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Edited Transcript of GRNG.ST earnings conference call or presentation 18-Jul-19 8:00am GMT

Q2 2019 Granges AB Earnings Call

STOCKHOLM Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Granges AB earnings conference call or presentation Thursday, July 18, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Johan Menckel

Gränges AB (publ) - CEO

* Oskar Hellström

Gränges AB (publ) - Deputy CEO & CFO

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Conference Call Participants

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* Johannes Grunselius

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Karl Bokvist

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Mats Liss

Kepler Cheuvreux, Research Division - Former Equity Research Analyst

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Presentation

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Johan Menckel, Gränges AB (publ) - CEO [1]

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Welcome to Gränges' conference call for the second quarter of 2019. Here in Stockholm, it's me, Johan Menckel, CEO of Granges; and beside me, I have CFO, Oskar Hellström. As usual, we will start this presentation with an update of Gränges' performance during the last quarter and touch upon some important events. Then it's time for Oskar to guide you through the financial results. After that, we will conclude the presentation with a short summary and a Q&A session.

Starting with the second quarter of 2019 highlights. The main theme of the quarter is undoubtedly the increasingly challenging market conditions, especially on the automotive side of our business. And as a consequence of this, our sales volume declined by 6% year-over-year in the second quarter. Asia, in particular, China remains to be very challenging, but we did also see lower demand from European automotive customers in the quarter. The demand for the HVAC and Other business in Americas continues to develop positively, but we are unfortunately not able to capture this growth due to limitations of available production capacity. Due to lower sales volume and additional costs related to the ongoing expansion projects, the adjusted operating profit declined to SEK 257 million in the quarter. High prices in Americas and favorable foreign exchange rates had a positive impact on the earnings.

Further, on the positive side, the cash generation continued to be strong in the quarter. The adjusted cash flow before financing amounted to SEK 249 million, which is close to 100% operating profit to cash conversion. We currently have a very large focus on completing the U.S. expansion project in Huntingdon and Newport and are currently in a CapEx-intensive phase of this.

The total CapEx related to the expansion investment amounted to SEK 354 million in the second quarter. In the quarter, we have also acquired the utilities infrastructure on our site in Finspång from a third party for SEK 93 million. Earlier today, we also announced that our production facility in Shanghai has achieved certification in accordance with the Aluminum Stewardship Initiative Performance Standard. This is a sustainability certification standard for the aluminum value chain. I'm very proud of this accomplishment and that Gränges has managed to certify our first site only 6 months after joining ASI. It is a good example of our strong commitment to sustainability and to promote a more responsible and sustainable aluminum value chain.

During the second quarter, we experienced continued soft market conditions for the automotive part of our business. If we look at some more statistics, the research firm, IHS, has made a quite substantial revision of the estimates since we presented our outlook for quarter 2 in April. At that time, IHS estimated a 3% global decline for the second quarter, and that figure has now doubled to a 6% decline. This is also more in line with the signals that we are picking up in the market. If we looked at estimates by region, we can see that the production of light vehicle was down 6% in Asia in the second quarter. Of this, China was down 11% compared with last year. On top of the reduction in vehicle build rates, the stocking of inventory in the supply chain continued to have some negative impact on demand for our product. The destocking is expected to continue also in the third quarter. And with what we see right now, we believe that IHS' positive demand forecast for Asia in quarter 3 seems a bit optimistic.

In Europe, light vehicle production is estimated to be down 7% on last year in the second quarter, and we start to see destocking taking place also in the market. Americas is holding up better with an estimated decline of 2% for the second quarter.

For the third quarter, IHS estimated a growth of 2% in light vehicle production on a global level. Based on what we are picking up in the market, we are currently have a slightly more pessimistic view on the short-term outlook.

For the full year 2019, IHS forecast a 3% global decline of light vehicle production. If we then look at the HVAC market, which represent 1/4 of our sales, we can see that HVAC unit built in the U.S. is expected to have an increase by about 3% in the second quarter.

In the coming quarters, we expect to see a continued growth in HVAC build rates. Here, we need to remember that we are currently having capacity constraints in Americas, and we'll not be able to take part of this growth until our new production capacity becomes available later this year.

If we then look into Gränges sales volume development during the second quarter, we can see that the sales volume in Asia decreased by 7%. The reduction is reflecting the lower vehicle production rate and the destocking at many of our customers, in particular, China. On the positive side, sales to industrial applications continue to increase but from low levels. In Europe, sales volume decreased by 10% in the second quarter, largely following the underlying market demand, but you also see destocking at our customers. In Americas, sales volume was 5% lower than last year, despite a stable automotive volume and a growing market demand for HVAC products.

This volume decline is primarily driven by 3 things. First, we are shifting the mix towards more advanced products that require more rolling capacity but have a higher margin. Second, we are running close to maximum capacity in our U.S. plants and need to execute on productivity improvements to grow sales volume. With our large focus on delivering the expansion products, we have however not managed to simultaneously maintain the production efficiency in the current operation. Third, we are experiencing some temporary production disturbances at our Salisbury plant at the end of the quarter, which was limiting the production output. These disruptions have been addressed now, and we expect them to have limited impact on the sales volume in the third quarter.

As you heard from me in the last couple of minutes, we are currently facing different types of challenges in our different regions. This mean that we need to focus on different types of measures to address the respective challenges in a good way.

In Americas, we continue to see a positive market development, and we continue to turn down orders due to lack of production capacity. As a consequence, finalizing the 2 expansion projects in Huntingdon and Newport is the top priority for our Americas team.

Startup production for the project in Huntingdon is planned for August, and the first commercial orders are expected to be shipped to customers in September. Sales from Newport locations are expected to gradually ramp up from October. Net startup costs for these projects amounted to SEK 16 million in the second quarter. In the third quarter, we expect to carry additional startup costs of about SEK 10 million. For the fourth quarter, we expect the expansion projects to continue positively to operating profit by about SEK 15 million.

The situation in Europe and Asia looks very different to the one in Americas. In these regions, we are impacted by the weak automotive production, and we are not expecting to see a significant pickup in the volume in the short term. As a consequence of this, we have taken additional cost reduction measures in our Swedish and Chinese production plants in order to align the cost base with the current market outlook for the second half of this year. Depending on how the market will develop going forward, we are prepared to implement additional measures to bring down costs even further.

With that, I hand over to Oskar for the financials.

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [2]

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Thank you, Johan. As Johan talked about, the sales volume continued to decline in the second quarter. As a consequence of this, we also saw the adjusted operating profit come down somewhat in the quarter, and the rolling 12-month profit per tonne declined to SEK 2,600.

For the automotive business, the lower sales volume led to a clear margin contraction in the quarter. But as you can see on this slide, this is partly offset by improved margins for the HVAC business, where we had a profit per tonne increase, despite the lower sales volume. Key drivers for this increase are the mix optimization and price increases in the U.S.

If we look at the second quarter financials and compare it with the same quarter last year, we can see that the sales volume decreased by 6.3% to 92,900 tonnes, whereas net sales decreased by 7.4% to SEK 3.2 billion.

The main reason for the net sales decreasing more than sales volume is the lower metal prices than compared with last year. The net impact from changes in foreign exchange rates was positive, SEK 194 million, compared with second quarter 2018.

Looking at the earnings, the adjusted operating profit amounted to SEK 257 million in Q2, a decrease of SEK 44 million or 14.6% on prior year. The negative impact from the lower sales volume and slightly higher operating cost was partly offset by higher average conversion price and net changes in foreign exchange rates that was positive SEK 22 million in the quarter.

As you heard from Johan, we are getting closer to start of production for the expansion projects in the U.S., and the net start-up costs for these projects amounted to SEK 16 million in the second quarter.

Looking at the profit margin, the adjusted operating profit per tonne declined from SEK 3,000 to SEK 2,800 in the quarter. There are no items affecting comparability in the second quarter, and the reported operating profit is therefore the same as the adjusted operating profit in the quarter.

The profit for the period decreased by 20% to SEK 171 million and corresponds to earnings per share of SEK 2.26. Cash flow before financing was negative SEK 198 million in the quarter. And by the end of June, the return on capital employed was 14.1% on a rolling 12-month basis. During the second quarter, the net debt increased by SEK 503 million to SEK 3.6 billion or to 2.6x adjusted EBITDA on a rolling 12-month basis.

There are 3 primary drivers behind this increase. First, the expansion investments amount to a total of SEK 354 million, of which SEK 310 million are related to U.S. and SEK 43 million to Sweden. Second, we acquired the utilities infrastructure for a site in Finspång for SEK 93 million, and this gives a total of SEK 447 million of cash outflow for expansion investments and acquisitions. And finally, we also distributed SEK 242 million to our shareholders in the quarter.

On the positive side, we continue to see a very strong underlying cash generation in the quarter, where the cash flow before financing, adjusted for the expansion investments, amounted to SEK 249 million. That corresponds to an operating profit to cash conversion of 97%. As for the development of working capital in the quarter, it includes a positive effect of SEK 85 million from the removal of U.S. sanctions against Rusal earlier in the year. Following this, Rusal reentered our supply chain financing program, and we see the full effect of this in the second quarter.

The expansion investments in the U.S. will be completed this year and positive EBITDA generation from these are expected to start to bring down the leverage ratio back down towards the target range of 1 to 2x adjusted EBITDA.

I will now hand over back to Johan Menckel, who will provide an outlook for the third quarter.

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Johan Menckel, Gränges AB (publ) - CEO [3]

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Thank you, Oskar. Looking into the third quarter of this year, we expect that the challenging market conditions will continue in terms of year-over-year sales volume development. We do, however, believe that quarter 3 will be slightly better than quarter 2, with a low single-digit growth on a group level.

For automotive materials, we foresee a low mid-single-digit sales volume decrease globally. In Asia, we expect a high single-digit reduction. And for Europe, we expect a stable development over last year, primarily due to weak comparables. For Americas, we foresee a mid-single-digit growth for our automotive business.

For the HVAC and other part of our business in Americas, we expect a mid-single-digit growth in the third quarter, as the newer capacity will start to become available in the quarter.

When looking further ahead, we will continue to focus on our growth initiatives. We are taking an active part in developing solutions for electrical vehicles, where we are currently in several very interesting customer discussions. Some of these have now started to materialize into contracts, and we have, during the last couple of months, signed contracts for better cooling plate materials. This is an area where we believe that our products are very competitive. Volume under these contracts will start to ramp up from 2021.

To conclude 2019 second quarter report, we continue to see soft market conditions in the second quarter, and because of this, we experienced a 6% decline in sales volume compared with last year. The adjusted operating profit was reduced to SEK 257 million, but the cash generation remains strong, with a cash conversion of close to 100%.

Our growth projects in the U.S. are proceeding according to plan, and the new capacity will start to become available in the third quarter this year. Although the market conditions are expected to remain soft in the coming quarter, we continue to be positive about the medium-term outlook and are determined to continue to grow and strengthen our presence and position globally.

Now we open up for questions.

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Questions and Answers

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Operator [1]

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Our first question comes from the line of Johannes Grunselius from Handelsbanken.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [2]

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This is Johannes, Handelsbanken. I have a few questions. My first question is on your comments that you will launch cost-cutting initiatives. Are these like small programs? Or is it something bigger that will require provision in that case? And can you elaborate? And so in that case, what kind of sort of positive benefits you can take out of this?

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Johan Menckel, Gränges AB (publ) - CEO [3]

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It's a fair question. I mean, as you probably know, a large part of our cost base is fixed or semi-fixed, and that means that we need to work actively to take out costs to maintain the operational leverage if the sales volume decreases. It doesn't come automatically, and this has been a high focus, of course, for us in Asia and Europe so far this year. And we expect to keep that focus for the second half of the year.

So the program that we are currently running is, at this stage, about manning reductions in terms of the nonpermanent employees as well as heavy restrictions on spend in general. And that means since it's nonpermanent employees that are in question here, there are no provisions required for this at this point in time. I don't know if that answers your question.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [4]

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Yes. Yes, it answers my question. And I mean you provide the year-over-year guidance in volumes, and you refer to, was it single -- low single-digit decline year-over-year? But I think I've heard you, Johan, in the call here that you are saying or indicating that volumes could be up quarter-over-quarter, so can you perhaps give a little bit of granularity on this one?

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Johan Menckel, Gränges AB (publ) - CEO [5]

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No. I think what we're saying or guiding for, Johannes, for third quarter, if you compare year-over-year, it's a growth, actually, for third quarter there, right? It's a low single-digit growth that we are expecting for -- not a decline. Just to keep that straight.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [6]

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Okay. Obviously, then it makes sense. I didn't (inaudible). Then that's right.

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [7]

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Sorry. Yes. Exactly. So it's a low to mid-single-digit decline for automotive, and it's a mid-single-digit growth for HVAC and other, but it adds up to the growth.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [8]

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Okay. Okay. So yes, obviously, and good. And then I have my last question. On the U.S. volumes, which at least to -- my numbers were a bit lower, but I also understand you had some production issues at 1 plant, but were also volumes affected by the ongoing expansions here in some way, I guess? So could you perhaps explain a little bit or talk a little bit about that?

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Johan Menckel, Gränges AB (publ) - CEO [9]

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. Absolutely. There are 3 drivers why we see volumes coming down year-over-year in Americas. One is the product mix optimization. That's something that we are benefiting from, from a profitability perspective, but of course, it means that we are delivering less volume. The second one was some smaller production issues. There were some disturbances in our Salisbury plant in the end of the quarter, and these have been addressed, but it did impact the volume in the quarter. And then the third one, which was your primary question here, is regarding the expansion projects. And as you know, we are running at full capacity in the U.S., and you need, basically, your process engineers and process technicians to work actively, supporting your production in order to keep that high-production output level. It's not easy to run at this high maximum or close to maximum capacity over time. But in the situation we have right now, of course, these individuals are also highly involved in making sure that we can deliver our expansion projects on time, and that's why we sort of -- we don't have resources enough, basically, to spend on both ends on this -- for point in time, but we believe that the right prioritization here is to focus on the expansion projects.

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Operator [10]

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(Operator Instructions) And our next question comes from the line of Kenneth Toll from Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [11]

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So the U.S. expansion project, I had expected commercial volumes to start a little bit earlier. And also, from looking at your guidance on costs and benefits from this project, it seems like it's a little bit postponed versus the view we had at the end of last year, at least. So can you talk a little bit about what the sort of later commercial impact is? Has it taken a longer time to receive a customer clearance? Or is it other issues affecting this project pace?

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [12]

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Ken, it's Oscar here. It's a very good question. And I think that our target has always been in start of production in third quarter, but of course, there are 3 months in the third quarter, so there is some room for flexibility there. Originally, the time line was to start the rolling mills in Huntingdon in July and start to ramp up production as of August. We are now seeing that we will start the rolling mill in August and start to ramp up production as of September, so there is like 1 month or so delay if you compare it with the very first time line there. The reason for this, and there are not only one reason. There are a couple of reasons. There was some equipment coming in late, and we also experienced some heavy rainfall for parts of the construction period here earlier in the year, which impacted the time line a little bit. So to compare with the first time line, it's about 1 month later that we start production. We're going to be within the third quarter.

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Operator [13]

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Our next question comes from the line of Karl Bokvist from ABG.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [14]

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I just want to follow-up a bit on the U.S. expansion here. When you say first commercial orders and then a gradual ramp-up of sales volumes, I'm just a bit curious how you should think in terms of actual delivered volumes in Q3, if we can start there, please.

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Johan Menckel, Gränges AB (publ) - CEO [15]

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Yes. Absolutely. It's a good question. I think we have a guidance there for the U.S. business for Q3, which is that we expect to see a mid-single-digit growth in the quarter if you compare year-over-year, and that growth is, to a very large extent driven by the volume that will be shipped from the new rolling mill that will start in September then. So that, I think, is my best guidance on how you should think about the volume for Q3.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [16]

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All right. And then I didn't really catch what you said earlier, Johan, about the net start-up cost Q2, SEK 16 million, and then you expected SEK 10 million in Q3. But then you said something about the positive contribution of SEK 15 million in Q4. Was that from the expected ramp-up in volumes? Or how should we think about the SEK 15 million?

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Johan Menckel, Gränges AB (publ) - CEO [17]

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Yes. Exactly. It's a positive impact on earnings on -- SEK 15 million in quarter 4 due to the ramp-up in volumes in Americas. You're correct.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [18]

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Okay. Because then my follow-up here is that you -- initially, when we talked about this, you expected that you would have a -- perhaps a neutral impact or -- yes, well, basically, a net impact for the full year in terms of start-up costs and positive contribution. So it seems that things have taken a slight turn on the negative side here.

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [19]

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You're absolutely right. And if you compare with that original plan, it's slightly lower here, right? So we will -- now looking at the scenario where we are not sort of net positive for the full year, we will be net positive for the second half of the year. That's our latest estimate.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [20]

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Okay. And is this mainly related to the reasons you just said about production delays and rainfalls and things like that? Or is there anything else?

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [21]

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If you look at the big expansion project here, which is the Huntingdon one, that is the key drivers. But then we also talked, if you remember, in the -- our last quarterly release, about the Newport project and that we saw that we are a little bit behind there in terms of commercial orders because we originally had a plan to ship commercial products from the old nonupgraded rolling mills, but that proved to be a little bit more difficult than expected. So commercial products will be shipped from the upgraded mills only, and that means that projects will start to ramp up volumes, with start of production -- as Johan said, start of production is going to be in September, ramp up from October and onwards, so there is a second reason also for that project.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [22]

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Okay. Perfect. And then just my final one here. Could you just shed some more light on when you said that you had higher operating costs. I mean if we exclude the start-up costs, I would guess that in -- that is what you're referring to, that the overall business is running on a bit higher cost than you perhaps would have liked. So what sort of costs are these? Are these just labor costs or higher shipping costs?

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [23]

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Very good question. It's a combination of things. And one of the things are, of course, connected to what I said earlier about the large part of the cost base here being fixed. And if you see a decline in volume, you need to work actively to take costs out. It doesn't necessarily go down automatically with volume, all of this. So that is certainly one part. And an example of that is just exactly what you say, right? It's the manning levels. You need to work with shift planning and production and orders to actively take this down, of course. We also see some impact from geographical product mix. If you remember, last year, in second quarter, we had a large part of our U.S. products produced in China, but due to U.S. antidumping duties being implemented, we switched this to Sweden, and we have a higher cost position in general in Sweden than in China, so the cost position for that volume is slightly higher than last year. And we also experienced some higher freight costs, primarily in Europe and U.S., where we see rates are increasing. So it's a combination of things, but these are also things that we are working actively with and are addressing as part of our cost reduction focus now for second half of the year.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [24]

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Okay. And then my final one here. I mean if you go back to Q1, you had a positive EBIT per tonne development partly because of the product mix optimization. I mean if we sort of disregard the cost issues you had this quarter and if we look a bit ahead, should we still expect a positive EBIT per tonne development year-over-year, given the ramp-up volumes and also what you have done in terms of product mix, despite the, perhaps, weaker regional mix?

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [25]

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Yes. Are you referring to the U.S. business now or sort of the general group level?

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [26]

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Yes. Now I'm talking about the group EBIT per tonne.

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [27]

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I mean there are certainly different things that comes into play here now. And given the cost base that we have, of course, we are very volume-sensitive. So in terms of EBIT per tonne for the automotive part of the business, that will be highly dependent on the market activity within light vehicle production. And then, of course, we can do certain actions to make that look better. But of course, if the market environment is very difficult, there is only so much we can do.

For the Americas business, we expect to see a continued profit per tonne improvement, driven by further product mixes, driven by increasing volumes and so forth, as we have now new and even more cost-efficient capacity coming online here in the next quarter and going forward. I don't know if that answers your question.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [28]

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Yes. That's helpful.

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Operator [29]

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Our next question comes from the line of Mats Liss from Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [30]

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A couple of questions. First, well, if you could give some flavor regarding the volume reduction here in Asia and Europe. How much is sort of inventory-related in the value chain and how much is sort of end-user production-related? And also, maybe if you feel that inventories are now sort of on a stable level, or if there are more need to reduce them in the value chain.

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [31]

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Yes. Mats, it's Oscar here. I think that, of course, a large part of the volume reductions in both Asia and Europe, of course, are driven by the end user demand here, right? We see, in Asia, automotive production is down 6% in the quarter. We are down 7%. Europe is down, automotive production, 7%. We are down 10%, indicating then that we have a little bit of more of a destocking taking place in Europe. But that's also only natural, I believe, because we saw the market coming down later in Europe than what we saw in Asia, and in particular, China. So the majority here is end market-driven or end -- demand-driven, but the sort of the delta between the -- our volume and the market's automotive production volume is primarily the effects of the destocking. And as for your question there if this will continue or not, we do expect this to to continue also in the third quarter, given what we see right now.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [32]

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Okay. Great. And then in China, I guess, volumes are down quite substantially, and do you see any change there in the competitive situation that -- well, you have other competitors trying to, well, enter your market or vice versa. I guess if you tried to sort of balance your volume decline in entering new segments.

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Johan Menckel, Gränges AB (publ) - CEO [33]

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No. I mean -- Johan here. Good question. What we see in China for the quarter 2 is a similar pattern that we have seen for several quarters historically. So basically, the loss of volume here is related to the market, not to market share loss. And the competition is basically a few actors that has been competitors to Gränges for a long time. On the other hand, which is not mentioned here in the report, we are having a positive development on our industrial products for wind powers, for instance, to the Chinese industry, where we see a strong growth, even though starting from a small volume. But there's no change in the competitive landscape in China.

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Mats Liss, Kepler Cheuvreux, Research Division - Former Equity Research Analyst [34]

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Okay. Great. And finally, just about, well, U.S. pricing development, if you sort of experience the same level of improvement that you talked about in previous quarters, about 10%? Or if you could add some flavor to that.

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Johan Menckel, Gränges AB (publ) - CEO [35]

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Yes. It's Johan. It's the same as we talked about before. It's in the range of 10% increase for 50% of the volumes. And we don't see any change there in that discussion or in the -- on the market side in the U.S.

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Operator [36]

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(Operator Instructions) And we have a question from the line of Johannes Grunselius from Handelsbanken.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [37]

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It's Johannes. Just want to come back to something you said here, Johan, on your presentation that you were selling volumes of cooling plates that will have a -- as of 2021, I think you mentioned in your presentation, that will be the year where you deliver. Could you elaborate a little bit on this one? Who are you selling it to? Is it producer of batteries? Or is it OEMs for the car industry? And could you indicate what kind of -- is this like very much breakthrough orders? Or how do you view these orders?

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Johan Menckel, Gränges AB (publ) - CEO [38]

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Yes. Sure. No, I mean we are already, today, into an EV segment with better cooling plate and chillers for several models, but the specific contract that I was referring to is actually a contract that we've been awarded for a battery cooling plate for a large European OEM, but it will be in partnership with another supplier, and it's actually a long contract that will span over 7 years and in quite substantial volumes. I'm not able to disclose the name of the OEM, but it's -- for us, it's an important project and milestone that we also were able to break through into this large OEM for battery cooling plate. And basically, we will produce this in Asia and will be shipped to mainly to Europe.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [39]

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Okay. Interesting. I think you might be able to follow up this one later on, right, with me?

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Johan Menckel, Gränges AB (publ) - CEO [40]

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Absolutely. And yes on that. Yes to -- I mean we -- as you all know, there is a very intensive activity right now in the automotive industry to switch to electrical vehicles. And of course, we clearly see that, and that's also why we are very active in several projects. And when it comes to EV cars, of course, first, you have the thermal management, where we see a larger demand for bracing sheet, around 40%. But then on top of that, you also have the battery cell that needs battery foil and the battery casing that also needs plate aluminum products. So there is actually, in the long term, a lot of need for our kind of products, but it's more about how we can manage to, yes, to navigate through this intensive development phase right now. But we are positive on that side.

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Operator [41]

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We have a question from the line of Karl Bokvist from ABG.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [42]

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Just a quick follow-up here. I mean I'm curious about the development of TRILLIUM. Can you give us an update on customer demand or winning new contracts or product development? And I think we talked about this, I think it was in Q1 or Q4 about how -- if we look a few years ahead, how large share of your volumes do you see that TRILLIUM could potentially become? It would be interesting to hear some more about this.

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Oskar Hellström, Gränges AB (publ) - Deputy CEO & CFO [43]

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No. Sure. No, but -- and we are already today in mass production of TRILLIUM products for battery cooling and chillers and other types of heat exchanger. Today, we also recently intensified our marketing of this to expand also to U.S. and to Asia. But first, we were more focusing on the European customers. But today, we have a few thousand tonnes of TRILLIUM materials sales, and of course, we have an opportunity or a pipeline of several thousand tonnes, depending on the outcome of the contract. And these contracts, in general, are very large. So it's -- if we will be awarded, of course, the volume will increase quite substantially, but it's also important to understand that this contract and start of production will be around 2021 or something, so it's still, yes, a year from now from, I mean, development phase. But we still see that TRILLIUM will be an important part of our business going forward.

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Operator [44]

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And as there appears to be no further questions, I will turn the conference to the speakers.

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Johan Menckel, Gränges AB (publ) - CEO [45]

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Okay. There is no more questions. I would like to conclude this session. I want to thank you, everyone, for participating today in this busy reporting day for you and even in the middle of the summer. And we really received good and interesting questions, and we look forward to our next call on October 24, when we'll present our third quarter report for 2019. Until then, I wish you all a continued good summer. Goodbye, everyone.

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Operator [46]

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Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.