Granges AB

STO:GRNG

Earnings Call Transcript 2020-Q1

[Johan Menckel, Chief Executive Officer]

Welcome to Gränges' conference call for the first quarter of 2020. As usual, here in Stockholm, it's me, Johan Menckel, CEO of Gränges. And with me, I have CFO, Oskar Hellström.We will start this presentation with an update of Gränges' performance during the last quarter and highlight some important events. After that, Oskar will take you through the financial results, and then we will conclude the presentation with a short summary and a Q&A session.The first quarter of 2020 included great challenges for Gränges but also great success. As we're all aware, the world is currently severely impacted by the outbreak of COVID-19. The extraordinary measures that the governments and authorities have taken to reduce the spread of the virus have significantly affected market conditions and operating conditions where Gränges operates.During the first quarter, we experienced very challenging market conditions, especially on the automotive side of our business, as many car producers in Asia and Europe temporarily closed their production as a consequence of the virus outbreak. Still, the demand in the HVAC business held up well in the first quarter. And here, we achieved the best quarter so far. With a successful ramp-up of the new production capacity in the U.S., in combination with the larger contracted market shares as of 2020, we managed to balance most of the sales volume lost on the automotive side.In total, our sales volume declined by 1% year-over-year in the first quarter. Due to the change in product mix between automotive and HVAC, we did experience some negative impact on the margins, and the adjusted operating profit declined to SEK 210 million in the quarter. On the positive side, the cash generation continued to be very strong, and the adjusted cash flow before financing amounted to SEK 329 million in quarter 1.The challenging market conditions on the automotive side becomes very evident if we look at some statistics over the recent market development. The research firm, IHS, currently estimates a global decline in light vehicle production of 24% in the first quarter. If we look at estimates by region, we can see that the decline in light vehicle production, followed by the spread of COVID-19 during quarter. Asia and China were hit early in the quarter and is down 30% on last year; followed by Europe, down 19%; and Americas has declined by 11%.As the production stops at car producers have extended far into April and many plants are still not in operation today, the negative impact is expected to be even larger in the second quarter. Currently, IHS estimates a decline in global light vehicle production of 47% in the quarter 2 of this year. As China has begun to open up again and slowly getting back to a more normal situation, the decline is expected to be a little bit lower in Asia than in Europe and Americas. Still, no matter which region we are looking at, I think it's fair to assume that all automotive-related business will have a very challenging time in the second quarter.If we look at the Americas HVAC market, the picture is a bit different for the first quarter. The HVAC unit production is expected to have increased by about 5% in the first quarter, and the impact of COVID-19 was limited to the 2 last weeks in the quarter. Given the current market uncertainty, it's very difficult to predict how the HVAC market will develop in the second quarter. It is typically a much more stable market than the automotive and, to a large extent, driven by replacements. But demand will largely depend on how the general economy develops in light of the COVID-19 outbreak.If we then look at Gränges' sales volume development during the first quarter, we can clearly see the impact of the lower automotive demand in all regions. In total, our sales of automotive materials declined by 15%. In Asia and Europe, sales of automotive material was down 17%. And in Americas, we experienced an 8% decline. This follows the pattern of the development of the light vehicle production in the quarter, but we see a slightly lower decline on the Gränges side. The main reason for this is that customers, in particular Asia, did not react quickly to the COVID-19 outbreak and have consequently built additional inventory in the supply chain. The same effects are seen in Europe and Americas, but to a slightly lower extent. This is expected to be reversed in the coming quarters.For the HVAC & Other business, Americas, we have, as of January 2020, contracted a larger share of the market. And the successful ramp-up of the new production capacity allowed us to increase the sales volume by 13% in the first quarter. The 51,700 tonnes that we delivered in the quarter is the highest that we have achieved so far for this business in an individual quarter. I will come back and comment a bit more on this later.Since Gränges has a large operation in China, we started to see the impact of COVID-19 already in January. And consequently, most of the first quarter has been spent addressing and mitigating the impact of this. We have activated contingency plan in China, Sweden and U.S., focusing on 3 primary areas: continuity, cash and cost.First, in this situation is, the first and foremost important, to ensure the health and well-being of our employees, to secure that we can continue to operate our production facilities in the short as well as in the long term. So far, the measures that we have been taking has allowed us to continue to run our business to the level required to meet customer demand. In addition, we have, to date, not experienced any lack of any critical raw material due to the disrupted supply chains.Secondly, to protect Gränges, it is important to secure cash flow. As part of this, we have increased the focus on working capital control and receivables collection. This is an area where we have seen positive effects already in quarter 1. To preserve cash, we have further reviewed our CapEx spending, and we have revisit on the ongoing expansion programs, which I will come back to and comment more on shortly.Finally, it's important to ensure good liquidity. On the 31st of March, Gränges has available cash and unutilized committed credit facilities totaling about SEK 2 billion, which is well above Gränges' need for the coming year. In light of this, I would also like to mention the decision by Gränges' Board to withdraw the previously communicated dividend proposal to the Annual General Meeting to ensure that Gränges continues to be well positioned for the future.Thirdly, we have addressed the cost base to try to adjust it to the market demand that we expect to see in the short to medium term. This means reduction of capacity and manning primarily through temporary plant closures and layoffs. We have also reinforced our general saving program and limited spend to allow only business-critical expenses for the time being.These slides intend to give you an indication of what the operational status in Gränges looks like as of today and how we have implemented the temporary plant closure across the group. If we start with Asia, we closed the plant in Shanghai for the first 2 weeks in February due to the fact that the Shanghai government imposed restrictions on all companies in the region. We were allowed to restart production on February 10, and we are operating as normal since the beginning of March.In Europe, we closed part of the plant in Finspång by end of March, and parts that remain in operation have been reduced to 40% of normal capacity. All employees have been temporarily laid off up to 60% of the time, and we have reached an agreement with the workers' union, which gives us flexibility to scale up or down the manning level at short notice, should that be needed.In the U.S., we have 2 plants with the same capabilities, which gives us an even greater flexibility to adjust capacity to market demand. The Salisbury plant was temporarily closed in early April, and all production has been transferred to the larger and more cost-efficient plant in Huntingdon. Similar to the Finspång plant, employees in Salisbury have been temporarily laid off. In total, this means that we are reducing the group's production capacity with around 20%, and that around 500 or about 30% of our employees are currently temporarily laid off. The Finspång and Salisbury plants will remain on current level of operation until further notice. Depending on how the demand develops going forward, we may do further capacity adjustments.As I mentioned earlier, one of the actions we have taken to mitigate the effects of COVID-19 is to postpone our capital expenditure. This goes for the maintenance investment as well as for the 2 ongoing expansion projects in Newport and in Finspång. In Newport, the upgrade of the first 2 rolling mills has been completed. The third mill was scheduled to be finalized in the first half of this year. Due to the imposed travel restriction, it is, however, impossible for the European equipment supplier to visit the site and refurbish the mill. The status of our site logistics project in Finspång is similar. We are at a phase where equipment will be installed, but under the current circumstances, the foreign suppliers cannot come to the site to complete installation work. Therefore, we have decided to put these 2 projects on hold for the time being. At this point in time, it's too early to say when the projects can be started up again. Assuming that neither of the 2 projects would be restarted before the year-end and also taking the planned reduction in maintenance CapEx into account, this would mean a total reduction in CapEx for 2020 with about SEK 200 million compared to what we have previously indicated.In the fourth quarter in 2019, we announced the acquisition of Aluminium Konin. The acquisition will strengthen the product offering and presence in Europe and contribute with a strong position in new attractive niche markets. Aluminium Konin would also add new capabilities and capacity to expand the offering for future transportation solution, such as electrical vehicles. The completion of the transaction is subject to customary approval from competition authorities. Due to the COVID-19 outbreak, the process to receive clearance from the competition authorities will take longer time than originally anticipated. Therefore, the closing of the transaction is expected to take place in the second half of this year. Following the completion of the transaction, Gränges intends to undertake a new share issue, with preferential rights for existing shareholders to finance the acquisition. Gränges' ambition is always to close an acquisition as soon as possible after signing. Still, in this case, considering the prevailing global climate and travel restrictions preventing visits to conduct preclosing and integration planning in Poland, a closing during the second half of 2020 may be preferable. This may contribute to less uncertainty and provide a better environment for completing the transaction.After addressing the challenges we have seen related to the coronavirus, I would now like to end this part of the presentation on a more positive note. In the fourth quarter last year, we completed the expansion of the Huntingdon facility, confirming its position as the most cost-efficient North America rolling mill in its field. We have now started to ramp up the 40,000 tonnes new capacity to support a higher contracted market share that we have from 1st of January this year.As some of you may remember, we have previously indicated a 10% to 15% increase in contracted volume for 2020. In the first quarter, we achieved a sales growth of 13% and, in the end of the quarter, have already reached a 90% availability of the new capacity, far above the target of 75% by June. This contributed to our best quarter so far in Americas, both in terms of sales and in terms of profit, a really great effort by our Americas team.As I mentioned earlier, we have taken out some capacity in Americas as of early April by temporarily closing down the Salisbury plant and consolidating production to Huntingdon due to the impact on demand from the coronavirus. This was possible, thanks to the successful ramp-up in Huntington during the first quarter. This means that we will be able to run the Huntingdon plant at a high utilization also in a lower market scenario, which will be beneficial for our overall cost performance in America.Finally, I would also like to mention that, even though we have stopped the upgrade of the third rolling mill in Newport for the time being, the first 2 upgraded mills are operational and the third mill will continue to run in its current condition for the time being. This is in order to serve the specialty packaging market with materials for pharmaceuticals and food packaging, where we are seeing an increased demand over the last month.With that, I hand over to Oskar for the financials.

[Oskar Hellstrom, Deputy CEO & CFO]

Thank you, Johan. As Johan has talked about, the sales volume remains fairly stable on total level in the first quarter as the increase in HVAC largely balanced the decrease in automotive. Despite the stable volume, the adjusted operating profit came down in the quarter, and so did the adjusted operating profit per tonne, as you can see on the right-hand side. There are 2 primary drivers behind this. First, we have done a lot to improve the margins of the HVAC business in recent years, and we have a good trajectory there, but the profit per tonne for HVAC products is still lower than for automotive products. Therefore, a shift from automotive to HVAC volume results in an unfavorable product mix effect for Gränges. Secondly, you can see that the profit per tonne for the automotive products is declining. One important driver behind this is the capacity utilization, and it comes down as a consequence of the drop in automotive sales. In quarter 1, the capacity utilization was on average 80% for the group, above 90% on the HVAC side, but only about 70% on the automotive side. Given that a large part of our cost base is fixed or semi-fixed, this reduced the operational leverage for the automotive business in the quarter. As Johan mentioned earlier, we have partly addressed this issue by taking out capacity and cost through temporary plant closures as of April.If we look at the first quarter financials and compare with the same quarter last year, we can see that the sales volume decreased by 1.1% to 89,900 tonnes, and that the net sales decreased by 1.5% to SEK 3.1 billion. Lower aluminium price than last year reduced the net sales, whereas the net impact from changes in foreign exchange rates was positive compared with the first quarter 2019.Looking at the earnings, the adjusted operating profit amounted to SEK 210 million in Q1, a decrease of SEK 65 million or 23.6% on prior year. As I mentioned just a minute ago, the main drivers behind the reduced operating profit is the negative mix effect and the low capacity utilization in the automotive business. In addition to these, we see some effects of less optimum metal management in the quarter. And the primary reason for this is that it's difficult to optimize the raw material mix in our cast houses when we have large changes in volume and product mix. Over time, this will be adjusted and optimized based on the new volume level.As you heard from Johan, we have completed the expansion project in Huntingdon and started to ramp up the new capacity in the first quarter. This means that we're also starting to depreciate the new assets. The increase in depreciation compared to Q1 last year was in total SEK 27 million for the group. Net changes in foreign exchange rates was positive SEK 45 million in the quarter. And looking at the profit margin, the adjusted operating profit per tonne declined from SEK 3,000 to SEK 2,300 in the quarter.Items affecting comparability amounted to in total SEK 6 million in the quarter, and these are related to the ongoing acquisition of Aluminium Konin. Including the items affecting comparability, the reported operating profit amounted to SEK 204 million in the first quarter. The profit for the period of SEK 133 million corresponds to earnings per share of SEK 1.76. The reason for the lower profit compared with last year is the lower operational result. This is partly offset by positive tax effect from the high-technology enterprise (sic) [ High and New Technology Enterprise ] tax in China that was not included in this first quarter 2019. By the end of March, the return on capital employed was 10.3%.During the first quarter, the net debt increased by SEK 94 million to SEK 3.6 billion or 2.8x adjusted EBITDA. We continue to see a very strong underlying cash generation in the quarter. The cash flow before financing adjusted for the expansion investments amounted to SEK 329 million, and this corresponds to an operating profit to cash conversion of 157%.As Johan mentioned earlier, one of the areas we have increased our focus on as a response to the coronavirus outbreak is working capital. Here, we see positive developments already in Q1. Typically, we build working capital in Q1 as seasonality of our business means that it grows sequentially from Q1 to Q4. And given the weak Q4 last year, you would expect to build more working capital than normal in the first quarter this year. But here, we instead see a release of SEK 66 million, which indicates that our working capital focus is having effect.We also continued to invest in total SEK 149 million in our expansion programs. Of this, SEK 131 million are related to Sweden and SEK 17 million to the U.S. Due to the coronavirus, we have now put these expansion programs on hold. This means that expansion CapEx will be lower in the coming quarters. But due to the contracts with the suppliers, it will, however, not go down to 0 immediately, and we expect to see some expansion related to CapEx also in the second quarter.With the planned reduction in maintenance CapEx and provided that the expansion investments is not restarted before year-end, we currently expect the full year CapEx for 2020 to be in the range of SEK 450 million to SEK 500 million for the group. The FX and other component on this slide is primarily not cash related but is the result of currency translation effects on U.S. dollar-denominated debt as the SEK depreciated against the dollar in the quarter.In terms of access to liquidity, we currently have cash of close to SEK 1.2 billion and committed available credit facilities of -- in total about SEK 1 billion. This does not include the financing arrangement for Aluminium Konin, which is a separate facility. Excluding commercial papers, which is backed by a revolving credit facility and a small working capital loan in China, we have no loans or bonds that are due within the next 1.5 years. We believe that the financing that is in place gives Gränges the strength to meet both the downturn and the recovery and allow enough room should the downturn be deeper than what we can expect today.With that, I hand over to Johan, who will provide an outlook and a summary of the first quarter.

[Johan Menckel, Chief Executive Officer]

Thank you, Oskar. Given the rapid development of the spread of COVID-19, the prevailing global climate and the high level of uncertainty in the market, it is currently very difficult to provide a forecast even for the short term. That said, it might make sense to reflect a bit on what we see in the market right now and what the general sentiment is for the time being.For the automotive production, IHS currently expects that this will drop by almost 50% globally in quarter 2. Even though some car producers have stopped -- opened up their production since a week or so, the pace is very slow. Consequently, I foresee that the demand for our automotive materials will be very weak in the second quarter.When we talk about the HVAC & Other business, it's worth to stress that this is a much more diverse than the automotive business and typically much less cyclical. About 1/4 of the sales for HVAC & Other goes into specialty packaging application, which is largely noncyclical and partly even countercyclical market. That said, the demand development in quarter 2 for HVAC and other will largely depend on the development of the economy in general. Based on the current situation, I think it would be fair to expect a lower decline for this business than for the automotive business in the second quarter.As we saw in the first quarter, a product mix shift from automotive to HVAC has a negative impact on the profitability. With a lower decline expected in HVAC than in automotive, we expect to see this effect in the second quarter as well. Although the short-term implication of COVID-19 should not be underestimated, we believe that for Gränges' part, the medium- to long-term fundamentals will not change to negative because of this. Our focus on supporting sustainability, light-weighting and electrification is likely to keep us in a favorable position also in the post-corona environment. It may even be so that the current crisis will speed up developments in other areas and create additional opportunities for Gränges. With this strong commitment to constantly improve and develop, Gränges is well positioned to continue to deliver sustainable and profitable growth throughout economic cycles.To conclude the 2020 first quarter report, the COVID-19 and measures taken to reduce the spread of the virus affected the markets in which Gränges operates. And the demand for our automotive materials declined by double digits in the quarter. This was, however, balanced by positive developments and sales volume growth on the HVAC side as we have been very successful in the ramp-up of the new capacity and deliver on the new contracts in the quarter.In total, our sales volume remain fairly stable in the quarter. The adjusted operating profit was reduced to SEK 210 million, but the cash generation remains strong with an adjusted cash flow before financing of SEK 329 million. Although the market conditions are expected to be very challenging in the coming quarter, we continue to be positive about the medium- to long-term outlook and are determined to continue to grow and strengthen our presence and positions globally.Now we open up for questions.

[Operator]

And so far, we have 2 questions already in the queue. The first is from the line of Kenneth Toll of Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Yes. So I'm thinking a little bit about the demand side. You usually have some feeling of the demand, if it's a little bit higher or a little bit lower than the IHS estimates. I'm also thinking that maybe -- [ so that ] customers were building inventories a little bit, do you think that they will reduce inventories in Q2 so that your sales to the automotive may be even worse than the minus 47%?

[Johan Menckel, Chief Executive Officer]

Yes. Johan here answering, [ Per ] Ken. You're right. We always gives our own view on this. But due to the high uncertainty we see right now, we basically refer to the IHS prediction of a 47% decline in the automotive market globally for quarter 2. We have seen, of course, as an example, in Europe, [ old ] customer has already started their production but at a very low level. And we also expect that U.S. will come in slightly later in this and have a more negative impact. But also, we've seen, of course, following the IHS forecast that China, in particular, has actually getting quite well started into a normal level, which is good.

[Kenneth Toll Johansson, Financial Analyst]

Yes. Then if one look into Q2, it's fair to assume that you will have lower earnings in Q2 than in Q1, at least. And maybe then your net debt-to-EBITDA ratio goes up from the 2.8 you were at for this quarter. So I'm a little bit curious on what covenants you have there on your debt? And secondly, if you get close or sort of break those covenants, what would that trigger? Would it trigger a total refinancing? Or would it trigger higher interest rate payment for some time? Or what would happen in such an event?

[Oskar Hellstrom, Deputy CEO & CFO]

Hi, Kenneth, it's Oskar. I think it's a fair question, of course. We refinanced Gränges in the beginning of 2019. So we have quite some tenor left on basically all credit facilities. We have some covenants in there. We have not disclosed exactly what those are, but I think it's fair to assume that they are on a customary level for a company of Gränges' size, positioned as an investment-grade company. I think that you are right that if we see lower earnings in the second quarter, that will have some impact on the net debt-to-EBITDA ratio. We also need to keep in mind, though, that we are very cash focused for the time being, and we are very confident that we can keep sort of the debt under control here. So at this point in time, we believe that we have quite some headroom left to the covenants with the current market scenario. Should this change dramatically going forward, and that we see a risk that we are getting too close to the covenants we have, we will, of course, initiate a discussion with our financing banks before that happens.To answer your question, what also happens, of course, is that if you get up higher in leverage, you typically have to pay a higher -- a higher margin on your financing. So the financing cost might increase a little bit as a consequence of an increasing net debt-to-EBITDA ratio.

[Kenneth Toll Johansson, Financial Analyst]

But there is no sort of automatic canceling on the finance agreement that, that would put you in a -- [ peak ] in a very difficult situation.

[Oskar Hellstrom, Deputy CEO & CFO]

I think if we will see risk of breaching covenants, we would initiate a discussion with the banks and find a solution for this before we get close to such a scenario. But at this point, we believe that we have enough headroom. So...

[Kenneth Toll Johansson, Financial Analyst]

Yes. And you have a lot of liquidity as well that you said before?

[Oskar Hellstrom, Deputy CEO & CFO]

So we have access to SEK 2.2 billion really at this point. So we believe that this is going to be more than enough to meet the demand in this year, for sure, irrespective really on how bad the market gets. But on the other hand, of course, as Johan also talked about just a minute ago, it's very difficult to say exactly what's going to happen in the coming quarters, of course. So -- but at this point, we are not very worried about this particular thing.

[Operator]

[Operator Instructions] Our next question comes from the line of Oskar Lindstrom of Danske Bank.

[Oskar Lindstrom, Senior Analyst]

Two questions from me here. And the first one, I think, Kenneth touched on it, but I wasn't sure if you gave an answer, was regarding the magnitude of the destocking impact that you're expecting in automotive in the second quarter. You mentioned that there had been an inventory buildup among some customers during Q1. I know you expect this, but do you dare to give some kind of an indication of the size of this?

[Johan Menckel, Chief Executive Officer]

Yes. Johan here, I can comment on this. Yes. I mean, as you know, I mean, in quarter 1, we actually performed better than the underlying market, in particular, in Asia. And one reason for that was a slightly higher buildup of inventory at the customer side. This is not a dramatic buildup. And the buildup was slightly higher in Asia and China than we have seen in Europe and in Americas. So -- but it was more an explanation of why we differ quite a lot from the underlying market, and specifically in Asia. We should not exaggerate this effect at this point of time.

[Oskar Lindstrom, Senior Analyst]

And do you expect this to unwind during Q2 or take longer to unwind?

[Johan Menckel, Chief Executive Officer]

I expect this to be corrected during quarter 2. That's normally the time it takes to -- for such impact.

[Oskar Lindstrom, Senior Analyst]

My second question is regarding the Konin acquisition or the acquisition process, rather. What's the timing of the European Commission investigation? What kind of questions have you been getting? And also, second here is once the travel restrictions are lifted, how quickly can the transaction sort of resume and move ahead? Or is there a backlog of a lot of actions, which need to be taken? So essentially, what I'm trying to get at, when you say H2, are you talking more July or more December?

[Johan Menckel, Chief Executive Officer]

Yes. Good question. Johan. I will give you an answer. I mean, first of all, just to underline that this acquisition is very strategically very good, and it makes a lot of sense for Gränges. And it will increase value over time. And as we said then, the closing has been delayed due to that conditions are not fulfilled. We are in a prenotification phase right now for the Phase 1 of the European Commission. And there have been quite many, I mean, the questions asked, and we have responded to them. And also our Konin company has also responded to their questions. But it's absolutely so that due to the coronavirus impact in Europe, the capacity of the EU Commission has been reduced and impacting, of course, the process as such. That's why that's our -- believe that this process will be completed on -- in the second half of 2020. But also, I think it's important to bear in mind that we still expect that Phase 1 will be enough for this commission approval. And there are, by the end of the day, we have 2 quite small rolling mills and have quite different markets in Europe.The practicality is around -- your question around -- I mean, as of today, it's not possible, of course, to travel. And still, there are some needs to visit the site physically to do some kind of the final, yes, integration reviews, et cetera, before finally closing. And that's not possible today, so it's very difficult to have a view on when restrictions will be lifted in Europe in general right now.

[Oskar Lindstrom, Senior Analyst]

Yes. I'd like a follow-up question on the payment because, as I recall, you're going to pay the agreed price plus expenditures on the investment program in Konin up to that date. If the acquisition takes longer to close, I presume they will have spent more of their investment program, does that mean you will also have to pay more?

[Oskar Hellstrom, Deputy CEO & CFO]

So it's Oskar here. I think it's a fair question. Of course, we are not in a position today where we can comment exactly on what is happening in Aluminium Konin because it's not our company. But if we'll say that -- I mean we -- from the Gränges side, we are very cautious with our own expansion programs right now, trying to limit spend. I would say it's not unfair to assume that Konin might think about a similar strategy and maybe not spend so much money short term. But I cannot disclose, of course, exactly how they are thinking. It's up to Konin to comment on that. But if the Konin acquisition is delayed and the closing takes longer, it may be more capital invested and need more for us, of course, to pay. But of course, it will be less to pay post acquisition in that scenario.

[Operator]

Our next question comes from the line of Karl Bokvist of ABG Sundal Collier.

[Karl Bokvist, Analyst]

Perhaps following up there on Konin, although perhaps you won't be able to give any specific numbers, but is there a share or portion of the deal that is variable? I mean based on the assessed profit that Konin would deliver that, as you know, when you first closed the deal this fall or last fall, how much of the deal payment could actually be variable, since, I guess, the profit will be considerably lower than what you had expected?

[Johan Menckel, Chief Executive Officer]

I can comment on that. I mean there is a clause in the agreement, it's saying that if Konin should not perform according to a certain profitability, there is a price reduction. But we know that for -- upon year-to-date performance -- the financial performance of Konin has been very good, actually. So there won't be any need to use that clause at this point in time. I think that's also -- is the strength of the Konin. I mean they have a more diverse business. And what we know, so far, their financial performance has been very good for them.

[Karl Bokvist, Analyst]

All right. And I think that you have had discussions with the company that they would -- they are also accepting the fact that the closure could actually be postponed into the second half. Do you -- or do you see that the current owners are in a sort of situation that they would like to see it being pushed through earlier? Or that they would like to perhaps push it -- to postpone it, I mean, to 2021?

[Johan Menckel, Chief Executive Officer]

No, we don't see any change there. I mean both parties are very committed to do this. And we also accept the reality that it will take longer time, and we are doing what we can from both sides to make this process as smooth as possible, and to answer and giving the questions that are asked by the commission.

[Karl Bokvist, Analyst]

Understood. And talking about the ramp-up there, you mentioned you are at sort of at a 90% run rate capacity, I can imagine. Is it possible for you to give some insight into actually how much volume came from the ramp-up project, specifically in Q1?

[Oskar Hellstrom, Deputy CEO & CFO]

I think it's -- I think you can view it as of on the -- I mean what we're doing here in Q1 is that we are managing to increase our volumes in -- domestically produced in the U.S. because we have ramped up, of course, the new capacity. That said, of course, it's difficult to say exactly how much came out of what. But 1 thing is, of course, true, and that is that we try to direct as much as possible of our volume through the new assets because now when they are ramped up, they are also among the most efficient ones that we have. So coming back to what Johan mentioned earlier here, when we now are in a situation that we want to reduce capacity, of course, we're trying to direct as much as possible of the volumes to the newest assets we have. And as a consequence also, we are limiting the capacity in Salisbury, which are among the oldest assets that we have. So we're trying to push as much volume as possible to the most efficient assets.

[Karl Bokvist, Analyst]

Okay. But would it be fair to assume that perhaps, although it's difficult to specify that [ they ] have been 4 million to 6 million to 8 million kilo tonnes from the new facilities?

[Oskar Hellstrom, Deputy CEO & CFO]

Again, it's very difficult to make that because some volumes are running on both old and new assets and so forth. So it's difficult to make that distinction, but we're trying to use the new assets as much as possible.

[Karl Bokvist, Analyst]

Okay. And my final question is, of course, you mentioned the IHS forecast for Q2. Could you give some insight into what you have seen in current trading as of -- well, as of today in March -- sorry, April, April, I mean -- April [indiscernible] end of March?

[Oskar Hellstrom, Deputy CEO & CFO]

Of course, we can indicate a little bit, and I think it's -- I mean you can also sort of start that with saying, look at what the environment looks like in the automotive industry today. I mean there are a lot of plants. I mean, for some period of time, basically all the European automotive plants, basically all the U.S. automotive plants have been temporary closed down. We see, of course, the plants now starting to open up here in Europe, again, like Volvo, Volkswagen, et cetera, are gradually opening up capacity. But of course, at this point in time, we are, I guess, looking at -- I think they started at 10% or 15% of their capacity or so, not being an expert in these companies, of course, but that's the indications I've heard. The consequence of that is, of course, that there is a limitation in demand from our customers in April. That's only natural. At this point in time, our best estimate for our April figures are very much in line with what IHS is estimating for the quarter. What will happen in May and June? It's very difficult to say at this point, and that's also one of the reasons why we are sort of not giving the type of guidance that we are typically doing for the coming quarter here. But so far, in April, the demand quite much looks like what IHS is believing as well.

[Johan Menckel, Chief Executive Officer]

Just to add to that, also -- IHS also has their view on the different regions, which we also see the similar pattern. I mean with a much more -- a higher decrease in Americas and then Europe and then less of a decrease in Asia, driven by the China, of course, market being quite back to normal. But you also have to bear in mind that India and Thailand and other important Asian markets are right now on lockdown, with basically no demand.

[Karl Bokvist, Analyst]

Okay. And -- sorry, from my side here, but just a quick final question here. I think you mentioned ahead of Q1 that there was a risk of inventory adjustments on the HVAC side. Did this actually materialize? And what do you see going forward there on the HVAC and other sides?

[Oskar Hellstrom, Deputy CEO & CFO]

We did see quite some impact of inventory reductions at HVAC customers in Q4, right, towards year-end, and that's also contributed to a very weak quarter in Q4 for us. I think what we said going into Q1 on the HVAC side is that we didn't expect the same effects in Q1, and we have also not seen that. What we have seen on the HVAC side is, as Johan talked about earlier also, that the unit build in the U.S. in the first quarter actually increased. And as a consequence of that, of course, customers going in with low inventory, there's not so much more inventory to reduce during the first quarter.Now looking into the second quarter, of course, the demand looks weaker on the HVAC side. But exactly what's going to happen there and how customers will react, we'll just have to wait and see.

[Operator]

And our next question comes from the line of Kenneth Toll of Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Yes. Just a small question. In the Newport facility, you started up new capacity. And as I remember, there were some issues with the certification from customers of these plants that took some time and so on. But are they upgraded capacity in Newport? Is it operational and delivering volumes now?

[Johan Menckel, Chief Executive Officer]

Yes. Johan here. Good question. No, we have -- as we said, we have upgraded 2 of the 3 rolling mills, and there's been a lot of interactions with -- I mean customers and new customers in this segment with a great interest. And that develops fairly well, I would say, with quite a large increase, though from a very low starting volume. But it's a very great interest for -- from the new -- yes, for products from the Newport plant. And the third mill, as I said, is not upgraded and will not be for the time being. But still, we can deliver material from the third mill. So there's a good momentum. And that -- that's, of course -- plant is producing materials for other segments, as you are aware upon that, pharmaceutical and consumer goods, et cetera, which has a quite strong demand right now.

[Kenneth Toll Johansson, Financial Analyst]

But there are no sort of commercial volumes going through that plant -- the first 2 mills right now? Or...

[Oskar Hellstrom, Deputy CEO & CFO]

There are commercial volumes, but they are fairly limited, and that's due to exactly what you referred to at the beginning here. We have to sort of finalize the qualifications and so forth with the customers. But we have seen, as Johan, said more interest in these volumes in the last couple of weeks here due to what's happening in the market. I'm speculating now, but I'm thinking that, that could also mean that the customers would be more interested and really speed up the qualification process here. But as we said before, we expect the qualification process with several customers, of course, to run during Q1, which it has. And during Q2 as well, and that you will see the real commercial volumes ramping up -- starting ramping up in the second quarter and more towards the second half of the year. Maybe we will see some quicker speed in that given the circumstances. But so far, we are following very much what we have indicated before.

[Johan Menckel, Chief Executive Officer]

Okay. And to add to that, Kenneth, just by, I mean, looking more longer term, of course, the interest for battery foil from that plant is very high from -- for many of the large battery producers in America. So we have a lot of projects ongoing as well in this field, worth to mention.

[Kenneth Toll Johansson, Financial Analyst]

And we, analysts, when we look at your P&L and so on -- the Newport volumes, would they give sort of a significant contribution to EBIT so that we see a step-wise increase in the second half of this year? Or is it more gradual gain?

[Oskar Hellstrom, Deputy CEO & CFO]

We expect this to gradually have an impact during the second half of this year. That's correct.

[Operator]

And our next question comes from Mats Liss of Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Well, just coming back to China. And I guess, Chinese car production is ramping up somewhat or, in that or shape or, in that sense, compared to Europe and the U.S. I just wondered about are there any sort of inventory levels there that sort of hold back your supply? Or could you say something there?

[Johan Menckel, Chief Executive Officer]

Not -- yes, Johan here. You mean if there is a high inventory level at customers stopping them from...

[Mats Liss, Equity Research Analyst]

Yes, some sort of labor about that, in that sense.

[Johan Menckel, Chief Executive Officer]

No, it's -- as I said, good question, Mats. No, it's not really clear, I mean, buildup of inventory. It's more the explanation we had for quarter 1 better performing than the market. But we see that, especially the Chinese market, is actually back to not fully as it was before, but to a more normal level, actually, which is good. And there's no really signs of inventory buildup here right now.

[Mats Liss, Equity Research Analyst]

But if you compare, I mean, the first and the second quarter in China, it seems that car production will be maybe a bit better. And I guess, historically, your profitability have been in -- on a higher level in China. Is it fair to assume that this will be the case this time as well. Are volume too low that you sort of -- there are some underabsorption that takes the cost and so on that make some headwinds?

[Oskar Hellstrom, Deputy CEO & CFO]

See, I try to answer that a little bit. Of course, our Chinese plant is the most efficient automotive materials plant that we have, of course. And that makes it easier to make good money also on lower capacity utilization compared with sort of the higher-cost structure plant that we have in Sweden, for instance. In terms of development in China going forward, as Johan said, we have seen the automotive production pick up, again, starting to go back -- slowly going back to normal. But of course, if we look at the forecast from IHS year-over-year in the second quarter, we expect to be quite a bit below demand in the automotive industry in China and Asia, also in Q2. This will lead to, of course, a lower capacity utilization in the plant in China as it will in the other plants that are serving this market, of course, and that is going to have an impact on profitability. I don't know if that was answering your question.

[Mats Liss, Equity Research Analyst]

No, no. Yes, it's a good answer. But I guess the sequential performance, I mean, Q1 compared to Q2, which it seems that production are sort of improving in -- if you compare the 2 quarters, in that sense year-over-year, I guess, there will be a substantial decline.

[Oskar Hellstrom, Deputy CEO & CFO]

No. About the -- okay, I get what you're meaning. Yes, year-over-year, it's one thing. But if you look at sort of Q2 versus Q1, I mean, the COVID-19 outbreak started in China and Asia. And of course, we saw a relatively larger impact in Asia for Q1. That means, we hope, at least, right, that the fact now that China seems to be getting back to normal will have a positive impact sequentially Q1 to Q2. But on the other hand, if you look at what IHS is estimating, the downturn year-over-year is similar in Q2 than compared to what they think about Q1.

[Johan Menckel, Chief Executive Officer]

But -- and also to give a short comment on this. I mean, of course, China is the one starting to see more normal market conditions. But you also see in quarter 2 that the other Asian countries has lower demand than during quarter 1. I was referring to India, for instance, Thailand, even Japan are being an important markets for Gränges, where you see maybe a more tougher situation for quarter 2.

[Mats Liss, Equity Research Analyst]

Okay. And then a short one on prices, I guess, volumes are down substantially. And do you see a considerable weak -- price weakness as well? Or is it more volume related?

[Oskar Hellstrom, Deputy CEO & CFO]

Yes. Oskar. We do see -- if you look at the average fabrication or conversion price for the group, it's coming down a little bit in the first quarter. It's a mix of things there. One part of it is, of course, that it's volume-driven, similar to sort of the profitability discussion we had earlier that, typically, the automotive products are more advanced, and we can get a higher price for those. So you have a mix effect on the price side. If you sort of look at comparable products, you would see a price increase coming through in the Americas. As we have indicated before, we are managing to realize a price increase of 4% to 5% on 50% of the volume in Americas this year, and we see that being pushed through our P&L in the first quarter. In Asia, we see the prices coming down a little bit in the first quarter. This is sort of similar to sort of the price reductions we have seen in recent years. So we haven't seen a big impact in Q1 from sort of the demand reduction per se. I mean we have long-term contracts with our customers, and that means that we can sort of typically follow the price level in those contracts rather than having to sell on a spot price, which would probably have had an impact on the price level, but limited impact from the COVID-19 outbreak on price at this point.

[Operator]

And we have 1 further question in the queue at this time. This comes from the line of Karl Bokvist of ABG Sundal Collier.

[Karl Bokvist, Analyst]

A quick one. I just wanted to confirm something you mentioned earlier regarding the -- your expectations of CapEx for 2020 as a whole and how much you think will be maintenance and how much will be expansion?

[Oskar Hellstrom, Deputy CEO & CFO]

We typically say that we have around 80% or so of our depreciation reinvested in as maintenance CapEx over time. And that's around SEK 400 million in 2020 in sort of the base scenario, then we had actually a slightly lower number in our base scenario. And then we have had an original expectation of investing SEK 300 million in expansion, giving the total sort of 2020 number being then around SEK 650 million. What we have said now is, of course, that we will reduce our maintenance CapEx and postpone parts of this. And we will also postpone the 2 remaining expansion programs in Newport and Finspång. And that means that we will reduce the total CapEx with around SEK 200 million, so to around SEK 450 million, or say SEK 450 million to SEK 500 million. Of that, we expect the reduction on the expansion side to be around SEK 70 million, and the expansion on the maintenance side to be around SEK 130 million then, give or take.

[Karl Bokvist, Analyst]

Okay. And also just in terms of how you look at working capital buildup or release for the coming quarters?

[Oskar Hellstrom, Deputy CEO & CFO]

Yes. Of course, working capital is a key focus area for Gränges at this point in time, as we've mentioned before. We managed to release quite some working capital in Q1, which I think is beneficial going into the second quarter. That is sort of more uncertain from a sort of a business point of view. It's difficult to give a forecast on exactly how working capital will develop, but it's a focusing area for us that we are monitoring very closely and put very high attention to for the time being.

[Operator]

And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.

[Johan Menckel, Chief Executive Officer]

Okay. Thank you for a lot of good questions and interest. And I just want to underline as well that we have good access to liquidity for Gränges for the coming period ahead of us. But with this, I would like to conclude this session, and thank you for participating. We look forward to our next call on July 16 when we present our second quarter report for 2020. And we will also hold our Annual General Meeting on June 25. And the notice to the AGM will be published no later than 4 weeks before the meeting. Thank you, and goodbye.