Ladies and gentlemen, welcome to Gränges interim report for January to September 2017. Today, I am pleased to present CEO Johan Menckel and CFO Oskar Hellström. For the first part of this call, all participants will be in a listen-only mode, afterwards, there will be a question and answer session. Johan Menckel, please begin your meeting.
Thank you. Welcome to Gränges third quarter conference call here in Stockholm. It is me, Johan Menckel, CEO of Gränges, and I am here together with CFO Oskar Hellström. We will start this call with an update on Gränges performance during third quarter and shortly present the growth initiatives that was recently announced. Oskar will then take you through the financial results. We will then conclude this presentation with a summary and a Q&A session. This is a brief overview of Gränges current operation. We have some 1,600 employees and an annual net sales of about SEK 11 billion. We have production facilities in Sweden, China, the United States, and since October, two smaller but important units in Germany and France for supply of spray forming billets. About half of our sales volume is to the global automotive industry, where we are the market leader globally.
The other half is split between the American HVAC markets for building and houses and other niche segments in the U.S. When looking at the third quarter of 2017, we have continued to see a very good growth in all our markets. We have also continued to execute on our strategic growth plan, which I will come back to in more detail in a moment. Sales volume increased by 48% to 93,000 tons, driven by the acquisition in the U.S. we made in August last year. Sales volume for the automotive heat exchange material was 7.6% higher than prior year. We have continued to see strong demand in all our regions in the quarter, most notable the automotive customers in Asia and in Americas. Operational-wise, we have also continued to record good product quality and metal management in the quarter.
Adjusted operating profit reached SEK 227 million, up from SEK 181 million last year. Both our acquired U.S. operations and the existing business contributed to the increase. Excluding the U.S. acquisition made last year, adjusted operating profit rose to SEK 157 million. Cash flow before financing activities was SEK 148 million. We ended the period with a net debt of SEK 2.3 billion, corresponding to 1.7 times EBITDA on a rolling 12-month basis. In mid-September, we announced the next steps in our strategic growth plan for North America. To address capacity constraints and support our customers in the growth plans, we will expand our production facility in Huntingdon, Tennessee. The investment amounts to $110 million over two years and will increase the capacity from 160,000 tons to nearly 200,000 tons per year when it is finalized.
This is a good business case for us that we expect will contribute to Gränges operating profit from 2019 and onwards. We have also announced our intention to partner up with Mitsubishi Aluminum in North America to establish a production facility for Clad products. A letter of intent has been signed, and the aim is to set up a joint venture in 2018. We are currently working on the details and will come back with more information once we have an agreement in place with Mitsubishi. I also want to mention the preliminary countervailing duties that were imposed in August on Chinese imports of certain aluminum foil products into the U.S. For the product categories we are operating in, duties are set to 22%. Above that, the U.S. Department of Commerce is expected to announce a preliminary decision on anti-dumping duties before the end of November.
A final decision on both these cases are expected early next year. Another important initiative taken during the third quarter is our investment in a production company specializing in advanced spray forming technology. This will enable us to expand within active brazing with products such as TRILLIUM that is an innovative technology for brazed aluminum heat exchangers. This investment means that we secure both competence and the supply chain to grow in this category of our products. We see great opportunities in years to come as this is an innovative, patented technology that offers great advantages for our customers and will increase our competitive edge significantly. That view is supported by the very positive response we have gotten from our customers already. Our investments amounts to EUR 4.4 million in cash, which gives 51% of the company.
Our partner, Alsted Aluminum, will hold the remaining 49%. During the third quarter, the global light vehicle production increased by 2% compared to last year. In Asia, the market growth was 3% in the quarter. The growth preliminary driven by Japan and Korea, whereas China was flat in the quarter when comparing with last year. In Europe, light vehicle production increased by 5% in the third quarter, while in the Americas, the market was down 4% compared to last year. If you then look into the fourth quarter of 2017, the global vehicle production is expected to be at the same level as last year, according to IHS. That comprises a decrease of 2% in Asia and 1% in the Americas. In Europe, however, vehicle production is expected to grow 6% in the fourth quarter.
To summarize the full year 2017, the production of light vehicles is now set to grow some 2%, according to IHS. If you then look into Gränges sales volume development during the third quarter, we can see that Asia grew by 9.4% to 20,700 tons. This means a significantly higher growth rate than the market. This is partly due to gained volume in new passenger car platforms and the strong sales to our global customers in China, as well as a good position in commercial vehicles. In Europe, sales volume was up 3.3% in the third quarter to 15,500 tons. Both sales of heat exchange and materials and sales of industrial products increased in the quarter. In the Americas, sales volume for the automotive heat exchanger was up by 11% in the quarter.
In our acquired U.S. operations, we continue to see strong demand in the quarter. The sales volume increased some 3.6% if compared to pro forma sales in the full quarter prior year. The growth is, however, limited due to the fact that we are operating close to maximum capacity. Now, I hand over to Oskar and the financials.
Thank you, Johan. The third quarter 2017 is yet another strong quarter for Gränges. By the end of September, the rolling 12-month sales volume reached 371,000 tons. The adjusted operating profit increased to SEK 925 million. That's an improvement of SEK 291 million compared to the year before, and it's the highest rolling 12-month profit so far for Gränges. The positive development is driven by a combination of organic growth and improvement in the existing Gränges business, combined with the acquisition in North America that we completed in mid Q3 last year. If we exclude the acquisition, the rolling 12-month sales volume would have been 185,000 tons. The adjusted operating profit SEK 656 million by September. That represents an 8% volume growth and a SEK 74 million profit improvement compared with 12 months ago.
In Q3, the sales volume increased by 48% to 93,000 tons, whereas the net sales increased by 47% to SEK 2.7 billion. The organic sales volume growth was 4.8% in the quarter. The U.S. acquisition contributed with sales volume of 48.9 thousand tons as compared to 21.8 thousand tons included in the third quarter last year. The underlying growth in the acquired business was 3.6% in the quarter. The higher volume and increase in metal prices had a positive impact on net sales, whereas lower average conversion price impacted net sales negatively. The net impact from changes in foreign exchange rates was negative SEK 73 million compared to Q3 2016. If we're then looking at the earnings side, the adjusted operating profit amounted to SEK 227 million in Q3, an increase of 25% on prior year.
The operating profit from the U.S. acquisition was SEK 70 million in Q3, which is SEK 20 million higher than last year. Excluding the acquired business, the adjusted operating profit amounted to SEK 157 million, an improvement of SEK 25 million over prior year. The increase in the adjusted operating profit in the underlying business is primarily driven by the increase in sales volume in combination with good productivity and metal management in the quarter. On the negative side, we continued to experience a reduction in average conversion price. Changes in foreign exchange rates had a net impact of minus SEK 2 million compared to Q3 2016. Cost for strategic projects and cost for the implementation of a new ERP system amounted to, in total, SEK 11 million in the quarter.
During the third quarter, we've also concluded the acquisition balance for the U.S. acquisition, and as a part of this work, we've also conducted a review of the useful life of all machinery and installations in the whole of the Gränges Group. The result of this is that we've updated the assumptions on the useful life for certain types of assets in the existing Gränges business. The consequence of this is a reduction of depreciation that has a net positive impact on the operating profit of SEK 17 million in the current quarter. Going forward, we expect the effect of the changed useful life assumptions to be about SEK 16 million positive per quarter at the current exchange rates. The details of the updated assumptions are described in the notes of the third quarter report.
The adjusted operating profit per ton reached SEK 2,400, a reduction of SEK 400 compared with Q3 2015. This decline is fully related to the fact that we, through the U.S. acquisition, had added a business with somewhat lower margins to the Gränges portfolio. Excluding the acquired business, the profit per ton increased to SEK 3.6 thousand in Q3. Highlighting the strong performance in the underlying business in the quarter. There are no items affecting comparability in the third quarter, and the reported operating profit is therefore the same as the adjusted operating profit in the quarter. The profit for the period reached SEK 151 million compared to SEK 189 million previous year and corresponds to earnings per share of SEK 2.0.
The lower profit for the period is due to the release of a provision for corporate income tax in China that had a positive impact of SEK 139 million on the profit in Q3 last year. Cash flow before financing amounted to SEK 158 million in the quarter. By the end of September, the return on capital employed reached 16.6% on a rolling 12-month basis. During the third quarter, the net debt decreased by SEK 201 million to SEK 2.3 billion. This corresponds to 1.7 times adjusted EBITDA on a rolling 12-month basis. That we continue to reduce the net debt this rapidly I think is a very good evidence of the strong cash generation potential of the Gränges business. If you look at the cash flow before financing in the third quarter, you see the contribution of the strong earnings.
Working capital increased by SEK 42 million in the quarter, and this increase is fully related to the increase in metal price in the period. Other operating items include taxes paid of SEK 46 million and investment in fixed assets amounted to SEK 74 million. With that, I now hand over to Johan Menckel that will provide an outlook into the fourth quarter and the summary of the third quarter.
Thank you, Oskar. Looking into the fourth quarter of 2017, we see a somewhat lower growth rate than the market when it comes to the automotive heat exchanger materials. In both Asia and in Americas, we expect a lower sales volume in the fourth quarter, while in Europe we foresee a growth in line with the market. For the U.S. operation we acquired in 2016, we expect fourth quarter sales volume to increase compared to last year. Changes in foreign exchange rates is expected to have a negative impact on the operating profit in the fourth quarter, given current exchange rates. Short term, we are still experiencing capacity constraints given the good demand this year and next year. Investment in new capacity in the U.S. will come into effect during the second half of 2019. Looking into next year, we expect a positive development in all our regions.
We will continue to execute on our strategy to grow our business and maintain a solid, sustainable profit. To conclude the third quarter, Gränges is reporting a good quarter with strong demand in all our regions. Sales volume reached 92,000 tonnes and adjusted operating profit SEK 227 million. We surpassed market growth in all our regions in the quarter. Our business in the U.S. is performing very well. We are now taking the next steps in our strategic growth plan for North America by expanding our facility in Tennessee and by partnering with Mitsubishi Aluminum to add both capacity and important capabilities on the North American markets. We also made an important investment in production of advanced spray forming billets that will enable us to grow our TRILLIUM offering. Net debt to EBITDA improved to 1.7, further down from the end of June, when it were at 1.9 times EBITDA.
That confirms our solid financial position. We continue to work according to the strategy that we have set out for 2020. We are positive about 2018 and are determined to continue to grow and strengthen our presence and position globally. Thank you. We open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question for the speakers, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. That is 01 to register for a question. There will be a brief pause while questions are being registered. As a reminder, if you do have a question for the speakers, please press 01 on your telephone keypad now. We have a question from Julien Batteau from Pascal Investment Advisers. Please go ahead. Your line is open. Hello. To the line of Julien.
Yep. Hello, can you hear me?
Yes, we can.
Sorry. Just a few questions. The first one, to be really precise, you talked about an impact on this depreciation reduction of SEK 17 million, while in your report you talk about a net impact of SEK 7 million. Maybe I'm a bit confused there. Is it 17 or is it 7? That's the first thing. Second thing is on the net debt. Usually Q3 is a good quarter for cash flow in terms of working capital. Is that delayed to Q4 due to metal price increase? The last question is on Noranda, actually. I don't really get why EBIT was down compared to Q2 in Noranda isolated, since volume were about the same. Thank you.
Thank you, Julien. Very good questions there. I think I will try to answer them, and if Johan wants to comment afterwards, I think that's good. Third question, depreciation changes. We did this review, and I think your question was why is the net effect in Q3 only SEK 7 million, whereas we expect a higher number as a run rate? I think we indicated SEK 16 million per quarter going forward there.
Okay.
Basically the review we did resulted in that some of our assets got a shorter useful life than what we have in the book. Some got a longer useful life. For the ones with a shorter useful life, that resulted in some write-downs in the quarter. That's about SEK 5 million in Q3, which will not be recurring. Also, depreciation impact the cost of material through the inventory, and it takes about three months before that flows through. That's also a one-off impact in the third quarter.
That's another SEK 5 million that is impacting this in Q3 this year.
On top of that, when we gave the guidance there going forward, there's a little bit of FX changes as well. That's really the explanation why SEK 7 million in the quarter and SEK 16 million is what we expect recurring going forward.
Okay.
Second question on the working capital. You're absolutely right there that typically you would see a release of working capital during the third quarter and fourth quarter as well. If you look at underlying performance there, this year is not really different. What we have to bear in mind, and what you are also pointing out there, is the changes in metal prices. That has had a negative impact on our working capital in absolute terms. If you would exclude the impact of the metal price change, you would actually see a release of working capital also in Q3 this year. Third question then was on the U.S. performance and why the U.S. performance is different in Q3 in relation to Q2.
I think that's a fair question because the volume that is delivered in the third quarter is about the same as the volume delivered in the second quarter. Why does the profit level differ? What we're looking at I think is a little bit more than 25 million SEK in difference.
10 out of these are related to the fact that the U.S. dollar and the SEK rate has changed between the quarters. I think in Q2, it was 8.9 SEK to the dollar, and in Q3, we have on average 8.1 SEK to the dollar. That's really a large part of the explanation.
Yes.
As for the remaining part, the additional 15 million SEK, that is really primarily explained about how the liability for vacation pay is accrued in our U.S. business historically there. Our employees earn half their vacation on January 1st and half on July 1st. We have to accrue that expense, half of it in January and half of it in July. You would see that negative impact in Q1 and Q3, but you don't see that in Q2 and Q4. Final thing we can say on this is that there is a slightly higher metal cost in America in Q3 than in Q2 due to less optimal metal management. The really key difference there is FX and accruals for vacation pay liabilities.
Okay. Just to come back on the working capital. Would you expect a better performance or a release in Q4, or should we assume a net outflow for the full year?
I would say it like this. Underlying, we would expect to see a release of working capital, but it very much depends on what happens to the metal price. Really what you can say as a rule of thumb, it takes about three months for a metal price increase to the impact of that to run through our balance sheet.
Provided that the metal price is stable for three months from now, you sort of would start to see the decrease in working capital in fourth quarter. If it continues to move, that will certainly have an impact. Underlying, we expect to decrease working capital.
Okay. Just, sorry, last question on CapEx. Will there be a tranche of the investment in Q4 or is it pushed back to almost in full in 2018?
Also, a very good question. I expect you're referring now to our U.S. investment-
Exactly
where we said we will invest $110 million over a period of two years. If you look at how that spend is split, if you look at our plans, it's about $60 million each in 2018 and 2019, and you would see $5 million-$7 million in Q4 2017. From $5 million-$7 million is what we expect to spend in the next coming quarter, yeah.
Okay, clear. Thank you very much.
Our next question comes from the line of Jan Enasson from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. I had some questions partly answered in the first question here. You talked quite a lot about what has impacted the earnings in Americas versus last year, but I think we had a good run through versus Q2. Was there anything else that you wanted to add to explain the Americas results? If you can perhaps go a little bit more into the details about the impact again from the M&A or from the acquisition.
Okay. I think the previous question was Q3 performance versus Q2 performance.
Exactly.
I understand your question is more Q3 year-over-year. Is that correct?
Yeah.
Okay. I think that if you look on how much operating profit that was generated in the acquired business, it's $7 million this year versus $50 million last year. Given that it was consolidated from 21st of August last year, that might not seem as a very large increase in M&A-driven growth if you look year-over-year. I think when we look at this, we need to keep in mind a couple of things, and really the main thing here is that Q3 2016 was not really representative for the underlying performance of the acquired business.
The part of Q3 that the acquired business or the Noranda business was under Gränges ownership, first it was unusually strong from a sales volume perspective, but more important maybe for this discussion is that from a cost perspective, it was not fully loaded with the stand-alone costs that we needed to run this, and also the depreciations was a bit on the low side in that period. I think we indicated already at the time of the acquisition that we acquired a 5%-6% margin business, and that's really also what we see in Q3 2017 when this business delivers an EBIT of 5.6%.
I think what we should say is that Q3 this year is a more representative quarter. If we compare Q3 this year with the pro forma Q3 for 2016 with the business included for the whole full quarter, you would actually see that the year-over-year development here is fairly stable. We get some benefit of the 3.6% organic growth that we see in this business, but we also see a little bit higher costs, primarily due to slightly higher natural gas prices. Fairly stable year-over-year if you compare with pro forma figures.
Okay. Thank you. Perfect.
Once again, if you do have a question for the speakers, please press 01 on your telephone keypad now. Our next question comes from the line of Jon Hiltner from Handelsbanken. Please go ahead. Your line is open.
Thank you. I'm going to dwell on the acquired unit, so sorry for that. If you just look at the run rate right now, would it be a good assumption just to use the past four quarters and look at EBIT per ton? Would that be a good run rate for the acquired business?
I think that's a very good point there, Jon. As you said, as I also mentioned a little bit when I commented on the previous question there, the performance we see, this is a 5%-6% EBIT business that we have acquired. We, of course, have intentions to further improve this over time, and that's also one of the reasons for the investment project that we are running. As of now, I think the Q3 performance is a fairly good indication of what this business can deliver in its current state. We need to bear in mind here, though, the seasonal pattern of this business, of course, so that not each quarter is the same. Q3 is a good representative for the current state of the business.
You mean the current quarter, or if I look Q3 and look back for the full year? For four quarters?
Yes, exactly. If you exclude, of course, third quarter last year, that was not representative, take the four quarters starting Q4 last year to Q3 this year, that is a good indication of the performance of this business, yes.
Super. That's very clear. Then on the underlying business, I was surprised with a pretty big improvement in underlying profitability. I wonder where that came from. Was it improvements in Finspång or in Shanghai or something else?
Yeah, it is a very good question, Jon. Needless to say, maybe we are, of course, very satisfied with this development from Gränges management perspective. I would say it is really three key drivers. First, it is a good volume growth, and growth in the areas where it has the highest payoff for Gränges, especially then for some of the Asian business. As you might remember, we have our lowest production cost in our Asian facility. The growth there is, of course, very good for us. That is one important driver. The other important driver is really good metal management in the quarter, in both Sweden and China. We have worked very much with this over the last years. We are starting to see some really good results now.
This is all about how we optimize our metal flow, how we use our raw material, how much we can recycle, and so forth. That showed really good results in the quarter in both our Swedish and Chinese production facilities. Third, we also experienced very good productivity in all production facilities in the quarter. There are several drivers for this.
Great. On metal management, how should we view this? Is it volatile between quarters how you execute on metal management? Maybe dependent on variables that you cannot really control, or is this fully in your own control and the better you execute, the better you will deliver on metal management?
Yeah. When we talk about it, I think it is important to remember it is the nature of the drivers involved here. You will always see some fluctuations from time to time, from quarter to quarter, when it comes to how efficient we can execute on raw material mix and recycling and so forth. What I think is fair to say here is that we have worked a lot with this over the last couple of years. We have raised the bar. Even though we do see some fluctuations, we expect to continue to see fluctuations with this area. The basic level on how we work with metal management has been increased. I do not know if that answers your question.
A bit. Maybe I should rephrase it a bit. Does it depend on what type of materials you're having up for delivery in the quarter? Is it a mix in your deliveries where some qualities might be easy to get good metal management execution and some might be tougher, where you maybe need to buy more virgin material, et cetera?
Yeah. The answer to that question, Jonas, is yes. There are a couple of different reasons for that. First of all is, of course, the production mix and demand mix, what is really demanded by the customers for delivery in a certain time period. Also then the production mix, because you might want to create larger batches in your cast house, for instance, to get a high productivity there. From time to time, you want to maybe run certain alloy mixes in one month and other alloy mixes in the other month to increase the batch size. That is something that could lead to that it will differ from one period to another.
Super. That's very clear. On the tariffs on aluminum for the U.S. market. First, is this for all the qualities you supply, both heat exchanger material and the other rolled products that you sell in Noranda, for example? Is this affecting everything?
Yeah, Johan here. Yeah. No, it's not. It's for material with 70 microns and below, so it's definition foil. As I said, the first countervailing duty was imposed here in August, and there's an expectation that there'll also be anti-dumping duties announced later this year. We saw, of course, due to this, you can see an even stronger demand from the market in the Americas. We have seen a very strong demand in Americas even before this announcement. Of course, with this anti-dumping duties, in addition to the countervailing duties, that will of course have an impact on the supply situation in Americas.
Sorry for not really knowing all the technical qualities here, but the foil you are talking about, is this going into auto heat exchangers or is it to other markets or other sectors?
Yes, of course, it goes to automotive heat exchanger, what we call fin material. It goes to fin material for stationary heat exchanger, Of course, large part is also foil for packaging foil. These are the three main categories for these countervailing duties.
Will this impact your exports to the U.S. from China or Sweden?
We have a very limited export from Shanghai to U.S. of this product. We have already basically transferred these product that we did produce in Shanghai to the Finspång operation. We would have a very limited impact on this. We have a small portion delivered from China in this category.
Do you think there would be an impact in China from supply previously going to the U.S. market now coming back to China or other markets?
Part of this distribution goes from China to U.S. today, but the main part of this is actually a packaging foil, which is not part of our Gränges business.
Okay. All of these tariffs shouldn't really have a big impact, maybe to the Noranda business, which you improved a bit then.
It has an impact on the Noranda, but also has an impact on the product category unclad fin, which is actually some 20% of what our customer uses for producing heat exchanger. Of course it will have an impact even for part of our business.
Okay. On your expansion in Noranda, can you say anything? You say it's a good return profile, but you only mention that it will be positive for profits, which it could be even with both high and low returns. Can you say anything about expected EBIT per ton, or anything that could give us a better feeling for what you expect in terms of profitability on the Noranda expansion?
I can comment shortly on that. First of all, the main targets here are both the existing businesses we acquired, basically fin for stationary heat exchanger, and of course also we are targeting automotive fin where we see strong demand in U.S. Of course, we will, by this investment, also increase the scale advantages in the plant we have. Of course there will be an improvement on the cost side. We haven't officially quantified any EBIT per ton figures from this investment.
I think to Johan's point there, I think it's fair to assume that economies of scale will improve, and we will go for and target higher margin segments. A fair assumption is that the margins in the expansion business will be higher than what we have in our current business today.
Let me add on that. The target business is also automotive here, which was not part of the Noranda business before.
Okay. You don't want to give us a hint if it's two times, three times, or four times the EBIT per ton level that you currently operate at in Noranda, for example?
No, we can't say that, but we can say that it will be higher.
Okay. Thank you.
Our next question comes from the line of Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, thank you. Coming back to the U.S. business once again, I guess you are currently running at quite high capacity, and you have talked about the bottlenecks there. On top of this investment program, are you able to handle those bottlenecks also in increasing capacity? Maybe it would be easier now when you go into the fourth quarter with a slightly lower demand to say something about that, please.
Thank you. Johan here. Good question. We have seen over the year actually that we've been able to open up bottlenecks and actually increase the capacity. Of course, we've seen a positive result of this work during this year. Of course, we also see in the coming months that we'll be able to release some capacity. Of course, in order to really grow the business, this capacity investment is needed for the future. We've seen a positive development all year actually in terms of increasing capacity slightly.
There's still room to probably increase it. If you expect demand to improve here next year, could you sort of add some volumes?
There's still room, and also what we are right now doing, we're also optimizing our product mix in Noranda, of course, to target a higher margin business, and of course also to optimize the product mix in terms of our capacity capabilities.
Okay. Maybe you comment on that, but the Mitsubishi, Johan , do you have any time schedule there when we should expect a decision or?
Yes, we haven't an official timeline here. Of course, we have signed this letter of intent. We know Mitsubishi Aluminum very well from the past, and we are now working on this business case together with Mitsubishi. I think it's likely to believe that we will have some kind of a decision during quarter one 2018.
Okay. Thank you very much.
Our next question is a follow-up question from Bjarne Emersom from Danske Bank. Please go ahead.
Yes. This is actually Max Frydén calling in from Danske Bank. I was on another call, I don't know how much you talked about this already. I would like to know if you could just quantify the costs for expanding the clad products now potentially with Mitsubishi in the U.S.
We can at a high level quantify this is still under investigation. One of the reasons for partnering up with Mitsubishi is also to share this investment because it will be a fairly large investment. I would say around $300 million-$400 million for the total investment, we haven't decided the split yet between Mitsubishi and Gränges. To add on that, it depends also very much on what starting point you would take. If you start from an existing Gränges facility, investments will be significantly lower. If you go for a greenfield, it will be a higher investment. That depends very much on the starting point as well. Yeah, that's good, Oskar. We haven't decided if this is a greenfield or if it's add-on to an existing Gränges facility or a brownfield.
That is actually a key part of this investigation. The figure I was mentioning was for a greenfield. Greenfield, yeah. If you would do it as a brownfield, first off, I guess that would be roughly half of that cost. Secondly, do you have room to do that in your existing facility? I don't want to speculate on the cost, it would of course be lower, otherwise you wouldn't go for a brownfield. Yeah, there is available space in the existing plant as well, we just need to see if that is the most optimal solution for this project. Depending on what Mitsubishi wants, et cetera. Yeah, that is one parameter going into this for sure. Okay. That's it for me. Thank you.
Our next question is a follow-up question from Jon Hiltner from Handelsbanken. Please go ahead. Your line is open.
Thank you. I'm going to continue with the same question from the former question. The $300 million-$400 million U.S. dollar investment, what type of capacity would that refer to?
We haven't decided that, at least an investment would be 100,000 tons at least.
Greenfield, that looks pretty low, to be honest. I thought investment for this type would be higher.
It's very preliminary right now where we are, of course, it's too early to give a more precise number here, Jon.
Okay.
To that point, I think if it's something that Gränges has proved that we are very good at historically is really to make cost-efficient rolling mill projects. If you look at our rolling mill in China that has a capacity in that region or even slightly higher, that investment is significantly lower. I think we have some very good skill sets that can prove to be very useful if we decide to go for a greenfield project at some point.
If you would add 100,000 tons, how quickly do you need to get up to high capacity for that type of a plant to be profitable? Do you need to reach 75% pretty quickly, or can you gradually expand so you might have 100,000 tons in the hot mill and then less later on in the process? Was that question clear enough?
Yeah, I understand your question. Of course, this investment will be taken in steps, you won't have all the investment and all the capacity ready at one day, basically. You will have to have the hot mill, then you will in sequence add on cold mill, of course. You won't have the full investment, then you will be able to run on a fairly high utilization rate on the cold mill, which are normally the bottleneck in our operation during the first phases. You won't need a 75% capacity utilization to be on the profit level for this possible greenfield or new plants.
Okay, the hot mill, you invest full capacity immediately, then you step by step add on capacity on the cold mill, which makes the breakeven level lower initially, you have the ability to gradually expand capacity. Is that correct?
That's absolutely correct.
Looking at your current facilities, do you have physical room, if you would agree with Mitsubishi to have it on your current land, so to speak? Do you have that land to build on?
Yes, we have. We have definitely land to build on. That's part of this investigation.
Interesting. To separate the joint venture business with your current business, that wouldn't be difficult even if the plant was on the same land. That wouldn't be a problem, would it?
No, that will not be a problem. Of course, we will do this in a clever way, so to say. That won't be a problem for us.
Sorry, silly question.
No.
Lastly, if you would add 100,000 tons to the market, what type of market capacity increase in these segments would that imply?
That would imply maybe about 30% more capacity into this segment. Today, this segment is supplied from basically one supplier in North America, of course. There is definitely a strong request or wish from the customer base to have another supplier in the region, and that is really part of the business case here.
Okay. Thank you. That's very clear. That's all for me.
Thanks.
Our next question comes from the line of Kenneth Toll from Carnegie. Please go ahead.
Yeah. I was just curious on the Noranda operations. You are investing there to get more capacity in a couple of years, but even before that, you're running at very close to full capacity. Do you see an opportunity to change the product mix in order to improve profitability over the next year? I'm wondering a little bit how long contracts you have and how quickly you can change the product mix to the better to improve profitability in Noranda.
Yes. Very good question. Johan here. Yes, of course, this is part of our strategy and activity right now in the acquired business that we want to change the product mix. We would like to supply more to the automotive industry. If you recall, right, the Noranda business did basically have very little automotive business, now we are already in discussion with several of our automotive customers to supply the unclad fin to our existing automotive customers.
That is a more high-margin product compared to the acquired business. This is absolutely one key activity. Of course, regarding the contract, we are, of course, in long-term contracts, so a large part of the business in 2018 is already contracted. There's not possible to change the full business or the product mix that we have to work on what is available to change. I would say that a bit more than half of the business is contracted.
Okay. Maybe you started thinking along those lines already a year ago when you acquired the business.
Yeah.
Sorry. Yeah. You might have some positive effects in 2018 anyway.
That's correct. We started this discussion with the customers. We started with validation already this year, and of course, hopefully, that will have a positive impact on next year's product mix for Americas.
Okay. Thank you. That's all.
As there are no further questions registered, I will return the conference back to the speakers for any closing comments.
Okay. Thanks a lot for all of you calling in. Thanks a lot for very good questions. By this, I would like to end this quarter three call for Gränges. Looking forward to talk to you again. Bye-bye