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

Good morning, ladies and gentlemen, and welcome to this Fourth Quarter 2002 (sic) [ 2022 ] and Full Year Presentation for 2002 (sic) [ 2022 ] for Gränges. My name is Jorgen Rosengren. I am Gränges CEO, and I'm joined here by our CFO and Deputy CEO, Oskar Hellstrom. The fourth quarter of 2022 was a stable quarter, which concluded a record year. We had stable sales volume of approximately 110,000 tonnes relative to 112,000 last year. And across our segment, we had a continued stable demand in Americas and a very strong post-COVID recovery in Asia, whereas the situation in Europe was decidedly weaker. Our profit measured as the adjusted operating profit was up 10% in the quarter to SEK 153 million relative to SEK 139 million. And this is, of course, despite the quite serious challenges that we faced in the outside world with notably energy prices in Europe. We had a strong cash flow. We reduced the net debt and we improved our leverage during the quarter. Taken as a whole, 2022 was our best year ever. It was our best year financially and it was the best sustainability performance we've ever recorded. And this morning, we also announced a further expansion in battery components. Looking then at the sales volume per segment and per customer group, we had in Americas largely seasonal slowdown in HVAC of about 5% and also in other niches, whereas specialty packaging and automotive performed well. The total Americas sales volume was largely constrained by capacity or production capacity and was up about 1%. The strong trend in automotive continues in Eurasia, where automotive was up a full 17%, whereas the weakness in Europe primarily resulted in a decline in other niches and in specialty packaging by 43% and 11% respectively. The total sales volume in Eurasia was down 5%. And this is a mix of a weak development in Europe with approximately 10% down in volume or so, but an extremely strong development in Asia, like I said before, with 15% plus. And taking this for the whole group then we can say that automotive continues to be a strong support with good backlogs, good order book and good sales also in the quarter, whereas HVAC and other niches performed worse. Specialty packaging in total performed well on the base of good demand, but also increased production capacity. The total volume was down 2% then, a little up in the Americas and a little down in Eurasia, but largely stable. And with that, I'd like to turn it over to Oskar, who will take us through the financials for the fourth quarter. Go ahead.

Thank you, Jorgen. So I think before drilling down in the fourth quarter, which I will certainly do, I think it's worth to spend a little bit on time on the full year, which so happens to be a new record year for Gränges as we heard from Jorgen. We've never had a higher adjusted operating profit and the SEK 1.115 billion that we delivered in 2022. And as you can see from this chart, we have now managed to more than recover the profit drop we experienced in 2020 as a consequence of the COVID pandemic. That said, the 2022 profit is generated on a higher sales volume and that means that the EBIT per tonne of SEK 2,400 for full year '22 is not yet fully back to historic peak levels, but we are gradually getting there. Now leaving the full year perspective and looking at the fourth quarter, as Jorgen mentioned, we experienced a year-over-year decline of 2% in sales volume. If we look at the margin, the EBIT per tonne, however, continued to improve from SEK 1,200 in Q4 2021 to SEK 1,400 in Q4 2022. If we look at the individual business areas, they move in a similar direction, but there are some differences. In Europe, as we heard from Jorgen, we continue to experience a weak market for especially general engineering and building and construction products within the other niches market and we see that also in the fourth quarter. This continues to impact capacity utilization and also the ability to optimize metal management and that has a negative operating profit per tonne impact. In addition to this, the weak market demand also makes it more difficult to immediately offset continued high costs with price increases and especially so then for the energy costs. Although we saw some relief on the European natural gas market in the quarter, this did not benefit our earnings in the quarter as we entered Q4 with high inventory levels in our Konin plant, as we talked about in our Q3 presentation. From a year-over-year perspective, I think the challenging situation in Europe was offset by strong performance in Asia in the quarter. And if we look in total, the capacity utilization in Eurasia was about 70% in the fourth quarter. In Americas, we see a more stable market situation. And as a consequence, we had a higher year-over-year margin improvement there. From a sequential perspective, we did, however, experience a larger margin decline in Americas than in Europe. But keep in mind, this is from a significantly higher level. This is related to 3 things, it's volume, mix and productivity-related. And as for volume, what we see there is, to a large extent, normal seasonal effects with Q4 being the quarter with the lowest sales volume in the year, but it's also constrained by the Salisbury facility that continues to operate below normal level. In total, the capacity utilization in Americas was about 80% in the quarter. Now looking at the quarterly performance for 2022, I would also like to comment on a adjustment that we made that is affecting the first 3 quarters of the year. As a result of our review of the annual accounts, we made a noncash inventory adjustment of negative SEK 80 million related to raw materials in Gränges Americas that they imported in Q1 to Q3 2022. In order to show representative comparables for future periods, the inventory adjustment has been recognized in our accounts as increased cost of materials in the first 3 quarters of '22 instead of as a onetime effect in the fourth quarter. And the Q1 to Q3 figures you show on this -- that you can see on this slide, they include these adjustments. If we look in more detail in the fourth quarter, we see the sales volume decreasing to 2%, but net sales increasing 10% to SEK 5.4 billion. And the main reason for this is, of course, that we increased the average fabrication price, but this is also seen in combination with net changes in foreign exchange rates that was positive SEK 600 million compared with fourth quarter last year. If we look at the earnings, adjusted operating profit increased by 10% to SEK 153 million. And on an overall level, price adjustments continue to compensate for significant external cost increases also in the fourth quarter, similar to the earlier quarters in the year. Net changes in foreign exchange rates had a positive impact of SEK 33 million in the quarter and this is primarily then the translation effect from the strengthening of the U.S. dollar against the SEK that we've seen throughout the year. In Q4, the adjusted operating profit also includes SEK 7 million of restructuring costs related to our European business. Depreciation increased with in total SEK 30 million and a large part of this increase is related to that we during Q4 completed the logistics improvement project in Finspång and the first of the 2 new recycling and costing centers in Huntingdon and we started to depreciate these. There are no items affecting comparability in the quarters that the reported operating profit for the group is the same as the adjusted operating profit in Q4. The profit for the period increased to SEK 50 million and earnings per share increased to SEK 0.47 in the fourth quarter. For the full year, the profit for the period increased to SEK 700 million and the earnings per share increased to SEK 6.59. And the Gränges Board of Directors proposed an increase of dividend to SEK 2.50 per share for the year and provided that this is approved by the Annual General Meeting, it means that 38% of the profit is distributed back to our shareholders. During Q4, the financial net debt decreased by close to SEK 0.5 billion to SEK 3.9 billion. And as a result, the leverage improved to 1.9x EBITDA on a rolling 12-month basis. And this means that we are now back in our target range of 1.2x EBITDA. As you can see on the slide, adjusted cash flow before financing activities was very strong in the quarter, SEK 679 million. This is driven by the earnings in combination with the release of working capital. And of course, the release in turn is driven by the seasonal sequential reduction in sales, which is normal in the fourth quarter. But this year, we've also put very high focus on reducing operational working capital and primarily then inventory. And this is something I think that the Gränges team delivered very well on in the quarter and we see the result as the reduced debt. We continued to invest in total SEK 163 million in the expansion of the group in key areas such as sustainable and circular products. The majority of the spend in the quarter relates to the 2 new recycling centers that we're building in the U.S. and [ Wangdon ] which has now been completed. For the full year '22, we had a total capital expenditure of about SEK 1 billion, of which half is maintenance and upgrades to existing assets and half is expansion programs. Before leaving this page, I would just like to briefly comment on how we currently view the capital expenditure for 2023. And with the expansion investments now in battery capacity communicated in Finspång, we expect the full year CapEx for 2023 to be about SEK 1.3 billion at current FX rates. And of this, about 70% is expected to be related to our expansion programs. If we now take a closer look at our business areas and we start with Gränges Americas. There, we continue to experience a fairly good market demand for most segments, as Jorgen told us about earlier. The factor limiting our sales in Q4 is really the production capacity in the Salisbury facility that remains constrained and it's currently about 3,000 tonnes below normal level for the quarter. And in terms of demand, we this year also start to see a normalization of the seasonality of the product mix with a higher share of packaging and the lower share of HVAC in the fourth quarter. Although this is quite normal, historically for a fourth quarter, it's a less favorable product mix than what we've seen in, for instance, the third quarter this year. Despite the challenges, the adjusted operating profit increased to SEK 99 million, which corresponds to an adjusted operating profit per tonne of SEK 1,700, and this includes higher depreciation from the fourth quarter as we're now starting to depreciate the new recycling center, as I mentioned earlier. And net changes in foreign exchange rates had a positive impact of SEK 20 million in the quarter. Continuing with Gränges Eurasia. Here, we -- as we said, we continue to experience a mixed market development. Demand from automotive customers in Asia was strong as China continued to recover after the COVID lockdowns. This positive development in Asia did, however, take a little bit of a hold towards the end of the quarter when China changed its COVID strategy and that had a quite significant short-term impact on our ability to produce the shipped products. Still in total, sales volume in Asia increased by 15% in the fourth quarter. The growth in Asia was, however, offset by 10% lower sales volume in Europe and this is driven by 2 things. First, the general negative market sentiment outside of automotive and second, the inventory levels at distributors that remain very high. As we talked about in Q3, in anticipation of this antidumping duty decision against China, European distributors built up significant stock of Chinese products, for instance, general engineering and building and construction markets. And due to the lower end market demand that we've seen in the year, the inventory levels continue to remain high throughout the fourth quarter. And the tight general engineering and business and building and construction market, it also reduces the possibility for optimizing metal management, which had a further negative impact on the earnings in the quarter. Still, the adjusted operating profit for the quarter increased to SEK 55 million, corresponding to an adjusted operating profit per tonne of SEK 900. Net changes in foreign exchange has a positive impact of SEK 13 million in the quarter, but these are partly offset then by restructuring costs in Europe of SEK 7 million. With a very challenging situation that we've seen in especially Europe, but also in Asia towards the end of the quarter, I must say that I think that our Eurasia team delivered very well in the fourth quarter. With that, I hand over back to Jorgen, who will comment further on the full year 2022.

Thank you, Oskar. I will speak a little bit about 2022 as a full year, also about our progress against our long-term targets. And then I will wind up by speaking about the outlook for the first quarter of 2023. I think 2022 was a year of challenges for many people. And I think it's a year that many people in the world will be happy to leave behind them. And that was also the case for Gränges. We had a complete lockdown of our factory in China in the spring, which is, of course, is a very tough thing to handle. In Europe, we were faced with the war in Ukraine and the energy crisis. We had supply chain constraints. We had the all-time high aluminium price peak in the summer. And in the fall, we have, of course, been hit by inflation in interest rates and not least, increasing energy costs. All of this has led throughout the year to dramatic demand swings and they themselves are, of course, a bit of a challenge to handle for an operations team. But all this has also cost money. On the profit level, we've been hit -- on the operating profit level, we've been hit with increased cost of approximately SEK 1.5 billion, which is more than the entire operating profit for 2021. Now fortunately, we have also been able to work hard on this and also been able to offset most of it. Most important maybe in the long term is that we've been able to keep up a steady supply and thereby kept our customers supplied in a very, very turbulent period, which is important for long-term customer relations. We have secured long-term financing. We've had a very good progress on sustainability. We've made a new long-term plan and set longer-term targets which are more ambitious than our historic performance. And we keep making expansion -- completing expansion projects and making new investments in new products and in new productivity. In total, we were able to achieve productivity and price increase improvements in close cooperation with our customers, which exceed the SEK 1,500 million negative and thereby bring the operating profit up to a good level. So as a summary of the year, you can see that we achieved stable volume. We achieved our best ever profit. And we -- as a result of also weathering all these challenges, we strengthened our team. We strengthened our operating footprint and we also got stronger partnerships, both upstream and downstream. So all in all, the year that we're content with, although the external environment was quite tough. Sustainability performance deserves a special mention. We had record levels for recycling. We had the lowest ever carbon emissions intensity. That in itself, those things have together, the recycling improvement drives lower carbon emissions intensity and we also got a lot of external accolades for our performance in this area. For instance, we achieved 2 new ASI certifications for Gränges Americas and we got for the second year in a row, I believe, the EcoVadis Platinum rating, which places us in the top 1% of the companies that they rate, quite a good performance. In the year, we also announced our Navigate plan. It has 3 phases. I'll speak about them in a second, restore, build and invest, and it aims at building in fact, the world's best aluminium technology company in our niche, achieving a 15% ROCE, achieving a long-term 10% EBIT growth, which I might mention we actually surpassed in 2022 and to continue towards a 2040 carbon neutrality target. In all these 3 phases, we're starting out, of course, but there were some notable things to record for the year of 2022. In restore, we're aiming to finalize our footprint, utilize it fully and then optimize it. And we are completing several of the expansion projects that we've started in the last couple of years, notably the recycling centers in Poland and in the U.S. and the internal logistics automization in Finspång. We had really good utilization in the year in Americas and it was uneven in Eurasia. It was very good in Europe in the spring and very good in Asia in the fall, you could say. But most of all, I think we've shown really good performance on price, on mix and on flexibility throughout the year thereby weathering most of the challenges that we've had on the cost or, in fact, more than the challenges than we had -- that we had on the cost side. On build, we have raised the ambition level in our always safe program. We're making good progress with the various solutions for electrification and other new businesses also. We've had this fantastic growth in our recycling volumes. That's now quite an important part of our business, in fact, and we're making new partnerships for green energy and for aluminium, both scrap in fact and primary aluminium. And we also aim to invest. We are starting now to execute the large investment in remelting and recycling for also a very green metal, a very green products, very low carbon intensity products in the U.S. and we're also continuing our expansion into battery components. And let me speak especially about that because it's important for long-term growth possibilities. Aluminium is, in fact, a very key material in the electrification revolution. It's low weight and other properties are ideal for that. And one part that you can see on this page here, several different product categories, but one very interesting product category for us is battery cathode foil, which the growth -- the demand for which will be driven by the very strong expected growth in the demand for lithium-ion battery applications over the next year. So there's a picture of that here. Interestingly, most of the supply chain for such battery cathode foil is located in Asia, but it's being built up in Europe and in North America as a part, I guess, with the general regionalization of supply chains trend in the world. And we started deliveries to customer of this product in 2002 in Asia and we're going to start deliveries this year in Europe. And next year, we will start deliveries in North America and believe them to be maybe the only or maybe one of the very, very few suppliers who can provide this type of service in all 3 continents to these global battery manufacturers and OEMs. And therefore, we announced today, in fact, that we're going to double our European battery foil manufacturing capacity to meet the growing interest we're seeing from all of these customers and invest in that capability SEK 600 million over the next 2 years and come online with it in 2025. Looking at longer-term development, Oskar has already touched on this. Our profitability is below our target. The improvement we're seeing in the profit is offset to some extent by the increase of our capital employed and not the least driven by the large aluminium price in the last year. We hope to be able to make the working capital more efficient and gradually improve this ratio. And that will also be helped, of course, by the profit growth where we're now touching on the target area there. As you can see, we have a long-term target to grow our operating profit by more than 10% per year. And now we are back towards the zone where we want to be there. And very importantly for us also, we have a good development of our capital structure despite, I might say, the very high aluminium price where we're now back in our target range of below or between 1 and 2x net debt over EBITDA. And dividend, of course, you have seen the Board proposal to the AGM of SEK 2.50 per share, which is in our target range of 30% to 50% of earnings per share. Turning then to the outlook. There is no doubt that there is uncertainty in the world and that uncertainty in 2023 remains. In the near term though, we see a very good support from the automotive backlogs globally. And also from the recovery in China, which we believe will support demand. In other customer segments, we see some hesitancy that makes us believe that the customers will shift their focus from securing supply to managing inventories. But that said, though, we still believe in a solid first quarter volume-wise and we believe more specifically in a sequential improvement of the volume in the first quarter of 2023 over last quarter by 10%. And then as before the ambition is and as we've proven to date, our ambition is to fully offset the year-on-year cost increases with price increases. And that concludes the outlook. To summarize this whole thing, we had a solid quarter, which ended our best-ever year financially, but also the very good sustainability performance in 2022, deserves mention. We made good progress on our long-term Navigate plan. As one example there, we're increasing our investment in battery foil capacity now in Europe. And the outlook for the first quarter then is a 10% volume growth and a continued ambition to offset all year-on-year cost increases with similar price or productivity increases. And that also concludes the presentation that we had prepared for you. But now, operator, we're willing to take any questions that the audience may have.

[Operator Instructions] The next question comes from Gustaf Schwerin from Handelsbanken.

Yes, Gustaf Schwerin, Handelsbanken. I have a few. Firstly, on this sequential earnings development in Americas and the Salisbury effect, are you only losing leverage on those 3,000 tonnes or is there actually extra cost impact in Q4 over Q3 as well? If so can you say roughly how much just to get a better understanding of the mix effect on the earnings? That's the first one.

Gustaf, it's Oskar here. No, it's a good question there. I think -- I mean, the challenge we have in Salisbury has been a little bit of a struggle for us the whole second half of the year. I mean, and one part is certainly the impact it has on constraining our sales volume. Basically, should we have this plant fully up to operating at normal levels, it would certainly be able to -- we will be able to sell more product in the U.S. So that's one part of it, as you say. In addition to that, of course, sort of from a productivity perspective, yield perspective, key metric for us, et cetera, the plant is not operating where it should be at this point. So there is more to it just than the volume side of this. And I mean if you look at the sequential development now in the U.S., third to fourth quarter, obviously, Q4 is a seasonally weaker quarter volume-wise, mix-wise. But we also have this productivity aspect in there for this year. And I mean, order of magnitude -- well, volume is the single most important driver sort of from a sequential perspective. And then you have mix and productivity basically half-half of the remaining quarter.

I guess when we have had normal seasonality in the past, you typically see a bit of uptick quarter-on-quarter for HVAC in Q1, right? Is that how we should view it for this year as well?

Well, the normal -- I mean, the HVAC business is typically strongest during second and third quarter, but it starts to ramp up during the first quarter and fourth quarter is typically a very low quarter for HVAC. And we had 2 extraordinary years now in HVAC in the U.S. I mean we don't know, of course, exactly how that will develop in the next couple of years. But if it returns to sort of the historic seasonality, that is the pattern that you could expect.

All right. And then also on the inventory situation in Europe, would you say -- I mean, are we at similar levels of this in Q3 or have you seen some destocking? And I mean, what's your best guess of how this is going to play out over the next coming quarters?

Yes. For clarification, you're talking here, I believe, about the downstream inventory situation among our customers in Europe…

Yes.

Which has been high during the second half of last year, you could say. We also end the year with what we believe is a high downstream inventory, but slightly lower than it was in Q3. So it is decreasing. It's decreasing slowly, however, on the back of basically low-end customer demand in those same sectors. But we believe that the inventory situation with what we can see now, the trends we can see now may correct itself during the first half of the year and lead then, therefore, to -- from our perspective, a better demand situation in the second half of the year in Europe.

Okay. Can I squeeze in a last one?

Sure, absolutely.

Yes. Just on the foil expansion you're doing now, are you building another rolling mill or are you adding melting capacity? The reason I'm asking is, I think you said 400 million for the first 20,000 tonnes, but that included then the logistics and efficient investments, right? So just curious what this means for total output in Finspång.

The 400 million is not a figure or recognized, but what we're doing here gradually is we're building more downstream rolling capacity, right? But we're reutilizing the upstream remelting, casting and hot rolling capacity better we think with this, right? We're trying to move away a little bit from the tonnage numbers on the battery foil because we don't believe it's the right metric. Rather, we should measure I don't know, square kilometers or something. But it is so that we will -- with this investment of the SEK 600 million then double the total capacity that we have projected for Europe then in battery cathode foil.

Maybe I can add to that. I think the 400 million, Gustaf, you referred to is sort of the logistics improvement and automation of the existing Finspång facility, which was completed then by the end of this year, right? And that in itself will sort of give the upstream part of Finspång 20% more or 20,000 tonnes more capacity. And I think adding to what Jorgen said that part of this capacity, we will now be able to direct into the battery foil segment by making some additional investments into that specific product area. So it goes hand-in-hand so to say.

[Operator Instructions]

Nordea Equity Research. So I'm -- first off, I'm wondering here if you could speak more on your guidance, what you expect will drive the 10% sequential increase in Q1? Is it a recovery in HVAC and further progress in automotive or what are your thoughts here?

No, like we said, the segment that we believe will work the best in our favor in the first quarter of this year is going to be automotive, right? So we believe -- we expect strong demand in Asia. We expect strong demand in Europe and also in Americas in automotive, although it's a smaller segment there. Then sequentially, we also do expect stronger demand and production in HVAC and the other segments in the Americas, as Oskar explained earlier, which is part of the normal seasonal pattern, both in our capacity and in demand, right? So we expect, in fact, increased sales volume in all segments in the first quarter. [

Yes. Understood. And then just to clarify here. Do you have any extras if the stock still you had some in Konin and Shanghai or do you still have some?

We have -- in general, I think the whole Gränges organization did a very good job reducing inventory in the fourth quarter. That said, of course, our teams in especially Konin had a tougher task in doing so because of the market situation. We currently have still higher than normal, I would say, inventory levels in -- especially in Konin, but we expect to sort of under normal market sort of conditions, the inventory levels will be turned in, let's say, 3 to 4 months. So throughout the first and leading to the second quarter, this should normalize provided that we don't see a significant deterioration of market demand.

Okay. Great. And finally, perhaps a follow-up on the previous question on the battery CapEx. I'm wondering if you could say what capacity you will have for battery-related products by 2025 after the investment announced today?

We're going to try to not go into the tonnage for battery products. It's also -- now we're talking about battery foil, but I guess I should have mentioned in my overview about the fact that there are other products there where we're, in fact, also taking volume, right? So we're expecting volume already in this year, 2023, in battery casing. And we had significant volume actually mostly in Asia, but expect significant volume in Asia and Europe this year in battery cooling plate, for instance. So the total tonnage of battery products is not something that we're at least right now going to report on externally, but I can tell you that it's growing.

The next question comes from Kenneth Toll Johansson from Carnegie.

Yes. So a couple of questions. First, in the Salisbury plant, what's happening there, what's the reason why it's not performing full speed? Is it still the safety issues?

Kenneth, Jorgen here. Yes, we had a safety -- we've had a safety issue in Salisbury and as I also commented on earlier, we're generally working on the safety situation in all of Gränges with a view to become much better than we are today. And as a result of that, we had a partial closure of the Salisbury plant in the beginning of the third quarter. But since then, we ramped up. But it is generally an operational and productivity issue, which is related to organizational issues and other issues there, but not specifically related to safety as such. And of course, when you have a factory that's not performing, it needs to improve. We have good management there. We have good plans. And we also have good confidence that the operating trend in the Americas generally and specifically in Salisbury will be a positive one during the spring of 2023.

Then I have some questions on pricing and relating to margins. You talked about batteries that you're initiating or starting deliveries on new products and orders and so on. But for the products you have delivered to in China and so on, do you see that you have a good profitability there and that it is higher than the Gränges average?