Welcome to Gränges conference call for the fourth quarter of 2019. Here in Stockholm, it's me, Johan Menckel, CEO of Gränges, 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 more important events. After that, Oskar will take you through the financial results, and then we will conclude the presentation with a short summary and a Q&A session. Starting with the fourth quarter's 2019 highlights. In the quarter, we have taken important steps to strengthen our platform for future growth. In November, we announced the acquisition of Aluminium Konin, which will be our largest acquisition since we bought Noranda back in 2016.
In the quarter, we also completed the expansion of the Huntingdon facility in the U.S. that will be an important enabler for continued growth in primarily the HVAC market. Another main theme of the quarter is the challenging market conditions. On the automotive side of our business, we saw a weak customer demand in Europe and Americas, where a continued decline in light vehicle production was further amplified by inventory reductions. Unlike the first three quarters of the year, we also experienced a lower demand from the HVAC and other customers in Americas. This is primarily driven by inventory reductions towards year-end. As a consequence of the lower market demand, our sales volume declined by 11% year-over-year in the fourth quarter. Due to the lower sales volume and additional costs related to the ongoing expansion projects, the adjusted operating profit declined to SEK 144 million in the quarter.
On the positive side, the cash generation continued to be very strong, and the adjusted cash flow before financing amounted to SEK 191 million. Finally, our board of directors propose a dividend of SEK 3.40 per share, which represent an increase of 6% over last year when we paid SEK 3.20 per share in dividend. I'm very happy that we, in November, signed an agreement to acquire the Polish aluminum rolling company, Aluminium Konin. This is an important step in realizing our growth strategy, as it will give us more capacity, new capabilities, and access to new market niches. The transactions values the business to SEK 2.3 billion on a cash and debt-free basis. That corresponds to an EV/EBITDA multiple of 6.9x based on last 12 months earnings for September. This means that we will be able to close this deal at an attractive valuation level.
The primary rationale behind this deal is to further strengthen our position in the European aluminum market by adding new capabilities and new attractive market segments. One of these areas that we specifically target with the acquisition is the future vehicles market, where the aluminum content per car is expected to increase significantly. Here we intend to broaden our offerings going forward. Given the good fit with the existing Gränges operation, we also see a potential for realizing synergies when combining the two businesses. Following the completion of the transaction, we intend to make a right issue with the preferential rights for existing shareholders of approximately SEK 2 billion. This will partly be used to finance the acquisition and partly be used for future growth projects. Closing of the transaction is subject to approval from competition authorities.
We expect that closing will take place sometime in the second quarter of 2020. As most of you know, we are currently running three material expansion projects in the U.S. and in Sweden. In the fourth quarter, we completed the expansion of the Huntingdon facility. We now expect to see 40,000 tons additional capacity to gradually ramp up over the coming quarters. Our target is to have 75% of the capacity available by half year, with full capacity being reached before the year-end 2020. We've had a good start on the ramp-up and are currently running at the 60% of full capacity in the new assets. Most of the new capacity is contracted, but we have allowed some room for flexibility during the ramp-up phase. The sum of all contracted volume for the HVAC and other market indicates a more than 10% higher volume in 2020 than in 2019.
The actual outcome will depend on the market demand. In Newport, the work with upgrading the rolling mills is progressing to plan, and the second rolling mill was completed during the fourth quarter. We have now begun with customer trials and product validations that are expected to continue through the first half of this year. In parallel with this, we will also start the upgrade of our third and final rolling mill. In Gränges Finspång in Sweden, we are now a third of the way into the site logistic improvement project. When this is finalized in the second half of 2021, we will get more efficient production plant with lower production cost and additional 20,000 tons capacity. During the fourth quarter, we experienced continued soft market conditions for the automotive part of our business.
If we look at some market statistics, the research firm IHS has made a further revision of the estimates since we presented our outlook for quarter four in October. At that time, IHS estimated a 3% global decline of light vehicle production in the fourth quarter. That figure has now changed to 5% decline. Together with continued reduction of inventory in the supply chains in most regions, this led to relatively weak demand for Gränges automotive materials in the fourth quarter. If we look at the estimates by region, we can see that the production of light vehicle was down 3% in Asia in the fourth quarter. Of this, China was up 2% compared with last year. On the customer side, the inventory levels in Asia have come down, and the heavy destocking that we experienced earlier did not occur at the same extent in the fourth quarter.
Still, for quarter one, IHS expect a continued reduction in Asian light vehicle production of 8%, indicating that inventory levels may need to come down further. In addition, the recent outbreak of the coronavirus in China could pose a downside risk on the automotive production in the first quarter, and this would in turn have a negative impact on the demand for Gränges products. In Europe, light vehicle production is estimated to be 6% lower in the fourth quarter and the destocking in the supply chain increased significantly in the quarter. With a continued reduction in light vehicle production indicated for the first quarter, we expect the destocking activities to continue into 2020. In the Americas, the fourth quarter, the light vehicle production figures were negatively impacted by the General Motors strike that took place in October.
In addition to this, we saw increased destocking also in Americas in the quarter. For the first quarter in 2020, IHS estimates a decline of 5% in light vehicle production on the global level. Based on what we are picking up in the market and taking the continued destocking activities into account, we currently have a slightly more pessimistic view on the quarter one outlook for the automotive business. For the full year 2020, IHS expects the light vehicle production to be on about the same level as in 2019. If we look at the Americas HVAC market, we can see that HVAC unit build in the U.S. is expected to have increased by about 2% in the fourth quarter. Still, an uncertainty about the general U.S. economy led to that most of our customers made efforts to reduce their inventory levels towards year-end.
This resulted in a negative demand development for HVAC materials in the quarter. Looking ahead, the HVAC unit built forecast indicated a stable outlook for the full year. If we then look into Gränges sales volume development during the fourth quarter, we can clearly see the impact of a softer automotive demand and the destocking among the HVAC and other customers. For the automotive materials, we experienced a double-digit decline in both Europe and Americas. On the positive side, the sales volume in Asia increased by 2%, primarily driven by customers in China that increased their orders quantities in the fourth quarter. For the HVAC and other business in Americas, we saw a sales volume reduction with about 11% in the fourth quarter. This decline is not much driven by the end market demand, but from inventory reductions at customers before year-end.
We do believe that this effect is temporary and it's not expected to continue into the first quarter. I will come back more to that when I comment on the outlook. When summarizing the whole of 2019, we can clearly see that the performance against our long-term financial targets are impacted by two things, the challenging automotive market and the fact that we have during the year carried out several very material expansion projects. Even though we are not satisfied with the sales volume development in this year, seeing a decline of 7% compared with 2018, we can note that this is fairly close to the benchmark figure for the light vehicle production that showed a decline of 6% in 2019. The lower volume and earnings in combination with an increased assets from the expansion investment had a negative impact on the return on capital employed in the year.
For 2019, ROCE was 11.7%. We ended the year with a net debt of SEK 3.5 billion, which correspond to 2.6x EBITDA. This is slightly outside our target range, but we expect to see the leverage ratio to come down going forward as we now start to utilize the new investments. Our board of directors proposes a dividend of SEK 3.40 per share, which is an increase of 6% from last year. Given that the annual general meeting approves the proposal in May, it means that 43% of the net profit will be returned to our shareholders. This is well within our target range. I would also like to highlight our sustainability performance for 2019. I'm very pleased that we have further increased our ambitions and can see good progress on many of our priorities.
We have during the year continued to implement our sustainability framework across all our operations and work to further align our local strategies with the global sustainability targets. At the beginning of the year, we became a member of the Aluminium Stewardship Initiative, ASI. A few months later, our Shanghai site received the ASI performance standard certification. I'm also very pleased that we see good progress on many of our sustainability priorities when summarizing 2019. Examples of achievements include a significantly improved safety accident rate, an increased share of sourced recycled aluminum, which has led to reduced carbon dioxide emissions from purchased materials and services, and high training participating in our annual code of conduct and anti-corruption training. We have also accelerated the development of broader and more sustainable customer offerings, both through the acquisition of Konin and through organic product development.
This is important from a commercial point of view, as our customers are increasingly recognizing the importance of using sustainable materials. All in all, we have many promising sustainability initiatives in place to support our long-term targets and to help make us a more sustainable and responsible company. With that, I hand over to Oskar for the financials.
Thank you, Johan. As Johan has talked about, the sales volume continued to decline in the fourth quarter and reached 347,000 tons for the full year of 2019. This is 7% lower than the volume we delivered in 2018. As a consequence of the lower sales volume, the adjusted operating profit came down to 866 million SEK for the year. This represents a profit per ton decline from SEK 2.7 thousand in 2018 to SEK 2.5 thousand for 2019. For the automotive business, the lower sales volume has led to a lower margin. This is partly offset by improved margins for the HVAC business, where we had a profit per ton increase for the year, despite the lower sales volume in the fourth quarter. Key drivers for this are mix optimization and price increases in the U.S., supported by a positive development of foreign exchange rates.
If we look at the fourth quarter financials and compare with the same quarter last year, we can see that the sales volume decreased by 10.9% to 77,900 tons, whereas the net sales decreased by 12.7% to SEK 2.7 billion. The main reason for net sales decreasing more than the sales volume is lower metal prices than in last year. The net impact from changes in foreign exchange rates was positive SEK 118 million compared with the fourth quarter 2018. Looking at the earnings, the adjusted operating profit amounted to SEK 144 million in Q4, a decrease of SEK 47 million, or 24.5% on prior year. The reduced operating profit is first and foremost a result of the low sales volume in the quarter.
Q4 is the seasonally weakest quarter for Gränges, and with the volume reduction on top, this means that we are running at the capacity utilization below 75% in the group. Given that a large part of our cost base is fixed or semi-fixed, this reduced the operational leverage in the quarter. That said, additional cost reduction measures and capacity adjustments helped to bring down the cost base in the quarter, if not one-to-one with the reduction in sales volume. We are continuing to focus on controlling the costs going forward. As you heard from Johan, we have now completed the expansion project in Huntingdon in the U.S. Net startup costs for the U.S. expansion projects amounted to SEK 12 million in the fourth quarter, and the U.S. projects are expected to contribute positively to earnings as of the first quarter 2020 and onwards.
Net changes in foreign exchange rates was SEK +20 million in the quarter. Looking at the profit margin, the adjusted operating profit per ton declined from SEK 2.2 thousand to SEK 1.9 thousand in the quarter. Items affecting comparability amounted to, in total, SEK 30 million in the quarter. Of this, SEK 16 million are costs related to the acquisition of Aluminium Konin, and SEK 14 million relates to the manning reduction in our European operations that we highlighted in our Quarter 3 report. Including the items affecting comparability, the operating profit amounted to SEK 115 million in the fourth quarter. The profit for the period of SEK 47 million corresponds to earnings per share of SEK 0.63. The reason for the lower profit compared with last year, in addition to the reduced volume, is primarily related to a tax provision release for China high-tech tax in Q4 2018.
In 2019, we did the corresponding release in Q3, and this distorts the year-over-year comparison in the quarter. Worth to mention is also that the income tax in the quarter includes a one-time tax on dividend from the Chinese subsidiary of SEK 17 million. With the high-tech tax in China in place, we expect the effective tax rate for the group to be around 19% in 2020. By the end of December, the return on capital employed was 11.7%. During the fourth quarter, the net debt was reduced by SEK 141 million to SEK 3.5 billion, or 2.6x adjusted EBITDA on a rolling 12-month basis. We continued 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 191 million. This corresponds to an adjusted operating profit to cash conversion of 132%.
We also continued to invest in total SEK 123 million in our expansion programs. Of this, SEK 91 million are related to the U.S. and SEK 32 million to Sweden. With the expansion investment in Huntingdon now completed, the positive EBITDA generation from this is expected to contribute to bringing the leverage ratio back down towards the target range of between 1x-2x adjusted EBITDA. Finally, I would just like to highlight that Gränges has always been a business with a strong underlying cash generation, and 2019 is no exception from this. If we look at the cash flow before financing activities and exclude acquisitions and CapEx for expansion investments, this amounts to SEK 1.05 billion for 2019, implying an operating profit to cash conversion of 121%.
This also means that we have been able to finance almost all of the SEK 1.1 billion expansion investments in 2019 with cash generated from the business. That's something that clearly illustrates the cash generation potential of the Gränges business, especially in a less investment heavy phase. With that, I will hand over back to Johan that will provide an outlook for the fourth quarter.
Thank you, Oskar. Looking into the first quarter of 2020, we expect that the challenging market conditions will continue for the automotive business. In terms of year-over-year sales volume development, we expect to see low single-digit decline compared with first quarter last year. For automotive materials, we foresee a low double-digit sales volume decline globally. For Europe and Americas, we expect low double-digit decline as the light vehicle production is expected to remain weak and customers destocking is likely to continue. In Asia, we expect a mid to high single-digit decline compared with last year, which is slightly better than the underlying light vehicle production in the region. The recent outbreak of the coronavirus in China poses a downside risk to this outlook.
First, it will most likely impact our automotive sales negatively in the first quarter, and second, it will limit our production output due to short-term governmental restrictions and extended holidays around the Chinese Spring Festival. For HVAC and other parts of our business in Americas, we forecast a mid to high single-digit increase in the first quarter. The new capacity in Huntingdon will gradually be ramped up, and we have contracts in place for increased deliveries as of January. The destocking we experienced in the fourth quarter is not expected to continue in the first quarter. Oskar showed earlier that HVAC and other business has a slightly lower profitability than the automotive business. As a consequence, the change in end market mix between automotive and the HVAC and other business is expected to have a negative impact on the profitability in the first quarter.
When looking further ahead, we will continue to work actively with innovation, efficiency improvements, as well as more sustainable customer offerings, which includes an increased focus on product development for electrical vehicles. With a strong commitment to constantly improve and develop Gränges, we are well positioned to continue to deliver sustainable and profitable growth. To conclude the 2019 fourth quarter report, in the quarter, we have taken important steps in strengthening our platform for future growth. We have announced the acquisition of Aluminium Konin and completed the expansion of the Huntingdon facility in the U.S. We continued to see soft market conditions in the fourth quarter, resulting in an 11% decline in sales volume compared with last year. The adjusted operating profit was reduced to SEK 144 million, but the cash generation remained strong with an adjusted cash flow before financing of SEK 191 million.
Finally, our board of directors propose a dividend of SEK 3.40 per share, which represent an increase of 6% over last year when we paid SEK 3.20 per share in dividend. 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.
Ladies and gentlemen, if you have a question, please press zero and one on your telephone keypad and you'll enter a queue. I remind you that if you want to ask a question, you will have to press zero and one on your telephone keypad. The first question comes from the line of Karl Bokvist, ABG. Your line is now open. Please go ahead.
Yes. Hi, thank you, and good morning to you, Johan and Oskar. First of all, you mentioned ramp-up percent, where, as you say now, was at approximately 60%. I was just wondering, would it be possible to receive some more insight into how you think the actual volumes might fall into the quarters of Q1 and Q2, if we assume, as you say, 75% ramp-up by the end of the first half?
Good morning, Karl. It's Oskar here. It's a good question there. If we start just by saying, okay, so what have we indicated that we think is possible in terms of the ramp-up of the actual production capacity? There, we have said that we aim to have the 75% of that capacity available by the end of second quarter, as you state there. Johan also mentioned earlier now that we are progressing very well on that track, and we already now in January run at some 60% of full capacity. I think that's a very positive sign.
In terms of how we can fill this with volume, we have indicated that for the full year, we expect the volume to increase with slightly more than 10%, for the first quarter, we are a little bit more cautious because we have, of course, less of the capacity available due to the ramp-up. There, we are indicating mid to high single-digit growth for the capacity. We don't expect to reach the +10% in Q1. Of course, as we release more capacity along the year, we expect to see a larger increase year-over-year in the second quarter than what we expect and indicate for the first quarter. I don't know if that's helping you a bit, maybe.
Yeah. Understood. Just another follow-up there. The volumes that you are now adding, are these the clear majority HVAC products, or what's the sort of product mix within the volumes that you're adding now?
It's a mix of products. It's relatively similar to the product mix that we already have in the Huntingdon facility, which means a large part of this is HVAC, and part of it is also the other products that we have in the U.S. For instance, specialty packaging, but we are also introducing a larger share of automotive products in the Huntingdon facility as we, with the expansion now, have more capabilities to produce automotive products available there.
Concluding a little bit on that, it means also that the contracts now for the new volume that we have entered, and I expect that might be that's what you're after here, they are taken with a little higher average price than the existing business in Huntingdon, partly due to product complexity and partly due to the fact that they have been renegotiated at a point in time where the general market price was slightly higher than the average old volume in the plant, so to speak.
Understood. A follow-up here. If we then think about as you guide in the first quarter, perhaps slight negative volumes and also that you expect mix to be negative. As we go into Q2 and Q3 and Q4, of course, now if we exclude Konin, what's your view here in terms of just the incremental volumes that you are gaining balanced by the mix impact and so on?
Of course, we are very confident and happy when it comes to the HVAC business. We think that's developing very well, we can see right now. I think the big question mark in this equation is what the demand will look like on the automotive side going forward. I think that's a question that many ask themselves at this point. That's the uncertainty. The HVAC part of the business, I think, is looking very strong at this point.
Understood. I think you mentioned in your annual report that TRILLIUM grew 30% in 2018. How much did it grow in 2019? Would it be possible to get some insight into how much TRILLIUM accounts for volumes today?
Good question, Johan here, is we see a similar development for 2019 as we did for 2018. What we have said, we see a clearly wish from the customer level to have really a low level of flux remaining in the system going forward, especially for electrical vehicles, where, of course, the TRILLIUM product comes in very well. I think it's difficult to give a more accurate indication for the near term. In the long term, we see absolutely that the TRILLIUM product could be up to 20%-30% of the total volume. It's still early days in this discussion with the customers. There's a positive trend.
Okay, final question from me here. If we go to the Konin acquisition, is there anything you could say in terms of when during Q2 you expect to receive the announcement in terms of earlier or later? A follow-up, if you could just perhaps once more just remind us what sort of synergy potential you are seeing?
Sure, Johan here. No, I think, first of all, we're standing confident still that the quarter two will be the period when we can finalize this acquisition. Of course, as you know, it has to pass competition authorities. Still during quarter two. There are several synergies as well that we see for the Konin acquisition. One is, of course, the general sourcing area where we as a larger player can have a more beneficial sourcing program. We also see that we can basically reuse more scrap in this facility and also install what we call a closed loop with the customers. On the sales and marketing side, we see a clear leverage on Gränges Finspång's capabilities on product development and R&I to further develop the business.
The fourth area is really on the operational side where we have a very good framework and methodology to work with the production efficiency. We clearly see that we can have an impact here on the Konin. Basically, there are four main areas for the synergies. I also want just to emphasize that the Konin business in itself is very healthy, it has been so for many years, and it still is, of course, and have very good customer base to grow on.
Okay. Sorry, just one more question I thought of here. I think there's been talks that Johnson Matthey is a company that is expecting to open a battery component factory in Konin as well. I was just wondering, let's say that you establish a customer relationship with them, what sort of products would you potentially be able to deliver to a battery manufacturer such as them?
Yeah, very good question. No, you're right. They are opening there, and there are also other battery producers that already have announced or are still in the area. Of course, being in the western part of Poland is really the right place to be in order to be close to the battery producer. If we look upon our potential here, you can divide them into three areas. For flat roll products, it's actually roughly around a market of 800,000 tons for flat roll products for battery, divided into three main parts. One is the battery cooling plate, which is basically the product that will make sure that the battery is in a good temperature. The second area is actually cathode foil for both prismatic and pouch cell. The third area is the structure part for the battery, where you have casing, et cetera.
It's roughly 1/3 each of these for the potential market. The two last ones, the foil and the structure part of the batteries, are totally new areas for Gränges, where we can basically from the Konin asset deliver to this also new customer for Gränges. That's very, of course, interesting for Gränges.
Okay. That's all for me. Thank you very much.
Thank you. The next question comes from the line of Julien Rault. Your line is now open. Please go ahead.
Hello, gentlemen. Two quick questions. The first one is regarding Konin numbers. I'm honestly surprised by the severity of the volume reduction in Q4 in your business, in the automotive. Can you share some details about Konin performance, were they affected to the same extent or to another one?
Hi, Julien, it's Oskar here. We totally acknowledge, of course, that the demand in the automotive sector has been very weak for the fourth quarter. At this point, we are not in a position to disclose the Konin numbers. I think that that's what you're asking for.
Yep.
What we can say, of course, is Konin less or more affected? Well, Konin has a lower share of sales to the automotive part of the market than what Gränges has today. If you just take that into account, it would be fair to assume that Konin would see a less impact of the turmoil in the automotive industry at this point.
Okay. Regarding China, could you share a little bit what is happening on the ground? It seems like some plants are not restarting following New Year celebration.
Yes.
Is that the case for you? Yeah.
Yes, absolutely. Yes, you are here.
How late are you compared to normal schedule today? Is it a couple of weeks?
First of all, we have good control of our employees. We have also implemented travel ban onto China and into China. Of course, all companies in the Shanghai and many other provinces has been requested to stop all production. As far as we know today, basically, 50% of all the production of light vehicle is stopped for one week until the 10th of February. That's the situation. Of course, that means that, of course, in the short term, the sales to these customers will be impacted. Of course, the good thing for Gränges in a way is also for the business that we are exporting from China. We can produce these products for the India market, Thailand market, Mexico from Sweden, for instance, or from U.S. I think we are quite well-positioned to address the global consequences of this.
For the Chinese market, there's not really an impact because the Chinese customer also has been requested to stop all production.
Yeah. You say 50% of auto production is what?
What we know today.
To restart.
basically 50% of the provinces there, including 50% of the production in China, has been requested to have a longer holiday.
Okay. Very clear. Thank you very much.
Thank you. There are currently no further questions. As a reminder, if you want to ask a question, you will have to press zero and one on your telephone keypad. The next question comes from the line of Kenneth Toll. Your line is now open. Please go ahead.
Yeah, thank you. Just a small detail. You said that in the Huntingdon facility, you expected a 10% growth in volumes in 2020. I was curious about the Newport volumes. What you expect in terms of sales volume there this year, please?
Hi, Kenneth. That was a very fair question. I think I was a little bit unclear when I made that reference. When we say the plus 10% expectation for the full year, that is actually relating to all the HVAC and other business, including the Newport plant. The Newport is included in that figure. The commercial volumes out of the Newport plant is expected to come in Q2 and onwards because we are currently in the middle of running the customer product validations there.
When we say 10+ %, that's for the whole HVAC and other business as we report that in our reports.
There will be an opportunity to grow even further than in 2021, both in Huntingdon and in Newport. Have you sold those volumes yet, or?
The answer to the first question is yes, there is an opportunity to continue to grow in 2021, absolutely. We have sold part of this. We have written long-term contracts with several customers, where we have increased the volumes year by year in those contracts to gradually get a larger share of that customer's wallet. Yes, to the second question as well there, part of the additional volume increase is already contracted in multi-year contracts.
Mm-hmm. Okay, great. Thank you.
Thank you.