Earnings Call: Q1 2018

Apr 26, 2018

Welcome to Granges Conference Call for the First Quarter of twenty eighteen. Here in Stockholm, it's me Johan Mencken, CEO of Granges and CFO, Helstrom. We will start this presentation with an update of Granges' performance during the first quarter and then go into the financial results. After that, we will conclude the presentation with a short summary, and we will open up for a Q and A session. To start, I want to briefly go through Granges' current operations. Granges is a global aluminum rolling company with some 1,600 employees with an annual net sales of more than SEK 11,000,000,000. We have production facilities in Sweden, China and in The United States. About half of our sales volume is to the global automotive industry, where we are the market leader globally. The other half is split between the American HVAC and markets for Buildings and Houses and other niche segments in The U. S. When we're looking at the first quarter of twenty eighteen, we have continued to see a good development in all our markets. Sales volume was stable at 95,000 tons in the quarter. In automotive, we experienced a better sales development than the market in all our regions. In Asia, sales volume was up 1.4% compared to last year and developed better than the underlying markets. In Europe, sales volume increased some 2.2% over the last year and in The Americas sales volumes was down 0.8 from last year. In The Americas, we continue to see a very good demand in all our product categories. Adjusted operating profit rose to million, up from SEK237 million last year. Improved operational performance in Europe, good metal management and price increases in The U. S. Contributed to a higher profit. Profit for the period was million. That includes items affecting comparability of negative SEK64 million and a positive SEK22 million from joint ventures, both related to the wind down of our former sales and distribution company in The U. S. Earnings per share increased to SEK2.21 in the quarter from SEK 2.09 last year. Cash flow before financing activities was SEK 192,000,000. We ended the quarter with a net debt of SEK 2,400,000,000.0 corresponding to 1.8 times EBITDA on a rolling twelve month basis. After the quarter ended, we have seen quite a turbulence on the global aluminum market. On April 6, the US Treasury Office issued a sanction list with Russian individuals and companies including the global aluminum company, Rizal. This move by US policy makers has caused a lot of turmoil in the industry. For Granges, the direct impact of the sanction is mainly related to Cribal in Silentwal, which is the supplier of aluminum slabs to Granges in Finspang. Oscar will come back on this. During the first quarter, the global light vehicle production decreased by 1% compared to the first quarter last year. In Asia, the market was down 1% in the quarter as production of light vehicle was lower in both China and Japan compared to last year. In Europe, light vehicle production increased by almost 1% in the first quarter, while in The Americas, the market was down some 1% compared to last year. If we then look into the second quarter of twenty eighteen, the global vehicle production is expected to grow 5% compared to last year according to IHS. That comprises an increase of about 5% in both Asia and Europe. In The Americas, light vehicle production is expected to grow nearly 6% in the second quarter of twenty eighteen. If you look further into 2018, the outlook for production of light vehicle is unchanged. IHS estimates a global growth of some 2% for the full year 2018. If we then look into Granges sales volume development during the first quarter, we can see that Asia was 1% higher at 23,000 tons. This was a better growth rate than the market. The good development during 2018 is partly due to good development in commercial vehicles. In Europe, sales volume was up 2% in the first quarter to 17,200 tons. Sales of Heat Exchanger Material was up some 4%, while sales of Industrial Products decreased in the quarter. In The Americas, sales volume was 64,800 tons in the quarter. Sales volume for HVAC in R and other was somewhat lower at 46,002 tons due to a temporary production disturbances in one of our rolling mills in Huntingdon. Sales for the automotive heat exchanger was 8,700 tons in the quarter. In our local U. S. Operation, we continue to see a strong demand in the quarter. The imposed import duties on certain aluminum rolling products from China is driving demand for all 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 twenty nineteen, we will be able to add new capacity in our Huntington facility. During the recent weeks, we have had made good progress regarding our patented Trillium technology. We have had several test projects with customers since last year, which have turned out very well, even better than expected, I would say. At the moment, we are in a dialogue with several of leading card brands in Europe regarding battery cooling plates, for example. Some smaller volume has been signed for new card platforms and we have more discussion coming up in the coming months. The sales volume is however still small. Last year, it was a few 100 tons, but expected to grow with double digits in the coming four to five years. What we see now is that Trillium could make up more than 20% of our sales volume in Europe in only a few years. That is, of course, of great importance since this product with higher prices than standard products. Now I will hand over to Oskar for the financials. Thank you, Johan. 2018 has started very well for Granges, and the first quarter is yet another very strong quarter for the group. Although the sales volume remained relatively stable year over year, the rolling twelve month adjusted operating profit continued to increase to SEK $977,000,000. That's an improvement of SEK $2.00 8,000,000 compared with the situation one year ago. If we look at the first quarter in isolation, we can see that the sales volume increased by 0.3% to 95,000 tons, whereas the net sales increased by 6.2% to SEK 3,100,000,000.0. The automotive sales volume increased by 1.2% globally, whereas the HVAC and Other volume in The U. S. Decreased by 0.6%. This slight reduction is related to a temporary disruption in one of the rolling mills in Huntington, limiting production capacity in the quarter. These issues have now been solved. The higher year over year increase in net sales and in sales volume is primarily driven by increasing metal prices. The net impact on net sales from changes in foreign exchange rates was negative million compared with the first quarter twenty seventeen. Moving to the earnings. The adjusted operating profit amounted to SEK282 million in Q1, an increase of 19% from prior year. The increase in adjusted operating profit is primarily driven by improved metal management and productivity in combination with a slightly higher average conversion price. Changes in foreign exchange rates had a net impact of minus 19,000,000 compared to Q1 twenty seventeen. As of 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, it had a positive impact on about 10,000,000 in Q1 when comparing year over year. In accordance with this, we will also see a negative year over year impact of about SEK 5,000,000 in Q2 and Q4, respectively. In the third quarter twenty seventeen, we updated the assumptions on the useful life for certain types of assets. The consequence of this is the reduction of depreciation and has a positive impact on the operating profit of 16,000,000 in the first quarter. We expect the same year over year effect also in the second quarter. The adjusted operating profit per ton reached SEK 3,000, which is SEK 500, or some 20% higher compared to Q1 twenty seventeen. The profit per ton development was positive in both the Automotive and the HVAC and Other business. Items affecting comparability amounts to negative 64,000,000 in the first quarter and relates to the change in distribution model for imports to Americas as of January 2018. The new distribution model that is fully administered by Grainius will be more cost efficient than the previous joint venture setup. Still, the change as such means that we have acquired the old distribution company and that we are, for a period of time, selling products out of acquired inventory, and therefore, we're accounting for a lower margin. This is a onetime effect impacting only the first quarter, and it was also described in our Q4 twenty seventeen report. Including the items affecting comparability, operating profit amounted to SEK217 million. The profit for the period reached SEK167 million compared to SEK157 million previous year and corresponds to earnings per share of SEK2.21. The profit for the period includes a positive effect of SEK22 million from the revaluation from book value to fair value of the acquired North American company when we acquired the remaining 50% of this in January. Cash flow before financing amounted to 192,000,000 in the quarter. And by the March, the return on capital employed reached 17.3% on a rolling twelve month basis. During the first quarter, the net debt increased by SEK 61,000,000 to SEK 2,400,000,000.0, This corresponds to 1.8 times adjusted EBITDA on a rolling twelve month basis, which is within our long term target range of one to two times. Looking at the cash flow before financing in the first quarter, we can see the positive contribution of the strong earnings. Working capital increased somewhat due to seasonal buildup of inventory and receivables. But if we look at working capital in relation to days of sales, this metric remained stable in the quarter. Other operating items refers to taxes paid of SEK 15,000,000. Investments in fixed assets amounted to SEK 123,000,000 in the first quarter. About half of this refers investments to maintain and improve efficiency in our current production facilities. CapEx related to the expansion of the plant in Huntington is included with SEK 65,000,000. Acquisitions and other capital transactions of SEK 22,000,000 positively primarily relates to net impact of the purchase price and acquired cash in the North American distribution company. FX and other mainly refers to the acquisition of the remaining 50 of the North American distribution company and the financing of the acquired working capital. In early April, the U. S. Department of Treasury introduced sanctions against certain individuals and legal entities. Among these is the global aluminum company, Russel, that is heavily integrated in the global aluminum supply chain. These functions, together with the recently imposed general tariffs and antidumping duties on certain imports in The U. S. Of aluminum production in China, have increased uncertainty on the aluminum market in general. As a consequence of this, we have seen rapidly increasing aluminum prices over the last couple of weeks. Although, the aluminum price has come down somewhat following the update from the U. S. Treasury Department earlier this week that the deadline to wind down the transactions with Rosol will be extended until mid October, the aluminum prices are still at a very high level. And in relation to this, I think it's important to highlight a couple of things. First, GAMES has a business model where we pass on the cost of the aluminum to our customers, which is also common practice within the rolled aluminum industry. During the time period, we have the metal in inventory it's fully hedged. And as a consequence, movements in the metal price has very limited impact on our operating profit. The increase in metal price does, however, have an impact on the value of our working capital. A higher metal price means higher working capital and that the cash flow is negatively impacted during the working capital buildup. This effect is, of course, reversed in a scenario with declining metal prices. Second, regarding the sanctions against Rusol. One of the Rusol subsidiaries, the Kodal smelter in Sosal, Sweden, is the supplier of rolling slabs to bring its operation in Finstom. For the full year 2017, the supply from Cobalt corresponded to about 20% of our metal purchases in Finsta and to less than 5% on the group level. We have a multi sourcing strategy for slabs. And since the sanctions were announced, we have worked intensively to reduce the risk by securing metal supply from non Rusol sources. As the situation looks today and with the deadline to run down transactions with Rusol extended, we do not expect to experience any raw material shortage for our Finstone operation in the short term. We are, however, continuously monitoring any developments in this area very closely. I will now hand over back to Warmenke that will summarize the first quarter and provide an outlook for the second quarter. Thank you, Oskar. When looking into the second quarter of twenty eighteen, we anticipate a lower growth rate than the research firm IHS forecast for the market. That applies for all our major regions. We also note the increased uncertainty on the aluminum market in general due to the recently announced U. S. Sanction against aluminum giant, Risson, and import tariffs on aluminum products into The U. S. We are monitoring this development closely and are taking actions to reduce our risks and being proactive. Short term, we are still experiencing capacity constraints. The investment in new capacity in The U. S. Will come into effect during second half of twenty nineteen. We're also reviewing capacity needs in Asia and Europe and are evaluating different ways to move forward. In total, we foresee a sales volume for the 2018 that is in line with the second quarter last year. When looking further into 2018, 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 twenty eighteen first quarter report, Brennus had a good start of the year with better than market growth in the automotive in all our regions. Sales volume was stable at 95,000 tons and adjusted operating profit increased by 18% to SEK $282,000,000, driven by improved operational performance in Europe, good metal management and price increases in The U. S. Cash flow before financing activities was SEK 192,000,000. Return on capital employed was up 17.3% and we ended the quarter with a net debt of 1.8 times EBITDA, which is within our target range. Our growth plans for North America are proceeding according to plan. Expansion of our facility in Huntington has started and is set to be finalized in the second half of twenty nineteen. We are also evaluating other projects in the region as well as in Europe and in Asia. Thank you. And now we're open for questions. The first question comes from Max from Danske Bank. Please go ahead. Yes. Hi. Good morning. Max Ferdin here. Can you hear me? Yes. Excellent. I have a few questions, three actually. And the first one is when you go through sort of the earnings drivers and congratulations on a good result, by the way, metal management as a driver, is that possible to quantify either in absolute terms or per ton on gross profit, etcetera? Hi, Max. It's Oskar here. Yes. Of course, it's possible to to to quantify the the the metal management impact. We have, however, been very careful with with indicating these things historically. So so this is not something we will comment on externally. Okay. Then I follow-up with the price increases. You say they are if you compare the price increases to Method Management, which one was the biggest contributor? Is that possible to say? Yes. I can comment on that. If you look at the net price increase versus the net impact of Metal Management, in the first quarter, the Metal Management had a larger positive impact than the price impact. Okay. And then on the price increases that you mentioned, you say you raised prices as of January 1. Should we expect that that's the price level we will see throughout the year? Or should you see increased prices on contracts coming in here during the year, so the year over year effect will actually increase? Johan here. I mean, we've seen in specifically in Americas where we have increased prices with some 5% for half of the volume. If you remember, basically 50% of our business in Americas is still contracted longer than 2018. So the price increases, of course, confirmed for the open volumes is will remain during 2018. Okay. And finally, I'm just trying to understand the purchase of your remaining 50 of Norke. I mean, you acquired finished goods and Finnish products here in 2017 that the 9% are selling here in 2018. Doesn't this have any positive impact on your result in Q1? I think it's a big question, Max. I mean, what you referred to here is the change in distribution for Americas that we highlight as items affecting comparability in the first quarter. And just to give you a little bit more flesh on the bone here, what this means is that in the past, we had a joint venture, which was selling the Granges products into North America. We have now changed this so that we are handling this distribution fully by ourselves, which we think is a more cost efficient solution. When we did this change, what we did was that we acquired the old the remaining 50% of the joint venture distribution company. And basically, the inventory in that company is now in the Granges books. Of course, we purchased this company by the book value, which means that the product margin or the margin that we generate when we produce the products in Sunstone and Shanghai, that margin is already accounted for in the inventory that we acquired when we acquired Neoscan. When we now sold that inventory in the first quarter, we could only get sort of a small additional distribution margin, the margin on top that is generated in the distribution company. But this is a true sort of onetime effect. It's isolated to the first quarter. And going forward, then you will not see this that you'll be back to normal. And if you want, you can say that it's so that going forward, we'll also get the distribution margin on top of the product margin. That distribution margin was not accounted for in the Granges Group historically. This margin is, however, very slim. So the biggest few things you won't notice there. Okay. So it seems like it's a sustainable level. And just maybe if I could get a general comment on your earnings growth here because it is remarkably strong. You only had a few quarters where you can see this sort of underlying strong growth. And even if I adjust for all these different positive effects from prolonged from the D and A and from the accrual accounting and the negative FX, it seems like a growing EBITDA of SEK38 million. I'm just trying to understand, should we extrapolate that putting sort of a price mix effect in the EBIT bridge in the same magnitude for the rest of the year, for the rest of the quarters? What am I missing? Well, I think it's a fair question there, Max. I think a lot of the drivers, of course, that we see here, the productivity, the metal management, the prices, those are things that we are working very intensely with and that we are continuously raising to new levels. And of course, we will try to keep those at that level. So that's, of course, on the positive side. On the negative side, the what only thing the case of course is on a group level, flat volumes for the second quarter. What we do see there is that we will see a slightly ish mix effect where we see a slower development or actually decline in the Asian volumes, whereas as Europe and America grows a little bit. So over the net of the volume is expected to be the same level as last year. That will lead to a slight negative geographical mix effect for Grainius. That's something you can keep in mind looking into second quarter. And I also want to highlight, of course, that I mentioned the timing of the vacation expenses that we are now trying to be and make more even over the year. Of course, that is a 10,000,000 positive impact in first quarter, but it will have EUR 5,000,000 negative impact in second quarter and fourth quarter, respectively, but neutral I over the got that one. I adjusted to that one in my very blurry comment there. And okay, so and the in Asia, is that primarily related to the inventory destocking you've seen from customers and that should maybe bounce back when we move into Q3? Yes, Johan here. Mean, it's somehow related to the destocking in Asia and of course, and we don't share the very positive view on the Asian market, but we have another view on the quarter two outlook for Asia. But still, are confident for our Asian business for the full year, but Okay. Thank you. I've been taking up too much of your time. Thank you so much. Yes. Thank you. The next question comes from Johannes Grenselius from Handelsbanken. Please go ahead. Yes. Hello, everyone. It's Johannes Grenselius, Handelsbanken here. Can you hear me? Yes. Great. Great. So I have some similar question as Max elaborated on, so a little bit of follow-up. But could you touch upon the FX effect? I think it was minus 18%. So that was pretty anticipated, I suppose, for Q1. But how should we view Q3 Q2, Q3, etcetera, going forward? Because I suppose you have more tailwind now again from FX. Johannes, it's Oskar here. It's true that the FX effect impacting or impact on our operating profit was negative 19,000,000 in the first quarter. And I think when we talk about FX, we never provide any forecasts for FX impact as such. But what we can remember here, when we talk about this and I think it's worth to highlight is that we are exposed both to the SEK2US dollar, the SEK2Euro and the SECU to the Chinese Yuan and the Chinese Yuan to the US dollar. So we have quite some exposures in in Granges. The transactional exposures, we do hedge and we hedge it in such a way that we delay the impact. The full impact will take some twelve months before you see the full impact of an FX change flowing through the bottom line. And after six months, you have basically half of the impact on FX change. Even though that you have seen some recent movements here in FX rates that is on the beneficial side to bring it, They won't fully come through directly, but it will come with a bit of a delay. I hope that Yes. But am I right that you will still have negative P and L effect from FX in Q1 and possibly also in the third quarter? And then in the fourth quarter, we should see more of a neutral effect or a positive effect? We only provide the numbers of the quarter we report. We don't provide any guidance on FX rather in addition to that we described the way we are exposed and the way we hedge. Yes. Okay. Then on The U. S. Pricing, think I you said here, Johan, that you still have 50% of the volumes open for negotiation, I suppose, in the next few quarters. But for the ones that you have negotiated, I mean, are you fully done with price hikes in The U. S. Now for Q2, Q3? Or should we see more of a sequential positive effect from pricing in The U. S? No, no. Basically, the price increases we have concluded for 2018 is done. And then there are remaining volume to be renegotiated for 2019 and onwards. Okay. Okay. Got you. And I mean, when you have a very solid demand in The U. S, and as you mentioned, there is a good appetite now from buying from the local players in The U. S, could you take advantage here and improve the mix, would you say, in this market? Or are you or this is or do you foresee more of an unchanged mix? Or how should we see that? Yes. Definitely, it's a very strong demand in The U. S. And of course, in addition to the expansion products we are currently running in the Tennessee, we are increasing capacity. Can you hear me? Okay. Sorry, I was there's some other one on the line. No, but the mix in Americas you were referring to and yes, we are working of course with also increasing the automotive part in U. S. For our customers. Okay. You very much. Thank you. Thank you. The next question comes from Matt Liss from Kepler Cheuvreux. Please go ahead. Hi, thank you. Congrats on the good results. Well, a couple of questions. First, regarding the price increases you mentioned, you have implemented then on 50% of the offering in The U. S. Is that a step change in the first quarter? Or did it sort of affect you gradually? So we will continue to see the impact during the second quarter, maybe to a larger extent. It's a step change in the first quarter, and the effect is now. Yes, good stuff. Secondly, regarding the production and business, you mentioned what could you say something about the volume and earnings impact during the first quarter? Mean yes. Matt. It's Oskar here. So basically, what we have said and what we forecast here for the first quarter as well as we are now saying for the second quarter, we expected a low single digit growth in volume in our domestically produced business in The U. S. Because we are even though we are operating at full capacity, we are continuously working on releasing bottlenecks and therefore adding additional capacity. So what you can say there is that we would probably have expected some growth in quarter, a couple of percentage points of growth. Instead, it was close to 1% decline. So that's sort of the delta I think you're after. Yes, great. In The U. S. Also, during the Capital Markets Day, you mentioned some idle capacity that you sort of got when you acquired Noranda. And when do you expect that to be up and running? Or is it sort of on hold? Or could you say something there? Yes, of course. No, no. We have when we acquired Niranda, we acquired three plants, one in Tennessee, one in North Carolina and then either one in Arkansas. So we are now actually looking into restarting this plant in Newport, Arkansas. And that will only require minor investment to get that plant up running. And that plant will then be dedicated for the thinnest foil product. This is something that we are working with right now, but there is no decision as of today. Then more than expected, it's very attractive opportunity for us. The volume there, I mean, were initially talking about some 20,000 ton. Sounds good. And then about the Mitsubishi JV here, do you have something some comment to make regarding the negotiation? Yes. The state that we are still in a phase where we are basically negotiating terms and conditions. So it's basically the same, yes, status as we presented during our Capital Market Day. So we have new updates here. It's of course an interesting project that we are pursuing, but we haven't concluded that yet. But you still expect to be finished during the year or is it more? Yes. We definitely expect to conclude on whether to do this or not this year for sure. Great. Then I guess The U. S. Tariffs have some impact on the Chinese market and could you give some commentary how it affects your segment? Yes, definitely. I mean there are basically two different kind of duties on Chinese rolled product. The first one was implemented last year and that was on the thin rolled products, foil, with some 100% basically tariffs. So for that volume, we have actually transferred that volume to our Finspang operation. And of course, that has also increased the demand in U. S. Subsidiary. Now it's also a similar review from the U. S. Department on the more thicker products, the remaining of the rolled products. And there's been preliminary duties imposed from January year, And it's likely to that these will also be concluded for all thicker products this year. So we have started also to transfer the volume we had in this category from China to U. S. Into our Finspang operation. And it's about 2,000 tons that are talking about here that we are part of that thicker product category. But that will, of course, also add a lot of, of course, to increase the demand for thicker products in The U. S. And in China, do you see any sort of that your Chinese competitors are sort of trying to balance negative well, impact of The U. S. Tariffs in China? Yes. I mean, of course, this volume needs to go somewhere else. I mean, of course, an active activity for these suppliers, the Chinese suppliers to compensate for the loss in The U. S. But we should not exaggerate this because we've had a very I mean, lot of capacity anyhow in China for many years and a lot of the business we have is already contracted. And you can also it's good to know there was not so many suppliers in our business segment supplying the North American markets. Thank you. And finally, just about the tax charge or tax rate for the full year. Could you give some indication there? So for the group tax rate, we have seen that for 2018 to be between 2225% here. And then we are basing that on the assumption that we have a twenty five percent tax rate in China. We still think that it's quite likely that we will enjoy this 15% High Technology Enterprise Tax also for 2018, but to be conservative, we are applying the 25% in our accounting. So that means 22% to 25 guidance for the full year. Okay. Thanks a lot. Thank you. The next question comes from Kenneth Toll from Carnegie. Please go ahead. Yes. Thank you. So returning to The U. S. Situation, I think that the metal price premiums in The U. S. Have gone up quite a lot. And I remember a few years back, you had some issues with compensating yourself fully from high metal price premiums. So the first question is, do you have still fixed metal price premiums in some U. S. Contracts that could hit your profitability? The second question is that, have you seen any I mean, one thing you can do when you have import duties is to not import the material, but make some products that contain a lot of material and import the final product to The U. S. Instead in order to avoid those import duties, such as if you would do a heat exchanger in Europe instead and import it to The U. S. So have you seen any such moves of all the production moving away from The U. S. Due to high aluminum prices? Okay, It's Oskar here. I can answer your first question there on the premiums. I think it's very well noted. We did have some issues a couple of years back when there was some speculation against the aluminum premiums. So I think what we can say can divide the answer in two parts. Basically, for the old Granges business, we have basically, when we are writing new contracts and we have applied in place the vast majority of all our contracts over the last couple of years, of course. So our contracts now are structured in such a way that we always pass on the metal price premium in addition to the basic LME price to our customers. And as a consequence, we do no longer have an exposure to premium fluctuations in the way we had in earlier years. So that I think that problem is no longer there. But then also the second part, of course, is our U. S. Business. And I think that's, of course, the business that is most exposed these U. S. Premiums. And I'm not referring to, of course, the ex Noranda business here. In The U. S, you typically quote the aluminum price on a Midwest price, and that includes both the LME and the premium. So there, it's automatically transferred to the customer. So it's a very fair comment and especially taking the the history in in in into account here. But we are not so worried about these things at this point. Kenneth, do you want to comment on your second question. I mean, there are proposed duties on 10% for aluminum products into U. S, which is now prolonged its negotiation ongoing. But we haven't seen or we haven't seen the value of doing semi product in Europe to ship. Because the consequence of this 10% is basically that the Midwest premium has increased by 10%. So the net impact for the American customers is actually zero. So that is not really a big issue with the 10% of tariffs from Europe that are not implemented yet still under discussion as you most likely know. Okay. Very good. Yeah. Thank you. Thank you very much. Thank you. The next question comes from Amy Austin from ABG. Please go ahead. Hi. This is Amy. I'm sorry if you've already answered this, but I mean you're adding 40,000 ton of capacity in The U. S. Over two years. And you sort of touched upon that we're going to see some of this capacity going to production in the second quarter of the year. Could you just give us some more colors on the details here and what we should expect to sort of production ramp up in The U. S. And things like that? Yes. We're adding 40,000 annual ton capacity in the Huntington plant in Tennessee that will come into start production basically in half year twenty nineteen. And I mean, right now, we are, course, discussing with customers also for this additional capacity and there is a very good dialogue, I would say, right now. Because what has happened in U. S. Is, of course, with the two types of countervailing and antitrust duties on Chinese import, there's a very strong demand for the coming years in U. S. These duties are decided for five year period. So there is very strong need for the customer base in U. S. To solve their long term supply locally. And you should I mean 40,000 ton, it's a very small number in relation to the overall demand. So basically, soon as you have this production capacity, you're you're you're thinking that this will sort of be filled up, immediately or is is that how you should think about this? Yes. We are very, very, I would say, comfortable with that this additional 40,000 ton will be contracted and sold. Okay. And this will come into effect in the second half of twenty nineteen. Is that correct? Yes. Correct. Yes. Okay. Thank you. That was all for me. Thank you. The next question comes from Sven Turian from Catala. Please go ahead. Hi, guys. Have a question on the Chinese capacity that's not exported to The U. S. Are you seeing this capacity popping up somewhere else in the world? Or do you think it will be closed? Johan, we haven't seen that capacity ending up somewhere else. But of course, the Chinese supply that cannot export to U. S. Are definitely working on finding new markets for this. I mean, there's also a lot of discussion in general in the European Aluminum Association, what will be the impact of tariffs on Chinese raw products to Europe, etcetera. So there is a concern in the overall market, but we haven't seen a clear pattern as of today. And secondly, we're interested to hear your view on supply coming to the market in general for 2018 and 2019, if you have any view on that? Sorry, once again, repeat the question. I be interested in your thoughts on the supply coming to the market in general in this year and next. Okay. No, there is no really, I mean, announcement on new capacity coming into the market, not in Europe and not in U. S. Either as of today. So there is no dramatic change from that perspective. But I think it's likely to believe, of course, over time in U. S. That there would be some announcements from other companies as well. And if I may, two additional questions. One, in terms of the Russian sanctions and the impact on your relation with Kibbe and so on and so on, you said that you don't expect any raw material shortage, but would you expect higher costs in order to find new suppliers and solve the issue? Hi, Simon, it's Oskar here. It's a fair question. Think that I mean, for the time being and until October, we still expect to continue to get deliveries from Kugol. But of course, in a scenario where you at some point would not be able to get those deliveries, we have other sourcing options. We are using multi sourcing strategy as I indicated earlier. But that strategy, of course, also involves that we try to optimize the capabilities of our suppliers using different suppliers for different types of raw material where we think they are the best. And of course, if we are to switch some of the supply that we have today buying from Cabal to some of the other slab suppliers, that could mean a cost increase. I mean, you could foresee a logistics cost increase, for instance, because they don't have the same location. You will have to buy from Norway instead of from Sunset, for instance. But you would also expect, at least for some period of time before we can tune in their raw material, you would probably some higher production cost at our end when we adjust to the new raw material. So yes, in a scenario where we could not use cabal volumes, I would foresee some higher cost. Okay. Thanks. The final one, if I may. You say in the report that you're evaluating other projects such as involving expansion in Finspang due to the fact that you're running at full capacity. Could that mean greenfield projects in Europe as well? Or is that out of the question? It's what we are evaluating right now is to increase capacity and improve capabilities in our Finspang operation. That is the best strategy for us in Europe. And of course, we see a fairly strong market in Europe going forward. So that's an interesting project for us. And of course, over time also we are optimistic about Asia and of course, we are actively looking how to address the future capacity in Asia. Okay. Thank you. The next question comes from Max Frieden from Danske Bank. Please go ahead. Yes, hi. Just a follow-up question on currency transaction flows because how has that changed now from U. S. Dollar to and from renminbi to U. S. Dollar? Sorry, Max. I'm not sure I understood your question. Can you please rephrase that again? Yes. Yes. Sorry. That went a little bit too fast here for me. So the transaction flow, when I look into your annual report on currency, you have the renminbi to U. S. Dollar on a 10% movement, it is SEK77 million effect. That was based on 2017. Now you have shifted a lot of production. You do not ship as much from China into The U. S, etcetera, but I'm not sure how your cost and revenue streams are in those two currencies anymore. So could you give us an updated view on that transaction flow, how we should look like with the new parameters in 2018? Absolutely. Now I understand your question, Herman. Yes, I mean, as you say, in our annual report, we have quite well described our exposures and how we hedge. I mean, just to pinpoint here, for anyone looking at that section of the report, the table that Max is referring to here is the impact on EBIT of our FX exposures, but it's also you need to remember that it's the transaction exposures and it's the unhedged transaction exposures that we are illustrating there. And then to your question on the change, we have moved some of the volume that we have previously produced for The U. S. In Asia. We have moved that to production in Sweden. Of course, as a consequence, that volume being sold in U. S. Dollar, that means that the U. S. Dollar exposure in our Asian operations, so that the USD to Chinese revenue exposure has come down slightly between 2018 and 2017. But at the same time, the biggest U. S. Dollar to revenue exposure is not for the volume shift from China to The U. S. It's from the volume shift from China to rest of Asia. So, you look at that totality, the change is actually not that big in that exposure. So, you can still use that table as a good proxy for the exposures also going into 2018. Very clear. Thank you so much. Ladies and gentlemen, there are no further questions at this time. I now give back the word to the speakers. Thank you. Okay. Ivan and Enkel here. No more questions. I would like to conclude this session. Thank you everyone for participating today. Thanks for a lot of good questions. And good and interesting questions. Looking forward to our next call on July 19, and we will present our quarter two report then. Thank you. Ladies and gentlemen, the conference call is now over. You may now disconnect your lines. Thank you.