Welcome to Gränges conference call for the first quarter of 2020. As usual, here in Stockholm, it's me, Johan Menckel, CEO of Gränges, and with me I have CFO Oskar Hellström. We will start this presentation with an update of Gränges performance during the last quarter and highlight some important events. After that, Oskar will take you through the financial results, and then we will conclude the presentation with a short summary and a Q&A session. The first quarter of 2020 included great challenges for Gränges, but also great success. As we're all aware, the world is currently severely impacted by the outbreak of COVID-19. The extraordinary measures that the governments and authorities have taken to reduce the spread of the virus have significantly affected market conditions and operating conditions where Gränges operates.
During the first quarter, we experienced very challenging market conditions, especially on the automotive side of our business, as many car producers in Asia and Europe temporarily closed their production as a consequence of the virus outbreak. Still, the demand in the HVAC business held up well in the first quarter, and here we achieved the best quarter so far. With a successful ramp-up of the new production capacity in the U.S., in combination with the larger contracted market shares as of 2020, we managed to balance most of the sales volume lost on the automotive side. In total, our sales volume declined by 1% year-over-year in the first quarter. Due to the change in product mix between automotive and HVAC, we did experience some negative impact on the margins, and the adjusted operating profit declined to SEK 210 million in the quarter.
On the positive side, the cash generation continued to be very strong. The adjusted cash flow before financing amounted to SEK 329 million in quarter one. The challenging market conditions on the automotive side becomes very evident if you look at some statistics over the recent market development. The research firm IHS currently estimates a global decline in light vehicle production of 24% in the first quarter. If we look at estimates by region, we can see that the decline in light vehicle production followed by the spread of COVID-19 during quarter, Asia and China were hit early in the quarter and is down 30% on last year, followed by Europe, down 19%, and Americas has declined by 11%.
As the production stops at car producers have extended far into April and many plants are still not in operation today, the negative impact is expected to be even larger in the second quarter. Currently, IHS estimates a decline in global light vehicle production of 47% in the quarter two this year. As China has begun to open up again and slowly getting back to a more normal situation, the decline is expected to be a little bit lower in Asia than in Europe and Americas. Still, no matter which region we are looking at, I think it's fair to assume that all automotive-related business will have a very challenging time in the second quarter. If we look at the Americas HVAC market, the picture is a bit different for the first quarter.
The HVAC unit production is expected to have increased by about 5% in the first quarter, and the impact of COVID-19 was limited to the two last weeks in the quarter. Given the current market uncertainty, it's very difficult to predict how the HVAC market will develop in the second quarter. It is typically a much more stable market than the automotive and to a large extent driven by replacements. Demand will largely depend on how the general economy develops in light of the COVID-19 outbreak. If we then look at Gränges sales volume development during the first quarter, we can clearly see the impact of the lower automotive demand in all regions. In total, our sales of automotive materials declined by 15%. In Asia and Europe, sales of automotive material was down 70%, and in Americas, we experienced an 8% decline.
This follows the pattern of the development of the light vehicle production in the quarter. We see a slightly lower decline on the Gränges side. The main reason for this is that customers, in particular Asia, did not react quickly to the COVID-19 outbreak and have consequently built additional inventory in the supply chain. The same effects are seen in Europe and Americas, to a slightly lower extent. This is expected to be reversed in the coming quarters. For the HVAC and other business in Americas, we have, as of January 2020, contracted a larger share of the market, and the successful ramp-up of the new production capacity allowed us to increase the sales volume by 13% in the first quarter. The 51,700 ton that we delivered in the quarter is the highest that we have achieved so far for this business in an individual quarter.
I will come back and comment a bit more on this later. Since Gränges has a large operation in China, we started to see the impact of COVID-19 already in January, and consequently, most of the first quarter has been spent addressing and mitigating the impact of this. We have activated contingency plan in China, Sweden, and U.S. focusing on three primary areas: continuity, cash, and cost. First, in this situation, it's the first and foremost important to ensure that health and wellbeing of our employees to secure that we can continue to operate our production facilities in the short as well as in the long term. So far, the measures that we have been taking has allowed us to continue to run our business to the level required to meet customer demand.
In addition, we have to date not experienced any lack of any critical raw material due to the disrupted supply chains. Secondly, to protect Gränges, it is important to secure cash flow. As part of this, we have increased the focus on working capital control and receivables collection. This is an area where we have seen positive effects already in quarter one. To preserve cash, we have further reviewed our CapEx spending, and we have revisited the ongoing expansion programs, which I will come back to and comment more on shortly. Finally, it's important to ensure good liquidity. On the 31st of March, Gränges has available cash and unutilized committed credit facilities totaling about 2 billion SEK, which is well above Gränges' need for the coming year.
In light of this, I would also like to mention the decision by Gränges board to withdraw the previously communicated dividend proposal to the annual general meeting to ensure that Gränges continues to be well-positioned for the future. Thirdly, we have addressed the cost base to try to adjust it to the market demand that we expect to see in the short to medium term. This means reduction of capacity and manning, primarily through temporary plant closures and layoffs. We have also reinforced our general saving program and limited spend to allow only business-critical expenses for the time being. These slides intend to give you an indication of what the operational status in Gränges looks like as of today, and how we have implemented the temporary plant closure across the group.
If we start with Asia, we closed the plant in Shanghai for the first two weeks in February due to the fact that the Shanghai government imposed restrictions on all companies in the region. We were allowed to restart production on February 10. We are operating as normal since the beginning of March. In Europe, we closed part of the plant in Finspång by end of March. Parts that remain in operation have been reduced to 40% of normal capacity. All employees have been temporarily laid off up to 60% of the time. We have reached an agreement with the workers' union, which gives us flexibility to scale up or down the manning level at short notice should that be needed. In the U.S., we have two plants with the same capabilities, which gives us an even greater flexibility to adjust capacity to market demand.
The Salisbury plant was temporarily closed in early April, and all production has been transferred to the larger and more cost-efficient plant in Huntingdon. Similar to the Finspång plant, employees in Salisbury have been temporarily laid off. In total, this means that we are reducing the group's production capacity with around 20% and that around 500 or about 30% of our employees are currently temporarily laid off. The Finspång/Salisbury plants will remain on current level of operation until further notice. Depending on how the demand develops going forward, we may do further capacity adjustments. As I mentioned earlier, one of the actions we have taken to mitigate the effects of COVID-19 is to postpone our capital expenditure. This goes for the maintenance investment as well as for the two ongoing expansion projects in Newport and in Finspång. In Newport, the upgrade of the first two rolling mills has been completed.
The third mill was scheduled to be finalized in the first half of this year. Due to the imposed travel restriction, it is, however, impossible for the European equipment supplier to visit the site and refurbish the mill. The status of our site logistic project in Finspång is similar. We are at the phase where equipment will be installed, but under the current circumstances, the foreign suppliers cannot come to the site to complete the installation work. Therefore, we have decided to put these two projects on hold for the time being. At this point of time, it is too early to say when the projects can be started up again.
Assuming that neither of the two projects would be restarted before the year-end, and also taking the planned reduction in maintenance CapEx into account, this would mean a total reduction in CapEx for 2020 with about SEK 200 million compared to what we have previously indicated. In the fourth quarter in 2019, we announced the acquisition of Aluminium Konin. The acquisition will strengthen the product offering and presence in Europe and contribute with a strong position in new attractive niche markets. Aluminium Konin will also add new capabilities and capacity to expand the offering for future transportation solutions, such as electrical vehicles. The completion of the transaction is subject to customary approval from competition authorities. Due to the COVID-19 outbreak, the process to receive clearance from the competition authorities will take longer time than originally anticipated.
Therefore, the closing of the transaction is expected to take place in the second half of this year. Following the completion of the transaction, Gränges intends to undertake a new share issue with preferential rights for existing shareholders to finance the acquisition. Gränges ambition is always to clause an acquisition as soon as possible after signing. Still, in this case, considering the prevailing global climate and travel restrictions preventing visits to conduct pre-closing and integration planning in Poland, a closing during the second half of 2020 may be preferable. This may contribute to less uncertainty and provide a better environment for completing the transaction. After addressing the challenges we have seen related to the coronavirus, I would now like to end this part of the presentation on a more positive note.
In the fourth quarter last year, we completed the expansion of the Huntingdon facility, confirming its position as the most cost-efficient North American rolling mill in its field. We have now started to ramp up the 40,000 tons new capacity to support the higher contracted market share that we have from 1st of January this year. As some of you may remember, we have previously indicated a 10% to 15% increase in contracted volume for 2020. In the first quarter, we achieved a sales growth of 13%, and in the end of the quarter, have already reached a 90% availability of the new capacity, far above the target of 75% by June. This contributed to our best quarter so far in Americas, both in terms of sales and in terms of profit. A really great effort by our Americas team.
As I mentioned earlier, we have taken out some capacity in Americas as of early April by temporarily closing down the Salisbury plant and consolidating production to Huntingdon due to the impact on demand from the COVID-19. This was possible thanks to the successful ramp-up in Huntingdon during the first quarter. This means that we were able to run the Huntingdon plant at a high utilization, also in a lower market scenario, which will be beneficial for our overall cost performance in America. I would also like to mention that even though we have stopped upgrade of the third rolling mill in Newport for the time being, the first two upgraded mills are operational, and the third mill will continue to run in its current condition for the time being.
This is in order to serve the specialty packaging market with materials for pharmaceuticals and food packaging, where we are seeing an increased demand over the last month. With that, I hand over to Oskar for the financials.
Thank you, Johan Menckel. As Johan has talked about, the sales volume remained fairly stable on total level in the first quarter, as the increase in HVAC largely balanced the decrease in automotive. Despite the stable volume, the adjusted operating profit came down in the quarter, and so did the adjusted operating profit per ton, as you can see on the right-hand side. There are two primary drivers behind this. First, we have done a lot to improve the margins of the HVAC business in recent years, and we have a good trajectory there. The profit per ton for HVAC products is still lower than for automotive products. Therefore, a shift from automotive to HVAC volume results in an unfavorable product mix effect for Gränges. Secondly, you can see that the profit per ton for the automotive products is declining.
One important driver behind this is the capacity utilization that comes down as a consequence of a drop in automotive sales. In quarter one, the capacity utilization was on average 80% for the group, above 90% on the HVAC side, but only about 70% on the automotive side. Given that a large part of our cost base is fixed or semi-fixed, this reduced the operational leverage for the automotive business in the quarter. As Johan mentioned earlier, we have partly addressed this issue by taking out capacity and cost through temporary plant closures as of April. If we look at the first quarter financials and compare with the same quarter last year, we can see that the sales volume decreased by 1.1% to 89,900 tons, and that the net sales decreased by 1.5% to 3.1 billion SEK.
Lower aluminum price than last year reduced the net sales, whereas the net impact from changes in foreign exchange rates was positive compared with first quarter 2019. Looking at the earnings, the adjusted operating profit amounted to 210 million SEK in Q1, a decrease of 65 million SEK, or 23.6% on prior year. As I mentioned just a minute ago, the main drivers behind the reduced operating profit is the negative mix effect and the low capacity utilization in the automotive business. In addition to these, we see some effects of less optimal metal management in the quarter. The primary reason for this is that it's difficult to optimize the raw material mix in our cast houses when we have large changes in volume and product mix. Over time, this will be adjusted and optimized based on the new volume level.
As you heard from Johan, we have completed the expansion project in Huntingdon and started to ramp up the new capacity in the first quarter. This means that we're also starting to depreciate the new assets. The increase in depreciation compared to Q1 last year was in total SEK 27 million for the group. Net changes in foreign exchange rates was positive SEK 45 million in the quarter. Looking at the profit margin, the adjusted operating profit per ton declined from SEK 3.0 thousand to SEK 2.3 thousand in the quarter. Items affecting comparability amounted to in total SEK 6 million in the quarter, and these are related to the ongoing acquisition of Aluminium Konin. Including the items affecting comparability, the reported operating profit amounted to SEK 204 million in the first quarter.
The profit for the period of SEK 133 million corresponds to earnings per share of SEK 1.76. The reason for the lower profit compared with last year is the lower operational result. This is partly offset by a positive tax effect from the High and New Technology Enterprise tax in China that was not included in the first quarter 2019. By the end of March, the return on capital employed was 10.3%.
During the first quarter, the net debt increased by SEK 94 million to SEK 3.6 billion, or 2.8 times adjusted EBITDA. We continue to see a very strong underlying cash generation in the quarter. Cash flow before financing, adjusted for the expansion investments, amounted to SEK 329 million. This corresponds to an operating profit to cash conversion of 157%. As Johan mentioned earlier, one of the areas we have increased our focus on as a response to the coronavirus outbreak is working capital.
Here we see positive developments already in Q1. Typically, we build working capital in Q1 as seasonality of our business means that it grows sequentially from Q1 to Q4. Given the weak Q4 last year, you would expect to build more working capital than normal in the first quarter this year. Here we instead see a release of 66 million SEK, which indicates that our working capital focus is having effect. We also continued to invest in total 149 million SEK in our expansion programs. Of this, 131 million SEK are related to Sweden and 17 million SEK to the U.S. Due to the COVID-19, we have now put these expansion programs on hold.
This means that expansion CapEx will be lower in the coming quarters, but due to the contracts with the suppliers, it will however not go down to zero immediately, and we expect to see some expansion related CapEx also in the second quarter. With the planned reduction in maintenance CapEx, and provided that the expansion investments is not restarted before year-end, we currently expect the full year CapEx for 2020 to be in the range of SEK 450 million-SEK 500 million for the group. The FX and other component on this slide is primarily not cash related, but is the result of currency translation effects on US dollar denominated debt as the SEK depreciated against the dollar in the quarter. In terms of access to liquidity, we currently have cash of close to SEK 1.2 billion and committed available credit facilities of in total about SEK 1 billion.
This does not include the financing arrangement for Aluminium Konin, which is a separate facility. Excluding commercial papers, which is backed by a revolving credit facility and a small working capital loan in China, we have no loans or bonds that are due within the next year and a half. We believe that the financing that is in place gives Gränges the strength to meet both the downturn and the recovery and allow enough room should the downturn be deeper than what we can expect today. With that, I hand over to Johan, who will provide an outlook and a summary of the first quarter.
Thank you, Oskar. Given the rapid development of the spread of COVID-19, the prevailing global climate, and the high level of uncertainty in the market, it is currently very difficult to provide a forecast even for the short term. That said, it might make sense to reflect a bit on what we see in the market right now and what the general sentiment is for the time being. For the automotive production, IHS currently expect that this will drop by almost 50% globally in quarter two. Even though some car producers have opened up their production since a week or so, the pace is very slow. Consequently, I foresee that the demand for our automotive materials will be very weak in the second quarter.
When we talk about HVAC and other business, it's worth to stress that this is a much more diverse than the automotive business and typically much less cyclical. About a quarter of the sales for HVAC and other goes into specialty packaging application, which is largely non-cyclical and partly even counter-cyclical market. That said, the demand development in quarter two for HVAC and other will largely depend on the development of the economy in general. Based on the current situation, I think it would be fair to expect a lower decline for this business than for the automotive business in the second quarter. As we saw in the first quarter, a product mix shift from automotive to HVAC has a negative impact on the profitability. With a lower decline expected in HVAC than in automotive, we expect to see this effect in the second quarter as well.
Although the short-term implication of COVID-19 should not be underestimated, we believe that for Gränges' part, the medium to long-term fundamentals will not change the negative because of this. Our focus on supporting sustainability, lightweighting, and electrification is likely to keep us in a favored position also in the post-corona environment. It may even be so that the current crisis will speed up developments in other areas and create additional opportunities for Gränges. With a strong commitment to constantly improve and develop, Gränges is well positioned to continue to deliver sustainable and profitable growth throughout economic cycles. To conclude the 2020 first quarter report, the COVID-19 and measures taken to reduce the spread of the virus affect the markets in which Gränges operates, and the demand for our automotive materials declined by double digits in the quarter.
This was, however, balanced by positive developments and sales volume growth on the HVAC side, as they've been very successful in the ramp-up of the new capacity and deliver on the new contracts in the quarter. In total, our sales volume remained fairly stable in the quarter. The adjusted operating profit was reduced to SEK 210 million, but the cash generation remained strong with an adjusted cash flow before financing of SEK 329 million. Although the market conditions are expected to be very challenging in the coming quarter, we continue to be positive about the medium to long-term outlook and are determined to continue to grow and strengthen our presence and positions globally. Now we open up for questions.
Thank you. So far, we have two questions already in the queue. The first is from the line of Kenneth Toll of Carnegie. Please go ahead. Your line is open.
Yeah, thanks. I'm thinking a little bit about the demand side. You usually have some feeling of the demand, if it's a little bit higher or a little bit lower than the IHS estimates. I'm also thinking that maybe you said that customers were building inventories a little bit. Do you think that they will reduce inventories in Q2, so that your sales to the automotive may be even worse than the -47?
Yeah. Johan here answering. Thank you. You're right, we always give our own view on this, but due to the high uncertainty we see right now, we basically refer to the IHS prediction of a 47% decline in the automotive market globally for quarter two. We have seen, of course, as an example, in Europe, all customer has already started a production, but at a very low level. We also expect that U.S. will come in slightly later in this and have a more negative impact. Also we've seen, of course, following the IHS forecast that China in particular, has actually getting quite well started into a normal level, which is good.
Yeah. If one look into Q2, it's fair to assume that you will have lower earnings in Q2 than in Q1 at least. Maybe then your net debt to EBITDA ratio goes up from the 2.8 you were at this quarter. I'm a little bit curious on what covenants you have on your debt. Secondly, if you get close or sort of break those covenants, what would that trigger? Would it trigger a total refinancing or would it trigger a higher interest rate payment for some time? What would happen in such an event?
Hi, Kenneth. It's Oskar here. I think it's a fair question, of course. We refinanced Gränges in the beginning of 2019. We have quite some tenure left on basically all credit facilities. We have some covenants in there. We have not disclosed exactly what those are, but I think it's fair to assume that they are on customary level for a company of Gränges' size, positioned as an investment grade company. I think that you are right that if we see lower earnings in the second quarter, that will have some impact on the net debt to EBITDA ratio. We also need to keep in mind though that we are very cash-focused for the time being, and we are very confident that we can keep the debt under control here.
At this point in time, we believe that we have quite some headroom left to the covenants with the current market scenario. Should this change dramatically going forward and that we see a risk that we are getting too close to the covenants we have, we will, of course, initiate a discussion with our financing banks before that happens.
Okay.
To answer your question, what also happens, of course, is that if you get up higher in leverage, you typically have to pay a higher margin on your financing. The financing cost might increase a little bit as a consequence of an increasing net debt to EBITDA ratio.
There is no sort of automatic canceling of the finance agreement that would put you in a very difficult situation?
I think if we will see a risk of breaching covenants, we would initiate a discussion with the banks and find a solution for this before we get close to such a scenario. At this point, we believe we have enough headroom.
Yeah.
Yeah.
Okay, you have a lot of liquidity as well, as you said before.
We have access to SEK 2.2 billion really at this point. We believe that this is going to be more than enough to meet the demand in this year for sure, irrespective really on how bad the market gets. On the other hand, of course, as Johan also talked about just a minute ago, it's very difficult to say exactly what's going to happen in the coming quarters, of course. At this point, we are not very worried about this particular thing.
Thanks.
Thank you. Just as a reminder to participants, if you do wish to ask a question, please dial zero one on your telephone keypad, and if you need to cancel, you can dial zero two. That's zero one to ask a question or zero two if you need to cancel. Our next question comes from the line of Oskar Lindström of Danske Bank. Please go ahead. Your line is open.
Hi. Good morning. Two questions from me here. The first one, I think Kenneth touched on it, but I wasn't sure if you gave an answer, was regarding the magnitude of the destocking impact that you're expecting in automotive in the second quarter. You mentioned that there had been an inventory buildup among some customers during Q1, and that you expect this, but do you dare to give some kind of indication of the size of this?
Yeah. Johan here. I can comment on this. Yes, as you know, in quarter one, we actually performed better than the underlying market, in particular in Asia. One reason for that was a slightly higher buildup of inventory at the customer side. This is not a dramatic buildup. The buildup was slightly higher in Asia, in China, than we have seen in Europe and in Americas. It was more an explanation of why we differ quite a lot from the underlying market, specifically in Asia.
We should not exaggerate this effect at this point of time.
Do you expect this to unwind during Q2 or take longer to unwind?
I expect this to be corrected during quarter two. That's normally the time it takes.
All right.
correct such an impact.
Thanks. My second question is regarding the Konin acquisition or the acquisition process rather. What's the timing of the European Commission investigation? What kind of questions have you been getting? Also second here is, once the travel restrictions are lifted, how quickly can the transaction sort of resume and move ahead, or is there a backlog of a lot of actions which need to be taken? Essentially what I'm trying to get at, when you say H2, are you talking more July or more December?
Yes, good question, Johan Menckel. I will give you an answer. First of all, just to underline that this acquisition is very strategic, very good, and it makes a lot of sense for Gränges, and it will increase value over time. As we said, then the closing has been delayed due to that conditions are not fulfilled. We are in a pre-notification phase right now for the phase 1 of the European Commission. There have been quite many questions asked, and we have responded to them, and also our Konin company has also responded to their questions. It's absolutely so that due to the COVID-19 impact in Europe, the capacity of the European Commission has been reduced and impacting, of course, the process as such. That's why that's our belief that this process will be completed in the second half of 2020.
Also, I think it's important to bear in mind that we still expect that phase one will be enough for this commission approval. There are, by the end of the day, we are two quite small rolling mills and have quite different markets in Europe.
Oh, thanks.
The practicalities around your question. As of today, it's not possible, of course, to travel. Still there are some need to visit the site physically to do some of that final integration reviews, et cetera, before finally closing. That's not possible today. It's very difficult to have a view on when restrictions will be lifted in Europe in general right now.
Yeah. I'd like a follow-up question on the payment, because as I recall, you're going to pay the agreed price plus expenditures on the investment program in Konin up to that date. If the acquisition takes longer to close, I presume they will have spent more of their investment program. Does that mean you will also have to pay more?
It's Oskar here. I think it's a fair question. Of course, we are not in a position today where we can comment exactly on what is happening in Aluminium Konin, because it's not our company. If we'll say that, from a Gränges side, we are very cautious with our own expansion programs right now, trying to limit spend. I would say it's not unfair to assume that Konin might think about a similar strategy and maybe not spend so much money short term. I cannot disclose, of course, exactly how they are thinking. It's up to Konin to comment on that. If the Konin acquisition is delayed and the closing takes longer, it may be more capital invested and more for us, of course, to pay, but of course it will be less to pay post-acquisition in that scenario.
Right. Okay. Thank you. That's a fair answer. Those were the questions that I had. Thank you.
Thank you. Our next question comes from the line of Karl Bokvist of ABG Sundal Collier. Please go ahead. Your line is open.
Yes. Hi. Thank you and good morning. Perhaps following up there on Konin, although perhaps you won't be able to give any specific numbers, is there a share or portion of the deal that is variable? Based on the assessed profit that Konin would deliver, that as you know when you first closed the deal this fall or last fall, how much of the deal payment could actually be variable since I guess the profit will be considerably lower than what you had expected?
I can comment on that. There is a clause in the agreement saying that if Konin should not perform according to a certain profitability, there is a price reduction. We know up on year date, the financial performance of Konin has been very good, actually. There won't be any need to use that close at this point in time. I think that also is the strength of the Konin. They have a more diverse business, and what we know so far, the financial performance has been very good for them.
All right. I take it that you have had discussions with the company that they are also accepting the fact that the closure could actually be postponed into the second half. Do you see that the current owners are in a sort of situation that they would like to see it still pushed through earlier, or that they would like to perhaps postpone it even into 2021?
No, we don't see any change there. Both parties are very committed to do this, and we also accept the reality that it will take a longer time, and we are doing what we can from both sides to make this process as smooth as possible, and to answer and giving the questions that are asked by the Commission.
Understood. Talking about the ramp-up there, you mentioned you are at sort of a 90% run rate capacity, I can imagine. Is it possible for you to give some insight into actually how much volumes came from the ramp-up probably specifically in Q1?
I think you could view it as, what we're doing here in Q1 is that we are managing to increase our volumes domestically produced in the U.S. because we have ramped up, of course, the new capacity. That said, of course, it's difficult to say exactly how much came out of what, but one thing is of course true, and that is that we try to direct as much as possible of our volume through the new assets because now when they are ramped up, they are also among the most efficient ones that we have. Coming back to what Johan mentioned earlier here, where we now are in a situation that we want to reduce capacity, of course, we're trying to direct as much as possible of the volumes to the newest assets we have.
As a consequence also, we are limiting the capacity in Salisbury, which are among the oldest assets that we have. We are trying to push as much volume as possible to the most efficient assets.
Okay. Would it be fair to assume that perhaps, although it's difficult to specify, but could have been four to six to eight million kilotons from the new facilities?
It's very difficult to make that because some volumes are running on both old and new assets and so forth. It's difficult to make that distinction, but we're trying to use the new assets as much as possible.
Okay. My final question is, of course, you mentioned the IHS forecast for Q2. Could you give some insight into what you have seen in current trading as of today in March? Sorry, April. I mean April, round those perhaps end of March.
Of course, we can indicate a little bit, and I think you can also sort of start that with saying, look at what the environment looks like in the automotive industry today. There are a lot of plants. For some period of time basically all the European automotive plants, basically all the U.S. automotive plants have been temporarily closed down. We see, of course, the plants now starting to open up here in Europe again, like Volvo, Volkswagen, et cetera, are gradually opening up capacity. Of course, at this point in time, we are, I guess, looking at, I think they started at 10% or 15% of their capacity or so. Not being an expert in these companies, of course, but that's the indications I've heard. The consequence of that is, of course, that there is a limitation in demand from our customers in April. That's only natural.
At this point in time, our best estimate for our April figures are very much in line with what IHS is estimating for the quarter. What will happen in May and June, it's very difficult to say at this point, and that's also one of the reasons why we are not giving the type of guidance that we are typically doing for the coming quarter here. So far in April, the demand quite much looks like what IHS is believing as well.
Just to add to that, IHS also has their view on the different regions, which we also see the similar pattern. With a much more higher decrease in Americas and then Europe and then less of a decrease in Asia, driven by the China, of course, market being quite back to normal. You also have to bear in mind that India and Thailand and other important Asian markets are right now on lockdown with basically no demand.
Okay. Sorry from my side here, but just a quick final question here. I think you mentioned ahead of Q1 that there was a risk of inventory adjustments on the HVAC side. Did this actually materialize, and what do you see going forward there on the HVAC and other side?
We did see quite some impact of inventory reductions at HVAC customers in Q4 right towards the end, and that's also contributed to a very weak quarter in Q4 for us. I think what we said going into Q1 on the HVAC side is that we didn't expect the same effects in Q1, and we have also not seen that. What we have seen on the HVAC side is, as Johan talked about earlier also, that the unit build in the U.S. in the first quarter actually increased. As a consequence of that, of course, customers going in with low inventory, there is not so much more inventory to reduce during the first quarter. Looking into the second quarter, of course, the demand looks weaker on the HVAC side. Exactly what's going to happen there and how customers will react, we just have to wait and see.
Thank you.
Thank you. Our next question comes from the line of Kenneth Toll of Carnegie. Please go ahead. Your line is open.
Just a small question. In the Newport facility, you started up new capacity, and as I remember, there were some issues with the certification from customers of these plants that took some time and so on. Is it operational and delivering volumes now?
Yes. Johan, a good question. As we said, we have upgraded two of the three rolling mills, and there's been a lot of interactions with customers and new customers in this segment with a great interest, and that develops fairly well, I would say, with quite a large increase, though from a very low starting volume. It's a very great interest for products from the Newport plant. The third mill, as I said, is not upgraded and will not be for the time being, but still we can deliver material from the third mill. There's a good momentum. That, of course, plant is producing material for other segments, as you are aware, upon that pharmaceutical and consumer goods, et cetera, which has a quite strong demand right now.
There are no sort of commercial volumes going through that plant, the first two mills right now or?
There are commercial volumes, they are fairly limited, and that's due to exactly what you referred to in the beginning here. We have to sort of finalize the qualifications and so forth with the customers. We have seen, as Johan said, more interest in these volumes in the last couple of weeks here due to what's happening in the market. I'm speculating now, I'm thinking that that could also mean that the customers would be more interested and really speed up the qualification process here. As we said before, we expect the qualification process with several customers, of course, to run during Q1, which it has, and during Q2 as well, and that you will see the real commercial volumes starting ramping up in the second quarter and more towards the second half of the year.
Maybe we will see some quicker speed in that given the circumstances. So far we are following very much what we have indicated before.
Okay.
To add to that, Kenneth, just by looking more longer term, of course, the interest for battery foil from that plant is very high from many of the large battery producers in America. We have a lot of projects ongoing as well in this field, worth mentioning.
We analysts, when we look at your P&L and so on, the Newport volumes, will they give sort of a significant contribution to EBIT so that we see sort of a stepwise increase in the second half of this year? Or is it more a gradual thing?
We expect this to gradually have an impact during the second half of this year. That's correct.
Okay. Yeah, thank you. That's all.
Thank you. Our next question comes from Mats Liss of Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah, hi there. Thank you. Well, just coming back to China, I guess the Chinese car production is ramping up somewhat or in better shape or in that sense, compared to Europe and the U.S. I just wondered about, are there any sort of inventory levels there that sort of hold back your supply, or could you say something there?
Yeah, Johan here. You mean if there is a high inventory level at customers, stopping them from-
Yeah, some sort of labor involved.
That sense.
Yeah. No, as I said, good question, Mats. No, it's not really a clear buildup of inventory. It's more the explanation we had for quarter one, better performing than the market. We see that especially the Chinese market is actually back to not fully as it was before, but to a more normal level actually, which is good, and there's no really signs of inventory buildup here right now.
If you compare, the first and the second quarter in China, it seems that car production will be maybe better, and I guess historically your profitability had been on a higher level in China. Is it fair to assume that this will be the case this time as well? Volume too low that there are some under absorption that takes the cost and so on, that make some headwinds?
I try to answer that a little bit. Of course, our Chinese plant is the most efficient automotive materials plant that we have, of course. That makes it easier to make good money also on a lower capacity utilization compared with the higher cost structure plant that we have in Sweden, for instance. In terms of development in China going forward, as Johan said, we have seen the automotive production pick up again, starting to slowly going back to normal. Of course, if we look at the forecast from IHS year-over-year in the second quarter, we expect to be quite a bit below demand in the automotive industry in China and Asia, also in Q2. This will lead to, of course, a lower capacity utilization in the plant in China as it will in the other plants that are serving this market, of course.
That is going to have an impact on profitability. I don't know if that was answering your question.
No. It's a good answer. I guess the sequential performance, Q1 compared to Q2, it seems that production are sort of improving if you compare the two quarters in that sense. Year-over-year, I guess there will be a substantial decline.
No, okay. I get what you're meaning. Yes, year-over-year it's one thing. If you look at Q2 versus Q1, the COVID-19 outbreak started in China and Asia. Of course, we saw a relatively then larger impact in Asia for Q1. That means, we hope at least, that the fact now that China seems to be getting back to normal will have a positive impact sequentially Q1 to Q2. On the other hand, if you look at what IHS is estimating, the downturn year-over-year is similar in Q2 compared to what they think about Q1.
Also to give a short comment on this, of course, China is the one starting to see a more normal market conditions, but you also see in quarter two that the other Asian countries has lower demand than during quarter one. I'm referring to India, for instance, Thailand, even Japan are being important markets for Gränges, where you see maybe a more tougher situation for quarter two.
Okay. Thank you very much. Then a short one on prices. I guess volumes are down substantially. Do you see a considerable price weakness as well, or is it more volume related?
Oskar. If you look at the average fabrication or conversion price for the group, it's coming down a little bit in the first quarter. It's a mix of things there. One part of it is, of course, that it's volume driven, similar to the profitability discussion we had earlier, that typically the automotive products are more advanced, and we can get a higher price for those. You have a mix effect on the price side. If you look at comparable products, you would see a price increase coming through in the Americas. As we have indicated before, we are managing to realize a price increase of 45%-50% of the volume in Americas this year, and we see that being pushed through our P&L in the first quarter. In Asia, we see the prices coming down a little bit in the first quarter.
This is similar to the price reductions we have seen in recent years. We haven't seen a big impact in Q1 from the demand reduction per se. We have long-term contracts with our customers, and that means that we can typically follow the price level in those contracts rather than having to sell on a spot price, which would probably have had an impact on the price level. Limited impact from the COVID-19 outbreak on price at this point.
Okay, great. Thanks a lot.
We have one further question in the queue at this time. This comes from the line of Karl Bokvist of ABG Sundal Collier. Please go ahead. Your line's open.
Yes, thank you. Quick one. I just wanted to confirm something you mentioned earlier regarding your expectations of CapEx for 2020 as a whole, and how much you think would be maintenance and how much would be expansion?
We typically say that we have around 80% or so of our depreciation reinvested as maintenance CapEx over time. That's around SEK 400 million in 2020 in sort of a base scenario. We had actually a slightly lower number in our base scenario, and then we have had an original expectation of investing SEK 300 million in expansion, giving the total sort of 2020 number being around SEK 650. What we have said now is, of course, that we will reduce our maintenance CapEx and postpone parts of this, and we will also postpone the two remaining expansion programs in Newport and Finspång, and that means that we will reduce the total CapEx with around SEK 200 million, so to around SEK 450 or say SEK 450-SEK 500.
Of that, we expect the reduction on the expansion side to be around SEK 70, and the expansion on the maintenance side to be around SEK 130 then, give or take.
Okay. Thank you. Also just in terms of how you look at working capital build-up or release for the coming quarters?
Of course, working capital is a key focus area for Gränges at this point in time, as we've mentioned before. We managed to release quite some working capital in Q1, which I think is beneficial going into the second quarter. That is sort of more uncertain from a sort of a business point of view. It's difficult to give a forecast on exactly how working capital will develop, but it's a focusing area for us that we are monitoring very closely and put very high attention to for the time being.
Okay. Thank you.
Thank you. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Okay. Thank you for a lot of good questions and interest. I just want to underline as well that we have good access to liquidity for Gränges for the coming period ahead of us. With this, I would like to conclude this session, and thank you for participating. We look forward to our next call on July 16, when we present our second quarter report for 2020. We will also hold our annual general meeting on June 25, and the notice to the AGM will be published no later than four weeks before the meeting. Thank you and goodbye.