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

Good morning, ladies and gentlemen, and welcome to the Second Quarter Earnings Call with Granges. It's a pleasure to have you here. We're going to be referring to our presentation that you can see on the screen. And if you're only listening, the presentation is also available on our Investor Relations web page. Starting in the beginning, we had a strong result in the second quarter, and we achieved that result in what we consider a very challenging environment. Safety is always first priority in Granges. And unfortunately, we have to report 2 serious setbacks in this quarter. We had a very serious fire in our Granges Konin plant. And tragically, we also lost a colleague in a fatal workplace accident in the U.S. in Salisbury. This is, of course, not acceptable. We need clearly to step up our efforts in this area. We are taking such actions accordingly. Looking at our sales results, the volume was down quite a bit from 131,000 tonnes last year to 123,000 tonnes this year, so about 7%. And there were several reasons for this. Demand actually was good across, but it was weak in automotive. And of course, there's a general dampening effect on all markets caused by the war in Ukraine. But we've also had reduced output in our plants in Shanghai and our plants in Salisbury for the reasons mentioned, especially in Shanghai, of course, related to the COVID lockdown that we had there. Despite this very or rather negative volume development, we had a very, very strong profit development, and that's because of an increased margin, mainly due to pricing, which more than compensated or at least fully compensated for our cost increases that were quite large in the quarter. And this together with the volume development then led to an all-time high operating results. And we also had, in fact, an all-time high sustainability results. I'll get back to that in a moment. In the quarter, also, we finalized making a long-term plan, which we call in Granges Navigate. And we put it in place, communicated internally, externally and also communicated external targets for the long term connected to that plan. I'll get back to that also. These good results, they don't happen by accident. They happened as a result of very strong work across Granges. And there are many good examples of that. But maybe one of the strongest examples is the work and the efforts that were made in China in Shanghai, to keep our customers supplied, to keep deliveries going despite the very severe, very draconic actually lockdown mechanisms that were in place in Shanghai. So an extraordinary team effort which kept the plant operating due to the personal efforts of more than 200 employees who volunteered to work in the factory during the lockdown, but also to live there in that time. Fortunately, we've been able to return to normal operations since last month in Shanghai. And the net result of all this is, in my opinion, an extraordinarily low negative impact of this very, very severe situation with a reduction of only 4,000 tonnes of the volume in the second quarter, approximately 20% then of the normal volume in Shanghai. So extremely well done. Turning then to sustainability. One of the longer-term ambitions that we have communicated in the quarter is our ambition to become climate neutral in 2040 or latest 2040. That is some time away, but it's very, very tough targets and a very strong commitment on our side and requires a lot of improvement over the next couple of years to get to that goal. Part of that effort and part contributing factor to that target is our increased recycling and the increased circularity that we can achieve, for instance, by adding closed-loop agreements with our customers. And we measure that in several different ways, but one way to measure it is the volume of recycling that we have. And there, we have set the target to have increase it ten-fold by 2030 relative to the reference year, which is 2017. Further on the sustainability area, we have launched a new brand for our sustainable, most sustainable products called Granges Endure. And that brand is reserved for products that are especially good in helping our customers decarbonize, helping our customers meet their demands of climate conscious end users and that offer our customers the highest quality with the lower sustainability impact. And more in detail, it requires our products to have a carbon footprint of a maximum of 4 tonnes carbon dioxide equivalents per tonne of product. cradle-to-gate and Granges is among the few companies who can have a measurement of the carbon footprint of our products, all the way from the boxes from the alumina, all the way to the finished product, what we call cradle to get them. All of our products will also then have a third-party verified carbon footprint and be responsibly sourced and produced again with a third-party verification. Now we're going to turn to the numbers and starting then with sustainability performance because in sustainability, we don't only have long-term ambitions. We also have short-term performance. And that was very evident in the quarter, where the carbon emissions intensity was reduced quite dramatically by 14% in fact, year-on-year and was now at 8%, an all-time low relative to the 11% -- not 8%, but 8 tonnes per tonne, of course, in the quarter, the best ever result and quite a bit down from the 11.4 in our baseline year of 2017. And also, the recycling rate, the amount of sourced aluminum scrap that we use is up quite a bit in the last quarter to 35%, again, an all-time high record and quite a bit up from the reference year also in that case. Volume then, we had generally good demand, as I said, but we did have 3 effects that went in the other direction. And one of them, of course, is something that goes across, and that's the general weakness we've seen and have seen now for quite some time in the automotive industry. And that impacts both Granges Americas and also Granges Eurasia. But we also had 2 regional specific things affecting volumes in Granges Americas. We had a close down of the Salisbury plant as a result of that accident, which impacted volumes there. And in Granges Eurasia, as mentioned, we had COVID lockdown. And these 2 things then in the quarter specifically go, of course, across all segments, and that's why you see a lot of red arrows on this page. In total, a 7% volume reduction in the quarter. On the other hand, as mentioned already, the margin went the other way. We measure margin in a couple of different ways, but an effective measure is or an efficient measure is the operating profit per tonne, which you can see on this page. And it recovered further from the lows that we had in the second half of last year as a result of cost increases, which we then had not fully compensated for by price increases, but now have fully compensated for by price increases. And as you can see in the quarter, this measure, the operating profit per tonne was up from 2.4% last year to 3.1%, a very solid improvement. Now these 2 factors together, the volume and the margin, of course, boil down to our profit, and Oskar, our CFO, will now speak about our profit in the quarter and also some other measures. So I'll turn it over to you, Oskar.

Well, let's see if I can provide you with some more details there on the financial development in the quarter. If we start with the sales volume, we can see that this decreased by close to 7% to 122,500 tonnes, as you just heard from Jorgen. The net sales, on the other hand, increased by 49% to SEK 6.9 billion. And the main reason for the net sales increasing where the sales volume decreased is the higher year-over-year aluminum price and increased average fabrication price. In addition to this, the net impact of changes of foreign exchange rates was positive SEK 697 million compared with the second quarter last year. I should also mention that the net sales include revenues of SEK 107 million related to insurance compensation for the fire in Konin and this does not have an impact on the operating profit in the quarter as the assets that was damaged by the fire are impaired with the same amount. Continuing on the earnings side, maybe we should again start by saying that this SEK 374 million in adjusted operating profit in Q2 is the highest we've seen in an individual quarter so far. And we're, of course, very happy about that. The adjusted operating profit per tonne increased, as Jorgen mentioned, to SEK 3,100 in the quarter, and the key driver behind the strong earnings increase is the continued margin recovery as price adjustments are now fully compensating for the significant external cost increases. On that topic, we continue to see almost all cost items increase year-over-year with the largest increases related to energy and freight, and in total, external costs increased by more than SEK 300 million in Q2 compared with last year. I should also say that this does not include the increased cost for aluminum that is directly passed through on to the customers. In addition to the improved balance between price and cost, net changes in foreign exchange rates had a positive impact of SEK 22 million in the quarter, primarily due to the effects from the U.S. dollar appreciating against the SEK in the first half of the year. Depreciation, amortization and impairment charges increased within total SEK 130 million. Of this, SEK 107 million relate to the impairment of the assets damaged by the fire in Konin. Reported operating profit of SEK 436 million further includes items affecting comparability of positive SEK 62 million, and this is fully related to the insurance compensation for the fire in Newport that occurred last year, and this case has now been closed. The profit for the period increased to SEK 295 million and earnings per share increased to SEK 2.78 in the second quarter. During Q2, the financial net debt remained stable at SEK 4.4 billion. driven by the earnings improvements, the leverage did, however, come down to 2.3x EBITDA on a rolling 12-month basis. As you can see on this slide, the adjusted cash flow before financing activities was strong in the quarter, totaling SEK 722 million. And as you may recall, we saw a very large buildup of working capital in the first quarter due to the dramatically increasing aluminum price on the back of the Russian invasion of Ukraine. With metal prices now coming down again, we've started to see the reverse effect of this and lower aluminum price contributed about SEK 350 million to the working capital release of SEK 177 million in the quarter. Provided that the metal prices remain on the current level, we expect to see further positive effect on the cash flow in the second half of the year. We continued to invest in total SEK 147 million in the expansion of the Granges group and the majority of the spend in the quarter relates to the 2 new recycling centers that we are currently building in Americas. And we also distributed SEK 239 million to our shareholders. Finally, I think it's also worth to comment on the quite large currency translation effect that impacts the net debt in the quarter, and this is primarily related to our dollar-denominated debt and the strengthening of the U.S. dollar against the SEK in the quarter. But all in all, I'm very happy that we are back to a strong operational cash generation and that we managed to reduce the leverage in a quarter where we also paid dividend to our shareholders. Let us now move on to the business areas, and we start with Granges Americas. In Americas, we continued to experience a strong market demand from all segments, except in automotive, which was negatively impacted by continued supply chain disruptions as well as high inventories at our customers' level. The temporary stop of the Salisbury facility in the month of June following the accident there, had a negative impact on the sales of nonautomotive markets with about 3,000 tonnes in the quarter. And in total, the sales volume decreased by 8% compared with last year. The adjusted operating profit increased to an all-time high level of SEK 270 million, which corresponds to an adjusted operating profit per tonne of SEK 4,200 and net changes in foreign exchange rates had a positive impact of SEK 40 million in the quarter. Continuing with Granges Eurasia. Also here, we continue to experience a slowdown of demand from automotive customers in the second quarter, and this was due to a continued shortage of components and further supply chain disruptions driven by the outbreak of COVID-19 in China primarily. Demand in other end customer markets remain fairly good, and the decline in automotive sales was partly offset by increased sales to other markets in Europe. Another consequence of the COVID-19 outbreak in China was that we had to -- our production facility in Shanghai was in lockdown basically during April and May, as Jorgen mentioned earlier. But thanks to the fantastic effort by the team there, we limited the volume loss to about 4,000 tonnes in the quarter. And in total, the decline of Granges Eurasia sales volume was limited to 6% year-over-year in the quarter. The adjusted operating profit per tonne increased to SEK 172 million, corresponding to an adjusted operating profit per tonne of SEK 2,600. Here, we see negative changes in foreign exchange rates with impacting SEK 18 million year-over-year. As we communicated earlier, there was a fire in the new cold rolling mill under commissioning in the Konin facility in May. We currently estimate that this will take about a year to rebuild or replace. And that means that the ramp-up of production capacity that was originally planned for the second half of 2022 will be delayed with at least a year. In terms of financial impact of the fire, the damage to the mill is covered by insurance, and we currently expect no further cost for this. Looking ahead, I think we can just acknowledge that the short-term market outlook is highly uncertain, impacts of COVID and war in Ukraine, leading to further supply chain disruptions, price increases, increasing interest rates, increased inflation expectations, I think it would be fair to believe that this, at some point, will influence consumer demand negatively. And this would then in turn impact most industries, including Granges and our customers. But that said, we have, as of yet, seen few concrete signs of sequentially weakening demand from our customers. And the negatives we have seen may short term be balanced by positives like a large order backlog in a large part of the Chinese industry after the recent COVID lockdown. Obviously, this is assuming that there will be no further major lockdowns in China, which could absolutely happen given the recent developments there. But all in all, I would however, say that we remain relatively optimistic about the demand situation going into the third quarter. We're also very determined to continue to defend margins by balancing cost increases with improved pricing, and we have a clear ambition to continue to further reduce leverage over the coming quarter. With that, I'll hand over back to Jorgen, who will give you an overview of our new long-term Navigate plan for sustainable growth.

Yes. And like I said in the second quarter, apart from just keeping our customers supplied and battling all these different headwinds, we also managed to communicate internally, externally the result of the Navigate work, which has produced a long-term plan for Granges and also some long-term targets. The background to this work is twofold. Firstly, we've seen historically a very strong value creation in Granges in this chart here measured as the difference between a positive ROCE and cost of capital. But we have to be honest and say that in the past few years that has tapered off to a low level and that, of course, is something that we want to do something about. The other part of the background is the very strong external trends that we see for regionalization for sustainability and also for electrification of all industries, in fact, but not the least, of course, the vehicle industry. And these 3 trends impact Granges in a fundamental way, but also create a lot of possibilities for us. So with those 3 inputs, we've made a plan, which is very simple and has 3 steps. The first step is to restore a strong value creation. And also, of course, we have to mention in this context, safety. The second step is to build the world's best aluminum technology company focusing on 3 parts of our business model, recycle, improve and grow, and 2 differentiators, which we think set Granges apart from the crowd in our industry, namely, people and sustainability, and to do so in partnerships with our customers, with suppliers of metal and energy in order to create a circular and sustainable supply chain for aluminum products to our end customers. And the third phase, which we will enter a little bit later than the first 2 after we have proven that we're in the right direction, is to invest in sustainable growth in things like recycling, optimizing our business in new markets and also, of course, in a continued successful acquisition and partnership agenda for Granges. Taken together, these 3 steps correspond to a very high ambition level, in fact. So after restore, build and invest, we intend to have a good development for Granges going forward. And more specifically, we intend, like I said, to build the world's best aluminum technology company to achieve a sustainable 15% return on capital employed to get back to previous levels of an average operating profit growth per year of 10%. And we have also, as I said before, communicated now our firm intention to reach climate neutrality by 2040 and in the near term to continue our already good progress towards that goal. To make this a little bit more formal, we have also revisited and announced new financial targets for the medium and long term. And those are to return to a return on capital employed of 15%. And as you can see in this chart, Granges has been at that level for a long period of time. But as I said then we have in the past few years, I guess, a fall off that green part of the chart, and our ambition is to restore that as soon as possible. We intend to have an average operating profit growth of 10%. And there, we've had a negative growth in the past years, they're relatively 2019 and 2020, and that's, of course, caused by the COVID pandemic and the subsequent crisis. But we intend in the near term to exceed this target and then to maintain our profit growth over 10%. And when it comes to the capital structure, Granges has a good cash generation in its core business, but we have also invested quite a lot. And that means that in the past quarters, especially now during times of high aluminum price, we've had a higher leverage than is good for the long term. And there, our ambition, as Oskar referred to earlier, is to gradually normalize the leverage into the area of 1 to 2x EBITDA, which we think is a sustainable level for the future. And dividend is something that we have always been good at in Granges, the only year that we didn't pay a dividend was 2019 for well-known reasons, but we intend to, of course, maintain this level also going forward. So to summarize today's presentation, I like to say that we're making good progress on many fronts. We've made some really important steps forward on sustainability in the near term with our performance, but also in the long term with our commitments. We have a very strong interest for that, especially for sustainable offerings to the electric vehicle industry and sustainable offerings to the battery industry but also many other industries like HVAC. We're making good headway on our announced existing investment programs, and we have also announced a new program for a $52 million investment in recycling in the Americas. The battery cathode foil program that we talked quite a lot about is taking form. And we have already made our first deliveries in Asia this year. And we intend to go to market in Europe in 2023 and in the Americas in 2024. As mentioned, we have communicated a new Navigate long-term plan and targets to go with it. And the objective of that is sustainable growth, and we have in the last quarter and actually also in the first half year, communicated our best ever financial results and our best ever sustainability results. And that really concludes our prepared remarks on the second quarter. So now I would like to turn to the operator and open up for questions and answers. Operator, please.

The first question comes from Gustaf Schwerin of Handelsbanken.

A few questions. Start with your guidance. I understand the uncertainty, but maybe if you could give some indication on what kind of volume development you're planning for year-over-year or sequentially? I assume it should tee up year-over-year given the outcomes Q3 last year? And also related to that, when you say you seeing some weakening demand, is that mainly in Europe, Americas, both and any specific segments? That's my first one.

I will continue. We have many factors impacting the demand in every quarter, right? And in the third quarter, we have, of course, seasonal effects and sequential effects. But as we say in the report, we haven't yet seen any concrete signs of weakening demand from our customers in the third quarter or at least very few such signs. That being said, it would be strange if longer term, the macroscopic development and the end customer demand would not over time impact demand also for our products. What counters that a little bit is that in several of our large customers and the large industries of automotive and HVAC, we also have a pent-up demand. And specifically, we also have, of course, a pent-up demand in Asia because of the lockdowns that preceded the third quarter. So as you can hear, lots of pluses and minuses. Overall, we are fairly confident for the third quarter, but we're not going to give you more precise volume guidance than that. Nevertheless, Oskar, if you would like to add to that, I think that could be helpful.

Yes, I think you said it in a very good way, Jorgen there. I think there are some minuses, but there are also some pluses. And I mean it boils down to, I think, a fairly stable view of the demand for Granges products from a sort of sequential perspective.

Right. Then second, on your earnings per tonne in Eurasia, you're saying in the report that they're increasingly compensating for inflation. At the same time, it's not significantly year-over-year on lower volumes, you have a higher cost. China was messy. I assume that contractual cost as well. Mix doesn't look better, you have the negative FX. So I mean, it looks like you're much more than compensated for inflation. And when we look at this going forward now, I mean how do you see earnings per tonne, the other thing? Do you have more price increases to push through? Or is some raw materials coming down now preventing that to happen?

Yes. I mean the price increases contain both price increases but also surcharges, right? So the picture is a bit complex. In Europe, we also have ordinary list prices and even spot prices. So it's not so simple picture to say there's only price increases. But what we have committed to and are still committed to is that we will compensate fully for all cost increases that we take. As you know, though, there are some costs that are working maybe now in the right direction, especially some of the raw materials that we use, right, but also costs where there are real cause for concern, primarily in Europe, energy and maybe also globally energy, but not least in Europe, energy because, of course, you are aware of the natural gas dependency on the European industry generally and also at Granges. So those factors together make the cost picture a bit uncertain for the third and fourth quarter, and that is why we are reiterating our commitment to compensating fully for the cost increases in the third and fourth quarter. It's nice that you say that our margin is good in Europe. We are not unhappy about it ourselves, but this is not a 1 quarter thing. I mean this is a long haul thing. And for that, we intend to fully compensate for any cost increases that we've had.

Okay. Fair enough. Then just on Salisbury. I didn't quite hear what you said Oskar, but did you say you lost 3,000 tonnes in Q2, implying that HVAC could actually have been up year-over-year, if you didn't have that stop?

Basically, as you probably know, automotive in Americas, those products are, to a very large extent, manufactured overseas and shipped in. So the domestic production in Americas, which the Salisbury facility is a part of that production is primarily serving HVAC packaging and other niche segments domestically in the U.S. So we stopped the Salisbury facility for the month of June before we could determine that it was basically safe to start to operate that again. That impacted these 3 other segments, HVAC, packaging and other niches with about 3,000 tonnes negatively in the quarter.

Okay. Very clear. Then just lastly on the Konin expansion program. I believe the wording here is a bit different from previously. Now you're saying that it's going to be delayed at least 1 year versus 2023 previously. Should I read into this? Is it because you're holding back given the demand outlook? Or are you not getting all the stuff you need for -- has something changed there?

No. But we're still in the early stages, of course, of making a plan for rebuilding that thing. When there's a fire, there's a mess. So if we have not been 100% consistent in the wording, that's probably because of that, there's going to be a delay in that order of magnitude. It's not a month-by-month thing. It's a big delay.

The next question comes from Victor Hansen at Nordea.

You mentioned one client in Specialty Packaging that was affected by the war. Would you be able to quantify the volume impact from this?

We had a strong volume impact of that previously, but that is not a significant thing. I think that's by way of example. The war in Ukraine, though impacted Granges in many ways. Firstly, our staff, of course, in Poland, primarily. But then, of course, everything else that happens in the industry now, it's a bit messy, as you know, right? So we have the energy prices. We have the supply of various things out of the Ukraine to our customers and so on. So the war is a big impact, but the actual direct impact on our sales to our customers is small. That particular customer was overrun at the early stage of the war, but that site has now been reconquered actually quite dramatically by Ukrainian forces and the production has started again.

Okay. That's helpful. And then it would be interesting to know your construction exposure within other niches because I know that you've grown here to mitigate some of the weaker or mostly volumes. Maybe you can mention the split and how it has developed over time.

Yes. I think -- that's right, I mean other niches is a combination of many different product segments. A large part of this is to the general engineering applications. Part of it is to building and construction and so forth. But I think the good thing with this is that it's relatively speaking, it's easier products that can be shifted between these various segments. So in the beginning of this year, we have increased sales to building and construction, that's for sure. But I won't be able to sort of provide you a further split of the other niche segment because we don't communicate that externally.

That has to do with the outlook. And that, I guess, the comment on that is the general comment that we gave that, of course, general weakening economy if such a thing would come about, will, of course, impact Granges it will all other boats that float on this ocean, so to speak. So -- and construction is a part of that for sure.

Yes. Understood. And my final question here. It would be interesting to hear the margin impact from your higher aluminum scrap ratio year-on-year, if there's been a margin impact from this?

Let me see now. You mean from the increased recycling...

Yes.

I mean, typically, you source scrap at least still, and this might change over time, of course, as demand for recycling and recycled products is getting larger. But typically, you can still source scrap at a discount to LME, and I guess that, that is probably what you're after. So I think that we don't provide a specific number for this. But I mean if you look at the totality, everything else equal, typically, there is a little bit of margin improvement from increased sourcing of scrap instead of sourcing primary metals yes.

The next question comes from Oskar Lindstrom at Danske Bank.

Three questions from my side. First one, I'd like to pick up a little bit on that previous question about where you comment in your report about offsetting the automotive weakness with sales to other segments. Could you say if this was sort of just part of a trend or was it more of a one-off reaction to weakness in automotive during the quarter? And also, did this have a positive or negative impact on EBIT per tonne relative to having sold these volumes to the automotive segment? That would be my first question. Would you like me to go on with the other questions as well?

I take this one first. Otherwise, we have such short memories. The offset was not some kind of accident or so. It's definitely a result of a very conscious effort, especially during the fourth quarter of last year to set that up and to sell it, right? Does it have a positive or negative impact on EBIT per tonne? It has a super positive impact relative to not selling those volumes. Relative to automotive, that depends. Right now, we have okay pricing for these other niche products that we're talking about here, but that varies a bit over time. But of course, very, very positive relative to not selling the products, and that's what we're looking at.

All right. My second question then is more specific. We saw the 6% volume drop in Eurasia. Was that due to sort of lockdown effects in China? Or was it more weakness in the automotive segment, i.e., meaning even if you've not had the lockdown in China and the negative effects that it still had, would there still have been minus 6% volume because of weakness in the automotive segment?

I can say, Oskar, that the development here is very much tied to the lockdown in Shanghai and the consequences that had on the automotive industry. And of course, it has a direct consequence for us because we were actually in the lockdown ourselves. But it has sort of an indirect impact on the automotive demand also because that -- the further disruptions of supply chains and component shortages stemming from the fact that there was an additional lockdown in China. And to give you a little bit of more flavor on it, if you sort of look at the demand levels in general on splitting it on sort of the geographical regions, we could say that in Europe, we actually compensated auto decline with sales to other markets. So Europe is fairly flat in terms of sales year-over-year, whereas the decline is related fully to Asia and lockdown driven to a very large extent.

Okay. Super. My final question is on energy supply to your operations and in particular, natural gas to your Konin plant in Poland. I mean, we've heard a little bit about, in Germany, some preparations or rationing and continuous threats from Russia about cutting supply, et cetera. How would that impact your Konin plant in terms of production, any preparations that you can do ahead of the winter residential heating season? Do you have any contracts which assure supply to you? Yes, anything related to that, how that could impact sort of, say, Q4, Q1?

Well, I mean, gas supply in Europe, I think nobody really knows what will happen, of course. It's an uncertain area and an area with many risks. I think it's fair to say that the risks were higher in Germany as a country than in Poland as a country. But having said that, however, we are 100% entirely dependent for the longer term on supply of natural gas from the Polish grid and the Polish gas grid does contain Russian gas and also German gas, right? So gas flows in every direction. We are not primarily concerned about a complete shut off or even a rationing of natural gas supply, although it's best to be prepared for everything, we are primarily concerned with the cost level that, that will result in. And there is, of course, a significant risk of dramatically increasing natural gas prices in Central Europe, including Poland in the third and fourth, maybe in the first quarter, depending a little bit on what happens to supply and what happens to the weather and what happens to industrial production. So it's something to watch, for sure. Can we prepare? Well, we can build a little bit of inventory, but a complete shutdown of gas supply in Poland or in Germany -- even more in Germany actually would be a super dramatic thing for the entire industry and would impact us also in that way, right? So it's something that we'll have to hope will not happen and something that we can prepare for in small ways, but cannot completely mitigate. But also having said all that, not something that worries us over much.

And just a follow-up on that. Do you have any price contracts with your customers in place that sort of energy surcharges basically to enable you to quickly compensate for higher natural gas prices?

The price increase work that we've done in the past 2 quarters has been related to installing such clauses, surcharges and so on. There, as I said a bit earlier, different for every customer and different also between the different segments. And we also have many customers where the pricing is set on a shorter time period and so on, right? But it's quite clear that an increase in gas price in Europe, a dramatically increase in gas price or electricity price for that matter, will have an impact on aluminum and on everything that's made of aluminum and everything that uses energy, right? So it will impact also the market price level up then, right, which is in itself a mechanism that makes easier to raise prices. Short answer is, yes, we have such mechanisms, but it's a complex picture with many complex mechanism with many moving parts, which depend on the customer and on the segment.

Of the SEK 300 million in external cost increases, excluding metal in this quarter year-on-year, how much was energy?

It was about 1/3 of that number. So by far, the largest single cost item from -- or largest increase in cost item for sure.

The next question comes from Karl Bokvist from ABG Sundal Collier.

My question is -- first one is on Asia. The lockdown effect that you saw in the second quarter and how this has recovered during the quarter and what you see in terms of production capability now for the rest of the year?

Yes. The lockdown effect was at 3,000 or 4,000 -- negative 4,000 in the quarter, right? That's, of course, an approximation because it's a relative number, but something like that, 4,000 tonnes in the quarter 2. We restored more or less normal production in the beginning of June and have produced normally since then. As you probably know, the situation with COVID generally in the world and also in China is uncertain because of the very infectious new strains that come out. So it's very hard to predict what will happen with production in China or indeed demand in China during the fall. But I think the team there has proven a fantastic resilience, fantastic flexibility. So our ambition clearly is to grow with it and produce no matter what. Right now, we're producing at "normal levels" although with a lot of mitigation and complications that result of the supply chains, both up and downstream being disturbed, of course, by these lockdowns. But right now at normal levels.

All right. Understood. And price increase one thing, and you hope to continue doing this, but despite automotive, which has historically been a good margin business for you, it seems like the mix effect efforts you are doing still help support positive improvement in EBIT per tonne. Is that a correct assumption that EBIT per tonne is improving despite potentially negative mix?

I don't know to say about potentially negative mix effects. I mean, the mix price effect is positive in the amount that you can see here, adjusted, of course, for the volume, right? So if we had had the same volume, the margin would have been even higher, meaning that there is a positive mix price net here relative to last quarter. Now Oskar looks worried. So he's going to have to comment on that.

Yes. No. But I think the question -- I think what we should comment on to answer this question, Karl, is also capacity utilization because I think this is really what this is about in this case. I mean we have a cost structure with a fairly large fixed cost, right? And as a consequence of that, we have fairly large operational leverage, which means volume through our assets is an important driver of profitability. And automotive products typically have a slightly more -- or higher technical content and everything else the same. We would typically have a higher margin on the automotive product. But in this case, I think it's more about making sure we have a high capacity utilization of our assets. And if the question is about selling a nonautomotive product or selling no products at all. Obviously, it's a given thing that with decent pricing, you should, of course, sell that nonautomotive product and that will be helpful for your overall operating profit because keeping high capacity utilization is really key for our profitability. I think that's an important add on to this.

Understood. That was what I was after. And then just the first quick one. So China, roughly the lockdown effect you said was 4 kilotons. And then the Salisbury accident or stop that was 3 kiloton. Was that correct?

I should add some earlier answer on China also that, of course, we're producing right now at normal levels, but the positive thing, so to speak, is that we have a backlog from the second quarter there, which we're now doing our best to work down. So that is, of course, also something that we have in the back of our demand for Q3.

All right. But the numbers you highlighted was 3 kilotons in China -- sorry, 4 in Asia and 3 in Salisbury during Q2 roughly.

Yes.

Okay. And then just with tragic accident, was it related directly to the production process and thereby you had to stop production during the entire month to ensure a safe return to production? Or where was it, what was it related to?

It was a forklift accident, so on the production floor. And but we didn't shut it down for any specific production process but to ensure that the plant in its entirety was safe to work in, which we ascertained and then we're able to say for sure that it was so on July 5. And on that date, we resumed production.

Understood. That is all for me.

The next question comes from Kenneth Toll Johansson at Carnegie.

Two questions, please. Continue with accidents and fires, there have been quite a few fires in your operations. So is that normal for your type of operations? And what can you do to limit those fires?

Well, normal, it's unacceptable to have 2 fires in 2 years, Kenneth, and that is something we all feel keenly in Granges and from the top management down to the people who operate this equipment and something we need to do something dramatic about. We have, of course, looked deeply into the root causes and the contributing causes also for the fires, both in Newport and in Konin and have action programs in place there. But of course, we're also looking into what we can do in the other sites to bring those lessons to bear to draw the conclusions from those lessons also in the other sites. But short answer is it's not acceptable to have 2 fires in 2 years.

Okay. Great. The other thing I was talking about that the other analysts asked about as well is the product mix where you have sort of had less and less automotive exposure. But if we look into the third quarter now, those forecasting institute like LMC and those guys, they expect a very strong recovery in automotive production with growth rates year-over-year over globally over 20%. And some of that is a catch-up from COVID lockdowns in China, but some of that is also better availability of other components that have been a shortage for 2 years or so now. So will you manage to deliver much higher automotive volumes in the third quarter. Is it easy for you to just switch over from general engineering and building and construction products back to automotive again to fulfill those waters?

Well, first of all, I think it's so that we're very much hoping that these institutes and forecasting people are right in their forecasts. But that's not at all given, of course, as you are well aware, having looked at this forecast now over the past 2 years, swinging widely up and down. That said, when our automotive customers want to buy more, they are welcome back to Granges and we will supply them.

Yes. So it's no sort of technical changes you need to do or to change the product mix in that way?

Well, I mean it's super hard work and requires many difficult judgments and also changes of all kinds throughout the production process, not reinvestment or anything like that, but just a change of the schedule and of the alloys and the supply chain upstream and so on. So it requires a lot of hard work, and it's absolutely not easy, but I have at least been quite encouraged in the past 2 quarters by the extreme mobility or extreme, but the very strong ability of the Granges organization to display flexibility in the face of very, very strong demand swings between our industries and between our regions. So I have high confidence that we'll manage it also in the third quarter.

Great. And then if we assume that those forecasting Institute are close to being right in their forecast, I mean, we're looking at quite significant higher deliveries in the third quarter. You also highlighted that you have some backlogs both in China and from the Salisbury incident. So it looks like production volumes in Q3 could be very good. And in your outlook, you're not as specific as you usually are, but you talk about a few signs of slowdown, but simply Q3 outlook's very good, actually.

I mean you have to read into it what you like. The Q2 outlook, we have tried actually to give a good Q2 outlook. And sorry, Q3 outlook, I apologize. And it is exactly like we said that there are many signs generally in the economy that point toward lower consumer demand, which will eventually impact Granges. But there are also positives, notably the industrial backlogs in those 2 segments that we talked about. But then there are again negatives to do with the seasonality. And all these things boil down to the generally positive outlook we have for Q3, summarized in the census that we have not yet seen any signs of negative sequential demand change.

It would be exciting as always.

[Operator Instructions] The next question comes from Mats Liss at Kepler Cheuvreux.

A couple of follow-ups from previous questions. I guess coming back to the auto segment there. I guess previously or previous years, you have been talking about supply chain inventories that affect sort of volumes that you experienced. Do you have any sort of deal about that there are inventories in the supply chain that could sort of delay the potential improvement now that the forecast institutes see in the second half of this year.

I can start there and comment and then Jorgen can add maybe, but I think we stayed specifically here now in this report that if you talk about automotive, we experienced that, especially in Americas, customers or our customers have unusually high or higher than usual than inventory level. So there, we certainly see that. In Asia, it's a little bit maybe the opposite picture is maybe difficult, more difficult in Asia, given that we have this COVID lockdown-related backlog and depending a little bit on where in China, you have had the supply chains, part of it has been lockdown parts, not and so forth. So the picture is a little bit more differentiated there in terms of who sits on inventory and so forth. But typically, the clear sign is that in Americas, it's a high inventory levels at our customers.

Great. And well coming into the HVAC segment, it's normally a strong quarter in the U.S., the third quarter. Is there any reason to believe anything else?

No, I think the answer is no. There's no reason for that.

No. Good. And finally, just about the -- you mentioned the insurance compensation you expect to see at Konin. And I guess that compensation is due to the, well, replacing of lost machinery and so on and not sort of potentially lost commercial volumes and the impact of those?

Loss of commercial volumes, I mean, that is insured as well. But of course, that will always be a discussion with the insurer. When you have a damaged piece of equipment, that discussion is typically much easier. And the effect we've seen now in this quarter related to insurance compensation and impairment of assets that's only due, of course, then to the assets that has been done, we are not including any sort of business interruption insurance in the financials in this quarter. But that said, if you look at the Newport fire, when we settled the claim the insurance company in this quarter, the $62 million we received there is fully related to exactly what that you're asking about, right? It's the business interruption compensation. So we expect to see some of this for Konin as well, but I think it's too early stage to say exactly what this number is because we also don't know yet when we will be able to restart this equipment.

And the sort of compensation is sort of a similar amount in Newport? Or is it too early to say?

It's far too early to say, right, because this depends when we will be able to restart. Our current estimate is that we will take about a year to rebuild or replace this damaged equipment, right? And then you could argue, okay, then you have a bit -- you have 12 months then or a year of lost sales, but maybe it's much quicker or maybe it takes longer time and then the result will be something different. So I think this type of discussions typically come at a much later stage with the insurer as well, and that's why you see this settling in the Newport case a year or more than a year after the actual incident. So I think we... to come back on this, when we know more.

[Operator Instructions] There are no further questions at this time. So I'll leave over to the speakers.

Okay. Then ladies and gentlemen, thank you so much for attending this earnings call for Granges for the second quarter of 2022. I wish everybody a nice summer and I welcome you back when we have hopefully then good results to communicate for the third quarter of 2022. Take care. Bye now.