Ladies and gentlemen, welcome to Trelleborg conference call. Today I am pleased to present Peter Nilsson, CEO, Ulf Berghult, CFO, and Christofer Sjögren, Vice President Investor Relations. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question and answer session. Christofer Sjögren, please begin your meeting.
Yes, good afternoon, everyone, and welcome to this brief update on the coronavirus's impact on Trelleborg during the first quarter of 2020. With me today, I have CEO Peter Nilsson and CFO Ulf Berghult. I trust that you all have had the opportunity to read our press release, which was published today at 11:00 CT, and which also includes a Q&A attachment. Before we start, let me just give some information on today's call. The purpose of this call is to shed some light on the current situation, as well as looking back on the development in the first quarter. We will limit this update to the first quarter, i.e., we will not release any financial guidance on the second quarter and onwards. It is also our ambition to include a guidance for the second quarter in our upcoming quarterly report, which is due out on the 23rd of April.
In this dynamic situation, Trelleborg will not do any more updates on the performance in the first quarter besides this update call until we release our Q1 report. Now, following CEO Peter Nilsson's remarks, there will be an opportunity to pose some questions to both Peter and Ulf, and we kindly ask you to refrain from asking forward-looking financial guidance questions. With that said, I welcome Peter to address the development in the current quarter. Peter?
Thank you, Christofer. Thanks all of you for joining this call, which we decided to do simply to try to be transparent and open about the situation which we are currently in. Trust all of you is well aware of these turbulent times that we have had here over the last month or so, and of course, the situation is changing daily. Of course, we have been continuously tracking the development and continuously also following the Trelleborg very decentralized model. Of course, we have been managers on all levels adjusting and changing their setups, and we have, of course, implemented measures all across all our units in order to address this new situation.
We are extensively be using all kind of measures like layoffs, worse shortened working hours, temporary closing of some facilities, either due to governmental laws or instructions. Also, of course, in some situations, we have also closed factories due to that our customers have been closing their factories. We, of course, also in this kind of turbulent time, of course, increased our focus on cash flow and thereby, of course, working heavily on the working capital and also been addressing all CapEx as being discussed. This is something also unique situation for all the parts of Trelleborg, so a lot of actions ongoing, having daily calls every morning, update calls on what is going on, both country-wise and also, let's say, organizational structural-wise through our business areas.
This is a kind of a very active period for us, but nevertheless, we decided to give you this call and give you an opportunity to ask questions. We should, of course, as usual, try to be as open and frank about our questions as we potentially can. As Christofer mentioned, we're living in a quite volatile environment, and it's difficult really to give any guidance ahead. That's why we don't really want to give any guidance ahead at the moment since we are simply changing our view here daily and implementing actions in accordance with our daily updates. Also, in this, since we have received a lot of questions, we are also clarifying our financial situation in terms of what kind of financing we have in place and what the overall covenants of this financing. Happy to discuss this further and explain to you more.
This shouldn't really be news. It's been in our annual report, but nevertheless, happy to clarify any kind of outstanding questions in relation to this. This is really, I think I end here and then opening up for Q&A. Please go ahead and shoot questions.
Thank you. If you wish to ask a question, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel. That is 01 to register for a question. Our first question comes from the line of Klas Berglind from Citi. Please go ahead. Your line is open.
Yes. Hi, Peter and Ulf. Klas from Citi. First of all, thanks for the transparency and the call. It's good to see. The first question on Industrial Solutions versus Sealing. You talk about a significant downturn in Industrial Solutions towards the end of the quarter versus Sealing Solutions. Negatively impacted by weaker demand towards the end of the quarter. That to me feels like Industrial Solutions much worse than Sealing, so far at least. Just as an indication, and this is not forward-looking, this is towards the end of the quarter. If we reflect back to the financial crisis, to me that feels maybe for Industrial Solutions down 30+, maybe 40% in March, and maybe down 5%-10% for Sealing. Just to get a feeling, Peter, for what's going on at the quarter exit.
Yeah. Let me explain, because the difference in business, and that is maybe also some general guidance for all of you. I mean, the businesses which is more exposed to kind of distributors, dealers, is the one that's been, let's say, hit the most here at the end of the quarter. We have some businesses within Industrial Solutions, we take exposure to this, like rubber sheeting, like industrial hoses and some other areas. I mean, they have been hard hit on the dealers and distributors being much more careful. Where we have more line feed in a way where we kind of feed straight on to the assembly lines, and like that Sealing Solutions, that is, let's say, less hit by this. I mean, it's difficult at the moment, Klas.
I understand that you're looking for guidance, but I don't really want to give any further kind of figure guidance than we give here. It's simply that Industrial Solutions is a little bit further down than what we see in Sealing Solutions. With all that said and done, also like everybody else has been stated, the order books actually looks quite good, but we don't really believe in the order books. That is the challenge for us at the moment.
Yeah. That's very clear. Sealing can, of course, weaken ahead. My second one. I'm not going to ask for guidance, I still want to hear your comment on automotive, Peter, and aerospace too, end markets that will really nosedive. You have the brake systems business, which is more like aftermarket in the automotive business. What is your total autos exposure that is purely linked to car production right now? Do you see the aftermarket type business taking hit as well on less utilization of the fleet? Aerospace during the fourth quarter, you were still pretty optimistic versus the 737 MAX shutdowns. It's a very different picture now. Have you seen any impact in aero as well? Just through the quarter, no guidance through the quarter.
No. The challenge here, I mean, also in order to be fully transparent, the order book still looks good for aerospace, if you like that. The order book still looks relatively okay for the automotive. As you know, the general automotive is that you're working with these eight-week schedules. Eight-week schedules is kind of a legal commitment, if you may say, from the automotive suppliers. We are, of course, discussing individually with them in order what to deliver and not to deliver. I mean, the major drop, it's not like it's a full stop when this has happened. Of course, we expect it to go down dramatically here if you look for the full Q2. The major drop here at the end of the quarter is substantial, but it's not like it's a full stop for the automotive.
With that said and done, I mean, our automotive exposure directly to OE is likely less than 10%. 88% or something like that of our total sales. That is not a full stop. Don't get it put out because there are still these eight-week commitments and then, of course, individual discussions whether to supply or keep it. The different OEs is acting in a different way in this respect, to be honest. That is where we have individual discussions with each of them. As for aerospace, it's also kind of a slower stop also there. We expect kind of not any major impact for that in Q1, but the major impact we will also there happen in Q2.
Okay.
Also there, the guidance is that you're relatively okay in Q1, even though we have seen the last year, March, where there is some downturn. That said and done, on our aerospace, I think if we go back to last year, we had some kind of extraordinary growth in that. Of course, year-on-year it's going to be down. At the run rate compared to, let's say, last quarter, is not really that much down.
My third and final one is on staff and the situation. Could you say anything about how many employees are now under short-term working? How many temps have left the group? I appreciate it's difficult to talk about layoffs, but from other countries.
I mean, let's put it like thousands of people is on short-term week, and we have given notice, and we have salary cuts. I mean, that's happening all over the place. I mean, we have cut our salaries at the head office. All of that is already happening. To give numbers, thousands of people is impacted by this, and already been impacted for a few weeks. That is not kind of something we have been waiting in doing. That is kind of we do weekly updates. In Sweden, of course, you have official figures. I think as of yesterday, it was some 600, 700 people in Sweden who was among our employees who was given the same notice on short working weeks. That is the thousands of people impacted across the group.
Once again, it's a daily and also depending, because the legislation and the systems are different in different areas. In some areas, you can apply for short working weeks, you cannot give notice. In other areas, you can go short working weeks and notice. In certain legislations, you don't have to give notice. You simply ask people to go home. That is a lot of difference on the various countries. We are running a daily update country by country, and also in parallel thereby, the operational organization and business area. Daily we run through the action plan on business area level, and we also run it through on country level, because on country level, you need coordination in accordance with the local legislation and rules. It is a matrix that we're running in that respect.
Thank you, Peter.
Our next question comes from the line of Erik Golrang from SEB. Please go ahead. Your line is open.
Thank you. I have two questions. You write in the Q&A material that the earnings trend has been relatively stable. The question is for what period and stable compared to what? Is it an absolute number compared to a year ago, last quarter, margin compared to a year ago, last quarter?
January, February, as we said, was in line both in terms of margin and absolute earnings, you may say. Of course, we've been dropping a little bit in March. March is also sales down. We expect a margin drop year-on-year, but it's not trending relatively stable, and that is what we're seeing. It's not a drama, but when we refer to it, of course, the reference is previous year.
Okay. Thank you. The second quarter is on this strike that you're seeing in industrial. What did it concern and how much of an issue was that in terms of earnings and sales?
In Turkey, it was about a salary. High inflation in Turkey, it was really a salary discussion. While in France, it was more a general strike that created some problems. There are independent reasons for those. It was simply that it was hitting one of the areas hard since we couldn't really ship or sell for over a week or so.
Okay. The last question, similar organic decline in wheel as you saw in Q4. We realize that the production announcement from the OE had come very late in the quarter, but you didn't see an impact on the aftermarket and so on towards the last part of Q1 there?
Limited, very limited. There was simply the last two weeks or something of that where we saw the OE impact. Also to note is compare quarter-on-quarter, of course, in this quarter as we indicated after the full year call, we all have been manufacturing basically in line with the sales. We don't have underproduction in this quarter.
Okay. Thank you.
Our next question comes from the line of Agnieszka Dylewska from Nordea. Please go ahead, your line is open.
Thank you. I have a couple of questions. Starting with your current production capacity. Can you tell us how much it is closed as of today?
I don't know. I've not checked the last hour I say because it is a daily activity, but in total, I should say vast majority of our factories is up and running. We have some factories with a high absenteeism and there's a lot of people being away on sick leave and all of that. In total, with a very few exceptions, we have been able to supply what the customer is asking for. Our concern is not really the production capacity at the moment, it's more to support our customers for the time being. We are supporting.
As is daily, we had a regulation in Italy a week ago where we were allowed to keep open, but now in Italy, the unions are pushing for a closure, and so that is being discussed on how to solve it, and these kind of discussions we have in a mode. I think in total, I think we have at the moment something between five or 10 factories closed, where a few of them is actually our own decision and a few of them is by authorities. It's changing daily, Agnieszka. It's really difficult to see because the challenge is not only the legislations, we have also in several countries also now with unions is pushing.
In most places we have implemented very good measures, and we are well ahead of the asked for measures and asked for initiatives to protect our workers. We have very strong support from our local unions. Sometimes the central unions is pushing in a different direction. That is a negotiation that we are managing in a lot of locations at the moment.
Yeah. Understand. Have you seen any supply chain issues for your guys?
Not really in and out. We don't really have any incoming material problems anywhere. We have had for a few days in Italy before it was sorted out when was actually closing the border and all of that, what is needed in terms of documentation. That was not really a big issue, and outgoing has also been fine. Outgoing, the freight expenses have been going up, but we have never really missed any delivery due to the fact that we couldn't find trucks or we couldn't find any ways of moving products. Of course, it's happening, but in most cases, when it's actually a problem, we have been able to find mutually acceptable solutions with our customers. With that said and done, we can expect because now we've been running only for a few weeks of problems and we expect
That to be a problem going forward, at the moment, we don't really see it coming anywhere, to be honest. We have a few cases in Sri Lanka where the port was closed for a few days. We have in Italy now coming up a little bit potential problems. Once again, it's not really been unsolvable problems up until now, at least.
Yeah. Perfect. Then some questions on the balance sheet. You have some loans that are maturing in 2020 and 2021 of about SEK 4 billion according to your annual report. What is your assessment of the credit markets for you right now, and would you consider drawing down on the RCF that you have just to roll the loans?
The basic is that we have The RCF is a backup on the short money, so let's say. If we will have a problem with the short term money, then we will, of course, then utilize the RCF. So far, we have not utilized the big RCFs and we have increased the liquidity. We have good liquidity, and we have the strategy in place, let's say that we have long-term facilities that will have backing up the short-term facilities.
Otherwise on the cash flow, obviously you have now postponed part of the dividend. You also mentioned that you could consider some CapEx cuts now in the current situation. Can you just elaborate on that?
I don't know what you refer to. We are cutting CapEx and the dividend is a decision for the AGM. That is something with the proposal is as it is.
Yeah.
Of course, from the CapEx point of view, we are very strict on CapEx going forward. We only allow more or less critical CapEx that's going through the system.
At the moment, yeah.
At the moment.
What's the maintenance CapEx? Yeah. What's the maintenance CapEx that you have? If you could remind us about that.
What we normally say is that we have the underlying base that is about 1.1 billion SEK in depreciation, which they normally would be allowed then to spend. On top of that, we individually, we approve strategic CapExes, but even that 1.1 billion is then cut. Right now we only do what is necessary for not harming the business on short term and yeah.
I think, Agnieszka, We've been working on this now for a few weeks, and we have given instructions to minimize the CapEx, and we have not really to full scope at the moment able to give you new guidance for the full year CapEx. It's simply that it's going to be substantially lower than the previous guidance, but we cannot see exactly how much at the moment.
Yeah. Understood. Thank you. Our next question comes from the line of Hampus Engellau from Handelsbanken. Please go ahead. Your line is open.
Thank you very much. Two questions from me. We've seen a lot of announced production stops as of around 25 March among OEMs and many of your customers. I'm sure you have gone through this by company and by customer. Would it be possible for you to maybe shed some light on a proportion of your customer base that have actually announced production stops ranging from two to four weeks coming into second quarter? Second question is on the oil and gas, of course, given that the major drop was in the oil price. How has that changed how you operate your business under development? I'm speaking, of course, of the offshore business. Thanks.
Yeah. The production stops is fairly small size production stops which has been decided at the moment. Of course, we have the automotive at less than 10%. We have a recent announcement by several of the original equipment for agriculture, and then of course, following down the line. At the moment, we are not impacted by that, and we are watching it daily. As you say, it's basically only the second part of March where this has been an impact for us, and difficult simply to give any kind of guidance of how much it is at the moment. It is once again a daily change, and you are agreeing on various special arrangements to do it. I cannot really give you a percentage of that. The only thing where it's heavily impacting us at the moment is automotive and then going forward also agri OE.
That is probably the biggest two areas. Beyond that, we have not seen a lot of impact for smaller factories in France or smaller customers in Spain or Italy, which I think is the three countries which is mostly affected outside of automotive. The second question, oil and gas. Oil and gas, we still, as we say, we have a good order book, and we have not yet at least seen any kind of major, not any kind of stopping on these running projects. As you know, we're moving into this quarter with a fairly sizable organic growth compared to a year ago. The only thing, of course, where we have been site jobs, support of our offshore activities, site installations and all of that has been stopped, and we are watching.
There's still a lot of pending projects in the market, and we have not really seen a stop of that yet. Of course, we are expecting that, and we are.
Kind of adjusting our cost base and then looking into what to do to adjust. For what we can see at the moment, it's not going to be a major impact, at least for the next one or two quarters. That is kind of beyond that we're going to see from oil and gas. Overall plan for this business under development is still the same. Of course, it's not improving the situation for oil and gas, what is happening now, but our plan was still to wait until we will have this a bit better order book in this, which might not be happening now. Of course, we're looking now into more wintering.
As you say, also the other big part of business under development, Printing Solutions, is probably the one business which has been least impacted actually with this corona, since you're printing more newspapers and you're printing more, and it's been deemed as a kind of a critical business by most governments. They are still supported, and they are actually doing very well, all considered.
Thank you.
I remind you that if you would like to ask a question, you will have to press zero one on your telephone keypad now. Our next question comes from the line of Klas Berglin from Citi. Please go ahead. Your line is open.
Yes, thanks for taking the follow-up. Just a few ones. One for you, Ulf, on working capital. How should we think about this in a downturn? Do you feel that you were overstocked going into this in certain segments? Inventories to sales have come down the last two years, but I still want to ask. On receivables, some companies in this space use factoring, which can create some unusual year-end swings. To what extent do you outsource the collection?
On receivables we don't have any factoring. We also mentioned then in Q4 on wheels, Sweden, one of the hits on the P&L was that we took down the stock. Overall, we still have some trimming to do on the inventory, but it's not a major one. The major one was then to trim down wheels in quarter four. Part of the actions that we're doing, that we have a special focus on not building stock or kind of creating a future problem. Also then we have a special view on overdue receivables, so we don't want to end up with future problems. People understand all the business areas, the three business areas and also the budget. They have clearly understood the message that cash is king, and also they have a high focus on working capital.
As in general, Klas, I can only comment that this is high on the agenda. It's been high on the agenda for some time, and we feel we have good control of the working capital. Overdue is on a relatively low level in all comparisons. Of course, we expect that we need to watch it a bit further than usual, but we have been watching it quite good, and we have been managing it quite good. We have fairly limited problems in the account receivables at the moment. Of course, we expect it to increase, and we need to watch it going forward. Also, like Ulf commented on inventory levels, we have been working on the inventory for quite some time, and we don't feel that we have any kind of excessive inventory.
Of course, it's always a challenge if the business goes down, we need to also underproduce, but that is something also that we are prepared to do. We don't really want to save the EBIT by overproducing. We're going to adjust our production levels in accordance with the demand we see in the market. We feel that going into this quarter, we are, let's say, running at a good level with good control.
Yes. Of course. I know you will underproduce in a downturn. I was more thinking outside of wheels. You've done a really good job on wheels, it seems to be okay outside as well.
Yeah.
On just oil and gas, can you give us a feeling for how much. Because it is difficult for us to break it out completely. How much have we recovered from the trough, Peter? I guess that's our starting point, thinking about how much we pull back to. Okay, guidance again, I'm not saying that, are we up 30%-40% from the trough, or?
Yeah, I would say even more, I guess, from the trough. I don't have the figure. I don't know. Christofer is on the line as well. I don't know, Christofer, if you want to comment on that.
Well, it's a very tough question to answer because, as you know, our structure of that unit has changed a lot also. We have downsized. I would say we are away from the trough and away from somewhere in the middle between trough and the peak, I would say.
Okay. Thank you.
Okay, next question.
Our next question comes from the line of Malte Schulz from Commerzbank. Please go ahead. Your line is open.
Hi. Good afternoon. Thank you for taking my question. First of all, maybe on your hedging results, because you now require a lot less input materials as well, I assume, if you downsize your production, do you incur some hedging losses on some commodities which have fallen, but you don't regain these advantages as by cheaper procurement? A second question would be, you touched already on your transport cost, but can you quantify maybe a little bit over the past two weeks by how much your transport cost has on average maybe increased? Do you also face any late delivery payments? My final question, if you might be able to shed some more light on your current liquidity. You said it's quite strong, but can you also provide us with a number how much liquidity you had available as of yesterday?
On the raw material hedging, generally we don't do raw material hedging. We don't really have any long-term commitments on that one. We feel we are very flexible, and we feel that we are in a good position now. As I trust all of you know now, oil prices are going down. At the same time, demand is going down. We have a very, let's say, volatile development along the raw materials, and I think we are in a good position to benefit from this. Of course, the problem is that we manufacture less, but that is something that we are working on, so we don't feel any problems there. On the transport cost, it's kind of negligible.
I think that the crisis here on the transport cost was more actually in the first one or two weeks of this, but it's been naturalized in the last few, in the last week or so, the transport cost is actually going down again. That is because new setups is being arranged, and also in the beginning it was a lot about import/export and these closed borders, how to manage it, what papers do you need, what is the routine to go through a closed border, all of that. Most of that has now been settled and established kind of a structure around that. This I see it okay. We're probably going to pay a little bit more for the transport, but it's not really a noticeable cost for us at the moment. Sea freight is getting actually cheaper, so there is a benefit in that.
There is a little bit balance, but not any major thing. What was that? Liquidity, we don't really want to give a figure.
We feel that it's adequate and we have sufficient.
To cover, yeah, for now and for the future. We don't see a liquidity problem approaching unless the whole bank system falls into pieces. Of course, it's something else.
Yeah.
We don't really see us from a balance sheet perspective, having any kind of liquidity problems. We are ready for tough scenarios in that respect. Malte, what was the final? Maybe I missed the question here.
Maybe if you allow one more. Have you been already approached by some clients to delay payments or by some suppliers that you help them a little bit as you are more stronger financial company that you help them a little bit with either paying earlier or receiving payments later?
Nothing like that at the moment. It might come, and then we need to have, let's say, pragmatic discussion and decide whether we want to support or not. At the moment, it's really not on the table, and we have not seen any kind of slide on overviews or anything so far. We are monitoring it closely, of course, but we have not been given any indication basically from anywhere that there is kind of a major shift. Of course, always customers difficulty paying, but it's not really any more problems at the moment than it was six months ago. We don't really see any change in that at the moment. Of course, we are prepared for it, and we are watching it much closer than we have been watching it close, but it's getting even closer watched now at the moment.
Once again, so far, no issues identified.
Okay, thanks.
Our next question is a follow-up question from Agnieszka Vilela from Nordea. Please go ahead. Your line is open.
Thank you. Just to follow up on Erik's question about the earnings trend that you see. You said that you referred to year-on-year kind of thinking here. Looking sequentially, Q1 margin is usually, say, 2 to 3 percentage points stronger than in Q4. Q4 this year or last year was affected by the weakness in wheel to a large extent. Do you still expect basically that the margin will improve from Q4 in Q1 and quite substantially, despite the things that are happening right now?
Now you're trying, Agnieszka. No, I understand it's challenging for you, but it's also, I trust you need also to respect it's also not that easy for us.
Right.
This is what we can guide you, and we don't really want to give you any further guidance on that. I'm sorry.
Okay. stable earnings, you mean quite stable than year-on-year?
Quite stable in terms of margin compared to a year ago. It's getting a little bit hit, but it's not really a major hit that you could in worst case scenarios.
All right. Thank you.
There are no further questions registered, so I'll hand back to Christofer Sjögren for any closing comments.
Okay. Thank you very much. Let me wrap up this call by thank you all for calling in. We at Trelleborg wish you all to stay safe, and let me remind you once again that we are now entering our silent period. Trelleborg will not do any more updates on the performance in the first quarter until we release our Q1 report on the 23rd of April, and we'll talk to you then in a few weeks' time. Thank you very much. Bye.