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

Good morning, ladies and gentlemen, and welcome to this presentation of Granges' first half year results for 2023. My name is Jorgen Rosengren, and I'm joined here by our CFO, Oskar Hellstrom. And we will try to take you through this morning the big picture, but also the details of our half year results. So starting with the big picture then, we had in the quarter now, a stable volume, slightly down from 122,000 tonnes last year to 120,000. And we think that this is kind of an achievement in itself in a very uncertain and volatile environment. Our good earnings in the quarter and also reduced working capital led to a good cash flow, which helps our balance sheet situation and creates flexibility, of course, for the future, very good. I should mention that this happens despite the fact that we continue to invest rather heavily in our future and hope then, therefore, to have a very good future also looking forward. Speaking of earnings, the price and productivity and new business actions that we undertook in the quarter and have been undertaking for a long time, more than offset the cost mix and demand challenges in the quarter. And also for the longer term, we continued in the quarter as we have done now for some time to progress relative to our Navigate plan for sustainable growth. And in sum then, the adjusted operating profit for the quarter was up 30% relative to last year. Last year was a record quarter, and therefore, this year is also a record quarter, and we reached a level now of SEK 450 million in the quarter compared to SEK 350 million approximately last year, an all-time high results. Let's begin then to go over the market. We saw a market which in most segments was rather weak in the quarter. That goes for HVAC, so heating, ventilation and air conditioning customers, for packaging customers, and for many other niches where Granges is active. But we did see very stable, and in fact good growth in automotive customers. This, of course, is related partly to the difficulties that the automotive industry experienced last year because of component shortages then. But it's also due to the fact that last year, we had trouble in China, and we're suffering there from a COVID lockdown, which, of course, now we're recovering from. In total, for the group, then we had very strong growth in automotive, and we had weak growth in other segments. And this proves, again, I guess, the value of having a very diversified and widespread customer portfolio geographically, and also over segments. In total, as I said before, the volume sales of Granges were down by about 2% in the quarter. Sustainability is very important for Granges, and we keep investing in it and improving our processes for it and also building partnerships for it. In this quarter, we had record high recycling volume, actually, for the first time, over 40% recycling. That brings our total recycled volume in the vicinity at least of 200,000 tonnes. So 200 million kilos of recycling. So in fact, now recycling is a rather sizable business in Granges, and very important also for our future. It also makes it easier to take new customer contracts when we can show that we are gradually moving to a much more circular business model. And in fact, they're very often ahead of our competitors. This was driven by new partnerships, but also driven to a large extent by the now fully operational casting and recycling center in Huntingdon in the U.S., which contributed not only to good recycling, but also to a more favorable cost position and also good cash flow in the quarter. However, our scope 3 emissions and our total emissions, therefore, were negatively affected in the quarter by the phaseout of low-carbon Russian material. This is, of course, a conscious decision prompted by the awful and terrible war in Ukraine, which started last year. But year-on-year, we therefore have a negative comparison to this very low carbon material that we're phasing out. We are, however, undertaking actions, of course, to replace this new material with low carbon material, and that is where the partnerships that we're now building with upstream players play a very significant role. And we expect, therefore, to continue a very good performance also on carbon emissions going forward and regard this as a temporary setback, but a necessary one. On other sustainability factors, we had a very good development of our own emissions, the so-called Scope 1 and 2 emissions, and that was driven mainly by the fact that we now -- this year, switched over entirely to renewable electricity in Asia, and was also helped along a little bit by starting to use solar panel installation in our factory in Shanghai towards the end of the quarter. So that's also a good step forward. When it comes to the result, a very important factor this quarter was margin. Volume was down a little bit, but margin was up steeply. And this, in fact, is the combination of actions that have taken place over the past 2 years now since the second half of 2021. And in that half year, we started to see a very, very negative effect on our costs from various things. First, it was magnesium, for instance, then energy, then freight and then even more energy effects, right? And those negative cost effects have continued to impact us in the -- during the whole of 2022 and also during the beginning of this year. And as you can see on this chart, of course, the full year of 2022 represented the lion's share of those cost increases. We have, however, from the beginning, said that we would offset all those cost increases with price increases and with productivity increases in partnerships with our customers. And that is also exactly what has happened. So we now are, you could say, back on a level having compensated all of them. And in the beginning, of course, there was a bit of a negative time lag in the sense that our price increases lagged of course, the cost increases. And now in this particular quarter, we have a slight positive time lag where our price increases are catching up with the cost situation. But in total, the net impact on Granges is 0. We have, in fact, compensated entirely for the cost increases over the past years. This looks easy. Looking at this picture, maybe sounds easy, I don't know. But it is a lot of work, and I'm extremely proud of the Granges organization for having achieved this good result, and also very proud of our customer relations having worked through this and continuing then to award us new business, for instance, after all this journey. For the long term, we have launched what we call the Navigate plan. The Navigate plan is a plan for sustainable growth, and it aims at bringing us to a level where we can say that we're the worst -- not the worst, I'm sorry, but the world's best aluminum technology company in on each. And we also aim at a 15% ROCE and year-on-year rolling -- yearly operating profit growth of 10%. And we have also committed to climate neutrality in 2014. The plan has 3 steps we call them restore, build and invest. And we're now well into the restore phase where we are basically finalizing the rather large capacity expansion steps we've been taking over the past years. Then we will move into the build phase, and that is now our main focus going forward. And finally, we will create room, we believe, to invest in sustainable growth in the areas that are on this picture. And that brings us to the question how we're doing against this plan and more in detail what happened in the second quarter. And then I will turn over to our CFO, Oskar Hellstrom.

Thank you. Yes. As we heard from Jorgen, we continue to improve the earnings to a new record level despite the challenging market environment and lower sales volume. Higher earnings generated on a lower volume, of course, also means improved margin. And in Q2, this is true both if we compare year-on-year, and quarter-on-quarter. As you can see on this slide, the EBIT per tonne improved by SEK 900 from SEK 2,800 in Q2 2022, to SEK 3,700 this year. And as we heard from Jorgen, there are, of course, several drivers behind this improvement, but I would say that the most important ones in the second quarter are the ramp-up to full utilization of the new recycling and casting center in America. It's improved productivity. It's a tailwind from FX and last but not least, an additional price increases. And connected to the price increases, as you know, we put surcharge clauses in place in many of our customer contracts in order to efficiently pass on the cost increases in the value chain. And as costs, for instance, energy, freight, alloying elements have now started to come down, the delay built into the surcharge clauses is creating a positive timing effect in Q2. And this effect was approximately SEK 40 million in the quarter. With the current outlook on the cost development, we do not, at this point in time, expect to see a similar timing effect from surge clauses going forward. Rather, we expect this effect to be fairly neutral in the third quarter. Looking at the individual business areas, we can see that we are improving margins in both Americas and Eurasia, again, both year-on-year and quarter-on-quarter. And what worth to notice when looking at this chart is that we have negative geographical mix development in Q2. As you can see, we have growth in Eurasia that has a relative to group average than lower margin. Where in Americas then, with a higher-than-average margin, we see a declining volume. And this shift impact the group operating profit negatively in the quarter. In terms of capacity utilization, which is an important profit driver for Granges, we continue to operate below the optimal level. And for the group, the capacity utilization remained at about 80% in Q2. I will come back and talk more about the business area shortly, but let's first go and look at the group financials for Q2 in a bit more detail. Starting with the sales volume. This decreased with about 2% to 120,500 tonnes, whereas the net sales decreased by 13% to SEK 6 billion. And the development of net sales in Q2 is the net effect of slightly lower sales volume, increased fabrication prices, decreased aluminum price and positive changes in foreign exchange rates compared with the second quarter last year. Moving on to the earnings. The adjusted operating profit increased by 30% to SEK 450 million, which then is the new record level for Granges for an individual quarter. And the key drivers behind this is, as I mentioned, the improved pricing, better productivity and reduced raw material costs from the new recycling center in Americas. In addition then, the net changes in foreign exchange rates was positive SEK 85 million compared to the same quarter last year. On the negative side, the lower sales volume and the shift in geographical mix had a negative impact on the operating profit in the quarter. Excluding the onetime effect in Q2 last year from the write-down of assets damaged in the fire in Konin, excluding this, the depreciation and amortizations increased within total SEK 23 million compared with last year. And the increase is primarily then related to that we have completed the logistics improvement project in Finspang and the recycling and casting center in Huntingdon and started to depreciate these. There are no items affecting comparability in Q2 as the reported operating profit is therefore the same as the adjusted operating profit in the quarter. Regarding the tax in the quarter, it includes some one-off items related to, for instance, tax credits in the U.S. and Chinese withholding tax and the net of these are SEK 18 million positive. If you exclude these items, the effective tax rates in the quarter will be about 18%. The profit for the period increased to SEK 316 million, and earnings per share increased to SEK 2.97 in the second quarter. During Q2, the financial net debt remained stable at SEK 3.9 billion and the leverage remained at 1.8x EBITDA. As you can see on this slide, the adjusted cash flow before financing was strong in the quarter, totaling SEK 779 million. And in addition to the strong earnings, a key driver of the cash flow is the continued focus on reducing net working capital and then in particular, the inventory. And in Q2, we got the working capital down by an additional SEK 245 million. At the same time, the sales volume remained sequentially stable. So in general, I think we have a good momentum here, and I expect to see further results on our focus in this field in the second half of the year. In the quarter, we also continued to invest in total SEK 145 million in expansion of the group and in key areas and such as more sustainable and circular products. And the majority of the spend in Q2 relates to the expansion of capacity and capabilities for battery cathode foil in Europe and Americas and to the second of the 2 recycling casting centers that we are building in Americas. In the second quarter, we also distributed SEK 266 million to our shareholders. And finally, I think it's worth to comment on the 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. But all in all, I'm very happy that we continue to have a strong operational cash generation and we have managed to keep the leverage stable in a quarter when we also paid a dividend to our shareholders. If we then go back to the business areas, starting to look at -- starting looking at Granges Americas. As you heard from Jorgen, the market demand in Americas was significantly lower than last year. And despite successful actions compensating for some of this, the sales volume was down about 11% year-on-year. Despite the challenges and the lower sales volume, the adjusted operating profit increased by 20% to SEK 292 million, which corresponds to an adjusted operating profit per tonne of SEK 5,200. I would say that this is a very good margin level given the fact that we're only operating at about 80% capacity utilization in Americas in the quarter. We had some help from favorable currency that contributed SEK 21 million to the operating profit compared with last year, but the majority of the year-over-year improvement is really related to improved pricing and productivity and to lower cost of material, thanks to the new recycling and casting center that was running at close to full utilization in the quarter. If we look at Granges Eurasia, and here, we continue to experience a mixed market development, resulting in a total 6% year-on-year sales volume growth in the quarter. And the growth was primarily driven by Asia, where we met low comparable as China was largely affected by the COVID lockdown in Q2 last year. And as we heard from Jorgen, it's really the demand from the automotive customers that remain strong here and fueled by the backlog. And in total, sales in Asia increased by 29% in the first quarter. The growth in Asia was then partly offset by 4% lower sales volume in Europe. And similar to the first quarter this year, this is really 2 things that drive this. First, there is a general negative market sentiment outside of automotive. And second, we still have high inventory levels downstream at distributors, mainly for general engineering and building and construction products. And the type engineering and B&C market also reduces the possibilities for us for optimizing metal management, and that has a negative impact on the earnings in the quarter. On the positive side, we saw a reduced external cost pressure, and we also continue to have a tailwind from FX with net changes in foreign exchange rates impacting positively with SEK 64 million in the second quarter. And as a result, the adjusted operating profit increased by 16% to SEK 199 million, and that corresponds to an adjusted operating profit per tonne of SEK 2,800 and that's up SEK 200 per tonne compared with second quarter last year. With that, I'll hand over back to Jorgen, who will provide you with an outlook for the third quarter and the summary of the second quarter.

Yes. And regarding the outlook, we're right here on this picture that the market uncertainty remains high in all regions. It's becoming almost tedious now because this is -- I don't know, we've -- for many quarters in a row, spoken about this high uncertainty. It is high, but we've also, I think, proven that we can handle high uncertainty and still provide a good result, development, and good volume development also. Specifically for the third quarter, we expect stable demand in automotive, but we expect continued soft demand in other markets. In other words, we expect the quarter 3 to behave something like the quarter 2. This translates into an expected decline year-on-year by a mid- to high single-digit percentage when it comes to sales volume, and that also corresponds then, of course, to decline relative to the second quarter of this year, the one we just concluded. And this is a normal seasonal pattern for Granges historically. And this normal seasonal pattern has not repeated itself in the last 2 years because of the very strong demand and pent-up order books and so on that we saw after the COVID shutdowns in 2020. But this year, we expect a normal seasonal pattern, and that means lower volumes in Q3 than Q2. In addition, the timing effects that we saw, and I spoke about before, and Oskar also mentioned, from the surcharge clauses in customer contracts that we had such a good effect of in the second quarter, that effect is not expected to recur in the third quarter because prices and costs are then expected to be in balance. But on the other hand, we also expect to continue to offset any cost challenges and demand challenges with flexibility and productivity and price increases. And as a result of all of this, we expect the operating profit per tonne to be weaker sequentially than the second quarter of this year, which is the normal pattern in Granges, but we also expect it to be stronger than last year. So to continue, in fact, the pattern we've had now over many quarters to have a margin improvement year-on-year. And that is the outlook for the third quarter. Now in summary then, we feel that the third quarter -- sorry, the second quarter of this year was a very good one. In fact, it was our best ever quarter. In fact, if you look at the rolling 12 months result, we're also now at a level, which in itself represents an all-time high. So the best ever rolling 12 months EBIT for Granges. We are making -- we feel very good progress with Navigate. And on this picture, you can see also a clip from our Global Leadership Summit, which took place here in just a few weeks ago in Poland. And there is a large engagement throughout Granges' organization, a lot of energy in making this Navigate plan succeed, and we also feel good confidence that we will. And therefore, also, we have high ambitions going forward, also accounted for in the quarterly report and hope to be able to show also a continued good development for Granges' shareholders. And that concludes our prepared remarks about the second quarter. And now we can open up for questions.

[Operator Instructions] Next question comes from Gustaf Schwerin from Handelsbanken.

Firstly, on the nonautomotive segments in Eurasia, maybe especially the other category. I mean, it's growing year-over-year. It's clearly up quarter-over-quarter. This should be the bellwether on general industrial demand, construction, et cetera. What is going on here quarter-over-quarter? Is there a restocking element after the destocking period you have been talking about previously? Because I mean, when you talk about the weak demand situation outside autos, we can't really see that in the numbers. Yes, that's the first one.

Yes. Maybe I can start to comment a little bit on sort of the technical aspects of this also. Of course, when you look at Eurasia, you have 2 quite different market environments in Q2, right? You have the Asia environment where you have large year-over-year growth, also good development with the first quarter. But whereas you have a weaker situation in Europe. And of course, when we present the Eurasian numbers, that's a mix of the 2. But in reality right now, they are very different in these 2 markets. And that maybe distorts the picture a little bit.

Yes. But I mean Asia is quite automotive heavy. So I guess the majority of the sequential pickup in the other category should be driven by Europe? Or am I wrong there?

It's a combination. I mean if you look at the other businesses, of course, you have a very large pickup also in that business percentage-wise, year-over-year increase in Asia. But that's, of course, is a smaller business than the one in Europe.

But I mean just to be very clear here, do you have higher volumes in Europe for the other category, Q2 over Q1? And what is driving that? If that is the case.

Okay. I understand your question. Yes, also sequentially, also the volume in Europe improves a little bit in the other segments. And the reason for that is that we have had a situation with high inventories for quite a few quarters now, really started third quarter last year. And I mean, the inventory levels are coming down sequentially. And in the past, we expected to see a normalization of the inventory levels after the second quarter. Unfortunately, we're not really there yet. But if you compare -- if you compare sequentially, you will see lower inventory levels, consequently higher demand for Granges products, but not as high as we have originally expected them to be. Sorry for misunderstanding your initial question there.

No that's fine. I thought that was the reason for it. But yes. Okay that is clear. And then I think coming back a bit to your guidance. This is one of the areas, I guess, the stream will be weaker in Q3, right? Because the automotive still looks pretty good. HVAC seasonality should be quite similar volumes to Q2. So we should have a positive mix effect also on the earnings for Q2, right?

We have both positive and negative mix effects, but in -- and we don't forecast, as you know, mix, but there are some strong negative factors. And firstly, it's that, of course, now Americas generally is higher profit generator. So we have a negative geographical mix in this second quarter, and there's nothing that says that, that will change in the third quarter. And also, we have other product-related negative mix effects that countered that, right? So we're not -- at least not guiding for any positive mix, either sequentially or year-on-year in the third quarter.

And then just not there. I mean, I understand that September is a big month in Q3 and you have visibility and that's good so far out. But should we read it as just -- I think you mentioned it here again, but normal seasonality rather than underlying demand deteriorating Q3 over Q2. Is that the way you see the market right now?

Yes, I think that's a good summary, that we don't have any reason to suspect that the market will sequentially deteriorate. But it is, however, so that last year we had a strong backlog situation, which is not the case this year, right? So that masked, I guess, the traditional seasonality in the third quarter of last year, and we can expect that now. For that reason, we expect this, let's say, high -- mid- to high single digits. Volume decline year-on-year, which is something like that also down sequentially, right? And that if you look back, you will see is similar to the ordinary seasonal pattern of Granges as it has been historically.

The next question comes from Victor Hansen from Nordea.

Thank you. Victor from Nordea here. A couple of questions from my side. First here, so you expect no timing effects on client surcharges in Q3, you made it clear, but I was hoping that you could quantify the number for Q2.

So this effect, if you isolate sort of the timing effect on the surcharges, that's about SEK 40 million in the second quarter. And we expect the sort of corresponding effect to be fairly neutral or at least very small in Q3, provided the current cost outlook.

And I should -- Victor, I should stress that once again, that is positive timing effect corresponds to a negative timing effects, which we had as far back as the last quarter of 2021, right? So now we're catching up, so to speak.

Yes. Got it. And you said 4,0, right? Not 14.

No. 4, 0 that's correct.

Okay. Great. Next question here. How much would you say your safety stock is currently? And when should we expect this to normalize?

I wouldn't necessarily say that we have safety stock, but we have, for various reasons, we believe that we have higher inventory that we necessarily should have, right? And we have a large focus on reducing net working capital in general and inventory than in particular. And as I mentioned, we saw good results of that in the second quarter. We have, of course, our internal target. I know where we would like to end up, but we have not communicated that externally, but I would say that we still have at least the same potential as we realized in the second quarter should be there to take out going forward, provided that there is not a huge pickup in the market. Of course, that will be a different picture then.

Yes. Okay, great. And my final question here. So you have quite a few ongoing investments now. How much of this remains of your expansion CapEx.

Yes. So basically, what we have provided in guidance here is that we expect to spend about SEK 1.3 billion for the full year. And then we know that we have some large investments there primarily into the battery kettle foil space, but also into additional recycling. So 1.3 million for the full year of this, we've spent about SEK 450 million to date. So we have quite a bit less than for the second half of the year. And then we have not provided an official number for guidance going forward. But if you look at these ongoing expansion projects, we expect to have a bit about SEK 0.5 billion or so left after this year of the communicated project.

[Operator Instructions] The next question comes from Oskar Lindstrom from Danske Bank.

A couple of questions from my side. The first one is, I mean, I appreciate the hard work that you've done to improve profitability over the past 2 years and what we saw from that in this quarter. You talked a little bit about now sort of entering the build phase of your Navigate program. Could you talk a little bit about sort of what that -- what we could expect from that in terms of earnings impact, let's say, in the coming year or 1.5 years? That's my first question. Would you like me to go on with the other questions or answer this one first?

Oskar, I think it's easier to take them one by one. This is Jorgen speaking. About the Navigate build phase. That's an excellent question. We have, as you know, a couple of pieces of that phase and one of them indeed, is Innovate and Grow. And that kind of blends also into the invest phase of Navigate, where we want to invest in growth with sustainable businesses shortly. And we expect, firstly, now we have a stronger focus now than we've had for some time on share growth. And the reason for that, of course, is the current market climate where we would appreciate any additional business we can achieve. And therefore, we have now a strong focus on hunting new business in all of our regions. Secondly, we are building up competencies, customer relations, technology and also a pretty good book of new business related to the electrification trend, which is one of the underpinnings of the Navigate plan. So there we're seeing now already in this result to date, not in significant volumes, especially in the battery heat management, battery cooling area. And we expect, of course, that to be a growth driver for us also going forward. Regarding the financial results, which I can understand that you're after, we have committed to 10% earnings growth annually, over long and short time horizons. And of course, this year, we have reached that number in a big way, but we need to also look over a longer time. But we've also committed to a ROCE of 15%, and we're far from that number. And that means, of course, to reach that number, we have to improve our earnings further. And also, as Oskar said, see if we can lean out the capital base a bit also. So we expect to fully expect to reach that 15% number, but I cannot provide you, of course, with a hard time line for it.