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

Good morning, ladies and gentlemen, and welcome to Granges' Second Quarter Results Presentation. My name is Jorgen Rosengren, and I have the great honor and also pleasure to be President and CEO at Granges. And today, I'm joined in this conference by Oskar Hellstrom, our CFO, and and Deputy CEO; and Anna Hedenbei, our Investor Relations Director. I will start today's call by giving a short summary of the second quarter, after which Oskar will present our results in more detail and then we'll round off with some comments on the outlook. And as always, we will do our best to get through the presentation rather quickly, leaving ample opportunity to ask questions after the presentation is finished. Now to summarize the second quarter, I'd like to first point out the continued strong volume growth. We grew our sales volume by 5% despite hesitant demand in many of our markets, -- and the driver -- the main driver behind this growth was continued market share gains as we've seen several quarters now and, of course, also strong operational performance, enabling us to deliver this volume, but also to respond quickly when we see commercial opportunities. And in fact, the second quarter of 2026 was our tenth consecutive quarter of year-on-year sales volume growth and in itself was the best sales volume we've ever had in a single quarter. So strong volume then. And this volume, together with pricing and recycling and also productivity improvements more than offset the cost increases we had to take during the quarter and also currency headwinds. And taken together, all this led to record adjusted operating profit. It, in fact, increased 33% and over last year to SEK 580 million, making this the stronger quarter result in the history of Granges. We also delivered record sustainability results. We had our lowest ever carbon emissions intensity, and we had our highest-ever recycling performance. And these achievements, of course, strengthen our competitiveness our customer relations, our long-term growth. But of course, they also help the planet. Now as I've already mentioned, market share gains continue to be the main driver behind our growth. Also in the second quarter as the underlying demand in most of our markets and segments remained hesitant. But looking at the different end markets, our sales to automotive grew by 7%, packaging by 11% and climate control by 4%. And -- in all cases, this is stronger growth than that of the end consumer and markets that underlie these numbers. And as you can see, the growth this quarter was mainly driven by Europe and by Americas. In Americas, market share gains grow strong growth in both packaging and climate control, resulting in a total volume increase of 8% despite relatively soft underlying demand. And in Europe, we grew even faster by 13%, delivering our best year-to-date sales volume ever. Growth was particularly strong in automotive in Europe, thanks to large market share gains there. And overall, our sales volume increased by 5% compared with the second quarter last year, thanks to market share gains, resulting as I've already said, in our best volume in the single quarter ever. Now -- before I hand over to Oskar, I'd like to briefly revisit some of the things we presented at our Capital Markets Day in June. And first, I'd like to point out that our long-term direction remains unchanged from what it has been for the last 5 years. And personally, I think this latest quarter is another really good example of us executing according to that plan, which we call Navigate. Now as many of you know, our Navigate strategy has 3 phases. And last year, we've finalized a long investment phase, which significantly expanded our production capacity worldwide and strengthen our capabilities also, but it was a phase that requires significant CapEx. Now we have shifted our focus to utilizing and optimizing the assets we've built increasing capacity utilization, continuing to gain market share, improving productivity, both capital productivity, cost productivity, asset productivity and also, of course, maintaining a disciplined capital allocation. Now all of this is built on the same strong foundation we have talked about for several years now, safety, people, sustainability as well as disciplined risk management and capital allocation. And taken together, all these initiatives support our ambition to build an industry leader in aluminum recycling and flat falling while delivering strong cash generation and attractive shareholder returns over time and then to reach carbon neutrality by 2014. Here are the key messages that we delivered on the Capital Markets Day. And as you can see, we made many bold statements. So our investment phase is finalized, so we expect lower CapEx from now on. We have a much higher sustainability ambition. We promised to try to get our utilization above 90% by 2027, which in itself is a very strong statement implying something like 100,000 tonnes of extra volume. We've launched a for optimized program to focus on price/mix, but also asset cost and capital productivity. And -- this is not something in only 1 of our regions. Now all of our regions raised ambition according to these strategic initiatives. Looking at the results side then, we do expect much stronger cash conversion ahead. In fact, our ambition is to have a 70% cash conversion from EBITDA to operating cash flow. We will be disciplined in how we allocate that cash -- and in particular, we are looking into share buyback as an alternative, which we will activate as soon as our leverage is sustainably below or at 1.5x net debt over EBITDA. We reconfirmed our financial targets and also that we believe that they are within reach, maybe not least importantly, our 15% return on capital employed targets. And we also recommitted to build an industry -- to building an industry leader in flat rolling and recycling of aluminum. And these messages are available, of course, in the Capital Markets Day material, which in turn is available on our Investor Relations page. So please take a look at that. And with that, which was quite a mouthful. I am turning it over to Oskar, who will take us through the results in a little bit more depth and detail.

Yes. Thank you, Jorgen. I will try to do so. So the second quarter of 2026 was, in fact, by quite a good margin, the best individual quarter we've had so far. And we continue to experience solid sales growth, as you heard from Jorgan, this slide the continued softness across many of our markets. And as you can see on the left-hand side here, the sales volume grew by 5% year-on-year. to 167,000 tonnes or 333,000 tonnes then on a rolling 12-month basis. On the earnings side, we saw an even stronger positive development, and the adjusted operating profit increased by 33% or SEK 144 million to SEK 580 million. And for the margin, the adjusted operating profit per tonne improved by more than SEK 700 from SEK 2,700 in Q2 last year to SEK 3,500 in Q2 2026. If we look at the drivers behind this, we can -- we continue to see increasing inflationary pressure for several cost items, not the least in Americas. And this, together with price pressure in Asia and negative but sequentially improving currency effects that totals SEK 32 million year-on-year. These are then the key negatives in the quarter. The external pressures that we see are, however, more than well offset by very positive developments in several other areas. We note a continued improvement on the market scrap spreads, and this is an important contributor when we compare with last year. But here, we, however, need to remember that we had the reverse effect from the scrap spreads in Q2 last year and that we are now back at or slightly above the levels we saw back in 2024. In total, the improved market scrap spreads added some SEK 60 million to operating profit from a year-on-year perspective provided that at the current spreads remain, we expect to see positive year-on-year effect from this also over the next 2 quarters. Looking at the things we can control ourselves, we continue to see positive effects from the volume growth, improved pricing and continued productivity improvements. And let's now continue with some more details on the group financials before we look into the operating segments. On this slide, I think it's worth to highlight that we've had items affecting comparability in the quarter that's negative SEK 15 million, and these are related to a fire that occurred in our production facility in Shandong. And this means that the reported operating profit for the quarter is SEK 565 million compared with the adjusted operating profit of SEK 580 million. The profit for the period increased by more than 38% to SEK 405 million for the quarter. And this is, of course, primarily driven by the higher operating profit. The financial net is fairly stable compared to last year as lower market interest rates compensated for the increased net debt level. Earnings per share attributable to Granges company -- parent company shareholders increased to SEK 3.73 for the second quarter, and the return on capital employed reached 11.8% in the quarter. So this represents an improvement by 0.6 percentage points compared to the year before. Before we look more in detail on the cash flow and leverage, I would like to spend a little bit time on the development on the market price for aluminum. Now -- as most of you probably know well, Granges makes the money on the value that we add on top of the aluminum raw material and that the aluminum price, therefore, is to be considered as a pass-through to our customers. This means that the impact from the aluminum price on the operating profit in absolute terms is limited. The aluminum price does, however, impact the value of our working capital. And when the market price for aluminum increases, this has a negative impact on the change in working capital and consequently on our operating cash flow. Understandably, the reverse is true when the market price declines. On the back of the U.S. introduction of tariffs on primary aluminum from Canada, the Midwest transaction price for aluminum has doubled since the beginning of 2025. And driven by this but also by increases in other regions, the average aluminum price for Granges has increased with more than USD 1,600 per ton in the same period. And we continue to see a further increase of the aluminum price in Q2. Now short term, the aluminum price is sensitive to many things. For instance, the development of the conflict in the Middle East. So it's very difficult to forecast how this will develop. But as you can see on this chart, the market price started to decline towards the end of the quarter, and this is, of course, positive for Granges and for our cash generation. In the second quarter, the increase in aluminum price had a negative impact still on our working capital and cash flow with some SEK 600 million, but provided that the aluminum price remains on the current level, we expect this to impact the operating cash flow positively with about SEK 300 million in the third quarter. With this in mind, let's now look at the cash flow for the second quarter in more detail. And starting then with the operating cash flow, this amounted to negative SEK 155 million in Q2, and as you can see on this chart here, the strong EBITDA of SEK 792 million couldn't fully compensate for the buildup of net working capital that totaled SEK 838 million. But as I mentioned earlier, about SEK 600 million of this is related to the increased aluminum price, and the remainder then is the volume-driven seasonal increase from the first to the second quarter. But here, we should note that we continue to improve the working capital efficiency in the quarter, and this has an offsetting effect on the seasonal buildup. Capital expenditure that amounted to SEK 109 million in the quarter. And during Q2, we also distributed SEK 179 million to our shareholders -- and the second dividend payment with the same amount will be paid in November including taxes and interest paid as well as changes in currency rates. This led to that the financial net debt increased by SEK 564 million to SEK 5.1 billion during the second quarter. But thanks to the strong earnings development and improved EBITDA, the net debt-to-EBITDA ratio increased only slightly to 1.9x. So still within our target range of between 1 and 2x. Now let's continue with the operating segments and starting then with Granges Americas that made a record quarter and reached new all-time highs for both sales volume and operating profit. As you heard from Jorgen earlier, we had a strong sales volume development in Americas. Sales volume increased by 8% year-on-year and reached 65,000 tonnes in the quarter. And the growth is primarily market share driven, but we also saw the demand gradually picking up in the climate control market, which is positive. In terms of the earnings, we continue to experience increased inflationary pressure for many cost items. And we also continue to have negative year-on-year currency translation effects from the strengthening of the Swedish krona against the U.S. dollar. But we see a sequential improvement here. And in the second quarter, the net change in foreign exchange rate was only SEK 7 million compared with the same period last year. Turning then to the positives. We had a very good operational performance in all our U.S. facilities in the quarter, and this enabled both the volume growth as well as productivity improvements. We also note the continued improvement of the market scrap spreads, which together with improved pricing and our important earnings driver than we compare with last year. In total, the adjusted operating profit increased by 55% to SEK 449 million. And in terms of the margin, this represents an operating profit per tonne increased from SEK 4,800 to SEK 6,900. And this, I think, is good evidence of the strong execution we're seeing from our Americas team. Leading Granges Americas continuing with Granges Asia. And here, the slowdown of the market that we saw in Q1 continued in the second quarter. We continue to gain market share within primarily automotive customers, and this compensated for some of the lower demand, but we also had some negative effects on the sales volume from the fire in the Shandong facility, where we were not able to ship about 3,000 tonnes to primarily industrial customers. But this, we should mention is fairly low margin products. Due to the negative volume effects from the fire, the sales volume decreased by close to 5%, slightly below 53,000 tonnes. Excluding this, the sales volume would have been fairly stable compared with last year. When it comes to earnings, the effects from the lower sales volume and the market price pressure were only partly offset by product mix improvement and by productivity increases. And as a consequence, the operating profit decreased to SEK 81 million, and the operating profit per tonne came in at SEK 15,000. Changes in currency rates were positive SEK 2 million compared to second quarter last year. The financial effects from the fire in Shandong were relatively limited in the second quarter. The contribution loss from the 3,000 tons of industrial products that we couldn't deliver was about SEK 3 million. And earlier, I mentioned the SEK 15 million of write-down and extraordinary costs there booked as items affecting comparability. For those of you who would like to have more details on this and also how we currently view the impact of this fire going forward. There is a good section on this on Page 12 in our half year report. So please have a look at that and you will get more detailed information. Then moving on to Granges Europe, where we continue to experience hesitant underlying end-user demand across most market segments. We did, however, successfully compensate for this with share gains, especially within the automotive and industrial markets. In total, the sales volume in Europe increased by 6,300 tonnes or 13% to 63,000 tonnes in Q2. And given how challenging the European market has been, I think this is a very good outcome. Despite negative effects from foreign exchange rates of SEK 27 million compared to last year. The operating profit increased by 17% to SEK 87 million and the operating profit per tonne reached SEK 1,600. The key drivers behind the improved earnings are the sales growth, improved pricing and increased productivity, together with the tailwind from the improved market scrap spreads. Finally, from my end, some words on our sustainability performance that also reached new record levels in the second quarter. We continue to reduce our carbon emissions intensity, which is down 13% and increased our volume of sourced recycled aluminum, which is up 14% compared to second quarter last year. The share of source recycled aluminum is now at an all-time high of 49%, which is close to 4 percentage points higher than in Q2 a year ago. And the carbon emissions is at an all-time low of 5,600 tonnes CO2 per tonne aluminum, and that also happens to be 50% down from our SBTi baseline from 2021. But more importantly, when it comes to the carbon emissions, -- we have raised our 2030 ambition further and lowered our total intensity target with 25% from 4 to 3 tons of CO2 per tonne aluminum. And this, I think, reflects the confidence in our strategic direction and our sustainability ambitions, and it puts us in the forefront of our industry. With that, I hand over back to Jorgen, who will provide you with an outlook for the third quarter.

Thank you, Oskar. We're getting closer now to the end of our prepared remarks, and we'll soon turn over to Q&A. But let me give you a flavor then on what we're expecting for the third quarter. First, we need to acknowledge that the market remains really difficult to predict and maybe not super strong in all respects. But having said that, we do continue to see opportunities to grow through market share gains. And in Americas and Europe, we expect sales volume growth in the mid- to high single digits compared with the third quarter of last year, driven mainly then by continued market share gains. And to get the full benefit of that growth, our ambition remains the same as before which is to offset cost increases through pricing and recycling and productivity also. In Asia, we're facing a different situation. There, we expect continued price pressure, but we also have a high ambition in the productivity area. But when it has to volume, we expect the firing and long to result in a year-on-year sales volume decrease of approximately 10,000 tonnes. And this decrease is done thankfully, primarily related to lower margin industrial products because in China and the situation Ren, our priority and focus remains on protecting strategic business and customer deliveries by securing supply through alternative solutions. And finally, unlike what I've said in the recent quarters, foreign exchange rates are currently expected to be broadly neutral compared with the third quarter of last year. And as Oskar already mentioned, we are optimistic about our ability to have a better cash flow going forward and better cash conversion, thanks to the development of the aluminum price. To summarize today's presentation, then we delivered our tenth consecutive quarter of year-on-year volume growth, and this was driven by continued systematic market share gains despite resident end user demand. Also in the quarter, we delivered record sales volume and record earnings. Our good commercial and operational performance apart from delivering the volume that we reported also enabled us to offset cost increases, continued price pressure in Asia and negative currency effects to pricing and recycling and productivity. Americas delivered another record earnings quarter and Europe delivered its best ever year-to-date volume and significantly improved its profitability. We also delivered our strongest sustainability performance so far, at least with the lowest carbon emissions intensity and the highest recycling level in our history. And we entered the third quarter with good momentum and optimism also and feel that we have many opportunities still to grow through market share gains. And all in all, this was the strongest quarter in the history of Granges, we remain focused going forward then on continuing to deliver profitable growth. And that concludes our prepared remarks for today. So operator, we are now ready to take questions from the audience.

[Operator Instructions] Our first question comes from the line of [indiscernible].

I have 1 question, and it's on how to think about the earning expense going forward. If I look at Q2, I take away the FX effect and the positive metal price effect you had, the contribution margin this quarter is far exceeding call it, the normal levels we've been talking about for a long time. So if we go into Q3, if you have a lower end of your volume guide, you will have largely unchanged volumes year-over-year. On an organic level, should we expect a similar level of contribution margins also for Q3. I guess, in other words, should we expect a significant improvement in organic EBIT even if you have largely unchanged volumes on a group level?

Oskar here. That was a very good question. I think maybe it's difficult to answer or maybe not. I will try. There is a lot -- there are some things now, of course, if you look sequentially from Q2 going into Q3, there are a couple of things we can mention. We do expect to see some growth in Europe and Americas and potentially some decline in Asia. If you look at the regional differences in margin, this means, of course, that even with a similar or slightly increasing even volume on group level, we should have a positive geographical mix effect here. That is one thing. The other thing I think worth to mention is, of course, that we do get some benefits from the price cost net, we managed to increase prices more year-over-year, then the costs are increasing. Now prices are, to a large extent, contracted for the rest of the year, cost levels to some extent, of course, also. But that means that we expect to see a similar, similar effects year-over-year in Q3 as we had in Q2. And -- last but not least, -- and the third thing, I think we can mention and highlight here is that we do get positive effects from the normalization of the the scrap spreads. So our recycling profitability in that sense is improving. We expect that to be fairly similar in Q3 as in Q2, and therefore, also that means a continued year-over-year improvement or normalization to 2024 levels or however you want to phrase that. I don't know if that answer your question, but either I think are the 3 key things to keep in mind when you're looking at the Q3 performance?

Maybe if I can follow up. I mean, if I take the FX effect you mentioned and what I believe is the positive metal price effect in the bridge. I mean in order to get to the EUR 580 million you did an EBIT this quarter. I mean, yes, the contribution margin is something like 13,000, 14,000 rather than the 7 to 8 we have been, again, talking about for a long time. I mean is the big element of very strong productivity in Americas, for example, just so we don't get rate on the earnings here in the coming quarters.

No, but that's a good point. It was a very good quarter in Granges Americas in many aspects. I think we had 3 production plants, all 3 production plants had operationally a very good performance in the quarter. Basically, everything went well, which is, of course, what you expect, but what you hope for, but that's not necessarily how it is all the time. That was the case in Q2. So it was a very strong quarter. That, of course, contributes to the good margin development -- and secondly, also, we see now in the U.S., a very positive effect from the price cost net there that we managed to increase prices more than the costs are increasing.

We will now proceed to the next question. And the next question comes from the line of Kaleb Solomon of SEB.

Just a few from me. Americas EBIT per tonne was very sort of impressive at risk record high for the second quarter in a row. Could you maybe just help us reason through the mix impact of HVAC volumes sort of return? I mean is it fair to say that the HFC volumes that will sort of temporarily replaced by sales into other segments generally were replaced by business with shorter contract durations and therefore, may be faster repricing. And correct me if I'm wrong. But a significant portion of the HVAC deliveries over the next few quarters will still be done on sort of old terms. So how should we think about the just sort of timing of any potential profitability improvements from there? And maybe can you tell us roughly what portion during the second half of HVAC deliveries will still be done on all terms.

Oskar here. Yes. of here that I think is a good question, and this is sometimes a little bit counterintuitive, right? But you're absolutely right in the sense that -- the HVAC market is a relatively high-margin market for us in the U.S., but also market then that where we have longer-term contracts and in contrast for some other market segments, industrial, for instance, where contracts are typically shorter. And that also means then that market price effects flow through quicker in -- typically quicker in industrial than in HVAC. So the fact that we've seen a weak HVAC demand now for some quarters. has had actually had a positive effect in the sense that we can get access to the positive market price effects for the industrial segment when we had capacity available for that sort of thing. But you're absolutely right now that that's shifting back now into more HVAC volumes. We need to remember that a HVAC volumes are typically higher margin relative to average. But to your point then, some of this is still going to be under older contracts, if you wish, that's not necessarily fully maybe reflects the current price level of the market. So you will have those 2 effects that are going in opposite directions.

And how should we think about that timing-wise? Because I guess during the year or beginning of next year, you sort of renegotiate some of the HVAC contracts? How should we think about any potential positive mix improvements.

So we try to make it so that we have these contracts renegotiated evenly. Basically, we don't want everything to expire at the same time. So about 1/3 or up to 50% of the contracts are typically negotiated every year. And typically, the time to do this is towards year-end and first of January is the most common starting point for new contracts. We will have a breaking point there. going into 2027. And that also, of course, means then that the price levels that we will have on on these contracts will largely reflect the market situation when these contracts are renegotiated. So the Q4 market is going to be important, I think, for determining the price levels of the contracts that are up for renegotiation for 2027.

That's very clear. And last year, you also -- you mentioned the sort of negative impact of SEK 60 million from premiums last year scrap spreads, which sort of fully reverse this quarter? And can you maybe just help us quantify how big that negative impact was for Q3 and Q4 last year? You said SEK 60 million for Q2. But -- just to sort of give us an idea of the financial impact during the second half of the year.

Yes. Sure. So $60 million was actually the improvement to Q2 last year. And if you see the Q2 '25 versus '24 effect, that was negative some some SEK 50 million or so. And if I remember correctly, we had the corresponding effects in Q3 and Q4, SEK 25 million versus SEK 24 million some SEK 40 million and SEK 30 million or so, respectively. So that also means then that we have reversed that and add a little bit more than regards it, right? I think indicated that also in my prepared remarks. And if scrap spreads remain on the current level, we expect -- we expect a year-over-year effect in Q3 versus Q3 2025 then to be approximately SEK 70 million. So hopefully, we will get some tailwind there.

Okay. That's very clear. And just lastly, a lot of sort of the big HVAC players in the U.S. seem to sort of suggest on the reported last quarter that we expect inventories to fully normalize during Q2 and be back to completely normal levels in Q3. And I know shipping data isn't perfect, but it seems to sort of suggest the same thing. Have you in the same sort of thing? And has there been any sort of visible changes even if small at the beginning of Q3.

I think we -- to -- based on what we see, we agree with that picture. I think many of our customers were a little bit reluctant going into the year and going into the second quarter as well. But if you look at the shipment data that we can see from the HVAC industry, that indicates 5%, 6% growth or so in in the second quarter so far, and that they are actually working down their inventories also of our type of materials. So that means that we expect to see HVAC deliveries for us also to pick up even more in Q3 year-over-year than what we saw in Q2. Then we need to, of course, remember that, that Q3 last year was not a particularly strong HVAC quarter, rather the opposite, right? But there is some positive momentum here in the industry. And our view also is that inventories are coming down.

And the next question comes from the line of Adrian Gilani from ABG Sundal Collier.

Yes, I had a couple of questions on the similar line of the contribution margin questions before. First of all, just trying to get an understanding of the earnings impact in Asia with the fire. -- and partly in higher costs, that's pretty straightforward. But then you have the 10,000 lost tons. And as you mentioned, these are lower margin tons. So can you give us an indication of what perhaps a reasonable contribution margin on these lost tons could be?