Welcome to Gränges conference call for the fourth quarter of 2018. 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 important events. It's time for Oskar to guide you through the financial results. We will conclude the presentation with a short summary and a Q&A session. Looking now into the fourth quarter of 2018 highlights. First, I would like to say that I'm pleased that our growth continue despite the softening market conditions we have started to see in the fourth quarter. In total, our sales volume reached 87,000 tons in the quarter and increased by a little bit more than 1% compared with last year.
The main growth driver in the quarter was the HVAC and other business in Americas that increased by close to 3% despite limitations of available production capacity. Our automotive business remained stable compared with last year. This is a better performance than the underlying market as IHS estimates the light vehicle production to have declined by more than 3% in the fourth quarter. Adjusted operating profit rose to SEK 191 million, up from SEK 179 million last year. Higher prices in Americas is an important driver of the earning increase. Offsetting this, we carried some additional cost in the quarter related to the production disturbances in Finspång in the third quarter, and cost related to the ongoing expansion projects in the U.S. Profit for the period was SEK 149 million, and earnings per share SEK 1.97 in the quarter.
Cash flow before financing activities came in strong at SEK 133 million, despite heavy CapEx investment of SEK 316 million. We ended the quarter with a net debt of SEK 2.5 billion, corresponding to 1.8 times EBITDA on a rolling 12-month basis. Our board of directors proposes a dividend of SEK 3.2 per share, which represent an increase of 7% over last year when we paid SEK 3 per share in dividend. Finally, I'm also pleased to mention that Gränges is now a member of ASI, the Aluminium Stewardship Initiative. ASI is a global nonprofit organization which has the ambition to maximize the sustainability performance for the aluminium industry. For Gränges, sustainability is an integrated part of our business model, and we fully support ASI's commitment to promote greater sustainability and transparency in the aluminium value chain.
It is my strong belief that going forward, good sustainability performance will be a prerequisite to maintain our value and relevance to our customers. During fourth quarter, we experienced a softening of the market conditions for the automotive part of our business. We look at some market statistic, the research from IHS has made a quite substantial revision of the estimate since we presented our outlook for quarter four in October. At that time, IHS estimate was a growth of 2% globally for the fourth quarter, and that figure has now been revised to more than 3% decline. Based on the signals that we are picking up in the market, I wouldn't be surprised if the actual outcome in quarter four is even lower than that.
If we look at the regions, we can see that the production of light vehicle was down 4% in Asia in the fourth quarter. Of this, China was down more than 11% compared with last year. We have not yet experienced this level of reduction in our customers' orders, what we have seen is that inventory is starting to build up in the supply chain. This is likely to have a negative impact on the demand levels going into the first quarter of 2019. With what we see right now, the flat demand development that IHS forecast for Asia in quarter one 2019 seems a bit too optimistic. In Europe, light vehicle production is estimated to be down 4% on last year in the fourth quarter, whereas 2% growth is estimated for Americas.
This pattern is expected to continue into first quarter of 2019 and is relatively consistent with how we are experiencing current market condition as well. For the full year 2019, IHS forecast a growth of about 1% on the global level. Touching briefly on the market for HVAC product, the HVAC unit built in the U.S. is expected to have an increase by about 8% in the fourth quarter. Looking into the coming quarters, we expect to see that HVAC build rates continue to grow. Here we need to remember that we are currently capacity constrained in Americas, and we will not be able to take part of this growth until our new production capacity becomes available in the second half of 2019. If we then look into Gränges sales volume development during the fourth quarter, we can see that the sales volume in Asia decreased by 3%.
The reduction is to a large extent driven by lower sales to the automotive industry in China, where sales to industrial applications like wind power industry continue to increase. In Europe, sales volume remained stable in the fourth quarter. Sales of heat exchange material was about 1% down, while sales of industrial product increased slightly in the quarter. In the Americas, sales volume was about 3% higher than last year, driven by strong demand for both automotive and HVAC products in the fourth quarter. I'm especially pleased with the close to 3% growth that we see on the HVAC and other side, since we are running close to maximum capacity levels in our U.S. plants, it means that we have successfully executed on productivity improvements in order to deliver this growth. I also want to give a short update on our expansion projects in the U.S.
The expansion in Huntington is on track for startup in third quarter this year. It will be the cautious ramp-up of volumes during second half of 2019. From 2020, we will see full effect from this new 40,000 tons capacity. We have now actively started to sell this new volume. In Newport, we are reopening the idle facility to re-enter the market for light gauge foil for various consumer applications, which is very exciting. So far, the response from the customer have been very positive. We've already restarted the mills in current conditions and are right now running tests with very good results. The mills will be upgraded in the first half of this year, and the plan is to gradually start shipping products after the summer. We are already shipping test orders to customers for validation purposes.
In terms of financial impact, we expect startup costs for the two projects of about SEK 15 million per quarter in quarter one and in quarter two this year. As we move into commercial production in the second half of the year, we expect that the profits in quarter three and quarter four will compensate for the startup cost in the first half of the year. For the full year, we expect both projects to contribute positively to the operating profit. In general, I'm very satisfied with how these projects are being managed by our Americas team. When summarizing the whole of 2018, I'm pleased to see that we have delivered on our financial targets for the fourth year in a row.
Even though we report a modest volume growth of only 0.5% for the full year, this is higher than benchmark figure for light vehicle production that showed a slight decline in 2018. The return on capital employed was 16.5%, which is on the same level as for 2017. During the year, we have increased our profits, but we have also increased our assets, primarily through expansion investments in Americas. We ended the year with a net debt of SEK 2.5 billion, which correspond to 1.8 times EBITDA, well within our target range of one to two times EBITDA. Our board of directors proposes a dividend of SEK 3.2 per share, which is an increase of 7% from last year. Given that the annual general meeting approved a proposal in May, it means that 35% of the net profit will be returned to our shareholders.
Now I hand over to Oskar for the financials.
Thank you, Johan. During the fourth quarter, our sales volume and operating profit continued to increase, but at a somewhat slower pace than what we saw in the first half of the year. Nevertheless, if we look at the full year 2018, it's the best year so far for Gränges, with a total sales volume of 375,000 tons and an adjusted operating profit of SEK 1,005 million. Also in relative terms, the operating profit continued to increase to SEK 2.7 thousand per ton from SEK 2.5 thousand per ton in 2017. As you can see on the right-hand side chart, the profit per ton improved for both the automotive and the HVAC business in 2018.
If we look at the fourth quarter financials and compare with the same quarter last year, we can see that the sales volume increased by 1.1% to 87,400 tons, whereas the net sales increased by 12.5% to SEK 3.1 billion. The higher increase in net sales than in sales volume is driven by a slightly higher average conversion price in combination with the net impact from foreign exchange rates that was positive SEK 216 million compared with the fourth quarter 2017. Looking at the earnings, the adjusted operating profit amounted to SEK 191 million in Q4, an increase of close to 7% on prior year. The key driver behind this increase is the slightly higher average conversion price in combination with changes in foreign exchange rates that had a net impact of positive SEK 32 million compared to Q4 2017.
During the second quarter 2018, Gränges completed a transfer of production of volumes that are exposed to U.S. anti-dumping duties from Shanghai to Finspång. Consequently, no additional costs have been taken for anti-dumping duties in the second half of the year. During the fourth quarter, the U.S. announced that the anti-dumping duties on aluminium sheet would not be implemented retroactively, as earlier indicated. For Gränges, this resulted in a positive effect from a released provision of SEK 13 million in the quarter. This was partly offset by costs for Section 232 tariffs on imports to the U.S. from Sweden of SEK 3 million in the quarter. Consequently, the net impact of the additional U.S. duties was positive SEK 10 million in the fourth quarter. As some of you might remember, we experienced temporary production disturbances in our Finspång plant in the third quarter.
Although this was addressed already in Q3, we carried an additional cost of SEK 13 million in the fourth quarter, primarily related to additional manning in production and costs for express transportations to meet delivery commitments. No further costs for this is expected going forward. As you just heard from Johan, we are getting closer to start of production for the expansion projects in the U.S. The Newport plant is partly up and running with test orders and customer validations. As a consequence of this, we took additional costs of SEK 12 million in the fourth quarter.
As Johan also mentioned earlier, we foresee that these startup costs will increase to about SEK 15 million per quarter for Q1 and Q2 this year before we start to scale up the commercial production in Q3. In 2018, we rebalanced the timing of vacation expenses in Americas to get a more even distribution over the year. Although this is neutral from a full year perspective, it has a negative impact of about SEK 5 million in Q4 when comparing year-over-year. The adjusted operating profit per ton reached SEK 2,200 in Q4, which is SEK 100 higher compared to 2017. There are no items affecting comparability in the fourth quarter, and the reported operating profit is therefore the same as the adjusted operating profit in the quarter. The profit for the period reached SEK 149 million and corresponds to earnings per share of SEK 1.97.
Cash flow before financing increased to SEK 133 million in the quarter. By the end of December, the return on capital employed reached 16.5% on a rolling 12-month basis. Gränges has always been a business with a strong underlying cash generation, and 2018 is no exception from this. If we look at the cash flow before financing activities, we exclude the CapEx for expansion investments of SEK 470 million, this cash flow amounts to SEK 1 billion for 2018, implying an operating profit to cash conversion of 100%. If we also take into consideration that the U.S. sanctions against our supplier, Rusal, has led to an increase in working capital of SEK 165 million in 2018, we exclude also this effect, the underlying cash conversion is 116% for 2018. That's something that clearly illustrates the cash generation potential of the Gränges business.
The strong cash flow contributed to the reduction of the net debt in the fourth quarter. In Q4, the net debt decreased by SEK 71 million to SEK 2.5 billion. This corresponds to 1.8 times adjusted EBITDA on a rolling 12-month basis and remains within our long-term target range of one to two times. Looking at the cash flow before financing in the fourth quarter, we can see that the earnings contributed with SEK 283 million. A release of working capital, primarily driven by the seasonal slowdown, contributed with a further SEK 220 million in the quarter. Other operating items refers to taxes paid of SEK 54 million. Investments in fixed assets amounted to SEK 316 million in the fourth quarter. Of this, SEK 182 million is the CapEx related to the expansion of Huntington and the restart of the Newport facility in the U.S.
As we have discussed throughout 2018, new U.S. trade legislation, both in terms of tariffs as well as sanctions against the aluminum company, Rusal, has had a large impact on the aluminum market, this is something that is impacting Gränges as well, both in positive and in negative ways. First, the U.S. Department of Commerce has introduced countervailing and anti-dumping duties on aluminum foil and sheet from China with a combined duty rate of up to 200%. To avoid being exposed to the anti-dumping duties, Gränges has transferred the production of all volumes imported to the U.S. from China to Sweden during the first half of 2018. Following the release of provision in Q4 that I talked about earlier, the total cost for anti-dumping duties for Gränges ended at SEK 3 million in 2018, we do not expect to pay more of this going forward.
On the positive side, the anti-dumping duties has led to rapidly increasing market prices in the U.S., this is having a benefit for our domestic U.S. business. The general Section 232 tariff of 10% is affecting Gränges supply chain from Sweden to U.S. These additional tariffs are, to a large extent, being carried by customers, which is reducing the Gränges impact to about SEK 15 million on an annual basis going forward, given the current customer agreement and FX rates. We do, however, believe that the majority of our products should qualify for exemptions from the 232 tariffs, we have filed for this with support from our customers. We originally expected to receive the answer from the Department of Commerce during Q4, due to the U.S. government shutdown, we are still waiting for this.
As for the sanctions against Rusal that prohibited U.S. persons and limited non-U.S. persons to transact with Rusal, they were finally lifted on January 27th. For Gränges, this means that we can continue to buy aluminium slabs from the Rusal smelter in Sundsvall in Sweden, and we do not expect to see any additional costs for having to resource this material elsewhere. In addition, we expect that Rusal will now reenter into our supply chain financing program and restore the consignment stock at our Finspång site. This will have a positive impact on our working capital and cash flow in the first half of this year. I will now hand over back to Johan Menckel that will provide a summary of the fourth quarter and provide an outlook for the first quarter.
Thank you, Oskar. As I talked about earlier, we have experienced a softening in the market in the fourth quarter, we expect that this will continue into this year. For the first quarter of 2019, we expect Gränges overall sales volume to decrease with low single digits compared with the first quarter last year. For automotive materials, we foresee a mid-single digit sales volume decrease on a global level. In Asia, we expect a close to double-digit reduction driven by destocking in the supply chain. For Europe, we foresee a mid-single-digit decline, and for Americas, we expect a low single-digit growth. For the HVAC and other part of our business in Americas, we expect a low single-digit growth in the first quarter. When looking further into 2019, we will continue to focus on our growth initiatives.
During second half of next year, we will see new volumes coming in as a result of the expansion project in the U.S., as we talked about earlier. We are taking an active part in developing solutions for electrical vehicles, we're also optimistic about our potential to improve our operations in Europe and in Asia. To conclude, the 2018 fourth quarter and a year-end report, Gränges had another good quarter with a sales volume increase of a little bit more than 1%. The adjusted operating profit increased by close to 7% to 191 million SEK. When summarizing the full year 2018, we can look back on a new record year, both in terms of sales volume, operating profit, and cash flow. We have also continued to deliver on our financial targets.
Our board of directors are proposing a dividend of 3.2 SEK per share, an increase of 7% from previous year, and in line with our dividend policy to distribute 30%-50% of net profit back to our shareholders. Our growth projects in Americas are proceeding according to plan, we'll have a new capacity available in the second half of this year. Although the market conditions are expected to remain soft in the beginning of 2019, we continue to be positive about the medium-term outlook and are determined to continue grow and strengthen our presence and positions globally. Now we open up for questions.
Thank you, ladies and gentlemen. If you wish to ask a question, please press 01 on your telephone keypad, and you will enter a queue. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There'll be a brief pause while questions are being registered. Okay, our first question comes from the line of Kenneth Toll from Carnegie. Please go ahead. Your line is now open.
Yes. You write in the report that you have a good success in the materials you sell for electric vehicles, and that is a good driver for your order intake. Could you give some more information on the order intake for such products? Is it several orders? What kind of volumes are we talking? Is it from one customer, or is it several customers? Is it only orders for Europe or also for the U.S. or China? Please elaborate a bit.
Yes. Kenneth, Johan here. What we are seeing and are doing actively now is to be very engaged in the quotations for primarily battery cooling systems. That's basically for the battery cooling system in itself, but it's also chillers for battery cooling. There's not really a large sales to this, but we are already into some models, and we see especially very positive response from the market, specifically for the Trillium material for specific heat exchanger. We cannot really right now give a figure on the volume here, but I think it's early days here on the EV and EV sales.
Okay. Can you say, is it only from one OEM or are there several OEMs, or is it only Europe or also Asia and North America?
Okay. No, of course. We are basically working with all our customers and all OEMs, we're also working with in some part new customers in terms of battery producer. There are several customer interactions in this area. We are also already today delivering some applications for battery cooling to several customers. Still in small volumes, though.
Okay. It is a global product, more or less?
Yes. These are all global products. There are quotations for global platform for battery cooling.
Okay. When do you expect that volumes could be a significant or a contributor that we could see in terms of volumes and profitability?
It will take at least a year or something like that, because what we are quoting now is for platform coming up in 2020, 2021, or in that time horizon.
Okay. Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Johannes Grunselius from Handelsbanken. Please go ahead. Your line is now open.
Yes. Hello, everyone. A couple of questions. On the U.S. expansion, you are very specific here on telling us that it will be a cost here of SEK 50 million per quarter, Q1, Q2. You're also saying that it will be a positive net contribution here on the operating profit for the full year. Can you say anything about how we should interpret Q3 and Q4 in terms of incremental EBIT?
Yeah. Johannes, Oskar here.
It means minimum SEK 30 million, obviously. Could you give some more color on that one, please?
Yeah. It's a fair question, and partly you already answered it. It certainly means at least SEK 30 million. We hope for a little bit more than that. What we're saying is that what we expect is that this should be positive for the full year, which means slightly more than SEK 30 million in the second half of the year. What we will start to do is we will gradually ramp up
production volumes during Q3 and Q4, which means that you will expect a more positive profit from this project in Q4 than in Q3.
Okay. I'm looking into page 8 in your presentation, and thanks for providing much more clarity or indicating the profitability or EBIT per what's auto-related and what's not auto-related. That's fantastic. My question is, what kind of operating rates are you running at in Finspång and in Asia at the moment? Because we can see in the slide that your EBIT per ton contribution increases here. But as I understand the situation, you're running not at full speed in your low volumes in Asia. How sort of sensitive is the EBIT per ton to volumes?
No, I think a very good question, Johannes. If we start with the capacity utilization, what we said also in Q3 is that the Finspång plant in Sweden is basically running now very close to maximum capacity utilization since we had to transfer the part of the U.S. business that was produced in China to Sweden. Consequently, the opposite is true as well, that we now have available capacity in our Chinese plant. Our Chinese plant is currently, excuse me, currently operating at around 80% of capacity utilization. We certainly have room to fill that with other products going forward.
Then in terms of volume sensitivity in general, what we say and the guidance we have provided on that is that if you look at the cost base we have, obviously the cost of material is something that we can view as close to 100% variable with volume, of course. If you then look at the payroll and other operating expense, that can be considered to be between 50% and 60% variable, which is sort of giving an indication on the volume sensitivities of this business.
Okay. Yep. Thanks. My final question is on pricing in the U.S. Maybe you can elaborate a little bit on it, but I remember you were saying you were raising prices in the beginning of 2018 with, let's say, 7% or so for half of the U.S. volume. The intention is to raise prices for another 50% of the U.S. volumes with about the same for 2019. What's the status there? Have you achieved the 7% price hike is the first question, are you looking at sort of the same ambition for 2019 as before?
Yes, that's still valid. There are price increases around 7% to 10% for the 50% for 2019. We also see a very strong, basically, commitment to the new capacity, we have locked in main part for 2019, almost everything, and also majority of the capacity for 2020, 2021. This is still valid, the comments we made, yeah.
Yeah. Okay, good to know. Will that then imply that there will be a sort of a step-up in earnings in Q1 versus Q4 because of new contracts kicking in?
Yes, you would see that to some extent in Q1 this year. We do see a price increase for our Americas business, we need to remember here that a part of this contract or a large part of this contract are also valid from the second quarter, which means that you will see the price increases gradually coming in during the first half of this year for the Americas business.
Okay. Thank you very much for answering the questions. Thank you.
Thank you. Our next question comes from the line of Max Frydén from Danske Bank. Please go ahead. Your line is now open.
Thank you so much. Just a follow-up question on the price increases. In 2018, you had a similar profile in price increases for half of your volume. Can we just assume that the comment on the gradual price increase that you made for 2019 is the similar pattern as you had in 2018?
Yes, I would say that that's a fair assumption, Max.
Thank you. Another one on price. In Huntington, again, very good with the page eight there in the presentation, if you look at the additional volumes, the 40,000 tons, should we assume that that will be at a similar profitability level as you're running at now?
Also a very good question. Coming back to a little bit what Johan touched upon earlier, we are selling this new capacity now, we have been very successful in doing so. We have worked very actively with the mix because we want to fill this plant now with a favorable mix or as favorable as we can. That also means that we foresee to have a little bit higher price level on this new volume than what we have on sort of average for the Americas business. The second thing, of course, is that what we are doing here is that we are adding capacity to an existing plant with existing overhead structures and so forth already in place, which means that from a profit perspective, we are not adding so much additional fixed cost here.
I would say that we expect the profitability from the new volumes here to be higher than what you can see on average there on page eight.
Thank you. On the Newport facility, I think you mentioned this many times, but just to repeat or clarify, the profits there for the thing Gränges Americas is well above group average, or was it more in line group average, or could you help us guide in any way you want?
Absolutely. No, but sorry. It's a fair question again. This is, of course, a niche market, and there are not very many suppliers of these products in the U.S., only two, including us, which means that we are competing here with quite expensive imports. That means that the price level in this market is very attractive. From a profitability perspective, what we have said here is that we certainly expect this to be higher profitability than the average U.S. business and also higher profitability than the HVAC business and the other business that we are running in Huntington.
Okay. Is that above group?
It's above the average of the group, yes.
Okay. Finally, I can probably do the math, but might be easier just asking. The Rusal effect from the working capital release, could you give an estimate of how much you expect that could contribute to cash in the first half?
Yeah. What I can start with saying, I can start with commenting on the negative effects we have experienced in 2018.
Yeah.
That's in total SEK 165 million. The majority of that is due to that Rusal were forced to exit our supply chain financing program. It is the consignment stock in Finspång that they had to take away. In addition, we built some safety stock also of Rusal slabs in order to manage a situation or transition to a potential new supplier. We don't know for sure. The safety stock part, that we can control ourselves. Whether or not Rusal will restore the consignment stock or enter into our supply chain financing platform, it is not entirely up to us. It's other parties involved there as well, but we certainly expect that they would do so. Provided that they do during Q1, we will start to release this working capital gradually during Q1 and Q2.
It basically takes three months to restore the effect on the supply chain financing side. Depending on when this starts, it will take three months, and we expect this to have a positive impact during the first half of this year, but not necessarily the full impact in the first quarter.
Okay. Thank you, Oskar.
Thank you. Our next question comes from the line of Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yeah. Hi, thank you. Just a couple of questions. First, regarding the outlook there, you mentioned you expect a low single-digit decline then, and somewhat more in the automotive part. I guess you also mentioned the inventory build-up in China. When you indicate a mid-single digit reduction in automotive, that includes the de-stocking part then, and you expect to be able to deliver a decline mid-single digit volumes?
Yeah, the mid-single digit decline includes the inventory reduction part as mentioned in the report. Of course, this goes for especially Asia then, as mentioned in the report, where we see, and of course in Americas, we have a slightly positive view on the demand for automotive.
Great. In Finspång, you're ramping up production, I guess. Could you give some more flavor regarding that project?
Yes. We have decided to increase the capacity by 20,000 tons, but also to improve the operation efficiency substantially in the Finspång operation. That project will basically start to cost by the second half of 2019. During the first half of this year, it's more in the planning phase. I think it's also important to emphasize that this is a capacity and an efficiency improvement project for the Finspång operation, which will, of course, have a positive view on the cost position for Finspång going forward.
Great. Finally, just coming back to Kenneth's questions about the EVs there. In China, for instance, do you see other competitors trying to enter this market, or is this about the same?
I think it's relatively the same competitors that we are meeting as for our more combustion engine related business in China. I think all in all, the demand for rolled aluminium will be higher on an EV car compared to a combustion engine. That I think is a clear conclusion from the market. As I said also, we are very active in many quotations and in working hard with the customer in their improving or helping them in their design solutions. It's still quite early days, but the quotations that we are working on are really for a global platform for the large OEMs like BMW and Volkswagen and the others.
Yeah. The quality demands are the same in an electric vehicle. There's not the ability for new competitors.
Yeah. No, actually, there are some additional challenges for battery cooling. One specific area is what we call the flux residue. When our customer produce heat exchange, they're adding salt, and especially the battery cooling is more sensitive to this salt for the performance of the battery. There, of course, we have the product that already is in a commercial use, Trillium product, which is very suitable for this, where you will have a very low, so to say, flux residue still on the heat exchanger. It's also a benefit for the customer because they don't need to wash basically the cooling plates in their production. In some ways, there are more demanding products than other heat exchanger.
Okay, great. Thanks a lot.
Thank you. Our next question comes from the line of Kenneth Toll from Carnegie. Please go ahead. Your line is now open.
Yeah, thank you. Two questions. You talked about the opportunity to reduce working capital now when the sanctions on Rusal is gone in the first half. Also in the second half, you are starting up production in the U.S. I was wondering, that should build some working capital when those volumes are coming up. Should we expect normal sort of working capital build as share of sales for the new capacity in the U.S.? Are there higher depreciations hurting the P&L in the second half as a result of the U.S. capacity increase?
Fair questions. Kenneth, yes, of course we will build a working capital when we start. In terms of what to expect there, I would say that the type of business that we are running in the U.S. is running a little bit lower on the working capital than the group average. In the startup phase, I think it's fair to assume that you would add working capital for this at group average level. Over time, we should be able to reduce it a little bit to the more slightly lower than group average level. In terms of depreciation, yes, we do foresee that depreciation will increase following the expansions in the U.S.
What we foresee now is that depreciation in 2020, when this will be fully up and finished, will be about SEK 40 million-SEK 50 million higher than the current depreciation level. That will of course start to come in as we start to depreciate this in the second half of this year.
Also in the presentation, you talk about that in Asia and Europe, that your sales to non-automotive customers are developing well to other industrial applications. How large a share approximately do you sell to non-automotive customers in Europe and Asia, roughly?
Today, of course, the majority in both Asia and Europe are to the automotive industry. I would say it depends. Europe, a little bit less to industrial applications, between 5%-10%, and in Asia, it's around 10% that goes to industrial applications.
Okay. Thank you.
Thank you. Our next question comes from the line of Karl Bokvist from ABG Sundal Collier. Please go ahead. Your line is now open.
Thank you. Good morning. My question concerns as other people have been talking about as well, price mix. If we simply look at aluminum prices, both in USD terms and SEK terms, year-on-year effect should be negative. I was just curious to see on a group level what you expect from pricing contribution into 2019.
Hello, Karl. Yeah, just to make sure I understand, you're thinking about the raw material prices here or our conversion price on top of raw material price?
Well, I think that's a fair question. I'm curious about both components.
Yeah
Of course.
Okay. If we start with the raw material price or the aluminum price, we are typically not commenting so much on what we expect there on the commodity price development because it's very difficult for us to really have a view on that. That said, that is also not the key part of the pricing for Gränges, since for us, the raw material or the aluminum price is a pass-through. We pay something to our suppliers for the raw material, and we pass that on to our customers. That part is expected to have a neutral impact in 2019, irrespective of how the aluminum price develops. If we take the second part of the pricing, which is the conversion price, or what we add on top of the commodity when we sell to our customers.
We talked about earlier here that we expect to see a price increase in Americas, that I think is pretty well-described already. We also expect to see a slightly positive price mix effect in Europe, although much lower positive impact than in Americas. In Asia, we foresee that the development that we have seen now over the last couple of years with gradually declining market prices, although from high levels, we should say, that that is continuing into 2019. If we sum all this up, we expect to see a positive price mix effect in 2019. When you talk about the mix here, we should also say that this is, of course, a comment that is very much based on the volume outlook because this can change if, for instance, Asia would continue to decline, if Americas would grow a little bit more, and so forth.
What we see now is a positive price mix effect for 2019.
Okay, thanks. Then I have a question concerning the new Trillium product. Are you seeing a high demand for this? In a few years, how much do you expect this product and other types of new innovations to account for in terms of volumes?
Johan, we see a great interest for the Trillium product due to the fact that it's very suitable, especially for battery cooling. If we look a bit in front of us, what will happen in our industry is that, of course, the battery cooling system will represent a large part of the total demand for heat exchange material. In that sense, we foresee a very strong demand for the Trillium product going forward. I think it will become a very important part of our business. It's still quite early days on the EV development, and there's a lot of quotations, I think we will expect this in a few years to come, but gradually from this year and forward. Just to also emphasize on your question there, we have also increased our patent portfolio during 2018.
There are also other interesting new developed product that we are starting to commercialize during 2019.
Okay. Thank you. The final question from me would be, have you seen anything on the material cost side? Has there been any change in mix between scrap and new materials and price mixes there which could explain, in part, the perhaps lower materials sales and also what you see going forward?
Okay. The raw material mix is something that we work quite a lot with there in our metal management team. What we are trying to do, of course, is to, as large extent as possible, replace primary aluminum with recycled aluminum that we buy on the scrap market, because that will give us a lower input cost. During this year, we have made quite good improvements, especially in the U.S., in terms of sourcing scrap and recycled aluminum instead of primary aluminum. This is something that has had a benefit for us, for our material cost in 2018, and we continue to work on this in 2019, and I expect that we will be able to improve this further. I don't know if that was an answer to your question, or if your question was more from an external perspective.
No, I think you answered it well. How should we think about the mix between recycle and primary between the different regions, and if you are seeing any major changes between the recent quarters or year-over-year and what you expect going forward?
Yeah. What you can say is that in each region, there is a different type of market for the recycled aluminum. In Europe, for instance, the aluminum recycling market is very well developed. It's easy to access scrap metal and so forth. In China, it's a bit different. The market for aluminum recycling is much smaller. There, for that reason, we are using less recycled aluminum there. In the U.S., the Noranda business that we acquired in 2016 originally also had a primary part, which means that they didn't use almost any scrap material or recycled material. That's something we are now trying to change, because in the U.S. also, there is a developed aluminum recycling market, so you can access that. That's, of course, something that we are then working very much with. There we will see some changes.
In Europe and in Asia, the changes would be smaller due to the nature of the markets.
Just a side comment here, Johan. I think when it comes to scrap recycling, I think it's really clear and there are a lot of indications now also from the OEMs that sustainability will become much more in focus going forward, and the CO2 footprint is, of course, very important for the consumers, and that also implies a focus on this in the automotive value chain. Of course, to increase the scrap in your production, make sure that you can source aluminum that has a very low CO2 footprint, has a very high priority going forward. There Gränges is working very actively, and we are quite confident that this will also, in the future, create value for our customers, our work on this side.
Okay, perfect. Thank you very much.
Thank you. Our next question comes from the line of Max Frydén from Danske Bank. Please go ahead. Your line is now open.
Hi again. I just had a more technical question on the Trillium. I don't know if you talked about this several years ago, but do you need to do a large production adaptation or resetting in your facilities in order to produce Trillium today?
No, we don't need. As if you'll recall, we did, the year before last or last year, actually, a small acquisition in 2 production units, one in France and one in Germany, that will enable us and make sure that we have the Trillium material in-house. When it comes to Gränges' operation, there is no additional need for investment to adjust for Trillium production.
Yeah. Now I remember.
Yeah.
Okay. Maybe just a follow-up. Since you're eliminating the fluxing, as you say, do you expect better profitability for Trillium when commercialized, or is it too early to say at this stage?
The Trillium is a more advanced product, meaning that it create more value for the customers. It should have a better profitability than the average product.
Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yeah. Hi. Thank you. Well, just a follow-up there on Max's question about Trillium. I guess, as I remember it, there are some costs involved for the customer to make the changeover to Trillium, I guess. Could that be easier to, well, take in an electric vehicle world?
Yeah, there are not that much, of course, additional cost for the customers, just more that they need to manage the production. One of the benefit with Trillium is also that it has what we call a better brazeability, meaning that their brazing process is less sensitive and can basically make the production in one way more easy. One of the disadvantages has been that the customer needs to take out the flux residue on the ready heat exchanger. That's why they need to wash the whole heat exchanger. With the Trillium concept, there is less need of washing. That's the clear benefit for the customer.
There are no additional investment for the customer to make a changeover?
It's more related to their production, and they have to make sure that they can produce because it's a slightly different design and different brazing furnaces, or not furnaces, but processes. There's not really a hardware investment as such. It's more to learn the process.
Okay, great. Just the final one on page 13 there in the annual report, you comment on the IFRS 16 changeover, and I guess, well, the impact is not that material. Could you give some comment there? You mentioned what will happen, but you don't mention any more figures. You mentioned the SEK 270 there.
Yes. You're absolutely right there. I think you have certainly drawn the right conclusion here, Mats, that we are applying IFRS 16 as of January this year. Here we need to remember that we don't have that much leased assets, which means that it's not going to have a big impact on our numbers. The number that we are highlighting here, the SEK 270 million, that's sort of the number that you need to know. You don't need to recalculate that much other things in our P&L or balance sheets.
Okay, great. Thanks.
Thank you. Ladies and gentlemen, I just remind you, if you wish to ask a question, please press zero one on your telephone keypad. There will be a brief pause while questions are being registered. As there are no more questions registered at this time, I hand the calls back to you, speaker. Please go ahead.
Okay. If there are no more questions, I would like to conclude this session. Thank you everyone for participating in today's conference call. Thanks a lot for very good question and active participation. Interesting questions. We look forward to our next call on the 26th of April, when we'll present the first quarter report for 2019. Thank you and goodbye.