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

Good morning, ladies and gentlemen, and welcome to this Result presentation for Gränges. My name is Jorgen Rosengren. I'm Gränges' CEO. And with me here is Oskar Hellstrom, our CFO; and Sara Lander Hyléen, who is our Head of Communications and Investor Relations. This is the second quarter of 2024 that we're going to present today, but it also happens to be the 40th quarter of Gränges as a listed company, since our IPO in 2014, a fact that we're celebrating with presenting some, what we call, at least very good results in this quarter. We're going to be referring throughout the presentation to a presentation, a powerful presentation, which is available on our investor website and also broadcast here. Turning then to the beginning of this presentation. We think that it's fair to say that this quarter has been characterized by stability and by profitability. And we set out entering this year to achieve two commercial objectives, to gain new business and to protect our margin. And I'm going to speak about them now in turn. Regarding the sales volume, we had a muted demand, but also a stable demand, where most of our businesses, automotive, HVAC and so on, are back to relatively normal demand patterns. But that also means, of course, that the growth has been -- the market growth has been quite subdued. But we complemented that with strong results from our sales efforts, focusing on new business. And as a result, we clocked in on a 9% volume growth year-on-year to 131,000 tonnes compared to 121,000 tonnes last year. This is a higher number than last year and also, than 2 years ago. So in fact, a rather strong quarter for us volume-wise. The second commercial priority for the year, as I mentioned, is to work on productivity. And the reason for that is that there is generally now in our industry, quite a bit of price pressure, and also quite a bit of lingering wage inflation, which generally then lags, of course, the general inflation in society. And therefore, we've worked quite a bit on productivity improvements in our company and have been able to offset the majority at least of the wage inflation and price pressure effects in this quarter, and thereby retaining a good gross margin, I guess, you could say. And as a result of these two effects, the volume and the productivity, we've achieved an all-time high quarterly adjusted operating profit result of SEK 471 million compared to SEK 450 million last year, an increase of about 5%, which is quite good, we think. In addition and more on a longer-term note, we are continuing our very successful decarbonization of our business. And not the least, we are continuing to grow as a recycler of aluminum. And in the last year, we had, again, a record level of recycled material, which is now approaching 50%. So 50% of our input aluminum is now recycled, close to at least, which is also, we think, something to be proud of. Turning then to the next page of the presentation. You see here the sales development year-on-year, for each of our segments and each of our customer areas as well. And as you can see, taking it from the top here on this table, the automotive sales were a little down in Gränges Americas, but we're up about the same level in Gränges Eurasia, resulting in a more or less flat development year-on-year for automotive, which also, more or less reflects the production of automotive and also, I believe, the end customer demand, because the backlogs that had been prevalent in this industry for the past 1 year, 1.5 years or so, are now more or less gone. When it comes to HVAC, we had a small growth in Gränges Americas, but not a very strong one. And as we're not really active in HVAC and Gränges Eurasia, that also is the group result there, a small growth, but not a strong one. And that is then the normalization also of the HVAC industry relative to last year when -- and also the second half of last year, in particular, when we were plagued in that industry by overstocks. And they too are now more or less gone out of this industry. So what we're seeing here is the production level in the industry, and it also reflects, I guess, more or less the end customer demand. The two other segments where we're present in -- or customer areas we're present, specialty packaging and other niches. On the other hand, enjoyed very strong growth. It's also in those areas that we have attained the majority of the new business that we have secured. And together with those two areas then we saw for Gränges Americas, 7% volume growth year-on-year. And for Gränges Eurasia, a 10% volume growth, which then nets out to the 9% volume growth that the Gränges group had in this quarter. And as I said the last year and the year before had then lower volumes, we regard this as a good quarter, volume-wise. In the quarter also, we entered into a strategic partnership, an extended strategic partnership, which we hope will enable us to continue the strong electrification growth we have seen over the past 2 years in Gränges Asia. As per the terms of this partnership, we will take ownership of a casting and hot rolling facility in the Shandong province in Northeastern China, and also in the same -- under the same deal make -- get access to scalable downstream capabilities and also good supply of metal and of energy in that area. In exchange for these assets, our partner will obtain a minority ownership share in our subsidiary in China. And together, these two things will happen without the cash impact, because it's a purely equity-based deal, which we expect to close in the second half of this year. Now in the beginning, the effects of this partnership will be rather limited, but we do expect the partnership to contribute positively to Gränges' earnings per share, after the equity effects starting in 2025. In the quarter, as I alluded to earlier, also, we had record sustainability performance, and this is not a flash in the pan type of thing. It's actually the -- quite a long-term trend, where we are now on our two major KPIs, enjoying a good reduction from our 2017 baseline, both when it comes to carbon emissions and intensity, which has been reduced by over 30% compared to 2017, and where we got achieved now a very, very good result in this particular quarter, and we hope, of course, that, that trend can continue. But also when it comes to recycling, which is now quite a substantial business in Gränges. In fact, we have recycled in the last 12 months, something like 213 million kilos of aluminium, and that puts us about halfway to our target for that, which is to recycle 0.5 billion kilos of aluminium at the latest in the year 2030. And all of this, of course, aims at Gränges' overall target to achieve a net zero carbon emissions effect on the environment in 2040 that year, which has also been submitted to and approved by the science-based targets initiative. And those were just some starting remarks. And now I will turn it over to Oskar, who will take us through the financials for the second quarter of 2024. Go ahead.

Thank you, Jorgen. As we heard from Jorgen, as you can see also on this slide, Q2 is a new record quarter for Gränges with the highest operating profit and the second highest sales volume, that we've delivered in an individual quarter. So in the second quarter, the sales volume grew by 9% year-on-year, and 7% sequentially. And this reflects that we now continue to see a return to a more normal seasonality. And as a consequence, we see a seasonal increase of both, the operating profit that reached SEK 471 million in Q2, and of the operating profit per tonne. Still looking from a year-on-year perspective, the EBIT per ton decreased by SEK 100 from SEK 3,700 in Q2 last year to SEK 6,300 this year. But here, we need to remember that the SEK 450 million of operating profit that we delivered in Q2 '23, that included a one-off timing effect related to surcharge clauses in customer contracts, and that was in total SEK 40 million. So adjusted for this, the year-on-year operating profit improvement is even more significant, showing a SEK 61 million or SEK 200 per tonne increase. If we look at the drivers behind this development, we can see that we managed to fully offset the continued market price pressure, as well as the wage inflation in the second quarter. And the main contributors to these are the increased sales volume, fueled by the new business gains that Jorgen mentioned. It's increased utilization of our casting and recycling centers, which together with good metal management had a positive impact on our raw material costs. And we also see a continued decrease of unit costs for energy, in especially Europe. And last but not least, generally improved cost productivity. If we look at the capacity utilization, which is an important profit driver for Gränges, this increased to about 85% for the group in Q2. Now this is a good improvement year-over-year, but we still operate below the optimal level from a utilization perspective. Let's now look at the group financials for the quarter in a bit more detail. We start with the sales volume. As we said, it increased with close to 9% to 131,000 tonnes, while the net sales increased by a little more than 2% to SEK 6.1 billion. The lower increase in net sales than in sales volume is primarily explained by a lower average fabrication price. Moving on to the earnings. The adjusted operating profit reached a record SEK 471 million, again, that's SEK 61 million higher than in Q2 last year when excluding the one-off surcharge timing effect, that I mentioned earlier. And the market price pressure and wage inflation was fully offset by increased sales, good metal management. and improved cost productivity across the group. On the negative side, depreciation increased by SEK 6 million, and that's related to the completed expansion project. And also the net effect from changes in foreign exchange rates was negative SEK 15 million compared with last year. The profit for the period remained fairly flat and reached SEK 314 million for the quarter, and the earnings per share was SEK 2.94. The main reason for why we don't see the same year-on-year improvement in the profit for the period as in the operating profit is that, the tax in the second quarter last year included positive one-off items of net SEK 18 million. We do not have any such items in 2024. On a further positive note, the return on capital employed increased to 11.9% by the end of second quarter, up 1.7 percentage points compared to the year before. Now moving on to the balance sheet. During Q2, the financial net debt remained stable at SEK 3 billion, and the net debt-to-EBITDA ratio was 1.3x. And this means that we remain well within our target range of 1 to 2x EBITDA. Now keeping the net debt flat may not seem like much of an achievement. But in this quarter, I actually think that it is. And the reason is first that, as a consequence of the seasonality of our business, we typically see a large buildup of net working capital in Q2, so also this year. And second, the aluminium price increased by about 15% during the quarter, and this added some SEK 370 million or so to our working capital. But through continued focus on working capital efficiency, we managed to limit the actual net working capital increase to only SEK 47 million in the quarter. I think this is very well done by our teams across all our regions. And in turn, this led to that the adjusted cash flow before financing was positive SEK 399 million in Q2. During the quarter, we also continued to invest in total SEK 262 million in expansion, and the majority of the spend in the quarter relates to the expansion of capacity and capabilities for battery cathode foil production in Europe and Americas. And also to the second of the two recycling and casting centers that we are building in Americas. In the second quarter, we also distributed SEK 159 million to our shareholders. And the second dividend payment with the same amount will be made in November this year. But all in all, I'm very happy that we continue to have a strong operational cash generation and that we managed to keep the net debt and leverage stable in a quarter where we also paid the dividend to our shareholders. Moving on to the business areas and starting with Gränges Americas. As you heard from Jorgen earlier, with the exception of automotive, the market demand in Americas remained fairly stable in Q2 compared with last year. And in addition to this, we saw increasing effects from the actions taken to further grow sales where capturing new business, and then especially within the specialty packaging and other niche markets. And in total, this led to sales volume growth in Q2 on 7% year-on-year for Gränges Americas. In terms of earnings, we managed to more than offset the continued market price pressure with the increased sales volume, generally good cost productivity and increased utilization of our casting and recycling centers. And when it comes to the latter, I think that it's good to see that our new recycling center in Huntingdon continues to perform very well. In total, the Q2 operating profit increased by SEK 33 million to SEK 325 million, which corresponds to a margin of SEK 5,400 per tonne. And this is a new record level for Gränges Americas, both in terms of operating profit in absolute terms and per tonne. Moving on to Gränges Eurasia. Also here, we experienced improved market demand that in combination with new business gains, resulted in a total 7% year-on-year sales volume growth. In Asia, we continue to see a positive development, in especially the automotive market, and this resulted in that sales volume in Asia grew by some 13% compared to Q2 last year. In Europe, we experienced an increased demand on the back of a normalization of downstream inventory levels within general engineering and distribution markets. And in combination with a stable demand from European automotive customers. This led to a 3% year-on-year sales volume growth in Europe. The adjusted operating profit reached SEK 176 million in the second quarter, and this represents an increase by SEK 17 million, compared with the same quarter last year when we adjust for the one-off surcharge timing effect that we had in '23. On the negative side, we saw the lower average fabrication price and a negative SEK 15 million net effect from changes in foreign exchange rates, but this was, however, more than offset by the higher sales volume, improved metal management and lower energy unit costs. I think it is fair to conclude that the underlying development in Eurasia in Q2 was slightly better than what one might think there at first glance. With that, I hand over back to Jorgen, who will provide an outlook for the third quarter.

Thank you, Oskar. As you can see in this picture of our colleague there our stance for the third quarter is one of determination. And what we're determined to do is to continue to do what we did in the second quarter. Of course, the end customer demand remains really hard to predict. But compared to some other quarters that we have had, at least appears more stable in the near term. And in this relatively stable and [indiscernible] environment, but maybe also not so strong growth environment. We will continue to focus on gaining new business, and that we then expect to drive a mid- to high single-digit percentage sales volume growth compared to the third quarter of 2023. That's a bit of a mouthful. Incidentally, that's the exact same guidance that we issued for the second quarter relative to the second quarter of 2023. In the environment where we're still seeing quite significant wage inflation and also not insignificant price pressure from our customers. We intend to offset any further price pressure and wage inflation. And with that, we mean sequential relative to the first half of the year, with further productivity improvement, thereby hopefully getting a benefit from the volume growth, which we also intend on to back. So the third quarter outlook is very similar to the second quarter outlook and that, I guess, is also a sign of maybe a return to some stability in this industry after some turbulent years. And with that, operator, I would like to turn over to the audience for any questions.

[Operator Instructions] The next question comes from Adrian Gilani from ABG Sundal Collier.

Yes. Oskar. I'd like to start off with a few questions on the Shandong partnership. I guess, first of all, are you able to give us any more color on roughly how you expected the utilization rate in Shandong to ramp up in 2025, '26 and when you expect to be close to sort of optimal utilization?

Adrian, hope you're doing fine. Actually, we can't. The factory in Shandong, we haven't even closed this deal yet. And it does provide us with good capacity opportunity, I guess, you could say, and therefore, an opportunity to grow. But how fast we will grow, we don't know yet. It just increases the rates of the [indiscernible], I guess, for our growth in Asia. What we can say is that from some kind of technical point of view, we can look at this as 150,000 tonnes of capacity. And of course, our plan is to gradually grow into that, but our plan is to grow into it with good profitability. And what we can say then is we expect the business to be profitable in 2025, and profitable to such an extent that it offsets the dilution of the minority share of Eurasian operations. Thereby, providing this marginally positive EPS contribution in 2025. And now first, we will then grow from there. We will have to return to you when we have more firm plans in the future.

Okay. I understand. I guess, a bit of a broader note, if we look at your Shanghai factory, that has been operating at very good utilization rates recently, and it seems the Chinese auto market continues to be strong. So what I don't really understand is why SAG has been keeping the Shandong factory idled right now, if the market seems to be so good. Can you give any input on why that's the case?

Yes, I don't think they would describe it as having kept it idle. But in our business, it's so that we have a saying in Gränges, which we call people make the difference. And in our business, that's very true. Anybody can find the customers, anybody can find the suppliers, anybody can obtain the machinery needed to run a flat-rolling plant. And in China, there are many, many flat-rolling plants that operate on very, very low utilization levels, which makes the competitive situation in China very tough. We, on the other hand, have a fantastic team in China, and that fantastic team has been able to generate growth and also good utilization and therefore, also good profitability under some really, really tough competitive conditions. So it's about that, I guess. We believe that our team will -- is a better owner in fact of this factory than [SAG], and [SAG] also believes that. And that is why we've been able to make this deal.

Okay. Sounds good. And then in the more near term, I guess, on the fabrication pricing. Is your best guess that this is going to continue, or that we're going to continue to see price pressure escalating for the second half of this year as well? Or do you expect that most of these problems have -- are behind us, so to say?

You're talking about Gränges globally, right?

On a group level, I guess.

Yes. Like you probably know, it's nice of you to ask, but we don't give any forecast for the fab pricing, because it's complex, right? We have the regional mix, we have the business mix, and then we have individual customer negotiations, of course, as well. And also the factory -- the fab price depends on market movements that are not known now, because not all of our business is contracted, some is more of a spot character and the spot price depends on the energy price and on our freight price and on imports and on many, many things that we simply don't know, where they're headed. So that's why we are trying to be precise in our guidance and seeing that any further fair price pressure that occurs, we intend to offset with productivity, and that's about as good a guidance as we feel we can cap.

Okay. Okay. And a final one from my end. A bit of a housekeeping question. A question on the expansions that are going to, or that are planned to be commissioned around the end of this year, is sort of all the timelines -- are they the same as last quarter? Or have there been any delays since?

No significant delays, Adrian. And I just want to -- so the short answer is no significant further delays, and we keep -- we stay with the timelines that we have communicated previously, but it's maybe important to then say in this context that what we're talking about then is capacity availability. And then, of course, it needs to also be filled, which is a commercial question that we'll revert to when we give guidance for the first quarter of 2025.

The next question comes from Gustaf Schwerin from Handelsbanken.

I have two questions. Firstly, if we look at the comment where you said that you have good growth in Asia for automotive, can you be a bit more explicit to how much that was in the quarter?

We do not -- Gustaf here, we typically don't communicate growth for regional segments in that detail, but I would say that to give you an order of magnitude for what it was, it was between 5% and 10%, so year-over-year automotive in Asia, in Q2.

Now the reason for asking is, because when you say a flat development on the group for all of those, that implies growth in line with global LVP. When we discussed this at Q1, you were quite clear that you were growing above production levels. Can you just confirm that, that's the case also in Q2? I don't have the number for your mix in Asia for Q2.

We believe that if you look at Q2 in isolation, we have a better growth than the underlying vehicle production. But again, we also need to remember that, this is not necessarily a one-to-one thing when you compare for a short period of time like a quarter.

Yes. Okay. Fair. Then secondly, on Americas and the profitability, which is great again, especially considering the fact that your fab prices are down something like 10%. I mean I appreciate there's a lot of moving parts here. But broadly speaking, where do you think you can take the profitability from, say, this 5.4 per tonne EBIT level, returning capital deployed running at almost 20% now. Are we closing in, on say, the maximum potential for Americas, where any, say, further improvement would come from the second casting center, for example, volume leverage, which would be quite limited given where you're running capacity-wise? Or am I thinking wrong here?

But there is still some potential to run more volume through our American operations. And now that we're looking at, at least in near term at the period of no further significant capacity investments, neither in Eurasia nor in Americas. Our focus really is on making sure that the volume first is up to the rafter, so to speak. And secondly, that the mix is optimized. And we believe that there are opportunities there. On the other hand, it must be said that 20% or close to it, at least, return on capital employed is a very high number in our business, right? That's -- at least we consider to be quite a good return to get out of any flat-rolling operation, anywhere in the world. So of course, there are factors that go into different direction to do with competition and imports and whatnot. But so I guess we can say we're happy with the return on capital employed that we're enjoying right now in Americas. There are things we can do to improve it, but there are also things that can happen externally, so to speak, that could detract from it, right? So we're not giving any forecast on that. But if I had to say, I would say if we can keep it on 20% forever, then that's quite an achievement, I think.

Can I understand that because I mean, of course, you can always work with mix, and you will have a different profitability levels on different segments. But in terms of, say, the mix you're running right now, like-for-like, is there still things you can do in production here, making this more efficient to lift profitability? Or would anything from here deleverage on increased volumes and mix?

Mix. First, the mix is a complex thing, because we need mix that doesn't only fill the factory, but also fills it in such a way that we can honor all our customer obligations. So the mix is not only a question about the profitability of each individual product or customers that run through the operations, but also, a question of how it all works together to ensure earnings stability over time on average, number one. Number two, when it comes to opportunities to improve the marginal profitability of our business, there are definitely such opportunities in Americas, because as we've also shown in these last 2 quarters with good cost savings, both on the variable and the fixed side, which is good. And of course, there are further such opportunities, but there are also pressures, for instance, in the form of inflation, in the form of pretty tight still labor market and so on, right? So again, it becomes -- when you're at such a high level of profitability, it becomes a bit of a feat just to stay on that level also. It's also not so that our competitors don't know what we make, right? Because we are talking to you now about it, and they can read up on it and the customers too, right? And all of that presents, of course, a strategic threat to the business there of new entrants of customers and so on, right? So again, our ambition is, of course, to always improve, but we have to be realistic also about the very high level that we retain in Gränges Americas.

The next question comes from Albin Nordmark from Nordea.

Oskar. So I would like to start off with the specialty packaging and other niches that are developing well during this quarter. And you're mentioning some new businesses in both those areas. Can you elaborate a bit on that? What products markets, et cetera?

Yes. So first, the new business that we've been taking is business primarily that's a little bit easier to take fast, right, because we set out on this journey, at least full tilt, I guess, between 6 and 4 quarters ago, depending on the various regions. And then, of course, we're looking for business that we can take and fit in, without having to tell any of our existing customers that we no longer have capacity for them, right? And then we're talking about extending a bit our scope and capabilities. For instance, in Gränges Americas, we've moved into higher gauges, thicker material than we usually operate with there. And that's actually a negative mix, you could say, in terms of that the fabrication price for such product is lower, but of course, it still contributes to our business in Gränges Europe and Gränges Asia. Well, let's talk about Europe first. There we've, of course, grown, as you can see, in specialty packaging, both with existing and some new customers, and we've also expanded our reach primarily in general engineering area to try to break out a little bit of Eastern European focus that we've had for some time and also find some other customers in the rest of Europe, number one. And there also, we have some specific advances in, for instance, structural auto parts and other things, that help bolster that growth there. But again, the game is always to try to have a good baseload and flexibility with that base load, so that we're liked by those customers who cannot either forecast exactly how much they're going to need next quarter, for instance, but then have also some customers who also like us, but where we can enjoy a little bit more flexibility on the volume so that we can get an average high utilization. And the sales efforts that we have made reflect that ambition.

And on the HVAC in America, can you comment on the demand from your customers, at the carrier [indiscernible] similar?

Yes. So the -- I think we said in the last quarter and truthfully then that the beginning of the season was more normal than it has been for a couple of years. Now we're in the middle of the production season, and it continues more or less as planned and also in a normal fashion. The demand that comes from end customers in the season is delayed, is -- reaches us only after some time, right, because you have the distributors in between and some inventory, and then you have the production and so on. So whether or not this becomes from a retail perspective, a good HVAC season, that influences our demand rather in the third quarter than in the second quarter, because then if it is really good season, then there will be the replenishment of inventories will just continue longer than normal, right, or vice versa. So -- and right now, as you probably know, it's rather hot weather in the U.S., which is a very large market for us. And that, of course, is bad in itself, but it's good for HVAC sales. So I guess that bodes well. But any signals that reach us we'll see -- we'll know more about when we get further into the third quarter.

And the last one, regarding the guidance, can you give us some guidance on the end market level?

No. I mean, we really would like to do that, but we can't. I mean, we really don't know. We really don't know. I mean, it's simply so that, we weigh all these things together and then we come up with this we think rather precise volume forecast. But of course, there are many moving parts in that. And we're, I guess, just hoping that some of them will move in the right direction and some in the wrong direction, but it's really hard to say something about the end customer markets. And there are people who do that better than we, but even people who do it better, and we don't do it so well, right? So it's -- it doesn't pay off to speculate in that, at least not for us. Instead, what we're trying to do is to be flexible in -- and have, like I said before, a mix that allows us to be flexible, so that we can meet end customer demand variations in a good way without for instance, incurring a lot of cost when demand is higher than expected, or a lot of empty capacity when it's lower than expected.

The next question comes from Oskar Lindstrom from Danske Bank.