guess you could also look at from a long-term perspective, and there you can see that we had good development on most of those. We did have a very strong profit growth. We also improved the strength of our balance sheet and got to a very comfortable level in our interval when it comes to the net debt to EBTA multiple. The dividend proposal I'll get back to that, actually. But the profitability, of course, is where we still have a ways to go to our 15% target. But you can see that we've had, trend-wise, a good development in the past couple of years. And we intend, of course, long-term to continue that. And the good performance on these and other metrics, I suppose, have a lot to do with the confidence performance. of the board to propose a rather significant increase of our dividend by by 20 percent from 250 the year before to three sec for the full year in 2023 and that is also done within the span of 30 to 50 percent of our net profit which is also one of our financial targets then Turning to the outlook, this is, of course, an uncertain world that we're operating in, also in 2024, and the market demand is also uncertain. We think for the first quarter that we will be in a relatively stable situation with volumes perhaps edging down a bit, especially in Americas, where we have yet to see a recovery of especially the HVAC market, which we hope will occur once the season kick starts there again a little later in the spring when the when it gets warmer. As you've seen, no doubt it's rather cold in many places in America now, so not a lot of people are buying HVAC equipment. For 2024, our ambition, our aim, if you like, is to offset the increased price pressure that can be expected and continued inflation of wages with increased market share and cost productivity. And both when it comes to the market share and when it comes to the cost productivity, we have We believe good activities and plans, both good plans and also good activities ongoing. And that, of course, gives us some comfort for the full year of 2024. Longer term, our Navigate plan and the ambitions it contains remain unchanged. So to summarize this presentation, then, this was, we feel, the fourth quarter of 2023, a very strong finish to our record year in which we developed or proved our best ever operating profit over 1.5 billion SEC in a hesitant market and despite low demand and low utilization, in fact. We also did deliver our best ever net profit over 1 billion SEC for the first time and also our best ever earnings per share by not a small margin and now up to 950 or thereabouts. So also quite good. And a very strong cash flow and a good profitability improvement, which together then significantly strengthened our balance sheet, as we've already referred to. then also a strong increase of the dividend. We made good progress toward our long-term financial targets, but of course every year is a new year, and this year, of course, will bring its own challenges. And we're going to meet them in the way I just indicated by focusing on market share growth and on cost productivity. In 2023, we had our best ever sustainability performance and also up the ante, I suppose, by becoming very formal about our long-term goal and getting it approved by the science-based target initiative. And we continue the systematic work on our Navigate plan for sustainability growth with unchanged ambition. And that actually concludes the prepared remarks for about 2023 and about the last quarter of it. So now I would like to open up for any questions from the audience.

If you wish to ask a question, please dial star key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star key 5 on your telephone keypad. The next question comes from Adrian Jelani from ABG Sundal Collier. Please go ahead.

Yeah, hello.

A few questions here from my end. Starting off on the American market on the HVAC side, you mentioned just recently that you are expecting to see an improvement here when the season starts. Can you just give us an understanding of what the lead times are? Does that mean that sales we'll start seeing a recovery from Q2, as you expect, or are we talking more towards the second half of the year for you on that front?

No, for sure. Seasonally, every year so far, and we also expect 2024, we expect good sales in the second quarter and the third quarter, which are the large quarters for HVAC. But if you're asking for a year-on-year improvement, that is a figure that we don't yet forecast. We don't know what the year-on-year improvement will be in the second quarter yet. And that has to do with some uncertainty as regards to inventory, which we believe to be rather normalized in the HVAC supply chain or value chain in the Americas. But where there is some uncertainty and it's hard to tell exactly what the situation is until the season starts. So sequentially, of course, we absolutely expect an improvement. And year on year, we will have to wait and see a little bit and see. until the market starts and maybe be able to give you a forecast of that in our first quarter presentation.

Okay, I understand. And then on the automotive side, in recent weeks we've seen both Tesla in Germany and Volvo Cars in Belgium that temporarily shut down their production due to the whole Red Sea situation. Is this something that could have an effect on your automotive sales in Europe or should we not worry too much about that?

I think everybody should worry about the Red Sea situation. And we should also worry, of course, about the terrible conflict in the Middle East that it's now been drawn into. So we worry quite a bit about that. And, of course, it's a negative, I believe, for the world and for the economy and also terrible personally for the people who are hit by it. But leaving that aside, the Red Sea supply difficulties that are being encountered now It can have negative influences on us of the kind that you mentioned, but can also perhaps be a short-term positive because if there's a shortage of supply from Asia, that can lead to an increase in demand from Americas or Europe. On balance, though, we don't think that this will be a major factor for Q1 one way or another. And whatever factor there is, is factored into our outlook or guidance there of slightly negative volumes overall.

Okay, I understand. And then also a question on the 223 million invested in your joint venture in China. Was this a one-time thing, or are we going to see continued investments in here in the coming quarters, sort of in addition to the normal CapEx that you guide for?

It's a good question, Adrian. The 223 million, it's us basically buying our 49% of this company. So you can consider it as primarily as a financial investment from a growing perspective. And it's not a recurring item. It's a one-time thing.

Okay, perfect. I think that was all for me for now.

The next question comes from Mats Liss from Kepler Chuvriaks. Please go ahead.

Yeah, hi, Kepler Chuvriaks, Mats Liss. Just a couple of questions. First, I mean, coming back to the Americas there, and you mentioned that you expect volumes to, well, this is the main reason why you see lower volumes in Q1. But is it more related to the market, I guess, or is it a continued inventory correction that you foresee?

Yes, it's a good question, and we do not have a precise answer because I don't think anybody has a full overview of the inventory situation in the full HVAC supply chain. But it's quite clear that after a year or so of destocking, the HVAC manufacturers are cautious to build up new inventory, and I think we'll have to wait to see the actual end customer demand coming before we know what the demand for material will be. both out from our customers and into our customers. So there's some uncertainty there, but it's not a higher uncertainty than we've learned to deal with in the past. And it's actually probably a lower uncertainty than we faced going into 2023, when there was a lot of inventory, but nobody knew exactly how much, right? So we believe that the right understanding to have is that there's a more or less normal inventory situation in the HVAC supply chain in the Americas.

Okay, great. Then looking at cash flow, I mean you had an excellent cash flow generation and probably the help of working capital and do you foresee a continued support this year or is it sort of on a balance situation more or less now?

Good question there, Mats. And I think, I mean, what we will see, I think, is continued efforts from Greng's side to further optimize networking capital in general, and particularly also on the inventory side, where we put a high focus. We achieved a lot there, we need to remember, in 2023, which means that the potential to reduce further is, of course... smaller going into this year. But it's certainly our ambition to continue to optimize. And then I think the other thing that we need to take into account that we don't know fully yet is what working capital need we will get from the development of the overall market. But our focus to optimize working capital remains.

Great, then I read the other day here about the European sanctions on Russian, potential further sanctions on Russian aluminium. Could you be affected in some way or what do you foresee if those are implemented?

First, I can say that we strongly support the sanctions by the European Union on import of Russian aluminum in every way possible. And we have also done what we can in our industry associations and directly with the European Union to express that strong support. There is still a very large, in fact, import of Russian-made aluminum into the European Union. And in our opinion, that should stop. In fact, the sanctions that have been imposed and suggested we would rather see stronger sanctions also covering more product groups than are currently covered by the imposed or proposed sanctions. For Grange's, though, it's a long time since we decided to phase out all Russian-made aluminum. We decided that in the beginning of 2022. And we have also done it. So there is no... Russian made aluminum in any of our products. And that is also what we can promise our customers. Not all, unfortunately, European manufacturers of products can promise that. But we hope that in the future they can because we hope that these sanctions will have teeth.

And maybe we can add also there, if you asked from a more external angle, maybe, Mats, that if this happens, of course, this could have an impact on the aluminium supply into Europe. And the consequence of that will, of course, be seen on the pricing side. And in that case, it's most likely the European aluminium premiums that will be impacted and will probably be increasing. But as you know also, from a Grenges perspective, our pricing models work in such a way that we pass on the aluminium price, certainly the LME price, but to a very large extent also the metal premiums to our customers in the value chain. So even though it may impact aluminium price, it will have a limited impact on Grenges.

Great and just finally there I mean you're building capacity to supply battery foil to well battery producers I guess and what's the status there are you sort of well in good mood talking to the customers with supply contractor and so on could you give some comments there?

Firstly, from an industrial level and a technical level, we are making good progress, we think, and are more or less following our time plans for that investment program. Regarding customers, there is very strong interest from customers who have started or intend to start battery production in Americas or in Europe, especially in Europe. And we believe that we have the customer contacts and the customer interest that we need to make that investment a success. Having said that, though, there is, of course, a lot of news now about short-term software demand for electric vehicles and also delays of various industrial projects, I guess, related to battery manufacturing in both Americas and in Europe. And that, of course, translates also to some extent to delay for the need for components for such batteries, such as the foil that we intend to provide. And that is something that we will have to deal with and is part, of course, of the overall guidance that we give on volume year-on-year. But as we've said before, this is a long-term thing and we're quite confident that we will be it will be a good addition to Grengis' portfolio of businesses to also produce battery cathode foil. If you zoom out, if you allow just one more comment on the battery part, we believe that there are many other areas also related to battery and to EVs, which are important for Grengis' growth. And there we had really good growth, especially in Asia in 2023 in certain segments. And we are also taking a lot of contracts in other segments in Asia as well. and in Europe for 24 and out. So overall, we are still very optimistic about the opportunities that the electric vehicle thing represents for Grengis. Thank you. Great.

That's all for me. Thank you.

The next question comes from Mats Liss from Kepler-Civriax. Please go ahead.

I'm already done. Thank you.

But thanks anyway. Take care. Have a good day.

As a reminder, if you wish to ask a question, please dial star key 5 on your telephone keypad. There are no more questions at this time. So I hand the conference back to Jorgen Rosengren for any closing comments.

Okay, then I'd like to thank you all for attending this fourth quarter and full year earnings call and for the interested and intelligent questions and wish you all a good day and see you next time. Goodbye.