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Trelleborg AB
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Ladies and gentlemen, welcome to the Trelleborg Q1 Report 2020. Today, I'm pleased to present Peter Nilsson, CEO; and Ulf Berghult, CFO. [Operator Instructions] Speakers, please begin.
Thank you. Peter Nilsson speaking here, welcoming you to this call where we're going to present our quarter 1 results for 2020. And then, of course, offer some comments on this and finishing off with a Q&A. And supporting me on this presentation, as usual, is our group CFO, Ulf Berghult. And we're going to use the presentation, which is uploaded on our home page. So I guess all of you -- I assume all of you has this in front of you. So quickly moving on to that. Moving on to Page 2, where we see the agenda for the meeting, normal agenda, starting up with some general highlights, then some individual comments on the business areas. And then Ulf will guide you through the financials, and then we'll finish up with a summary. And then, as I said in the beginning here, also finishing off with a Q&A. So then quickly moving to Page #3 in the presentation, having stable quarter growing challenges ahead, which is really -- we see it. I mean we have a good -- generally, a good development in the quarter. Of course, as everybody else, all other industrial companies, some more troublesome, the final weeks of the quarter, but not really hitting us that much in this quarter. Sales finishing up basically flat compared to last year, then assisted a little bit with the exchange rates and assisted with a small structural growth as well, organic, then pushing it down by 5%. EBIT almost on the level of last year, while then the margin is down by some 0.5 percentage points, so 13.3% EBIT margin in the quarter, excluding extraordinary items, which was then, let's say, on the level of SEK 46 million in the quarter and kept it as usual, keeping the overall guideline for these items affecting comparability. Ulf will get back and comment on that as well. Cash flow, very strong in the quarter. We are broadly satisfied with the management of working capital. Because, as you note, in the quarter, also, CapEx is still on a relatively high level. And also, Ulf will guide you later on that, that the guidance for CapEx will dramatically be down for this year, as we have initiated some contigency plans also in relation to CapEx. But overall, good cash generation, as I said before, assisted by good working capital management. We have not been growing the inventory in the quarter and basically been more or less underproducing in the quarter. And even then, we are managing this relatively good profitability. And at the same time, they are delivering a solid cash flow, so cash conversion is actually above 100% now looking at rolling 12. Also to be noted here, this morning, also we announced kind of the first divestiture coming out of these Businesses Under Development, and where we divested the smallest unit in these 4 businesses we gather here, where we divested what we called the Baltic moulded component business, which is a business which focusing on Sweden and Estonia. Also from profit outcome, the divesture was done slightly -- very slightly above the assumptions we made when we did this write-down in the beginning of December last year. So device -- divestment in line with our expectations and happy to get some of that executed. We're also guiding here, we'll get back to that, of course, commenting more on the guidance. I mean we actually have a fairly good order intake in the quarter, surprisingly good order intake in the quarter, but we don't really believe in that. We believe there will be some order cancellations coming up and also some other, of course, uncertainty hitting us. So we won't say that we see considerable negative impact here going into this running quarter, while still also with this stand-alone that uncertainty, of course, is high. I'll get back and comment a little bit more on that later when we -- and when we talk a little bit more focused on the guidance. Talking or moving over to Page 4. Looking organic sales development geography, we can see that Western Europe is the one which has been down much for us, actually, slightly more down there compared to Asia and other markets, even though, of course, like everybody else, we've been hurt, especially in China, while with negative organic growth, while the rest of Asia and other markets has been slightly compensating for that. So Western Europe and Asia and other markets down by some 9%, 10%. And then we have North America by half of that, minus 5%, while we have a slight growth then in what we call other Europe, which we are tracking individually within Trelleborg. And then south and other Americas actually up a little bit. But that is, unfortunately, for us, a very small part of total sales, but nevertheless a positive development. So this is the -- and also, I should say, this is valued for the core businesses that we report here. If you're looking then at the Business Under Development, then we have actually a growth -- organic growth in the quarter, but that is driven solely by the continued positive development in our oil and gas business. Moving on to Page 4, the next agenda page, business areas. Quickly turning to Page 6. Trelleborg Industrial Solutions, which has been a little bit negative in the quarter, impacted by COVID-19 and also with some strikes hitting us in Turkey and France in the quarter, which is then impacting both sales and also partly the profitability. Overall, rather negative sales in most market segments, nothing really sticking out, a slight negative development all over. We see Europe and Asia down, and we say, North America and overall. Then the results are hit by the softer markets and the strikes, so that is a little bit below in -- say, below expectations in the certain areas, but it's also explainable. And of course, we're working on all the issues to try to correct it there as we move forward. Turning to Page 7, having solid performance. Trelleborg Sealing Solutions doing very well. Organic sales down by 3%, supplemented only a little bit by structural growth coming from an acquisition that we did a short year ago. Organic trend is downward in most regions. Here, we see a heavy impact in Asia, while the rest of the -- as you can see from the world figures, the rest of geographies is actually slightly better even though in negative territory. General industry in automotive, weaker in most regions. Even though, we say automotive, a little bit strange development in the quarter actually started very well in the quarter with some sales due to some specific Tier 3 and Tier 2s, where we're a little bit surprised about that. Of course, happy to deliver, happy to sell, but it's not through development, which is not really in line with the underlying development, at the end of the quarter, turned a little bit more as we expected it to be. Aerospace also continued very strong actually in the beginning of the quarter, but turned down here also at the end of the quarter. We expect a tougher development going forward. A slight downturn in EBIT and margin, but also, on that, we've, of course, been watching a little, starting to adapt also from a cash perspective here. And that is also kind of a little bit slight underproduction in certain areas to be able to deliver good cash flow on top of these good results, as we see here in Sealing Solutions. Going over to then Page 8, Trelleborg Wheel Systems, heading sluggish market and temporary shutdowns. It's been a tough market environment, organic sales down by 12%, and we see organic sales going down all areas. But behind this and also on top of that, especially at the end of the quarters, we have some dramatic shutdowns on the major OE customers here, which we stopped buying here in March. And we'll back and comment on that. It's also creating some uncertainty going forward and when that will start again and how quickly that will start, but nevertheless hurting the sales here by the end of the quarter. Continued focus on cash flow in this area as well. So even though with this dramatic drop in sales, we say the inventory levels have been well managed, and we also here continue to deliver good cash flow and a good balancing between sales and manufacturing volumes. EBIT and margin, slightly down, but, of course, well managed. I must say as well here, well managed in terms of adapting to this new reality. We should hide as well. I mean the last few quarters, we've been kind of complaining a little bit about the negative mix, but we also should say here in this quarter, we have a positive mix in the way that OE has been going down more than the aftermarket. And that is pushing us into a more negative -- a little more positive mix this time compared to the last few quarters, where we have had the OE growing more than the aftermarket. So that is helping us here to keep the margin up on a good level because -- I mean if you have a negative organic by 12%, I think it's good to have a less than a percentage drop in the EBIT margin. Page 9, the other Businesses Under Development. Organic sales, plus 10%, driven by a strong continued organic growth in offshore oil and gas, which is then also, of course, assisting us in terms of profit also. But also the other areas where we've been, I would say, struggling more on volumes has also been fairly well managed. And a good cost control here is pushing the overall profitability up here. And we -- that's to say, turning it from basically 0 profitability a year ago up to 7% EBIT, which is, of course, a good development. Of course, we have a note as well. Even though we have good order book and good, what we call, orders to be placed portfolio in the oil and gas, we, of course, are not at all neglecting the recent oil price development. And we need to see here in the next, next few months, exactly what kind of impact that will have in the businesses. It will, of course, have a negative impact. But also, we note that most of our sales in oil and gas is actually very late cyclical into the oil and gas sector. So we actually have to watch here carefully what's going to happen in the next few months and the next few quarters. Also here, as I already commented on, we divested the smallest business within business development in the quarter and happy to be able to execute that and to lead that business, which we think is more a good business. But it's a local regional business, which doesn't really fit with our strategy. And also the divestment, already commented as well, was in line with our expectations when we value this business in the beginning of December last year. So happy to execute that and to get that development going. Turning to Page 10. Agenda, financials, and then leaving. Page 11, Ulf, please.
Okay. Thank you, Peter. So on my first slide, Page 11, sales development, you can see that organic growth in the quarter was negative 5%, impacted by the decline in demand in the wake of COVID-19, especially in March. Excluding Business Under Development, organic growth was negative 7%, and Business Under Development reported plus 10%. The impact on currency translation was plus 2%. Next slide, Page 12, describes the historical performance of our organic growth. As you can see it on the graph, the COVID-19 broke a long positive sales trend. On Slide 13, you will find the reported sales development per quarter as well as rolling 12 months. Slide 14 presents our EBIT development. Our EBIT reached SEK 1.235 billion in the quarter and was positively impacted by currency translation of SEK 36 million. EBIT development was positively impacted by Business Under Development and especially then oil and gas. Slide 15 present EBIT and margin on a rolling 12-month basis. On a rolling 12-month basis, we are currently at 12.6% EBIT margin. The next slide presents the profit and loss statement for the total group. Items affecting comparability consist of the restructuring costs and has been in line with our annual guideline. Financial net has been impacted by positive exchange rate differences of SEK 66 million compared with Q1 2019. The quarter was charged with the nonrecurring costs in the tax charges related to dividends from subsidiaries due to additional withholding tax. These internal dividends would strengthen our central liquidity since these funds were previously in banks accounts outside the group account structure. The tax rate for the quarter for the group, excluded items affecting comparability, amounted to 26% compared with 25% a year ago.Slide 17 presents earnings per share, adjusted for comparability items, which was down by 1% to SEK 3.21. Slide 18 describes the development of our operating cash flow. The operating cash flow was positively impacted by lower working capital. The group initiated an extended review of working capital with extra focus on accounts receivable and inventory. The inventory was in line with the level at year-end and lower compared with Q1 2019. Overdue accounts receivable declined compared with the level at year-end. Quarter 1 is, from a seasonal aspect, a strong quarter and would normally demand a higher working capital need. The operations have handled the working capital and cash flow very well. The investment level was higher during the quarter compared with the year earlier period, but the full year outcome is expected to be significantly lower compared to 2019. And we now expect the CapEx to reach approximately SEK 1.2 billion for the full year. During the quarter, property was divested with a cash effect of approximately SEK 100 million with only a minor impact on earnings. The cash conversion rate for the most recent 12-month period was 102%. Slide 19 presents rolling 12 months operating cash flow. Slide 20 shows the net debt movements. As you can see, the weakening of the Swedish krona has impacted the net debt negatively by SEK 1.1 billion. Slide 21 shows the net debt-to-EBITDA ratio and the net gearing development. Slide 22 describes the return on equity, where the long-term target is 12%, including items affecting comparability. The action outcome in the quarter is minus 0.7% compared with 10.5% a year ago, and then impacted by the impairment of working capital in Business Under Development in quarter 4 2019. And then finally, on Page 23, going through then the guidelines for the full year. As I said, the CapEx of SEK 1.2 billion. Previously, we had a stand between SEK 1.6 billion and SEK 1.8 billion. The restructuring costs, as you see it right now, that's about SEK 300 million. Underlying tax rate is 25%, and then amortization of intangible assets about SEK 400 million. So that concludes the financials. So Peter?
Yes. Page 24 then quickly, agenda, turning over to summary and some comments on outlook. Page 25. As I said, sales down by 1%. On top line, organic sales down by 5%, and thereby supported a little bit by structural growth and with some currency and then ending up with this minus 1%. Margin in the quarter, down 0.5 percentage point compared to a year ago. Items affecting comparability in line with the guidance. Cash flow's strong, as Ulf presented with a good development of working capital in the quarter, leading to a good cash conversion above SEK 100 million for the last 12 months. And then also the divestiture of this moulded component business for Sweden and Estonia also executed actually today. And then also, certainly, on the guidance going forward, we'll comment on that when I get to that page. Going forward here, the priorities, of course, is to manage the market conditions now in the wake of this corona development. We have been working hard on this, of course, in Trelleborg since some time now when we have multiple of actions ongoing and working with all kind of tools which, of course, I mean all of these contingencies, working co-safety measures for our employees and making sure that we manage the spreading of the virus in the best possible way. High focus on that. Then from an operational point of view, of course, also, we're working in basically 2 dimensions. We're working with the cost and with the cash, and then, of course, also managing the customers. And we have a multiple of actions ongoing and, of course, using all kind of measures, which is possible. And then finally, also in this COVID-19. Of course, we commented here already a few weeks ago. We're working also with the financing and cash management in making sure that we have a solid and wide gap and making sure that we actually have all the liquidity, which we want, but we feel confident that this will be the case going forward. Of course, we continue as well to work with the Business Under Development. Of course, the environment at the moment is a little more tricky than when we started with this activity -- this focused activity a few months ago. But nevertheless, this is continuing. And we're continuing to focus on these businesses, which we have in this extra business area. Over that, I mean, otherwise, we continue, of course, operationally to work with our portfolio, continue to work on our excellence programs, and, of course, continue to invest also in innovation, and we still have also some integration, ongoing acquisitions. Even though acquisitions is not high in the agenda exactly at the moment. We continue to monitor because we still have a long list of interesting targets for us that we, of course, are watching carefully now and trying to see what happens with them. Turning to Page 27. Outlook, as I said, significantly lower in the first quarter -- sorry, I should say, significantly lower in the running quarter compared to the first quarter. I will say that this is a little bit difficult. I mean, actually, our order intake in this quarter has actually been fairly good and been basically in line with the sales, but we don't really believe in this order book at the moment. We believe it's going to go down, and we don't feel that the order book at the moment is the best guidance for sales expectations for the running quarter. And that is why we decided to have this guidance. And also on top of this, of course, Wheel Systems, which is probably the ones which is heavily impacted short term, where I trust you know that some of the OEs has been had basically a full shut down here throughout April. And on bigger ones here, as announced, they're going to open again next week. And that is, of course, creating some uncertainty, whether that actually will be up and running next week. We know that AGCO and John Deere, especially, has been out in guiding that their order book is actually quite healthy, but there have been difficult for them to run as they use some kind of the same component suppliers with the automotive industry. So as the automotive industry starts to gear up or -- and the heavy truck industry, they also would like to go up and running. But that is basically the uncertainty. So if you say for Industrial Solutions and Sealing Solutions actually looks quite okay, and if we believe in the order book, it's going to be a very good quarter, but we don't really believe in that one. So we are planning, a little bit -- planning for the worst and hoping for the best. Our guidance here, to put about some figures, is, of course, that Wheel Systems probably will be down slightly more than 20% while the others will be down slightly less than 20%. But it's really given with the high uncertainty, and we don't really know what's going to happen. We are looking at it daily, more or less, and then, of course, trying to adjust and make sure that we are preparing in the best way we can. So that is the comment on that. And then moving to Page 28, and then quickly to Page 29 and opening up for some questions. Hello, operator?
[Operator Instructions] And the first question comes from Erik Golrang from SEB. Erik's line seems to be disconnected, so we'll go to Hampus Engellau from Handelsbanken.
Three questions for me. I think you touched upon this, Peter, on your last statement here on the outlook but very impressive margin development in Wheel Systems during the quarter. And my question is more -- if you could maybe talk a little bit about cost savings and how to think about that? I guess you shouldn't expect a similar drop from if we would have like a 20% drop in sales year-on-year. That's my first question. Second question is on offshore oil and gas. If you could maybe remind us on how much is Czech? How much is U.S. exposure? How to think about these lead times given that we should have, probably on this level, switched on, switched off as many of these entities. And then maybe more last, on your guidance, on this SEK 300 million restructuring cost. If you could maybe back out a little bit on what these components persist on. How much is like temporary cost pressures, and how it should be more like more permanent savings?
On Wheel Systems, it's a mix change, which is driving it. And on top of that, as we say, also -- because we also need to be aware that some of these investments that we've been doing in the last few years is actually now kicking in as well. I mean now we have our Serbian factory fully up and running, and we see the more efficient to manufacturing Serbia than in Czech Republic and Italy. So this is a -- the margin here is a combination of good cost management, better efficiency and a marginal mix development. So that is a combination of everything. And I must say, looking at the figures internally, they've been doing good in all aspects here in the quarter. Mix is better. They've been able to manage pricing in a good way. And on top of that, also, actually, transformation cost is also in a good level. So that is good development. And I mean -- of course, I mean we need to see internally also the team within Wheel Systems that have been working hard here to get this and is happy to see for us, Ulf and myself and the others, here to see that actually their hard efforts is paying off a little bit in this quarter. Of course, as you say, if we then -- depending on how the agricultural OE will restart here in the quarter, there is a huge -- there's the uncertainty about the volume drop in this quarter, where we know that we lost basically 1 month already here on the OE manufacturing, and we will continue to watch also in Wheel Systems the inventory level. So we will not overproduce in a way. So of course, we're entering into a challenging quarter, but we also expect the underlying market of agriculture, especially, is actually quite good. And it's not really impacted overall by this kind of drop in the industrial demand. And we see, of course, now also in U.S., that the U.S. government is starting to offer some kind of support for the farmers in the U.S., and we don't know what's going to happen in Europe. So overall, we don't feel too concerned about the agricultural market if we look beyond the current quarter. But the current quarter, of course, is going to be hit by these shutdowns on the manufacturing of tractors. So I don't know if that's enough on that, Hampus.
Yes, yes. I mean that's helpful.
And then oil and gas, I mean, we have virtually no exposure to shale gas. I mean very, very limited to shale gas. We are not really hurt by this dramatic drop in the oil pricing in the last few days. But our exposure is mainly to offshore. And once again, I mean, as we mentioned before, we are very late cyclical in some projects. We actually got a very big order yesterday here for delivery in Q4, where they've already spent $1 billion on the project. And then they need to buy our products to get them running. So we don't expect kind of a full stop on our oil and gas activity at the moment since we are not really -- we are more into capital equipment, and we are also late cyclical into this. So the order book still looks healthy, and we've still been building order book also in the last few days. So -- but of course, with that said, we fully understand that it will have an impact, and we need to look carefully here, of course, about these running projects. So we don't really -- we have to watch it, but maybe not for the next quarter or 2. So that is really the way we look at that oil and gas. And with regard to restructuring, there's virtually no immediate measures in that. I mean the immediate measures is more using this -- or kind of furloughs and these temporary factory closures and all of that. But there is a lot of, I should say, governmental support to get that. So among this is still vast majority, if not everything, is linked to kind of structural improvements and shifting factories and shifting volumes, moving sales offices and so on. But that is really -- this SEK 300 million is coming from that.
Our next question comes from the line of Erik Golrang from SEB.
I have 3 questions. The first one is on the commentary you provided on organic growth there for the different divisions for Q2, more than 20% down for Wheel and a bit less for the others. Is that basically a reflection of what you -- where you were late in Q1? Or is there some built-in expectations of a deterioration in there?
Deterioration is in Wheel Systems, where we -- once again, where we're impacted by these factory closures in the other ones. And I mean to be honest, if we should be -- if you should believe in the order intake here in March, it will be better both in Industrial Solutions and in Sealing Solutions, so that is kind of a little bit. We are looking back to what's happened in 2008, 2009, and we know that when the order book cancellation starts to happen, they're going to go down. But if we simply see the normal kind of estimation that we usually go, it will be better, but we don't really believe in that. So we believe it's going to go down more than that. Then the uncertainty, there is an uncertainty in the Wheel Systems because if it's true like, of course, we don't mistrust our customers, but AGCO and John Deere is pushing that have good order books. But then they need to restart it, they need to start to buy. And of course, they are -- still have to be up and running. So that is with some uncertainty in both areas, Erik. So sorry, I mean we're working on it daily, and we're trying to figure. But once again, I'm going to say, if we firmly believe in our order books, it will be better than this. But we don't really believe in order books at the moment.
Okay. Then the second question is on aerospace. Specifically, you said it deteriorated quite a bit towards the end of the quarter. What are you seeing there now in terms of order trends and call-offs and comments from your major customers?
They're going down, of course, and a huge uncertainty. I mean we know the Spirit aerospace in U.S. has been basically stopping operations, and they are the main suppliers to Boeing. At the same time, Boeing is commenting when they're going to start 737 again, Airbus is down. So it's really difficult, Erik, to give you guidance. We expect to go down by 2 digit organically here in Q2. But we also, in that area, is really -- the visibility is very -- it's not that bad in April, to be honest. We don't look that bad in April. But of course, I've been hinting that it's going down in May and June. So that is something we also have to watch carefully. But Q1, in total, was quite okay. Actually, positive growth, to be honest.
But you're not down double digits in April so far on aerospace?
No, no, no. Not at all, no.
Okay. And then the final question is on the strategic review and the -- with the asset sale you announced this morning. But then you also said that, obviously, part of this process is more difficult in the current environment. I guess 2 questions to that. Are you revising your price expectations lower in the event that you want to sell some of these assets? And secondly, would you say that there is a higher likelihood that some of these assets will remain in the group now compared to previously?
No. I mean it's no change. I mean we're going to expect -- price expectations are not down. We are working on them. We have announced all from the beginning it's going to take up to 24 months, and the time plan is actually the same. I mean we're working with some legal rework on some of these businesses. We're also separating them for the business, we're doing some reorganizations. So we are not kind of changing our overall game plan for time being. I mean we were not really planning in the beginning for any of the other units to be kind of sold already because all of them is in a repositioning. And some of them is also with the possibility of improving, and then may -- might get back into the ordinary business also going forward. So we are still -- we have not changed in any way the direction or the -- we still have allocated resources for it. We still -- we appointed bankers where that is kind of in our plan and all of that, so nothing has changed. Of course, we need to watch and we need to make sure that the market looks -- I mean, as you say, the printing business, if you say that the printing has gone very little impact from this one. I mean since that is more consumer packaging and newspapers and all of that. So they have a very limited impact from this recent happening in oil and gas. It's still moving kind of in a positive territory, and we need to watch and see on that one. And then, of course, the other one, the Czech operation has been heavily impacted by -- because there's a lot of automotive in that, and that has been heavily impacted. But on the same time, we're in a downsizing activity there, and we have almost cut the number of people in that operation by some 20%, so that is kind of in execution mode. So we are still running these businesses in a very operational way and to get them ready to be independent or potentially then get back. But I mean no change in direction at all for time being.
Our next question comes from the line of Douglas Lindahl.
Peter, just a clarification question there on one of the questions you got previously. Did I get you right that you don't expect any big negative shifts for your oil and gas business over the coming few months? Sort of indicating that we should continue to see organic growth in business under development in Q2, at least. You don't really seem to expect the same degree of order cancellation for this business specifically. Is that true?
No. We cannot see that. I mean, I should say, I mean, we've been losing a little bit on the growth profile because all these site jobs is difficult, but we are expecting still positive growth, solid organic growth in that one. But of course, it's going to be negatively impacted, especially with the site jobs, so that is more -- the site jobs will happen eventually because they need to happen. But I mean, at the moment, which is quarantines and all of that, it's difficult. So that they are not disappearing, but they have simply been pushed ahead. But that is a minor part of the totality.
The site jobs is a minor part?
Yes.
Yes.
Yes, okay. And a question on your revised CapEx number here. You -- can you give some examples of what sort of investments you're skipping and what investments you're prioritizing?
Ulf, do you want to comment on that?
No. We are pushing all -- we normally say that the running -- we have a depreciation base about SEK 1.1 billion. And that is -- we're also saying that there's no reason of kind of cutting in a normal day, so that is the maintenance CapEx. And then, of course, we've been quite drastic on those maintenance CapEx. And then on the strategic ones, then on top of the SEK 1.1 billion, we have then scrutinized each one individually. And then some of them, we have put down into lower modes and then try to push it forward. So most of the strategic CapEx is they are only pushed forward, while the maintenance then that we've been more harsh on that. So we have implemented very harsh approval steps in all 4 CapEx-es. That is basically maintenance.
Okay. And Ulf, on that, the divestment, which was announced this morning, is that the SEK 112 million in the cash flow sold noncurrent assets?
No, they are not part of this one because that happens now in Q2.
I'm sorry. The one that affect you, of course.
So that was included in -- so the only disposal, that was the building that we had in Germany that we sold now in quarter 1. The impact from this one will come in Q2.
Our next question comes from the line of Klas Bergelind from Citi.
Peter and Ulf, It's Klas from Citi. First on Sealing Solutions and reflecting back how this business has changed since the financial crisis, obviously, total automotive is much lower today for Trelleborg, but I guess there are other changes as well, of course. When others like Industrial Solutions get a big hit from channel destocking, I think Sealing Solutions compared to '08 and '09 can perhaps do a bit better. And the way I think about this, Peter, is you no longer sell old seals on the planet and through big distribution. It's more digital today and more customized. Would you say that sealing, from that point of view, if we compare with the financial crisis, we see less of an impact from channel destocking?
That is our intention. I mean if we go back to this financial crisis, then, of course, we had some 20% or something, 20% plus, 25% maybe, through distributors. I know that is going down to 5%. So of course, we don't have this kind of destocking on the distributor wholesaler level. But we still have some impact, of course, the destocking at the manufacturer, so at the assembly lines, but it will not be in the same dimension as we saw the last time. And then, of course, also the mix is different. Now we have a fairly sizable share of medical and health care, which we didn't have. We had nothing of that, something, yes, which is now approaching some -- about 10%, Ulf, I guess.
Yes.
So you're going about 10% of sales. So we have definitely a more stable -- but there will be some destocking or restocking impact, but it will be substantially less compared to when you're more exposed to these kind of wholesalers and distributors.
No, it's good. Sealing Solutions, it's a better business. I just want to confirm that. That's good. Then on -- my second one is on the margin there in Wheel Systems. During the March update call, I think you said that the you stopped the destocking in Wheels had been a drag for you for 2 quarters at least before. I mean you will likely destock again, given that you have these massive shutdowns looking at the OEMs. But did you stop the destocking in Wheels? And how much did that boost the margin in the first quarter?
Well, I mean we manufactured more than we did in Q4, but we still manufacture in line with the sales. So of course, it's still kind of a negative impact. But if you look overall, I mean, it's a negative impact. We've still been cutting it with some 10%, 15% on the manufacturing capacity. And of course, as you said, we need to -- so we're planning on some factory closures here and closed for a week in a few factories to make sure that we adapt for this OE downturn that we've seen here from mid-March and running at the moment. So it will -- there will be some impact, but on the same time, the positives that we have here is the mix improvement. And on top of that, also more benefits really from this, let's say, investments and reorganizations that we're doing shifting volumes between the various factories. I mean we've been struggling a little bit to say on the Serbian. We did a major investment in Serbia, and we moved production to Serbia, both from Italy and Czech Republic, but that has now been running actually very efficient in this quarter. That is a beneficiary -- the beneficial -- it's been benefiting us in the -- especially on the transformation costs. So there is benefits from better operations and mix and then it's a negative still on fairly low manufacturing levels.
Yes.
Because we produce against demand, I'd say. We don't have a destocking. But if we don't have the demand, then we will not produce. So we're adjusting.
Of course. But -- yes. But the year-over-year in the bridge, it's less of a drag. Otherwise, that is what I understood it, at least from the March update call. But maybe I misunderstood it then.
No, no, no. But it's correct. There's more in line. We don't have annual production as we had in Q4, but it's still a negative drag because we are manufacturing less than a year ago.
Yes, makes sense. Cool. A very quick final one is, did you say how much the strike impact was on sales and margin there in Industrial Solutions?
No, we don't really want to comment on that. That is a combination of a few different stuff. But it's not the only explanation, just because there was a little bit -- because, also, we say Industrial Solutions, why that is impacted, then we are back because they still have some of these wholesale distribution sales, where they have been probably been pushed down a little bit more than the market in the quarter. And that has been hurting us a little bit.
Our next question comes from the line of Agnieszka Vilela from Nordea Markets.
I have a couple of questions. You have seen already 3 weeks of your sales in April, and I wonder if you could give us some color on the development for different divisions? How was it for Wheels, Sealing and Industrial Solutions so far in April?
I don't want to give any kind of details on that. But Wheels has been, of course, impacted by these closures on OE, as we already commented on. I mean, as you know, the factories of AGCO and the factories of John Deere and the factors CNH has basically been closed. So of course, that has been hurting us more. So we are down more in Wheels here in the first few weeks, dramatically down more than we see in the first quarter, while the other 2 businesses actually tagging along basically in line with what we've seen slightly more negative in the first few weeks compared to what we have seen throughout Q1. But I mean -- but we expect it to be tougher, both for Industrial Solutions and for Sealing Solutions here in the next 2 months. So that is a little bit roughly and also very frankly and openly about the way it is at the moment.
Yes. Perfect. And then my last question is actually on the kind of your cost savings measures that you're taking. Usually, you take the restructuring costs of about SEK 200 million to SEK 300 million per year anyway as a kind of pruning of the business way. So my question really is, why aren't you kind of taking the opportunity to cut costs even more in that -- in this downturn? Is it so that you expect the demand to come back already in Q3? Or how should we think about it?
Now also, when we look at this restructuring, a lot of the restructuring that we have been taking last year is coming actually from acquisitions as well. We're integrating acquisitions and while integrating acquisitions, we need to take some costs. And we see the acquisition-related restructurings will be less. And of course, we will put in some more actions on other restructurings. But I mean this restructuring is a very short payback with some of these downsizing has. We don't take it as restructuring. That is really a structural improvement. And we need -- we, of course, looking at it, as you understand, at the moment, can we do more? Is there anything that we should change more? At the moment, the guidance is still this roughly SEK 300 million, but we need to look at this and we need to review it. And with that said and done, it's not for sure it's going to go up. But remember, there is -- of course, if you find something, we will announce it. But at the moment, we're running it, and we are managing these downsizing and cost adoptions without having to add any more to this SEK 300 million guidance.
Okay. And then how much savings do you expect from this SEK 300 million in restructuring costs?
Ulf, you want to say.
We don't know a normal comment, but the only thing we normally say that it is a good payoff. Then also, as I said, also then due to that we -- when coming from acquisitions that we -- in order to realize or to get the synergies, then you need to pay for it. So in most cases, it is a good pay up, but we don't comment specifically.
But I mean the majority of the savings in this cost saving is not going to come from that. That is normal downsizing when we do some furloughs and temporary factory closures and stuff like that and that is not ending up in this post. This is really structural changes and not kind of ordinary downsizing when we are releasing people.
Yes. And then lastly, also on the savings. Are you benefiting from any government's help when you put people on shortened week and layoffs? It wasn't that visible when I look at your administrative expense, for example, in the quarter, selling expenses, but maybe it will come more into Q2. Is it how we should think about it? And how long are those benefits going to be? Yes.
Yes. I mean that has been announced. But it's been -- I don't know. I mean it's not going to be a major amount. Of course, we're using -- there could be, I don't know, what I was going to say, SEK 100 million or whatever. But it's not really -- the majority is not coming from that. And I mean all of that has not only been announced there in March, some of them, but is it kicking in? I think we got the first payout now wasn't it coming in the next -- in this week. So that is coming...
In Sweden now.
In Sweden. And then, of course, we are -- it varies also throughout different countries on how you are supported and all of that, but I don't think we're going to report that in any way. That is kind of normal operational cost. It's going to -- probably the majority of it, you're not going to see an administrational cost. The majority of that is coming into the transformation cost and is assisting on the gross profit and cost of goods sold because that is where the majority of this cost is coming.
Question comes from Robert Davies from Morgan Stanley.
Just a couple. One was just as sort of stepping back, big picture kind of view of the world, I guess, what are you sort of thinking from a growth trajectory through the rest of the year? I know you obviously mentioned that you're expecting a sharp drop-off in 2Q, but are you expecting sort of a sharp snapback in 3Q and then continued momentum? Are you expecting a sort of fade into the end of the year, given some of the employment figures we've seen globally? I'd just be kind of interested to see what you're sort of modeling from a sort of top-down perspective in terms of what the data you're seeing at the moment.
A simple question. I mean, what do you think yourself? But I mean it's really -- what we are planning for at the moment is a dramatic drop in Q2, and we expect that to continue into Q3, while a slight improvement probably on Wheel Systems in Q3, that is what we're looking for. And then exactly what is then happening in Q4, we are not really speculating too much on that. And we need to watch and see what is happening and then make sure that we adapt to the demand level in Q2 and then also in Q3. And then make sure that we kind of not -- that we are able to manage an upturn. But we don't expect -- we're not planning for any kind of dramatic upturn. We are planning for -- to be able to adapt in both directions, so to say. So we are not really too much focused on what is going to happen in Q4. I mean we're looking at Q2, and then we expect Q3 then coming up to vacations and all of that also to be relatively soft.
Because it's kind of based on -- when we also look at then the reaction from the financial crisis in 2007, '08, '09, based on that one is, like Peter said, in Q2 and then Q3 that you will have 2 quarters which will be kind of more down, and then let's see how Q4 develops. But based on how things were being back in '08 and '09.
So we feel -- I mean, right or wrong, we feel we are fairly quick on the actions here and we see a few customers, which is, I shouldn't say, overbuying. But I mean maybe overbuying a little bit, a little bit slower in adoption. And then they will find out. And that is what we believe also Q3 will be impacted. And then, of course, to bring down inventory levels in Q3, especially for a European company, will be quite easy by extending holidays and extending vacations. So we expect that's going to hit us in Q3 as well. While the joker here or the difficulty for us is actually on agriculture because we know that the agricultural market is not really dependent on this overall industrial demand, and we expect this sharp downturn that we see in Q3 to be bouncing back a little bit in Q3. But once again, we need to look at that. But that is, once again, to be transparent and tell about the way we look at it.
Okay. And then the other one I had was just really around your flexibility, your cost footprint. Could you just give us some sense of what proportion of your employee base is on flexible contracts, how many that you either have sort of pulled back from using or planning to sort of pull back in using in the second quarter? Just to get a sense of the flexibility of the business model and the cost base.
By the way we look at it, Robert, at the moment, I mean, okay, now with these governmental measures and all these actions and going in, I mean, we feel that the vast majority of our cost base is actually flexible. But of course to -- but that is based on that we get furloughs and we get support and we get this kind of action. So we don't feel limited by that, if I may say, Ulf. I mean, at the moment, it is more to make sure that we make the right assumptions and that we get the actions going as quickly as possible because this is really quite generous support in a few countries where you can create this flexibility. Our big base, of course, is U.S. and China. And then, I mean, the more difficult ones, historically, which is France and Italy and all of that. But there you have more kind of generous or more support from the government, which is creating more flexibility than we -- actually than we had in 2008, 2009. So that is kind of more offering more options and offering more support than we had 10 years ago.
And then just to finish off, my final one is just really around your current footprint. Has the downturn sort of pushed you into maybe having a second thought about any of your factories or locations or consolidate in any of those sort of production centers when you look at this sort of downturn? Is it maybe sort of...
Of course. I mean of course it is because this is creating opportunity, of course, to do downsizing. And when we do this downsizing, it's not necessary that we're going to build up in the same pattern when the demand is coming back. So of course, it's offering opportunities to do some changes, which we probably would have taken longer to do. But that is dependent on the bounce back. But for sure, it's offering some opportunities, and we already have that on our actual list in a few areas.
Our next question comes from Malte Schulz from Commerzbank.
Yes, 3 questions. First of all, maybe on your working capital, do you see there are more opportunities to optimize it further into Q2 and Q3? Or have you gone already most of the optimization opportunities at the end of Q1?
No. What we're saying that the message is more cash is king and that we don't produce against stock. So it's more than to try to adopt -- adapt the production after the real demand. So it's not -- so it's better to bite the bullet than to run the factory more dry, so to say, than to produce against stock. So it's really then to have a good feeling on the real demand. From a stock level like that, I think I'm really proud of the guys because they were really, really good in the quarter of bringing down the stock. So we have that high focus on the stock and also then accounts receivable and making sure that we don't run into having too much overdues. And as we mentioned in the report, we don't have -- actually, the overdues went down. So it's more kind of a harsh judgment from the business and making sure that our customers will pay.
Historically, we know the receivables. We follow the sales. So we need to -- so we were fairly -- generally, we have fairly good customers, solid payers as -- if you look at the total of our footprint. But -- so that is something. So we need to watch the stock, and then we make sure that we don't have overdues and then it will follow. So that is really the watch.
Okay. Maybe also a question on aerospace, particularly, given the very deep cry for the airline industry and both for civil aviation in total. How much of your aerospace sales is OE-related issue? And how much is based on the current operating feature? Just so we get an idea of how much we lose if, we say, for example, new aircraft sales will decline by 50% for the next year?
The majority of the sales is Wheel like more or less everything in aerospace, but we need to watch that. We don't know exactly at the moment. We still know -- as you also know that the Airbus and Boeing has solid order books, but then we need to watch and see what is happening with the cancellations and some of the customers will probably go away. So -- but we also have to say that this is kind of 10%, 15% of Sealing and is even less than that on Industrial. So this is not a huge exposure for us, and we will have other businesses compensating for that. So we are watching it, and we are adapting. We don't feel too concerned about it, to be honest. Of course, we would like to sell, and we would like to have customers, but we feel that we have good control of potential. And whether that will be a 50% drop or 20% drop or 30% drop, let's wait and see.
Okay. And maybe final question on your product portfolio. Do you now see or look at certain offerings and considering canceling them earlier, decommissioning part of your offering?
Sorry. I didn't understand that, Malte.
Yes. I mean that you speak decommission of some of your products and now look -- take a particular look at some further cuts even in the core businesses or do you want to continue?
No. I mean we don't have any like that on our agenda. I mean, one, you refer to the other one. There might be some factory consolidations or something, which we have not looked at before, but it's not going to be a big -- it's not a big issue for us.
And our next question comes from Erik Paulsson from Pareto Securities.
Yes. Just a quick follow-up regarding your outlook, significantly lower. Can you just put some numbers on that compared to, for instance, lower outlook?
No. We only say that, we have lower before, we talk about the individual percent. Here, we talk about something, let's say, a 20% plus/minus. And like I said before, it's really difficult to judge. I mean if you look at our order book, it will be a lot better than that, but we don't expect that to say. So we simply wanted to guide to make sure that it's not interpreted that it's, let's say, 2% down or 3% down or even 5% down. It's going to be more than 5%, but it's going to be less than the 25%. I mean that is really what we have at the moment. And I mean, once again, April showing slightly better than that, but we expect it to be tougher as the quarter develops. So there's really a lot of uncertainty on that. So this significantly was simply there to make sure that nobody interpreted this as a down by 3% or 5%. But -- and we don't really know. I mean it to be very open on that one. We are watching it daily, and we're watching the order intake daily. And April, so far, has starting slightly better than this one, but we expect it to be a very rough ride here in the -- up until end of the quarter.
And as there appear to be no further questions, I'll return the call to the speakers.
Okay. Thanks a lot. And thanks for the interest. And as usual, Ulf and myself and especially Christofer is fully available for any follow-up questions. And I hope to speak to you soon. Take care, and, yes, speak to you soon. Thank you.