Welcome to Gränges conference call for the second quarter of 2018. Here in Stockholm, it's me, Johan Menckel, CEO of Gränges, and CFO Oskar Hellström. We will start this presentation with an update of Gränges performance during the second quarter and then go into the financial results. After that, we will conclude the presentation with a short summary and the Q&A session. To start with, 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 11 billion SEK. We have production facilities in Sweden, China, and in the United States. 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 second quarter of 2018, we have continued to see a good development across all regions. Sales volume was 99.1 thousand tons in the quarter, slightly higher than last year and in line with expectations. In Asia, sales volume was up some 0.9%, driven by good development in China. In Europe, sales volume was 0.4% lower than last year, although sales of heat exchange material rose some 3%. In the Americas, sales volume increased by 0.5% from last year. We continue to see a very good demand in the Americas, but growth is still limited by available capacity in our plants. Adjusted operating profit rose to 301 million SEK, up from 290 million SEK last year, and include cost of 27 million SEK related to U.S. anti-dumping duties on Chinese imports. Good metal management, improved operational performance in Europe, and price increases in the U.S. has contributed positively.
Profit for the period was 214 million SEK. Earnings per share increased to 2.84 SEK in the quarter, up from 2.55 SEK last year. Cash flow before financing activities was 125 million SEK and includes CapEx investment of 166 million SEK. We ended the quarter with a net debt of 2.6 billion SEK, corresponding to 2.0 times EBITDA on a rolling 12-month basis. We are currently working actively to mitigate costs for U.S. import duties and don't foresee further costs related to Chinese import. The general tariffs of 10% that are effective from June also include imports from EU. The net effect of these tariffs is, however, expected to be limited for us. During the second quarter, the global light vehicle production increased by 4% compared to the second quarter last year, according to the research firm IHS.
In Asia, the market was up 6% in the quarter as production of light vehicle was increasing in China compared to last year. In Europe, light vehicle production increased by almost 5% in the second quarter, while in the Americas, the market was unchanged compared to last year. If we look into the third quarter of 2018, the global vehicle production is expected to grow 4% compared to last year, according to IHS. That comprises an increase of about 2%, both in Asia and in Europe. In the Americas, light vehicle production is expected to grow over 9% in the third quarter. Our view isn't that optimistic as IHS, I wouldn't be surprised if they came down somehow as the quarter proceeds. If we look further into 2018, the outlook for production of light vehicle is unchanged.
IHS estimate a global growth of some 2% for the full year 2018. If we then look into Gränges sales volume development during the second quarter, we can see that Asia was 0.9% higher at 22,500 tons. In China, the growth was 4.4% in the quarter. If we look at the first quarter and the second quarter combined, we have had higher growth rate than the market in China and in India. In Europe, sales volume was flat at 17,800 tons. Sales of heat exchanger material was up some 3%, while sales of industrial products decreased in the quarter. In the Americas, sales volume was 0.5% higher at 58,800 tons in the quarter. That comprises a sales volume to the HVAC/R and other of 49,600 tons and to automotive of 9,200 tons. In our local U.S. operations, we continue to see strong demand.
The import duties on rolled aluminum products from China is driving demand for locally produced products. Our growth is, however, still limited due to the fact that we are operating close to maximum capacity. From the second half of 2019, we will be able to add new capacity when the expansion in the Huntingdon is ready. In May, we announced the decision to restart production at our facility in Newport, Arkansas, focusing on light gauge foil for various consumer applications. This is a great opportunity for us to use an asset we already own and entering a new market niche. The investment amounts to $26 million and will be used to upgrade current mills and equipment. Production is scheduled to start in the first quarter next year and then gradually be ramped up.
When fully upgraded in the second half of 2019, the capacity in Newport will be around 20,000 tons per year. We are currently in discussions with customers and have received a very positive response so far. Already in 2019, we expect the investment to contribute positively to earnings. Another important project is the capacity expansion in Huntingdon. The site work is progressing according to plan, with the construction of new buildings just started and all major equipment now being ordered. When finalized next year, the capacity at the Huntingdon plant will increase by 25%. I hand over to Oskar and the financials.
Thank you, Johan. 2018 has started very well for Gränges, and the positive trend continues in the second quarter. The second quarter is also the best quarter so far for the group. Although the sales volume remained relatively stable year-over-year, the rolling 12-month adjusted operating profit continued to increase to SEK 989 million. That's an improvement of SEK 110 million compared with the run rate earnings a year ago. If we look at the second quarter financials in more detail, we can see that the sales volume increased by half a percent to 99,000 tons, whereas net sales increased by 12% to SEK 3.4 billion. The higher year-over-year increase in net sales than in sales volume is primarily driven by increasing metal prices. The net impact on net sales from foreign exchange rates was positive SEK 53 million compared with second quarter 2017.
Moving to the earnings, the adjusted operating profit amounted to SEK 301 million in Q2, an increase of close to 4% on prior year. The increase in adjusted operating profit is primarily driven by improved metal management across all regions and a slightly higher average conversion price. Changes in foreign exchange rates had a net impact of positive SEK 16 million compared to Q2 2017. On the metal management side, I would like to highlight that we managed scrap metal very well in the quarter. First, we have been able to increase the recycling of internal scrap to a new record level. Second, we've also managed to increase the amount of external scrap used instead of primary aluminum, especially in our Americas operations. This is important both from a cost and from a sustainability perspective.
On the negative side, cost for countervailing and anti-dumping duties on products imported to the U.S. from China amounted to SEK 27 million in the quarter. As of 2018, we are rebalancing the timing of vacation expense in Americas to get a more even distribution over the year. Although this is neutral from a full year perspective, it has a negative impact of about SEK 5 million in Q2 when comparing year-over-year. We will also see a negative year-over-year impact of about SEK 5 million in Q4, balancing the positive SEK 10 million impact we saw in Q1. In the third quarter 2017, we updated the assumptions on the useful life for certain types of assets. The consequence of this is a reduction of depreciation that has a positive impact on the operating profit of SEK 16 million in the second quarter.
As the updated assumptions have now been in use for four quarters, we do not expect any further year-over-year effects from this going forward. The adjusted operating profit per ton reached SEK 3,000, which is SEK 100 or 3% higher compared to Q2 2017. Excluding the anti-dumping duties, the underlying operating profit per ton increased by 13% to SEK 3.3 thousand. There are no items affecting comparability in the second quarter, the reported operating profit is therefore the same as the adjusted operating profit in the quarter. The profit for the period reached SEK 214 million compared to SEK 192 million previous year and corresponds to earnings per share of SEK 2.84. Cash flow before financing amounted to SEK 125 million in the quarter, and by the end of June, the return on capital employed reached 17.2% on a rolling 12-month basis.
During the second quarter, the net debt increased by SEK 269 million to SEK 2.6 billion. This corresponds to two 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 second quarter, we can see that the strong earnings contributed with SEK 390 million. For the working capital, we, however, see a negative development of SEK 82 million in the quarter, this is primarily driven by two things. First, the U.S. sanctions against Rusal, that is a supplier to Gränges from their Kubal plant in Sundsvall in Sweden. Following the introduction of the sanctions in early April, Rusal closed the consignment stock of slabs at the Gränges plant in Finspång, leading to increased inventory carried in Gränges books.
As a consequence of the sanctions, Rusal has also exited Gränges' supply chain financing program, reducing the amount of credit days Gränges has for payments to Rusal. In total, this is impacting the working capital and the cash flow negatively in the second quarter by SEK 135 million. In addition to the issue with Rusal, increasing metal prices tied an additional working capital of some SEK 100 million in the quarter. Excluding these two effects, we can see that the working capital was managed very well from an operational perspective in the quarter. Other operating items refers to taxes paid of SEK 17 million, and investments in fixed assets amounted to SEK 166 million in the second quarter. Of this, SEK 90 million refers to investments to maintain and improve the current production facilities, and SEK 76 million is CapEx related to the expansion in Huntingdon.
During the quarter, we also distributed SEK 227 million to our shareholders. FX and other mainly refers to the SEC revaluation of loans denominated in U.S. dollars. As we discussed in our first quarter report this year, new U.S. trade legislation, both in terms of new tariffs as well as sanctions against Rusal, has had a large impact on the aluminum market. This development has continued over the last couple of months, and this is also something that has impacted Gränges in both positive and negative ways. There are three areas that has an impact on Gränges' business. Anti-dumping duties on foil and sheet from China, general additional tariffs under Section 232, and trade sanctions against Rusal. On June 18th, the U.S. Department of Commerce introduced preliminary anti-dumping duties on aluminum sheet from China of 167%, valid retroactively from March 24.
This comes in addition to the 31%-113% countervailing duties on sheet that were already in place. This brings the total duty on aluminum sheet to well above 200%. Similar anti-dumping duties for Chinese aluminum foil was finally confirmed on March 15 this year and will be valid for at least five years. As I previously mentioned, the impact of the anti-dumping duties was SEK 27 million in Q2, and this was largely driven by the retroactive duties on sheet. To avoid being exposed to 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. We are now waiting for the last customer to finalize its validation, and provided that this is completed on time, we do not expect to see any further cost for anti-dumping duties going forward.
We do, however, expect to see some increase in production costs for the transferred products due to the slightly higher cost position in Sweden compared with China. On the positive side, the anti-dumping duties have led to rapidly increasing market prices in the U.S., and this is expected to greatly benefit our domestic U.S. business going forward. The general Section 232 tariff of 10% was presented on March 23, and the exemption for EU, Canada, and Mexico ended by the 31st of May. So far, Gränges has only carried limited additional cost to this, but the supply chain from Sweden to the U.S. is exposed to the Section 232 tariffs. These tariffs are, to a large extent, by agreement being carried by our customers, and it may also be possible to recover some of the remaining costs for the metal price component, at least in the short-term.
We do, however, believe that the majority of our products should qualify for exemptions from the 232 tariffs, and we have filed for this with support from our customers. We expect to receive the answer from the Department of Commerce in early Q4, and after that, the impact to Gränges of the new tariffs will be clear. As for the sanctions against Rusal, they prohibit U.S. persons and limit non-U.S. persons to transact with Rusal after the 23rd of October. As we have previously mentioned, one of the Rusal subsidiaries, the Kubal smelter in Sundsvall in Sweden, is a supplier of aluminum slabs to Gränges in Finspång. In Q2, we saw an effect of the sanctions on the working capital and cash flow, but this is a one-time effect that is expected to be reversed should the sanctions against Rusal be lifted.
Looking ahead, we've always had a multi-sourcing strategy for slabs, and since the sanctions were announced, we have reduced any risk for Gränges by securing metal supply from non-Rusal sources. Should the situation around Rusal not be resolved and the sanctions come into effect in October, we do, however, expect to see a slight increase in material and logistics costs in Q4 this year and 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, that will summarize the second quarter and provide an outlook for the third quarter.
Thank you, Oskar. When looking into the third quarter of 2018, we foresee a stable sales volume to the automotive customers in all regions. That implies a lower growth rate than the research firm IHS currently forecast of the market. For the HVAC business in Americas, we expect a low single-digit growth in the third quarter. We are seeing a very strong demand, but have to turn down customer requests as we still have capacity constraints. The investment in new capacity in the U.S. will come into effect during the second half of 2019. We're also reviewing capacity needs in Asia and Europe, and we are evaluating different ways to move forward. In total, we foresee a sales volume for the third quarter of 2018 that is in line with the third quarter last year. When looking further ahead, we remain positive and see good market potential.
We will continue to execute on our strategy to grow our business and maintain a solid and sustainable profit. To conclude the 2018 second quarter report, we have continued to see a very good development during the second quarter. Sales volume increased slightly to 99,100 tons, which was in line with expectations. Adjusted operating profit increased by 4% to SEK 301 million, despite having cost of SEK 27 million for the anti-dumping duties. Good metal management, improved operation performance in Europe, and price increases in the U.S. has worked on the positive side. Cash flow before financing activities was SEK 125 million. Return on capital employed was up to 17.2%, and we ended the quarter with a net debt of two times EBITDA. Our growth plans for North America are proceeding according to plan.
The expansion of our facility in Huntingdon is set to be finalized in the second half of 2019, and the upgrade of the Newport facility has just started and will be ready next year. We're also evaluating other projects in the region as well as in Europe and in Asia. Thank you. Now we open up for questions.
Thank you. Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you will enter a queue. We have a question from the line of Johannes Grunselius of Handelsbanken. Please go ahead. Your line is open.
Yes. Hi, everyone. It's Johannes Grunselius, Handelsbanken here. I have two questions. Johan and Oskar and team, could you give a little bit more flavor perhaps on the ongoing investments? Are they proceeding according to plan? How are you in terms of planning and budgeting, et cetera? Thanks.
Yes, absolutely, Johannes. Johan here. Yes, the current project we are running in U.S., the main one in Tennessee, Huntingdon, is progressing according to plan. We have basically completed the foundation work and started the construction work, and all the major equipments are ordered. The project is running according to plan and both in terms of budget and cost and time. As we stated, we will see this new capacity coming to the market on the second half of 2019. We are also in a positive discussion with customer, which there is a strong request and need for this new capacity. The second project, in Arkansas, Newport facility has just started, that is also according to plan and budget so far. I hope this helped, Johannes.
Yeah, sure. I think about the CapEx here and the risk that it could be higher or lower compared to your indication and your budget. Do you feel that there is a very low risk that we should see any deviation from the CapEx sort of?
We have a good experience of running major expansion projects within Gränges, and we always successfully manage our projects. Even this project are really going according to plan, and we have a lot of experienced people within Gränges. I'm actually confident that we will be successful with these projects.
Okay. Good. Thank you. The second question is more near term, and that's on FX, because on one hand here you have, I suppose, a lot of tailwind from stronger dollar primarily. I think that helps you. You have your hedging position. If we look at the Q3, it's impossible to quantify that, obviously, but I was surprised that you had a positive effect of SEK 16 here in the second quarter. How should we think about this effect in the third quarter is basically my question.
Hi, Johannes, it's Oskar here. I think it's a fair question. We've had, as you say, quite good tailwind now in the second quarter in terms of FX. What you see here is, and you're right there, we do hedge our transaction exposures, which means that the positive or favorable development of the U.S. dollar as well as of the euro now in the second quarter here, you see that to some extent, but you will also see that coming through later because of it that is hedged. On top of that, of course, we also have the translation effects when we translate the earnings in our U.S. business as well as translate the earnings from our Asian business to SEK, that is sensitive especially then to the dollar-SEK and to the CNY-SEK, of course, but that's also quite tied to the dollar.
A stronger dollar here in Q2 has also had a large impact on the translation of FX, and that's why you see the positive effect being so large in the second quarter.
Okay. Yeah, that helps. We should expect the third quarter total FX effect to be positive as well, I assume.
Provided that the FX rates remains on the current level, you can expect the translation there to be positive for sure. You will also see some delayed positive impact from the hedged.
Yeah, sure
transaction exposures.
Sorry, guys, I also have a third question, which is quite important. Sorry for taking a lot of time here, The effect here from anti-dumping duties on Chinese volumes into the U.S. that you quantify to SEK 27 million, you have to be clear on that one. Your own expectations and planning is that this number should be virtually zero, I guess, in the third quarter and the fourth quarter, thus providing that the final customer give you the quality approval. Is that right?
This is something, of course, that is very high on the agenda, because it's a large number and the anti-dumping duty rates are very high here, of course. From the Gränges perspective, we have finalized the transfers. We are producing in Finspång now all the products we previously produced in Shanghai. From our perspective and the internal work that we have to do, we have completed this. As you said, we are awaiting the final customer to confirm the validation. We are confident that they can do that on time, and if they can, we will not see any anti-dumping duties going forward. That's our belief.
Worst case, if this approval doesn't come, would it imply that you will pay a few million in duties? Should we think about an insignificant effect in all kind of scenarios in the third quarter from this?
That in the end, it will be a commercial discussion with that particular customer, exactly how that will be handled in that case, I would say.
Okay.
Yeah.
Just to add to this, Johan here, Johannes, that we've been successfully transferring all the volumes for all the other customers. We are still confident that we will also manage this last customer's transfer.
Okay. Thank you very much, guys.
Yep.
Can I just have a second?
Thank you. May I remind you that if you want to ask a question, you will have to press zero one on your telephone keypad. There are no further questions at this time. Please go ahead, speakers. I stand corrected. We do have a question from the line of Emmi Östlund of ABG Sundal Collier. Please go ahead. Your line is open.
Hi, good morning. I have a question on Europe. It says here that your sales of industrial products were lower, and I think overall, the volume decreased. Could you give us a bit more color on that, and do you see this improving in the next quarter, please?
Yes. Johan here. The main market for us in Europe are the brazing sheet for heat exchanger, and the industrial product segment has been a way to optimize our, basically, scrap. We have given priority to the heat exchanger market. It's a decision we've taken to reduce that group or that segment, actually.
Okay.
Yeah. Maybe to add on that also, I commented earlier on here that we have been very good in scrap handling and scrap recycling and so forth now, especially in the second quarter, but also, of course, in the first quarter this year, we saw some improvements. The better we are in reusing our internal scrap for our heat exchanger products into new heat exchanger products, the less industrial products, basically, we need to produce, because producing industrial products in Europe is an alternative to selling the scrap on the market and taking a loss on the scrap. From our perspective, you can maybe say even that it's a positive thing that the sales of industrial products goes down because that means that we are better at recycling our own scrap.
Got you. You're actually trying to reduce this number actively.
I wouldn't say we're trying to reduce it actively. What we're trying to do is we're trying to be reusing as much as possible of the scrap we generate into our core market product, which in Europe then would be the heat exchanger products. In an ideal world, we can reuse 100% of the scrap into those products, and in that situation, we would probably not sell any industrial products at all, if that helps.
Yeah. Okay. Well, thank you very much. I will get back into queue.
Thank you.
Thank you.
Thank you. Once again, to remind you, if you do want to ask a question, please press zero one on your telephone keypads. There are no further questions at this time. Please go ahead, speakers.
Yes, no more question. Thanks a lot for participating and for good question as always. We look forward to our next call on the October 25, when we'll present our Quarter Three report. Until then, I wish you all a very nice summer. Thank you and goodbye.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.