Trelleborg AB

STO:TREL B

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the Trelleborg Q1 report 2018. Today, I'm pleased to present Peter Nilsson, President and CEO and Ulf Berghult, CFO. For the first part of this call, all participants will be in a listen-only mode and afterwards there will be a question-and-answer session. I will now hand over to speakers. Please begin.

[Peter Nilsson]

Thank you, Peter Nilsson speaking. Welcome to all of you to the presentation of our Trelleborg's interim report for January-March 2018. I will start and then later on on the call, Ulf Berghult, our CFO, will support me and guide us through the financials and then at the end of the call, I will get back to sum it up and also then opening up for a Q&A session. But then jumping on to the presentation of our report, I'm going to use, let's say the PowerPoint presentation, which has been presented on our web which I -- I guess all of you also have in front of you. So that is one I am going to use as my -- while guiding you through the presentation.So starting and turning over to Page 2 in this presentation. The agenda, as usual, when we present our report, we start with some highlights and guide you through the business areas individually. Ulf, then guide you through the financials more in detail and then some summary and some comments on the running quarter and then finishing off with the Q&A. So then moving on to the highlights in Page 3 in this presentation. We have the headline good earnings improvement. Sales is increasing in the quarter by 3% for us which then equates to an organic sales by 4% and 5%, if you exclude our project deliveries, which we usually do as they are kind of bumpy in -- normally bumpy.EBIT is up by 12% which would then indicates a good leverage if you compare to the increase of sales and that is then corresponding to a marginal 15.1% which makes this quarter the highest ever for Trelleborg both in terms of EBIT and in terms of margin.Items affecting comparability slightly at minus SEK 18 million in the quarter, slightly lower than the average, [ but also we could get back to it ]. The guidance for the full year remains the same and nothing strange in these items from our point of view.Operating cash flow, slightly ahead of SEK 400 million, roughly in line with last year, still growing with the efficient management of working capital but of course somewhat influenced [ by providing ] growing sales and also maybe more so influenced by the somewhat higher CapEx in this quarter compared to the corresponding quarter last year. But all in all, continued as we see it a very solid cash conversion running it for the last 12 months at 87% of EBIT. So that is kind of the summary.And then moving over to Page 4, also part of this but there is also further light on the organic sales. So as you see here, we have basically fairly stable organic growth all across the globe. But for what you call it other Europe, which is basically former Central and Eastern Europe for us where we're down, while in the other areas it's been up between 6% and 9%. On the positive we highlight the bigger economies in Europe doing fine. U.S. is still doing fine, Asia, then all over basically doing fine with China as a driver but also good development coming from Japan and India in this quarter for us. And in the other Europe, I mean partly of this downturn in Central Eastern Europe [ has been through ] some, say, cleansing, portfolio cleansing or some of our sales, some of the local sales here from some of our factories here. We have stopped selling some external compounding for instance which is low profitability, but nevertheless influencing the sales in the quarter. So that is basically, as expected and a fairly global evenly growth for us.Page 5, then back to the agenda slide and moving on to the business areas. Turning to Page 6, where we continue -- where we look at Coated Systems, organic sales down by 4%, but the productivity and better control of the operation is pushing up the profit anyway. And as you see down there the margin is up by 1.5 percentage points. A few more comments on the sales coated fabrics, so relatively strong development in North America but somewhat weaker in Europe and Asia, although not that big difference as printing blankets somewhat lower sales in most regions across the globe. And also the sales here [ I am going to ] get back to the comment I had before on slightly lower sales in Central and Eastern Europe. I mean, here we have had in one unit we decided basically to downsize or mixing operations, but align it more. We can [ tunnel them on ] which has been putting down the sale somewhat, but not really influence the profit since this has been used more as fixed cost coverage, and now we are adjusting the fixed costs in order to get the better leverage of this. All in all, EBIT is up and also less than 1.5 percentage points up on the EBIT margin.Also note in the quarter, we made an interesting add-on acquisition called Dartex which is then strengthening [ in one in one ] particular niche within coated fabric, which means kind of medical coated fabric, you can say, which is used then, yes, in healthcare applications. [indiscernible] is supplementing our already existing business within that segment.Moving on to Page 7, Trelleborg Industrial Solutions, solid --a very solid even you can say, organic sales growth of 8% and here we can say we have improvement more or less all over, especially in all kind of industrial general industry related sales. We also see that most geographical regions actually improved here and also specifically in Asia, developing very nicely and this extra good growth is also having a good drop to EBIT which means also that we're increasing the margin from 10.6% to 11%. Also to note but maybe here not as a bullet, but also this is the first quarter where we include parts of this Rubena Savatech that came into the CGS acquisition [ with benefits ] being added to this business area. More comment about that in the report where you can read more in detail exactly what has been moved to get to these figures that you see on this slide.Moving on to the next page, 8. Still challenging market condition [ as we're heading ] here where we continue to see a dramatic drop in organic sales in the quarter, 18%, and the market situation remains challenging in offshore oil and gas. However, we have [ to note what we call ] that the order tunnel is increasing and we see that the activity level is increasing in the oil and gas activity, but the major impact on that is actual sales. We still have to wait for some 6 months before we will see that as showing an uptick in sales. So we still will struggle, you can say that, with our offshore activity for the next few quarters. Also in the quarter we are still at a good market development [indiscernible] the infrastructure part of this business area. But in the quarter with somewhat lower sales and on top of that also some unfavorable product mix as we call it, well it means actually that some of the projects being delivered in the infrastructure area in the quarter are showing the somewhat lower margin than they will do long term. So this is, of course, still continue to be challenging and we continue to address overall, especially the offshore related activity continue to address our cost base there and positioning ourselves for the future.Turning to Page 9, Sealing Solutions, a fairly plain quarter to be. I mean good organic sales, good all over the place, with Asia being especially strong and a good drop through on this extra sales, which is pushing the margin to the all-time high in the quarter -- in for this business area and all-time EBIT percent as percentage as well. So good development for ceiling basically all across the business. Turning then to Page 10, Trelleborg Wheel Systems, heading strong improvements in profitability. As you see we're growing sales by 8%, but EBIT is up by 30%, good -- overall good development even though organic sales is up by 4%. We have a good growth in Agri OE and also in industrial and construction tires is also increasing. We had the aftermarket sales, especially for the ag side has been impacted by this rather harsh winter conditions in the Northern Hemisphere with basically both North America and Europe has been impacted by this. Even though it's difficult for us really to fully estimate the impact, but we note that we have a somewhat delayed sales start-up in terms of those areas. However, all in all, as I already stated good drop through and good profit improvement and we're pushing the margin then up to 14.7%, which is the highest ever for Wheel Systems as well on the back of, of course, higher sales, stable raw material, but also that we continued to see the benefits of there the kind of the synergies coming from the integration of CGS or Mitas as to the brand for the tires is called. Even though I mean same as before, where we have, let's say a major part of this synergy is actually in front of us, as we are now investing in a new manufacturing platform, which then will create long-term benefits as we move into this new setup in the next year or so. Also a comment here even though, I mean we also know note that this sales mix -- sales channel mix that we have with the growing ag -- growing OE sales and a little bit lower in the aftermarket has somewhat a let's say adverse channel mix, if we look at the margin even though it should not be interpreted as being major, but we know that there is some impact from this sales mix channel and sales mix change in the quarter.Turning to Page 11, back to agenda, financials and then leaving to Ulf to move on from Page 12.

[Ulf Berghult, Chief Financial Officer]

Okay. Thank you, Peter. Okay. Let me explain into the consolidated group numbers then. On my first slide, Page 12, the sales development -- sales development, you can see that the organic growth in the quarter was plus 3%, coming mainly from a better demand from several segments. However, the organic growth is still impacted by lower project deliveries to the oil and gas segment. If we exclude for project-related business, which mainly consist of our oil and gas operations, our organic growth in the quarter was plus 5%. Moreover, we believe that the unusually prolonged winter conditions in the northern hemisphere hampered some of our business areas organic growth potential in the quarter. The impact from currency was minus 1%.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 5 quarters in a row of positive organic growth. Remember, though, that our organic growth has been hampered by declining raw material prices in the years prior to 2017.On Slide 14, you will find reported sales development for quarter as well as rolling 12 months. The organic growth accounts for the improvement in the last quarters. Slide 15 present our EBIT development. Our EBIT reached SEK 1,291,000,000 equivalent to an increase by 12%. Good market development and the cost control improved the quarter -- the quarterly EBIT to a highest level to date. EBIT margin of 15.1% versus the 13.9% a year ago is also the highest to date. The EBIT was positively impacted by currency translation of SEK 6 million.Slide 16 presents the EBIT and margin on a rolling 12-month basis. The stable EBIT margin looking over the period is despite having exposure to many tough markets during this period. On a rolling 12-month basis we are currently at 13.3% EBIT margin.The next slide presents the profit and loss statement for the total group. Items affecting comparability consist of the restructuring costs and it's in line with our annual guideline. The tax rate was 25% in the quarter. Our guidance of an underlying tax rate of 26% for the full year still stands.Slide 18 presents earnings per share, adjusted for comparability item which was up by 9% to SEK 3.41 for the continued operations. Slide 19 describes the development of our operating cash flow. The operating cash flow was impacted by an improved EBITDA, but offset by a higher working capital coming from the high activity. The CapEx is in line with our annual guidance of SEK 1.82 billion.Slide 20 presents rolling 12-months operating cash flow. Slide 21 shows the net debt to EBITDA ratio and net gearing development. Our leverage level is currently at 1.8x and our net debt/equity ratio is at 34%. Net debt is impacted negatively by SEK 360 million from rate movements.And Slide 22 shows our leverage development based on continuing operations excluding comparability items. Slide 23 describes the return on equity where the long-term target is 12% on a continuous operations including items affecting comparability. The actual outcome in the quarter is 10.8% compared with the 12.1% a year ago. Year-on-year development is impacted by the one-off U.S. tax charge in quarter 4, 2017, but also by the capital gain from the divestment of TrelleborgVibracoustic that is the larger equity base.And finally on Page 24, I want to finish off this part of the presentation by repeating our financial guidelines for the full year 2018. And as I mentioned, the CapEx is then for the full year SEK 1.82 billion. We're going back to previously year's restructuring cost, that is about SEK 250 million. We have then the underlying tax rate that is 26%, and we have amortization of intangible assets mainly then to PPA impact from acquisition that is about SEK 300 million on an annual basis.So that concludes the financials. So I will have it handed over to Peter again.

[Peter Nilsson]

Thank you, Ulf. Moving then quickly to Page 25 we have the agenda slide again, summary and Q2 outlook. Page 26, as I said, sales in the quarter up by 3%, organic, 4% and 5% if we exclude project deliveries. EBIT are on a all-time high level for us and also with the margin all-time high at 15.1%. Items affecting comparability is slightly low, but the guidance for the full year remains the same. Cash flow slightly north of SEK 400 million, which is a slight decrease from a year ago but behind this is a continued actually an improvement in efficiency of working capital management but is influenced by slightly there CapEx, which is also perfectly in line with our guidance. And all in all the cash conversion remains at very comfortable levels at 87% of EBIT.Page 27 about let's say the priorities, so no change here really. We continue to focus on growth and excellence and try to balance these 2 items. Market conditions remain good in a vast majority of geographies and vast majority of industries. We still have a few industries as we we've been talking about. The oil and gas where we have to continue to adjust our cost base and continue to adjust for slightly lower sales. But even in this segment, I mean we see basically an improved activity all over the place with exception probably of the Mexican Gulf. We see the North Sea is improving, we see West Africa improving, we see Brazil improving, we see also Asia improving. So we expect that to be better in the future even though let's say the timing here between increased activity and increased sales will be a few quarters. So we will not see any kind of improvement in our figures until the end of the year.And in all businesses, we continue to work heavier with our market positioning, continue to invest in operational excellence in all aspects. And of course also by using new technology, we continue to launch new initiatives and new products to improve our customer integration in various aspects. We also note there on bullets #3, continued portfolio management and we continue to make clear priorities on where to invest and where not to invest and also of course continue to [ scout ] for acquisitions to supplement our organic drives to get to this improvement.Integration of CGS, still very high on the agenda. I mean the structural changes has been done. The new organization is now fully launched from this quarter. As you know the tire operations has been integrated within Wheel Systems for some time. And now in the quarter, we're integrating the Rubena Savatech activities into Industrial Solutions and Coated Systems. But we also have some other acquisitions, which we also have been successfully integrated, but also noting which I wanted cover them before some of the synergies, especially from CGS acquisition is still in front of us as they are leading to some changes in the manufacturing footprint, and that requires some CapEx which is ongoing and that is also why -- one major explanation of why the CapEx for this year is going to be slightly higher than our average CapEx and that is in order to prepare these new factories for absorbing some -- or absorbing or to change the overall setup for manufacturing especially of some of the tires. So this is really the priorities we have for '18.And then moving over to Page 28, on the outlook. I mean we believe or we expect this running quarter to be on the same level as the quarter we have left which means that the activity level will remain high in most of our businesses and then also in most of the geographies. So we expect the overall demand to be in line or to be on par with the quarter we just left. Then Page 29, before we move on to Q&A, I want just to highlight that we also during the quarter sent out an invitation to our Capital Markets Day for 2018, which will be held at June 5 at Berns in central Stockholm. So very welcome to all of you to register to participate here and listen to a run-through of the full company and our strategies and our plans going forward.Then, next agenda point, Page 30, moving on to Q&A and quickly to Page 31 and then opening up for Q&A. So please go ahead.

[Operator]

[Operator Instructions] First question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, Automotive Analyst]

I have 3 questions. Starting off with Sealing Solutions. Very nice to see a really good drop-through on the organic growth. I think that you previously have downplayed the operating leverage in Sealing Solutions going forward and more talking about prioritizing growth. My question is should we think of this type of operating leverage going forward given that where organic growth is trending? That's the first question. The second question is on Wheel Systems. If you would dare to maybe discuss what type of a growth -- organic growth you had in aftermarket, if that was negative during the quarter, or maybe how we should think of that for the rest of the year? And then last, more [indiscernible] on offshore, a bit surprised with their organic sales drop. Do you feel that you have ended all restructuring there or given this drop do you see that you might just need to do something else? Those are my 3 questions.

[Peter Nilsson]

Yes, and I talk about TSS. We continue to invest a lot to grow the business. As we said before, [indiscernible] stays the same. And we are more interested actually in growing the business at these similar margins going forward. So continue to invest and then there are some small individual variations. So I can say that the same drop-through will remain. Honestly, I hope not. I hope that we will be able to grow the business and grow the EBIT. That will be more and more important for us than really to push the margin up. But with that said and done, I mean we're running with fairly high gross profits in [ DS ] and of course increasing sales will create the drop-through. But I don't really want to give a firm guidance on the drop-through. So don't take this as a guidance going forward. We expect the EBIT to continue to grow, of course, as the organic growth is growing, but we also would like to continue to invest in certain segments. And we are investing to strengthen our position, for instance, in the aerospace. We are investing quite a lot also in medical and healthcare to grow that area, and also within this, what you call electrification, not only about automotive industry but electrification of a lot of industries. We are today using combustion engines or hydraulics and moving all to electrification, we're driving a completely new demand on certain seals and all of that. So we continue to invest in those areas to strengthen our position. About Wheel Systems, aftermarket was negative, but some of that being that we kind of decided to [indiscernible] yes, but steel, I think, it was [ rebated on the ] online market. I think we've grown market share, but I mean it's difficult really to estimate this. But definitely there was the winter impact as the farmers couldn't use the tractor since there was snow in the fields, then, of course, they didn't buy tires. So we don't expect that to last. We expect it to bounce back, but we can't say that everything of it is bouncing back. But the mix effect is substantial in the quarter going from growth in OE and a slight decline in the aftermarket. With our Offshore & Construction, I mean, I will say I was also -- we were also a little bit negatively kind of surprised by the actual outcome here. There are some slight delays on projects and also, as I hinted on the call, you shouldn't read this as it being solely offshore-related. I mean, we had also in the quarter slightly low sales of the infrastructure part of it, but that's more kind of a quarterly one-off impact. If you look at the full year, it will get better. But I mean I cannot say really next quarter or next quarters, for offshore, will be continue to be challenging and then we will hopefully see a slight improvement by the end of the year. But we expect the infrastructure part to actually get better as the year develops.

[Operator]

Next question comes from [ Jeffrey Ceasion ], private investor.

[Unknown Analyst]

Yes. I hope you can hear me clearly.

[Peter Nilsson]

Yes.

[Unknown Analyst]

Good. My question concerns the innovation center which you are creating in Germany and is due to open in the summer of this year, I presume.

[Peter Nilsson]

Yes, correct. Opening beginning of September, yes.

[Unknown Analyst]

My questions are as follows. Where is it located and how many employees will it have and will there be any production facilities attached to that location?

[Peter Nilsson]

The location is Stuttgart and it will be combined then with our headquarters for our Sealing Solutions activity. Number of employees it depends because it's a mix both with sales, R&D and all of that. But there is different kinds of R&D centers [ in DS ]. There is kind of basic R&D, advanced material R&D, but there is also comprehensive testing because a lot of this innovation that we do here is very much linked to applying new materials into new products. So it's kind of a combination of that. But we don't really want to announce exactly how many it is. And it's also a kind of innovation center supporting our 30-over plants around the world. So that is also not really interesting, really, to talk about the number of people. But I mean we are investing a lot in this, especially what we call application -- innovation in application, we put it like that, so it's a lot of testing, a lot of facilities, which is kind of assisting our customers to develop better products.

[Unknown Analyst]

So this innovation center will support the whole of the Trelleborg Group and not just Sealing Solutions?

[Peter Nilsson]

Primarily Sealing Solutions, but, of course, there will also be some benefits here. Sealing Solutions is very good [indiscernible] avoid heat buildup in friction. So some of these innovations will benefit also in other parts of Trelleborg, but the major focus in this, the primary focus in this is to support Trelleborg Sealing Solutions.

[Unknown Analyst]

It's a good location, Stuttgart, to do that.

[Peter Nilsson]

We firmly believe that. We've been there forever -- and not forever, I shouldn't say -- we've been there for very long and what we have is -- it's a highly kind of innovative area of Germany. But with that said and done, of course, we have similar innovation centers, although a lot smaller, both in Asia and in Americas.

[Operator]

Next question comes from [ Eric Garr from SEB ].

[Unknown Analyst]

I have 3 questions. Following up on what was said on Wheel Systems, I'm just struggling a bit to square the organic growth given your end markets. I mean, construction equipment and material handling, at least on the OE side, should be up well into double digits if you look at the industry, at least in the first quarter. And then if ag OE is up as well, then the aftermarket part should be really weak. Could you give some kind of indication on what the construction and material handling parts are growing? And then secondly, on your guidance, given what you have said about the tough winter impacting aftermarket demand for ag, it doesn't seem as you're really comfortable that that will come back in the second quarter, is that correct? And then thirdly, on your specific growth initiatives in Sealing Solutions, springs, the new segment you talked about, online initiatives, can you give some update on how those are developing?

[Peter Nilsson]

On the aftermarket, I mean we are -- I mean I should be honest to say that we are also struggling a little bit to get the full picture of that. And we don't know -- we cannot really read how much of this is kind of linked to the harsh winter. But, I mean for sure that there have been, let's say, a substantial, let's say, push down on the aftermarket. But then also in that area, we are also doing our positioning and we are phasing out a few, let's say, accounts in order to get this higher margin, to get the right mix, going forward. I mean, we have a substantial increase in -- but also in OE I don't know where you get the figures, but the tractor registration is actually down in Europe and in North America and we are growing in that. So we are actually gaining market share. So I think we are performing, yes, substantially, I should say, in the OE and that is being then pushed down a little bit with aftermarket. Correct you state, also construction is doing good, but also on that, we are relatively small, even though that is part of our ambition here as we invest especially in Serbia, we invest in a factory in [indiscernible] in order to grow our capacity for construction equipment, which we believe, let's say, will assist us in growing that part of the business going forward. And I'm sorry, we don't really want to give any further guidance on this. This is also a little bit kind competitive intelligence that we don't really want to share openly. About going back -- I mean, coming back here, some of this is coming due to the harsh -- from the harsh winter, most likely, will be a bounce back here in the running quarter, but honestly, we don't really know. We know that part of this farmers today are kind of having the money in their pocket and they're spending it. So we are a little bit concerned that some of this which we lost in the first quarter, that we'll not gain it back fully in the running quarter. The final question was about --?

[Unknown Analyst]

The growth initiatives in Sealing that you talk about.

[Peter Nilsson]

[indiscernible] pushing that all across. I mean, the springs is improving, but it is still a low base, it is online support. Online sales is growing, but is also a small figure, all of them in totality. So they are progressing in a good way, but they are not really impacting the overall sales growth yet.

[Operator]

Our next question comes from Johan Sjöberg from Danske Bank.

[Johan Sjöberg, Analyst]

Returning to the drop-through in Sealing Solutions. I remember in Q4, it was a little bit of a hiccup because the drop-through was quite -- you explained it highlighting there some negative impact from acquisition but also high SG&A cost, but now we bounced back really in Q1. I just want to make sure -- I know you have got the question earlier, but what should we view as a normal quarter, this quarter or the fourth quarter would you say?

[Peter Nilsson]

Probably, I mean [indiscernible] the acquisitions is improving as we have them. Of course, we have them and integrating them more and more into our model it gets better and better. But I don't know, Ulf, if you want to supplement.

[Ulf Berghult, Chief Financial Officer]

Basically we are running with the same cost base on a quarterly basis, and quarter 1 and quarter 2 are much, much larger in sales than quarter 3 and quarter 4. So of course, you have a larger drop, you have a larger base and then we then get the organic growth in top of that, then we have a nice drop through.

[Johan Sjöberg, Analyst]

Okay. Yes, that makes sense. But there is not -- okay, yes, fine.

[Peter Nilsson]

Not really any major change. It's simply that we had a few bigger projects in Q4 but I mean, we're talking here about the individual millions of euros, which is not really a major impact on the totality.

[Johan Sjöberg, Analyst]

Okay. And also just coming to the calendar effect in Q1 also, the Easter effect. What would you say was the impact from that in the quarter?

[Peter Nilsson]

Mathematically, I think it's one less working day. But then of course you have Easter, some holidays, it could be more, but that is something between 1 and 2 days, which is then what you have 60 days or something. Then we talk about, yes, what is that. That is 1 or 2 percentage points or something like that. I mean, it's not really any major, but there is of course a negative.

[Johan Sjöberg, Analyst]

Okay. And also coming back to Wheel Systems here. Could you explain a little bit about the bridge here? I mean, if you look at the Q1 last year, it was -- I think you had a negative impact from raw material cost of SEK 200 million in the first half. I'd make it simpler for myself to say that it's SEK 100 million, all things equal there in Q1. I look at also the organic growth year-over-year, it 4%. I still see that the underlying EBIT is up less than SEK 100 million. Is there some other effect here which is I'm missing here or what was it that in Q1 last year you had a good sale of aftermarket tires and, yes...?

[Peter Nilsson]

We have some of it -- we already hinted on that there is some sales mix impact on this one, of course, which is pushing it down. But all in all, of course, we're moving into and it is not being fully compensated yet, and we are moving into a better reality. So we -- I mean it's difficult really to give the bridge, but -- I mean, we are -- to give you a bridge in detail, but we of course, we are moving -- we feel that's definitely moving in the right direction, and we are more or less compensating ourselves for the raw materials. And then on top of that, we'll be having some impact on this negative mix coming from kind of higher share of OE and lower sales -- lower share [indiscernible].

[Johan Sjöberg, Analyst]

It's a big margin difference then between aftermarket and OE?

[Peter Nilsson]

As immediate it is, but long term is the same basically we said because to sell the product for an OE, substantially -- the selling cost for that is substantially less than the aftermarket. If you look at the total EBIT drop-through, it's basically the same. But of course, if you have these swings from one quarter to another, you cannot really adjust it. But if this remains, then of course, we will adjust it and we'll get better on the totality.

[Johan Sjöberg, Analyst]

And my final question about your cost cutting program in Houston, which I -- could you say how -- looking into -- I mean, Q1 was slightly weaker than expected, obviously, and Q2 doesn't seem to be great either. But if you look at into the second half year and just looking at your own cost initiatives, do you expect offshore and construction to be running with black figures as of Q3 or is that too early?

[Peter Nilsson]

I don't really want to comment on that, Johan. We have to wait and see a little bit, but of course, as we move into a better reality, it will get better, but I mean, whether we go into black in Q3 or whatever that's going to be dependent a little bit on the sales and the margin, of course, also we'll be getting on the projects we are going to ship in that individual quarter. But I mean, it will definitely be better. We'll move into a more efficient setup as the months pass.

[Operator]

Our next question comes from Agnieszka Vilela from Nordea.

[Agnieszka Vilela, Research Analyst]

I have 2 questions. Firstly, I wonder what was the net pricing in Q1 and what we should expect in the new term? So if you could just elaborate about the current balance between your pricing and raw material fluctuations? And secondly, in the report, you write a couple of times that you had very good cost control during the quarter, and I can also see that you have a relatively low research and development and administrative expenses. Is it sustainable or what do you expect for the coming quarters?

[Peter Nilsson]

Starting what we have done on the cost side, I mean, we are always looking at the cost, we're always cost cautious. I mean, we don't see it any kind of abnormal in the quarter. It is more stable and we don't really have a lot of one-off incentives in the quarter, which is somewhat like marketing campaigns or exhibitions whatever. We are fairly low on that, which means that the quarter is, let's say, on a good level in terms of total cost. But once again, I mean -- once again, there is not really any extraordinary, simply it is good cost control across most areas. When talking about raw material pricing. I mean, the raw materials has been stable for some time and we are constantly adjusting of course to adjust. I mean, we are -- in some, let's say, smaller raw materials, not maybe on the bigger end of this, but some smaller raw materials there is some bottleneck situations. So of course we are working with -- deal with price increases. By the way, this is going to be only in very specific segments and with very specific materials. I mean, we have a few like silicons we have some PTFE, we have some in bronze. There is a few materials which the supply is getting very tight, but is not really major for Trelleborg, but in those areas where we are influenced by that, of course, we are still -- although we continue to adjust the pricing.

[Operator]

Our next question comes from Malte Shulz from Commerzbank.

[Malte Christoph Schulz, Industrials Analyst]

A couple of questions, and the first one is on the Wheel Systems. Can you elaborate a little bit on the position in the U.S. on your market share gains and on the ramp-up process and where you are now and maybe your plan for the next coming quarters? My second question will be again on Offshore & Construction, particularly, on the oil and gas. Some other companies have reported relatively optimistic statements on oil and gas recently. And also, for example, Alpha booked several orders in offshore oil and gas. So my question is do you already have booked orders yet for the later part of H2 or is it still -- or you would expect orders coming in there? And my final question would be on the M&A, was relatively quiet from your side during the past, should we expect anything in the near future?

[Peter Nilsson]

[indiscernible] just continues according to plan. I mean, we are growing our market share in U.S. and we are getting what you call tire type by [indiscernible] than we are getting, let's say, an attention or interest -- strong interest, especially on the OE part of it. [indiscernible] that will be our and we still believe that throughout this year our running kind of EBIT in U.S. will turn positive probably at the later part of the year and not in the earlier part of the year. So we are definitely moving in the right direction there because offshore -- we are also slightly -- we are also very positive in a way on the changes in offshore. What we are following what we call orders to be placed, which is basically we know that our customers have been getting the order, and we know that they need to award the order and that's kind of I should say that activity has increased a lot. So that we know that we're going to get orders and orders there are starting to get in, but the major chunk of that is something we expect to see an uptick probably in the next say 1 or 2 quarters and then it will take another 1 or 2 quarters before we actually invoice. So don't misunderstand as there are more months. We also feel that this is moving very much in the right direction. Even though, I mean, the first one, which is coming here is this MMO, basis maintenance, modification, operations we don't have a lot of that at the moment because our exposure is mainly into capital equipment with offshore and that is coming slightly later. But overall the activity level within the oil and gas activity is substantially higher than it was before. And if you are looking on the onshore activity, then that is definitely already up and running while on the offshore activity is basically higher activity everywhere. But I should say -- but for the Mexican Gulf probably, we don't really see an uptick in the Mexican Gulf. But the North Sea is good, Brazil is good, West Africa is good, and also Asia is turning also positive. So we are becoming more positive in the offshore, but we also need to be fully aware of that it's going to take a few quarters before we see it in sales. The final question was then about M&A -- M&A we continue to scout M&A. We still have a high activity level in M&A, but that is coming in bulk or you cannot really control the timing, but we still have plenty of M&A opportunities and we are still working on several opportunities there. And it is really difficult to give any kind of guidance when they actually will materialize, but for sure there is a lot of activity in that area still.

[Operator]

[Operator Instructions] The next question comes from Erik Paulsson from Pareto Securities.

[Erik Paulsson, Analyst]

So you mentioned bottlenecks among your sub suppliers, some of them, earlier on the call. You were talking about silicon et cetera. Do you only have this among your own sub suppliers or do you see bottlenecks in your own production system as well and where is that in that case?

[Peter Nilsson]

We do also have bottlenecks in our operations here. Delivery time in certain areas is getting long. I mean, we have very strong increases -- strong increase in demand in certain segments. So we are struggling, but of course, there is more -- it always have some bottlenecks in the production, otherwise you have too much capacity. So that's of course a problem that we are used of working with, but nothing really, really major at the moment. I mean, we are struggling in certain sealing application. We're definitely struggling, for instance, with construction tires. Certain segments also in the hose, industrial hose side and also certain applications there, which is being under pressure. So, I mean, there is some bottlenecks but it is nothing really major in a way and nothing extraordinary. We're working of course to get the delivery time down to be quick to deliver and adjusting our capacity wherever we can, but that is once again I shouldn't exaggerate, it is a challenge which we are used to work with and once again, if we did not have these kinds of challenges, then we would have too much manufacturing capacity.

[Erik Paulsson, Analyst]

Okay. Just a follow-up, is the situation now more difficult or less difficult compared to last quarter?

[Peter Nilsson]

On --- in what respect?

[Erik Paulsson, Analyst]

In terms of the bottlenecks.

[Peter Nilsson]

Probably increasing somewhat because, I mean, there is in certain segments, the segments which are growing is growing even more. So if there is only change is probably slightly more challenges in this quarter compared to Q4. But once again, nothing really major and nothing really which is stopping us in any major way to get the sales done.

[Operator]

Thank you. There appears to be no further questions. I'll return the conference back to you.

[Peter Nilsson]

Okay. Thank you then. Thanks to all of you. Now we are going to rush here. We have AGM in Trelleborg today as well to meet, let's say a major part of our shareholders with [ lists ] around Trelleborg. So that's going to be nice, and beyond that of course I hope that we're going to talk to some of you and if I'm not talking to them, of course you have full access to Christofer who is going to guide you through and give you more flavor about the results. And then later on, I hope that I will see most of you all, if not all of you, at our Capital Markets Day here in June in Stockholm. So take care -- meanwhile take care and talk to you soon. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you very much for attending. You may now disconnect your lines.