Gränges AB (publ)

Good morning, ladies and gentlemen, and welcome to this Q3 results conference with Grengis. I'm here, my name is Jörgen Rosengren, I'm Grengis' CEO, and I'm here with Oskar Hellström, our CFO, and with Sara Lander-Helén, our VP of Communications and Investor Relations. We'll be referring in this call to a PowerPoint presentation that's available on our webpage, and I'm going to start on page two of that presentation. And as you can see on this page, we had in the third quarter of this year another growth quarter. And that's very gratifying, especially considering that the market was rather slow. Our sales volume increased by 7% to 123,000 tons compared to 115 last year. And this, as I just said, was in spite of rather weak automotive demand, but bolstered by good growth in other markets. And in all of our segments and in all of our markets, in fact, we had really good effect of the market share gains that we've achieved over the past year and a half or two during an increased focus period on sales for Grengis. That's, of course, extremely good to see, especially considering the external market conditions. We had in the quarter a good productivity improvement and also good metals management, which is an important thing for Grengis, generally speaking. And these two positive effects largely offset an increase in price pressure and increase in wage inflation. And together then with the strong volume development, we had a stable operating profit at 420 million SEC, which is roughly in line with last year. Also extremely nice to see, of course, is the very good development of our sustainability numbers, notably the carbon footprint, which is at a very low level compared to our historical levels, and also the record recycling that we achieved in the quarter. We also announced in May this year our partnership with a company called the Shandong Innovation Group, I'm sorry. So going to back up a little bit and let's go through the market segments here. So we saw, as I said before, in automotive, a weaker market, but we saw a very good recovery in our other market segments. We saw strong growth in HVAC. We saw stable growth in specialty packaging, but the comparison quarter there was quite strong. So year to date, also strong growth in packaging. And we saw a very strong growth in other niches. And in total, that turned out then to be a 7% growth for the Grengas group. And as you can also see on this page, there was good growth in both of our segments, both in Grengas Americas and Grengas Eurasia. But, of course, especially nice to see the very strong growth in Grengas Eurasia, which relied on growth both in Europe and in Asia, in fact, in this quarter. And now let's turn to the... new partnership that we're entering into soon, we hope, in the Shandong province in China. We announced this partnership in May, and the objective of it is to strengthen competitiveness and to enable further market share growth in Asia, in China, but also in Greater Asia. And by the terms of this partnership, Grengis will acquire a large production facility from the Shandong Innovation Group, but we will also gain access to scalable downstream capabilities as well as improved metal supply and also improved energy supply, which, by the way, is also going to help our recycling efforts and our sustainability efforts in Asia and in China. In exchange for this, the Shandong Innovation Group will gain a minority share in Grengis' subsidiary in China. And the new factory that we're acquiring, of course, needs sales volume in order to be profitable. And we expect in the first months of operations, the new facility to be operating at approximately break-even profitability. But we also expect the transaction as a whole to contribute positively, marginally, to EPS from 2025, from next year then, and on. On sustainability performance, you can see here that we had, as I already referred to, very good performance. The run rate carbon emissions intensity of 7.6 tonnes per tonne in the third quarter in the last 12 months is in fact 33% lower than the baseline that we referred to in 2017. And we also recycled in the last 12 months 240,000 tonnes of carbon aluminum, so quarter million tons, which is a very good level, especially if we compare with the 2017 baseline, it's then almost 400% higher than that level. And now we'll turn over to Oskar Hellström, who will take us to the financial results in a little bit more detail.

Thank you, Jörgen. As Jörgen mentioned here, and as you can see on this slide, Q3 is yet another good quarter with solid growth for Granges. Sales volume was up 7% year-on-year, but declined 6% sequentially. And I would say that this reflects that we now continue to see a more normal seasonality again. And as a consequence of this, we also see a normal seasonal decrease of both the operating profit and of the operating profit per ton in the quarter. Looking from a year-on-year perspective, we do, however, see a slightly negative development, both in terms of EBIT that reached 420 million SEC in the third quarter and in the EBIT per ton that decreased by 400 SEC from 3.8 thousand SEC in Q3 last year to 3.4 thousand SEC this year. But here, I think we need to remember that the 439 million SEC of EBIT that we delivered in Q3 last year includes a one-off energy cost compensation that is related to the years 2021 and 22, and that totals 22 million SEK. If you adjust for this, the year-on-year EBIT development is slightly up, despite unfavourable development of currency rates. If we look at the drivers behind this development, we can see that we continue to manage to fully offset the market price pressure as well as the wage inflation in the third quarter. With the main contributors to this is then the increased sales volume fueled by the new business gains, as we heard from Jørgen. It's the increased utilization of our casting and recycling centers, which together with generally good metal management had a positive impact on our raw material costs. And last but not least, generally improved cost productivity. If we look at capacity utilization, which is an important profit driver for Grengis, this increased by 5 percentage points year on year to about 80% for the group in the third quarter. This is a good improvement over prior year, but it still means that we operate currently below the optimal level. Let's now look in more detail on the group financials for the quarter. Starting from the top there, we can see that the sales volume increased by 7% to 123,000 tonnes. Net sales, on the other hand, increased slightly less, 3% to 5.75 billion SEK. The lower increase in net sales and in sales volume is primarily explained by the lower average fabrication price. On the earnings, the adjusted operating profit reached 420 million SEC. That's 3 million SEC higher than in Q3 last year when excluding the one of energy cost compensation that I mentioned earlier. On the negative side, depreciation increased like for like by 8 million SEC year over year. And this is fully related to completed expansion projects. And the net effect from changes in foreign exchange rates was negative 12 million SEC compared with last year. The profit for the period reached 285 million SEK for the quarter and the earnings per share was 2.67 SEK. And this represents a year-on-year improvement of 15 million SEK when excluding the positive impact of one-off items in 2023. We do not have any such items in Q3 2024. On a further positive note, the return on capital employed increased to 11.9% by the end of the third quarter. That's up 0.7 percentage points compared to the year before. Now looking at the balance sheet and during Q3, the financial net debt was reduced by 200 million SEK to 2.8 billion SEK. And as a consequence, the net debt to EBITDA ratio came down to 1.2 times. And this means that we are gradually approaching the bottom of our target range for leverage of 1 to 2 times EBITDA. And as you can see on this chart, this was achieved by a continued strong cash flow from operations with the adjusted cash flow before financing positive 474 million SEC in Q3. And as you know, we are now approaching completion of several large expansion projects. And during the quarter, we invested in total 280 million SEC in expansion projects And the majority of the spend in Q3 relates to the expansion of capacity and capabilities for battery cathode foil production in Europe. and to the second of the two recycling centers that we're building in Americas. As you know, we typically don't provide any forward-looking guidance for leverage. But looking ahead at the fourth quarter this year, I do, however, think that there are a couple of things that are worth to keep in mind. First, with a fairly strong sales outlook that Jörgen will come back to shortly, we don't expect to see a major release of working capital from a sequential seasonal decline in Q4 this year. Second, as we are completing several large expansion projects at the same time as we're conducting year-end maintenance, we expect capital expenditure to be higher than normal in the fourth quarter. And lastly, in November, we will distribute 159 million SEK to our shareholders in the second of the two dividend payments. And taking this together, I think it's likely that we will see a leverage increase for Grengis in the fourth quarter, albeit then from a very low level. Moving on to the business areas and starting with Grengis Americas. As you heard from Jörgen, with the exception then of automotive, market demand in Americas improved somewhat in Q3 compared with last year. But in addition to this, we saw an increasing effect from the actions taken to further grow sales through capturing new business, especially within the HVAC and other niches markets. And in total, this led to a sales volume growth of 3% year on year for Grengis Americas. In terms of earnings, we managed to largely offset the continued market price pressure with increased sales volume, generally improved cost productivity and increased utilization of our casting and recycling centers. On the negative side, the net effect from changes in foreign exchange rates was negative 11 million SEC compared with last year for Americas. In total, the Q3 operating profit reached 283 million SEK, which corresponds then to a margin of 4.8 thousand SEK per ton. Although this is slightly lower than in last year, we need to keep in mind there that this is still a very good margin level in the industry. Moving on to grain incineration. Also here we experienced some improvement in market demand except for in automotive. And in combination with the new business gains, this resulted in a total 10% year-on-year sales volume growth. In Europe, we experienced increased demand on the back of normalization of downstream inventory levels, especially within the packaging, general engineering and distribution markets. And in combination then with a largely stable demand from automotive customers, this led to an 11% year-on-year sales volume growth in Europe. In Asia, we continue to see some positive developments, especially connected to electrification part of the automotive industry, but also other industries. And this resulted in a sales volume growth in Asia of 7% compared to Q3 last year. The adjusted operating profit reached 165 million SEK in the third quarter. This represents an increase by 65 million SEK compared with the same quarter last year when adjusting for the one-off energy cost compensation there in 2023. um the lower average fabrication price was more than offset by higher sales volume improved metal management and improved cost productivity we also see some benefits from from lower energy unit costs in in europe in particular so generally a very good development in in grains eurasia in the third quarter so with that i hand back to jorgen who will provide you with an outlook for the fourth quarter

Thank you, Oskar. Well, as we've been saying for quite some time now, the market demand remains quite hard to predict. Also in the fourth quarter of this year, there is an apparent weakness in automotive. But on the other hand, we have seen a recovery and expect also to see a continued recovery in other markets. In this environment, we're continuing to focus on market share gains, considering the significant capacity opportunities that we have. And all of this taken together leads us to expect a high single-digit percentage sales volume growth compared to the fourth quarter of 2023. For this volume, then, we aim to continue to offset price pressure and wage inflation with cost reduction and productivity improvements, as we did in the third quarter. And as regards currency, it depends, of course, on what the rates will be during the quarter. But we're currently expecting a slight negative effect compared to the fourth quarter of 2023. And that actually concludes the prepared comments on the quarterly results. And therefore, operator, now is a good time to take questions from the audience.

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 on your telephone keypad. The next question comes from Adrian Jelani from ABG Sundal Collier.

Please go ahead.

Yes.

Hello, Jörgen and Oskar. I'd just like to start off on the fact that you mentioned the noticeably weaker demand from automotive customers, but at the same time, your automotive volumes in Eurasia were fairly flat year on year. So I guess, do you expect more of a downturn in those volumes, or do you think you can keep fully offsetting that with market share gains?

Well, as you point out, there is a lot of news now about weakness in automotive. But we don't have any further news than what is already in the market. And what we're expecting is, generally speaking, not only for automotive, but generally speaking for Gragas, to continue to take market share gain in an uncertain market. Exactly how that will play out in the individual segments, we'll have to wait until the fourth quarter report to see. But it is, I think, also important to point out that automotive, though it's an important segment for Grengis, is by no means our only segment, and that we are able to generate a 7% growth in a quarter when automotive is weak, I think proves that we have a well-diversified customer and operations space.

Understood. And now you talked a bit about the expansion projects as well, and you're only a few months away from commissioning the new battery cathode foil line in Finsbong. And of course, a lot of battery producers right now are struggling. And with that in mind, are you Are you concerned for that line that you may have a fairly low utilization rate there for some time? Or do you feel confident that you can fill those volumes?

Well, as you say, it's correct to say that many of the electrification projects for the automotive industry, and especially in Europe and in Americas, have been delayed somewhat, right? And that, of course, influences not only our battery cathode foil, but our business in general. On the other hand, we are seeing good growth with many of the battery and electrification related products, such as battery cooling plate, battery casing, and so on. Regarding that specific line, we'll have to see. We have good customer relations there and a strong interest for it. But of course, like with any new production equipment, there will be a ramp-up period during which utilization is low, and that also goes for that particular line.

Understood. And a final one from my end. Are you able to give us any more comments on the financials of the Shandong plant, not for 2025, but just more over time? Because, I mean, things like if it will be above or below group average in terms of fabrication price or EBIT per ton or any other metrics you could provide to help us understand the asset a bit better.

Yeah, no, I can start there. I mean, we haven't closed the transaction yet. We hope to do that in the very near future. And after that, of course, we can comment a little bit more on it when it's actually within the Grängis group, so to say. But maybe a little bit of flavor on this facility and what we can expect, right? From what we have communicated earlier, we consider this to be a low-cost facility, right? And I think that that's going to be an enabler for us to take larger market share in certain product segments in Asia that we cannot address from our current Asian production facility in Shanghai. And then what characterizes these market segments? Well, these tend to be market segments with slightly higher volumes, but also generally a lower value add and lower pricing. So you will see slightly different sort of metrics coming out from this facility. So EBIT per ton, it's likely going to be lower from the Shandong facility than what we have on Grangis Average. On the other hand, we will process quite a few tons there if we can deliver on our business plan. So in terms of absolute numbers or absolute earnings, it will hopefully be a good contributor over time there. I don't know, Jörgen, if you want to add anything else to that or if we try to keep quiet prior to actually completing the acquisitions.

I think the acquisition should be seen as a strategic acquisition, which is intended to strengthen our competitiveness, but also our ability to grow and take market share in China and in Asia. And I guess strategically, you can say that the market in Asia, and not least the market in China, has become in some respects more important because of the strong players that are there in the automotive industry. And therefore, we think it is quite important for us to be there and be able to grow with those partners. But as regards profitability of this, we have to also be honest and say that it's a relatively low-utilized factory that we're acquiring, and therefore we're saying we expected to break even in the first couple of months, and then we expected to contribute slightly positively to net earnings, to earnings per share, during 2025, after taking into account the minority interest that we're, so to speak, paying for the acquisition. So it's not something that will be a major plus or a major minus in 2025, but we do expect it to be a major strategic step forward in our position in the Asian market.

Perfect. That was a very helpful answer. And that was all for me, so thank you for taking my questions.

Thank you, Adrian. Take care.

If you wish to ask a question, please dial star 5 on your telephone keypad. The next question comes from Albin Nordmark from Nordia.

Please go ahead.

Hello Juergen and Oscar, Albin from Nordea here. So thanks for taking my questions. It shows quite impressive growth here in HVAC and other niches. So especially maybe for other niches, in what products do you manage to gain market share? And how much more is there to do, do you think? And also, is there a supply-demand issue that you quite easily can grab market share, or is it rather that you win over customers from other players?

Well, firstly, other niches is other niches, right? So it contains many different niches. And what we've been doing now over the past two years is to look a little bit more proactively at the market and say, look, we have this capacity and these capabilities. What other niches, what other customers are there out there whom we could serve? And that has then given results in various. It's not one or two or three. It's, in fact, very many different customers and applications that we're serving there. So it's hard to pinpoint any individual product or customer. As regards to the question whether it's hard or difficult or easy, I would say it's difficult, but we're also quite good at it, as you can see. And it's good that it's difficult because in this business, you have to have the customers for a long time, preferably. And that is also what we intend to do with these market shares. We don't only intend to have them now, but also to keep them for the longer term. So in total, I guess we can be quite content with these market share gains that we've had, and especially as it's a result of an effort that has been ongoing now for a year and a half or two years. Hopefully that answers your question. Otherwise, please repeat it.

Yeah, that's a good answer. And automotive, I know that you don't usually want to talk so much about the market going forward, but can you talk a bit on the automotive demand if you split it between Asia, Europe and America? And also, is content per vehicle here contributing to your quite solid numbers or, yeah?

Well, firstly, for Grengis, the most important part of the automotive market is Eurasia, because our market in America is, relatively speaking, much smaller. So that is the most important part of it. With regard to content per vehicle, it is strategically so that we believe in bigger content of aluminum and also of our products per vehicle, especially in the shift to hybrid vehicles and to fully electric vehicles. That shift has slowed down a little bit, especially on the fully electric vehicles. On the other hand, hybrids are strong, and we expect for some years to come a higher per vehicle content of aluminum and a higher per vehicle content of Gragas' products to be a growth driver. In the short term, however, what happens to the market and the market shares matters much more than the content for vehicle. And that's also the case in this quarter and in the next one.

All right, perfect. Thanks very much. That's all for me. Sabin?

There are no more questions at this time. So I hand the conference back to the President and CEO, Jorgen Rosengren, for any closing comments.

Thank you, Operator. Then I'd like to thank all the participants for listening in and wish you all a nice day. Goodbye.