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Edited Transcript of TREL B.ST earnings conference call or presentation 24-Oct-19 8:30am GMT

Q3 2019 Trelleborg AB Earnings Call

Stockholm Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Trelleborg AB earnings conference call or presentation Thursday, October 24, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Peter Nilsson

Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director

* Ulf Berghult

Trelleborg AB (publ) - CFO

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Conference Call Participants

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* Erik Pettersson-Golrang

SEB, Research Division - Head of Research for Sweden

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Malte Christoph Schulz

Commerzbank AG, Research Division - Equity Analyst of Industrials

* Robert John Davies

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [1]

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It's working now? Okay. Okay, then we start all over again. Thanks to all of you for welcoming us here for the -- welcome to all of you for joining us here on the Q3 presentation where we're going to guide you through the financials for Trelleborg following Q3.

As usual, starting, I starting giving you the overall highlights and also commenting on the business areas. Later on then joined by Ulf Berghult, our CFO, who will guide us through the financials. And then we finishing off with some summary conclusions and followed with the Q&A, then moderated by Erik Golrang. And then -- yes, then after that, we will, let's say, sum it up again, of course. But as usual then agenda, starting off with some highlights, and then guiding to the BAs, business areas for us, financials, summary and Q&A, finish off with that.

So starting with the overall headlights -- highlights for Trelleborg. Sales in the quarter came in with an increase of 6%, then supported by currency and structural moves and acquisitions, primarily within Sealing Solutions. Organic sales, though, decreased with 1%. And if you don't exclude the project business of Trelleborg, it actually came in with a decrease of 3%. Sorry, yes, with a decrease of 3%. If you go through here, we say we will have a little bit tougher times in general industry and automotive and then supported with somewhat better development, continued good development within aerospace. And then as anticipated and guided before, we see a fairly strong increase then in oil and gas and the infrastructure construction. Get back and comment more on that later.

EBIT came in at SEK 1 billion -- roughly SEK 1 billion, corresponding to a margin a little bit shy of 12%. And I mean this is a decrease compared to last year and decrease basically coming from -- get back and comment on that more later on, but from some market headwinds in -- related to especially wheel systems and then some actions connected to that, but also due to highlight in comparison to last year, we had very low central costs last year due to some extraordinary income in that line, and that is also a difference compared to last year of almost a little bit north of SEK 50 million.

We also, as for sure most of you remember, we announced some increased, what we call, efficiency measures here after Q2, and these measures are kicking in, even though the majority of this is not really in this quarter, and will not be in the running quarter either. The majority of that will be kicking in, in 2020. We are working on this, of course, and it will be probably increasing the number of redundancy following these actions, but it will not increase the costs allocated to these measures. That means that the items affecting comparability came up at SEK 127 million, which is increased compared to last year, but I mean, we will get back also and then confirm the guidance that we've given for the full year 2019.

Cash flow, very strong in the quarter, coming then from, as I already guided, some inventory focus and, of course, also with this negative organic sales we also see, let's say, good outflow, even from accounts receivables as well. It's a good development with the working capital while CapEx is on the same level as last year, and that means that the cash conversion is now increasing and, of course, as we go into more uncertain territories in some businesses, we will continue to focus on the cash flow. We'll continue to make sure that we deliver cash going forward as well.

Looking at organic sales by geography. You see it's kind of negative all over the world with an exception for us in South and other Americas, but that is a small part, I mean, of Trelleborg and not really material in the total picture, if you look then in Western Europe, down by 2%. North America, down roughly the same, 3% down. And then we have Asia and other markets down by 9%, and I know there are some concerns. China is down, here we're down by some 5%, 10% organically. So they are down slightly more than the overall Asia, but that is being compensated for us by good development in India. So that is kind of why we're ending up roughly at the minus 4% there as well. So basically, the same development all over the world if you kind of try to generalize a little bit. No big differences between geographies for us.

Going to the business areas, Coated Systems. We've had a headline and stable profitability. And I mean we have, let's say, basically same margin as last year, and EBIT growing slightly more than the net sales growth, and actually underlying a little bit better since we are hit in the quarter with a customer insolvency in South America, which is hitting us. We put away a reserve. We don't know exactly how it will end up, but we are fully, let's say, reserved for whatever happens in this insolvency. So that cost us roughly SEK 10 million in the quarter. Coated Fabrics, developing well. Growing in Aerospace especially, but also growing into some other segments like Medical and some other also general industry actually also developing quite okay in this area.

Printing blankets, negative year-on-year besides Asia, actually. So Asia continued to develop well here, and we're growing our market share in Asia while we kind of keeping our market share in the rest of the world and developing in line with the market. So that is kind of the comments on Coated Systems.

And moving on to Industrial Solutions where we have organic sales minus 1%, but with structural growth plus 6% coming from an acquisition in the quarter. I'll get back and comment on that. Lower sales in general industry, automotive actually stable in this area. We're developing substantially better than the market here due to some innovations and some growth of market share in specific segments. We are not hitting this area, I'll get back to it. Sealing Solutions has been hit by automotive, but not really in this area. So this is more general industry going down. And from a geographical perspective, we are losing a little bit in Western Europe and North America, but then positive, especially, in Asia for this business area. EBIT is slightly down on weaker sales mix, especially -- so but basically in line with last year. We are very happy also to finalize within the quarter the Signum acquisition, which is then strengthening our position, especially in LNG, offloading LNG transport. So it's not -- I mean, just to clarify that, it's not really linked to kind of the -- let's say, the drilling or kind of extraction of LNG. It's more linked to the infrastructure development you have when you're offloading LNG into ports and new power stations sort of that. So don't mix up this with different segments, and that is a segment which we feel is a growing -- quickly growing segment, and it's also a great supplement for us to develop better solutions for that specific segments. So that is the comments on Industrial Solutions.

Moving on to Offshore & Construction, very strong growth. As you see here, organic, 27%, which we guided for. So we're happy now that this growing order book is kind of getting true. And we also say that this is basically good organic sales growth in oil and gas and the infrastructure segments and this, in terms of order intake, is the best quarter for years, if you put it like that. We continue to build orders here, and I mean it's really more -- the challenge here is more coming not from orders going forward, but it's more to make sure that we get profitable orders in and that we can get good margins on what we will deliver in the future. So kind of a little bit changed -- changing the focus here now.

EBIT is increasing, but as I said, we still have an order book which is not of the highest quality here, but I mean we believe that the order book will improve in quality. Of course, it's not going to happen quarter-on-quarter, but we see now with confidence here going into next year that we will go into next year with a better order book and better possibilities to deliver even better profitability. And we say also recovery will continue in Q4, so the sales growth that we see today in Q4 will actually organically be even better than we've seen in this quarter. So -- but then, of course, it's going to be always a struggle here when you have this kind of growth figures. It's always a little bit uncertainty whether you're actually -- whether you actually are able to deliver what you have in orders, but -- so that's going to be the challenge here going forward. But I mean, we're going into this quarter with a better order book than we went into Q3. And then we hopefully also will continue to build order book also in Q4 for 2020.

We also here, which we have not really commented on before this, we made a small but interesting technology acquisition, which is focusing on low-density products called Deep Springs. Case New development company in U.S., which is then more, let's say, improving the performance of products and actually creating own sales. So this is something more of an internal acquisition, but very interesting for us, but kind of difficult to fully explain without going into depth. And so -- but I'm happy to tell you more about that going on. But from sales perspective, it will not have an impact.

Sealing Solutions. Execution in tougher markets, we are heading. We continue here to adjust, continue to deliver. Organic sales is down by 2%, but then supplemented by structural growth of 5%, and then on top of that also some currency translation on this one. Basically, it's a little bit softer all over the world for no drama anywhere actually. But I mean, we are slightly down. And we also had general industry and here also automotive is down, and we had -- that is maybe where we're suffering a little bit also. We say margin is down a little bit, organic sales and unfavorable sales mix. In some automotive segments, it's quite a lot down, which has also been impacting the manufacturing units. So that is something we expect to be more balanced in the next few quarters. As we see, what we read today, of course, is changing, but if you see today, we don't expect the drop in automotive for this year -- continue to drop, but not at the same pace as we have seen in the last few quarters. It's going to be a little bit more stable going forward and, hopefully, will be easy for us then to manage capacity and make sure that we adjust.

We also note here, Aerospace continues to be very strong. Of course, we have the Boeing situation here, which we don't really know what will happen. But at the moment, we continue to see good Aerospace demand, and we don't really see that turning any way in the next few quarters, but to continue on a very strong sales growth path.

Finally, on the business areas, then, of course, the troubled market headwinds, the inventory adjustment. Trelleborg Wheel Systems dramatically down, minus 6%, and then, of course, that is going into the quarter. As you -- those of you are following us closely, remember that we said at the end of the quarter -- Q2, was quite dramatic, and that continued therein. And we say, basically declining organic growth in more or less all areas, as we say, are we down -- we see aftermarket down, and that relates both to agriculture and material handling. So for us, then, when we saw that coming, we have substantially underproduced in the quarter. So on top of this kind of organic sales decrease, we have also done inventory adjustments, and we are underproducing. And also, we are also on top of that doing some volume transfers between plants for -- simply to adjust a little bit for more kind of new ways of supplying some markets, but also to facilitate for future more efficient set by basically moving production to our Serbian plant. And in the quarter, that has been costing us some money.

So overall, market headwind, of course, is the majority of the profit drop, but also there is also tens of millions of Swedish krona is coming from each of the inventory adjustment, the volume transfers. The good on the inventory adjustment is, of course, that this turns into good cash flow, which you can see as well. So we have some cash outflow, which is better than the EBIT in this business area. And we also say that we don't see really any change in the short-term here. We see that is kind of negative, especially from lesser production volumes and also these transfers will impact also Q4, and of course on top of that also. So we don't see really any change in the running quarter, even though we still believe in the underlying market trends here of growing agriculture production and also growing, let's say, furthermore material handling. We see this growing as well in terms of global trade. And then on top of that, also, this e-trading and all of that, which is also benefiting the material handling. So overall, tough quarter, and it continues to adjust, and we continue to build the platform for the future when this market eventually will turn up.

So with that, Ulf, I'll leave it to you to guide us through the financials.

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Ulf Berghult, Trelleborg AB (publ) - CFO [2]

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Thank you. So my first slide, we have the total sales. As you can see then, we have the total sales development of 6% in the quarter, of which an organic is minus 1%, and as Peter told you earlier then take away the project-based business, we are then in the quarter minus 3% year-to-date and also then from the organic growth, flattish, low 0% in year-to-date, we are minus 1% on excluding project-based business. The structural growth is coming from 2 acquisitions in 2019; one in quarter 1, Sil-Pro within Sealing Solutions. And then in beginning of quarter 3 then within the Industrial Solutions, the acquisition of Signum. And on organic, as Peter said earlier, the major swings here that we have Offshore & Construction plus 27%, but then also Wheels on the other side of minus 6%.

The next slide is then the quarterly development. You can see then that we have on the bottom line, you can see then we have a negative organic growth, but on overall sales growth including structural and currency, we have 14 quarters of positive sales. And of course later then, it has been fueled by the acquisitions. And unfortunately then on organic growth, we have a negative growth then in quarter -- in this quarter.

Next slide is then the rolling 12 months. This is then the highest third quarter so far within Trelleborg and again impacted by acquisitions.

Next slide is then the EBIT. You can see then that we have in the quarter then a minus 9% on EBIT from -- down to SEK 1.036 billion. Also, the margin is down from 13.6% down to 11.7%. And of course, that is then the main 2 impacts of the 3 impacts we have. On a positive side, we have Offshore & Construction delivering the first positive quarterly results in quarter 1 -- since quarter 1 2017. And then on the negative side, we have then the Wheel Systems that Peter mentioned that the sales dropped. The movement that we need to do in order to create a better footprint going forward, but also then we have some under absorptions that we have taken in order to adjust our inventory. And the other third one -- the third one is then on others that we are going to be in a normal mode. We had a natural low cost last year in quarter 3, 2018.

The translation impact in the quarter is minor, it's only SEK 38 million. Year-to-date, that is SEK 123 million. And then, as Peter mentioned earlier, also then if you look on the margin, it's slightly also kind of a mix between the BA as we have then Sealing and Wheels going down slightly and then Offshore coming up.

Then we have -- on the next slide, we have the rolling 12 months numbers. And this is then the first EBIT drop we have had now after 25 consecutive quarters of improvements. And on a rolling 12-month basis, the margin is on 12.9%.

If I look on then the P&L, the next slide, we have then the financial net. It's low in the quarter, basically then due to we have some positive exchange differences, FX impact. The tax is also quite low in the quarter due to favorable mix between countries, and it's 22%. But year-to-date, it is 25%, and we still guide then that we will be around 26% for the full year. And also then in the quarter, you can see then the impact from the launched restructuring program that we did in quarter 2. So we are slightly higher than on SEK 127 million versus the SEK 28 million last year on our restructuring cost. And the guidance for full year, that is the SEK 500 million.

Next one is then earnings per share. You can see then that we have in the group total, we're down 15%. If I take away the restructuring, we are down by 5%. The good thing now in the quarter, also Peter mentioned earlier, that we have a very good cash flow and is considered large improvements coming then from working capital. We have put more focus on, as we have done on the cost base, on working capital, and it is slightly -- still slightly high if I look in absolute terms, but also then that will have an impact due to that. We are doing some restructuring and that will -- we are carrying some extra inventory. And also then, now offshore is coming back into business, that will also consume working capital. But again, it is on healthy levels.

The next one is cash conversion. We took a jump and then went from 69% up to 82%, and we would like to be then above 82% -- 80%. And also then we will have, going forward, more focus on CapEx spending. And we are kind of ending it. And when we're moving into 2020, we are stepping down in CapEx spending.

And then the only slide on Page 21 in order to explain the net debt, as we have done, the impact from IFRS 16 on lease debt, which we also then took the opportunity then to reclassify the pension debt. So we had -- you can watch then the SEK 10 billion, we added the pension debt, and then we have restated, then we have the leasing debt. So in double ways -- so right now, we have then a net debt of SEK 15.9 billion including lease and pension.

Next slide is then the leverage, which is then up then from 1.9 to 2.6. And then we have, excluding lease and pension liability, that is up from 1.8 up to 2.2.

And then the next slide is gearing and leverage over a period of years. And then it's moving in -- so the 2.2, and like I mentioned on the leverage, of course, we will have -- these are not pro forma numbers. And based on that, we get the debt as we've done acquisitions, but we don't get the full EBITDA from -- until we have run for 12 months.

And next slide is then return on equity, which you can see then, of course, with the falling, then decline in earnings, we are down then to -- for the total group, down from 10.3% down to 9.4%.

And then I will finish off with the guidance for 2019. The CapEx is SEK 1.8 billion to SEK 2 billion. It's -- we most likely will end up below -- down to the SEK 1.8 billion, not at SEK 2 billion. Restructuring costs will be around SEK 500 million. And then as I said previously, the underlying tax rate will be about 26%.

So Peter?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [3]

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Continuing then with summary. So as a summary, I said sales is up for us by about 6%, driven by currency and structural growth coming from acquisitions, then primarily within Sealing Solutions, but also in this quarter also within Industrial Solutions. Organic sales total down by 1%, which is in a mix, (inaudible) general industry, a little bit short of where we wanted to be. And automotive down while then supported positively by aerospace, oil and gas and infrastructure construction.

EBIT down roughly SEK 100 million compared to a year ago, coming down primarily from, say, lower central costs or different -- say, more natural central costs in this quarter and then primarily from a drop that we had in Wheel systems, coming down from market headwinds, inventory adjustments and some own initiatives to shift production.

Efficiency measures, which we announced, is running according to plan, slightly upgraded, slightly more activity in this, but it will not cost us more and -- but that will have an impact primarily going into 2020, which means that items affecting comparability, some up compared to a year ago, but as we have already commented on keeping the guidance for this year.

Cash flow is strong, coming from a working capital release and a flattish CapEx spending, and that means also cash conversion is up, and we are now above 80%, again, where we expect it to remain now as we're focusing slightly more on the cash flow going forward as we see some tougher markets in some areas.

And priorities Of course, manage the market conditions, stay close and try to read what is happening and be ready to act whenever necessary. We continue to work on portfolio management. Of course, we are addressing some parts of the portfolio where we would like that to improve. Continue also, of course, annual operational excellence and efficiency measures and also continue to work on our footprint optimization, as you know, especially within Wheel Systems, there is still some changes ongoing following the CGS acquisition a few years ago. So there is still some actions from that kicking in, especially now in Serbia, and we're also addressing with some investment in Czech Republic where we're going to grow our capacity in especially one of the plants in Czech Republic in order to create a better long-term footprint.

Continue to focus on innovation and especially then what we call ease of doing business with us. We are working closely in the customer interface in order to make it easier for the customers to do business with us in a more efficient way, but also to support them in a better way. And of course, now we continue to make acquisitions and we continue to focus on integrating these acquisitions. As you mentioned, also maybe on the medical and health care area, which is this acquisition of Sil-Pro in Sealing Solutions, which we now also created a platform for global growth in that area, and that is kind of a new strong focus area within Sealing Solutions going forward, while also this acquisition that we did in Industrial Solutions is a very good fit for them, and we're growing our strength and our leading position in -- especially in this LNG transfers.

Outlook for the running quarter. We keep the guidance going into this and we say it is going to be on par. We're going to sell -- let's say, the organic development is going to be similar in Q4 as we saw in Q3. It might be slightly -- continued, kind of slightly weaker in kind of the general industry. We continue to see automotive probably getting slightly better since we don't see kind of inventory adjustment kicking in as much in this quarter as done in the last few quarters, and then we continue to see strengthening in oil and gas and infrastructure construction.

So that is kind of, overall, a mixed bag, but overall, we expect the organic growth to be on par, what you have seen from Q3. So that's really where we would like to end and then inviting Erik to guide us through the Q&A session.

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Questions and Answers

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [1]

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Okay. I'll start with 1 or 2 questions of my own. You highlighted the -- one of the priorities being continued portfolio management. That has mostly meant acquisitions now for a number of years. And my question is really that, as you sort of try to position the group now for the next upturn, is the portfolio the way you'd like it? Or is there room to perhaps be a bit more active on the divestment side as well?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [2]

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There is always kind of divestments on the horizon as well. But it's of course linked also to valuation and the way we believe in the markets. But I mean that is always on the agenda, and we are working in both ways with this to be honest, but what we need, to be honest, I'm always honest, of course, but I mean to tell you the way we look at it, so portfolio is definitely a 2-way activity for us. But for us also portfolio optimization, what you might not see, is also putting priorities within the businesses and stepping out of certain segments and stepping into other segments. There is, of course, exits ongoing within the portfolio, but it might not be seen as kind of divestures.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [3]

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Very good. And the second question for me, if you could give some more guidance on the Offshore & Construction division. You talked about sustained or even higher rate of growth in the fourth quarter. Obviously, this is one of the key earnings drivers now for the group, meaning the pace of that growth into 2020 is quite important. So any indication on sort of where the last couple of quarters orders have been running in relation to sales to set the stage for what to expect next year?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [4]

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It's higher. I mean, we have the highest order book that we had for many years. I mean, it's difficult area to give you guidance, but we can say it's higher. And we expect the profitability to improve in the next few quarters step-by-step. But really to give you a guidance on what levels, we don't want to do that. We simply say it's moving in the right way and it is improving, and we expect improvements here step-by-step in the next few quarters. That is really -- I don't know if I want to tell anything more, but I think that's what we can tell at the moment.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [5]

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Okay. Let's turn to the room and see if there are any questions? Yes, there are.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [6]

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I am Hampus Engellau, Handelsbanken. Two questions. On Wheel Systems, could you maybe talk a little bit where you are in the inventory reductions which we should speak more to come into Q4 or if it's less? Second question is on Spartanburg. If you can talk about capacity utilization? How things are going there? And then lastly, I would like to hear a little bit about cost savings, if you could quantify costs with savings during the quarter, at least say if it's less or more, or we should expect more next year?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [7]

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Finally, I mean, we are stepping up. So the actual cost savings this quarter, we talked out, I'd say a few tens of millions of Swedish krona, is probably from these new measures if that is what you meant, and that's going to increase in Q4 and going to increase even more. But the lion part of it will be in 2020 and not in this year. But we talked a few tens of millions of Swedish krona, so I mean it's not really -- the big chunk of it will be in 2020.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [8]

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So when you add more people to the head count reduction within the same cost....

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [9]

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But that's of course -- that is improving the run rate. But I mean this is not going to be into short term, that is going into 2020. Because this headcount reduction is also linked to a few moves of production and all of that. That is also why it will take a little bit longer, but we have identified some more efficiency measures, if you put like that, going forward. And then you said, sorry, you get back on other one.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [10]

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On Wheel Systems where you are in the inventory reduction?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [11]

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Inventory reduction will be less in Q4 than in Q3, but there will be inventory reductions as well in Q4.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [12]

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Spartanburg?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [13]

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Spartanburg is still -- I mean, we are growing. I mean, we are probably, let's say, making profit in North -- we are making profit in North America at the moment. But I mean, we are not really supported by the underlying market, let's say. So we don't really see that there is not really a substantial improvement quarter-on-quarter. We are kind of growing our market share in North America, but that is an overall shrinking market. So that is kind of a little bit tough at the moment as well. So it's difficult. We're working on it. But at the moment, it's kind of quite tough markets in North America and especially in agriculture, but also in material handing. Both material handing and agriculture is quite tough in North America.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [14]

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Erik Paulsson, Pareto Securities. Can you talk a bit about the CapEx profile in the coming years? Because you said it's going down now.

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Ulf Berghult, Trelleborg AB (publ) - CFO [15]

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What we said is that we -- we divide into what we have underlying, which is in line with the depreciation, about SEK 1 billion or SEK 1.1 billion. And then we have what we call strategic CapExes. And we have been through a phase now in '18, '19 and then slightly in the beginning of 2020 where we have large strategic CapExes, but that will then go down. So what we are then -- we've been more strict on strategic CapExes going forward. So -- but it will not be down slightly, but more than underlying depreciations, not in full in 2020, but when we're moving into 2021. So it will be sliding down.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [16]

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Right. Can you tell us anything about the restructuring charges for 2020?

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Ulf Berghult, Trelleborg AB (publ) - CFO [17]

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Again, that depends on what we -- as Peter said before, that we are -- we don't read the current market conditions, we are owning the business areas that we want them to be forceful on the cost base. So what we said is that we -- and then that might be that we need then to take further restructuring costs. But right now, we are in the guidance of SEK 500 million. And the next year, we see then, most likely, we will get back to the guidance of SEK 250 million.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [18]

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Okay. It seems to be no further questions in the room. Operator, do we have any questions from the telephone lines?

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Operator [19]

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(Operator Instructions) We already have a question from Malte Schulz from Commerzbank.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [20]

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First of all, maybe -- you spoke already on portfolio readjustment. Do you have a specific target for healthcare and aerospace in mind, which you would like the group to have in, let's say, 2 to 3 years down the road?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [21]

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Sorry, Malte, I didn't get it really.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [22]

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Okay, I'll try to rephrase the question again, and speak a bit louder. I mean, you talked a lot about portfolio readjustments, and do you have a specific target for healthcare and aerospace you want to reach over the next 2 to 3 years?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [23]

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No. I mean, we don't really have a specific target besides that we want to continue to grow it. I mean, we are expanding, especially within aerospace. We are expanding our offering and we're moving into new sealing families. We are penetrating more of the sealing applications within engines. We are also targeting more of what we call airframe seals or what we talk structural seals on an airplane. So we are basically having very high market shares in the segments where we are present within Sealing Solutions. So the growth there will be dependent on that we are able to grow our, let's say, offering into those segments, which we think we have good possibilities to do as we are kind of already established as one of the main suppliers, and you know there is a lot of supplier cutting and all of that within the aerospace industry. So I think we are well equipped to grow. I mean, our market share in the existing segments, there is a few, maybe let's say, what you call, air frames, (inaudible) the details, but I mean in some of these product families, we still have potential to grow, while in others, we're probably on the market share that we cannot grow. So the growth here would be mainly coming from extensions in the offering and we see good possibilities to do this. And the same basically applies also in the other area of Coated Systems where we also have aerospace exposure on these escape slides and all of that, that is also where we're working heavily together with the customers in order to develop lighter materials in order to kind of save some weight on the airplanes, and there also we have good momentum to get even closer to our customers. So this is coming, primarily -- I mean, it's coming from basically organic development and we expect it to grow. And the same applies for medical healthcare where we have made a few acquisitions in the last few years, and we have now created a platform for growth. So that's going to come through pure organic growth where we kind of leverage the solutions where we have 2 to 3 individual customers and moving in to a wider space. And because most of these -- all of these acquisitions we've been doing has been fairly local or regional companies, and now we're pulling it into a global sales organization and then being able to offer it to more customers. So both of these areas is going to grow. And there are going to be a step-wise, let's say not a step-wise like that, there's going to be a continuous growth and continuous focus in extending both the product offering as well as the customer portfolio.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [24]

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Okay. And maybe a second question rather on Wheel System. I mean you -- some years ago, you gave some synergy targets after the CGS acquisition. Maybe you can update us there where you are? What you have achieved? And where you have been maybe short? Where you have exceeded the targets? And particularly also maybe on the second comment, also say something about the technology transfer between Trelleborg and Mitas, and if you have been able to grow also in your anticipated (inaudible) Construction tires there or where you see the business developing going forward there?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [25]

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I mean, it's not easy to say now, when we look at the performance, let's say, the actual underlying EBIT performance. But I mean, the integration has been successful. We have been able to position the Mitas brand, Trelleborg in a very good way. We have been integrating and closing some close to 15 sales offices, integrating the sales offices. We have been getting purchasing synergies. So the integration as such has been good. What remains on the synergy side is to grow the sales, especially in construction, and that is kind of more a long-term range extension and then putting that into the market afterwards. And that is where we still have some way to go in order to -- but that is also not clearly, let's say, that we are late. Simply, that's a long time because it requires investments like we do in Serbia, like we do in Czech Republic, and it takes time to get into that. So the integration has been good. And then, of course, it's not easy to stand here and blame the market. But I mean, I must say it's from -- when we did the CGS acquisition a few years ago, I think us and everybody else expected, let's say, the agricultural market to bounce back, but it's not -- it has not happened. So since then, we believe we were in a throw, and I think also everybody else. If we are not blaming analysts, they are also wrong sometimes. So I think also that the analysts were also, let's say, aligned with us here, and that is really the big disappointment for us and a big disappointment for others that we really have not seen the agricultural market bouncing back as we expected when we did the acquisition. So I cannot -- I mean, of course, we always try to do better. But if you look at the pure integration efforts made following the CGS acquisition, that's actually internally been very well made. We have built a new organization. We changed the organization, as I said before. We have closed sales offices. We have gotten the kind of these moves in between the factories. But then, unfortunately, the market has continued to develop negatively organically, even though I think when we made the acquisition, everybody expected it actually to improve from that level. But that has not happened yet.

But while we still see that underlying market, more food is produced, more advanced practices coming on the market, we know now we have Agritechnica, which is the biggest trade show for this, coming up in the next few weeks. And we know there's still a lot of launches of new, better products, more digital solutions. So I think the industry is getting more sophisticated. The production of food is increasing. But unfortunately or strangely, if you may say, it's not really coming into sales yet, and it's not only for us because that is the overall market. So that is the way we look at that at the moment. We're working hard, of course, to try adjust for this and to improve from this base. But at the end of the day, we cannot blame ourselves for the integration. It is simply the underlying market which has not developed as we expected for the last few years.

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Malte Christoph Schulz, Commerzbank AG, Research Division - Equity Analyst of Industrials [26]

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Yes. And on the R&D synergies...

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [27]

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Yes, that's ongoing. I mean, we have been changing. I mean, we don't give details again. We have changed the curing systems for our tires. We now do nitrogen curing instead of steam curing, which has been saving energy and thereby saving costs as well, improving our CO2 footprint, but to also improve in the efficiency of that by several. We also now, if you relate back to this Agritechnica show which is coming up, now we're launching what you call a (inaudible) [new grip no] track system, which is actually a joint, which is a combination of pneumatic tire & rubber track with the benefits of -- let's say, maintaining the benefits of both. And that is a development that is ongoing between CGS, if you play CGS and the Trelleborg Organization, which is now one. And now -- I mean, it takes some time to do it. But we're launching this now together with one of the major tractor manufacturers. And also from a production innovation, it is happening. And also from a product innovation, it is happening. So this is really also -- you can always push a little bit more, but things are happening and things are improving.

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

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Do we have one more question on the line?

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Operator [29]

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Yes, we have another question from Robert Davies from Morgan Stanley.

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Robert John Davies, Morgan Stanley, Research Division - Equity Analyst [30]

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I guess just 2 questions, really. One was around the Wheel Systems business and the ongoing inventory destock that you mentioned in sort of still positioning into the fourth quarter. Could you give us some sort of idea on a sort of relative balance? I guess, I'm sort of asking in the terms of -- what are your sort of expectations in terms of margin profile for that? Can you actually get margins up in an environment where you're getting an inventory destock in that business?

And then the second one, just sort of more broadly on some of the end-markets. You mentioned sort of autos, I think, progressively getting better. Is that from a demand standpoint? Or is that just a comp effect as you're moving into the back half of the year and into early 2020?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [31]

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Now we're talking automotive. I mean, our reading of the situation is not really that the underlying market is improving. It's more that the destocking is flattening out or we're more going to continue to supply in line with the demand. So it's not really -- we don't see an improvement in the underlying demand. It's simply that our, let's say, loss of sales in that area has been definitely above the kind of the market development. So that is more an inventory adjustments are true when we get more into. So that is the way we look at that.

And then on the margin in Wheel System, of course, as we guided here, we don't expect the margin to get a lot better here in Q4 compared to my EBITDA that we can do a little bit uptick, but it's not going to be, let's say, bounce back here in Q4. We expect also from maybe -- of course, also from a seasonality point of view, is a tough quarter Q4 and on top of that we're going to continue to do inventory adjustment, but maybe not to the full extent that we did in Q3. But nevertheless, there is going to be a negative push on the margin coming from inventory reductions as well as coming from seasonality. So that is the way -- an important quarter for us here is, of course, not maybe Q4, is more we're going into Q1 and Q2 next year where we hopefully will see a market improvement coming, and that is also from a profitability point of view, especially for the agri part of Wheel Systems, then Q1 and Q2 is the most important quarter. So it's not really Q4.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [32]

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I have one more question, which relates to your comment about the negative mix impact on Sealing Solutions in the third quarter. You expected that to improve a bit in Q4. Should we expect that the pace of year-on-year decline and for the margin proceeding to more or less go away in Q4?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [33]

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I don't want to give that details really because I mean when you talk about mix in Q4, it's a little bit linked to automotive, it's automotive shrinking. And on top of that, we also have some kind of downgrading about the factories, and we expect that to improve. But on the same time, we maybe also expect the general industry to be a little bit tougher in Q4 compared to Q3. So overall, I don't think -- as we see it today, I mean, there's not going to be a big change on the trend compared to what we've seen in Q3. I don't really want to send any signals, there is difference at the moment.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [34]

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There appears to be no more questions. Thank you so much. Any finishing words?

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Peter Nilsson, Trelleborg AB (publ) - CEO, President, Business Area President of Trelleborg Offshore & Construction and Director [35]

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No. I mean, I want to say it's a tough -- I mean, we are developing a quarter which is not as good as last year. And I mean once again, the explanation is, especially in Wheel Systems, and there are some central costs compared to last year. But overall, besides that, I mean, we continue to work hard to adjust our cost base and to adjust operations to the underlying markets. And of course, we need to continue to watch carefully what is happening going forward. But I mean, the major priority for us is, of course, to get Wheel Systems in the right shape and in the right position in order to really get the gains when the markets eventually turn up because the underlying consumption, the underlying production of food and underlying movement of goods is there. It's simply they are not buying tires at the moment. And that is something that we need to adjust for, something we need to be ready for when it eventually turns up.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [36]

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Thank you.