Granges AB

STO:GRNG

Earnings Call Analysis

Gränges Reports Strong Growth Amidst Challenging Market Conditions

In the third quarter, Gränges achieved a 7% year-on-year sales volume increase to 123,000 tonnes, despite a decline in the automotive market. Net sales rose 3% to SEK 5.75 billion. Operating profit remained stable at SEK 420 million, though EBIT per tonne fell from SEK 3.8 thousand to SEK 3.4 thousand due to previous one-off energy compensations. Positive developments included enhanced capacity utilization at 80% and an 11.9% return on capital. Looking ahead, Gränges anticipates high single-digit percentage sales volume growth for Q4 and expects higher capital expenditures. They will distribute a SEK 159 million dividend to shareholders in November.

Solid Performance in Q3 Amid Market Challenges

In the third quarter, Gränges demonstrated resilience with a 7% increase in sales volume, totaling 123,000 tonnes, despite market challenges, particularly in the automotive sector. Although Q3 saw a sequential decline of 6%, this is attributed to a return to normal seasonal patterns, suggesting stability in the company's operations. The year-on-year EBIT was SEK 420 million, showing a marginal increase when adjusted for last year’s one-off energy cost compensation of SEK 22 million. The decrease in operating profit per tonne from SEK 3.8 thousand to SEK 3.4 thousand is notable, but it must be considered within the context of prior temporary boosts in 2022.

Cost Management and Operational Efficiency Drive Earnings

The increased sales volume and improved cost productivity played a significant role in offsetting market price pressures and wage inflation. Capacity utilization rose by 5 percentage points year-on-year to approximately 80%, indicating room for operational improvements. The company reported improved metal management and higher utilization of casting and recycling centers, which were instrumental in maintaining profitability, despite currency fluctuations causing a negative SEK 12 million impact.

Segment Analysis: Americas and Eurasia Perform Differently

In the Americas, sales volume grew 3%, driven by market share gains outside of the automotive segment, particularly in HVAC and niche markets. However, operating profit faced a slight decline, resulting in a margin of SEK 4.8 thousand per tonne. Conversely, Gränges Eurasia exhibited stronger growth, achieving a 10% year-on-year increase in sales volume and significantly benefiting from stabilization in European demand and new business wins. The operating profit improved to SEK 165 million, an increase of SEK 65 million when excluding one-off items.

Strategic Acquisitions and Future Outlook

Gränges is advancing its strategic initiatives with the nearing completion of major expansion projects. A notable development is the planned acquisition of a facility from the Shandong Innovation Group in China, aimed at enhancing competitiveness in the Asia market. Although this site is expected to operate at breakeven initially, it should begin to contribute positively to EPS from 2025. The company anticipates a high single-digit percentage growth in sales volume for Q4, while also planning to mitigate price pressures through continued cost reductions and productivity enhancements.

Financial Health Remains Strong

The net debt decreased by SEK 200 million to SEK 2.8 billion, resulting in a net debt-to-EBITDA ratio of 1.2x, nearing the target range of 1x to 2x. Gränges generated an adjusted cash flow before financing of SEK 474 million, reflecting strong operational cash generation. The company also plans to distribute SEK 159 million to shareholders, highlighting its commitment to returning value while maintaining a cautious approach towards leverage as capital expenditures are expected to rise in Q4 due to year-end maintenance and project completions.

Sustainability Focus Fulfilling Corporate Responsibility

Gränges emphasizes sustainability, achieving a 33% reduction in carbon emissions compared to the 2017 baseline. The company recycled 240,000 tonnes of aluminum in the past year, reflecting a 400% increase from historical levels. These metrics underline Gränges’s commitment to reducing its environmental footprint while supporting growth in its core operations.

Earnings Call Transcript 2024-Q3

[Jorgen Rosengren, executive]

Good morning, ladies and gentlemen, and welcome to this Q3 results conference with Gränges. My name is Jorgen Rosengren. I'm Gränges' CEO and I'm here with Oskar Hellstrom, our CFO; and with Sara Lander Hyléen, our VP Communication & Investor Relations. We'll be referring in this call to a PowerPoint presentation that's available on our web page. And I'm going to start on Page 2 of that presentation.



And as you can see on this page, we had in the third quarter of this year, another growth quarter, and that's very gratifying, especially considering that the market was rather slow. Our sales volume increased by 7% to 123,000 tonnes compared to 115,000 tonnes last year. And this, as I just said, was in spite the rather weak Automotive demand, but bolstered by good growth in other markets. And in all of our segments and in all of our markets, in fact, we had really good effect of the market share gains that we've achieved over the past 1.5 years or 2 during an increased focus period on sales for Gränges. That's, of course, extremely good to see especially considering the external market conditions.



We had in the quarter a good productivity improvement and also a good metals management, which is an important thing for Gränges, generally speaking. And these two positive effects largely offset an increasing price pressure and increase in wage inflation. And together then with the strong volume development, we had a stable operating profit at SEK 420 million, which is roughly in line with last year.



Also extremely nice to see, of course, is the very good development of our sustainability numbers, notably the carbon footprint, which is at a very low level compared to our historical levels and also the record recycling that we achieved in the quarter.



We also announced in May this year our partnership with a company called the Shandong Innovation Group. I'm sorry. So going to back up a little bit, and let's go through the market segments here. So we

saw, as I said before, in Automotive, a weaker market, but we saw a very good recovery in our other market segments. We saw strong growth in HVAC. We saw stable growth in Speciality packaging, but the comparison quarter there was quite strong. So, year-to-date also strong growth in packaging and we saw a very strong growth in other niches. And in total, that turned out then to be a 7% growth for the Gränges Group.



And as you can also see on this page, there was good growth in both of our segments, both in Gränges Americas and Gränges Eurasia. But of course, especially nice to see the very strong growth in Gränges Eurasia, which was -- which relied on growth, both in Europe and in Asia, in fact, in this quarter.



And now let's turn to the new partnership that we're entering into soon we hope, in the Shandong province in China. We announced this partnership in May, and the objective of it is to strengthen competitiveness and to enable further market share growth in Asia – in China, but also in Greater Asia. And by the terms of this partnership, Gränges will acquire a large production facility from the Shandong Innovation Group, but we will also gain access to scalable downstream capabilities as well as improved metal supply and also improved energy supply, which, by the way, is also going to help our recycling efforts and our sustainability efforts in Asia and in China.



In exchange for this, the Shandong Innovation Group will gain a minority share in Gränges' subsidiary in China and the new factory that we're acquiring, of course, needs sales volume in order to be profitable, and we expect in the first months of operations, the new facility to be operating at approximately break-even profitability. But we also expect the transaction as a whole to contribute positively marginally to EPS from 2025 from next year then and on.



On sustainability performance then, you can see here that we had, as I already referred to, a very good performance. The run rate carbon emissions intensity of 7.6 tonnes per tonne in the third quarter in the last 12 months is, in fact, 33% lower than the baseline that we referred to in 2017. And we also recycled in the last 12 months, 240,000 tonnes of aluminum, so 0.25 million tonnes, which is a very good level, especially if we compare with the 2017 baseline, it's then almost 400% higher than that level.



And now I'll turn over to Oskar Hellstrom, who will take us through the financial results in a little bit more detail.

[Oskar Hellström, executive]

Thank you, Jorgen. As Jorgen mentioned here and as you can see on this slide, Q3 is yet another good quarter with solid growth for Gränges. Sales volume was up 7% year-on-year, but declined 6% sequentially. And I would say that this reflects that we now continue to see a more normal seasonality again. And as a consequence of this, we also see a normal seasonal decrease of both the operating profit and the operating profit per tonne in the quarter.



Looking from a year-on-year perspective, we do, however, see a slightly negative development, both in terms of EBIT that reached SEK 420 million in the third quarter and in the EBIT per tonne that decreased by SEK 400 from SEK 3.8 thousand in Q3 last year to SEK 3.4 thousand this year. But here, I think we need to remember that the SEK 439 million of EBIT that we delivered in Q3 last year includes one-off energy cost compensation that is related to the years 2021 and '22, and that totals SEK 22 million.



If you adjust for this, the year-on-year EBIT development is slightly up despite unfavorable development of currency rates. 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 third quarter. With the main contributors to this is then the increased sales volume fueled by the new business gains, as we heard from Jorgen. It's the increased utilization of our casting and recycling centers, which together with generally good metal management had a positive impact on our raw material costs. And last but not least, a generally improved cost productivity.



If we look at capacity utilization, which is an important profit driver for Gränges, this increased by 5 percentage points year-on-year to about 80% for the group in the third quarter. This is a good improvement over prior year, but it still means that we operate currently below the optimal level.



Let's now look in more detail on the group financials for the quarter. Starting from the top there, we can see that the sales volume increased by 7% to the 123,000 tonnes. Net sales, on the other hand, increased slightly less, 3% to SEK 5.75 billion. The lower increase in net sales and in sales volume is primarily explained by the lower average fabrication price.



On the earnings, the adjusted operating profit reached SEK 420 million. That's SEK 3 million higher than in Q3 last year when excluding the one-off energy cost compensation that I mentioned earlier. On the negative side, depreciation increased like-for-like by SEK 8 million year-over-year, and this is fully related to completed expansion projects. And the net effect from changes in foreign exchange rates was negative SEK 12 million compared with last year.



The profit for the period reached SEK 285 million for the quarter, and the earnings per share was SEK 2.67. And this represents a year-on-year improvement of SEK 15 million when excluding the positive impact of one-off items in 2023. We do not have any such items in Q3 2024.



On a further positive note, the return on capital employed increased to 11.9% by the end of the third quarter. That's up 0.7 percentage points compared to the year before.



Now looking at the balance sheet. And during Q3, the financial net debt was reduced by SEK 200 million to SEK 2.8 billion. And as a consequence, the net debt-to-EBITDA ratio came down to 1.2x. And this means that we are gradually approaching the bottom of our target range for leverage of 1x to 2x EBITDA. And as you can see on this chart, this was achieved by a continued strong cash flow from operations with the adjusted cash flow before financing, positive SEK 474 million in Q3.



And as you know, we are now approaching completion of several large expansion projects. And during the quarter, we invested in total SEK 280 million in expansion. And the majority of the spend in Q3 relates to the expansion of capacity and capabilities for battery cathode foil production in Europe and to the second of the 2 recycling centers that we're building in the Americas.



As you know, we typically don't provide any forward-looking guidance for leverage. But looking ahead at the fourth quarter this year, I do, however, think that there are a couple of things that are worth to keep in mind. First, with a fairly strong sales outlook that Jorgen will come back to shortly, we don't expect to see a major release of working capital from a sequential seasonal decline in Q4 this year.



Second, as we are completing several large expansion projects at the same time as we're conducting year-end maintenance, we expect capital expenditure to be higher than normal in the fourth quarter. And lastly, in November, we will distribute SEK 159 million to our shareholders in the second of the 2 dividend payments. And taking this together, I think it's likely that we will see a leverage increase for Gränges in the fourth quarter, albeit then from a very low level.



Moving on to the business areas and starting with Gränges Americas. As you heard from Jorgen, with the exception then of Automotive, market demand in Americas improved somewhat in Q3 compared with last year. But in addition to this, we saw an increasing effect from the actions taken to further grow sales through capturing new business, especially within the HVAC and other niches markets. And in total, this led to a sales volume growth of 3% year-on-year for Gränges Americas.



In terms of earnings, we managed to largely offset the continued market price pressure with increased sales volume, generally improved cost productivity and increased utilization of our casting and recycling centers. On the negative side, the net effect from changes in foreign exchange rates was negative SEK 11 million compared with last year for Americas.



In total, the Q3 operating profit reached SEK 283 million, which corresponds then to a margin of SEK 4.8 thousand per tonne. Although this is slightly lower than in last year, we need to keep in mind there that this is still a very good margin level in the industry.



Moving on to Gränges Eurasia. Also here, we experienced some improvement in market demand, except for in Automotive. In combination with the new business gains, this resulted in a total 10% year-on-year sales volume growth.



In Europe, we experienced increased demand on the back of normalization of downstream inventory levels, especially within packaging, general engineering, and distribution markets. And in combination then with a largely stable demand from Automotive customers, this led to an 11% year-on-year sales volume growth in Europe.



In Asia, we continue to see some positive developments, especially connected to electrification part of the Automotive industry, but also other industries. And this resulted in a sales volume growth in Asia of 7% compared to Q3 last year. The adjusted operating profit reached SEK 165 million in the third quarter. This represents an increase by SEK 65 million compared with the same quarter last year when adjusting for the one-off energy cost compensation there in 2023.



The lower average fabrication price was more than offset by higher sales volume, improved metal management, and improved cost productivity. We also see some benefits from lower energy unit costs in Europe, in particular. So generally, a very good development in Gränges Eurasia in the third quarter.



So with that, I hand back to Jorgen, who will provide you with an outlook for the fourth quarter.

[Jorgen Rosengren, executive]

Thank you, Oskar. Well, as we've been saying for quite some time now, the market demand remains quite hard to predict, also in the fourth quarter of this year. There is an apparent weakness in Automotive. But on the other hand, we have seen a recovery and expect also to see a continued recovery in other markets.



In this environment, we're continuing to focus on market share gains considering the significant capacity opportunities that we have. And all of this taken together leads us to expect a high single-digit percentage sales volume growth compared to the fourth quarter of 2023.



For this volume, then we aim to continue to offset price pressure and wage inflation with cost reduction and productivity improvements as we did in the third quarter. And as regards to currency, it depends, of course, on what the rates will be during the quarter, but we're currently expecting a slight negative effect compared to the fourth quarter of 2023.



And that actually concludes the prepared comments on the quarterly results. And therefore, operator, now is a good time to take questions from the audience.

[Operator]

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

[Adrian Gilani Göransson, analyst]

Hello Jorgen and Oskar. I'd just like to start off on the fact that you mentioned in the report a noticeably weaker demand from Automotive customers. But at the same time, your Automotive volumes in Eurasia were fairly flat year-on-year. So I guess, do you expect more of a downturn in those volumes? Or do you sort of think you can keep fully offsetting that with market share gains?

[Jorgen Rosengren, executive]

Well, as you point out, there is a lot of news now about weakness in Automotive. But we don't have any further news than what is already in the market. And what we're expecting is, generally speaking, not only for Automotive, but generally speaking, for Gränges to continue to take market share gain in an uncertain market. Exactly how that will play out in the individual segments, we'll have to wait until the fourth quarter report to see.



But it is, I think, also important to point out that Automotive, though it's an important segment of Gränges is by no means our only segment and that we are able to generate a 7% growth in quarter when Automotive is weak, I think, proves that we have a well-diversified customer and operations base.

[Adrian Gilani Göransson, analyst]

Understood. And now you talked a bit about the expansion projects as well, and you're only a few months away from commissioning the new battery cathode foil line in Finspång. And of course, a lot of battery producers right now are struggling. And with that in mind, are you concerned for that line that you may have a fairly low utilization rate there for some time? Or do you feel confident that you can fill those volumes?

[Jorgen Rosengren, executive]

Well, as you say, it's correct to say that many of the electrification projects for the Automotive industry and especially in Europe and in Americas have been delayed somewhat, right? And that, of course, influences not only our battery cathode foil, but our business in general. On the other hand, we are seeing good growth with many of the battery and electrification related products such as battery cooling plate, battery casing and so on. Regarding that specific line, we'll have to see. We have good customer relations there and a strong interest for it. But of course, like with any new production equipment, there will be a ramp-up period during which utilization is low, and that also goes for that particular line.

[Adrian Gilani Göransson, analyst]

Understood. And a final one from my end. Are you able to give us any more comments on the financials of the Shandong plant, not for 2025, but just more over time? Because, I mean, things like if it will be above or below group average in terms of fabrication price or EBIT per tonne or any other metrics you could provide to help us understand the asset a bit better?

[Oskar Hellström, executive]

Yes. No, I can start there. I mean we haven't closed the transaction yet. We hope to do that in the very near future. And after that, of course, we can comment a little bit more on it when it's actually within the Gränges Group, so to say. But maybe a little bit of flavor on this facility and what we can expect, right?



From what we have communicated earlier, we consider this to be a low-cost facility. And I think that's going to be an enabler for us to take larger market share in certain product segments in Asia that we cannot address from our current Asian production facility in Shanghai. And then what characterizes these market segments? Well, these tend to be market segments with slightly higher volumes, but also generally a lower value add and lower pricing. So you will see slightly different sort of metrics coming out on this facility. So EBIT per tonne is likely going to be lower from the Shandong facility than what we have on Gränges average. On the other hand, we will process quite a few tonnes there if we can deliver on our business plan. So in terms of absolute numbers and absolute earnings, it will hopefully be a good contributor over time there.



I don't know, Jorgen, if you want to add anything else to that or if we try to keep quiet prior to actually completing the acquisition?

[Jorgen Rosengren, executive]

I think the acquisition should be seen as a strategic acquisition, which is intended to strengthen our competitiveness, but also our ability to grow and take market share in China and in Asia. And I guess, strategically, you can say that the market in Asia and not the least the market in China has become in some respect more important because of the strong players that are there in the Automotive industry. And therefore, we think it is quite important for us to be there and be able to grow with those partners.



But as regards to profitability of this, we have to also be honest and say that it's a relatively low utilized factory that we're acquiring. And therefore, we're saying we expect it to break-even in the first couple of months, and then we expect it to contribute slightly positively to net earnings to earnings per share during 2025 after taking into account the minority interest that we're, so to speak, paying for the acquisition.



So it's not something that will be a major plus or a major minus in 2025, but we do expect it to be a major strategic step forward in our position in the Asian market.

[Operator]

[Operator Instructions] The next question comes from Albin Nordmark from Nordea.

[Albin Nordmark, analyst]

Hello Jorgen and Oskar. Albin from Nordea here. You showed quite impressive growth here in HVAC and other niches. So especially maybe for other niches, in what products do you manage to gain market share? And how much more is there to do, do you think? And also, is there a supply-demand issue that you -- quite easily can grow market share? Or is it rather that you win over customers from other players?

[Jorgen Rosengren, executive]

Well, firstly, other niches is other niches, right? So it contains many different niches. And what we've been doing now over the past 2 years is to look a little bit more proactively at the market and say, look, we have this capacity and these capabilities, what other niches, what other customers are there out there whom we could serve. And that has then given results in various -- it's not one or two or three. It's, in fact, very many different customers and applications that we're serving there. So it's hard to pinpoint any individual product or customer.



As regards to the question whether it's hard or difficult or easy, I would say it's difficult, but we're also quite good at it, as you can see. And it's good that it's difficult because we -- in this business, you have to have the customers for a long time preferably. And that is also what we intend to do with these market shares. We don't only intend to have them now, but also to keep them for the longer term.



So we're -- in total, I guess, we can be quite content with these market share gains that we've had and especially as it's a result of an effort that has been ongoing now for 1.5 years or 2 years. Hopefully, that answers your question. Otherwise, please repeat it.

[Albin Nordmark, analyst]

Yes, that's a good answer. And Automotive, I know that you don't usually want to talk so much about the market going forward. But can you talk a bit on the Automotive demand if you split it between Asia, Europe and America? And also, is content per vehicle here contributing to quite solid numbers or – yes?

[Jorgen Rosengren, executive]

Well, firstly, for Gränges, the most important part of the Automotive market is Eurasia because our market in Americas is, relatively speaking, much smaller. So that is the most important part of it. With regard to content per vehicle, it is strategically so that we believe in a bigger content of aluminum and also of our products per vehicle, especially in the shift to hybrid vehicles and to fully electric vehicles. That shift has slowed down a little bit, especially on the fully electric vehicles. On the other hand, hybrids are strong. And we expect for some years to come a higher vehicle -- per vehicle content of aluminum and a higher per vehicle content of Gränges' products to be a growth driver.



In the short term, however, what happens to the market and the market shares matters much more than the content per vehicle. And that's also the case in this quarter and in the next one.

[Operator]

There are no more questions at this time. So I hand the conference back to the President and CEO, Jorgen Rosengren, for any closing comments.

[Jorgen Rosengren, executive]

Thank you, Operator. Then I'd like to thank all the participants for listening in, and wish you all a nice day. Goodbye.