Edited Transcript of TREL B.ST earnings conference call or presentation 26-Apr-19 1:00pm GMT

EBIT, SEK 1.295 billion corresponding to a margin of 13.8%, already commented on that. We had also, as usual, some items affecting comparability at SEK 20 million, which is kind of lower than the annual run rate, but it’s in line. We still keep the same guidance as before. Ulf will also comment on that and confirm that later.

Cash flow. A little bit lower than last year impacted by higher CapEx but mainly then what you call — we call a higher seasonal working capital, which means that we have a higher — especially accounts receivable is higher this year compared to a year ago, which means that we expect that this working capital is kind of in a good spot and that we expect to get that back throughout the year. So this is not really an indication in any way on a lower cash flow generation. Cash conversion then, obviously, gets a bit lower in the 70%. Once again, we expect that to move up throughout the year. We also noted satisfaction here beginning of the quarter and impacting the sales and profit in the quarter.

We have completed acquisition of Sil-Pro within Sealing Solutions, and thereby by this following another string of acquisition the last few years. Now we are establishing ourselves with a nice platform for medical and health care. And that this kind of approaching — medical health care now is approaching some 10% of sales within Sealing Solutions. So that is a nice move that we’ve done in the last few years, which has done strengthening our position in for us attractive market segment.

So that is kind of the overall headlines. And then moving to the next page, Page 4, commenting a little bit about organic sales. Then we note that organic sales although lower than a year ago still holding up very well in Western Europe and North America. Other Europe down, nothing really strange in that. That is a normal South and Other America is also fairly small for Trelleborg. Asia is the part where a little bit lower than we would have liked it to be and where we have some lower sales in this quarter compared to the run rate before, although we don’t see this as a kind of a change in direction in any way. It’s simply an individual quarter measurement here. We expect it to get better going forward.

Turning then to Page 5. New agenda point, business areas.

Moving on to Page 6, and commenting then on the first business area, Trelleborg Coated Systems. Organic sales down by 3% and then compensated by strong structural growth following acquisitions last year, ending up with 11%, also then supported once again by the currency, but up by 11% year-on-year. And as you know, we have 2 main businesses in this, which is coated fabric, which is basically unchanged, where North America, as you can see yourself, with a little bit change throughout geographies, but nevertheless a good development in this segment.

Printing blankets, weak in the quarter in terms of sales, which then, of course, interpret that this is the area which brings down the organic growth in this business area. We expect part of that to be linked to some inventory adjustment to our customers. So we don’t really see this as a trend, continuous trend going forward. EBIT up, but linked to the acquisitions, but we also note a little bit that we have a small mix if you hear that it’s pushing down the overall margin a little bit, but nothing really strange in this and is simply a move in the right direction overall for Coated Systems. So we feel, I say, strategically very satisfied with the development we encountered.

Moving onto Page 7. Good organic growth is the heading, but weaker margins. And the margin here is, as I will relate to it, still impacted by these challenges or inefficiencies that they have in the Czech plant, which was also impacting us in the last quarter. Overall, organic sales up by 4% and then supported also with currency.

Construction-related segments, positive; general industry, a little bit mixed. We note also that we have a positive sales here in Europe and Asia, slightly weak in North America, not really big differences. And the EBIT and margin, generally it’s good. But the year-on-year impact is that we are hit more with these challenges we have in Czech Republic, which we, of course, working very hard to correct and where we have several actions ongoing. And we kind of expect it to be better step-by-step going forward.

We also note that within this area we are establishing to integration actually happening this month both in U.S. And India and U.S. then consolidating 3 smaller factories into one bigger, which then creates more efficiency. But it may be more important, the better kind of strategic opportunities, better capabilities to support our customers and better capabilities to really bring new business in.

In India, it’s pure — it’s a pure expansion, which forced us then to move to a new facility where the main activity for India actually is antivibration components or Indian railway where we’ve done — are getting orders and that we need to create a bigger facility in order to support this growing segment of ours in India.

So moving over to Page 8. Offshore and construction. Organic sales down by 8%, which is still a lot down, of course, but still getting better and better. As we have indicated before, we are now seeing improvements here. But in the individual quarter, we are, of course, hitting here, also losing on EBIT because of these lower sales and particularly in offshore, but also a little bit in infrastructure segments. And that is, of course, pushing down both the EBIT and the margin. But also here, we noted satisfaction with it [as before]. The order book continue to grow both for offshore and infrastructure segment. Then we are, as stated before, getting more and more confidence that their recovery is on the horizon. And we’ll still firm that it’s going to get better and better by quarter and also that by the end of the year that we’re going to turn into profitability again in this business area.

Turning to Page 9. Trelleborg Sealing Solutions. Organic sales flattish, but with structural growth of 4%. We have North America developing nicely. Europe and Asia slightly softer. General industry flattish. You can read — you’re reading yourself, automotive weaker, aerospace strong. So there is some mix, as you see, about geographies. And segment-wise and also from the acquisitions, we also have to note when we look at the EBIT percentage that what we are acquiring is actually mix-wise bringing down the margin a little bit here, which, of course, we don’t expect to be lasting. And that is something we’re working on in order to improve and get it back, so it’s not really pushing down our margin in a negative way on a medium, long-term. Already commented Sil-Pro. Of course, satisfactory, now once again, creating a good platform for us in medical and health care. And now we are getting on a pro forma basis close to 10% of sales from Sealing Solutions coming from medical and health care segment.

Turning to Page 10. On Wheel Systems, good organic sales, you can say 3% and a good structural growth as well. And on the top of that also some currency, which pushing up the sales by 11%. Agri, smaller — relatively small figures, but still positive agri sales in Europe and North America, while it’s softer in Asia in the quarter. And while the other segments, 2 segments here, industrial and construction continue to grow. Margin here, a little bit dramatically down in a way compared to a year ago, primarily driven then by some price increases, which kicked in during the quarter. So we’re going out of the quarter with a slightly higher margin than we actually have for the full quarter, driven by that we have to — had to increase prices in order to compensate ourselves for raw material pricing. And it has been happening, and it’s been implemented, so the run rate is slightly higher now compared to what we have for the full quarter in Q1. So that is basically the business areas.

Moving over to agenda. Page 11, financials and then slowly — quickly, moving over to Ulf on Page 12 to comment on the figures.

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Ulf Berghult, Trelleborg AB (publ) – CFO [3]

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Thank you, Peter. Okay. So let me take you through the consolidated group numbers. So on my first slide, Page 12, sales development. You can see that organic growth in the quarter was plus 1% where sales impacted our guidance quarter-over-quarter. And if we exclude for project-related businesses, which was mainly consisted of our oil and gas operations, our organic growth in the quarter was also plus 1%. In other words, project business did not have a big impact this quarter. Structural growth of 2% is mainly coming from Coated Systems and Sealing Solutions. The impact on currency translation was plus 6%.

Next slide, Page 13, describes the historical performance of our organic growth. As you can see on the bottom end of the chart, we have had 8 quarters in a row of positive organic growth.

On Slide 14, you will find a report of sales development by quarter as well as rolling 12 months.

Slide 15 presents our EBIT development. Our EBIT reached SEK 1.295 billion in quarter and was positively impacted by currency translation of SEK 53 million and also from the newer accounting rule, IFRS 16 on the leasing, by SEK 20 million. Negative sales mix and placing of actions to compensate cost increases impacted the EBIT margin in the quarter.

Slide 16 presents the EBIT and margin on a rolling 12-month basis. A stable EBIT margin looking over the period, despite having exposure to many tough markets during this period. On a rolling 12-month basis, we are currently at 13.5% EBIT margin.

Next slide presents the profit and loss statement for the Total Group. Items affecting comparability consist of the restructuring cost [basically] in line with our annual guideline. Financial net has been impacted by negative exchange rate difference of SEK 24 million and effects from interest expense on the lease recognized in accordance with IFRS 16 of SEK 20 million. Our underlying financial net has been impacted by higher interest rates. The tax rate was 26%, and the guidance of — and 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, which was down by 5% to SEK 3.25.

Slide 19 describes the development of our operating cash flow. EBITDA has been impacted by IFRS 16 with plus SEK 96 million. And as you can see, we have amortized SEK 90 million on the leasing debts. The operating cash flow was impacted by higher seasonal working capital and by higher CapEx activity. CapEx is in line with our annual guidance of SEK 1.8 billion to SEK 2 billion.

Slide 20 presents rolling 12-month base — 12 months operating cash flow.

Slide 21 shows the impact of IFRS 16. Opening balance has been impacted by the reclassification of the pension debt from working capital to interest-bearing debt. 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 net debt-to-EBITDA ratio, including and excluding the impact of lease and pension liability. Both ratios have been impacted by higher M&A activity in the quarter and by timing of the dividend payouts. In addition, the operational cash flow was weak in the quarter.

Slide 23 shows the net debt-to-EBITDA ratio and the net gearing development, excluding the lease and pension liabilities.

Slide 24 describes the return on equity where the long-term target is 12%, including items affecting comparability. The actual outcome in the quarter is 10.5% compared with 9.2% year ago.

And then finally on Page 25. I want to finish off this part of the presentation by repeating our financial guidelines for the full year 2019. And as I mentioned, CapEx is then SEK 1.8 billion to SEK 2 billion. The restructuring cost that is in $250 million. The underlying tax rate is 26%. And then amortization of intangible assets, we raised that from SEK 300 million to SEK 350 million for 2019. So that concludes the financials.

So I hand it over to Peter again.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [4]

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Thank you. So then Page 26, summary and Q2 outlook, running quarter outlook.

Turning then to Page 27. I mean as I said, sales developing as expected and then supported, as I said, some exchange rates. EBIT at an all-time high, but we note, and as Ulf commented on as well, that this has been supported with some exchange rates, again, and also with these accounting changes related to the lease contracts. So that means that overall the margin is down, driven a little bit — driven by sales mix in various areas and also with a bit slow compensation for some cost inflation in some areas. But all in all, decent quarter with the expectations on sales in line. We, of course, we’d have aimed for most likely higher margin in this quarter. We’re working hard to compensate for that going forward. Also, final bullet point area, I remind you again about the Sil-Pro acquisition, which is then opening up a nice platform for us in medical and health care within Sealing Solutions. And also we already — which we have already have done also in Coated System, where we also during last year made an acquisition also moving in closer to this medical and health care segment.

Turning down to Page 28. I mean, current no real changes for us in the way we see market conditions. We don’t see, as you say, the market conditions is not really changing going forward. There is some mix issues where we’re going to get back to where we still see some challenges in automotive or vehicle segment, while we see that some other segments will continue to improve, like oil and gas, infrastructure, construction. We then compensate for that. And of course, we continue to stay very close to the operations and very close to the business with a more developed, decent price model, making sure people keep on being very agile and quick in changing if needed.

Continue overall on Trelleborg, of course, to work with our portfolio management and focus on improving or keeping our leading positions. Still some constraints in supply chain in some materials, even though we see softer demand in some areas. We still struggle in some areas to get exactly the raw materials on the time we want. And that is, of course, something also in all of business, which is a challenge for us.

Another area where we continue to invest and continue to learn, as I say, especially with the smart use of new technology and the way we are using that to innovate new products and solutions for our customers. And then we still continue on integration. We did quite a few acquisitions last year, and, of course, we are making sure that we get the synergies and that we get the correct setup for those acquisitions, making sure that they’re integrated in the right way into the existing business. But that is kind of the focused operational priorities for us at the moment.

Turning to Page 29. Commenting on the outlook in the current quarter. We see, also based on a good order — I mean, good and a reasonable good order intake in the quarter, we feel confident that running in a running quarter will be on par with the quarter we have left behind us. So our guidance is that we have a similar demand — expecting a similar demand in the running quarter, quarter Q2 2019, as we saw in Q1 2019.

So with that, turning to Page 30 and then quickly to Page 31 and opening up for a Q&A session. So please operator, guide us through this session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Klas Bergelind from Citigroup.

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Klas Henrik Bergelind, Citigroup Inc, Research Division – Director [2]

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It’s Klas. A couple of questions, please. And the first I wanted to ask you on Coated volumes and are weaker, and it’s only down to a weaker macro backdrop. Printing is pretty volatile there. So I just wanted to ask you, Peter, about your confidence level in reaching the 15% margin target. If you could provide us with an update on the actions, what is needed, and to get there on the timing, please? Do think you need to look at the portfolio by any chance? Are you confident that you can reach 15% as Coated is structured now? I will start there.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [3]

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Yes. I mean, quickly comment that we still remain on the 15% target. I mean, as you know, we’ve made some acquisitions. We see opportunities there for synergies and all of that. So we’re working hard in order to get there. It will not happen this year and — but we are still, let’s say, feeling it’s within reach for a run rate during 2020 for that business. But still, it will entail that we are successful in doing this kind of synergistic actions that we are about to begin to take.

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Klas Henrik Bergelind, Citigroup Inc, Research Division – Director [4]

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So just to follow up on that. During the Capital Markets Day in Stockholm last year, I think you guys had said that the target was within reach. Now that when the production issues were solved in North America, the 400 bps GAAP on rolling 12 months, you said that half of that was explained by the production issues. We are roughly similar GAAP, still on rolling 12. So could you just talk a little bit about the production issues and whether you’re surprised that they haven’t seen much more expansion there?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [5]

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It’s not really a big GAAP. It might look a big GAAP I’d say looking at the figures, but we are now — we are looking behind the figures, but there’s really a few things that needs to move in the right direction. We need — there is a few areas here where, especially on the coated fabrics side, where we have — we need some orders in certain areas. We have had some kind of internal mix issues unfortunate and — but we see possibilities to get that right now. That’s especially related to North America where we’ve been selling into some segments where we — while we would like to have sell into other segments. So that is a little bit mix issue. And on top of that, as I said, some synergistics, some closed down actions related to some of those acquisitions we’ve been doing as well. So it might look that we are far away, but, I mean, it’s not really — it could turn quickly if we have a little bit — if we get business in the right areas.

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Klas Henrik Bergelind, Citigroup Inc, Research Division – Director [6]

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Okay. My second one is on the price increases that you have announced in Wheels. It may be tricky to talk about the next price increase if it happens on this call. But just to understand, to what extent is the price increase you pushed through today enough for the margin to go back to that 14%, 15% level again? It would be good to understand whether there on price versus cost. Is cost now stable? So we’re just waiting for the price increase to seep it through.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [7]

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I mean, price increase — price is, of course, the simplest way to increase the margin. But also we need to make sure that it [fills the shoe] and we get the right volumes. So it is a combination of volume and price increases.

So I mean, we’re always staying close to the market. But at the moment, we are not really planning or see a need for further price increases. But at the same time, of course, we note that oil price is up a little bit. And we know from history that then the raw material suppliers will try to increase prices. And then, of course, that’s going to be linked a little bit to the [demand situation] of successful on that. And as we know — automotive is a little bit under challenge in certain areas. And we know that automotive is the biggest consumer of this standard rubber grades, which is also impacting us in the Wheel Systems.

So we stay close to it, but at the moment, there is no more kind of price increases within our immediate plan, but who knows, because we stay very close to it. And we will, of course, continue to act in a rapid way if we see a need and a benefit in increasing prices. Also to — since we continue, of course, also if we’re talking the margin side, we continue to have cost synergies kicking in. And we continue to have a small support also from that during this year.

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Klas Henrik Bergelind, Citigroup Inc, Research Division – Director [8]

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And just a follow-up. So understand, obviously, raw material. But you started off the call by saying that is raw material and some other cost inflation. Could you just talk, is it wages and a bottleneck somewhere in Wheels we have to be aware of?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [9]

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Not really. There are, of course, some bottlenecks everywhere. I mean, this general cost increase is more than salaries. It’s not really related solely to Wheel Systems. That is an overall kind of cost inflation issue. I was going to say we were taken by surprise, but we are a little bit behind on a few compensations, not only Wheel but also in other areas. For instance, where we have a fairly increase in logistic cost and transport costs and all of that, which also was — surprise is a wrong word, but we’re not really quick enough to challenge ourselves to get fully compensated for that. So that’s in various areas, not only raw materials, it’s salaries, it’s logistics cost, it’s a little bit — I mean you know it as well, as we have seen kind of reinflation pressure, which is a little higher than the last 2 years. And we have corrected it now, but I mean — we have — we could have done better in that aspect. That is simply that you have to be honest to yourself in order to make sure that you improve going forward.

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Klas Henrik Bergelind, Citigroup Inc, Research Division – Director [10]

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Yes. Enough for general cost increase. Okay, good. My final one is an offshore. When volumes eventually recover, because we know that orders right now are up strongly, but with the cost cap being now in place — I’m not sure if you will answer this, but I will try, is it possible on the new cost structure to see the margin back there to perhaps the low double digit but at lower volumes as you have this cost action and as pricing here with the recovering oil price should perhaps stabilize? Just to understand where margins can go to once deliveries increase?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [11]

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But definitely, if we are able to sell at the same prices as we did before, then, of course, we will get back to — above the previous profitability with the, let’s say, lower volume that we had before. But the big but here and the challenge we have, to be very transparent, is, of course, what is the pricing we have here in this uptick of the market, what pricing will we get and what can we get on this product that we’re quoting at the moment. So I don’t think the volume or cost is not the big thing. It’s more what kind of pricing we’re able to get. And we know that as the volume grow, as the kind of bottlenecks starts off to show in some areas, then, of course, the pricing will go up. Because it’s not only volume independent, it’s also a matter of the kind of prices we can get on the products that we actually catch.

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Klas Henrik Bergelind, Citigroup Inc, Research Division – Director [12]

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And my final follow-up then, has the pricing backdrop quarter-on-quarter improved at all with the recovering oil price? Or do we need to see the supply/demand getting more tight for that to come through?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [13]

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It’s getting better, but it’s not on the level as it was kind of before the crisis, yes. But it’s getting better, and it’s moving up in a good way. And that is why we see a double up here — triple up. We say both volumes up, pricing up and cost down. That’s, of course, a combination which sounds very great. But I mean, we need to get, let’s say, the projects on a better price level than before. And we are getting there, but it is a little bit also gamble on how brave you want to be on the pricing and all of that. Because still we and a lot of our competitors still not having the factories full. In certain segments, we already see it in the offshore. But it’s more on the small niches than on the bigger more, let’s say, bulk-oriented sales. So we need them both. So we need a mix in the factories in order to get back to — get closer to this, let’s say, 10% EBIT margin that we are aiming — still aiming for a long term.

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Operator [14]

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Our next question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

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Douglas Lindahl, Kepler Cheuvreux, Research Division – Analyst [15]

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A few questions from my side. So I see that you seem to be reporting some bright spots for the group. Western European organic growth excluding product is improving sequentially, and you’ve now reverted back, obviously, to your default outlook statement. So how do you think we should view your marginally, more optimistic outlook with regards to growth? Is this mainly certain geography that’s driving this? Or is it certain segments? That’s my first question.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [16]

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I know — it’s not really a big change. I know that you’re looking at it a lot in detail but kind of fine-tuning. We had a little bit weaker order intake in Q4. Now the order intake in Q1 is slightly better, and that is why we feel confident that it’s going to be on par quarter-on-quarter. So we’re not really — I cannot see — and we are looking to it no big geographical difference in all of that. North America still doing okay. Europe flattish or flattish positive. And this is — I mean, the guidance is that to remain on this 1% level roughly in Q2 and — but once again, we don’t see that as a major change. It’s simply that we are slightly more confident, slightly better order intake in Q1 compared to Q4. And then segment-wise, I mean, it’s generally flattish there as well. We see a negative in the automotive-related and then we see positive in oil and gas and maybe aerospace. So we shouldn’t forget the aerospace. We didn’t comment on aerospace. It’s still looking very good overall. So it’s not really a big change from our point of view.

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Douglas Lindahl, Kepler Cheuvreux, Research Division – Analyst [17]

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Okay. Going back to Wheel Systems, just briefly. Raw materials here again having a negative impact. Are there any sort of internal efforts you can do to become more agile on adjusting pricing going forward?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [18]

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Well, we need to be quick. But also, you cannot really increase — the challenge here, you cannot really increase the pricing until you — as I see, the price increases — and of course, we are — we need to follow the industry. And I mean, we say that — or should I say without being mean, sometimes some of our competitors get slow in compensating and want to sell out the stock before they are kind of changing the pricing. We are definitely the first one in the line, but nevertheless we cannot really be ahead of the line. So we feel that we are very close to it, and we know what we want to do. So this is, unfortunately, an impact that we cannot really avoid, that we will have, let’s say, a margin impact very short term if raw materials going up and down as well. We have — also if they start to go down then, of course, we will have a positive one. So this is the way it is.

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Douglas Lindahl, Kepler Cheuvreux, Research Division – Analyst [19]

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Yes. And I think Ulf mentioned the synergies from CGS. Are those — can you give an update on that? Are those still on track? SEK 300 million out of 2020…

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Ulf Berghult, Trelleborg AB (publ) – CFO [20]

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Yes. I guess what we then communicated earlier in Capital Market Day. We have tracked in that business platform, which has also then the original business plan. So as Peter mentioned, we will have further synergies coming in, kicking in, in 2019.

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Douglas Lindahl, Kepler Cheuvreux, Research Division – Analyst [21]

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So in terms of the magnitude of the synergies in 2019, that should be comparable to the magnitude of the synergies you saw in 2018, is that correct?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [22]

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I mean, we attempted — We [accounted for] we should maybe have it here, but we don’t — I don’t have it in front of me. But…

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Unidentified Company Representative, [23]

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Yes. It’s incremental in ’19 than in ’18.

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Ulf Berghult, Trelleborg AB (publ) – CFO [24]

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But I think the details is in this presentation. Either way we will look at it off-line. I don’t remember by my head, but I mean, otherwise, it’s — you can go back and look at that, and then you’ll get some details on what kind of more money we talk about.

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Douglas Lindahl, Kepler Cheuvreux, Research Division – Analyst [25]

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And just the final question on one-offs. You had very — quite low one-offs here in the quarter. And you’re guiding for SEK 250 million for the full year. Ulf, should we expect most of the one-offs coming towards the latter end of the year? Or is maybe the SEK 250 million number a bit high?

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Ulf Berghult, Trelleborg AB (publ) – CFO [26]

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No. SEK 250 million is in line. We always — right or wrong, we always guided. We don’t book it according to you — kind of an equal number on quarter basis. We book them when we take decisions. And we had a board meeting today, and we kicked off some of them today. So they will be coming in, in Q2 and Q3.

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Operator [27]

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Our next question come from the line of Erik Golrang with SEB.

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Erik Pettersson-Golrang, SEB, Research Division – Head of Research for Sweden [28]

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I have one question. And we’ve been on the topic and I want to go at it again on the margin development in Wheel Systems and the inability to compensate fully through the quarter there with price. It’s just — at least, if I’m not mistaking on the kind of raw material volatility we’ve had leading up to this and looking at historical patterns, this sort of stand out as clearly worse in terms of managing it and being able to raise prices. Is it a more — and that would indicate that it’s a more competitive situation there or that your competitive position has deteriorated, but — is there anything to that? Or I mean is it more price pressure in general, more aggressive behavior from competition?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [29]

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We don’t really like that, Erik. I mean we have, let’s say, increased pricing during quarter, but it’s kind of not kicking in until — so we have a better run rate at the end of the quarter than compared to the beginning of the quarter. We don’t really see it in the same way as you describe it.

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Operator [30]

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(Operator Instructions) Our next question comes from the line of Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division – Equity Analyst of Industrials [31]

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Just a couple of questions left from my side. And you already talked a little bit about on the Czech side. Is it something or when are you confident that those issues completely resolved? Is there already some plan at mid-quarter, at end of quarter? And maybe then also on the other side, I mean, on the M&A side, is there anything [launched] to expect? I mean, you still hold a relatively big cash position on your balance sheet. So anything you’re working on it? And on the offshore side maybe, can you give us an idea now on your current take? Is it still so that you expect a significant improvement during Q2? Or will it be rather than in the Q3 end of the year?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [32]

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Starting with the offshore one. And the guidance that we have done before is to find order intake is good. We expect improvement throughout the year, but it’s not going to get into some kind of positive territory until end — later end of the year. Second part of the year we can say, but we are still — I mean there is a lot of order still pending, and we’re working on that. But that we feel higher activity level and we feel more confident if we put like that in our guidance as the weeks go. So we feel that it’s going to be a substantial improvement throughout the year but not really an immediate. We — once again, guidance stands that it is going to be substantially better second part of the year compared to the first part of the year. It’s going to be a sequential improvement throughout the year.

So that is probably the guidance I can give. We also know that this is individual invoicing in quarters and all of that. It’s really difficult to give a really clear guidance, especially what was going to get in, in each and every quarter.

Moving backwards in a way. M&A, I mean, we continue to see plenty of M&A opportunities, nothing big. As we said before, we’re not really looking for any kind of major here. It’s more bolt-on type of acquisitions. We note that there is a scarcity of bigger activities. And we see bigger M&A opportunities, and we think in certain processes that we’ve been in at the moment, I have to be honest to say that we think the valuation is too high. So we are kind of stepped out of a few activities where we feel that the — it’s a lot of competition on all the bigger M&As. And actually I don’t think the pricing truly reflects the value of the businesses. It is more that some is really pushing a lot to do M&A. And we are waiting for M&A who fits both in terms of valuation and business. But still, there is opportunities, and we expect to continue to make acquisitions.

But once again, we will be careful on the valuations, and we will also be — how should I say, careful also making sure that we are only buying really what will fit. And let’s say, the situation in Czech Republic with Industrial Solutions, I mean we’re working hard, but it will require some investments. We are running substantial investments both in people and facilities in order to get more efficient and get a better setup there. And it will improve. It will improve stepwise, but it’s not kind of — there is no magic wand who’ll be solving this. This is simply something that we need to work hard with and we do a step-by-step improvement. So I don’t want to sit here and give a kind of a quarter-by-quarter improvement. I do expect it to be better quarter-by-quarter.

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Operator [33]

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Our next question comes from the line of Agnieszka Vilela from Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division – Research Analyst [34]

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I have a question on Sealing Solutions. Can you tell us what is your outlook for this division specifically? And maybe if you could comment on the current strategy in Q2? And also, given the fact that you had some margin headwinds in Q1, what is your margin progression expectations for that division?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [35]

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No, in terms of the segments, we say North America slightly stronger, Europe okay, Asia going to be okay. It’s been, of course, now Chinese New Year, and everything is always difficult to really read too much out of it, but we see higher activity level continued in Asia. Slightly lower in Europe; still good in North America. Take about geographies, talking about the segments. Automotive, as we said, is down, I mean, considering down in the quarter, driven, of course, with the lower overall demand. But also we believe with some inventory adjustments pushing down, the automotive even more than the underlying demand. Industrial flattish basically globally, and then aerospace continuing very well.

In terms of margin ambitions, I mean, we have guided for 23% for the full year. And that is really what we feel is in line with what we can reach. Because we also have to note that — I mean, this margin, as a reminder, that this margin drop, if we may say, in Q1, is primarily related to integration of acquisitions, which is then pushing down the margin somewhat. And on top of that, some mix issues — internal mix issues, not really any big, but some mix issues in some segments of it. But the primary driver for the — correct me if I’m wrong, Ulf, but the primary driver for the margin drop is the acquisitions. And of course, also, then we should also note that we continue to invest. I mean, now with the health care — let’s say, medical and health care, aerospace, we will continue also to invest in creating a better growth platform. So we are, as I say, all purpose, carrying a little bit extra cost in order to create a better platform for growth long term, which we have been also telling before that we are investing in this business area in order to create good platforms for long-term growth.

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Ulf Berghult, Trelleborg AB (publ) – CFO [36]

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Want more EBIT.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [37]

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Yes, want more EBIT more than pushing up the margin. Yes.

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Agnieszka Vilela, Nordea Markets, Research Division – Research Analyst [38]

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Yes. Perfect. And the second question I have is on your structure for the group. And rather than talking about the M&A angle, I would like to ask you if you plan any kind of divestment — divestitures? Are you happy with every niches that you are present in right now?

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [39]

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Of course, we are never happy. I mean, we are never happy. We always try to improve. But whether that will end up with selling some, I mean, it’s not in the agenda exactly at the moment. But we have been selling business before, and it might — it will probably happen also in the future as we sell some businesses, but that is nothing really that we want to elaborate on externally what to sell or what to buy or something like that. That is something we are running as an internal process, but our portfolio, what we call portfolio management activity, is a never-ending activity and something which we are continuously addressing here, working on.

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Operator [40]

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Our next question comes from the line of Erik Paulsson from Pareto Securities.

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Erik Paulsson, Pareto Securities, Research Division – Analyst [41]

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This is Erik. Maybe a bit strange question, but I’m wondering how much management activity or time do you put on offshore and construction in relation to the other type of business areas and the overall structure of the business.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [42]

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I mean, I cannot say that I put a lot — we have — I mean, internally, we have restructured that we have 2 very capable managers now within that business area. I mean, we have 1 guy running the offshore, and 1 guy running the marine and infrastructure segment. So this is kind of more run as a business area from my point of view. And those guys is kind of running the businesses. And I don’t feel since we have restructured this into that, it is more that we kind of restructure ourselves out of the business area structure, so that is really the activity. And we also changed a little bit internally in the quarter so that Ulf is stepping out, and we have appointed another guy who is more assisting on the kind of financial part coordination of that activity. So I don’t feel that is any kind of special burden for me if that is what you are referring to.

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Operator [43]

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Thank you. And as there are no further questions registered, I will hand the word back to the speakers for any closing comments.

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Peter Nilsson, Trelleborg AB (publ) – President, CEO & Director [44]

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Thanks a lot for your interest in listening in on our presentation of our Q1 results. And as usual, Christofer is available for any follow-up question, of course, so is Ulf and myself as well. And we will meet some of you, I guess, here in the next few days as we are visiting a few guys to present this further in detail. And if not so, then hope to see you soon, and have a nice weekend.

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Ulf Berghult, Trelleborg AB (publ) – CFO [45]

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Have a nice weekend.

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Operator [46]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.