Ladies and gentlemen, welcome to the Trelleborg Q1 Report 2020. Today, I'm pleased to present Peter Nilsson, CEO, and Ulf Berghult, CFO. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there'll be a question and answer session. Speakers, please begin.
Thank you. Peter Nilsson speaking here, welcoming you to this call where we're going to present our quarter one results for 2020, then, of course, offer some comments on this and finishing off with the Q&A. Supporting me on this presentation, as usual, is our Group CFO, Ulf Berghult. We're going to use the presentation, which is uploaded on our homepage. I guess all of you, assume all of you, have this in front of you. Quickly moving on to that. Moving on to page two, where we see the agenda for the meeting, normal agenda, starting up with some general highlights, then some individual comments on the business areas, then Ulf will guide you through the financials. Then we'll finish up with the summary, then as I said in the beginning here, also finishing off with a Q&A.
Quickly moving to page number three in the presentation, heading Stable Quarter, Growing Challenges Ahead. Which is really we see it. We have generally a good development in the quarter. Of course, as everybody else, all other industrial companies, some more troublesome the final weeks of the quarter, but not really hitting us that much in this quarter. Sales finishing up basically flat compared to last year, then assisted a little bit with exchange rates and assisted with a small structural growth as well, organic, then pushing it down by 5%. EBIT almost on the level of last year, while then the margin is down by some half a percentage point, so 13.3% EBIT margin in the quarter, excluding extraordinary items which was then, let's say, on the level of SEK 46 in the quarter and kept as usual, keeping the overall guideline for these items affecting comparability.
Ulf will get back and comment on that as well. Cash flow, very strong in the quarter. We are rather satisfied with the management of working capital because as you note in the quarter also, CapEx is still on a relatively high level, and also Ulf will guide you later on that the guidance for CapEx will dramatically be down for this year as we have initiated some contingency plans also in relation to CapEx. Overall, good cash generation, as I said before, assisted by good working capital management. We have not been growing the inventory in the quarter and basically been more or less underproducing in the quarter, and even then, we are managing this relatively good profitability, and at the same time then delivering a solid cash flow. The cash conversion is actually above 100% now looking at rolling 12.
Also to be noted here, this morning also we announced the first divestiture coming out of these businesses under development, and where we divested the smallest unit in these four businesses we gather here, where we divested what's called the Baltic Moulded Component business, which is a business which focusing on Sweden and Estonia. Also from profit outcome, the divestiture was done very slightly above the assumptions we made when we did it right down in the beginning of December last year. A divestment in line with our expectations and happy to get some of that executed. We're also guiding here. We'll get back to that, of course, commenting more on the guidance. We actually have a fairly good order intake in the quarter, surprisingly good order intake in the quarter, but we don't really believe in that.
We believe there will be some order cancellations coming up, also some other, of course, uncertainty hitting us. We would say that we see a considerable negative impact here going into this running quarter, while still also with this send along, that uncertainty, of course, is high. I'll get back and comment a little bit more on that later when we talk a little bit more focused on the guidance. Moving on with the page four, looking at organic sales development by geography. We can see that Western Europe is the one which has been down much for us, actually slightly more down there compared to Asia and other markets, even though, of course, like everybody else, we've been hurt, especially in China, with negative organic growth, while the rest of Asia and other markets have been slightly compensating for that.
Western Europe and Asia and other markets down by some 9%, 10%. We have North America down by half of that, -5%, while we have a slight growth than in what we call other Europe, which we are tracking individually within Trelleborg, and then South and other Americas actually up a little bit. That is unfortunately for us, a very small part of total sales, but nevertheless, a positive development. This is the analysis to say this is valid for the core businesses that we report here. If you're looking then at the business under development, we have actually a growth, organic growth in the quarter, but that is driven solely by the continued positive development in our oil and gas business. Moving on to page four, next agenda page, business areas.
Quickly turning to page six, Trelleborg Industrial Solutions, which has been a little bit negative in the quarter, impacted by COVID-19 and also with some strikes hitting us in Turkey and France in the quarter, which is impacting both sales and also partly the profitability. Rather negative sales in most market segments, nothing really sticking out, a slight negative development all over. We see Europe and Asia down, and we say North America, the results are hit by this soft markets and the strikes. That is a little bit below expectations in certain areas, but it's also explainable and we're working on all the issues to try to correct it there as we move forward. Turning to page seven, heading Solid Performance, Trelleborg Sealing Solutions doing very well.
Organic sales down by 3%, supplemented a little bit by structural growth coming from an acquisition that we did a short year ago. Organic trend is downward in most region. Here we see a heavy impact in Asia, while the rest of as you can see from the world figures, the rest of geographies is actually slightly better, even though in a negative territory. General industry and automotive weaker in most regions, even though we say automotive, little bit strange development in quarter. Actually started very well in the quarter with some sales to some specific tier 3 and tier 2s, where we're a little bit surprised about that. Of course, happy to deliver, happy to sell, It's not a development which is not really in line with underlying development at the end of the quarter, turned a little bit more as we expected it to be.
Aerospace also continued very strong actually in the beginning of the quarter, but turned down here also at the end of the quarter. We expect a tougher development going forward. A slight downturn in EBIT and margin, but also on that, we of course, been watching a little starting to adapt also from a cash perspective here, and that is also a little bit slight underproduction in certain areas to be able to deliver good cash flow on top of these good results as we see here in Sealing Solutions. Going over to page eight, Trelleborg Wheel Systems, heading Sluggish Market and Temporary Shutdowns. It's been a tough market environment. Organic sales down by 12%. We see organic sales going down all areas.
Behind this, and also on top of that, especially at the end of the quarters, we have some dramatic shutdowns from the major OE customers here, which we stopped buying here in March. When we get back and comment on that's also creating some uncertainty going forward on when they will start again and how quickly they will start, but nevertheless hurting the sales here by the end of the quarter. Continued focus on cash flow in this area as well. Even though with this dramatic drop in sales, we say the inventory levels has been well managed, and we also here continue to deliver a good cash flow and a good balancing between sales and manufacturing volumes. EBIT and margin slightly down, but of course, well managed, I must say as well here, well managed in terms of adapting to this new reality.
We should hide as well. I mean, the last few quarters we've been kind of complaining a little bit about the negative mix, but we also should say here in this quarter, we have a positive mix in the way that OE has been going down more than the aftermarket, and that is pushing us into a more positive mix this time compared to the last few quarters where we have had the OE growing more than aftermarket. That is helping us here to keep the margin up on a good level, because if you have a negative organic by 12, I think it's good to have a less than a percentage drop in the EBIT margin.
Page nine, the other businesses under development, organic sales plus 10%, driven by a strong continued organic growth in offshore oil and gas, which is then also, of course, assisting us in terms of profit also. Although also the other areas where we've been, I say, struggling more on volumes, has also been fairly well managed and a good cost control here is pushing the overall profitability up here, and with, as I say, turning it from basically zero profitability a year ago up to 7% EBIT, which is, of course, a good development.
Of course, we have a note as well, even though we have good order book and good, what we call, orders to be placed portfolio in the oil and gas, we of course, are not at all neglecting the recent oil price development that we need to see here in the next few months exactly what kind of impact that will have on the businesses. Will of course, have a negative impact, but also we note that most of our sales in oil and gas is actually very late cyclical into the oil and gas sector. We actually have to watch here carefully what's going to happen in the next few months and the next few quarters.
Also here, as I already commented on, we divested the smallest business within business development in the quarter, happy to be able to execute that and to leave that business, which you think is a good business, but it's a local regional business which doesn't really fit with our strategy. Also the divestment already commented on as well was in line with our expectations when we valued this business in the beginning of December last year. Happy to execute that and to get that development going. Turning to page 10, agenda financials, leaving page 11, Ulf, please.
Okay. Thank you, Peter. On my first slide, page 11, sales developments. You can see that organic growth in the quarter was negative 5%, impacted by the decline in demand in the wake of the COVID-19, especially in March. Excluding business under development, organic growth was - 7%, and business under development reported + 10%. The impact from currency translation was + 2%. Next slide, page 12, describes the historical performance of our organic growth. As you can see on the graph, the COVID-19 broke a long positive sales trend. On slide 13, you will find the reported sales development per quarter as well as rolling 12 months. Slide 14 presents our EBIT development. Our EBIT reached SEK 1.235 billion in the quarter and was positively impacted by currency translation of SEK 36 million.
EBIT development was positively impacted by business under development and especially oil and gas. Slide 15 presents EBIT and margin on a rolling 12-month basis. On a rolling 12-month basis, we are currently at 12.6% EBIT margin. The next slide presents the profit and loss statement for the total group. Items affecting comparability consist of the restructuring cost in line with our annual guideline. Financial net has been impacted by positive exchange rate differences of SEK 66 million compared with Q1 2019. The quarter was charged with a non-recurring cost in the tax charges related to dividends from subsidiaries due to additional withholding tax. These internal dividends would strengthen our central liquidity since these funds were previously in bank accounts outside the group account structure. The tax rate for the quarter for the group, excluding items affecting comparability, amounted to 26% compared with 25% a year ago.
Slide 17 presents earnings per share, adjusted for comparability items, which was down by 1% to SEK 3.21 . Slide 18 describes the development of our operating cash flow. The operating cash flow was positively impacted by lower working capital. The group initiated an extended review of working capital with extra focus on accounts receivable and inventory. The inventory was in line with the level at year-end and lower compared with Q1 2019. Overdue accounts receivable declined compared with the level at the year-end. Quarter one is, from a seasonal aspect, a strong quarter and would normally demand a higher working capital need. The operations have handled the working capital and cash flow very well. The investment level was somewhat higher during the quarter compared with the year earlier period, but the full-year outcome is expected to be significantly lower compared to 2019.
We now expect CapEx to reach approximately SEK 1.2 billion for the full year. During the quarter, property was divested with a cash effect of approximately SEK 100 million with only a minor impact on earnings. The cash conversion ratio for the most recent 12 months period was 102%. Slide 19 presents rolling 12 months operating cash flow. Slide 20 shows the net debt movements. As you can see, the weakening of the Swedish Krona has impacted the net debt negatively by SEK 1.1 billion. Slide 21 shows the net debt EBITDA ratio and the net gearing development. Slide 22 describes the returning equity, where the long-term target is 12%, including items affecting comparability. The actual outcome in the quarter is -0.7% compared with 10.5% a year ago, and then impacted by the impairment of working capital in business under development in quarter four, 2019.
Finally on page 23, going through the guidelines for the full year. As I said, CapEx SEK 1.2 billion. Previously, we had a stand between SEK 1.6 billion and SEK 1.8 billion. The restructuring cost as received right now, that's about SEK 300 million. Underlying tax rate is 25%, and amortization of intangible assets, about SEK 400 million. That concludes the financials. Peter?
Yes. Page 24. Quickly, agenda turning over to summary and some comments and outlooks. Page 25. As I said, sales down by 1% on top line, organic sales down by 5%, and thereby supported a little bit by structural growth and with some currency, and then ending up with this - 1%. Margin in the quarter down half a percentage point compared to a year ago. Items affecting comparability in line with the guidance. Cash flow is strong, as Ulf presented, with a good development of working capital in the quarter, leading to a good cash conversion above 100 for the last 12 months. Also divestiture of this Moulded Components business for Sweden and Estonia also executed actually today. Also certainly on the guidance going forward, we'll comment on that when I get to that page.
Going forward here, the priorities, of course, is to manage the market conditions now in the wake of this Corona development. We have been working hard on this, of course, in Trelleborg since some time now, when we have multiple of actions ongoing and working with all kind of tools, which, of course, all of this continuously is working, of course, safety measures for our employees and making sure that we manage the spreading of the virus in the best possible way. High focus on that. From an operational point of view, of course, also we working in basically three dimensions. We working with the cost and with the cash and then, of course, also managing the customers. We have a multiple of actions ongoing, and of course, using all kind of measures which is possible.
Finally, also in this COVID-19, of course, we commented here already a few weeks ago, we working also with the financing and cash management and making sure that we have a solid and wide gap and making sure that we actually have all the liquidity which we want, where we feel confident that this will be the case going forward. Of course, we continue as well to work with the business under development. Of course, the environment at the moment is a little bit more tricky than we started with this focused activity a few months ago. Nevertheless, this is continuing, and we're continuing to focus on these businesses which we have in these extra business areas. Over that, otherwise we continue, of course, operationally, to work with our portfolio, continue to work on our excellence programs and of course, continue to invest also in innovation.
We still have also some integration ongoing and acquisitions, even though acquisitions is not high in the agenda exactly at the moment. We continue to monitor because we still have a long list of interesting targets for us that we, of course, are watching carefully now and trying to see what happens with them. Turning to page 27, outlook, as I said, significantly lower in the first quarter. Sorry, significantly lower in the running quarter compared to the first quarter. I would say that this is a little bit difficult. Actually, our order intake in this quarter has actually been fairly good and been basically in line with the sales. We don't really believe in this order book at the moment.
We believe it's going to go down, and we don't feel that the order book at the moment is the best guidance for sales expectations for the running quarter. That is why we decided to have this guidance. Also on top of this, of course, Wheel Systems, which is probably the ones which is heavily impacted short-term, where I trust you know that some of the have basically a full shutdown here throughout April. Bigger ones here has announced they're going to open again next week, and that is, of course, creating some uncertainty whether they actually will be up and running next week.
We know that AGCO and John Deere especially has been out and guiding that their order book is actually quite healthy, but they have been difficult for them to run as they use some kind of the same component supplier as for the automotive industry. As the automotive industry starts to gear up and the heavy truck industry, they also would like to go up and running. That is basically the uncertainty. If you say for Industry Solutions and Sealing Solutions, actually looks quite okay, and if we believe in the order book, it's going to be a very good quarter. We don't really believe in that one. We are planning for the worst and hoping for the best.
Our guidance here, to put about some figures is, of course, that Wheel Systems probably will be down slightly more than 20, while the others will be down slightly less than 20. It's really given with a high uncertainty, and we don't really know what's going to happen. We are looking at it daily, more or less, and then of course, trying to adjust and make sure that we are preparing in the best way we can. That is the comment on that, and then moving to page 28, and then quickly to page 29, and opening up for some questions. Hello? Operator?
Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw that question, you do so by pressing zero two to cancel. There'll be a brief pause while questions are being registered. The first question comes from Erik Golrang from SEB. Please go ahead. Your line is now open. Erik's line seems to have disconnected, so I'll go to Hampus Engellau from Handelsbanken. Please go ahead, your line is now open.
Thank you very much. Three questions from me. I think you touched upon this a little in your last statement there on the outlook. Very impressive margin development in Wheel Systems during the quarter. My question is more if you could maybe talk a little bit about cost savings and how to think about that. I guess you shouldn't expect a similar drop if we would have a 20% drop in sales year-on-year. That's my first question. Second question is on offshore oil and gas. If you could maybe remind us on how much is shaved there, how much is U.S. exposure, and how to think about these lead times, given that we should have probably on this level three storms. Maybe more last on your guidance on this SEK 300 million restructuring cost.
If you could maybe back out a little bit on what these components consist of, how much is temporary cost pressures and how should we view more permanent savings? Thanks.
On Wheel Systems, it's a mixed change with the driving it. On top of that, as you say, also because we also need to be aware that some of these investments that have been doing the last few years is actually now kicking in as well. Now we have our Serbian factory fully up and running, and we see they're more efficient to manufacture in Serbia than in Czech Republic and Italy. The margin here is a combination of good cost management, better efficiency, and the margin of mix development. That is a combination of everything. I must say, looking at the figures internally, they've been doing good in all aspects here in the quarter. Mix is better. They've been able to manage pricing in a good way. On top of that, also actually transformation cost is also in a good level.
That is good development. Of course, we need to see internally also the team within Wheel Systems have been working hard here to get this, and it's happy to see for us, with myself and others here, to see that actually the hard effort is paying off a little bit in this quarter. Of course, as you say, depending on how the agricultural will restart here in the quarter, there is a huge uncertainty about the volume drop in this quarter. We know that we lost basically one month already here on the OE manufacturing. We will continue to watch also in Wheel Systems, the inventory levels. We will not overproduce in a way.
Of course, we entering into a challenging quarter, but we also expect the underlying market of agriculture especially is actually quite good, and it's not really impacted overall by this kind of drop in the industrial demand. We see, of course, now also in U.S. that the U.S. government is starting to offer some kind of support for the farmers in U.S., and we don't know what's going to happen in Europe. Overall, we don't feel too concerned about the agriculture market if you look beyond the current quarter, but the current quarter, of course, going to be hit by these shutdowns on the manufacturing of tractors. I don't know if that's enough on that, Hampus?
Yeah.
Oil and gas, we have virtually no exposure to shale gas. Very limited to shale gas. We are not really hurt by this dramatic drop in oil pricing in the last few days. Our exposure is mainly to offshore. Once again, as we mentioned before, we are very late cyclical in some projects. We actually got a very big order yesterday here for delivery in Q4, where I've already spent $1 billion on a project, and then I need to buy our products to get them running. We don't expect kind of a full stop on our oil and gas activity at the moment, since we are more into capital equipment, and we are also late cyclical into this. The order book still looks healthy, and we've still been building order book also in the last few days.
Of course, with that said, we fully understand that it will have an impact and we need to look carefully here, of course, about these running projects. We have to watch it, but maybe not for the next quarter or two. That is really the way we look at that oil and gas. When you go to restructuring, there is virtually no immediate measures in that. The immediate measures is more using this all kind of furloughs and these temporary factory closures and all of that, where there is a lot of, how should I say, governmental support to get that. Among this is still vast majority, if not everything is linked to kind of structural improvements and shifting factories and shifting volumes, moving sales offices and so on. That is really this SEK 300 million is coming for that.
Thank you very much.
Our next question comes from line of Erik Golrang from SEB. Please go ahead. Your line is now open.
Thank you. I have three questions. The first one is on the commentary you provided on organic growth there for the different divisions for Q2, more than 20% down for wheel and a bit less for the others. Is that basically a reflection of where you were late in Q1, or is there some built-in expectations of a deterioration in there?
The deterioration is in Wheel Systems, where once again, we were impacted by these factory closures in the other ones. To be honest, if you should believe in the ordering take care in March, it will be better both in Industrial Solutions and in the Sealing Solutions. That is kind of a little bit we are looking back to what happened in 2008, 2009, we know that when the order book cancellation starts to happen, they're going to go down. If we simply did a normal kind of estimation that we usually go, it will be better. We don't really believe in that. We believe it's going to go down more than that.
There is an uncertainty in the Wheel Systems because if it's true, of course, we don't mistrust our customers, but AGCO on there is pushing that they have good order books, but then they need to restart, they need to start to buy. Of course, they still have to be up and running. That is with some uncertainty in both areas, Erik. Sorry. We're working on it daily and we're trying to figure, Once again, I want to say if we firmly believe in order books, it will be better than this, but we don't really believe in order books at the moment.
Okay. Thank you. The second question is on aerospace specifically. You said it deteriorated quite a bit towards the end of the quarter. What are you seeing there now in terms of order trends and call-offs and comments from your major customers?
They're going down, of course, and a huge uncertainty. We know that Spirit AeroSystems in U.S. has been basically stopping operations. They are the main supplier to Boeing. At the same time, Boeing is commenting when they're going to start Boeing 737 again. The Airbus is down. It's really difficult, Erik, to give you a guidance. We expect to go down by two digits organically here in Q2, but also in that area, the visibility is not that bad in April, to be honest. We don't look that bad in April. Of course, they've been hinting that they're going down in May and June. That is something we also have to watch carefully. Q1 in total was quite okay. Actually positive growth, to be honest.
You're not down double digits in April so far on aerospace, is it?
No, they're not. No.
Okay. Thank you. The final question is on the strategic review with the asset sale you announced this morning. You also said that obviously part of this process is more difficult in the current environment. I guess two questions to that. Are you revising your price expectations lower in the event that you want to sell some of these assets? Secondly, would you say that there is a higher likelihood that some of these assets will remain in the group now compared to previously?
No. There's no change. Price expectations are not down. We are working on them. We have announced all it from beginning going to take up to 24 months, and the time plan is actually the same. We work on some of these businesses. We're also separating them from the business. We're doing some reorganization. We are not changing our overall game plan for time being. We were not really planning in the beginning for any of the other units to be sold already because all of them is in a repositioning, and some of them is also with the possibility of improving and then might get back into the ordinary business also going forward. We are not changed in any way the direction, or we still have allocated resources for it. We appointed bankers with that in our plan and all of that.
Nothing has changed. Of course, we need to watch and we need to make sure that the market. As you say, the printing business, if you say that the printing has got a very little impact from this one, since that is more consumer packaging and newspapers and all of that. They have a very limited impact from this recent happening. Oil and gas is still moving in a positive territory, and we need to watch and see on that one. Of course, the other one, the Czech operation has been heavily impacted because that is a lot of automotive in that, and that has been heavily impacted. At the same time, we're in a downsizing activity there, and we have almost cut the number of people in that operation by 20%. That is in execution mode.
We are still running these businesses in a very operational way and to get them ready to be independent or potentially then get back. No change in direction at all for time being.
Thank you.
Our next question comes from the line of [Douglas Lindahl]. Please go ahead. Your line is now open.
Hello, gentlemen. Hope you can hear me. Peter, just a clarification question there on one of the questions you got previously. Did I get you right that you don't expect any big negative shifts for your oil and gas business over the coming few months, sort of indicating that we should continue to see organic growth in business on a development in Q2 at least? You don't really seem to expect the same degree of order cancellation for this business specifically. Is that true?
No, we cannot see that. As you say, we're losing a little bit on the growth profile because all the site jobs is difficult. We are expecting still positive growth, solid organic growth in that one. Of course, it's going to be negatively impacted, especially with the site jobs. The site jobs will happen eventually because they need to happen. At the moment with these quarantines and all of that, it's difficult. They are not disappearing, but they are simply being pushed ahead. That is a minor part of the totality.
The site jobs is a minor part?
Yeah.
Okay. A question on your revised CapEx number here. Can you give some examples of what sort of investments you're skipping and what investments you're prioritizing?
Which one?
We normally say that the running, we have a depreciation base about SEK 1.1 billion, that is what we also say that there's no reason of cutting in a normal day. That is the maintenance CapEx. Of course, we've been quite drastic on those maintenance CapEx. On the strategic ones, then on top of the SEK 1.1 billion, we have then scrutinized each one individually, and then some of them
We are put down into a lower mode then try to push it forward. Most of the strategic CapEx, they are only pushed forward while the maintenance then that we've been more harsh on that. We have implemented very harsh approval steps in all forward CapExes.
Okay.
It's basically maintenance.
Okay. Ulf, on the divestment which was announced this morning, is that the SEK 112 million in the cash flow sold non-current assets?
No, they are not part of this one because that happened now in Q2.
I'm sorry, the wind asset, of course.
The only disposal, that was the building that we had in Germany, that we sold now in quarter one.
Okay.
The impact from this one will come in the Q2.
Perfect. Okay. Thank you. That's it.
Thank you. Our next question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Hi, Peter and Ulf. It's Klas from Citi. Hope you're both well. First on Sealing Solutions and reflecting back how this business has changed since the financial crisis. Obviously, total automotive is much lower today for Trelleborg, but I guess there are other changes as well, of course. When others like Industrial Solutions get a bit hit from channel destocking, I think Sealing Solutions compared to 2008 and 2009 can perhaps do a bit better. The way I think about this, Peter, is you no longer sell all sealings on the planet and through big distribution, it's more digital today and more customized. Would you say that sealing from that point of view, if we compare with the financial crisis, will see less of an impact from channel destocking?
That is our intention. If we go back to this financial crisis, then of course we have some 20% or something, +20% , 25% maybe through distributors, and now that is gathered down to 5%. Of course, we don't have this kind of destocking on the distributor wholesaler level. We still have some impact, of course, with destocking at the manufacturers or at the assembly lines. It will not be on the same dimension as we saw the last time. Of course, also the mix is different. Now we have a fairly sizable share of medical and healthcare, which we didn't have. We had nothing of that some 10 years, which is now approaching some about 10%, Ulf, I guess.
Yeah.
You're going above 10% of sales. We have definitely a more stable, but there will be some destocking or restocking impact, but it will be substantially less compared to when you're more exposed to these kind of wholesalers and distributors.
That's good. Sealing Solutions is a better business. I just want to confirm that. That's good. My second one is on the Modular and Wheel Systems. During the March update call, I think you said that you stopped the destocking in Wheels, had been a drag for you for two quarters, at least before. You will likely destock again, given that you have these massive shutdowns looking at the OEMs. Did you stop the destocking in Wheels, and how much did that boost the margin in the first quarter?
Well, we manufactured more than we did in Q4, we still manufactured in line with the sales. Of course, it's still kind of a negative impact. If you look overall, it's a negative impact. We've still been cutting it with some 10%, 15% on the manufacturing capacity. Of course, as you said, we need to. We're planning on some factory closures here and close for a week in a few factories to make sure that we adapt for this OE downturn that we've seen here from mid-March and running at the moment. There will be some impact, but at the same time, the positives that we have here is the mix improvement, and on top of that, also more benefits really from this, let's say, investment and reorganizations that we do in shifting volumes between the various factories.
We've been struggling a little bit to say on the Serbian, we did a major investment in Serbia, and we moved production to Serbia, both from Italy and Czech Republic. That has now been running actually very efficient in this quarter. It's benefiting us especially on the transformation cost. There is benefits from better operations and mix. There's a negative still on fairly low manufacturing levels.
Yeah. We produce against demand, so to say. We don't have a destocking, but if we don't have the demand, then we will not produce. We are adjusting.
Of course.
Year-over-year in the bridge, it's a less of a drag. Otherwise, that is what I understood it, at least from the March update call, but maybe I misunderstood it then.
No, it's correct. It's more in line. We don't have underproduction as we had in Q4, there's still a negative drag because we are manufacturing less than a year ago.
Yeah. Makes sense. Cool. My very quick final one is, did you say how much the strike impact was on sales for Modular and Industrial Solutions?
No, we don't really want to comment on that. That is a combination of a few different stuff.
Okay.
It's not the only explanation. It's just that we have also been having a little bit. We say Industrial Solutions, why that is impacted, then we are back because they still have some of these wholesaler distribution sales where they've been probably been pushed down a little bit more than the market in the quarter, and that has been hurting us a little bit.
Thank you.
Thank you. Our next question comes from the line of Agnieszka Vilela from Nordea Markets. Please go ahead. Your line is now open.
Thank you. I have a couple of questions. You have seen already three weeks of your sales in April, and I wonder if you could give us some color on the development for different divisions. How was it for Wheels, Sealing, and Industrial Solutions so far in April?
I don't want to give any kind of details on that, Wheels has been, of course, impacted by these closures on OEs that we already commented on. As you know, the factories of AGCO and the factories of John Deere and the factories of CNH have basically been closed. Of course, that has been hurting us more. We are down more in Wheels here in the first few weeks, dramatically down more than we see in the first quarter, while the other two businesses actually tagging along basically in line with what we see in slightly more negative in the first few weeks compared to what we have seen throughout Q1. We expect it to be tough for both Industrial Solutions and for Sealing Solutions here in the next two months.
That is a little bit roughly and also very frankly and openly about the way it is at the moment.
Yeah. Perfect. Thank you. My last question is actually on your cost savings measures that you're taking. Usually, you take the restructuring costs of about SEK 200 million-SEK 300 million per year anyway, as a kind of pruning of the business way. My question really is why aren't you taking the opportunity to cut costs even more in this downturn? Is it so that you expect the demand to come back already in Q3? How should we think about it?
Also, when we look at this restructuring, a lot of the restructuring that we have been taking is coming actually from acquisitions as well. We're integrating acquisitions, while integrating acquisitions, we need to take some costs. We see the acquisition-related restructurings will be less, of course, we will put in some more actions on other restructurings. This restructuring is a very short payback with some of these downsizing cuts. We don't take it as restructuring. That is really a structural improvement. We're of course looking at it, as you understand at the moment, can we do more? Is there anything that we should change more? At the moment, the guidance is still this roughly SEK 300 million, we need to look at it, we need to review it.
With that said and done, it's not for sure it's going to go up, but there is, of course, if we find something, we will announce it, but at the moment, we're running it, and we are managing this downsizing and cost adaptions without having to add any more to this SEK 300 milion guidance.
Okay. Then how much savings do you expect from this SEK 300 million in restructuring costs?
We don't know. We normally comment that, but the only thing we normally say that it is a good payoff.
Okay.
It's part of that, as Peter said also, due to that when coming from acquisitions that in order to realize or to get the synergies, you need to pay for it. In most cases it is a good payoff, but we don't comment specifically.
The majority of the savings in this cost saving is not going to come from that. That is normal downsizing when reducing furloughs and temporary factory closures and stuff like that. That is not ending up in this post. This is really structural changes and not kind of ordinary downsizing when we are releasing people.
Yeah. Lastly, also on the savings, are you benefiting from any government's help when you put people on shortened week and layoffs? It wasn't that visible when I look at your administrative expenses, for example, in the quarter, selling expenses, but maybe it will come more into Q2. Is it how we should think about it and how large the benefit is going to be? Yeah.
It's been a no, I don't know. It's not going to be a major amount. Of course, we're using. There could be, I don't know, we're going to say SEK 100 million or whatever, but it's not really the majority is not coming from that. All of that has not only been announced there in March, some of them, but is it kicking in? I think we got the first payout now, wasn't it, I mean, in this week. That is coming in Sweden. Then of course it varies also throughout different countries on how you are supported and all of that, but I don't think we're going to report that in any way. That is kind of a normal operational cost. Probably the majority of it you're not going to see in administration cost.
The majority of that is coming into the transformation cost and it's assisting on the gross profit and cost of goods sold because that is where the majority of this cost is coming.
Yeah. Okay, perfect. Thank you.
Question comes from Robert Davies from Morgan Stanley. Please go ahead. Your line is now open.
Yeah. Thanks for taking my question. Just to cover, one was just to sort of stepping back big picture kind of view of the world, I guess. What are you sort of thinking kind of growth trajectory through the rest of the year? I know you obviously mentioned that you're expecting a sharp drop off in 2Q, but are you expecting sort of a sharp snap back in 3Q and then continued momentum? Are you expecting a sort of fade into the end of the year given some of the employment figures we've seen globally? I'd just be kind of interested to see what you're sort of modeling from a sort of top-down perspective in terms of what the data you're seeing at the moment. Thank you.
A simple question. What do you think yourself? It's really what we are planning for at the moment is a dramatic drop in Q2, and we expect that to continue into Q3, while a slight improvement probably on Wheel Systems in Q3, that is what we're looking for. Exactly what is then happening in Q4. We are not really speculating too much on that. We need to watch and see what is happening, and then make sure that we adapt to the demand level in Q2 and then also in Q3, and then make sure that we are able to manage an upturn. We're not planning for any kind of dramatic upturn. We are planning to be able to adapt in both directions, so to say. We are not really too much focused on what is going to happen in Q4.
We're looking at Q2, and then we expect Q3 then coming up to vacations and all of that also to be relatively soft.
It's kind of based on when we also look at then the reaction from the financial crisis in 2008-2009, based on that one, it's like Peter said, then Q2 and then Q3, that you will have two quarters, which will be more down. Let's see how Q4 develops. Based on how things were being back in 2008 and 2009.
Right or wrong, we feel we are fairly quick on the actions here, and we see a few customers which is, I shouldn't say overbuying, but they may be overbuying a little bit, a little bit slower in adaption, and then they will find out. That is what we believe also Q3 will be impacted. Then, of course, to bring down inventory levels in Q3, especially for a European company, will be quite easy by extending holidays and extending vacations. We expect that's going to hit us in Q3 as well. While the joker here or the difficulty for us is also on agriculture, because we know that the agriculture market is not really dependent on this overall industrial demand. We expect this sharp downturn that we see in Q3 to be bouncing back a little bit in Q3.
Once again, we need to look at that, but that is once again to be transparent and tell about the way we look at it.
Okay. Thank you. Then the other one I had is just really around your flexibility or cost footprint. Can you just give us some sense of what proportion of your employee base is on flexible contracts, how many that you either have pulled back from using or planning to pull back in using in the second quarter, just to get a sense of the flexibility of the business model and the cost base?
The way we look at it, Robert, at the moment, okay, now with these governmental measures and all these actions and going in, we feel that the vast majority of our cost base is actually flexible.
Okay.
That is based on that we get furloughs and we get support and we get this kind of action. We don't feel limited by that, if I may say, Ulf. I mean, at the moment it is more to make sure that we make the right assumptions and that we get actions going as quickly as possible, because it is really quite generous support in a few countries where you can create this flexibility. Our big base, of course, is U.S. and China, and then the more difficult ones historically, which is France and Italy and all of that. There you have more support from the government, which is creating more flexibility actually than we had in 2008, 2009. That is offering more options and offering more support than we had 10 years ago.
Thank you. Just to finish off my final one, it's just really around your current footprint. Has the downturn pushed you into maybe having a second thought about any of your factories or locations or consolidating any of those production centers? When you look at this downturn, is it maybe sort of looking forward?
Of course. This is creating opportunities, of course, to do a downsizing. When we do this downsizing, it's not necessary that we're going to build up in the same pattern when the demand is coming back. Of course, it's offering opportunities to do some changes, which we probably would have taken longer to do. That is dependent on the bounce back. For sure, it's offering some opportunities, and we already have that on our action list in a few areas.
Okay. Great. Thank you. Thanks very much.
Thank you. Our next question comes from [Walter Schwarz] from Commerzbank. Please go ahead. Your line is now open.
Hi. Good morning, Peter and Ulf. Three questions. First of all, maybe on your working capital, do you see there are more opportunities to optimize it further in Q2 and Q3, or have you gone already most of the optimization opportunities at the end of Q1?
What we're saying, the message is more cash is king and that we don't produce against stock. It's more then to try to adapt the production after the real demand. It's better to bite the bullet than to run the factory more dry, I would say, than to produce against stock. It's really then to have a good feeling on the real demand. From a stock level like that, I think I'm really proud of the guys because they were really, really good in the quarter of bringing down the stock. We have a high focus on the stock and also then accounts receivable and making sure that we don't run into having too much overdues. As we mentioned in the report, actually the overdues went down. It's more a harsh judgment from the business in making sure that our customers will pay.
Historically, we know the receivables will follow the sales.
Yeah.
Generally we have fairly good customers who solidly pay us. If you look at the total of our footprint. We need to watch the stock, and then we make sure that we don't have overdues, and then it will follow. That is really the watch.
Yeah. Okay. Maybe also a question on Aerospace, particularly given that there is a very deep crisis now for the air industry or civil aviation in total. How much of your Aerospace sales is OE related, and how much is based on the current operating picture? Just to get an idea of how much you lose if we say, for example, new aircraft will decline by 50% over the next year.
The majority of the sales is OE, like more or less everything in Aerospace. We need to watch that. We don't know exactly at the moment. We still know, as you also know, that Airbus and Boeing has solid order books, we need to watch and see what is happening with the cancellations and some of the customers will probably go away. We also have to say that this is 10%- 15% of Sealing, and it's even less than that on Industrial. It's not a huge exposure for us, and we will have other businesses compensating for that. We are watching it, and we are adapting. We don't feel too concerned about it, to be honest. Of course, we would like to sell, and we would like to have customers, but we feel that we have good control of potential.
Whether that will be a 50% drop or a 20% drop, a 30% drop, let's wait and see.
Okay. Thanks. Maybe final question on your product portfolio, do you now see or look at certain offerings and considering canceling them early or decommissioning parts of your offering?
Sorry, I didn't understand that, [Martin].
Yeah. I mean, just decommission some of your products and now take a particular look at some further cuts, even in the core businesses, or do you want to continue?
No, we don't have any like that on our agenda. If it refers to the other one, it might be some factory consolidations or something which we have not looked at before, but it's not a big issue for us.
Okay, great.
Thank you. Our next question comes from Erik Paulsson from Pareto Securities. Please go ahead. The line is now open.
Yes. Hi, Peter and Ulf. Just a quick follow-up regarding your outlook. Significantly lower. Can you just put some numbers on that compared to, for instance, lower outlooks?
No, we only say that when we have lower before, we talk about individual percent. Here we talk about something, let's say, 20% ±. Like I said before, it's really difficult to judge. If you look at our order books, it will be a lot better than that. We don't expect that to say. We simply wanted to guide to make sure that it's not interpreted that that is let's say 2% down or 3% down or even 5% down. It's going to be more than 5%, but it's going to be less than the 25%. That is really what we have at the moment. Once again, April showing slightly better than that, but we expect it to be tougher as the quarter develops. It's really a lot of uncertainty on that.
The significantly was simply there to make sure that nobody interpreted this as a down by 3% or 5%.
All right. Great. Thank you.
We don't really know. To be very open on that one, we are watching it daily, and we're watching the order intake daily, and April so far has started slightly better than this one, but we expect it to be a very rough ride here up until the end of the quarter.
Understood. Thank you.
Thank you. As there appears to be no further questions, I'll return the conference.
Okay. Thanks a lot. Thanks for the interest. As usual, Ulf and myself, and especially [Christofer], is fully available for any follow-up questions, and hope to speak to you soon. Take care and speak to you soon. Thank you.