Gränges AB (publ) (GRNG) Earnings Call Transcript & Summary

Welcome to Gränges' conference call for the second quarter of 2021 here in Stockholm. It's me, Johan Menckel, CEO; and beside me, I have our CFO, Oskar Hellstrom. We will start this presentation with an update of Gränges' performance during the last quarter and highlight some important events. After that, Oskar will take you through the financial results, and then we will conclude the presentation with an outlook and the Q&A session. When summarizing the second quarter of 2021, we can look back on another very good quarter for Gränges. We continue to experience strong market across all regions and end customer markets during the quarter. This contributed to an all-time high sales volume of 131,000 tonnes, which represents an 86% growth over quarter 2 last year. Excluding the acquired sales volume from Gränges Konin, the second quarter sales volume was up 51% compared with last year. Here, we do need to keep in mind that quarter 2 in 2020 was heavily impacted by COVID-19 and that comparable, therefore, are very weak. The adjusted operating profit increased to SEK 309 million, largely driven by higher sales volume, supported by continued good cost performance. Cash generation was very strong in the second quarter, and we delivered a cash flow before financing, excluding expansion investment, of SEK 334 million. This contributed to that our net debt is now back in the target range at 2x EBITDA. During the quarter, we have also continued to execute on our growth strategy. We reached an important milestone in our Finspång expansion project when the first coil was rolled in the new cold rolling mill in the beginning of June. We have also increased our focus on new materials for battery applications and have decided to increase our capabilities in 2 of our production facilities to meet the increasing customer demand. I will come back and talk more about this shortly. Following the efforts we have made to grow and diversify Gränges' product portfolio, we today have leading positions in 4 key end customer markets: automotive, representing 42% of our sales volume in 2021; HVAC with 22%; specialty packaging with 16%; and other niches with 20% of our sales volume. Short-term sales to the automotive industry is primarily driven by the number of vehicles produced. Longer term, the increasing share of hybrid and electric vehicle as well as a general lightweighting trends will have further positive impact on demand for Gränges' products. Sales to the HVAC industry in short term driven by consumer confidence and the general activity within the building and construction. The increased requirements on energy efficiency of HVAC unit is expected to have a further positive impact on demand for Gränges products in the longer term. The demand for materials for specific packaging is relatively stable in its nature and reduces some of the cyclicality and seasonality in the product portfolio. Sales to other niche applications are largely driven by the general economic activity. That said, in this product category, there are also several very interesting applications with very high growth potential that may be new core markets for Gränges in the future. Good example of this are, for instance, our products for renewable energy, green transformers and electrical vehicles batteries, which we'll talk more about later today. As I mentioned earlier, on -- all our key markets developed very positively in the second quarter. If we start by looking at the geographical dimension, we can see that the demand for Gränges' products increased the most in Europe. This is driven by that Europe was part of our business where we saw the largest negative impact of COVID-19 in quarter 2 last year, partly due to the comparatively large automotive business. In total, year-over-year, demand for our products increased [ activity ] in the quarter. Demand for our automotive products increased by 75% globally compared with last year. Here, we experienced a very strong development of sales in the beginning of the second quarter, but a slowdown in the second half of the quarter. The slowdown is a result of customers canceling orders or ordering in lower quantities as the semiconductor shortage has led to line stops and lower production rates in the automotive industry. We currently expect the semiconductor shortage to have an impact on our automotive sales in the third quarter as well. Demand for HVAC products increased by 51% in the second quarter, driven by a continued increase in HVAC unit production, low comparables and an increase in market share for Gränges. Demand for specialty packaging materials increased by 29% in the second quarter. Although the year-over-year increase is lower than for automotive and HVAC, this is actually a better performance since packaging demand did not drop much in quarter 2 last year. Demand for materials to other niches increased by 29% in the second quarter. As you probably know, we are currently running an expansion and logistic improvement project in our Finspång facility in Sweden. This product has a dual purpose. First, to improve the efficiency, which will reduce both the production cost and the environmental footprint, which would be very important in order to sustain competitiveness going forward. Finspång is an old facility, and it was not originally built for the type of production that we are running there today. It is a well-managed site, but the production flow is not as efficient as in other Gränges locations. The product we are running will improve the flow and reduce internal transportation by 80%. We will also replace all diesel trucks used to move products in the plant to modern electrical trucks and automotive vehicles. Finally, we will install a new fully automated and energy-efficient annealing furnaces. Once completed, this will be a game changer for the Finspång plant. The second purpose of this project is to expand the current production capacity by 20% or 20,000 tonnes. This new capacity will target growth in materials for heat exchanger as well as for other products like, for instance, battery applications. Unfortunately, we had to put this project on hold in 2020 due to the COVID-19, but we are now back at full speed. And we have reached a very important milestone in this project in early June when the first coil was successfully rolled on the new cold rolling mill. This is actually the first new cold rolling mill to be installed in Finspång since the 1960s. And the design and installation is a collaboration between our Chinese and Swedish engineering teams. The investment project is expected to be completed in the second half of 2022 with benefits materializing in 2023. As we have talked about before, Gränges works actively to support the green transition and the electrification of the transportation industry. So far, we have worked primarily in the field of efficient cooling for battery using our leading expertise in heat exchanger material and design. The electrification also creates additional opportunities to Gränges outside of the current product portfolio. For instance, rolled aluminum is used to produce both the cathode and the cell casing for lithium-ion batteries. And the demand for this material is expected to increase significantly over the coming years. With its global footprint of aluminum rolling mills, Gränges has unique capabilities to serve emerging battery value chains in all geographical regions with high-quality aluminum materials. In terms of market potential, recent estimates suggest that the increased EV penetration will drive the demand for our current core products in the automotive HEX, from current about 800,000 tonnes per year to more than 900,000 tonnes in 2025. The demand for rolled aluminum products for battery foil and casing is estimated to be at a similar level in 2025, indicating the size of this opportunity for Gränges. We are already today producing test material for battery casing, which we're able to supply using our existing asset base. To capture additional growth in battery market, we have made a decision to invest SEK 100 million over 2 years to add capabilities for commercial production of initially 10,000 tonnes of cathode foil in the production sites in Shanghai and Finspång. Over time, we expect battery applications be very attractive new market niche for Gränges. Gränges has also recently announced a new collaboration with the primary aluminum and energy company, Hydro, to reduce the climate impact in the automotive industry, both for heat exchanger and battery applications. Through the initiative, Gränges source primary aluminum from Hydro, which has a certified carbon footprint that is less than 1/4 of the global average. With the global transformation into a more circular and resource-efficient economy, our customers are increasingly recognizing the importance of using sustainable materials. We see clearly that Tier 1 and OEM customers are focusing on not only reducing their own carbon footprint and emissions from the use phase of the application, but also reducing the emission upstream the value chain, especially in relation to materials and metals. Sourcing low-carbon primary aluminum produced using hydropower is one of the key priorities in our sustainability and climate strategy since emission from sourced metal accounts for more than 90% our total carbon footprint. The collaboration with Hydro reinforces our focus to reduce climate impact along the value chain, and we strongly believe that building close relationship with our customers, suppliers and other business partner is key to support the automotive industry and other end markets to become more sustainable. With that, I hand over to Oskar for the financials.

Thank you, Johan. And as Johan mentioned earlier, we made a strong second quarter, and we saw both the sales volume and the operating profit recover compared with the second quarter last year. In terms of the margin, the group's adjusted operating profit per tonne increased from SEK 600 in Q2 2020 to SEK 2,400 in Q2 2021. If we look at the 2 business areas, the Eurasia margin, excluding Gränges Konin, increased from negative SEK 900 in 2020 to positive SEK 1,900 in 2021. And the corresponding development for Americas is SEK 1,900 to SEK 3,200, which is also the highest margin to date [ for a grand ] cost performance. This is, of course, the good development, but I would still like to highlight some important items that had a negative impact when comparing the year-over-year margin development. First, as you can see on this slide, Gränges Konin has a below-average operating profit per tonne of SEK 2,000 in Q2. This is a good representation of the performance that can currently be expected from Konin. And as you may recall, we have previously guided for a full year operating profit per tonne of SEK 1,900 for Gränges Konin. If we exclude Gränges Konin, the adjusted operating profit per tonne was closer to SEK 2,500 for the group for Q2. Second, as we also mentioned in our guidance for the second quarter, we have a large negative impact on operating profit from unfavorable currency development if we compare with Q2 last year. And in total, the net impact of the FX changes was negative SEK 36 million in the quarter. And thirdly, the second quarter is also impacted by extraordinary cost items of SEK 10 million related to a fire in our facility in Newport and SEK 7 million related to repayment of COVID-19-associated government grants in Sweden. If we exclude the impact of Konin currency and extraordinary costs to get a better understanding of the underlying performance of the business, the adjusted operating profit per tonne will be closer to SEK 3,000 in Q2. If we then look at the second quarter in more detail, we can see that the sales volume increased by 86% to 131,000 tonnes and that the net sales more than doubled to SEK 4.6 billion. As Johan mentioned earlier, this is a new record level for Gränges. Excluding acquisitions, sales volume increased by 51% and net sales by 74%. And the main reason for that net sales increase more than sales volume is increasing aluminum price. The net impact from changes in foreign exchange rates was, on the other hand, negative SEK 429 million compared with second quarter last year. Looking at the earnings, the adjusted operating profit increased to SEK 309 million in Q2, SEK 267 million higher than in prior year. Of this, the acquired Konin business contributes with operating profit of SEK 48 million. And drivers of the positive development are, as I mentioned before, the increased sales volume and capacity utilization, slightly higher average conversion price and continued good underlying cost performance. That said, we do see some increased inflationary pressure in the quarter in, for instance, the cost for packaging material and transportation. Depreciation increased within total SEK 19 million, and that's primarily related to Gränges Konin. Net changes in foreign exchange rates was negative SEK 36 million in the quarter. There are no items affecting comparability in the quarter. And the profit for the period increased to SEK 226 million, and earnings per share increased to SEK 2.12 in the second quarter. During the second quarter, net debt decreased by SEK 160 million to SEK 3.5 billion. And in terms of net debt to adjusted EBITDA, this corresponds to a decrease from 2.4 to 2.0x. And that means that we are now back into our target range of between 1 and 2x EBITDA on a rolling 12-month basis. As you can see on this slide, we had a strong underlying cash generation in the second quarter, and the cash flow before financing adjusted for the expansion investments amounted to SEK 334 million. That corresponds to an operating profit to cash conversion of 108%. We have continued to invest in total SEK 94 million in the expansion of the Gränges business to the ongoing programs in Konin and Finspång. During the quarter, we also distributed SEK 117 million to our shareholders. Needless to say, I'm very pleased that we are now back at a debt level in our target range, and I'm also happy that we managed to get there in a quarter where we also paid the dividend to our shareholders. If we look at the Gränges Americas business area, we continued to experience a strong market activity in the second quarter of 2021, driven by a strong underlying market demand, combined with the continued market share increase. In total, the sales volume in the second quarter increased to 69,000 tonnes, which is 10% above the volume in the first quarter. And this is also the highest sales volume in an individual quarter so far for Gränges Americas. The adjusted operating profit for the second quarter increased to SEK 219 million, which corresponds to an adjusted operating profit per tonne of SEK 3,200. The improvement in operating profit was driven by increased sales volume in combination with a slightly higher average conversion price, whereas additional cost of SEK 10 million related to the Newport fire had a negative impact. Net changes in foreign exchange rates was also negative by SEK 27 million in the quarter. And without the cost of the fire and the same FX rates for last year, the Americas' operating profit would have been SEK 256 million or SEK 3,700 per tonne. I think this indicates that our Americas business has a very strong momentum right now. That said, we also had some challenges in Americas during the quarter. And as you know, we recently finalized the upgrade of the third and final cold rolling mill in our Newport plant, and we were just about to start the second phase of the sales volume ramp-up. In late May, the second rolling mill in Newport that has been in operation since early 2020 was damaged in a fire. Luckily, no people were hurt, but the damaged mill is expected to take between 6 and 9 months to rebuild. And during this time, the Newport facility will once again operate with 2 instead of 3 mills. And this means that the current production level in Newport can be sustained, but that the volume ramp-up originally planned to take place in the second half of 2021 will be delayed into 2022. The mill rebuild will be covered by insurance and currently, no further cost for this -- in addition to the SEK 10 million that we've already taken in the second quarter -- is expected going forward. Also, Gränges Eurasia continued to experience a strong market activity in the second quarter of 2021, although not as strong as in the first quarter. As Johan talked about earlier, the demand from the automotive industry was initially strong but softened towards the end of the quarter due to increasing impact of the semiconductor shortage. The sales volume in the second quarter reached 70,000 tonnes, which represents an organic 65% increase over the second quarter last year but a 10% decline over the first quarter this year. The adjusted operating profit for the second quarter increased to SEK 136 million, corresponding to an adjusted operating profit per tonne of SEK 1,900. The operating profit includes cost of SEK 7 million related to the repayment of the COVID-19-associated government grants in Sweden, and net changes in foreign exchange rates was also negative with SEK 8 million in the quarter. In addition to the year-over-year performance, I think it's also worth to briefly look at the development from the first to the second quarter. As you can see on the right on this slide, the margins is coming down slightly from SEK 2,600 per tonne in Q1 to SEK 1,900 in Q2. And key contributors to this are obviously the sequentially lower sales volume in the grant repayment and the FX that we mentioned. But in addition to this, the Eurasia business is where we see the largest effect of external cost increases on transportation and packaging material due to that this is where we have the overseas export business. On a more positive note, the integration of Gränges Konin continues to move forward according to plan. And since Gränges Konin has a broader product portfolio, it was less impacted by the softening automotive demand in the quarter, and we continued to deliver a stable sales volume of 24,000 tonnes and an adjusted operating profit of SEK 48 million. And we expect to see a similar performance from Gränges Konin in the third quarter. With that, I hand over to Johan, who will provide an outlook for the third quarter and a summary of the second quarter.

Thank you, Oskar. Although the COVID-19 pandemic is still ongoing, the market demand is generally anticipated to remain on a healthy level in the coming quarter. Typically, the third quarter is a seasonably weaker quarter than the second quarter, and we do expect to see this pattern also this year. Given the still somewhat unusual market situation, it is, however, not really possible to say if what we see is seasonality or if it's an effect of the sequential slowdown in the automotive sales due to the impact of the semiconductor shortage. That said, we currently expect the sales volume in the third quarter to be lower than in the second quarter by low to mid-single-digit percentage. Moreover, increased costs for strategic projects will have a negative impact on the profitability when comparing the third quarter to the second quarter this year. Looking further ahead, I strongly believe that we will be able to capitalize on the strong platform we have established for Gränges, with a strong commitment to sustainability, innovation, digitalization and continuous improvement. Gränges is well positioned to deliver sustainable and profitable growth for the coming years. To conclude, the 2021 second quarter report. The second quarter was a record quarter for Gränges with a strong market, all-time high sales volume and solid increase in operating profit. In total, we delivered a year-over-year growth of 86%, of which 51% was organic. Cash generation was very strong in the second quarter, and this contributed to that our net debt is now back into the target range at 2x EBITDA. During the quarter, we have also continued to execute on our growth strategy. We have reached an important milestones in our expansion and logistic improvement project in Finspång and have taken a decision to invest to increase our capabilities for production of cathode foil for batteries. Sustainability is a strong driver and enabler of our long-term competitiveness and value creation. The recently announced collaboration with Hydro on low-carbon aluminum is a good example of how we are helping our customers to reduce their carbon footprint from sourced materials. Finally, looking into the third quarter this year, we expect the healthy market condition to remain. As most of you know, this was my last presentation as Gränges' CEO, and it has been a fantastic 18 years for me at Gränges. I've had the opportunity to work in several roles in different parts of the Gränges global organization. Starting in Finspång as a global key account manager for Gränges Japanese customers, then I moved to Shanghai for heading Gränges Asia, a very important and expansive phase for the company. In 2012, I moved back to Sweden to become the CEO of the company. And during the last 8 years, Gränges has achieved a lot, and I just wanted to mention a few important accomplishments. In 2014, Gränges returned to the stock market at NASDAQ Stockholm and received several long-term shareholders. In 2016, we did the acquisition of the U.S.-based company, Noranda, which was important as we broaden both our geographical position and our product portfolio. Then I also want to highlight our latest acquisition, Aluminium Konin, which suits us very well. Together, we create a strong platform for optimizing the product mix and for sustainable profitable growth in Europe. We have also expanded and upgraded our plants in Finspång and Shanghai with new capacity and capabilities. And during these years, we have strengthened our automotive and HVAC core markets and broadening the portfolio by creating new core end customer markets. And throughout the years, Gränges has tripled capacity and sales. We have also developed new products and deliver high-value products and services to our customers around the world. One future product is our aluminum powder that will be used for 3D printing products. Finally, Gränges' success depends on our strong company culture and company values, but most importantly, on our great people. My colleagues throughout the whole organization, you have been very instrumental for the success of Gränges and where we are today, and you will continue to be. I would also like to thank our customers and shareholders for your trust and support. And with this, I leave the floor open for questions.

[Operator Instructions] We have the first question from Gustaf Schwerin from Handelsbanken.

Johan and Oskar, if we start with your automotive volumes in the quarter. When you're saying that this has weakened a bit towards the end, can you say anything about sort of exit rate versus the quarter as a whole? And perhaps related to that, when we look at your volume guidance for Q3, should we view that as fully explained by lower auto volumes, so relatively flat HVAC? Or is there still some lower seasonality in Q3? That's my first one.

It's Oskar. I think it's a very valid question there. I think when we look at automotive in second quarter, it started off very strong. It ended fairly strong as well, although not as strong as it started. I think that's maybe the way to look at it. But of course, if we look sequentially, how it developed, we see some 5%, 6% decline sequentially in automotive from quarter 1 to quarter 2. And of course, that's the net of the full quarter. Looking ahead a little bit into the third quarter, I would say that the automotive product segment is really where we do see the big changes quarter-to-quarter. We expect basically all the other market segments to remain fairly stable and that the underlying demand remains fairly strong. So we had a guidance for the full quarter of a low to mid-single-digit percent on sort of overall sales volume. And if you look at how to get there and back-calculate, I think the automotive impact then, assuming everything else is very stable, I will say that you have a mid-single-digit decline for the automotive there from a sequential perspective.

All right. Very clear. The second is for profitability. Americas is looking very strong again, but I'm a little bit surprised on the margin contraction in Eurasia sequentially even though we have lower auto volumes. Cost is now on par with sort of the only -- Gränges and again, auto volumes are down, but for Eurasia, you looked at lower FX headwinds versus Q1 and mix looks better than Q4 when we had sort of similar EBIT per tonne. You mentioned there's lower conversion price. So perhaps you could mention a few words on how much that is impacting, how much is cost inflation? And is there anything on top of the SEK 7 million that is disturbing the picture in Q2?

I think the most significant -- I mean, if you look at the cost base and how that develops, let me sort of do it, let's start with the sales. Obviously, the largest impact quarter-to-quarter there in terms of profit comes from the lower volume. And as you clearly point out, Gustaf, it's largely automotive related because it's in Eurasia, where we have the largest automotive business. If you look at the cost structure, it is fairly similar quarter-to-quarter, but there are some differences. And in addition to the one-off items and the FX there that I highlighted, we also do see some inflationary pressure here quarter-to-quarter. And from a good sort of viewpoint there for Gränges, of course, our largest raw material cost is for aluminum, that's a pass-through by contract to our customers. So it's still sort of a fairly limited impact, but we do see higher costs for transportation and packaging material specifically. And that's a driver sort of when you look at the quarter-to-quarter performance in Eurasia as well.

And if we look at your earnings in Q3 sequentially, I would -- just to be very clear, we should, of course, have this negative mix impact on EBIT per tonne due to the auto volumes. But on top of that, these strategic extra costs that you're referring to, can you just say a bit more on what that refers to, perhaps the size of this as well?

From time to time, you will do larger strategic type of projects, and we have, in the past, had these type of costs as well for Gränges. We typically don't say exactly what it is, but to give you a little bit of flavor of what this project specifically is about, it's very much connected to our sustainability agenda. And I think the cost to expect here is around SEK 10 million to SEK 15 million, and you should certainly view that as a one-off cost item for Q3.

Perfect. And then lastly, on this SEK 100 million investment you're making in the foil business. You mentioned the market size of -- was it 900,000 tonnes by 2025? Just a bit curious to hear your ambition in terms of market share here. And I didn't quite get the timing. Did you say this is supposed to be up and running within 2 years?

Yes. I can give you some more flavor on this. Johan here. Yes, I mean the whole opportunity for Gränges within the battery segment is fairly big, actually. And as you said, around 900,000 tonnes of demand in 2025 in a market where we basically are not in today. So it's basically the same size as the other market, our core markets for heat exchange and materials. We are very active here, and we are working with basically all large battery producers globally to deliver test material in casing and also we are developing this cathode foil, which is actually the most demanding material, and the cathode foil will really be the heart of the battery production. And Gränges has a very unique capabilities to serve these products to these global customers in all regions. So of course, looking forward, we see that Gränges has a very good opportunity to reach a similar market share that we have in the heat exchange metal for combustion engine. And so that gives you maybe some more flavor. I mean it's -- overall, we are entering into a growing market here, which requires really demanding products with high technical expertise.

Yes. And just to add to that, to your question on timing there also. I mean this is SEK 100 million that we have sort of dedicated over a 2-year time period to the battery foil segment. And we do expect to start to have some of these capabilities available already early next year, and then we build additionally throughout 2022 on this as well.

Next question from Erik Paulsson from Nordea.

I'm hanging on to Gustaf's question there regarding the increased costs that you mentioned there, SEK 10 million to SEK 15 million, I guess, for the one-off cost items for the Q3. Is it so then that we shouldn't look upon this in terms of sequential EBIT development going down in Q3? It's just those costs that are incurred in the actual quarter. Is that correct?

Yes. I think yes, those costs are to be viewed as a one-off item in third quarter. And I think in terms of guidance, of course, we are guiding for a little bit of a softer market on automotive side, a little bit lower sales volume, although a fairly normal seasonal pattern, if you wish. And then you can always argue if there is a seasonality in 2021 or not, as Johan said earlier. In terms of cost structure, excluding this very specific one-off item that we are guiding for, I think it's fair to assume a similar cost structure in the third quarter as in the second quarter. We do see -- I mean, we do expect to have some additional negative FX as well but not as much as we have seen in Q1 and Q2 this year. So I think in terms of cost, Q2 is a fairly good sort of starting point for your Q3 estimate.

So then we can expect still a sequential improvement in Q3? Do you expect that?

You mean in terms of earnings, sorry?

Yes, adjusted EBIT.

Well, we do expect to see the sales volume coming down. And of course, that is the largest driver of the earnings. So based on that, I wouldn't necessarily expect to see earnings increase sequentially, but I would say probably rather quite stable.

Okay. And my final one is on the current available maximum capacity now in North America, which you have. How many kilotonnes is that at the moment, actually? And what is your current capacity utilization?

Now I think in North America, I think you should view it as that we have 200 in Huntington, 40 in Salisbury. We should have had 20 in Newport, but unfortunately then due to the fire, Newport should currently be viewed as around 10,000 tonnes of capacity, which adds to a total 250. And in terms of capacity utilization, we have an average of around 90% in the group in the second quarter. U.S. or Americas is above the average, and Eurasia is slightly below the average.

Next question from Oskar Lindstrom from Danske Bank.

This is Oskar Lindstrom at Danske Bank. First off, Johan, just thank you for taking Gränges on a very impressive journey. And I think, especially the Konin acquisition has been -- seems to have been very well executed and also well-timed expansion. So best of luck in the future as well. A couple of questions from me. The first one here is on the automotive volumes where you're saying now that you're not only sort of, as I understand it, a slowdown in the market. But actually, you mentioned cancellation of orders. And my question is, is this slowdown accelerating? Or has it accelerated also obviously throughout Q2, but also going into Q3? Or is it more of a drop and now we've seen it and you feel confident about where the volumes will end up for the third quarter? And I presume also we'll see these lower volumes in the fourth quarter. Could you say a little bit more about that? Sort of how deep, how long and kind of what confidence level do you feel around this automotive market?

It's Oskar here. I can start a little bit and then Johan can add to that sort of from a more commercial perspective. But if we just look at sort of the development we have seen, we saw a slowdown, as we said, in the second quarter, some customers canceling orders and that happens from time to time, of course. But when we do sort of look into the third quarter, we see the automotive market continuing to decline from the second quarter but not necessarily from the demand level that we saw in the second half of the quarter. So from that perspective, it's more stable. Whether or not it will be stable going into the fourth quarter or not, I think it's a little bit early to say here. It's not necessarily easy to have that type of visibility at this point because there are so many different things impacting here in terms of shortages of semiconductors as well as other components for the automotive industry there. But sort of looking into the third quarter, we expect to see more or less the same demand levels that we saw in the second half of the second quarter. So fairly stable from that perspective.

And just a follow-up...

Yes, I can just -- yes, just to add on comment to that. I mean it's really -- the cancellations are very much due to the shortage of the semiconductors. But we can also say that there are a lot of activities on the customer side in validation for new programs, et cetera. So there you see a sign of a healthy market, more mid to long term, but the right short term, of course, there is some cancellation. Sorry?

And are you able to shift volumes which were initially intended for the automotive market to other segments? Or doesn't -- that doesn't work or...

Yes. We -- I mean we can do that. Of course, they always require some lead time, very much depending on what kind of product there is. But of course, for -- yes, but for some parts of the product, we can shift to other markets if the automotive market should be a little bit weaker for short term. So we have that flexibility, and we also historically have been doing that successfully. So I think that is one of the strengths in our capability and it's also in our global footprint.

Because other markets seem to be rather strong, so that's why I was wondering if you could use this to [indiscernible] so to say, for these markets.

Indeed.

Finally -- yes. Finally, I just want to ask about the synergies in the Konin acquisition. You say there are synergies, but you haven't given us any numeric guidance. What's the latest here on synergies from the Konin acquisition?

No, that's a good point, Oskar. And there are certainly many different types of synergies there. And I think we have talked about the types of synergies before. But the synergies that we do see short term and expect to see short term are primarily synergies on the sourcing side. And there, we have started to implement those. But in terms of timing there, it was a little bit unfortunate for us that we closed the acquisition so late in the year because as we also talked about a little bit earlier, metal is our largest sort of input, and it's primarily there that we can get the large scale effects. But due to that we closed so late in the year, a lot of the metal contracts for 2021 were already negotiated. So many of the synergies that we have sort of negotiated now and so forth will come into play in 2022 and onwards on the sourcing side. But that said, there are realized synergies already, but they are a little bit smaller to the nature.

And sorry, those synergies should show up in the Konin results primarily?

Show up both in the Konin result as well as in our Finspång result because synergies sort of are impacting both ends here, right? It's basically the European footprint then that we are trying to optimize here.

Just to comment there, I mean -- sorry, the synergies are also -- maybe Oskar mentioned that, but it's also related to productivity synergies, but also, later on, to more of a sales synergy where we have the ambition to basically slightly change the customer portfolio of the Konin plant to address more high-end products going forward.

Next question from Karl Bokvist from ABG.

First question, have you seen any differences between the electric vehicle automotive side and the internal combustion engine automotive side, if that is possible for you to distinguish if we look at the sort of core legacy products?

Yes. Karl, it's Oskar. I'm not fully sure what your question is about. Are you thinking more like demand is higher for EV and that type of production is keeping up better? Or sort of what is it that you are...

Yes. That's my question. I understand semiconductors have an impact on both drivetrains, but still it would be interesting to hear if you have any thoughts about differences in demand development.

That is a good point. I don't -- personally, I must admit. I don't know if, Johan, you want to have any comments on this.

No. But I think the same pattern as we've seen before. There are large, many activities on the OEM side to develop the new platform, Volkswagen [ and psi ] and the other is Daimler, and they are all related to EV. So that we are part of that and we'll also be part in delivering to some of these platform, and most of them will come into play from 2022 and onwards. But also, there are expected to be, over time, quite good, I mean, a decent demand on the combustion engine as well actually. So we foresee quite good market for both these. But of course, long term, the growth -- high growth rate is really within the EV.

And just a brief reminder here, but you have your own global market share, but would it be fair to assume that the kind of overall, how the automotive market is split now between electric vehicles and ICE is sort of also reflecting your own business exposure? I know you're talking about the increased content per vehicle in the electric drivetrains, but just would be interesting to hear if you have a sort of rough estimate of the split within automotive going to the different drivetrains?

But we have -- a good question. And basically, we have the ambition and target to have the similar market share for EV as we have for combustion engines. And there are no reason to believe that we should not be able to do that actually. We have very good capabilities globally and all the customer relation. And of course, on top of that, we have the new customer segment in terms of the battery producers.

I think it's worth to point out there also, Karl, that if you look at what it looks like today, right, in the current market, the heat exchanger producers to the ICE cars and the EV cars, it's the same type of -- and it's the same companies producing the heat exchangers for both types of cars, and it's our customers, basically. So from that respect, it's at this point in time, at least not very much of a difference to Gränges if it's EV car or ICE car from a customer perspective.

Understood. And about the rolling mill and the unfortunate fire, is it one of the -- you mentioned Newport. But I mean, is it the new mill that you were about to install that also, unfortunately, caught fire? Or is it sort of old equipment that have this mishap, which has impacted the overall expansion?

No, it's -- I would say yes and yes. There are 3 rolling mills in the Newport facility, and they are -- all of them originally from late 19 -- no, they're probably a bit newer. The plant is from the late 1950s, but these are slightly newer than that, but it's old mills. We -- what we have done in our expansion and project here is that we have refurbished all 3 mills. And we had just finished the refurbishment of the third and final mill and then the -- 1 of the 2 earlier refurbished mills, unfortunately, caught fire. So it's old equipment, but it was basically very recently refurbished. Was that the answer to your question there, Karl? Or was it...

Yes, exactly. If it was sort of at the time you were about to install the new one, then this accident happened? Or if it was the sort of mill that was fully up and running?

It was a mill that was up and running. But sort of if you want to be a little bit positive here, you can say that the third and final mill has -- that we just finalized the upgrade of -- has the same capabilities as the mill that was damaged in the fire. So basically, what happens from a practical perspective is that the third mill will just replace the second mill and we will continue to produce at the same volume level as we did before. The difference is that since we only have 2 out of 3 mills in operation, it was the case also prior to the upgrade of the third mill, we will not be able to sort of get that final growth ramp-up to happen in the short term. It will happen next year after we have basically repaired the damaged mill and -- so you can sort of view this as the business will be stable. There will be -- the ramp-up -- the final ramp-up will be delayed some 6 to 9 months while we repair the mill.

Understood. And about partly this aspect and also the 10 kilotonnes in cathode foil expansion, how should we think about timing during next year? Will both of them be sort of impacting volumes towards the second half? Or the Newport fire situation, can you mitigate that already during the first half?

I think that we should be able -- depending a little bit on how quick we can rebuild the Newport mill. But I see no reason why it shouldn't be rebuilt and finalized by the end of the first quarter. And then, of course, you need some time to sort of commission it and so forth. But what we know right now, I would say it's fair to assume that the ramp-up that we plan to sort of take place now in the second half of this year, it will probably be able to start in the second quarter of next year. In terms of timing of the battery foil, this has, of course, to do with adding capabilities to be able to produce this. And this is something that happens right now. And then we will gradually, of course, bring these new capabilities into production. But then, of course, this is also an area where we will need to do a lot of validation similar to what we do with our heat exchanger material and so forth, and we're validating new customers. So I think it's a little bit early to say when exactly we can start to see commercial volumes ramp up here. But I would certainly hope that we can see some commercial volumes primarily from our Shanghai facility then that is sort of the ones that are furthest ahead here and that that will come in next year. But I think it's a little bit early to say once we are sort of ready with customer qualifications and so forth.

Understood. And just to sort of recap your comments on Q3 profitability. If we look at EBIT per tonne, EBIT per tonne Q3 compared to Q2, what do you think will be the main drivers? Just a sort of brief recap would be helpful.

I think there are 4 items there, right? I think you do expect to see a slightly lower sales volume, which we all know is a very important driver of the EBIT. I think that you can say that we do see some negative year-over-year FX as well, although not as big as in first and second quarter. I think in terms of the cost base, in general, if you exclude one-off type items both in Q2 and in Q3, I think it's fair to assume that the cost base will look fairly similar in the third and the second quarter. And then finally, we do guide for these strategic project costs in the range of SEK 10 million to SEK 15 million. That will be a one-off type item in Q3. And then I think if we all -- add all that up, it's something that everyone can do for themselves, I guess, and come up with an impact. But these are the 4 main drivers, I think it's worth to take into account when looking ahead in third quarter.

And last question actually registered from Mats Liss from Kepler Cheuvreux.

A couple of questions there. Coming back to this automotive, in the automotive guidance. And you mentioned -- I mean demand for new cars and so on and inventories are low at car producers. And you have this shortage on semis. Would you say that there is a sort of -- could you say something about the inventories in your part of the value chain? Are there sort of a concern also? Or is it more or less you have seen some sort of production stoppage impact and so on?

It's a very good question there, Mats. And I think that I mean, obviously, we are not an automaker. We are a Tier 2 supplier typically. So we are -- I mean, there is a little bit of a delay between the demand for Gränges' products and the automotive production. I think that we had talked about automotive in slightly negative words today and say that, okay, we do expect to see the slowdown into Q3. But to your point there on inventories and so forth, I mean, if you look at the year-over-year sales forecast for -- or light vehicle production forecast, the latest IHS numbers, it's more or less stable compared with Q3 in 2020, whereas if you look at sort of our guidance saying that we expect the Q3 numbers to be slightly lower than Q2, that means still that we will expect to have year-over-year growth in automotive demand for Gränges of -- in the range of 20% or so. So of course, that indicates that there is something happening with the inventory here maybe in the supply chain and that there might be either some kind of restocking activities expected in Q3 here. But I think it's also worth to point out here that sort of from a year-over-year perspective, we expect to grow more in automotive than the underlying light vehicle production is expected to grow.

Okay. Great. And then, I mean, you have this new customer segments of battery producers. And do you see the same sort of market share opportunity there compared to what you have with the heat exchangers producers going to the automotive segment?

I mean we are starting from a very low level. And for some of the components like for casing and cathode foil over time, we can expect that. But not for all the parts of the battery. But I mean, you have to bear in mind that this is basically a market that we are not at today. So we are very optimistic in that sense. But we are also, just to give you some more flavor, I mean, in several of these battery products, we are passing different test steps here. So we are passing different -- at the customer side with good results. So we're also learning with this new customer type, what is the requirement, et cetera, so...

And I think it's -- just to add to what Johan said there, of course that there are different types of rolled aluminum products for batteries. And the cathode foil and casing are the one that we believe are fitting Gränges' capabilities the best, right? And there, we think we will have the largest market share potential in the medium to long term.

Do you see new competitor there? Or is it sort of a new area of growth?

No, we don't see really a new competitor. It's -- of course, some of the existing players are also working with this. But I think -- one more time, to stress out what the opportunity we see within casing and cathode foil. I mean cathode foil really suits our global footprint very well in terms of the mill size and width. And in terms of casing, we have a good sustainability offer, which is very important for these products. So I think in that respect, Gränges has a very good position to capture growth.

Okay. Great. And then about HVAC there. I mean in the U.S., you saw a pretty good start in a strong market last year, gradually during the quarter. Is it sort of too early to say that you will see a similar development this year? Or are there other issues like capacity and so on that -- well, hinders you from making the same -- well, starting from the same positive performance to start there?

No. I think the HVAC market in general is performing very well. And looking into third quarter, we expect to see a continued strong market. And all jokes aside here, it's certainly not a disadvantage to Gränges that it seems to be very hot in North America right now, and that typically drives consumers to upgrade air conditioning equipment and so forth. And that, of course, everything else the same, that's positive for the HVAC demand. So we expect that to have a positive development. I mean it was positive in second quarter, and we expect it to continue to be positive in the third quarter.

Thank you very much, Mats. All right. If there are no more questions, I would like to conclude this session, and thank you, everyone, for participating today. As usual, we received good and interesting questions. And for those of you who would like to listen to our presentation of the third quarter report for 2021, it will take place on the 21st of October. In the meantime, I would like to wish you all a great summer. Thank you, and goodbye, everyone.