Welcome all of you to this presentation of our Q3 results for 2018. As usual, I will start by myself giving you some overall takeaways from our side then go through our individual business areas in a similar way, then give you our main takeaways per business area. Then Ulf Berghult, our group CFO, will guide you through more the figure part of the report, then we will finish off with some comments from me as well. Of course, also opening up for a Q&A session following our presentation. Agenda for today. As usual, same agenda as we have when we present our quarterly reports the last few years, actually. Highlights, starting with some general highlights, comments on individual business areas, financials by Ulf, financial summary, and finishing off with the Q&A. Starting, we have a headline saying solid quarter.
The quarter basically developed in the same way as we had earlier in the year. Of course, impacted by the seasonality here. As you know, we have a major part of our business in Europe, which is then impacted by the holiday season and also with some seasonality in the individual businesses. Usual, but all in all, ending up with the record high figures in all aspects of Trelleborg. Sales up at SEK 8.3, an increase by 14%. Of course, driven both by organic growth, similar to earlier in the year. Some positive structural effects coming from some acquisitions made, then, of course, also assisted with the currency as we report in SEK, but mainly sell in other currencies. EBIT up, also record high for Q3 for us.
SEK 1.1 billion, an increase by 23%, which is, of course, showing a good leverage in relation to the sales growth. Also giving us a margin in the quarter of 13.6%, which is also the highest EBIT margin we ever had in Q3. Get back and comment on the EBIT later on for the individual BIs, but you see it's growth all over with exception of Trelleborg Offshore & Construction. Items affecting comparability a little bit low in the quarter, Ulf will give you later. We'll actually guide down these items affecting comparability the full year, Ulf will get back on that. Basically in line with our plans, nothing strange in that. Cash flow, slightly lower compared to a year ago, driven by a higher CapEx, which you also guided before that we will invest more.
We are investing more in order to improve our structure. Of course, also get some structural savings by moving some of the operations and also some focused investments. There is more than usually for us in growing in specific segments. Also with satisfaction, we continue to make acquisitions. Three bolt-on acquisitions signed in the quarter, two of them closed and one pending here where we expect the Sil-Pro acquisition in TSS, which will be closed, let's say, only beginning of next year. The other two are already in the books. Looking at the sales is basically the same development that we've seen. This is, as I said, excluding our product related businesses since that is a little bit bumpy and not really dependent on the underlying markets. Basically the same growth, strong growth in Western Europe, strong growth in North America.
Other Europe, a little bit depressed, but still small numbers. Asia and other markets still growing. China continues to, for us, organically to grow in excess of 10%. We have extraordinary high growth figures in South and Central America. That is a very small part of the group, so the figures is a little bit strange, to be honest. Nevertheless, very strong growth, but it is not really impacting the overall figure. Basically, development same as earlier in the year, and we are already now I can comment also. We foresee a similar development here going into Q4. Getting back to the business areas. Coated Systems. We see organic sales unchanged, but structural growth is strong, supported by two acquisitions done in the year.
Also here as earlier alignment, we are changing and mixing as a focus on a mixing operation within this business area, which means that we are leaving some external sales, and that is impacting organic growth by roughly 1%. That will continue to be a negative drag for this business area, at least for the next two quarters as well in a similar level. That is going to push down the organic growth in Q4 and Q1 by 1%, which is, let's say, long term going to create more efficiency for us. That is, of course, why we do it. Coating about this is now two operations here: Coated fabrics and Printing blankets. We have a similar development in both of them. Coated fabrics doing good, aerospace doing very good. General industry and automotive also continuing good in this area.
We are still a little bit subdued, what you call in the transport segment. We are big in one specific segment here, which is gangways for rails, where they have changed the, how should I say? The law has changed, and we are still fine-tuning here in order to comply fully with the new regulations. We are through that, and it is going to be an improvement going forward. Printing blankets solid in the quarter, a little bit weaker in Europe, but supplemented by good growth in Americas and Asia. All in all, nevertheless, ending up on a flattish sales development, EBIT growing, but by similar sales as you see, supported by the acquisitions and also with a general good cost control.
A notice also in the quarter, this acquisition of Laminating Coating Technologies, Inc., which is an American factory, which is supplementing our offering within a specific segment related to polyurethane, which is going to be beneficial for us, especially targeting medical applications and aerospace applications going forward. A nice supplementary acquisition, which we have been in the making for some time and therefore happy to be able to sign it. Industrial Solutions, I would say, very strong organic sales development. It is 9% up, especially driven by general industry, and basically in all geographical regions is improving. If you should highlight something going down, the building-related segment is down a little bit, but honestly, that is a little bit up to our own decision. We went in with some price increases linked to some specific raw materials linked to these segments, and we expect that to improve going forward.
In the quarter, we've been hit by this action initiated by ourselves. Note here, we have some inflationary pressure in parts of this business and some extra cost related, we call bottlenecks, qualified operators, especially related to some countries in Middle Europe, where it's actually getting tricky to find qualified labor, which is then creating a higher turnover than we would like it to be, which is then creating extra cost. On top of that, also, we expect an extra inflationary pressure in those areas linked to the salaries. That has also been somewhat hitting, not any big figures here, don't overestimate it. Nevertheless, there is a negative impact coming from this in the quarter. All in all, solid improvement in profit here as well.
Margin, as I said, somewhat impacted by this extra cost related to the labor issues, nevertheless, under good cost control and good leverage in all. Here, we can also note that we opened a plant in Mexico related to building and some automotive, some building-related products and also related to some automotive niches. That is also basically spreading our footprint from U.S. into Mexico and thereby we will be able to better cover some existing customers in this part of the world. Moving on to Trelleborg Offshore & Construction. Continued strong negative organic growth. We have been downsizing this a lot, but this has been substantial negative organic growth for quite some time now. This is, of course, creating a hit on the profitability here also.
Here also, we have to note that we were expecting some big projects to be delivered in this quarter and in Q4, some of these big projects, specifically one big project for Australia that has been pushed into Q1 or Q2 next year. We will have to wait and see, especially linked to our customer did not get fully the governmental permits in place to conclude a project this year. That's in the order book, or almost in the order book, put it like that. There's always some insecurity when these things happen. This is kind of the reason for this more downturn in this area than we kind of expected only a few months ago. However, with satisfaction, we see now the order book is growing fast and we have, let's say, oil and gas related businesses.
We have the best order intake in the quarter for more than two years. Within the running quarter, we are also quite positive on the order intake for this running quarter. However, we have to note also this growing order intake, substantially growing order intake is not going to benefit us for the next few quarters. That is why we guide also that we see this improvement coming in early 2019. The substantial part of this is going to come only in the latter part of 2019. Valid also for the infrastructure segments, of course, somewhat supported by the push of projects second part of the year into next year.
Supporting the infrastructure part of it also where we see you have a good order intake, both in the marine operations and also with the tunnel segments also here, where we have gotten and will get some nice orders, especially for China in that segment. We want to be firm on our guidance here. This is a little bit changed compared to what we said before, linked to this push of projects. We expect Q4 still to be in the red. As we see it today, we expect a slight profit then going into beginning of next year with an uptick on the later part of next year. That is the way we see it at the moment. The challenge is, of course, that organic sales will continue to be negative, but the activity level is very high.
This is something that we have to balance and have to make sure that we focus on long term and not really on the short term here. Moving on to Sealing Solutions, also very strong organic sales, 8% up and basically coming from all over the place. All geographies and basically all market segments, including automotive, I should say, because we got some questions on that. Also automotive is growing in the quarter, although not with 8%, but it is still a solid growth also in automotive related segments. We, of course, see a slight downturn there, but it is nothing really dramatic, and we continue to gain market share in the areas where we are focusing. Highlight also Asia, of course, we are focusing a lot on Asia here, and Asia is then growing even more than 8%.
EBIT margin up solid, as you see with good cost control and reasonable leverage. We also have to say how we continue to invest in order to support the growth going forward. We are not really allowing all the leverage to drop through. We also continue to invest and to grow into segments like the medical segment. You see here also we signed acquisition for Sil-Pro in Minnesota. Very happy for us, which is then creating a completely new platform for us in healthcare and medical. Of course, linked to that is also some marketing and sales efforts in order to utilize this new platform in the best possible way. Also with satisfaction, we also inaugurated in the quarter a new innovation center in Germany.
Decided to put it up in Stuttgart because we believe Stuttgart is a good location for this kind of activities, we have a completely new setup here, which is going to offer us a much better platform in order to approach our customers in an even more professional way. All in all, as you see, a satisfactory development of Sealing Solutions. Wheel Systems also growing 3%. All those are some mixed. We continue to grow a solid growth in the, what you say, agri sales in North America growing, more flattish in Europe, somewhat weaker in Asia. Agri tire very well. Original equipment continues very well, we still have a less, a bit small, what you call subdued demand for aftermarket overall, we are linking that a little bit to the weather situation, which has been kind of pushing down the aftermarket a little bit.
We still feel there is an underlying demand, but we will need some assistance in order to really trigger the expected growth in the aftermarket. Other segments, as you know, agri is 60% of the sales and other segments within this, which is related to industrial and construction, all doing well. Here we're adding capacity. We are now also gearing up. Those of you who have been following us for some time know that we've been investing in Serbia and the footprint in Serbia is now getting ready, thereby we will be able also to continue to capture markets, especially in the construction related segments. Very happy for that development. All in all, of course, we have a continued margin expansion. We are one percentage point up compared to a year ago. You see also there is a good leverage from the sales.
Looking at that, you also need to be aware, which we don't really comment on here, but the comment on the report is also that synergies is kicking in, and synergies is assisting us as expected in the quarter. Also here, we continue also to make supplementary acquisition, acquired the market leader in off-road tires, TRS in New Zealand, which means now that we clearly can say that we are the market leader for especially agricultural tires in both New Zealand and Australia, which is an interesting, may not be the biggest market globally, but nevertheless an interesting market for agriculture, which we're now also using that platform also to push into material handling and construction in Oceania. That is all in all a satisfactory development of Wheel Systems as well. Moving on, handing over to Ulf then on the financials. Please.
Good morning. I will then guide you through then the consolidated group, and then my first slide is then the sales. You can see here that we have an organic growth of 4%. If I then, as Peter said, also then exclude the project-based business, which is then lumpy between the quarters, then we have an underlying of 6% organic growth. To highlight, even though you've seen the numbers, but the good numbers within Industrial Solutions having a growth of 9%. You have Sealing Solutions with 8% and then Wheels not in the same magnitude, but although with 3%. As Peter also mentioned, we have signed five acquisitions in 2018, of which four we have closed, and then Sil-Pro will then be closed in the beginning of 2019.
Next slide, that is then the historical development of sales, and then you can see then we have 10 quarters of growth, and where we have seven quarters of positive organic growth. The guideline we have is then to, we have the sales growth of between 5% and 8% over a business cycle. The next slide is then the rolling 12 months development. You can also then see then quarter by quarter development. The third quarter now in 2018, that is the highest quarter so far in Trelleborg. The next slide is then our EBIT. That is also then the best third quarter so far in both absolute terms in EBIT and also in margin. We have an EBIT increase of 23%. We impact by translation of SEK 60 million, that is a translation impact, that is not a transaction, it's a translation impact of SEK 60 million.
We can also say that I've seen that there's been some issues or questions about the central cost. We have a guidance on the central cost, which is between SEK 40 million and SEK 70 million per quarter. That means that we should be about SEK 55 million. In this quarter, we have exceptional low cost, and that is due to that we have normally, we have also we assess, provisions, accruals. We also have FX items impacting also M&A activities. In particular this quarter now we had a very positive one-off accruals or provisions assessments. That said, I also want to highlight that we have, if you look on individual business areas, we have Coated Systems, which is 19% up in profit. Industrial Solutions is up 19%, Trelleborg Sealing Solutions is up 21%, and Wheels is up 25%.
It's a very strong underlying performance from the business areas. If we then assess the year-to-date, that is the best so far in the group also in absolute terms in margins, for nine months. If we look on the next one, that is the rolling 12 months development. You can see that we have 22 consecutive improved EBIT quarters. We have an EBIT margin on the rolling 12 months basis on 13.9%, and that is also the best ever for the group. This is the P&L statement for the group. We have low restructuring items in the quarter and also if you look on the for the year-to-date, we also considerably below previous year's numbers.
We have a guidance of SEK 250 million. We will, as we see now, be between SEK 150 million and SEK 200 million, more closer to SEK 150 million than SEK 200 million, that is for 2018. The financial net is 2.6% versus the last year of 2.4%, is basically impacted by a higher base rate and in particular the US dollar. The tax rate is 24% in the quarter versus last year's 22%. The underlying guidance is still 26% for the group. If I take the next slide, which is earnings per share, we have if I adjusted by items affecting comparability and looking at underlying, we have an increase of 21% up to SEK 2.98. Next slide is the cash flow, operational cash flow for the quarter. It is, as you can see, much good solid operation from the EBITDA improvement.
We also have impact in the quarter by a higher CapEx activity, that is particularly within Industrial Solutions and Trelleborg Sealing Solutions. We also have somewhat higher working capital, which has come from a high activity and mainly from Trelleborg Sealing Solutions. Next one is the rolling 12 months development on cash flow, that is of course also impacted by our higher CapEx activity. The guideline for this year, as we previously said, is that between SEK 1.8 billion and SEK 2 billion. As we see now, it will be more close to SEK 2 billion than SEK 1.8 billion. The next slide is our leverage year-on-year performance, which is going down for the group.
Also, I also want to mention that we have an FX impact of course, which is about SEK 800 million negative so far year-to-date on the net debt. The next one is you can see the historical development and where you can see that we have come down to very good levels. The next one is return on equity, where we have a long-term target of 12%. Unfortunate or not unfortunate, if we just to explain the numbers, that is the rolling 12 months 2017, that was impacted by the capital gain of a mixing unit that we sold in quarter one 2017, which is still in the rolling 12 months of 2017.
An opposite in the rolling 12 months 2018, that is impacted by the higher restructuring charges that we took in quarter four 2017, based on that we closed one unit within business area Offshore & Construction. Coming to my last slide is the financial guidelines. As I said, we have had a guiding on SEK 1.8 billion-SEK 2 billion on CapEx. We will be more close to the SEK 2 billion. The restructuring charges will be about SEK 150 million-SEK 200 million, previously SEK 250 million. Underlying tax rate, that is 26%. Just for your information, the intangible asset amortization, that is about SEK 300 million. Peter?
Thank you.
You can stay here.
Getting back, we had a heading solid quarter. Sales is up by 14%, profit is up by 23%. Organic sales continuing as earlier in the year. Also with a record high EBIT for a Q3 and also with a record high margin for a Q3 for Trelleborg. Operating cash flow somewhat lower than a year ago, but that is basically based on decisions by ourselves to invest more than before in focus-oriented investments. That is something we actually believe is good. Satisfactory also that we continue to make bolt-on acquisitions because we believe that is highly value accretive long-term for us, that we continue to build our positions and continue to reinforce our already leading positions in selected segments. Looking overall as our focus, same as before, basically manage our market conditions.
I'll get back to that, we don't really see any changes in that one. We see it continue as is, we're going into Q4 with a stronger order book than we went into Q3. We don't really see any downturn in any. We see some downturn, but overall, the mix is the same. We see some upturn in some segments, and we see some slight downturn in others, but overall, the guidance remain exactly the same. Manage sales and margin. As we say, market positioning. That is, of course, we continue to work on creating our leading positions and doing that in various ways. Continued portfolio management to improve. I didn't comment before, for instance, on this Ulf's move from Houston to Skelmersdale. That's, of course, important for Trelleborg Offshore & Construction, that we're getting that into a better and more lean setup.
With satisfaction, I can mention there as well, we have already received our first orders for manufacturing in Skelmersdale, so that's also going to be off to a good start then early next year when this operation is up and running. Some constraints in the supply chain, I think nothing changed compared to a quarter ago. We still have some tight availability of some raw materials, tight availability for qualified labor in certain areas, but nothing really deteriorating. It's the same situation or similar situation as we had a quarter ago. Managing in a good way, we're not really concerned about it, but nevertheless, we need to recognize there is some challenges, good challenges, I should say, because they're based on that you have a little bit higher demand than you were prepared for. Continued focus innovation, smart use of technology.
We continue to invest quite a lot, as we said, in innovation center within Trelleborg Sealing Solutions and also continue to launch new business models and new products based on new technology. Integration of recent acquisitions. I said that the biggest acquisition which is still benefiting us is, of course, the acquisition of CGS a year and a half ago, where we're now moving into a situation with this investments that we're doing in the manufacturing setup is, of course, taking some time following the acquisitions, but we continue to see the benefits from this, we are fully in line with the synergy extractions as we commented on the capital market day earlier this year. No changes there, it's moving in the right area. The outlook in total is the same as we had previous quarter.
We see it's moving on par with the other one. Of course, we note, like all of you, there is a slight downturn in automotive in certain geographies, but overall, it's not really a major thing for us, and we continue to grow our market share in those automotive segments which we are focusing on. We feel that is a reasonable good development, but of course not really with a good underlying. Then we note in other areas like in oil and gas and some infrastructure construction related areas that the demand is actually going up, which is more late cyclical areas. All in all, we see this is balancing each other in a good way. I said before, order book going into Q4 is actually stronger than it was going into Q3.
That is with some confidence that we are making this guidance for the running quarter. I guess that's it. Opening up then for Q&A and inviting Olof up to the stage as well to join us and guide us through this Q&A session.
Thank you, Peter. I'm Olof Larshammar, and I'm working at DNB Markets as an analyst. I can kick off with two questions. Firstly, a quite positive outlook for Q4, we're soon approaching 2019 as well, it would be very interesting to hear your thoughts about what you're seeing in different segments for 2019 as of now.
You said positive, I don't see it as a positive. We see it continuing in the same way. We don't see really any changes. I said there is some changes within the individual market segment, as a totality, we see general industry continuing as before. Automotive, slight downturn but compensated by growth in other areas. We still feel that the agricultural market is somewhat subdued. Of course, we saw that the OE has been growing in a nice way, we still have some push in the aftermarket, which we are expecting to turn up eventually, because we know the tractors are being used and we know the farmers is using the equipment. Eventually they have to buy new tires as well. We still feel that this market is a little bit depressed. You have to wait and see.
We are not overly concerned about that as we are using this to move into new, more efficient structure and then continue to invest in order to be better positioned to capture this growth. Nevertheless, there is a potential positive coming, but not really confirmed yet. Don't misunderstand me there. It's not really confirmed in the figures. It's not going to happen in this quarter. Nevertheless, if you go into 2019, we have some wishes that it might turn there. Overall, we cannot really see, talking to the customer, looking into our order books, we cannot really see any changes. Then, of course, we note on the same way, we are not living our own world. We see also that there is some political movements globally which might impact this and which might have an impact on the global demands.
Of course, this stated with some extra uncertainty, but of course, who knows if the U.S. make a deal with China or something, suddenly it's being positive or there's a nice Brexit. Who knows what happens? Nevertheless, we need to look at that, and we need to say there is some uncertainty in the markets which we cannot influence. Overall, everything continue as earlier in the year, and we don't see really any changes, but some mix issues in between some individual segments.
Yep. In Wheel System, you were mentioning that you're ramping up production in Serbia and I guess also in North America, and we're seeing quite good demand, especially from the construction segment. Would it be possible to quantify it in any way, how much more capacity you will have in mind?
I don't really want to. We are big globally. We are probably number two globally in ag tires. We are number one material handling tires globally, but we are maybe in top 10 for construction tires. Construction tires is the smallest segment for us, and of course, with the strongest growth opportunities. Also, we need to note that also in the construction segment as a total, that there is quite a lot of commodities. We are not really targeting the full construction tire market. We are targeting, let's say, the high-end applications, the demanding applications, or even though the construction segment is a lot bigger probably than the ag tire segment. The interesting segments in the construction segment is less than in the ag tire segment.
We are working on it. We are launching product family by product family, where we see good growth opportunities, but it's not going to happen immediately. That is something that we're going to launch step by step. We note with satisfaction there is quite a high demand, especially from the OEs. We also want to make sure that we have a balance in the aftermarket and the OE exposure in that segment. That is something we're working on in order to get. As I said, we're adding capacity, but we are also at the same time investing, as I say, in Serbia, we're investing in Czech Republic, investing in China, investing in the U.S. That is also part of the reason for the high CapEx levels in the quarter.
We definitely feel that we're moving into a better overall structure within Wheel Systems, fully aligned with our plans that we had a few years ago. It's nothing really, at least internally, no surprises. This is moving. We feel that we're creating a solid platform then to continue to grow in Asia, continue to grow in North America, continue to grow into the construction segment while we are more well-established, if I may say, in the agri segment and the material handling segment. This is a little bit portfolio management that we're working on in that area. Fully aligned with our expectations, but maybe with somewhat subdued demand, especially in the agri aftermarket, where we expected a better growth. That is supplemented with probably a better growth than expected in the agri OE and continued good growth in the material handling and construction segments.
Yeah. Do we have any questions from Agnieszka? Please.
Agnieszka Vilela, Nordea. I have a couple of questions on the outlook. Firstly, you say that your order book today is higher than what it was when you entered Q3. I wonder if you exclude or include the, say, oil and gas segment orders in that?
Include everything.
Include everything?
Yeah.
If you would exclude them, can you tell us about visibility again?
Similar. I don't know exactly the figures, but then I think there's no dramatic change.
No.
It's the same.
Okay.
It's the same. We have growth in certain general industries segment as well. It's not really only related to that, but also a little bit down in some other areas.
Yeah. How long does
Sorry, Agnieszka, I want to clarify that. Okay, I said growth in the order book, yes. As we say, the underlying demand is basically the same.
Yes.
We don't see any change in the underlying demand.
No concerns on the automotive segment either from your side?
Of course, we have concerns. We're looking at it, of course, we note externally, looking at the numbers, it's a little bit lower growth rates, it's still growth.
Also, can you just remind us about your visibility for the businesses apart from oil and gas?
We have a generally good visibility for the next 60 to 90 days. Beyond that, it's a little bit more guesswork.
Just a question on Wheel Segment. I appreciate the fact that you're quite satisfied with the development, but when I look at the EBIT change and consider the organic growth effects and acquisitions, I think that the leverage on organic growth was quite subdued in the quarter, especially if you think that you got the synergy.
There is some improvement possibilities in this, as always. Of course, not all stars are aligned. There is always some stars which is misaligned. We are of course working on that. There is a little bit higher inflationary pressure in certain areas, Czech Republic, which we need to compensate, so we're implementing pricing. For those of you following the market, we have been implementing price increases on that to compensate for that. We have some hit in the quarter for some extra inflation, which is not fully captured. There is also some price rollover situations also. Not really raw material impacted, but more that we have a formula with some of our OEs, which is then impacting it also. We have a slight negative from that as well.
In an optimum situation, we would have had higher profit, but overall, it's always a little bit ups and downs.
Yeah.
Of course, you're correct in that. If you have 100% full drop-through with nothing else, then probably should have been better. That is something we cannot pre-act on some things. We're working on that, of course, to correct it going forward. That's what I said, the overall satisfaction, but we can, of course, always find some issues that could have been managed better, I shouldn't say, but we would have wished for a slightly different development.
How much synergies are left for that business, and what's the run rate today?
Well, I don't know. I can't remember. I don't know if you have the figures.
We will not comment on each quarter, if you go back to the capital market day, we have specified the synergies to be achieved in 2018 and 2019.
2020.
I don't have it on top of my head.
There is documentation.
We don't comment in individual quarters.
Okay. Thank you.
Yeah.
Olof Cederholm, ABG. Just a couple of questions. The restructuring costs were lower than expected, and you're guiding for something lower as well. Does this reflect less activity, or is it simply delay of activity that we should?
No, I think it's more. Last year we had much, much higher. That was due to we also then closed Houston and then moved up to Skelmersdale. This is just slightly lower, but it's also then partly driven by acquisitions. Then it also depends what kind of acquisition you do and if it's a larger or smaller one. Next year, we will come back next year to guide you when we release a quarter.
It's not, I mean, overall, of course, it's good that it goes a little bit up and down. It's linked to acquisition, linked to activities. Some of the actions is due to some acquisitions and due to some changes, pushed it forward a little bit. We still have plenty of possibilities to improve. It's simply that we will have a slight downturn here in the second part of the year.
Okay. I have a question about the group costs that were fantastic in the quarter.
We would like to keep it like that every quarter.
Should we put in.
No salaries for us.
SEK 12 million for 2019, or how should we think about that?
No, what we need to do is that we will have one-off, so to say, when we do, because we do assessments on provisions, accruals. We have all M&A costs centrally, also M&A accruals or M&A provisions centrally. We need to assess those, then it happened to be that many items then turned kind of a positive in quarter three. It's not a big thing, but you need to regard it as kind of a one-off. The underlying is the guidance between SEK 40 million and SEK 70 million in the middle of SEK 55 million, and that's where you need to do. If we pick up something more significant going forward, but it's not major significant, we guide you, but you need to count on SEK 55 million.
If you look at year to date, we are, let's say, on the lower end of the guidance. This is really the way we look at it. We are on the lower end of the guidance for, let's say, nine months guidance, if you put it like that. This happens.
Yeah.
Of course, we are happy that they are positive this quarter, but it could be slightly negative next quarter. It's depending on what is happening.
Okay, one last one from me. In Wheels, we hear a few tire manufacturers talking about higher raw material cost going into next year, et cetera. What's your view on that?
It's a little bit difficult to say, to be honest. We still see, depending on individual raw materials. In general, we are not really expecting any push upwards, I should say. There is some, how should I say, challenges in some raw materials, like carbon black and that, depending on the Russia relation with the rest of the world and how to do that. Iran is there as well. There is a few of those which has changed kind of the supply chains in the industry. We have no general concerns about it. We think we're managing in a good way. If it happens, it's not really a big thing, then of course we need to change the pricing, we are not really concerned about it.
I think we are compared to Now, I should say, they have to comment themselves, Michelin and Bridgestone and others, they are, of course, more exposed to consumer markets. We are exposed more to specialty tires. I shouldn't say it's easier for us to adapt pricing, somewhat easier probably because we are more focused on individual segments. We feel confident that if the raw material pricing goes up, we will be able to adjust. Of course, with some delay, not really talking about any major things here. At the moment, Olof, we cannot see that. It's not on the top of our agenda, to put it like that. Johan?
Yes, just a question. On the offshore and construction business, you have this transfer of the operation from the U.S. to the U.K., which you have said previously should sort of give you benefits around SEK 100 million per year.
Where are we with regards to those savings in terms of, how much did you get into in Q3, and what can we expect in Q4?
Of course, the major of the saving is only going to kick in when we actually start to manufacture in the new structure. That is, I said before, we have gotten the first orders, and that's going to be, we don't have exactly the delivery time on that, but we're going to start to make this in the U.K. instead of U.S. here in beginning of next year. Part of that saving has already come with the cost cut down, but some benefits will come also when we start to manufacture. That is kind of a going run rate. I have difficulty saying exactly how much is kicking in at the moment. We see the benefit. We see, of course, the cost is going down. The Houston cost is disappearing.
We don't really see the benefits yet of manufacturing in a more competitive setup, which we will have then when we move everything to U.K. Sorry, Johan, I don't really want to give any, because it's also project dependent, and this SEK 100 million is plus/minus a little bit as well, depending on the orders we get.
Thank you. Erik Golrang, SEB. Three questions. If you look at the net in the third quarter and also the outlook for the fourth quarter, do you fully compensate yourself for both material cost inflation and other inflationary pressures?
If I take overall, I think it's slightly negative.
Slightly negative.
slightly negative in Q3. We're talking about a few individual EUR millions. On the totality it's really negligible, and we expect it to be, I don't know. What we say, Q4, I don't know.
Moving into Q4, we will partly compensate that way.
Yeah.
We will not have the full impact because of that also again.
We also have to speculate what's happening. We think hovering, let's say, plus/minus a few million EUR, that is something we need to accept if you look at the total group.
Thank you. On the second question, if you could say anything about what kind of magnitude in the oil and gas recovery that the second quarter or the third quarter order intake reflects. You said the highest in two years, I don't recall orders being that high two years ago either. Are we looking at a mid-single-digit return to growth next year, or will it be significant into the teens?
I really want to wait until I'll see the order intake here for Q4 and Q1 next year. We see there is a strong uptick, and of course, with the current order intake. Of course, if you look at the full Offshore & Construction, you need to be aware also oil and gas is one thing, and infrastructure is the other thing. For oil and gas, we will need more orders in the oil and gas related businesses than we got in Q3 in order to go into solid profitability. At least it is moving in the right direction. It's not sufficient to bring us up to solid profitability. We need more, but we see movement, and we expect growth in order intake also in Q4, of course, dependent on when we exactly get the order.
We see the activity level is a lot up. We say activity level is up, then we're looking, drilling is still very black. Not black, red, just saying. It's still very red. We don't see any light in the tunnel. That is why we did this kind of restructuring, moving from Houston to Skelmersdale in U.K. We're cutting down capacity because we don't expect that market to go back. We don't really see some increased activity, but not at all in the dimension to compensate what we lost. While on the other areas, we see more subsea, which is then for us, we call Distributed Buoyancy Module, bend restrictor subsea insulation. There is very high activity level. There is the expectations that that's going to continue to grow. There is something which is getting back, and we have seen the first.
We got the first big order.
Yeah.
Of course, we're talking about orders also between 5 and sometimes up to 20 million EUR. These kind of orders we have not been getting at all for the last two years. We got one order in this quarter, which was the first big order for two years. We still have a few of these big orders in the pipeline. When exactly they will come in, we don't really know. I have to wait. Before I can give you even better guidance for 2019, we need to look at the order book here for Q4 and Q1. The only thing I want to guide for is the activity level is high, order book strongly increasing. We believe we have expectations that they continue to grow the order book here into Q1 and Q4.
That is why we say that it's still going to be somewhat challenging for the first six months of next year. With the current trend, we feel comfortable that the second part of next year going to be much, much better than it is today.
The final question. Going into this year, you said that it would be an investment intense year. Is that still the case? Should we still expect CapEx to fall materially into 2019?
Yes, we expect it to continue to be on a high CapEx level, we're going to give better guidance here in the next-
Q4 report.
Q4 report. It's going to be continued to be on a higher CapEx level than it should be in Trelleborg in the long term.
2018 on. For 2019 as well. 2019 as well. 2019 as well. 2018 and 2019. 2019 will be high as well in compared to historical averages. Thank you.
Do we have any questions from the phone?
Thank you. Ladies and gentlemen, if you do wish to ask a question via the telephones, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Our first question comes on the line of Erik Paulsson of Pareto Securities. Please go ahead. Your line is open.
Yeah. Hi, this is Erik. Regarding also automotive, touched upon it earlier here in the outlook and sealing solutions, and also Agnieszka touched upon it. What is your current exposure within automotive? I think it was 11% for 2017. How does it look like now on a rolling 12-month basis?
Similar. I don't know exactly the figure. Between 11% and 12%. I'm looking here at Christofer, who knows the figure.
Yeah.
I think that it 's very similar
very similar. 11% is probably a good reference point.
Okay. The second one on the acquisition multiples. What do you see here now? Are they still a bit high, or have they come down in the recent market turmoil here?
Yeah. As you know, it's been a turmoil the last few weeks or months here, we still have to wait and see. There's still activity level. There's still a lot of companies for sale, of course, we need to watch carefully what the multiples are. Of course, this turmoil has not been good for the multiples, of course, we try to use this in our discussions when we are buying something, when we're selling, we tend to try to forget about it. This is, of course, a discussion point ongoing, we basically have to wait and see exactly what's happening. Yeah. Difficult, really. I trust you understand that this is a little bit up in the air at the moment, it's a discussion point on the valuations.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Klas Bergelind of Citi. Please go ahead. Your line is now open.
Yes. Hi, Peter and Ulf. It's Klas from Citi. I have a couple of questions, please. First, on Trelleborg Offshore & Construction, just so we understand the moving parts, you saw deliveries slippages, but you say that the savings are coming through. I want to understand the margin impact. Organic sales down 19%, which was in line with expectations, the margin was quite a bit lower. Out of the backlog, are we looking at, was this a weak price quarter? Was it mix? On the new orders that you're taking now, which gives you visibility into the second half of next year, is pricing higher on those orders than what is leaving the backlog right now, or is the cost and volume effect mainly that will lift the profitability in 2019?
I think that the profitability is more fixed cost issues and under absorption. Standing here three months ago, we did expect to sell a little bit more in this quarter, we expected the cost absorption to be higher. That is also the challenge here, looking into the 2019 figures, is actually what kind of volume we get. When we look at the direct margin, as we call it, where we absorb the projects with the margin excluding the fixed cost, they're on an okay level. It could be better, they're on an okay level. Really the dependent here is actually how much orders we will get. How much orders will we get? How much direct margin will we get to cover the fixed cost?
That is the big question mark for us, that is something that we need to work on and make sure that we manage in a good way. We feel that we have been cutting costs a lot in this area, we are on a level where basically we don't feel that we should be cutting the fixed cost anymore. It's better to wait until the orders come in. Otherwise, we start to really destroy the overall business, that is something we don't feel is justified at all at the moment.
Okay. I want to come back to automotive. You say 11%. If you break out the brake systems, which is more off the market, more recurring, and then the other business that is more stable versus pure production, what is the pure car production exposure within Trelleborg right now?
Yeah. Probably, I say 60/40 or something like that. Maybe 60 OE and 40 off the market, but it varies a little bit. Also we should be what we call OE. There's also some kind of off-the-market related business in that, when fuel injection seals or something. I should say, we have very limited sales directly to the OEs. We're selling to sub-suppliers, and really with these tier 2 or tier 3 suppliers, some of their business also goes into the aftermarket. Maybe if you group everything else, let's say our best guess is probably 50/50. 50% OE and 50% off the market. Honestly, it's really difficult to give more better figures than that.
Okay. My final one is to come back there on Trelleborg Industrial Solutions and the cost pressures. You said that you had raws on one side, and then you said that costs were increasing there on labor shortages, wages are up. How should we think about this impacting to the fourth quarter? Will it get worse, or to what extent can you offset this through to pricing?
Our ambition, of course, is not going to get worse, that it's going to get better. We know it that we need to watch it more careful, and we do expect some higher inflationary pressure overall going forward. That is something we're working on constantly, of course, with price adjustments and with other kind of ways of compensating. Okay, we note that it's inflationary pressure, but we are honestly not overly concerned, at least not at the moment.
Thank you.
Thank you. Our next question comes from the line of Malte Schulz of Commerzbank. Please go ahead. Your line is open.
Hi. Thank you for taking my questions. To your left, first of all, to the procurement issues, did they particularly impact the organic growth in Sealing Solutions like we have seen it in the last quarter, and can you quantify? Last quarter, we had approximately, you said, 2 percentage point growth impact. What would we have seen if it would have been as you would have liked it? Second question is on the items affecting comparability. How should we look at it going forward? Do you still regard the SEK 250 million as a good guidance, or would you also go there for a little bit lower figure?
On the last question here, I would say that if you need something today for 2019, you should guide for SEK 250 million. What was the first question? Sorry. The first one was the impact on Sealing Solutions on organic growth. Yeah. The arrears. Let's say the arrears as we fall in, basically on the same level. The other 2% you said, I think that's a little bit high to be honest. We talk about fairly small figures, and we will always have some arrears. It's not that it's going to be zero, so I don't know. 0.5% maybe or something like that. It's not really a major thing for us. Once again, I know you're focusing on that, but arrears will always be there. It's not really if we supplied all arrears, then probably we will have another percentage point plus.
It is not realistic to say that you have no areas. Might be if you have full capacity, a lot of availability, we will sell another 0.5% to 1%, but that is not really realistic to end up in that. The important thing for us that we don't feel that we're losing any sales, it's simply that there is a slight delay in deliveries in certain areas due to limitations of supply. As I say, it's not only our bottlenecks, there's also some bottlenecks in supply of some raw materials and all of that. It's not really only caused by us, it's also caused by supply chain in other aspects.
Okay, thank you.
Thank you. Our next question comes from the line of Hampus Engellau of Handelsbanken. Please go ahead. Your line is open.
Thank you very much. I have three questions. Starting off with Trelleborg Sealing Solutions. This business area, I think, continues to surprise on the margin improvements even though that you have downplayed that for some time, especially on the second half. Could you maybe discuss a little bit about the 90 basis points margin improvement? I mean, how much is price realization cost? Of course, we saw the volume growth during the quarter. That's my first question.
If I understand right, the growth in TSS is very wide. We cannot identify aerospace doing very good. We have some industrial segments doing also very good. We continue to benefit from construction equipment part of it. It's really widespread. I cannot really highlight a specific segment. It's not a specific segment explaining it. It's really a growth all over the place. We continue to work what we call an Advanced Delivery services, adding more services to our supply. We might be sorting small assembly, packaging, clever packaging, some RFID solutions, some automatic feeding into the production line. It's a wide variety of activities. You must not forget that within Trelleborg Sealing Solutions, we have close to half a million active articles every year. Of course, there's none of those products which is really driving the overall sales.
It's really widely spread among a lot of different, let's say, A big order within Sealing Solutions is EUR 1 million. That is a very big order. Most of the orders here is a few hundred thousand EUR on annual supply. Then if you compare that to the total figures, you see it's not really any major impact from any individual sales.
On the margin improvement, is that mostly volume or is it price and cost during the quarter?
No. I think it more volume-oriented. Honestly, Hampus, we continue to invest. We continue to grow, as I said, we continue to invest in our, let's say, innovation center. We continue to grow our presence in the aerospace area. We have been investing quite a lot now into medical, which we don't really see the benefits of. I think the actual drop-through, I trust you see the figures and you know that we're working with fairly high gross profit levels. If we were interested in simply seeing the full drop-through, you will see more than this. On top of this, that you see this drop-through, that there is also quite a lot of investments in selling expenses and R&D.
If I move on to Wheel Systems then and maybe coming back to the U.S. operations, where are you now? Could you maybe talk a little bit about volumes, et cetera, how you're breaking into that market?
Yeah, we are still not where we wanted to be, let's put it like that. We are quite far away. We would like to grow more. I should say it's been good in certain aspects, but not that good in other aspects. Overall, we are still, should say, a little bit behind plan, to be honest. If we looked at the plan we had two years ago, we should have been a little bit longer, but we're moving in the right direction and we feel certain that we're going to get there. Eventually, we're going to get these market share gains that we are aiming for. It's also a little bit, I should say, the competitive situation in U.S.
is a little bit tricky at the moment due to these import duties and tariffs and all of that we need to be aware that we don't underprice and we don't overprice. It's a little bit turbulent in that aspect. Overall, I should say there is more to do than what has been done. We still see that as kind of an uptick. Once again, it's a little bit turbulent at the moment due to these imported tariffs. In certain tire segments, there is quite a lot of imports from Asia, which has been hit by these tariffs. We are not exposed to that, but then, of course, we are also partly exposed to it, I should say, but we are working through that. The majority of our sales in U.S.
is not impacted by that, and then we need to make sure that we position ourselves in the correct way. It is a little bit both challenging and showing quite good opportunities to improve it there as well. That's something we're working on, and Ulf and myself was there only a week ago.
Yeah.
This is something we decided at the end that we're going there today as well, and partly of that is also linked to this situation.
Okay. Unfortunately, we're running out of time. Any closing remarks?
No, only to send the message again, a solid quarter for us. We are growing sales. We are growing profit more than sales. We're showing the highest sales ever for Trelleborg, highest profit ever for Q3, highest margin ever for Q3. Cash flow slightly down, but that is linked to decisions by us to do CapEx into growing into a better structure. We are confident, but with some, of course, humbleness that we need to identify that the markets are a little bit more unstable at the moment, and there is also some, let's say, happenings outside of the actual market which might influence the business. We need to stay on our toes, and we need to make sure that we continuously adapt and continuously change where we would like to change and where we can change. That is really the message.
Thanks to all of you, and looking forward talking to you again.
Thank you.
Thank you.