Ladies and gentlemen, welcome to the Gränges Year End Report 2017. Today, I am pleased to present CEO Johan Menckel. For the first part of the call, all participants will be in a listen-only mode, afterwards there will be a question and answer session. Johan, please begin.
Good morning, and welcome everyone to Gränges 2017 fourth quarter and year-end conference call. Here in Stockholm, it is me, Johan Menckel, CEO of Gränges. Our CFO, Oskar Hellström, is not with us today as he recently become a father and is on paternity leave. Instead, I have Johan Dufvenmark, Group Treasury, and Niklas Hermansson, Group Business Control, with me today that can answer questions during our Q&A. I will start this call with an update on Gränges' performance during the fourth quarter go into the financial results. We will conclude the presentation with a short summary of the report, followed by a Q&A session. To start, I will give you a brief overview of Gränges' current operations. We have some 1,600 employees and an annual net sales of more than SEK 11 billion.
We have production facilities in Sweden, China, the United States, and since October last year, two small but important units in Germany and France for supply of spray forming billets. About half our sales volume is to the global automotive industry, where we are the market leader globally. The other half is split between the American HVAC market for building and houses and other niche segments in the U.S. When looking at the fourth quarter of 2017, we have continued to see a good development in all our markets. Sales volume increased by 2.1% to 86.5 thousand tons in the quarter. In Asia, sales volume was somewhat lower than in the fourth quarter last year when we experienced a very good ending of the year. In Europe, sales volume increased some 1% over last year, in the Americas, volume increased by 4%.
We continue to see a very good demand in all our markets in the quarter. Adjusted operating profit rose to SEK 179 million, up from SEK 171 million last year. Excluding the U.S. acquisition, adjusted operating profit increased to SEK 142 million compared to SEK 134 million last year. Profit for the period was SEK 152 million. That includes a release of tax provision of SEK 53 million and a withholding tax of negative SEK 19 million on dividend from our Chinese subsidiary. Earnings per share was SEK 2.02 in the quarter, up from SEK 1.35 last year. Cash flow before financing activities was SEK 41 million. We ended the year with a net debt of SEK 2.3 billion, corresponding to 1.8 times EBITDA on a rolling 12-month basis.
Our board of directors proposes a dividend of SEK 3 per share, which represents an increase of 25% over prior year when we paid SEK 2.4 per share in dividend. During the fall, the U.S. Department of Commerce has imposed preliminary duties on imports of aluminum foil from China. In August, countervailing duties was imposed, followed by anti-dumping duties in October. By the end of February, the U.S. Department of Commerce is expected to announce a final determination of these duties. We are now seeing further increase in demand for domestically produced aluminum products, including the product range Gränges produces locally in the U.S. This is clearly positive for our U.S. business. The duties are, however, also applicable to some of the automotive heat exchange material Gränges has produced in Shanghai to customers in North America.
During 2017, the production of aluminum foil for U.S. customers has gradually been shifted from Shanghai to Finspång. In total, 2,000 tons has been shifted. There are expectations that the U.S. Department of Commerce will impose duties also on aluminum sheet products from China. To be prepared for that, the sheet volume for U.S. customers will be transferred from Shanghai to Finspång during first half of 2018. That's about another 2,000 tons. In total, the import duties are expected to have a positive impact on Gränges' business in the years to come as the competition from Chinese suppliers will ease in North America. During the fourth quarter, the global light vehicle production increased by 1% compared to last year. In Asia, the market was down 1% in the quarter as production of light vehicle was lower in both China and Japan compared to last year.
In Korea, the market grew a few percent in the fourth quarter. In Europe, light vehicle production increased by almost 8% in the fourth quarter, while in the Americas, the market was down some 1% compared to last year. If we look into the first quarter of 2018, the global vehicle production is expected to be 1% higher than last year, according to IHS. That comprises a decrease of nearly 1% in Asia, while an increase of 3% is expected in Europe. In the Americas, light vehicle production is expected to grow close to 2% in the first quarter of 2018. If we look further into 2018, the production of light vehicle is set to grow some 2% in the full year 2018, according to IHS.
If you look into Gränges sales volume development during the fourth quarter, we can see that Asia was somewhat lower at 20,600 tons. This was still better growth rate than the market. The good development during 2017 is partly due to gained volume in new passenger car platform, strong sales to our global customers in China, and a good development in commercial vehicles. In Europe, sales volume was up 1% in the fourth quarter to 15,400 tons. Sales of heat exchanger material was up some 3%, while sales of industrial products decreased in the quarter. In the Americas, sales volume to automotive heat exchanger was up 1% in the quarter. In our acquired U.S. operation, we continued to see a strong demand in the quarter, and the sales volume increased some 4% if compared to last year.
The growth is, however, still limited due to the fact that we are operating close to maximum capacity. When summarizing the whole of 2017, I am pleased to see that we have delivered on our financial targets for the third year in a row. We reported a high growth rate in the market when compared to the production of light vehicle, which we use as a benchmark. The return on capital employed was 16.7% compared to 17.5% the year earlier. As the acquired U.S. operation has been accounted for in the whole of 2017. We ended the year with a net debt of SEK 2.3 billion, down from SEK 2.7 billion a year ago, thanks to good cash generation and strong financials. That corresponds to 1.8 times EBITDA, well within our target range of 1 to 2 times EBITDA.
Our board of directors proposes a dividend of SEK 3 per share, which is an increase of 25% from last year. Given that the annual general meeting approves the proposal in May, it means that 35% of the net profit will be returned to our shareholders. The fourth quarter 2017 is yet another strong quarter for Gränges and contributed to a new record year for Gränges in 2017. By the end of December, the rolling 12-month sales volume reached 373,000 tons, and the adjusted operating profit increased to SEK 933 million. That is an improvement of SEK 246 million compared with the year before, and is the highest rolling 12-months profit so far for Gränges. The positive development is driven by a combination of organic growth and improvements in our business, combined with the acquisition in North America, completed in the mid of third quarter 2016.
If we exclude acquired volume and profits, the rolling 12-month sales volume would have been 250,000 tons, and the adjusted operating profit SEK 732 million by December. That represents a 5% organic volume growth and a SEK 45 million profit improvement compared with 12 months ago. In quarter four, the sales volume increased by 2.1% to 87,000 tons, whereas the net sales increased by 7% to SEK 2.7 billion. The U.S. acquisition contributed with a sales volume of 42,700 tons as compared to 41,000 tons in the fourth quarter last year. The higher volume and increased metal prices had a positive impact on net sales, whereas a lower average conversion price impacted net sales negatively. The net impact from changes in foreign exchange rate was a negative SEK 162 million compared to quarter four 2016.
Looking at the earnings side, the adjusted operating profit amounted to SEK 179 million in quarter four, an increase of 5% on prior year. The increase in adjusted operating profit in the quarter is primarily driven by the increase in sales volume in combination with an improvements in metal management and productivity in the quarter. On the negative side, we continued to experience a lower average conversion price. Changes in foreign exchange rates had a net impact of minus SEK 2 million compared to quarter four 2016. Cost for strategic projects and for implementation of a new ERP system amounted to a total SEK 11 million in the quarter. During the third quarter, we updated the assumption on the useful life for certain types of assets.
The consequence of this is a reduction of depreciation that has a positive impact on the operating profit of SEK 16 million in the fourth quarter and also in the coming quarters given current exchange rates. The adjusted operating profit per ton reached SEK 2,100, which is about 5% higher compared to quarter 4 2016. Items affecting comparability amounts to negative SEK 16 million in the fourth quarter and consist of a one-time cost for closing down Norca Heat Transfer. Norca was a joint venture that has administrated the import and distribution of Gränges heat exchanger materials to customers in the Americas for the last two decades. The joint venture operation has been discontinued as from January 2018, and from this point in time, the import and distribution will be administrated by Gränges Americas.
This new distribution model will enable a more efficient supply of heat transfer material to Gränges customers in North America. The profit for the period reached SEK 152 million compared to SEK 101 million previous year, and corresponds to an earnings per share of SEK 2. The profit for the period includes the release of a provision for corporate income tax in China that had a positive impact of SEK 53 million on the profit in the quarter, as well as a withholding tax on a dividend, minus SEK 19 million from the Chinese subsidiary to Gränges AB. Cash flow before financing amounted to SEK 41 million in the quarter, and by the end of December, the return on capital employed reached 16.7% on a rolling 12-month basis. During the fourth quarter, the net debt stayed relatively flat at SEK 2.3 billion.
This corresponds to 1.8 times adjusted EBITDA on a rolling 12-month basis, which is within our long-term range of one to two times. Looking at the cash flow before financing in the fourth quarter, we can see the contribution of the strong earnings in the quarter. Working capital was relatively flat in the quarter. The positive impact from seasonally lower receivables was offset by higher inventory levels to meet expected demand in quarter 1, primarily in Asia. Investments in fixed assets amounted to SEK 178 million in the fourth quarter. The majority of these refers to investment to maintain and improve efficiency in our current production facilities. CapEx related to expansion of our Huntington facilities in the U.S. is included with SEK 35 million. Looking at the full year 2017, I'm pleased that we have reduced net debt by over SEK 400 million.
When looking into the first quarter of 2018, we continue to see a good demand in all our regions. However, sales volume in the Americas is expected to be somewhat lower in the first quarter, as we are moving import volumes to American customers to our wholly owned subsidiary, which will cause a delay in revenue recognition during the first three months of the year. Adjusted for that, we are experiencing good markets, both Asia and the Americas, while we foresee a slower start of the year in Europe compared to IHS Markit expectations. Short term, we are experiencing capacity constraints given the good demand we see. The investment in new capacity in the U.S. will come into effect during the second half of 2019, and we're also addressing capacity needs in Asia and Europe, and are evaluating different ways to move forward.
Looking further into 2018, we expect a positive development in all our regions. We will continue to execute on our strategy to grow our business and maintain a solid and sustainable profit. To conclude 2017 fourth quarter and year-end report, Gränges had another good quarter, although the seasonal weakest quarter of the year with a good demand in all our regions. Sales volume reached 86,500 tons, up 2.1%, and adjusted operating profit increased to SEK 179 million. Summarizing the full year 2017, we have continued to deliver on our financial targets. Our growth in the automotive heat exchanger material increased by 5%, well above the market rate. Return on capital employed was 16.7%, and we ended the year with a net debt of 1.8 times EBITDA, which is in line with our target range.
Our board of directors are proposing a dividend of three SEK per share, an increase of 25% from previous year, and in line with our dividend policy to distribute 30%-50% of net profit back to our shareholders. Our growth plans for North America are proceeding according to plan. The expansion of our facility in Huntington has started, and we are currently preparing for a partnership with Mitsubishi Aluminum to add both capacity and capabilities on the North American market. We will continue to work according to our strategy that we have set out for 2020. We are positive about the rest of 2018 and are determined to continue to grow and strengthen our presence and position globally. Thank you. We open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad now. If you want to withdraw the question again, you can do so by pressing 00 to cancel. Once again, that's 01 on your telephone keypad to register for a question. We have our first question from the line of Max Frydén from Danske Bank. Please go ahead. Your line is now open.
Yes. Hi. Good morning. Can you hear me good enough?
Yes.
Perfect. I have a couple questions. The first one is on the outlook. Maybe just clarify it because when I read it in both Europe and Americas on automotive, we're expecting a decline in Europe and lower growth year-over-year in a market that is growing 2%-3% for both of them, and then flat in Americas, if I'm not mistaken, and then slightly better than the market on a group level. Does that imply that you will see significant growth in Asia?
Asia, we see a somehow better growth. In Europe, as you said, we see a slightly lower growth rate than the market, and that is due to that we are giving priority to supply the volume that we did supply from China to North America, into our American customers. In Americas there is a flat development, you're correct, but that's due to that we are under capacity constraints and basically are declining in demand there. That is the answer to this question, Max. Just to comment on that as well, in Europe we are positive for the full year of 2018, but in Q1 we have to give priority to reallocate some volumes to our American customers due to the duties.
That makes sense. Thanks for clarifying. On the revaluation of the lifespan of your property, plant, and equipment, or, sorry, the depreciation of the just mentioned. You haven't included pro forma numbers from last year, when I look into 2018, should I think that you should have a positive comparison effect in Q1, Q2, and Q3 as well? Or is that now in the numbers?
Niklas can comment on that.
Yes, you're correct. If you look into the coming quarters in 2018, you will have a positive impact of SEK 16 million up until Q2 of 2018. We had an impact of SEK 7 million in Q3, so smaller positive impact then, as from Q4 next year, this effect should be diminished.
Okay. SEK 7 million in Q3. Okay, perfect. On the tax effect, a lot of items going back and forth, I presume the release of the provision of income tax in China is related that you are classified as a high technology company. Going forward here, maybe you can help us, this guide on the effective tax rate in the P&L for 2018.
You mean the tax rate for Gränges AB as a whole or specifically on China or?
No, as a whole, as the numbers we see.
Okay. I think Johan Dufvenmark can comment on that.
Yes. It's fair to assume that the tax rate going forward will be a little bit lower than we previously had said. Now we guide that it will be between 22%-25%. This is due both to the effective tax rate in U.S. and as well in China with this high tech tax included.
Okay. Included your estimate of both U.S. and China?
Yes.
Finally, before I let someone else in, I'm not going to take up all of the time. On the currency transaction exposure, you have limited your exposure, I presume, in producing in CNY, and selling in USD now that you don't ship as much from China. Is that correct? Or is there still a big transaction exposure as reported in your annual report between the USD and CNY?
That effect is slightly lower, so we have a slightly less effect of the dollar renminbi going forward compared to previously.
Okay. Perfect. Thank you so much for answering my questions.
The next question comes from the line of Kenneth Toll Johansson from Carnegie. Please go ahead. Your line is now open.
Yeah. Thank you. I just want to ask you a little bit about competitors adding new production capacity, maybe in Asia and Europe. Are you seeing major capacity increases coming to the market? What are the pricing trends currently in Asia and Europe, please?
Yes. Johan here. Good question. There has been, basically in Asia, no additional capacity announced recently. As we also know, there are, of course, available general capacity in Asia. In North America, the market is limited on capacity. There have been some announcement as well from some of the large aluminum companies that they intend to increase capacity on the North American market. Basically, no change from last quarter when it comes to new capacity added in Asia or in Europe. Prices, the second question, it's basically the same pattern we have seen before, that the conversion prices coming down from a high level in Asia. We also, going forward, of course, see a possibility to improve prices in the Americas due to the supply and demand situation.
Okay. Those ERP costs, when do you think those will be over?
Basically, we will have the cost for the ERP for at least three quarter in 2018, where we expect the ERP project to be finalized.
Okay. Finally, maybe you talk now about capacity constraints also in Europe. Can you expand the Finspång plant, or are you looking to maybe buy another plant, or what's the thinking there?
We see a strong, of course, demand going forward long term in Europe. We also, as we said, we are allocating some of the business from Shanghai to Finspång. We are now looking into basically expanding capacity at our Finspång plant. That we see to be the best option for capacity growth in Europe.
Okay. The lead time and sizes of those investments, are they comparable to the Huntington expansion?
I think the lead time would be fairly short, basically, in line with the Huntington then. When it comes to capacity investment cost, we haven't concluded that. The positive thing here is that we have space to increase capacity in Finspång, and that would facilitate that kind of investment quite a lot.
Okay. Thank you.
The next question comes to the line of Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is now open.
Oh, hi. Thank you. Two questions, please. First, you touched upon the U.S. pricing and the impact of the tariffs on Chinese imports there. Could you give some more flavor about the timeline there, how long it takes for you to get support from those increases?
We have some background noise there. We have, of course, in the U.S. operation, we have a strong demand, as I said, and we have, of course, around 50% of our business in the U.S., the acquired business is under contract, meaning that 50% is up for renegotiation. That is, of course, positive. Then we have, of course, in the second half of 2019, where we'll have additional capacity around 40,000 tons, 25%. That is, of course, very positive for our business in the U.S. I think that was basically the question, Mats, or did I miss something there?
Yeah, I guess. What about the pricing in general terms? Have you seen any impact of these tariffs that's improving the U.S. pricing, and maybe when you renew your contracts, you get an additional boost from that?
No, sorry, I missed that. That is what we see right now due to the strong demand. There is possibility to increase prices in the U.S., and also with the new capacity. That is what we currently are working with. Yes, possibility to do so in the U.S.
Again, you talk about capacity constraints. Is there something that is Gränges specific, or do you see that overall that your competition is also in a pretty high level of capacity utilization?
If you look into the U.S. market, it is a general situation for our competitors as well, for our competitors in the U.S. that are basically under capacity constraints. Of course, we managed to increase our capacity 2017 compared to 2016 due to releasing bottlenecks, that is, of course, also what we are working with for 2018 until our new capacity is in place.
How much do you expect to be able to increase capacity? You worked with those bottlenecks during last year also, but how much? A couple of %?
Yeah, it's a couple of percent. We had an increase of 4% 2017. I think it's in range of single digits, percentage-wise, capacity improvements in the U.S.
In Finspång, do you see bottlenecks that could add some capacity, or is it more like a step-change investment needed there?
There are still available capacity in Finspång, and we are looking into how we could also increase the capacity more with limited investment. That's nothing that is decided, but that's something that we are looking into right now.
Okay. Finally, just about, you touched upon the ongoing work to start the joint venture, and still, I guess you have a letter of intent only, and is there a final agreement on the agenda? Do you have any date there or some time frame to give us?
Yes, you're referring to the discussion we have with Mitsubishi Aluminum of establishing a joint venture in America for cladded aluminum sheet. We are basically right now under quite intensive negotiation discussions. This is something that we are, of course, the intention is to conclude on this year as early as possible, but there's no update today about this. We are currently giving this high priority.
Okay, great. Thanks a lot.
We have a follow-up question from the line of Kenneth Toll Johansson from Carnegie. Please go ahead. Your line is now open.
Yeah. You're talking about some pricing pressure in the Chinese market that you have been talking about for a very long time. Now also in the U.S., you see opportunities to increase prices. If you set those two against each other, how do you believe that the net price for the group will be affected? Do you believe that the price increases in the U.S. might mitigate the pricing pressure in China?
It's a good question, a bit difficult to answer straightforward. Of course, there are different markets we're working on. As I said, the U.S. market possibility to increase prices, and in Asia, we have seen the prices coming down. We also expect these to stabilize at one point of time. I think the most important for Gränges is really to be able to develop and launch new innovative products that we can price higher. That is also the reason why we have put even more effort into what we call research and innovation, and put effort into developing new products. I think the announced acquisition of the spray forming units in Europe, in quarter three is also a way for Gränges to basically launch new innovative products with basically higher prices.
Yeah. Talking about new products, I saw on your homepage that you're going forward with the TRILLIUM product, and you're launching a TRILLIUM 2.0 or a simplified version or cheaper version to get a broader market coverage. Can you talk a little bit about what's happening there? Maybe touch upon pricing versus other similar products.
Yes. As you correctly said, we have recently launched 2 types of TRILLIUM product, TRILLUM Lean and TRILLIUM Solid. The TRILLIUM Solid is the product we have had for a while, which have very good capabilities, product features, but it's slightly higher in prices. We also launched a more simplified product, which we call TRILLIUM Lean, which still have a lot of good product features, and has been very well-received at our customers. We are currently now very active in working with several of our customers in presenting and in testing these new products. I can just say that the feedback so far is very positive for this, especially for this TRILLIUM Lean version of TRILLIUM, which tend to be very much appreciated by the customers.
I can't comment on the prices, of course, but this is a more advanced product, and therefore is also priced differently compared to the more normal brazing sheets.
If the customers decide to go ahead, when do you think that you could get your first sales after testing and evaluations and everything like that?
We are already delivering these lean products to some customers, so it's more a question of ramping up these sales. The response is very positive so far from the customer base. It's more to manage, of course, this increased demand from an operational point of view at Gränges' side.
Is this totally a unique Gränges product, or do competitor have similar or competing products?
This is a very strong product, and there are similar applications, but we believe that the TRILLIUM has several advantages compared to other comparable products on the market. That is also the response from the customers.
Okay, great. Thanks.
I remind you that to ask a question, please press zero one on your telephone keypad now. We have a follow-up question from the line of Max Frydén from Danske Bank. Please go ahead. Your line is now open.
Yes, hi, just a follow-up from, the line broke up there when you talked about the price increases in North America. Could you just maybe, if you haven't done it already, quantify, in percentage term, what you're actually talking about here? I presume that's going to be effective more in 2019 rather than 2018.
Yes. I don't know how much you heard Max, in the U.S. market, there's of course a supply-demand situation that enable, of course, some price adjustments in general in the market. As you know, the business we acquired, we are under contract to 50%, we are talking about 50% open for renegotiation this year. The main impact will be have, of course, in 2019, when we will have our new capacity on the market. Of course, also then we will have a more efficient operation, meaning, of course, a total benefit for Gränges profitability for that operation.
What are we talking about? Is it 2%-3% or 5%? How are your discussions going?
There are price increases, it's a bit sensitive to discuss that right now. It's very customer specific. We are, in general, optimistic that there will be possibility to improve prices in general in the U.S.
Okay, fair enough. Thank you.
Thank you.
As it appears that there are no further questions, I'll hand back to the speakers for closing comments.
Okay, Johan here. Thanks a lot for calling in. Thanks a lot for good questions. I would like to conclude this session then. I think also would like to highlight that on March 21st, we will have our capital market day here in Stockholm, and I'm looking forward to seeing you all then. Have a good day, and goodbye, and thank you.