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

Good morning, ladies and gentlemen, and welcome to this webcast and presentation of Gränges' fourth quarter results, which conclude a year when we had record high sales volume and earnings. I'm here. My name is Jorgen Rosengren, I'm Gränges' CEO and President, and I'm here together with Oskar Hellstrom, our CFO; and Sara Lander Hyléen, our VP of Communications and Investor Relations. As I alluded to, we saw an accelerating growth in the fourth quarter and in fact, recorded a sales volume increase of 21% to 130 tonnes compared to 108 tonnes in the same quarter of 2023. We saw stable markets, generally speaking, but we also recorded a lot of market share gains, in fact, in all of our geographies and in many customer segments, which underpin this very good growth. As many of you know, we made an acquisition in October of a factory in the Shandong province in Northeastern China. And we completed that acquisition and very quickly integrated it and we're also able to quickly ramp up sourcing and production and sales to reach our first communicated milestone, which is to reach breakeven with the additional volume. This acquisition helps us be able to make really strong market share gains in Asia, but these market share gains and the buildup of inventory and other working capital components to enable them, of course, impact cash flow in the fourth quarter. We saw continued tendency to price pressure in the market, but we're able as we were in the beginning of the year also and the year before to offset those tendencies to price pressure with sales volume growth with cost savings and also with a continued improvement of our operating productivity. And this all enabled us to reach a really good operating result, which increased from SEK 245 million in the fourth quarter of 2023 to SEK 324 million in the fourth quarter of 2024, an increase of over 30%. And like I said, starting out here, this concludes the year when we recorded the best ever full year volume, earnings and also the best ever sustainability results, which I will comment a little bit more on in just a bit. Talking about our markets and regions then, we saw, generally speaking, stable markets. Even automotive, which has been maybe not too great in the past quarters and the past years was stable, I guess, you could say, in the quarter. But even more gratifying, of course, is that we saw really good market share gains in all of our geographies and in both of our operating segments. And taken together, this led to good growth in Gränges Americas of 17% year-on-year, and also very good growth in Gränges Eurasia of 24%, netting out to a growth for the whole group of 21% of sales volume in the fourth quarter of 2024 year-on-year. The growth in Eurasia was helped to some extent by our acquisition that we concluded in the fourth quarter, and it adds production capacity of 160,000 tonnes in this facility that I've talked about already in Shandong in China. This acquisition is a very transformational one for Gränges Asia, a very important one for Gränges. It provides the scale and the cost and also the partnerships for things like metal and energy that we need for continued competitiveness in Asia. And as you know, Asia is a very competitive market, but also a very important market, maybe not the least for the global automotive industry. And therefore, we're very happy to have been able to take this step. Our first milestone was to reach breakeven, and we reached this milestone with a very quick ramp up of sales to a full year volume of 90,000 tonnes on an annual basis already in December, which was our first real invoicing month. The new business that we've gained these 90,000 tonnes is relatively low margin. But still, it is super gratifying and a really good achievement to have achieved breakeven in such a short time in a completely new factory. The growth, of course, impacts working capital, as I already alluded to. Our focus going forward then for Gränges Asia is to retain this volume that we've acquired, this 90,000 tonnes that we have built up now this 90,000 tonnes. But over time, during 2025 rather than grow it further, instead optimize, price and optimize mix and also optimize the cost position for these products, so that we can gradually improve its profitability. And with these actions, we aim to reach our ambition or stated ambition, to reach -- to contribute positively to EPS for the full year of 2025 as a result of this acquisition. We had in 2024, a really good sustainability performance, and it's not the first time either. It's in fact, a very long term and a very successful trend for Gränges. We continued our decarbonization progress and reached an all-time low carbon footprint for the full year. And that level is now 35% more or less below the level when we started out measuring this, our reference here, which is 2017. And maybe an even better performance in recycling where we have, in fact, 5x higher recycling volume now in 2024 than we did in 2017. Also in the quarter, we published new frameworks for our green and sustainability-linked finance vehicles. To summarize then, we had in 2024, a record volume for the full year. We had a record adjusted operating profit, and we also had a record earnings per share. And as you can see in this long-term trend curve here, this corrects, I guess it was sort of a slump that we had between 2018-ish and 2020 or so. And we now feel that we're back on a good growth trajectory for Gränges both when it comes to volume and when it comes to profit. And with that, I would like to turn the word over to Oskar Hellstrom, our CFO. Go ahead, Oskar.

Thank you, Jorgen. So we're now going to look a little bit more detail into the fourth quarter. But before doing that, it may be worth commenting a little bit more on the full year because it is after all a new record year for Gränges. As you can see on this slide and that you also saw on the long-term chart that Jorgen just showed, in 2024, we generated our highest sales volume and our highest operating profit so far. 506,000 tonnes of sales volume, SEK 1,571 million of adjusted operating profit. And the theme of the year has been to offset price decreases with growth and productivity, which I would say that we have succeeded with. As a consequence of this, however, we see a slightly lower margin in 2024 than in '23 and the 2024 full year adjusted operating profit per tonne reached SEK 3,100 compared to SEK 3,300 in the year before, as you can see on the right-hand side here. But if you remember, we did get some tailwind in 2023 from energy cost compensation and positive timing effects on energy surcharge clauses in customer contracts, and this totaled 117 -- sorry, SEK 107 million, and we did not enjoy this in '24. So if we adjust for this, we actually see a slight improvement also in the EBIT per tonne in 2024 compared to '23. And that, I think, is a more true representation of our underlying performance. Now leaving the full year perspective and looking more at the fourth quarter, which also happened to be a record quarter with the highest sales volume and highest adjusted operating profit that we've ever had in the fourth quarter. So in Q4, we continued to experience a solid sales growth despite the continued softness in many of our markets. And the sales volume grew by 21% year-on-year, albeit against rather weak comparables. In terms of earnings, we see a normal seasonal decline on both the operating profit and the operating profit per tonne in the quarter. Looking from a year-on-year perspective, we do, however, have a very positive development, both in terms of adjusted operating profit that reached SEK 324 million in the fourth quarter and in the adjusted operating profit per tonne, that increased by SEK 200 from SEK 2,300 in Q4 '23 to SEK 2,500 in '24. Excluding the new business in Shandong that is currently at breakeven as Jorgen described earlier, and the energy cost compensation that we received in Q4 2023, the operating profit per tonne improved by about SEK 400 year-on-year on a like-for-like basis. If we look at the drivers behind this development, we can see that we continue to manage to fully offset the market price pressure as well as the wage inflation in the fourth quarter, and the main contributors to this are the increased sales volume, fueled by the market share gains or new business gains. 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 last but not least, generally good and improved cost productivity. If we look at capacity utilization, which you know is an important driver for Gränges, this increased by close to 10 percentage points year-on-year in the fourth quarter to about 80% on a like-for-like basis, excluding the impact of the facility in Shandong. I think this is a very good improvement over prior year, but we need to remember that we still operate below the optimal level. I will come back and comment more on the individual business areas shortly, but we'll first look at the -- some more highlights of the group financials for the fourth quarter. Starting with the sales volume. This increased by 21% to 130,000 tonnes while net sales increased a little bit more than 24% to SEK 6.2 billion, and the higher increase in net sales compared to the increase in sales volume, it's primarily explained by higher aluminum price and currency effects. Looking at the earnings, the adjusted operating profit reached SEK 324 million, that's SEK 91 million better than in Q4 last year when excluding the SEK 12 million one-off energy cost compensation in '23 that I mentioned earlier. Depreciation increased like-for-like, excluding Shandong, with SEK 16 million year-over-year, and this is fully related to completed expansion projects. The net effect of foreign exchange rates was slightly positive, plus SEK 4 million compared with last year. The operating profit or reported operating profit for the fourth quarter was SEK 276 million, and that includes items affecting comparability of SEK 48 million. Of this, SEK 31 million are related to the acquisition, integration and start-up costs for Gränges Shandong and SEK 17 million are write-downs of production assets that have been taken out of use. The profit for the period increased to SEK 175 million for the quarter and reached above SEK 1 billion for the full year for the second year in a row. Earnings per share increased to SEK 1.67 for the fourth quarter and to a new record level of SEK 9.51 for the full year. The Gränges Board of Directors proposed an increase of dividend to SEK 3.20 per share for the year and provided that this is approved by the Annual General Meeting. This means that most -- that almost 34% of the profit is distributed back to our shareholders in line with our policy. The return on capital employed decreased to 11.9% by the end of the fourth quarter. That's down 0.3 percentage points compared to the year before. And the decrease in ROCE is fully attributable to the additional capital that we've added in Asia through the acquisition and ramp up of the facility in Shandong. Continuing on that theme and looking at the balance sheet, where we, as expected, saw an increase of the net debt and leverage during the fourth quarter. As we talked about already in our Q3 presentation, we have a couple of different drivers behind the leverage increase in Q4. First, the strong sequential sales development did not allow for a seasonal working capital release. On the contrary, we built inventory to manage longer than normal year-end maintenance stops and to prepare for the expected sales increase in Q1. Moreover, higher aluminum price increased the working capital by about SEK 100 million in Q4. And in addition to this, as Jorgen said earlier, we have ramped up a 90,000 tonne annual business in Shandong in just 2 months' time. This adds a significant amount of working capital since metal suppliers in China are typically paid cash. And this is then also the main driver of the SEK 1.2 billion working capital increase in Q4. On a positive note, though, we have now built up a large part of the working capital that we need to operate the Shandong facility on a 90,000 tonne per year level. Second, we completed several large expansion projects at the same time as we conducted year-end maintenance. As a consequence of that, we had higher-than-normal capital expenditure in the fourth quarter. In total, we invested SEK 399 million in our operations, of which SEK 224 million in expansion. And lastly, we distributed SEK 159 million to our shareholders in the second of the 2 dividend payments in 2024. Combined with some unfavorable developments and of currency rates, mainly the U.S. dollar appreciating against the SEK, this led to that the financial net debt increased to SEK 4.3 billion or 1.8x EBITDA by year-end. And this means that the net debt-to-EBITDA ratio remains within our target range of between 1x to 2x. Before leaving this page, I would also briefly like to touch upon how we currently view the capital expenditure for 2025. And we currently expect this to be some SEK 700 million to SEK 800 million for the full year. About 1/4 of this is related to the final payments for the expansion investments and the rest is normal maintenance CapEx. Moving on to the business areas and starting with Gränges Americas. As you heard from Jorgen earlier, we had a customer demand in Americas, that was pretty good in the fourth quarter or higher than last year, especially for the HVAC market, where an upcoming change of legislation prolonged the season throughout Q4. In addition to this, we saw increasing effects from actions taken to further grow sales by capturing new business in both specialty packaging and other niches. And in total, the sales volume in Americas increased by 17% year-on-year to 55,000 tonnes. In terms of earnings, we managed to offset the continued market price pressure with increased sales volume, generally improved cost productivity and good utilization of our casting and recycling centers. Net changes in foreign exchange rates were fairly neutral in the quarter. So in total, the Q4 operating profit increased by SEK 27 million to SEK 193 million, and that corresponds to a margin of SEK 3,500 per tonne. And although it is slightly lower than in last year, we need to keep in mind that this is still a very good margin level in a seasonally weak fourth quarter. Leaving Gränges Americas and moving to Eurasia and maybe starting then with the most exciting development in the quarter, the successful ramp-up of our new production facility in Shandong. We already heard from Jorgen that we managed to ramp up both production and sales for a business of about 90,000 tonnes of annual run rate in just 2 months. And I think that is certainly an achievement. The new business is relatively low margin, still with the favorable cost structure of the Shandong facility, the volume is enough to reach breakeven profitability already in Q4. And as I mentioned earlier, this acquired a buildup of working capital, but it also allowed for significant volume growth of 41% compared to last year for Asia. During 2025, we will shift focus to optimizing price mix and cost of the business in the Shandong plant, and we have the target to make the acquisition accretive to EPS after a minority interest during this year. In Europe, we experienced an increased demand on the back of normalization of downstream inventory levels within packaging, general engineering and distribution markets. And in combination with largely stable sales to automotive customers, this led to an 8% year-on-year sales volume growth in Europe. And in total, Gränges Eurasia recorded a 24% growth in Q4. The adjusted operating profit reached SEK 170 million in the fourth quarter, and this represents an increase of SEK 79 million compared with the last -- same quarter last year when adjusting for these one-off energy cost compensations in '23. The lower average fabrication price was more than offset by the higher sales volume with -- by improved metal management, lower energy unit costs in especially Europe and improved cost productivity. And the EBIT per tonne improved by SEK 500 to SEK 2,100 per tonne in Q4. So generally, a very good development in Eurasia in the fourth quarter as well as for the full year. With that, I hand over back to Jorgen, who will provide you with a summary of 2024 and outlook for the first quarter this year.

Thank you, Oskar. Summarizing 2024, then I think it's also important to say that this year marked the completion of the first phase of our Navigate plan. And we feel that in the 3 years that we've been working on this since 2021, we have created a very solid foundation for sustainable growth. But we also feel that we've achieved good results. The net profit since the year of starting this plan has increased by over 70%, but also sustainability numbers are very good. Our recycling is up 400%, and our carbon intensity is down, as I already think I said in this call, over 35% since our reference year 2017. And this puts us right on track for reaching our targets that we set also as a part of this new Navigate strategy to reach carbon neutrality net 0 in 2040. 2024 also marks the end of the construction phase of a very long multiyear expansion program, which is intended to take us to 800,000 tonnes of capacity, and to get full availability of that capacity from the second half of this year, 2025, and that's a 40% capacity increase since 2021. To utilize this capacity, we've also worked hard to achieve a significant diversification of our sales volume over different geographies and segments. And we believe that, that diversification has already helped to stabilize volumes and earnings over time as the different markets and geographies vary in terms of their demand. And most important well, of course, we have built a strong team of 3,500 people now, and then I count the 600 new colleagues that we have employed in Gränges Shandong starting in the fourth quarter in Americas and in Europe and in Asia. For the next phase of the Navigate plan, we aim to build a leader in our industry. And we aim to build a leader partly with focusing on, as Oskar already alluded to, increased utilization, but also an optimization of the price structure, the cost structure and also the business mix that we use this new capacity for. We don't, at the time, at least, have any new large capacity expansion programs in our plans, and this gives us also an opportunity for a better cash conversion in 2025 and out. We communicated also new long-term targets in 2021, and we see good progress against those targets in most cases. In the case of our profitability target, which is return on capital employed, we're aiming to get to above 15%, and that we have improved, but we still have a ways to go with approximately 12% full year full year profitability in 2024. Our profit growth, however, has been very good. And we're now solidly in the range that we have communicated, which is to have an average profit -- average operating profit growth over time, over 10% per year. Our capital structure took a step up in leverage in the fourth quarter of 2024, as we've already talked about. But it's now, for some time, been solidly within our target range of 1 to 2x EBITDA, net debt to EBITDA, and we aim to keep it in that range also going forward. And our dividend, our target is to have over 30% of dividend as a result -- as in proportion to the net earnings for the full year. And the Board of Directors have proposed to the Annual General Meeting a dividend for the full year of 2024 or SEK 3.20, which is slightly over 30% of net earnings for 2024. Turning to 2025 then. The outlook for the first quarter is that, first of all, we aim to retain to keep the new business that we have gained in the fourth quarter and which was enabled by the Shandong acquisition. And this new business has done something like 90,000 tonnes for -- on a full year basis. We aim in the first quarter to retain also a breakeven profitability of this new business. And after that, we intend to improve it with price actions and cost actions and mix actions. And this is then instead of trying to grow the volume aggressively further, but rather try to optimize its profitability during the year 2025. The objective with all these actions is to reach -- our objective is to reach the target of making the acquisition in Shandong EPS accretive after minority interest during 2025 for the full year. Looking at the like-for-like basis, then instead, we expect muted demand, generally speaking, but also continued market share gains. And as a result of those 2 things, we expect our mid-single-digit sales volume growth in the first quarter. And on the margin side, we do expect continued negative effects. There are always negative effects to take into account when you're in business, right? So we see negative effects from price pressure, labor cost inflation, scrap prices and also development in the Chinese export taxation, but we intend to continue to offset those effects as we have done very successfully in 2024 and as we did also in 2024 and '23 and in '22, with actions of our own in areas that we can control, and particularly, we intend to focus on volume growth, on cost reduction and on productivity improvement. And for the full year of 2025, we also target an improved cash flow on the strength of having included our capacity investments and also because we do not intend to build working capital at the same rate as we did at the tail end of 2024. All in all, we have good confidence for 2025, and we base that confidence on the foundation for growth we've created in the first years of the Navigate plan, but also on the good performance that we've had now for 3 years in a row, and personally, although we don't see any real signs of a fantastic improvement of end consumer demand, I feel rather more optimistic for 2025 than it did at the beginning of 2024, and we look forward to this year with confidence and with -- well, I won't say happiness, but at least with a lot of confidence. So with that, that concludes also the prepared comments that we had for the fourth quarter result, and I would like then to turn over to the operator for any questions that the audience may have. So operator, please Q&A.

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

Yes. Gustaf at Handelsbanken. I have a few. First, if we start with the HVAC business in the U.S. growing at 17%. Obviously, the inventory buildup you are mentioning here, would you say that, that is explaining the full growth year-over-year? And second part of that question is, when we look at official shipment data from the U.S., this has rather been growing at, say, plus 50% for October and November. You guys should be earlier in the cycle. I'm wondering here if there's an element of this pre-buy effect also in Q2, Q3. Q3 was quite good, right? And if that is the case, do you think it's going to reverse in 2025? Yes, that's the first part.

Gustaf, Jorgen speaking here. I hope you're doing fine. The question about HVAC market going forward and historically also is a very good one, but it's a hard one to parse or to unravel I think. We did see effects of the upcoming change of legislation or the -- which has now taken effect then concerning refrigerants. And it's no doubt so that, that is a main factor behind this very good growth that we saw in the fourth quarter. Usually, the fourth quarter is a very weak one. This year, the fourth quarter was a very strong one for HVAC in North America, and the majority of that effect is due to this change in legislation. What does that tell us about the market going forward? I think that's a really hard question to answer because it gets drowned out in these very big effects. But we're, I guess, not negative at least about the HVAC market for 2025, and then we'll have to wait and see what the weather does.

I think to add to that, what Jorgen says, I think we have a positive view of the underlying development for HVAC for 2025. But that said, I think there was a lot of preproduction in the HVAC industry in the U.S. in Q4. And I mean, provided that the end customer demand has not changed, the HVAC industry will need to destock a little bit at some point, right?

Well, maybe to push you a bit further on that because when you guys reported Q3 numbers, we have not seen the October data, which was the first month with a big uptick year-over-year in the U.S. And I guess, to agree with me that you must have sold products before those units were shipped. I can't remember that we spoke at all about this effect in Q3. Was that something you reflected on when we saw, I think, 16% or 17% growth in HVAC for you guys in third quarter? Or am I reading much into this?

I mean, HVAC has been quite strong in general in 2024, maybe with the exception of Q1, that wasn't particularly strong. But I mean, Gustaf, from our perspective, we don't have a fantastic visibility into the end customer and our customers' demand, except for the forecast that they give us. That's what we deliver on, right? So we are not experts on this industry. So it's difficult to comment in detail, except for what we see from our customers' forecast that we do receive, right?

But structurally, I think it is in an industry like also said, Oskar, that we're positive about. We think it has good structural growth trends. And also, we think that the customer base that we have is a very strong one with some of the real leaders in this industry. So we're super optimistic about the forecast or the outlook for this industry in the longer term. But when it comes to quarterly data, it is really hard to predict.

Okay. Yes, I hear you. Then yes, I'll take one by one. Shandong, just to be very clear here. When you're talking about the 90,000 run rate, basically, we should see that from Q1 and throughout the year. And then, of course, the plan is to lift mix and margins. Is that how we should read Shandong volume contribution in Q1 and going forward?

The volume contribution of new business that we have gained already and which we intend to keep and which was enabled by the Shandong acquisition. You have to remember, we acquired a factory not a business. And this factory together with our existing production facilities in the Asia have a production capacity that enables this buildup, right? So -- but to give you a short answer to your question, the answer is yes.

The next question comes from Albin Nordmark from Nordea.

Albin from Nordea here. Just a few questions from my side. Firstly, you guided for mid-single digit organically here. Can you give us some flavor? Is it both geographies and also a flavor between end markets? Yes, first one.

Yes. I can start here and Jorgen can add to it. But I think, first of all, right, the mid-single-digit growth guidance that excludes any impact now from this 90,000 tonnes annual run rate in the business that we have built up in Shandong. So this is a guidance for sort of the -- on a like-for-like basis, excluding Shandong, right? That's maybe important to point out. But that said, I think we, as Jorgen said, we don't expect any fantastic market or underlying market growth in any of the regions, but we do see good impact from the work we've done on the sales side, basically capturing new business and market share gains. And in terms of how this mid-single-digit growth is spread, we do expect that to be fairly evenly spread across the geographies, maybe with a little bit stronger growth in Asia rather than in Europe and Americas, but fairly evenly distributed.

And when it comes to the market segments, I guess you could say also regarding the earlier questions that we got in HVAC, that there is uncertainty there and there is uncertainty in all the other segments also. But our experience has been that these forecasts, we tend to end up in a good place, relatively speaking, there are some positive surprises and negative surprises. But there's -- it's not so that everything here depends on a single segment.

Understood. And regarding the Shandong facility, and what's the main end market and product categories currently in the new facility and what end markets and products are you like aiming for with the improved mix? And also, how long do you think it will take for you to have an optimal mix start to be able to focus on increasing volumes again?

I don't think we'll ever get an optimal mix. But I'll answer the second part of your question first. We've said as an ambition level then that we should make sure that this acquisition and the sales it enables accretes to Gränges' EPS after minority interest in 2025. So that means, I guess, that we feel that we have this year and it's a full 4 quarters to optimize the mix to a level where we reach that kind of profitability, right? Regarding your question about the end markets, we built up this volume very quickly, and that means that we've taken some business which we like and intend to keep for long term, for instance, in automotive, but also in general engineering segments and other segments. And we've also taken some business, which we intend to maybe not keep forever because it's profitability and it's, let's say, its characteristics are not so that it's a long-term business, but nevertheless helps us reach breakeven, right? And that can be, for instance, again, in the distribution segments but then speaking of relatively low end, relatively undifferentiated products. For instance, thick plate business, which is something that we have in Gränges now with this acquisition and haven't had before. But also it's a learning process, right? We're learning these new end markets that we can address. We're learning to use the equipment that we've acquired in a good way. We're also working to build up a strong organization, strong systems, strong processes and all these things will be ongoing for the balance of this year for sure and will hopefully then help to contribute to an improved profitability of this business that we have built up.

The next question comes from Adrian Gilani from ABG Sundal Collier.

Yes, I'd also like to ask some questions about Shandong with -- I guess, first of all, you want to retain the 90,000 tonne run rate. How long do you want to be sort of at that 90,000 tonne run rate before taking the next step up in volumes?

Well, as you know, we don't give any volume forecast so far out in time. So this is more like a declaration of intent, right? But we've said that we're very happy to have been able to build up such a large volume in such a short time in the fourth quarter. And we think, therefore, that it's time to take a breather and not first and foremost, at least focus on new business gains in the next coming quarters, but rather try to optimize the business we have at the run rates we have. And this phase will continue until we feel that the profitability is good enough to then, so to speak, have earned the right to grow further. And if you want a ballpark number, I guess, you could count on 2025 being the time that it will take to reach that level, right? If we're then successful as we aim to be to make it more profitable, then maybe 2026 is a good time to continue to grow this business further.

Okay. That's very clear. And then on what's actually going to drive the earnings growth in Shandong. Is it mainly an effect of improving the product mix? Or is it mainly an effect of making the facility more cost efficient?

It's an effect of the 2 things that you mentioned, but also effect of price. When you take business quickly, it's not always possible to get the price that you wish for. And you have to understand also that this business that we've taken this 90,000 tonnes, that's a really large volume for Gränges. It corresponds in size to our facility in Finspång, where we've been for many decades, producing flat-rolled aluminum, right? And to have done it in such a short time, it's reasonable to assume that price is not optimal. It's reasonable to assume that mix is not optimal. And it's also reasonable to assume -- very reasonable to assume that our cost productivity is not optimal that we don't have the perfect processes, that we don't have the perfect sources, that we don't have the perfect production techniques systems and so on, and also not the perfect skills yet. So all those -- those 2 things that you mentioned, plus price are the 3 factors, and exactly what will contribute what we'll see. It's -- in the end, it's the whole portfolio of profitability that matters, right? So all 3 factors.