Earnings Call: Q4 2017

Feb 1, 2018

Ladies and gentlemen, welcome to the Granges Year End Report twenty seventeen. Today, I'm pleased to present CEO, Johan Mengele. For the first part of the call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Johan, please begin. Good morning, and welcome, everyone, to Granges twenty seventeen fourth quarter and year end conference call. Here in Stockholm, it's me, Johan Menkel, CEO of Granges. Our CFO, Oskar Hellstrom, is not with us today as he recently become a father and is on paternity leave. Instead, I have Johan Duvermark, Group Treasury and Niklas Hermanson, Group Business Control with me today that can answer questions during our Q and A. I will start this call with an update on Granges performance during the fourth quarter and then go into the financial results. We will then conclude the presentation with a short summary of the report followed by a Q and A session. To start, I will give you a brief overview of Granges current operations. We have some 1,600 employees and an annual net sales of more than SEK11 billion. We have production facilities in Sweden, China, The United States and since October, two small but important units in Germany and France for supply of spray forming billets. About half of 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 twenty seventeen, we have continued to see a good development in all our markets. Sales volume increased by 2.1% to 86,500 tonnes 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 and in The Americas volume increased by 4%. We continued to see a very good demand in all our markets in the quarter. Adjusted operating profit rose to SEK179 million, up from SEK171 million last year. Excluding The U. S. Acquisition, adjusted operating profit increased to million compared to SEK134 million last year. Profit for the period was SEK152 million. That includes a release of tax provision of SEK53 million and a withholding tax of negative SEK19 million on dividend from our Chinese subsidiary. Earnings per share was SEK2.02 in the quarter, up from SEK 1.35 last year. Cash flow before financing activities was SEK 41,000,000. We ended the year with a net debt of SEK 2,300,000,000.0 corresponding to 1.8x EBITDA on a rolling twelve month basis. Our Board of Directors proposes a dividend of DKK3 per share, which represents an increase of 25% over prior year when we paid NOK2.4 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 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 Granges produces locally in The United States. This is clearly positive for our U. S. Business. The duties are, however, also applicable to some of the automotive heat exchanger material Granges 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 Finspang in total 2,000 ton 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 Finspang during first half of twenty eighteen, that's about another 2,000 tonnes. In total, the import duties are expected to have a positive impact on Granges 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 then look into the first quarter of twenty eighteen, 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 America, light vehicle production is expected to grow close to 2% in the first quarter of twenty eighteen. 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 we then look into Granges sales volume development during the fourth quarter, we can see that Asia was somewhat lower at 20,600 tonnes. 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 tonnes. Sales of heat exchanger material was up some three percent, 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'm 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. Operation has been accounted for in the whole of 2017. We ended the year with a net debt of billion, down from SEK2.7 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 one to two times EBITDA. Our Board of Directors proposes a dividend of NOK3 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 twenty seventeen is yet another strong quarter for Granges and contributed to a new record year for Granges in 2017. By the December, the rolling twelve month sales volume reached 373,000 tonnes and the adjusted operating profit increased to SEK $933,000,000. That is an improvement of SEK $246,000,000 compared with the year before and is the highest rolling twelve months profit so far for Granges. 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 twenty sixteen. If we exclude acquired volume and profits, the rolling twelve month sales volume would have been 250,000 tonnes and the adjusted operating profit million by December. That represents a 5% organic volume growth and a SEK45 million profit improvement compared with twelve months ago. In quarter four, the sales volume increased by 2.1% to 87,000 tonnes, whereas the net sales increased by 7% to SEK2.7 billion. The U. S. Acquisition contributed with a sales volume of 42,700 tonnes as compared to 41,000 tonnes 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 million compared to quarter four twenty sixteen. Looking at the earnings side, the adjusted operating profit amount to SEK179 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 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 SEK2 million compared to quarter four twenty sixteen. Cost for strategic projects and for implementation of a new ERP system amounted to a total SEK11 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 SEK16 million in the fourth quarter, and also in the coming quarters given current exchange rates. The adjusted operating profit per tonne reached SEK2.1 thousand, which is about 5% higher compared to quarter four twenty sixteen. Items affecting comparability amounts to negative SEK16 million in the fourth quarter and consists of a onetime cost for closing down Nordka heat transfer. Nordka was a joint venture that has administrated the import and distribution of Granges 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 Granges Americas. This new distribution model will enable a more efficient supply of heat transfer material to Granges customers in North America. The profit for the period reached million compared to SEK101 million previous year and correspond to an earnings per share of SEK2. The profit for the period includes the release of a provision for corporate income tax in China that had a positive impact of SEK53 million on the profit in the quarter as well as a withholding tax on a dividend minus SEK19 million from the Chinese subsidiary to Granges AB. Cash flow before financing amounted to SEK41 million in the quarter. And by the December, the return on capital employed reached 16.7% on a rolling twelve month basis. During the fourth quarter, the net debt stayed relatively flat at SEK2.3 billion. This corresponds to 1.8 times adjusted EBITDA on a rolling twelve 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 one, primarily in Asia. Investments in fixed assets amounted to SEK178 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 million. Looking at the full year 2017, I'm pleased that we have reduced net debt by over million. When looking into the first quarter of twenty eighteen, 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 market 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 2019 and we are also addressing capacity needs in Asia and Europe and are evaluating different ways to move forward. When 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 twenty seventeen fourth quarter and year end report, Granges had another good quarter, although the seasonally weakest quarter of the year, with a good demand in all our regions. Sales volume reached 86,500 tonnes, up 2.1% and adjusted operating profit increased to SEK179 million. When 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 with our target range. Our Board of Directors are proposing a dividend of NOK3 per share, an increase of 25% from previous year and in line with our dividend policy to distribute 30% to 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. Now we open up for questions. Thank And we have our first question from the line of Max Frodeyn from Danske Bank. Please go ahead. Your line is now open. Yes. Hi. Good morning. Can you hear me good enough? Yes. Perfect. So I have a couple of questions. The first one is on the outlook. Maybe just clarify it because when I read it in both Europe and America on automotive, we're expecting a decline in Europe and lower growth year over year in the market that is growing 2% to 3% for both of them and then flat in Noranda, if I'm not mistaken, and then slightly better than the market on a group level. So does that imply that you will see significant growth in Asia? Yes. The question yes, 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. And in America, there is a flat development, you're correct, but that's due to that we are under capacity constraints and basically are declining a demand there. So that is the answer to this question, Max. So I mean, just to comment on that as well. I mean, in Europe, we are positive for the full year of 2018. But in quarter one, we have to give priority to reallocate some volumes to our American customers due to the duties. Yes, that makes sense. For clarifying. And then on the reevaluation of the lifespan of your property plant and equipment or sorry, the depreciation of the just mentioned. Now you have you haven't included pro form a numbers from last year. So when I look into 2018, should I think that you should have a positive sort of comparison effect in Q1, Q2 and Q3 as well? Or is that now in the numbers? If you yes, 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 16,000,000 up until Q2 of twenty eighteen. Then we had an impact of EUR 7,000,000 in Q3. So smaller positive impact then, but as from Q4 next year, this effect should be diminished. Okay. 7,000,000 in Q3. Okay, perfect. And then on the tax effect, a lot of items going back and forth. And I presume the release of the provision of income tax in China is related that you are classified as a high technology company. And going forward here, maybe you can help us just guide on the effective tax rate in the P and L for 2018. You mean the tax rates for Granges AB as a whole or specifically on China or No, as a whole, as we the numbers we see. Okay. Think Johan Duvermay can comment on that. Yes. It is it's fair to assume that the tax rate going forward will be a little bit lower than we previously had said. So now we'll guide that to be between 22% to 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. So it included your estimate of both The U. S. And China? Yes. Okay. Then finally, before I let someone else in, I'm not gonna take up all of your time. On the currency transaction exposure, you have limited your exposure, I presume, in producing in in Chinese yen and selling in US dollars now that you don't ship as much from from China. Is that correct? Or is there still a big transaction exposure as reported in your annual report between the U. S. Dollar and renminbi? That effect is slightly lower. So we have a slightly less effect of the dollar or 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. Yes. Thank you. So 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? And what are the pricing trends currently in Asia and Europe, please? Yes. Johan here, good question. There has been basically in Asia, additional capacity announced recently. But as we also know, there are, of course, available general capacity in Asia. And 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. But basically, change from last quarter when it comes to new capacity added in Asia or in Europe. And prices, then the second question, it's basically the same pattern we have seen before that the conversion prices coming down from a high level, but in Asia. But we also, going forward, of course, see a possibility to improve prices in The Americas due to the supply and demand situation. Okay. And then those ERP costs, when do you think those will be over? Basically, they will 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. And finally, maybe you talk now about capacity constraints also in Europe. So are you looking to can you expand the Finspang 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. And we also as we said, we are allocating some of the business from Shanghai to Finspang. So we are now looking into basically expanding capacity at our Finspang plant that we see to be the best option for capacity growth in Europe. Okay. And the lead time and sizes of those investments, are they comparable to the Huntington expansion or? I think the lead time would be fairly short, basically, yes, in line with the Huntington then. And when it comes to capacity investment costs, we haven't concluded that. But I mean, the positive thing here is that we have space to increase capacity in Finspang, and that would facilitate that kind of investment quite a lot. Okay. Thank you. The next question comes from the line of Matt Liss from Kepler Cheuvreux. Please go ahead. Your line is now open. Hi. Thank you. Yes. Well, two questions, please. First, I mean, you touched upon The U. S. Pricing and the impact of the Chinese tariffs on Chinese imports there. And could you give some more flavor about the timeline there? How long it takes for you to to get support from those increase? We have some background noise. But 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, and that is, of course, positive. And then we have, of course, in the second half of twenty nineteen, where we will have additional capacity around 40,000 ton, 25025%. And 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? Yes, I guess. And what about the pricing in general terms? Have you seen any impact of these tariffs that's sort of improving The U. S. Force pricing? Pricing and maybe when you sort of renew your contracts, you get an additional boost from that. No, sorry, missed that. No, that's of course what we see right now due to the strong demand. There are possibility to increase prices in The U. S. And also with the new capacity. So that is what we currently are working with. So yes, possibility to do so in The U. S. And then again, you talked about capacity constraints. Is there something Granges specific or do you see that overall that your competition are also in a pretty high level of capacity utilization? If we look into The U. S. Market, it's a general situation for our competitors as well, for our competitors in The U. S. That are basically under capacity constraint. And of course, we managed to increase our capacity 2017 compared to 2016 due to releasing bottlenecks. And that is, of course, also what we are working with for 2018 until our new capacity is in place. And how much do you expect to be able to increase capacity? I mean, we worked with those bottlenecks during last year also, but how much? A couple of percent. Yes, it's a couple of percent. It's I mean, we had an increase of four percent 2017. So I think it's in range of single digit percentage wise capacity improvements in The U. S. And in is it a 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 Finspang, and we are looking into, yes, 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. And 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. Is there a final agreement on the agenda? Do you have any date there or at 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 kind of intensive negotiation discussions. So this is something that we of course, the intention is to conclude on this year as early as possible. But there's no update today about this. But it's we are currently giving this high priority. Okay, great. Thanks a And we have a follow-up question from the line of Kenneth Tolley Hansen from Carnegie. Please go ahead. Your line is now Yes. So you're talking about some pricing pressure in the Chinese market that you have been talking about for a very long time. And now also in The U. S, you see opportunities to increase prices. But 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, Ken. It's a bit difficult to answer straightforward. But of course, there is different markets we're working on. And as I said, The U. S. Market possibility to increase prices. And in Asia, we have seen that kind of prices coming down, but we also expect these to stabilize at one point of time. But I think the most important for Granges is really to be able to develop and launch new innovative products So 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. And I think the announced acquisition of the spray forming units in Europe in quarter three is also a way for Granges to basically launch new innovative products with basically higher prices. Yes. So talking about new products, I saw on your homepage that you're sort of going forward with the Trillium product and you're launching a sort of Trillium two point zero 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 two types of Trillium products, lean and solid. The solid is kind of the product we have had for a while, which is have very, very good capabilities, product features, but it's slightly higher in prices. So we also launched a more simplified product, which we call lean, which still have a lot of good product features and has been very well received at our customers. So we are currently now very active in working with several of our customers in presenting and in testing these new products. And I can just say that the feedback so far is very positive for this, especially for this lean version of Trillium, which tend to be very much appreciated by the customers. And I can't comment on the prices, of course, but this is a more advanced product and therefore, it's also priced differently compared to the more normal bracing sheet. And if 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. So it's more to manage, of course, this increased demand from an operational point of view at Granges side. And is this totally a unique Granges product? Or do competitor have similar or competing products? I mean this is a very I mean, strong product, and there are similar applications. But we believe that the Trillium has several advantages compared to other comparable products on the market. So that is also the response from the customers. Okay, great. Thanks. And we have a follow-up question from the line of Max Frieden 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? And I presume that's going to be effective more in 2019 rather than 2018. Yes. I don't know how much here, Max. But in The U. S. Market, there's, of course, supply demand situation that enable, of course, some price adjustments in general in the market. And as you know, the business we acquired, we are under contract to 50%. So we are talking about 50 open for reorganization this year. But the main impact will we 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, total benefit for Granges profitability for that operation. And what are we talking about? Is it 2%, 3% or 5%? How are your discussions going? I mean there are prices increases. So it's a bit sensitive to discuss that. Right now, it's very customer specific. But 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. 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 21, 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.