Granges AB

STO:GRNG

Earnings Call Transcript 2018-Q1

[Johan Menckel, Chief Executive Officer]

Welcome to Gränges Conference Call for the First Quarter of 2018 [indiscernible] 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 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 Q&A session.To start, I want to briefly go through Gränges current operations. Gränges is a global aluminum rolling company with some 1,600 employees and an annual net sales of more than SEK 11 billion. We have production facilities in Sweden, China and in the 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 market for buildings and houses and other niche segments in the U.S.When looking at the first quarter of 2018, we have continued to see a good development in all our markets. Sales volume was stable at 95,000 tonnes in the quarter. In automotive, we experienced a better sales development down 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 continued to see a very good demand in all our product categories.Adjusted operating profit rose to SEK 282 million, up from SEK 237 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 SEK 167 million. That includes items affecting compatibility of negative SEK 64 million and the positive SEK 22 million from joint ventures, both related to the winddown of our former sales and distribution company in the U.S.Earnings per share increased to SEK 2.21 in the quarter from SEK 2.09 last year. Cash flow before financing activities was SEK 192 million. We ended the quarter with a net debt of SEK 2.4 billion corresponding to 1.8x EBITDA on a rolling 12-month basis.After the quarter ended, we have seen quite a turbulence on the global aluminum markets. On April 6, the U.S. Treasury office issued a sanction list with Russian individuals and companies, including the global aluminum company, Rusal, [indiscernible] by U.S. policymakers have caused a lot of turmoil in the industry. For Gränges, the direct impact of the sanction is mainly related to Kubal in Sundsvall, which is the supplier of aluminum slabs to Gränges in Finspång. Oskar 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 2018, 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 2018.If we look further into 2018, the outlook for production of light vehicle is unchanged. I just estimate the global growth of some 2% for the full year 2018. If we then look into Gränges sales volume development during the first quarter, we can see that Asia was 1% higher at 23,000 tonnes. This was [indiscernible] growth rate than the market. The good development during first quarter of 2018 is partly due to the good development in commercial vehicles.In Europe, sales volume was up 2% in the first quarter to 17,200 tonnes. Sales of heat exchanger material was up some 4%, while sales of industrial products decreased in the quarter. In the Americas, sales volume was 54,800 tonnes in the quarter. Sales volume for HVAC&R and other was somewhat lower at 46,200 tonnes due to a temporary production disturbances in one of our rolling mills in Huntingdon. Sales to the automotive heat exchanger was 8,700 tonnes 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 local-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 in our Huntingdon facility.During the recent weeks, we 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 will say. At the moment, we are in dialogue with several of leading car brands in Europe regarding battery cooling plate, for example. Some smaller volume has been signed for new car platforms, and we have more discussion coming up in the coming months. The sales volume is, however, still smooth. Last year, it was a few hundred tonnes but expected to grow with double digits in the coming 4 to 5 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 high prices than standard products.Now I will hand over to Oskar for the financials.

[Oskar Hellström]

Thank you, Johan. The 2018 has started very well for Gränges, 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 12-month adjusted operating profit continued to increase to SEK 977 million. That's an improvement of SEK 208 million compared with the situation 1 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 tonnes whereas the net sales increased by 6.2% to SEK 3.1 billion. 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 Huntingdon limiting production capacity in the quarter. These issues are now being solved.The higher year-over-year increase in net sales and sales volume is primarily driven by increasing metal prices. The net impact on net sales from changes in foreign exchange rates was negative SEK 176 million compared with the first quarter 2017.Moving to the earnings. The adjusted operating profit amounted to SEK 282 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 SEK 19 million compared to Q1 2017.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 has a positive impact of about SEK 10 million 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 million in Q2 and Q4 respectively.In the third quarter 2017, 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 SEK 16 million in the first quarter. We expect the same year-over-year effect also in the second quarter.The adjusted operating profit per tonne reached SEK 3,000, which is SEK 500 or some 20% higher compared to Q1 2017. The profit per tonne development was positive in both the automotive and the HVAC and other businesses. Items affecting comparability amounts to negative SEK 64 million 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 administrated by Gränges would be more cost-efficient than the previous joint venture set up, 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 on 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 2017 report.Including the items affecting compatibility, operating profit amounted to SEK 217 million. The profit for the period reached SEK 167 million compared to SEK 157 million previous year and corresponds to earnings per share of SEK 2.21. The profit for the period includes a positive effect of SEK 22 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 a SEK 192 million in the quarter. And by the end of March, the return of capital employed reached 17.3% on the rolling 12-month basis.During the first quarter, the net debt increased by SEK 61 million to SEK 2.4 billion. This corresponds to 1.8x adjusted EBITDA on rolling 12-month basis, which is within our long-term target range of 1 to 2x. 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 remains stable in the quarter.Other operating items refers to taxes paid of SEK 15 million. Investments in fixed assets amounted to SEK 123 million in the first quarter. About half of this refers to investments to maintain and improve efficiency in our current production facilities.CapEx related to the expansion of the plant in Huntingdon is included with SEK 65 million. Acquisitions and other capital transactions of SEK 22 million 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 its 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, Rusal, that is heavily integrated in the global aluminum supply chain. These sanctions, together with the recently imposed general tariffs and antidumping duties on certain imports into U.S. of aluminum products from 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 Rusal 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, Gränges 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 a 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, has an impact on the value of our working capital. The higher metal price means higher working capital and that the cash flow is negatively impacted during the working capital build up. This effect is of course reversed in the scenario of declining metal prices.Second, regarding the sanctions against Rusal. One of the Rusal subsidiaries, the Kubal smelter in Sundsvall, Sweden, is the supplier of rolling slabs to Gränges operations in Finspång. For the full year 2017, the supply from Kubal corresponded to about 20% of our metal purchases in Finspång 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 [indiscernible]. As the situation looks today and with the deadline wind down transactions with Rusal extended, we do not expect to experience any raw material shortage for our Finspång operation in the short term. We are, however, continuously monitoring any developments in this area very closely.I will now hand over back to Johan Menckel, that will summarize the first quarter and provide an outlook for the second quarter.

[Johan Menckel, Chief Executive Officer]

Thank you, Oskar. When looking into the second quarter of 2018, we anticipate a lower growth rate down the research firm IHS forecast for the market. That applies for all our major regions. We also note the increased uncertainty on the aluminum markets in general due to the recently announced U.S. sanction against aluminum giant, Rusal, 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 investments in new capacity in the U.S. will come into effect during second half of 2019. 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 second quarter of 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 2018 first quarter report, Gränges 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 tonnes. And adjusted operating profit increased by 18% to SEK 282 million, driven by improved operation performance in Europe, good metal management and price increases in the U.S.Cash flow before financing activities was SEK 192 million. Return on capital employed was up 17.3%, and we ended the quarter with a net debt of 1.8x EBITDA, which is within our target range. Our growth plans for North America are proceeding according to plan. The expansion of our facility in Huntingdon has started and is set to be finalized in the second half of 2019. We are also evaluating other projects in the region as well as in Europe and in Asia.Thank you. And now we open for questions.

[Operator]

[Operator Instructions] The first question comes from Max Fryden from Danske Bank.

[Max Fryden, Analyst]

Max Fryden here. Can you hear me?

[Johan Menckel, Chief Executive Officer]

Yes.

[Max Fryden, Analyst]

Excellent. I have a few questions, 3 actually. And the first one is when you go through sort of the earnings drivers -- and congratulations on the good result, by the way. The metal management as a driver, is that possible to quantify either in absolute terms or per tonne on gross profit, et cetera?

[Oskar Hellström]

Max, this is Oskar here. Yes, of course, it's possible to quantify the metal management impact. We have, however, been very careful with indicating these things historically. So this is not something we will comment on externally.

[Max Fryden, Analyst]

Okay. Then a follow-up with the price increases. You say they are -- if you compare the price increases to metal management, which one was the biggest contributor? Is that possible to say?

[Oskar Hellström]

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.

[Max Fryden, Analyst]

Okay. And then on the price increase that you mentioned, you say you raised prices as of 1st of January. 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 during the year? So the year-over-year effect will actually increase.

[Johan Menckel, Chief Executive Officer]

Yes, Johan here. I mean we've seen 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, confirm for the open volumes is -- will remain during 2018.

[Max Fryden, Analyst]

Okay. And finally, I'm just trying to understand the purchase of your remaining 50% of Norca. I mean you acquired finished goods and finished products here in 2017 that then I presume are selling in '18. Doesn't this have any positive impact on your results in Q1?

[Oskar Hellström]

I think it's a good question, Max. I mean, what you referred to here is the change in distribution one for Americas that we highlighted 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 Gränges 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 -- sorry, the remaining 50% of the joint venture distribution company and basically the inventory in that company is now in the Gränges 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 product in Finspång and Shanghai, that margin is already accounted for in the inventory that we acquired when we acquired Norca. When we now sell -- sold that inventory in the first quarter, we could only get sort of the 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 this will be back to normal. And if you want, you can say that, that actually it's so that going forward also get the distribution margin on top of the product margin. Distribution margin was not accounted for in the Gränges group historically. This margin is, however, very slim. So the biggest [indiscernible] things that you won't notice that.

[Max Fryden, Analyst]

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 all had a few quarters where you can see the sort of underlying strong growth and even if I adjust for all these different positive effects from prolonged -- from the D&A and from the accrual accounting and the negative FX, it seems like a growing EBITDA at SEK 38 million, I'm just trying to understand, should we extrapolate that putting in 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 quarter? So what am I missing?

[Oskar Hellström]

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, what Johan has indicated, of course, is on the group level flat volumes for the second quarter. What we do see there is that we will see a slightly mix effect where we see slower development or actually decline in the Asian volumes, whereas as Europe and Americas grows a little bit. So the net of the volume is expected to be on the same level as last year. That will lead to a slight negative geographical mix effect for Gränges. 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 make more even over the year. Of course, that is a SEK 10 million positive impact in first quarter, but it will have SEK 5 million negative impact in second quarter and fourth quarter, respectively, but neutral over year.

[Max Fryden, Analyst]

Yes, I got that one. I adjusted for that volume very blurry comment. And -- okay. So in Asia, is that primarily related to the inventory destocking you've seen from the customers? And that should maybe bounce back moving to Q3?

[Johan Menckel, Chief Executive Officer]

Yes, Johan here. I mean it's somehow related to destocking in Asia and of course -- and we don't share the very positive view on the Asian market that IHS has. We have another view on the quarter 2 outlook for Asia. But still, we are confident for our Asian business for the full year.

[Operator]

The next question comes from Johannes Grunselius from Handelsbanken.

[Johannes Grunselius, Research Analyst]

It's Johannes Grunselius, Handelsbanken here. Can you hear me?

[Johan Menckel, Chief Executive Officer]

Yes.

[Johannes Grunselius, Research Analyst]

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 SEK 18 million, so that was pretty anticipated, I suppose, for Q1. But how should we view Q3 -- Q2, Q3, et cetera, going forward? Because I suppose you have more tailwind now again from FX.

[Oskar Hellström]

Yes. Johannes, it's Oskar here. It's true that the FX impact on our operating profit was negative SEK 19 million in the first quarter. And I think when we talk about FX, we never provide any forecast for FX impact as such, but what we can remember here, let me talk about this, and I think it's worth a highlight, is that we are exposed, both to the SEK U.S. dollar and the SEK euro and the SEK to the Chinese yuan and the Chinese yuan to the U.S. dollar. So we have quite some exposures in Gränges. 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 12 month before you see the full impact of an FX change flowing through to the bottom line. And after 6 months, you have basically half of the impact of an FX change. So even though that you have seen some recent movements here in FX rates that is on the beneficial side for Gränges, they won't fully come through directly but it will come with a bit of a delay. I hope that helps.

[Johannes Grunselius, Research Analyst]

Okay, yes. But am I right that you will still have negative P&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 positive effect?

[Oskar Hellström]

We only provide the numbers of the quarter that we report. We don't provide any guidance on FX rather in addition to describe the way we are exposed and the way we hedge.

[Johannes Grunselius, Research Analyst]

Yes, okay. Then on the U.S. pricing, I think 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 FX from pricing in the U.S.?

[Johan Menckel, Chief Executive Officer]

No, no. Basically for the price increases we have concluded for '18 is done. And then there are remaining volume to be renegotiated for '19 and onwards.

[Johannes Grunselius, Research Analyst]

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 the advantage here and improve the mix? Would you say in this market? Or are you -- or this is -- or do you foresee more of a unchanged mix? Or how should we see that?

[Johan Menckel, Chief Executive Officer]

Yes, definitely it's a very strong demand in the U.S. and, of course, in addition to the expansion product 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. But the mix in America as you were referring to, yes, we are working of course with also increasing the automotive part in U.S. for our customers.

[Operator]

The next question comes from Mats Liss from Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Well, a couple of questions. First, regarding the price increases you mentioned and you have implemented then of 50% of the offering in the U.S. Is that 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?

[Johan Menckel, Chief Executive Officer]

It's a step-change in the first quarter trend and the effect is now.

[Mats Liss, Equity Research Analyst]

Yes, good stuff. Secondly, regarding the production disturbance that you mentioned. Could you say something about the volume and earnings impact during the first quarter?

[Oskar Hellström]

Yes. Mats, 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 at a operating full capacity, we are continuously working on releasing bottlenecks and therefore adding additional capacity. So what you can say there is that we will probably have expected some growth in the quarter, couple of all the percentage points of growth, instead it was close to 1% decline. So that's sort of the delta I think you're after.

[Mats Liss, Equity Research Analyst]

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 did you say something there?

[Johan Menckel, Chief Executive Officer]

Yes, of course. No, no. We have -- when we acquired Noranda, we acquired 3 plants: one in Tennessee, one in North Carolina and then other 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 and 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.

[Mats Liss, Equity Research Analyst]

[indiscernible]

[Johan Menckel, Chief Executive Officer]

It's a very attractive opportunity for us. The volume there, I mean we were initially talking about some 20,000 tonne.

[Mats Liss, Equity Research Analyst]

That's good. And then about the Mitsubishi JV here, do you have something -- some comment to make regarding the negotiations?

[Johan Menckel, Chief Executive Officer]

Yes, as I stated, we are still in a phase where we are basically negotiating terms and conditions. So it's basically the same. The state is as we presented during our Capital Markets Day. So we have new updates here. It's, of course, an interesting project that we are pursuing, but we haven't concluded on that yet.

[Mats Liss, Equity Research Analyst]

But you still expect to be finished during the year or is it more...?

[Johan Menckel, Chief Executive Officer]

Yes, we definitely expect to conclude on whether to do this or not this year for sure.

[Mats Liss, Equity Research Analyst]

Okay, great. Then I guess the U.S. tariffs have some impact on the Chinese market. And could you could give some comment there how it affects your segment?

[Johan Menckel, Chief Executive Officer]

Yes, definitely. I mean, there are basically 2 different kind of duties on Chinese rolled product. The first one was implemented last year, and that was on thin rolled product, foil, with some 100% basically tariffs. So for that volume, we've actually transferred that volume to our Finspång operation. And of course, that has also increased the demand in U.S. substantially. Now it's also a similar review from the U.S. department on the more thicker products, the remaining of the rolled product, and that's being preliminary duties imposed from January this year, and it's likely to that this 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 Finspång operation, and it's about 2,000 tonne we are talking about here that we are part of that thicker product category. But that will, of course, will also add a lot of increased the demand for thicker products in the U.S.

[Mats Liss, Equity Research Analyst]

And in China, do you see any sort of that your Chinese competitors are sort of trying to balance negative -- well, the impact out of U.S. tariffs in China?

[Johan Menckel, Chief Executive Officer]

Yes, I mean, of course, this volume needs to go somewhere else, and it's of course an activity for these suppliers, the Chinese suppliers, to compensate for the lost in the U.S. But we should not exaggerate this because we've had a very -- I mean, a 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 businesses segment supplying the North American market.

[Mats Liss, Equity Research Analyst]

Okay. And finally just about the tax charge or tax rate for the full year, could you give some indication there?

[Oskar Hellström]

For the group tax rate, we assume that for 2018 to be between 22% and 25% here. And then we are basing that on the assumption that we have a 25% tax rate in China. We still think that it's quite likely that we will enjoy the 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.

[Operator]

The next question comes Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

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 steel 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 product 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 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?

[Oskar Hellström]

Okay, Kenneth, 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 and divide the answer in 2 parts. Basically for the old Gränges business, we have basically when we are writing new contracts and we have placed the vast majority of all our contracts last couple of years of course. So our contracts now are structured in such a way that they always pass on the metal price premium in addition to the basic LME price to our customers. As a consequence, we do no longer have any 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 to these U.S. premiums, and I'm not referring to of course the ex-Noranda business here. In the U.S., we 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. It's a very fair comment especially taking the history into account here, but we are not so worried about these things at this point.

[Johan Menckel, Chief Executive Officer]

Kenneth, Johan here. I can comment on your second question. I mean there are proposed duties on 10% for aluminum products into U.S., which is now prolonged. It's negotiation ongoing. But we haven't seen or we haven't seen the value of doing semi products in Europe to shape because the consequence of this 10% is basically that Midwest premium has increased by 10%. So the net impact for the American customers is actually 0. So that is not really a big issue. With this 10% of tariffs from the Europe that are not implemented yet, still under discussion as you most likely know.

[Operator]

The next question comes from Emmi Östlund from ABG.

[Emmi Östlund, Lead Analyst]

This is Emmi. I'm sorry if you've already answered this. But I mean you're adding 40,000 tonne of capacity in the U.S. over 2 years, and you sort of touched upon that we're going to see some of the -- 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 in sort of production ramp up in the U.S. and things like that?

[Johan Menckel, Chief Executive Officer]

Yes. We are adding 40,000 annual tonne capacity in the Huntingdon plant in Tennessee that will come into start of production basically in half year 2019. And I mean right now, we're of 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 2 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 5-year period. So there is very strong need for the customer base in U.S. to serve the long-term supply locally. And 40,000 tonne, it's very small number in relation to the overall demand.

[Emmi Östlund, Lead Analyst]

So basically as soon as you have this production capacity, you're thinking that this will sort of be filled up immediately? Or is that how we should think about this?

[Johan Menckel, Chief Executive Officer]

Yes. We are very, I will say, comfortable with that -- this additional 40,000 tonne will be contracted and sold.

[Emmi Östlund, Lead Analyst]

Okay. And this will come into effect in the second half of '19? Is that correct?

[Johan Menckel, Chief Executive Officer]

Yes, correct.

[Operator]

The next question comes from [indiscernible].

[Unknown Analyst]

The question on 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'll be closed?

[Johan Menckel, Chief Executive Officer]

Johan here. 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. But I mean there's also a lot of discussion in general in the European aluminum association what would be the impact of tariffs on Chinese rolled products to Europe, et cetera. So there is a concern in the overall market, but we haven't seen a clear pattern as of today.

[Unknown Analyst]

And secondly, it would be interesting to hear your view on supply coming to the market in general for '18,and '19. Is there any view on that?

[Johan Menckel, Chief Executive Officer]

Sorry, [indiscernible]. Once again, repeat the question.

[Unknown Analyst]

I'd be interested in your thoughts on the supply coming to the market in general in this year and then next.

[Johan Menckel, Chief Executive Officer]

Okay. No, there is no really 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.

[Unknown Analyst]

And if I may, 2 additional questions. One, in terms of the Russian sanctions and the impact on your relation with Kubal in Sundsvall, you said that you don't expect any raw material storage, but would you expect higher costs in order to find new suppliers and solve the issue?

[Oskar Hellström]

It's Oskar here. It's a fair question I think that for the time being and until October this year, we still expect to continue to get deliveries from Kubal. 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 Kubal 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 are not the -- they don't have the same location. You will have to buy from Norway instead of from Sundsvall, for instance. But you would also expect at least for some period of time before we can tune in their raw material, you would expect 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 Kubal volumes, I would foresee some higher cost.

[Unknown Analyst]

Okay. And final one, if I may. You say in the report that you're evaluating other projects such as involving expansion in Finspång due to the fact that you're running a full capacity. Could that mean greenfield project in Europe as well? Or is that out of the question?

[Johan Menckel, Chief Executive Officer]

It's -- what we are evaluating right now is to increase capacity and improve capabilities in our Finspång 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 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.

[Operator]

[Operator Instructions] The next question comes from Max Fryden from Danske Bank.

[Max Fryden, Analyst]

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?

[Oskar Hellström]

Sorry, Max. I'm not sure I understood your question. Can you please rephrase that again?

[Max Fryden, Analyst]

Yes, sorry, that went a little bit too fast even for me. So the transaction flow when I look into the annual report on currency, you have the renminbi to U.S. dollar. On a 10% movement, it is SEK 77 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., et cetera, but I'm not sure how your cost and revenue streams are in those 2 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?

[Oskar Hellström]

Absolutely. Now I understand your question fully [indiscernible]. Yes, I mean as you say, in our annual report, we have quite well described our exposures and how we hedge. And the key point here for anyone looking at that section of the report, the table that Max is referring to here is the impact on EBITDA 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. 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, that's a consequence, that volume being sold in U.S. dollar. That means that the U.S. dollar exposure in our Asian operations. So the USD to Chinese renminbi exposure has come down slightly between 2018 and 2017. But at the same time, with the biggest U.S. dollar to renminbi exposure is not for the volume shipped from China to the U.S. It's on the volume shipped from China to rest of Asia. So if 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 '18.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I now give back the word to the speakers. Thank you.

[Johan Menckel, Chief Executive Officer]

Okay. Johan Menckel 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 we see good and interesting questions. Looking forward to our next call on July 19, and we would present our quarter 2 report then. Thank you.