Ladies and gentlemen, welcome to Trelleborg Q2 2019 Call. Today, I am 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. Welcome to all of you to this Q2 update call from Trelleborg. Speaking is Peter Nilsson. I will be starting off this presentation as we usually do in presenting our quarterly results and give you some update highlights from the group and also walk you through the business areas. Ulf Berghult, our CFO, also as usual, will guide you through the financials. Jointly, we will sum up with the guidance for the running quarter and of course also be available for any potential follow-up call. In the call, we're going to refer to the presentation which has been on our webpage for a few hours. I trust all of you have this in front of you. Starting then, turning to page two, agenda, highlights, then business areas, financials, and then summary Q3, and then finishing off with the Q&A.
Quickly turning then to page three, we have a heading here, Overall, a Solid Quarter. We have development in most areas in line with our expectations, with a few exceptions that I will touch upon. Starting sales up by 7%, flattish organic. Of course, we have a structural benefit of some acquired units. Currency also, as we have seen for the last few quarters, also pushing up sales a little bit. Excluding project deliveries, as you know, we give two organic sales figures here on the total, flattish. Excluding the project deliveries, which is varying a little bit more in between the quarters and also fluctuating a little bit more along time, organic sales actually decreased with 1%. Looking into the individual markets, positive aerospace still in general continuing very well.
As you know, we have also been investing the last few years actually into medical devices, and that part of the business is also, although not the biggest part of Trelleborg, developing nicely for us. We also see in the more project-related areas, oil and gas and infrastructure construction, that they're now picking up. As you comment later, we're expecting to pick up even more going forward. Also in this quarter, we see benefits from this pickup in this more, if you may say, more late cyclical industries. On the negative side, we're well known, I guess, to all of you, automotive being pushed down. We also have agriculture a little bit challenging in the quarter, especially then on the very late part of the quarter. Comment a little bit more on that later on.
General industrials, a slight dent downwards, but no drama in general industrial demand for us, but nevertheless, once again, a small turn downwards. Looking at geographies, when I get back, then the highlight, you could say Americas, both North and South America, developing favorably while we see a slight downturn in Europe and Asia. Get back a little more in detail on that. Looking at EBIT. EBIT ending up without extraordinary items, ending up at SEK 1.3 billion, corresponding then to a margin of 14.1%, which is actually, again, the best-ever EBIT for us in SEK reported here, and we now are 25 quarters in a row with growing EBIT in SEK. In terms of margin, this is actually the third-best quarter for us historically when we look solely at the margin.
Of course, we are well aware that this EBIT is assisted by currency movement and also partly with this IFRS 16. In total, of course, it's not comparable figures. It's not as good as last year, but nevertheless, looking at the actual reported figures, it is the best-ever EBIT Trelleborg has had in an individual quarter. As I also hinted, we see that some of the areas is going down, some of our market segments going down. We have by the end of the quarter when this was more clear for us, initiate a quickly call it an action program, where we addressing the cost base and then mainly through headcount reduction, but also some efficiency measures, but by moving manufacturing from one area to another.
This is then also Ulf will touch on that later, which is then adding another SEK 250 million in non-recurring costs for us in the quarter. This equates to some 700 permanent employees who will leave Trelleborg. On top of that, of course, we will also have some downsizing on temporary and contracted workers. In total, we believe this to the shy of 1,000 employees that will be leaving the group in relation to those actions, which is already initiated, by the way, but will continue throughout the year and also partly going into next year. Ulf will touch a little bit on that later. We have to note as well, this is more of a program. We call it cost avoidance program because this is addressing a downturn.
Even though we're lowering the running cost by this extra SEK 250, by roughly the same figure, by SEK 250 million on an annual run rate. Once again, this is not really expected to improve the earnings more, kind of avoiding a drop in the earnings. Of course, with that said and done, if the development is slightly better, then of course there will be some savings coming to this. We're also, of course, doing this to create a better setup. When and if the demand start to turn up, then of course, we will move into a more efficient structure. That's something about that. It means in the quarter, we reported items affecting comparability of a little bit more of SEK 100 million, and we could get that more to guide you for the future.
Cash flow roughly equal as last year, a little bit more than SEK 1 billion. Slightly disappointing, we could say, or slightly lower than we anticipated, basically at the end of the quarter due to this downturn in sales in a few areas. We are a little bit high on working capital in a few areas, nothing major. If you look at the cash conversion, which is slightly lower than last year, then we also know the majority of that is actually coming from CapEx, even though once again, that we also have some working capital related to, let's say, the anticipated, not really fully anticipated downturn in June in some areas, which then pushed up the inventory. Also we say more on the other part of this weighing scale.
Of course, this also means that accounts payable is slightly lower, so the total impact there is not major. Once again, we were aiming for a little bit higher cash conversion in the quarter. This is really the overall topic that we want to address and call as highlights. Quickly turning them over once again on the organic sales on page four, I comment on this a little bit. Western Europe, Other Europe down, and you clearly can see that it's a little bit worse than last year in those areas, while North and South America still holding up on a positive territory.
To comment on that, in North America, for instance, both Canada, U.S. doing good, South and Other Americas is mainly the main economies down here, Mexico and Brazil, which is providing the uptick here, while in Western Europe it's a mixed picture. Germany, Sweden, basically flat-ish, we're losing a little bit, mainly U.K., Italy, Spain. It's not really any major differences. Other Europe, of course, is the big economies here, which is then pushing down a little bit like Czech Republic and Poland for us, which is a little bit negative. Asia and Other markets, slightly negative as well, minus three, is also kind of a mixed picture. China is down for us, while India and Japan is up. China is a bigger economy, then of course, with overall pushing down the organic sales in the quarter.
This is really the comment, as a totality, we already said it's minus one compared to 4%+ a year ago. Of course, it's a downward gouging on the overall sales development. Page five, Agenda, Business areas, quickly turning to page six, commenting on Trelleborg Coated Systems, headline being growing with improved profitability. Good organic development here, coming from several areas, highlighted by aerospace being good, if I should highlight one area here, also good efforts in many other areas. On top of that, also we're having structural growth coming from the acquisitions done during the last 12 months. It's a good growth in total. Good drop-through as well for this extra sales, which is then pushing up the margin by 1.6 percentage points.
Both EBIT and margin is up, and we say improved productivity, which is basically coming from higher volumes, but also slightly sales mix that we are growing in more profitable areas than we had. The overall sales mix is slightly better than we had a year ago. Overall, a good development within Coated Systems, and we are happy for that. Turning to page seven, Industrial Solutions, we say organic growth, muted profitability and good organic sales. We say oil and gas, favorable, quite strong growth in this relatively small part of Industrial Solutions, oil and gas, very strong growth there. General Industry basically flat here, if you look at that, while we also have the Automotive sales, which is then some 15% of the business here, which is declining. Overall, as you see, good organic sales and also relatively good development in all geographical areas.
Continue, as told before, we continue and expect that to continue to hit us for a few quarters, that we will have these inefficiencies in Czech Republic, which is creating. We are working on many different levels here to improve it. We are investing in order to get a better overall efficiency in the plant. Also working on the customer mix a little bit, being some aggressive on pricing in a few areas where we do not really believe in it long term. That, of course, also then addressing the cost base here and as part of this overall program that we are initiating now, that will also be impacting these operations in Czech Republic. We also note there is acquisition done in the quarter here, post actually, that was concluded after the ending of the quarter,
Signum, and I have to comment on that because we had some questions on that. That is not really related at all to LNG or oil extraction. That is more, when we say major business here, we call energy transfer, which we see as a quickly growing activity, which is basically supporting this development that we see in many markets around the world where you want to replace other fuels with LNG. This is really riding on the wave of investments being done in LNG ports, which is both export ports and import ports.
This is a very interesting add-on for us, which is then enhancing our offering and making a more complete offering for this, what you call energy transfer segment, and also not only OE equipment, but this is also a major part of this is also to aftermarket because these products is seen as safety critical and in many cases require, let's say, a regular service and then also replacement.
This is something which we expect going to bring benefits for us both in terms of ongoing, fairly nice operations, but also creating opportunities for good synergies, especially then related to our fluid handling business or Industrial Solutions. Moving over to page eight, Trelleborg Offshore & Construction, heading being a step towards profitability. We see now organic sales is turning positive. We see good organic growth in both oil and gas and infrastructure segments. This is driving EBIT and margin improvements. Also we continue to have a growing order book. We actually kind of have a turning point here where we are getting relatively okay with the overall order book, and we are now turning focus from actually from pure volume and also looking at the margin here.
Of course, we know that an early uptick that we're going to see here in the next few quarters is not going to be with the best product, is not with the best profitability, but that will improve over time. We now feel very confident, we can say that we will see a significant organic growth in the second part of the year. We will also see positive results, at least in Q4. Significant, I mean, we also expect some questions on that. We talk about the two-digit organic growth here. It's also a little bit tricky to give a very clear guidance on that since we know this is project business and we know there is, let's say, a slippage in between quarters sometimes.
Overall, we know the order book we have. We know that we're going to grow substantially or significantly over the next few quarters here in sales. That's going to also then roll over to a better EBIT. That is really the story on Offshore & Construction at the moment. Turning then to page nine, Trelleborg Sealing Solutions, headline being mixed market development. We have a flattish organic sales here. We are benefiting from structural growth from acquisitions made. North America continuing positive overall. Europe and Asia slightly softer without really any major things happening. There is better sales growth in or better sales development in North America, a little bit worse in Europe and Asia. General industry, as I already commented before, slightly weaker. Of course, we cannot have, while having automotive down and aerospace still strongly up.
Of course, auto down, we know that's going to impact machine tools and fluid power and all of that indirectly. Of course, this is a little bit to be expected. The tricky thing here is really to fully understand how much of inventory reduction is ongoing here and how much is actually the underlying demand. We know that the automotive is good in high single digits. We don't know exactly the impact on inventory on the other area. That is something we're watching carefully. Of course, it's a weekly or at least monthly development that we are targeting here. EBIT did increase, but coming from mainly or only from acquisitions.
As you probably know from before, the acquisition made, it's usually coming in with a lower margin than overall EBIT. We need to work with it in order to get it up to our margin levels. The margin is somewhat kind of depressed by this, but the major fact here is actually coming mainly from these volumes down in some of the auto-related plants of Sealing Solutions, where we're then downgrading the speed and thereby have a little bit lower contribution and lower cost absorption in these plants, which is then hitting us a little bit in this quarter. Of course, long term, this is the way we would like it to be. Overall, good performance in Sealing Solutions. We are happy with the overall development of the business areas, even though we had 1.4 percentage point down on the margin in the quarter.
Turning to page 10 in Trelleborg Wheel Systems, heading here, weak aftermarket results in margin drop. We have organic sales negative 5%, but still with some support with some structural growth. We see positive Agri sales in North America. For those of you following us for some time now, that we are kind of an entrant into North America, and we are still continuing to benefit on that one, even though the market might not be very good in North America either. We see a softer development in Europe and a little bit softer developing in Asia. Continue to see overall a positive organic sales for OE in both Agri and also actually now also material handling and construction as we are building up that product range.
This, of course, we feel firmly that we're growing our market share in the OE segment, which is perfectly in line with our target, and this is an area that we would like to sell. We would like to get into OE and then create a pull effect in the aftermarket at a later stage in order to get a little bit better pricing in the aftermarket. There was, I must say, a surprise for us in the quarter, a significant decline in the aftermarket for both segments by the end of the quarter. It's a little bit tricky, to be perfectly honest with you, to understand why this happened.
I mean, we know that it is kind of trade conflicts going on. We also see that it's been relatively good sales of OE for several quarters now. We see this as a correction in the market. We don't see any kind of difference in the overall long-term prospects of this area. Short-term, this is, of course, creating a negative mix effect for us that we have, let's say, a better gross profit on the aftermarket than we have on OE, even though sales cost is also dramatically different. We still confirm that overall EBIT margin on the business does not vary that much between OE sales and aftermarket sales, but when we have big swings in a quarter, of course, it is the drop-through on the marginal sales is creating challenges.
Of course, also we have also this down, also to watch the inventories and stuff like that. It's also having a, let's say, effect for us in the quarter. With this, what we noted, of course, we immediately addressed the cost base. We are now already implementing some cost reduction measures in the area in order to address this, both the change mix, but also we must not neglect, I dare not talk too much about sales mix, because also we note there is, let's say, this organic sales drop of 5%, which will require some changes in a few areas in order to approach this somewhat lower volume. This is kind of the story on Wheel Systems. Leaving that for time being at least, turning on financials and turn over to Ulf quickly from page 11, turning to page 12.
Okay. Thank you, Peter. On my first slide, page 12, sales development, you can see that organic growth in the quarter was flat, excluding project-related business, the organic growth decreased with 1% coming from Wheel Systems, while all other business areas report a positive organic growth. The impact from currency was +4%. Structural growth was 3%, coming mainly from acquisitions in Coated Systems and Sealing Solutions. Next slide, page 13, describes the historical performance of our growth. As you can see, we have had a year-on-year sales growth for the last 13 quarters. On slide 14, you will find the report to sales development per quarter as well as rolling 12 months, which is mostly impacted by structural growth. Slide 15 presents our EBIT development. Our EBIT reached SEK 1,321 million, equivalent to an increase of 2%.
EBIT was positively impacted from currency translation of SEK 32 million and from new accounting rules, IFRS 16, the leasing of SEK 20 million in the quarter. EBIT margin excluding items affecting comparability ended up at 14.1% versus previous year of 14.7%. Slide 16 presents EBIT and margin on a rolling 12-month basis. A stable EBIT margin looking back in time and an absolute EBIT improvement every quarter for more than six years running. On a rolling 12-month basis, we are currently at 13.3% EBIT margin. Next slide, 17, presents the profit and loss statement for the total group. Items affecting comparability was -SEK 118 million in the quarter related to restructuring costs. Due to softening demand in certain segments, we are proactively addressing the cost base mainly through headcount reduction and move of activities to more efficient setups.
In total, about 700 employees will leave the group. 2019 guidance on restructuring costs will be around SEK 500 million, an increase by SEK 250 million from our previous guidance. Financial net has been impacted by a negative exchange rate difference of SEK 14 million and effect from interest expenses on lease recognized in accordance with IFRS 16 of SEK 20 million. Tax rate was 26% in the quarter. Our guidance of an underlying tax rate of 26% for the full year still stands. Slide 18 presents earnings per share. Adjusted for comparability items, the earnings per share was down by 1% to 3.36 for continuing operations compared with previous year. Slide 19 describes the development of our operating cash flow. EBITDA has been impacted by IFRS 16 with +SEK 100 million, and as you can see, we have amortized SEK 100 million on the leasing debt.
Operating cash flow was impacted by higher seasonal working capital. CapEx is in line with our annual guidance of SEK 1.8 billion-SEK 2 billion. Slide 20 presents rolling 12-month operating cash flow. Our cash conversion is impacted by increased CapEx activity and by higher working capital movements in some business areas. Slide 21 shows the impact of IFRS 16. Opening balance has been impacted by the reclassification of the pension debt from working capital. We have restated the historical balance sheet numbers on this change. Closing balance has been impacted by IFRS 16 leasing debt of SEK 2.4 billion. Slide 22 shows the year-on-year development on leverage on continuing operations including or excluding comparability items. Net debt is impacted by negative translation difference of SEK 296 million and by acquisition activity of SEK 1.1 billion in 2019.
Slide 23 shows the leverage and net gearing excluding lease and pension liability development since 2011. Slide 24 describes the return on equity where the long-term target is 12% on continuous operation including items affecting comparability. Actual outcome is 10% versus 9.8% a year ago. Finally on slide 25, I want to finish up this part of the presentation by repeating our financial guidelines for the full year 2019. As you can see, the restructuring cost guidance has been revised, as I mentioned earlier. The guidance on CapEx is SEK 1.8 billion-SEK 2 billion. The restructuring cost is SEK 500 million. The early guidance was SEK 250 million, underlying tax rate is 26%. Thank you. Over to Peter.
Thank you. Quickly turning to page 27. Sales up in the quarter by 7%, 3% structural, 4% currency, basically. Organic sales flattish in the quarter. EBIT at SEK 1.321 billion, which is the highest ever for Trelleborg, equal to a margin of 14.1%, supported of course, with currency and also with some accounting, but nevertheless, the highest EBIT ever in individual quarter for Trelleborg. As Ulf also stated before, more than six years of every single quarter with increasing EBIT on a rolling 12 basis. In the quarter, to address expected downturn in certain segments, we are expanding our action programs and basically cutting down costs in the areas where we don't expect it to be better short term, and this is due mainly to a downsizing of our employees.
Some 700 permanent employees will leave the group as a consequence of those actions, which going to be kicking in the next few quarters, step by step. Items affecting comparability to Q1 2018, as Ulf also guided up earlier, we guide now for SEK 500 million for full year. Cash flow equal to last year, impacted on a little bit lower by higher CapEx, but also, as I commented before, somewhat higher working capital in a few areas. This is really a short version of Q2 2019 for Trelleborg. Turning to page 28, priorities, of course, we continue to focus on growing the business and making sure that we run it in the best possible way. We have, as we see it, some more volatility to be expected among the markets and geographies going forward.
We will address this a little bit more already. As you noted, of course, we are addressing it already, but of course, we will manage it and make sure we do it in the best possible way. We're going to continue to work with our portfolio, making sure that we long term get the leading positions we want. Also, as usual, high attention to operational excellence in Trelleborg and continuous focus on making sure that our footprint is the best one for the future. Also continue to invest in innovation. We still have plenty of activities ongoing in Trelleborg, what you call improved customer integration, with a lot of that linked to smart use of new technology, not the least, all that digital solutions that we continue to integrate into the business and we continue to see benefits from. We continue also to make acquisitions.
Of course, it's always high on the agenda then to make sure that those acquisitions are integrated in the best possible way. Turning to page 29, give you some guidance on the outlook for the running quarter. We expect, let's say, the demand in this running quarter to be basically on par with the development we saw in the last quarter in Q2. There will be some mix changes in this, and that is where we want to highlight in our comment and say that we expect the offshore construction area to grow a little bit more than others, and thereby also creating a slight negative margin mix for us going forward.
Nevertheless, of course, positive that we finally see this offshore construction, that there's a growth in the order book kicking into sales, and that is the first time we're going to see it really in the figures is, of course, now what we expect here in Q3. Once again, as we expect the uncertainty on the other areas going forward as well. This is really the outlook as we see it today. Going back to the agenda, the Q&A, and then turning over to page 31 and opening up for the Q&A. Please, operator, please introduce the questions and Ulf, myself, we'll address those questions in the best possible way.
Thank you. If you would like to ask a question, please press zero one. Our first question is from Hampus Engellau, from Handelsbanken. Please go ahead. Your line is open.
Thank you very much. I have three questions, if I may. Starting off on autos relating to Sealing and Industrial. I think if I remember correctly, you have a quite big exposure to auto market, and your volumes have been rather stable compared to what we've seen previous quarters in terms of production cuts by the OEM. Could you maybe talk a little bit about what are the big change now when you are seeing negative organic growth there? Second question is on the volatile demand that you highlighted during the quarter with April, May, and what happened in June. Would it be possible to maybe add some colors on geographies and end markets where there was the biggest volatility? Maybe last and not least, where you expect to achieve full run rate on the execute program on the savings, SEK 250 million. Thanks.
On the auto, it's correct, like you say, that we have been feeling we have a business which is aftermarket oriented and not really push that underlying demand. It is short-term impact that ideas that we have had an impact also on the aftermarket business in this quarter. We expect also to say that as this auto going down in this quarter, actually going down with higher numbers than the actual underlying demand, because experience tells that when this is happening, when there is a shift in demand, and of course there's a high inventory focus as well. It has been kind of hitting us all over in the automotive business, as I tell you, Hampus but not really any major differences, even on the aftermarket it's been going down.
We believe, as a guess on this bad, let's say, more worse, feeling in the market, which has also pushed some of the aftermarket players being a little more careful. Once again, Hampus, that is not really the way it should be. We expect it to be slightly better actually going forward, if I'm very blunt. It's really difficult to get the full view of that, and the transparency is not very good on some of our customers in this aspect either. This is something we need to stay very close to, and we need to kind of adjust as quickly as we can, which we already have been doing, which we highlighted before, talking about TSS, where we already as kind of addressing and bringing down the production volumes in a few factories.
About the volatility in demand, it's really difficult, honestly, even though we have all the figures, we have everything, there is variations. If I should highlight the biggest variations has probably been for us in the agricultural sector, and also in certain kind of industrial segments. It's kind of difficult to draw a, let's say, a conclusion on a trend in this. We want to highlight there was more volatility throughout the quarter without really being able to highlight any specific takeaways from this, to be honest. The only thing that we see at the end of the quarter was a dramatic downturn in the agricultural sector. That is probably what we can highlight. Otherwise, it's difficult to pinpoint anything others.
Yeah. Exactly.
being specific. Sorry.
No, I was just thinking, shouldn't you be more favorable in Wheel Systems given that you have a higher OE exposure compared to the markets?
Yes, we are. We are probably better than others, because we don't know whether there will be some industry statistics. We have seen them, but we cannot really use them at the moment because they're not really made official yet. This ETRMA, which is this industry organization, that will release some figures. I can say that you will see there is really a big swing in the aftermarket, bigger than we expected and bigger, honestly, than we saw also in our sales, at least in the beginning of the quarter. Even though we're doing better than the others, for sure, but it's still having a major impact also for us.
Okay. Thanks.
On the savings, we call it on a cost avoidance b ecause it's not a restructuring, it's a cost avoidance in order to kind of mitigate the decline in the market-
Yes
as we indicated. It is a cost down of roughly equal to this SEK 250 million is really also the cost down. If we were kind of selling the same, which would be difficult without these people, but even we're selling the same, that will, let's say, return roughly the same SEK 250 million as an extra quality saving, but we prefer to call it the cost avoidance.
Yeah. Thank you.
The next question is from Erik Golrang from SEB. Please go ahead. Your line is open.
Thank you. I have three questions. The first one is a follow-up on the savings program you mentioned. The 700 people, SEK 250 million in savings from that, is that from the incremental increase from SEK 250 million to SEK 500 million in restructuring?
Yes.
Thank you. The second question is if you can remind us of the aerospace business in Sealing, how much of that goes to Boeing specifically, and to the extent that you've experienced disruptions on that business related to the 737 MAX recent.
We don't want to really tell how much goes to Boeing and Airbus, but we can say we had a very limited impact, surprisingly limited impact from this 737 MAX. I don't really know, but I guess they are still producing 737s and putting them somewhere. We have not really seen any downturn in deliveries.
Okay. Thank you. The last question on pricing in Wheel Systems. Is it still fair to say that you're not fully covering the raw material cost? If that's the case, could you in any way quantify that? As a follow-up, what are your plans there on pricing for the second half, realizing that demand is weak, of course?
We have increased pricing. I think the run rate is that we are now balancing ourselves on that one. We don't see a need for kind of further price increases. There is some, of course, with these import duties and stuff like that, where we need to work on. There we might have a gap of some EUR 2 million or something that we will have to cover either by resourcing or by price increases. That is something which is currently addressed. In terms of raw materials, we are, let's say, covered, and we don't really expect any upturn going forward. Now with the latest industrial trends, even though we don't see it, but it could be that we're turning more to a more short-term case to support the raw material trends.
That is little bit too early to say, and we will not see it really in Q3. We of course watching carefully now on the price in Q4, whether there will be any hints of lower raw material prices. I don't see a need there, Erik, to increase the pricing at the moment, with the exception on specific tires where we are hit by import duties. On that one also, our competitors is hit by import duties, and that is more that you need to run out the inventories, and then you have new imports, and then the new imports will be hit. I think we have lower inventories in that one, so we have had a lot. To be very frank, we estimated in the quarter to have a negative of some EUR 2 million coming from not fully compensate the input duties in Wheel Systems.
Okay. Thank you.
In that one, it's not really big figures in a way, and that is something we're rolling into better coverage going forward.
Yeah. Thanks.
Our next question is from Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Peter and Ulf. It's Klas from Citi. First on printing blankets, you're talking about consolidation of the footprint, some factories there. I guess that's part of the increase in restructuring of SEK 500 million, if that's correct.
No, it's not. That was earlier in the plan. That was the original restructuring.
Got it
a decision we made already more than a year ago.
Yeah.
That is a part of the long-term plan.
All right.
It's not really an immediate action.
On the 250, you obviously say that it's cost avoidance. It's obviously a defensive move, which is absolutely fine, but where do you see the need to do this, to keep the margin steady? Is this more geared to Wheel Systems or any other-
I mean, the majority of this is Wheel Systems, parts of Industrial Solutions. Yeah.
Okay. Good. Thinking a little bit about Sealing Solutions through the quarter, particularly thinking about Asia, we had the working day impact. It would be interesting on an underlying basis to hear about how volumes in June developed relative to the other, I'm thinking year-over-year, and how July developed the first week, if you have any information on that.
Of course, we have information, then it's a matter of questioning what I want to tell you about. If I say in Industrial and Sealing Solutions, it's not been varying that much across the different months, at least not in terms of sales. Of course, order intake has been varying a little bit, but that is also related a little bit because Sealing, I have to elaborate a little bit that Sealing is, of course, selling quite a lot into assembly of various kind of industrial customers. We know they're coming up, the biggest market for us in Europe, and that is coming up to their summer breaks and how they're planning for that.
We expect that we have a downturn in sales for Sealing Solutions in June, but that we believe was also quite a lot linked to inventory planning among our customers. Of course, that is kind of expected. If you see a slow downturn in general industry, we expect, like I said, early stages of that downturn, we will have a bigger hit. Of course, and especially then linked to the summer break. I don't know exactly, I don't have all the facts at the moment, but I expect if they are, let's say, expecting a little bit lower demand, then of course they will start to cut inventories and then suddenly the call-ups from us in June, just before the summer breaks, will be slightly lower. That is something we will have difficulties really to get to a very firm conclusion at this stage.
We are on our toes. We're watching it carefully, of course, but we have to wait for a few more weeks or a few more months really to get the full picture of that. Sorry for elaborating a little bit about it, but that is we have to be
No
as usual, be very open about how we look at it.
Yeah. No, exactly. Destocking in June, we've heard from others as well. My final one is on ag and also elaborating a little bit, Peter, you said that obviously it's difficult to know why the aftermarket is weaker as well. We had this aftermarket weakness already last year because of erratic weather, so the comp should be easy. In Europe, where we understand that the customers are driving sort of longer distances, the wear and tear should be more apparent. Obviously tariffs is more an equipment question.
Correct
Odd to see that aftermarket is weaker in Europe.
Yeah. We have relatively tough comps in Europe also. We had a very good sales last year, not to overly, let's say, to make it very bigger, of course the comps gets easier here going forward. It gets a little bit easier in Q3 and Q4. Of course, then we have the trade war situation, which is also difficult to really read how much that is, and people probably are waiting. Of course it could be, I mean, especially it could be a boost if there is, let's say a problem. Let's say if it's getting solved one way or another, of course there could be a positive boost.
We need to wait for also there, sorry, we need to wait because it's so dramatic change here within the quarter, we need to wait a little bit before we get to a firm conclusion. Commenting on July. July is very early as before, we can say it's not continuing down in the same pace at least. It's not really a big drama here in the first few weeks of July. To get to a conclusion only for, let's say, the 10 trading days or whatever it is, it's not really clear to us. We need to watch a little bit more and see what's happening here through the summer break, let's say, what is happening after the summer break in Europe before we can really get to a more firmer view on the way forward.
We do see, or we do believe in certain areas that is going to be less demand, that is why we are attacking the cost base there. Of course, it's variable cost there that we are not really addressing any structural issues here. It's more variable cost to take out people, honestly.
I'm very final on this. Just to think about the margin impact, obviously, aftermarket versus equipment, it's not a big difference per se, but when aftermarket is falling, you get this difference on the drop-through. Could you at all say how much it was on the margin, we just can think about what can happen when the aftermarket bounces?
We don't really want to elaborate on that one either, because this is a little bit sensitive information for some of our competitors and stuff like that. Sorry.
Okay. Thank you.
Our next question is from Douglas Lindahl from Kepler Cheuvreux. Please go ahead. Your line is open.
Hello, Peter. Hello, Ulf. Thanks for taking my questions, two from my side. Firstly, on the Signum acquisition, correct me if I'm wrong, but did you comment on profitability levels for that business? I guess maybe not in absolute numbers, but at least in relations to group levels?
It's well in line. Of course, it's not going to drag down the margin.
Okay, very clear. Moving forward on Coated Systems, which has been this area where we see quite a lot of volatility, I think organically at least, going back historically, have we now reached sort of an inflection point? What are your expectations going into the next quarter and maybe even longer?
It is because, especially the coated fabrics part of it is a little bit volatile because that is linked to more projects, so that's going to be a little bit up and down. We've been working for quite some time to get more stable, be invested in a few areas which is more medical and healthcare-related, all of that. I think we are at least, we are expecting it to continue to be volatile. I don't really want to give a firm guidance on the next quarter, but it's going to be a little bit up and down going forward as well. You don't see this as a sustainable growth. They are more generally exposed to the overall industrial demand. Now in this quarter, I think especially aerospace was very good.
That is, of course, something which we continue to have a good aerospace business, but maybe not exactly on the level that we had in this individual quarter.
Okay. Yeah, that's what I mean. Thank you.
Just to highlight, just to follow up on Klas' questions before, just to elaborate on the margin on Wheel Systems, the underlying cost is well under control. We are very happy, to be honest, and talk about this integration on CGS. We have a good development in transformation. We have good development in selling expenses. The margin drop year-on-year is mix-related and country-related, and then we have also some for these import duties. It's not really any cost inflation. It's not an overall problem with the cost base. Rather the opposite, we are actually developing nicely there. The business overall within Wheel Systems is developing according to plan. Then we had this dramatic change in mix in the quarter, which was pushing down the margin.
Okay. Next question is from Olof Larshammar from Danske Bank. Please go ahead. Your line is open.
Thank you. Continuing on that remark which you just made, Peter, upon the Wheel Systems here, a little bit to how to think about this. We can look at Purdue indicators, CEMA indicators, they show that May was pretty grim, and I look at the organic growth in Wheel Systems, -5%. Would you say that the whole drop which we saw or these parameters showed us, have they already happened in Q2, or is that a kind of negative rollover effect taking place in Q3? Basically, what should we think about the organic growth in the third quarter? Yeah.
I'm sorry, Olof. You tell me a little bit. That is the problem, because it is really tricky. We did not, and I think none of us really anticipated this strong drop in June. This is something we are still watching, and we still believe that overall, the farmers are investing, and we say it has been relatively good this year and continue to. For us especially, we've been growing our market share, but also overall. We probably can look at John Deere and AGCO and Case New Holland, they are guiding for a relatively good market, even though maybe a little bit softer going forward than it has been, but they are not kind of guiding for any dramatic drops. We have a little bit trouble to understand, especially why there was this, and not only we.
We, of course, looked around, and we spoke to people, there is speculation on saturation, all of that. It's really not difficult to find firm ground for any conclusion. That is why we ending up that this trade war and general uncertainty and all of that. Honestly, that is our speculation and our conclusion, which is quite difficult. We are waiting for some industry statements and statistics and to really get to a fully better understanding of this. We need also to be aware, this development is only a few weeks out, it really was a dramatic turn here only in the last, let's say, six weeks. It's not really continuing into July. We need really to better understand this.
You're basically saying, looking at Q1 was plus 3%, it went to minus 5%. Would you say that this was just the last six weeks, which in the quarter, which made this big difference?
Probably the last half of the month. Then also it was quite tough comps as well. We need to be aware of that. It was quite good volumes, Q2 last year, and it is getting slightly easier comps here by going into Q3 and Q4.
Yeah. It was pretty tough comps in Q1 as well then, I guess.
Yes, correct.
When I look at margins here, it was down 200 basis points in both Q1 and Q2 here. Given your guidance and how to think here, is this a margin drop which we should continue to see at this magnitude? Should it pick up? Please help us here.
We don't really want to give a guidance, sorry, because it's really in a little bit tricky situation. The only thing we can watch is, of course, that we know our cost base is good, transformation cost is good, selling expenses is good. This is really on the contribution level and the mix between the various effect channels and the various geographies. Sorry, Olof, I cannot really give you a better guidance here. We need to watch on it, then we need to see what we can do when we get, let's say, some further into the quarter.
Okay. My final question here, this has to do with your overall quarter assessment. The demand in line with Q3 versus Q2, this advantage sales mix here. Just tell us a little bit about the directions here, what you're highlighting. You say that it's going to be somewhat negative upon earnings, I guess the margins, if you start off with that, just to see which Offshore & Construction you highlighted, obviously, trending.
The difference is really the overall explanation. We believe Offshore & Construction to continue to grow more than it did in Q2. We believe also that some other areas might seem to be guiding on the same, of course, some other areas will be slightly more challenging.
Which are some of the.
This is really what we want to guide for. Even though we guide for a flat sales development, it will have a negative mix effect since more of the sales will be from Offshore & Construction. Even though Offshore & Construction will, of course, improve, but at least not in Q3, that will not get to the margins we have in other businesses.
Okay. Which are the soft spots here? If you want to highlight those, that will be interesting because yesterday you had the guidance from Sandvik saying one thing, SKF saying something else, right now I don't-
We expect general industry to be slightly down. We expect automotive to continue down. Maybe not as much as we saw in Q2, but we expect a softening in general industry to continue. These are the big segments for us. We expect still good rail, we still expect good aerospace. We expect improvement in oil and gas, continued improvement in oil and gas, continued improvement in infrastructure construction. Of course, we're looking at the other guys' guidance as well. We see more at Sandvik, a small softening in the general industry, maybe not a flattish demand, that is probably the mix changes.
Not exaggerating this, not to interpret this too big, we expect a small softening in general industry, that is then to be compensated by extra sales related to infrastructure construction and oil and gas, that is, for us, driving a slight negative mix.
Got it. Thank you so much. Have a nice vacation.
Thank you.
Thank you.
Our next question is from Robert David from Morgan Stanley. Please go ahead, your line is open.
Hello, everybody. Thanks for taking my question. My question is just really around the Offshore & Construction business now that the margins have obviously started to improve. I guess a couple of things. One, is the outlook still for the fourth quarter to be positive? Following on from that is, once that business returns to profitability, how do you think about those two segments in that business between the oil and gas and the infrastructure? Do you still see both parts as core? Is there any reason that you have to have both of those in the portfolio? I guess, how do you think about that once that business returns to the black? Thanks.
Yeah, no, we're always looking at our portfolio, of course. At the moment, we don't see any kind of portfolio changes being addressed. We see, let's say, strong uptick in both of them, and if we should do anything, it will not be now, at least. We'll have to wait until it shows that it's getting better. With that said and done, they are not really combined. They are independent businesses, and we have developed it into more independent businesses. We have one more oil and gas-related activity and one more infrastructure-related, where the infrastructure part is mainly marine construction, harbors, and tunnels. Some then engineered products around that. We are watching as we watch with the rest of the group, of course, and we need to continue to see that this is improving and that we can do something better with it.
That is, we still, with both of these businesses, we still feel that we can improve them. As long as we can improve them, then of course we're going to maintain the development of them.
Thanks. Then maybe just as a follow-up on the comments you made on the outlook for ag. I think you called out Asia and Europe as being the sort of two weak spots. In terms of the magnitude they were down, was there any material difference between the two, or are they down to the same extent? Thanks.
I think for us, to be honest, Asia is small for us. Asia was down more. We are market leader. We were quite quick in increasing pricing. Always when you increase pricing, you are immediately hit a little bit more in Asia. Asia was down more than Europe. Of course, from an importance point of view for Trelleborg, then Asia in Wheel Systems is fairly small. Let us say that by far most important market is Europe.
Yeah. Okay, great. Thank you.
Our next question is from Olof Cederholm from ABG. Please go ahead. Your line is open.
Hi, guys. It is Olof from ABG. One question on the cost avoidance program. Maybe I missed this. Is it possible to give some sense of the timing of these savings or the lower cost, how they will come in to the numbers throughout the next 18 months?
We just announced this, it's a little bit development on union discussions and stuff. The majority of it, I guess we can say, the majority of it will kick in in 2020 and not really in 2019.
Okay.
Of the savings we will have is that. We will have impact already in 2019. We will have impact.
Okay.
The cost will be gradually taken in 2019. We will have some impact in 2019 to avoid, to meet the.
Mitigate, yes
mitigate the decline, as we say. Also it will run into next year. We talk about quite a high number on certain plants, and then at the moment we cannot really, because that is linked to union discussions and stuff. You know there is different regulations depending on how many people you're making redundant and all of that. We can only in few cases it will be immediate effect, because we need to respect the laws, we need to respect the union-
Yeah, of course
discussions in this, because a big share of that, this one, is going to be in Europe. That of course, in Europe you know also it's a little bit longer, in most geographies, at least in Europe, it takes a bit longer to implement these kind of changes.
Makes sense. With the situation in Industrial Solutions through the plant in Czech Republic and so forth, I guess you will sort this out partially through this program. Overall, could you quantify how much this costs you in Q2, and how long do you think it will take until it's resolved completely?
We're talking about individual millions of EUR, but it's not really in the lower end of that range, of course. We have our ambitions, but of course, it shouldn't be a drag on the profitability of Industrial Solutions, which it is at the moment. We are working hard, and it's not been fully as expected in all aspects, and now we're working on more addressing it on the next level. We have been investing. We have now also more firm view on some portfolio changes there, and now we are addressing the cost base by cost downs. That is something which we are addressing, let's say, weekly. Sorry, I don't really want to give you much. Sorry for being.
Oh, no. That's fine.
I don't really want to give you, because we are working hard on it, and we're doing our best, but it will be difficult to give you a very firm guidance which we actually feel very confident about.
Makes sense. Lastly, with the sort of global uncertainty, et cetera, it's early days in terms of lower M&A prices. What are the areas that you're right now looking mostly into, and have you seen signs of sellers wanting to accept slightly lower prices?
We don't see that. We don't see pricing going down, and that's why we always be careful. The M&As we're looking at the moment is more highly synergistic ones. The ones which is more kind of standalone, which is very rare that we make an acquisition like that. Those acquisitions is difficult. Actually, to be honest to say, we've been in a few processes lately where we actually stepped out because we thought the valuations was too high. With that said and done, we still have plenty of acquisitions which is more synergistic, and we continue to work on those. On the more standalone things, especially still private equity seems to have plenty of money, and they are kind of living in a different way of valuing companies than we do at the moment. You are probably looking at that as well.
It seems talking a little bit openly that the valuations in the private market at the moment is substantially higher than it is in the public market.
All right, perfect. Thank you very much, as Ulf said, well, have a good summer.
Yeah. Same to you.
Our next question is from Erik Paulsson from Pareto Securities. Please go ahead. Your line is open.
Yes. Hello. I was looking at the cash conversion here, which has basically decreased since beginning of 2017 from around 100% down to around 70% on a rolling 12-month basis. When do you expect this to turn upwards again? Should we expect those levels going forward as well?
Going forward, as we guided on CapEx is SEK 1.8 billion-SEK 2 billion. We have an underlying base is about SEK 1 billion, on top of that, we then allow strategic CapEx. We will run those through, that will also have a slight glide impact into next year, we are not committing or approving any new strategic CapEx, we will be more firm on CapEx. You will see CapEx going down gradually into next year. On the working capital also, there's another element, we have been in some areas, in some business areas, like if you take Offshore & Construction, even though if we see improvement in underlying performance from an EBIT point of view, that will also then consume some cash or consume more on the balance sheet. That is something that we will need to live with.
In other areas, we have more specific actions that we are dealing with because we have on inventory. You will hopefully see in the next few quarters that we will improve our cash conversion.
That might be on the bad side. On the other flip side, of course, if the economy goes down, of course working capital will also go down, we will have a better cash conversion coming from a lower demand. Of course, we don't want to have that now, that will happen as well.
Again, where we're spending CapEx, those are where we like in Sealing Solutions or with the Wheel Systems, we are in the right areas. You will see it gradually improving.
Okay, great. Thank you very much.
As there are no further questions, I will hand the word back to the speakers for any final comments.
Thank you. Thanks for showing interest in Trelleborg. As usual, Christofer is available for any follow-up calls. Of course, Ulf and myself will also. Now we will actually not do any roadshow here, but we will be more active and showing our faces in several conferences here after the summer break in Europe. Happy to catch up with you. Once again, Christofer is available as always, never on vacation. Please call him. He will be happy to take your calls. For the rest of you, happy holidays eventually, or happy vacation, whenever that comes up for you. Thanks, and take care.
Thank you.
Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.