Welcome to Gränges conference call for the third quarter 2018. Here in Stockholm, it's me, Johan Menckel, CEO of Gränges, and beside me I have CFO Oskar Hellström. As usual, we will start this presentation with an update of Gränges performance during the third quarter and touch upon some important events. Then it's time for Oskar to guide you through the financial results. After that, we will conclude the presentation with a short summary and a Q&A session. To start, I want to briefly go through Gränges current operations. Gränges is a global aluminum rolling company with some 1,600 employees and an annual net sales of more than SEK 11 billion. We have production facilities in Sweden, China, and in the U.S. 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 third quarter of 2018, we have had a stable development with sales volume and operating profit slightly higher than in the third quarter last year. In total, sales volume was 93.4 thousand tons in the quarter, up 0.4% from last year. In Asia, sales volume was somewhat higher, driven by good development in China, where sales to automotive customers rose 3% in the quarter. In Europe, sales volume was down 2.5%, with sales of heat exchange material some 5% lower. Production disturbances in Finspång due to issues when commissioning new equipment led to lower deliveries and higher cost in the quarter. The problems have been addressed, but it will take another two weeks before we are through the backlog of orders.
In the Americas, sales volume increased by 1.2% from last year. We continue to see very good demand in North America, but growth is still limited by available capacity in our plants. Adjusted operating profit rose to SEK 230 million, up from SEK 227 million last year. The production disturbances had a negative effect of SEK 22 million in the quarter. The move of production from Shanghai to Finspång has led to less efficient metal management in Shanghai, while we continue to experience positive effects from price increases in the U.S. Profit for the period was SEK 158 million. Earnings per share increased to SEK 2.09 in the quarter, up from SEK 2 last year. Cash flow before financing activities was SEK 81 million and includes CapEx investment of SEK 236 million.
We ended the quarter with a net debt of SEK 2.6 billion, corresponding to 1.9 times EBITDA on a rolling 12-month basis. In September, our technical seminar was held in Xiamen, China. The technical seminar is a biannual, and it's an important event for the whole industry. More than 350 customers and other industry representatives participated this year. Focus was on solutions for electrical vehicles and for the wind power industry. During third quarter, the global light vehicle production is estimated to have decreased. Research firm IHS Markit a quite significant revision in its estimates since we presented outlook for quarter three in July. At that time, IHS estimated an increase of 4% in the third quarter. That number has now been revised down to a decrease of 1%. I wouldn't be surprised if the actual outcome in quarter three has been even lower.
We then look into the fourth quarter of 2018, the global vehicle production is expected to grow 2% compared to last year, according to IHS current estimates. That comprises a flat development in Europe and a growth in both Asia and Americas. Our view isn't as optimistic as IHS. I found it more likely that they will revise the outlook further as we proceed in the quarter. We look into 2019, the outlook for production of light vehicle is still a growth of some 2% for the full year, according to IHS. In Asia, the market was down 2% in the quarter, as production of light vehicles in China was about 4% lower. In Europe, light vehicle production was down by almost 3% in the third quarter, while in the Americas, the market was up about 4% compared to last year.
We are looking to Gränges sales volume development during the third quarter, we can see that Asia was more or less flat at 20.8 thousand tons. In China, the growth was 3% in the quarter. Sales to the wind power industry in China continues to increase. In Europe, sales volume was down to 15.1 thousand tons. Sales of heat exchange material was some 5% lower, while sales of industrial products increased in the quarter. In the Americas, sales volume was 1.2% higher at 57.5 thousand tons in the quarter. That comprises a sales volume to HVAC/R and other of 49.3 thousand tons and to automotive of 8.2 thousand tons. This morning, we also announced the decision to invest in our European operations to make it more efficient and to grow the business.
In total, the investment amounts to SEK 400 million over two to three years. This is an important move for us that will enable a clear improvement of operating results in Finspång. We will add some 20,000 tons in new capacity and at the same time improve logistic flows on site considerably. We will also add capabilities which enable us to address new market segments. The plan comprises several elements that together will lead to more competitive and profitable European business. By this project, we're also taking important steps forward in our sustainability efforts by reducing transports on site and converting from diesel to electric forklifts. The project will start immediately. We expect the supplementary approval from Swedish authorities during the first half of 2019. From full year 2022, we expect effects from this project to be fully visible.
The investment decision in Finspång is also attractive from a market point of view. As more consumers are demanding electrical and hybrid cars, we see a very good growth for advanced materials for heat exchangers in Europe in the coming years. That includes, for example, applications for battery cooling. Gränges is well-positioned to take advantage of this growth as we have extensive R&I resources and offer the most advanced products. We can partner up with our customers in the development of new applications. We have seen lately that automotive OEMs now tend to select liquid cooling as the preferred technology for battery cooling. That is positive from a Gränges perspective as it increases demand for our core products. Our patented technology, TRILLIUM, is an excellent example of a product that brings additional advantage to liquid battery cooling solutions.
Today, we have discussions going on with several of the leading European OEMs regarding battery cooling solutions. Still, the volumes are low, but a ramp-up during 2019 and 2020 is expected, as many of the leading car brand has announced that high volume electrical car platforms will reach European market from 2020. As I mentioned earlier, wind power was one of the focus areas at our Chinese technical seminar in September. Gränges Shanghai has made great efforts in developing vacuum brazing solutions that meet the tough requirements in offshore wind turbines. The conditions are extremely challenging when it comes to corrosion, as the equipment constantly is exposed to moist, salty air and must remain functional for long periods of time due to high service costs.
By entering this market at an early stage, we have been able to set the standard for the materials used in new installed offshore wind power mills. We've also been awarded sole supply by large wind turbine suppliers. Today, we have a leading role in this market, and we see potential to continue to grow this niche going forward. I also short want to comment on our expansion projects in the U.S. The expansion in Huntingdon is on track for the start-up in third quarter next year, and it will be a cautious ramp-up of volumes during second half of 2019. From 2020, we will see full effect from this new capacity. We have actively started to sell this new volume. In Newport, we have restarted the mills in current conditions and will run tests in the fourth quarter and first quarter of 2019.
The mills will be upgraded in 2019, and the plan is to gradually start shipping products in the spring next year. This means that we reenter the market for light gauge foil for various consumer applications next year, which is very exciting. So far, the response from customers have been very positive. From January, we will increase prices for the remaining 50% of our current sales volume as these contracts are renewed. The increases are in the range of 7%-10%, excluding metal. I hand over to Oskar and the financials.
Thank you, Johan. The positive earnings development that we saw in the first half of 2018 continued in the third quarter, but at a lower pace. The single largest driver behind this slowdown is the production disturbances that we experienced in Finspång during the quarter, and that Johan mentioned earlier. Although the sales volume continued to remain relatively stable year-over-year, the rolling 12-month adjusted operating profit increased to SEK 992 million. That's an improvement of SEK 67 million compared with the run rate earnings one year ago. If we look at the third quarter financials and compare with the same quarter last year, we can see that the sales volume increased by close to half a percent to 93,400 tons, whereas the net sales increased by 22% to SEK 3.3 billion.
The higher increase in net sales than in sales volume is primarily driven by increasing metal prices. This in combination with the net impact from changes in foreign exchange rates, that was positive SEK 253 million compared with the third quarter 2017. Looking at the earnings, the adjusted operating profit amounted to SEK 230 million in Q3, an increase of 1.6% on prior year. During the second quarter, Gränges has completed the transfer of production of volumes that are exposed to U.S. anti-dumping duties from Shanghai to Finspång. As a consequence, no additional cost has been taken for U.S. anti-dumping duties in the third quarter. Instead, a retroactive adjustment in duty rate had a positive impact of SEK 9 million.
This was, however, offset by costs for Section 232 tariffs on imports to the U.S. from Sweden, making the total direct impact of additional U.S. duties neutral to Gränges in the quarter. The transfer of production from Shanghai to Finspång has also led to slightly lower contribution from the U.S. import volumes due to somewhat higher production cost in Sweden compared to China. Following the volume transfer, the capacity utilization in the Finspång plant is now at a very high level. The high utilization means that the flexibility in the production process is limited. That is more difficult to compensate for potential operational issues. The temporary production disturbance in Finspång in the third quarter had a net impact of negative SEK 22 million. Half of this is due to increased cost and half is due to reduced sales volume.
Although the situation has already been addressed, an additional cost of about SEK 10 million is expected for the fourth quarter. For the Shanghai plant, the volume transfer has led to a less optimal product mix from a scrap recycling perspective. This had a negative impact on the metal management performance in the third quarter. Although the product portfolio will be re-optimized over time, decreased metal management performance is expected also for the fourth quarter. On the positive side, slightly higher average conversion price had a favorable impact in the third quarter. Changes in foreign exchange rates had a net impact of positive SEK 30 million compared to Q3 2017. As we talked about before, from 2018, we are rebalancing the timing of vacation expenses in Americas to get a more even distribution over the year.
Although this is neutral from a full year perspective and also has no impact in the third quarter, it will have a negative impact of about SEK 5 million in Q4 when comparing year-over-year. The adjusted operating profit per ton in the third quarter reached SEK 2,500, which is close to SEK 100 higher compared to Q3 2017. There are no items affecting comparability in the third quarter. The reported operating profit is therefore the same as the adjusted operating profit in the quarter. The profit for the period reached SEK 158 million compared to SEK 151 million previous year, and corresponds to earnings per share of SEK 2.09. Cash flow before financing amounted to SEK 81 million in the quarter. By the end of September, the return on capital employed reached 16.8% on a rolling 12-month basis.
During the third quarter, the net debt decreased by 56 million SEK to 2.6 billion SEK. This corresponds to 1.9 times adjusted EBITDA on a rolling 12-month basis and remains within our long-term target range of one to two times. Looking at the cash flow before financing in the third quarter, we can see that the earnings contributed with 320 million SEK. For the working capital, we see a relatively neutral development in absolute terms in the quarter. This does, however, include a negative effect of 30 million SEK related to the buildup of an additional safety stock of rolling slabs in Finspång. This will be used to secure production should the wind down period for U.S. sanctions against Rusal not be extended post December 12th. Other operating items refers to taxes paid of 19 million SEK. Investments in fixed assets amounted to 236 million SEK in the third quarter.
Of this, 88 million SEK refers to investments to maintain and improve the current production facilities. 147 million SEK is the CapEx related to the expansion of the Huntingdon facility and the restart of the Newport plant in the U.S. During the third quarter, we launched an MTN program and refinanced part of the debt by issuing two bonds with a total value of 600 million SEK. The program has a frame amount of 3 billion SEK and will be used to finance the existing business as well as continued future growth. Long term, it's positive for Gränges to have an MTN program, but it is not expected to have a significant impact on the financing cost in 2018.
As we discussed in our first and second quarter reports this year, new U.S. trade legislation, both in terms of new tariffs as well as sanctions against the aluminum company Rusal, has had a large impact on the aluminum market. This is something that is impacting Gränges as well, both in positive and negative ways. First, the U.S. Department of Commerce has introduced countervailing and anti-dumping duties on aluminum foil and sheet from China, which has a combined duty rate of up to 200%. To avoid being exposed to the anti-dumping duties, Gränges has transferred the production of all volumes imported to the U.S. from China to Sweden during the first half of 2018. Consequently, we did not pay any additional anti-dumping duties in Q3 and do not expect to do so going forward.
On the positive side, the anti-dumping duties has led to rapidly increasing market prices in the U.S. This is expected to greatly benefit our domestic U.S. business going forward. The general Section 232 tariff of 10% is affecting Gränges' supply chain from Sweden to U.S. These additional tariffs are to a large extent being carried by the customers, which is reducing the impact to Gränges to about 25 million SEK on an annual basis. This is given the current customer agreements and FX rates. We do, however, believe that the majority of our products should qualify for exemptions from the 232 tariffs. We have filed for this with support from our customers. We expect to receive the answer from the Department of Commerce during Q4. After that, the impact to Gränges of the new tariffs will be clearer.
As for the sanctions against Rusal, they prohibit U.S. persons and limit non-U.S. persons to transact with Rusal. As we have previously mentioned, one of the Rusal subsidiaries, the Kubal smelter in Sundsvall in Sweden, is a supplier of aluminum slabs to the Gränges operation in Finspång. To secure supply of rolling slabs to Finspång in the short term, we have built an additional safety stock of slabs. For the medium to long term, we have a multi-sourcing strategy for slabs, and since the sanctions were announced, we have reduced the risk by securing metal supply from non-Rusal sources. Should the situation around Rusal not be resolved and the sanctions come into effect in December, we do however expect to see a slight increase in material and logistics costs in 2019. Needless to say, we continue to monitor the developments in this area very closely.
I will now hand over back to Johan Menckel who will summarize the third quarter and provide an outlook for the fourth quarter.
Thank you, Oskar. When looking into the fourth quarter of 2018, we expect Gränges' overall sales volume to increase with low single digits. For automotive products, we foresee a stable sales volume on an overall level. That comprises a higher sales volume in Europe, while we expect sales to be somewhat lower in Asia and in the U.S. For HVAC/R and other, we expect sales volume to increase with low single digits in the fourth quarter. Our outlook for fourth quarter implies a slightly better development than the market when compared to IHS forecast. As mentioned earlier, we have experienced production disturbances in Finspång in the third quarter due to problems when commissioning new equipment. The problems are solved but will cause a negative effect also in the fourth quarter, estimated to about 10 million SEK. When looking into 2019, we will continue to focus on our growth initiatives.
During the second half of next year, we will see new volume coming in as a result of the expansion projects in the U.S. We're also optimistic about our potential to improve our operations in Europe and in Asia next year. To conclude 2018 third quarter report, we have seen a stable development during the third quarter. Sales volume increased slightly to 93.4 thousand tons. Adjusted operating profit increased to 230 million SEK, including a negative effect of 22 million SEK related to production disturbances in Finspång. We had less efficient metal management in Asia, while price increases in the U.S. has worked on the positive side. Cash flow before financing activities was 81 million SEK, and return on capital employed was 16.8%, and we ended the quarter with a net debt of 1.9 times EBITDA. Thank you, and now we open up for questions.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad and you'll enter a queue. We have a question from Johannes Gunselius, Handelsbanken. Please go ahead.
Yes. Hello, everyone. It's Johannes here, Handelsbanken. I have a couple of questions. The first one is what you're saying about China here, that you are less efficient in terms of metal management. Could you possibly provide any sort of guidance there or more color, or perhaps give a financial range what this impact is about? Thanks.
Good morning, Johannes. Yes, I can certainly do that. The effect we see in China, it has a lot to do with how efficient we are in recycling our own process scrap. For us to have an efficient metal management, we need to have alloys that can absorb a large part of our process scrap in order to recirculate it efficiently in production. A large part of the volumes that went into the U.S. that was transferred from Shanghai to Finspång were of the type that could absorb a lot of process scrap. As a consequence, we have a less favorable product mix in the Shanghai plant right now from a metal management perspective. If we talk about the ranges here, the impact is around SEK 10 million or so in the quarter.
Not everything is due to the transfer of products, a large part of that is.
Okay, that helps a lot. I was more thinking about what you're seeing and hearing when you talk to clients now, and if you look into your order books, et cetera. Obviously the stock market investors are extremely nervous about a major decline in demand here for most manufacturing companies. What kind of worrying signs are you seeing, if any, at the moment?
Johan here, we can comment on that. We see in our order books we have a visibility of three months. As I mentioned, of course, we have a slightly more negative view of IHS prediction than the one we communicate here. Still for our products, on a global level, we see a positive demand, especially in Europe in the next quarter.
Yeah. Even if we would see the IHS scenario playing out perhaps a little bit weaker than that, you're still confident to go and deliver good volumes?
Yeah, if you look upon our global business, if you look upon the automotive business, there is a prediction that electrical and hybrid cars will increase by almost 45% in the next coming four years. Here we have a very good solution. We expect a strong demand for these kind of applications. Even though the automotive market might be a little bit weaker, the demand for heat exchange materials for electrical vehicle is actually higher than the normal average demand for ICE car. That is positive.
Yeah.
Looking to Americas, where we see a strong demand in general, especially from the HVAC and R market.
Okay. Back to China, the metal management is an important thing, obviously. I know that you also are running with quite low utilization rates at the moment. When do you expect the facility to be more running at normal production levels?
We are, of course, running at slightly lower utilization rates following the transfer of the U.S. volumes. I would say that it's still at a relatively high rate on an overall level. I think we can say that we have a good utilization in our China site plant.
Okay.
There is, of course, some room still for growth. There, I think that Johan highlighted a quite interesting new market segment for us, the wind power segment, which is a lot focused on Asia, and of course, then from our perspective, is going to be produced in the Shanghai plant.
Yes. Where do you see wind power to take significant volumes for you? Is that more in 2009, next year, or is it more of a 2020-2021 story?
It's a long-term, I would say, journey here. We see a very strong growth rate, but starting from very low volumes. If you're looking for the prediction of the wind power expansion, especially in China, it's at 20 times, actually, in the next coming 10 years.
Right.
Especially the offshore wind power turbines has a very tough environment. We have a good solution for that kind of segment. We started that journey, but it will take a couple of years.
Okay. That's all for me. Thank you.
Michael.
Our next question comes from Emmi Östlund , ABG. Madam, please go ahead.
Hi there. My first question is regarding the capacity investment in Finspång. I was just wondering, could we just expect a linear, I mean, the CapEx is just linear, this SEK 400 million over two years, when we will start to see the volumes coming in?
Yeah. Good morning, Emmi, it's Oskar here. Very good question. We will start the project basically immediately, that doesn't mean that the CapEx spend will come immediately. We foresee that the CapEx spend will start sometime in mid-2019, be relatively even spread over the two years following that, which basically means that around SEK 100 million in the second half of 2019, around SEK 200 million for 2020, around SEK 100 million for 2021. You would see the benefit of this project really coming in from 2022 and onwards.
Okay. Got you. Then, maybe you have mentioned that, you mentioned sort of that the liquid cooling system is sort of gaining ground. I don't really know how much heat exchange material do you need for each of the cooling systems, compared to a combustion engine. Could you just give a sort of brief, or I don't know, just so we can calculate a bit on it?
Yeah. Of course, it's a lot of technology activities ongoing right now. It's not really certain what technology that will be out there. The trend is really towards liquid cooling for battery cooling, which means that they need cladded brazing sheet to produce this. These cooling equipments are fairly large, which result in a higher need than in a normal ICE car of around 20%-30%, if that technologies goes up even higher.
Okay. For the two other cooling types, that would be the same as the combustion engine, or would it still be higher?
You can actually say that the total demand, if the technology will be liquid cooling, would be in the range of 40%-50% higher than the demand today.
Okay.
I will get back in line, I think. Yes, thank you very much.
We have a question from Björn Enarson , Danske Bank. Please go ahead, sir.
Hi, this is actually Max Fryden for Danske. A couple of questions from me. On the price increases for the rest of your U.S. business, 50%, if I'm not mistaken, please correct me if I'm wrong. You say 7%-10%. What was the price increase on the volumes that you increased prices on this year, if you compare apples to apples?
This year, we have increased around 50% of the volume as well. That we've previously communicated around between 5% and 10%. We basically foresee a little bit of a higher price increase in 2019 than in 2018.
Perfect. Thank you. In the European business, if you look at the capacity utilization rates in light with your investment here of SEK 400 million, you talk about costs or one-off costs in Q3 and Q4. Isn't this high-capacity utilization rate and your plants not being optimally structured going to keep margins down in that facility until you get the new capacity up and running?
We can comment on that. Of course, one of the driver and rational for the investment is to improve the efficiency and thereby reduce the cost of the overall production. For example, we will reduce the transportation five times internally. Of course, what we're doing now in the European operation in Finspång is constantly working on metal management and on the cost item that you can impact. Of course, on top of that, we're also working very actively on a product mix change that will have a positive impact. I think we're working on the areas where we can impact until the investment is fully completed.
Okay. What is a product mix change? To my understanding, I presume that these sort of higher priced products are maybe a little bit thinner and it takes more capacity utilization, or just if you could explain.
The product mix, during the years, we have learned a lot more about our cost position on a very detailed level, meaning that we can better understand and plan for what scrap we need for certain products and where we have competition and where we have the profitability per each article, so to say. That we have been using very strongly during our discussions with customers, of course. I think that knowledge is a great impact for Gränges business in general. It's many dimensions here, actually. Then, of course, we have the TRILLIUM product that we're now launching in a bigger scale that is a more advanced product with a better value for customers and thereby also a better price.
Okay. Thanks. Okay. Then China, you mentioned in the past years that you need to expand capacity in China, and now some of those volumes are moving to Europe. Looking at your positive growth outlook on electric vehicles, wind power, et cetera, we will be very close, I presume, for a capacity expansion again in China. If you could either confirm or deny and also give a time view of where you see this happening.
Max, we're overall positive long-term to Asia and specifically to China due to the fact that electrical vehicles will grow there much more than elsewhere. We have other segments such as wind power. Of course, we're working right now to address the long-term capacity challenge we have in China. There is nothing to report today, but this is something that we want to solve in the coming years, of course, how to address the growth we see in Asia and in China.
Okay. I'll do the math myself. Finally, I just have one more question, that was the light gauge, if I'm pronouncing that correctly, products that's going to be ramping up. Can you say anything on the profitability of that product? If I'm not mistaken, it's really thin aluminum into packaging and consumer goods. If that's a more profitable business than your traditional HVAC business.
Very good question, Max. The nature of this product is it might seem simple at first glance. It's really thin aluminum foil, it's really complicated to go that thin in gauge, which means that it's a very complicated product to produce, and therefore it also requires, of course, a high price. This is also one of the products that has been absolutely most affected by the U.S. anti-dumping duties on China, which means that it has a very attractive price level in the U.S. right now, which means it's higher priced than many of our current products in the U.S. We also need to keep in mind then when we're discussing that the opening of the Newport facility, that we're adding very little additional fixed costs, which means that the majority of
The cost that we're adding is variable, that's also, of course, something that will benefit the profitability for the products manufactured there. We are very positive to the profit level without mentioning any specific numbers.
Okay. I'm sorry for repeating myself here because I had another call, so I missed the first part. In terms of tons in capacity for the light gauge, how much is it, and when are you starting to produce this?
Yeah, it's in 20,000 tons in total, the startup of the Newport. Of course, there is potential to increase that capacity if we find this market attractive to continue to develop. The production has already started, and we will start to deliver products from quarter one next year and towards the remaining of the year. We will see actually deliveries from this already next year.
Okay. Thank you so much.
I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. We have a question from Mats Liss, Kepler Cheuvreux. Please go ahead, sir.
Thank you. A few questions there. First, I guess Rusal is an important supplier for you, and I guess there are some issues going on there, but could you say something about your ability to meet different scenarios there? I mean, if and what.
Absolutely, Mats. Basically, there are sanctions against Rusal, but they are not really in effect yet because the wind down period that you have for doing your transactions with Rusal has been extended several times, and it's now set to end by December 12. Of course, the consequence of this is that it has given us quite a lot of time to work on different types of solutions for this. Basically, from our perspective, we have in the short term now built additional slab stock in Finspång so that we can continue to supply throughout December and beginning of next year, even if we would not get any additional deliveries from Rusal. Going in then to next year, as of January, we have additional slab suppliers qualified that can deliver on basically all the volumes that Rusal would have supplied.
We are not really worried anymore of any sort of supply issues coming out of this. From our perspective, it's more a cost play because we have worked with the Kubal plant in Sundsvall for a very long time. We like them very much as a supplier and would like to continue to be supplied from Sundsvall. If we go for other supply, there will be certainly higher transportation costs because there are no other suppliers that are that close to us as the Sundsvall plant. You would also foresee some additional costs when running new material in your production initially and so forth. It's more on the cost side rather than the supply side that we will see effects in 2019 if Rusal is no longer there to supply us.
Okay, thank you. Second one about, not about electric cars here, but do you use the same sort of material technology when you supply a potential electric vehicle platform that you use when you supply a compacting engineering platform ?
Yeah, we do, and that's also really the confirmation we received from our customer that when it comes to battery cooling, which is of course the new heat exchanger here, the liquid brazed aluminum heat exchanger is the technology that will be for that kind of cooling equipment. There you need our products. Yes, we see the same kind of technology for battery cooling as for engine cooling.
Good. Then about the wind power segment there in China, the potential changeover there to aluminum, I guess, because that's not used currently, if that's right. It's sort of using a new type of material in that segment of the market.
Yes, you're right. Of course, the wind power market in China has a very strong prediction to grow, where China is putting a lot of efforts to. Traditionally, the heat exchange oil coolers has been in steel, but we have now worked together with some of the Chinese customers to develop an aluminum alloy that can withstand a tough corrosive environment. Of course, lightweight for wind powers are also extremely high importance. It's a promising segment for Gränges, and we have made a good entry into that segment and with good customer relation. Of course, starting from low volume, but expected to increase in the coming years.
You don't expect to meet any other competition in that area? Pretty well alone currently, I guess.
Of course, there's always competition, you should bear in mind that the product here for the wind power suppliers or the heat exchanger, is in a very tough environment, the alloys that have been developed are not that easy for many of our competitors to produce. You can also imagine that the service cost for this type of heat exchanger is extremely high if you have to change them out on the sea.
Sure. Okay, thank you very much.
Sure.
We have a question from Johannes Grunselius , Handelsbanken. Please go ahead, sir.
Yes. Hello again. Just have one more question that's related to the production disturbances in Finspång. Obviously, they are related to high capacity utilization, we're seeing these issues in other industries having very high capacity utilization for now. How do you see the risk that something of this could happen again over the next few quarters?
Very good point, Johannes, it's certainly connected. With the volumes we transfer now, we are at the capacity utilization on the Finspång plant of around 90%, which is a very high level. What does it mean then? Well, of course, it means that if you're running at a high capacity utilization, you are less flexible in your production process, so it's more difficult to make adoptions and so forth if you have disturbances in your production. What triggered this specific event that we saw in third quarter was that we actually commissioned some new equipment in the hot rolling mill in the summer maintenance stop there in July, and we had some startup issues with that. There was a very specific trigger for this event, and then the higher utilization made the consequences maybe a little bit larger than they otherwise would have been.
Over time, we will of course now be more used to running at this higher level, and it's going to be easier to plan for running at this higher level going forward. It will be more sensitive if things happen and if you have disturbances.
Yeah. It was a specific trigger for this one, and I can imagine it was a quite big disturbances compared to if something else, I don't know what can come up next, but we shouldn't see this sort of magnitude in the production issues if you have something. Am I right in the thinking here?
We haven't seen this type of disturbance for many years in Gränges. This was a relatively large one from that respect. You're right.
An additional comment, Johannes. Johan here, on top of that, we also moved production from Shanghai to Finspång with new products.
Yes.
You always have a challenge when you're producing new types of product in a production facility. That is already done by now, so we won't have that move.
Yeah. The further cost you mentioned, I guess SEK 10 million, that you will charge that will be impacting the fourth quarter. Is that your calculation on volumes that you lost, or how did you come up? I'm basically thinking about, is the issue completely solved now, and are you comfortable with this estimate of SEK 10 million?
Yes. We have addressed the root cause, and we are actually hitting production records in Finspång in the hot rolling mill after this disturbance. Production now is running very smooth. The costs that we foresee for fourth quarter are basically additional cost for express transportations to meet our delivery agreements with customers, and costs for additional manning that we will need in order to work down the backlog. That are very direct costs that we have estimated to be about SEK 10 million then for the fourth quarter. In terms of the sales there, we of course foresee to regain some of the sales that we lost in the third quarter, in the fourth quarter, and that's also one of the reasons why we are guiding for a little bit higher growth in Europe in the fourth quarter.
Okay. That's very helpful. Thank you.
We have a question from Mats Liss, sir. Please go ahead, sir.
Yeah. Thank you. Just two questions. First, energy cost. Could you say something about the potential impact going forward there in the fourth quarter?
Yeah. We don't see any particular changes in the energy cost levels in the fourth quarter compared to what we've seen earlier in the year.
Great. I guess you halted the Mitsubishi joint venture plans there. Are there anything more to say there about the future? Do you have those plans on hold totally, or could we expect some other measures to be taken to get the production facility in place in the U.S.?
Good question. You want to know, the objective is still to have a full range of capabilities in North America for the automotive product. We are working with that. We still have a dialogue with Mitsubishi, and we are also looking into other solutions to address that. There's nothing more to report today, unfortunately. We are working on that topic.
Mitsubishi is still an opportunity. You haven't sort of halted
Not fully. As of today, it's not likely that we will have announcement on Mitsubishi and Gränges in the near time.
Okay. Thank you.
Yep.
I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad. If you want to ask a question, you will have to press 01 on your telephone keypad. There are no further questions at this time. Please go ahead, dear speakers.
If no more questions, I would like to conclude this session. Thank you everyone for participating today's conference call. Thanks for all very good questions. We look forward to our next call on the 31st of January, 2019, when we present our year-end report for 2018. Goodbye, everyone, and thank you.