Trelleborg AB

STO:TREL B

Earnings Call Transcript 2023-Q2

[Peter Nilsson, executive]

Hello, everybody, and welcome to this half-year report of Trelleborg and more focused on our quarter 2 performance of 2023. As usual in these calls, I, Peter Nilsson, is starting the call and also ending it and in between also I will have Fredrik Nilsson, our CFO, assisting with the financials and also in the room here we have also Christofer Sjögren, Head of Investor Relations, if there is any questions that might be directed to him as well so you know that he might be on as well.But kicking off, and as usual, using the presentation that is on our webpage as a guidance throughout this call. And turning to Page 2 in this deck agenda, starting off with the highlights, and then some individual comments on our business areas. And then Fredrik will guide you through the financials, before I do the summary and also some comments on the running quarter. And then, as usual, also finishing off with a Q&A session.Turning to Page 3, heading for our quarter, another strong quarter, and we are performing good, and we are generally satisfied with the development throughout the quarter. Sales came in with SEK 8.7 billion, which is a strong increase compared to last year, an increase of 18%, which is a split for organic sales some 3%, M&A 9%, and currency 6%. EBITDA up by 14% to SEK 1,563 million, which is then corresponding to 17.9%.And maybe there a comment, I saw some of the early flashes here that you're ending up at 18.0%. And this is a rounding error in our calculation is actually ending up in 17.94%. But then, when you calculated it with full millions, it's actually coming up at 18.0%. So that is the discrepancy here which might be noted by some of you. And this is the highest quarterly EBITDA to date for us.Items affecting comparability coming up at minus SEK 194 million, and we're also increasing the guidance on items affecting comparability. Fredrik will get back and comment on that in his part of the presentation.Very strong cash flow in the quarter, which of course very satisfactory as well that we see that we are managing inventory, we are managing accountables and managing our purchasing in a good way which is basically a doubling of the cash flow compared to 2 year ago, with a very strong cash conversion now also in the last 12 months. But also that Fredrik will come back and comment more focused on that.Also, a very kind of a very, what should I say, a quarter which dramatically changed Trelleborg in the way that we know finally you might say we concluded in the quarter, we concluded the divestments of our tire business and as well our printing blanket operations which then let's say is leaving this finally leaving this behind us and now we can focus on the remaining Trelleborg fully.And following this, we also had a Capital Market Day in the quarter, where we then increased both our financial as well as our sustainability targets, which I trust all of you, or most of you already have noted. We'll not comment a lot about that in this call, but those of you who want more of that, you can go back and read on the press release from this Capital Market Day, and also of course, mentioned also in the quarterly report.So very let's say a, quarter for us with a lot of things happening and with a strong focus on the future of Trelleborg. I'll go back and comment on that now that we are building a new Trelleborg, and with a strong focus on what Trelleborg is to be. But meanwhile, also delivering we feel strong figures in the quarter.Moving to Page 4, and more comments on the organic sales and here also rounding just to be also clear on that, our exact organic growth is actually SEK 3.4 million so a little bit closer to SEK 4 million than maybe some of you noted in your comments at least the sell-side analyst noted in the comments, but the total is SEK 3.4 million, which is then basically even split where we have a 3% in Europe, 4% growth in South America and 4% in Asia and rest of the world. So very evenly split organic sales in the geographical regions that we are following across the world.And Page 5 then agenda again business areas. And then quickly moving to Page 6, which a comment on Industrial Solutions, we're heading here solid quarter in all aspects, organic sales plus 6%, which is somewhat let's say mixed performance throughout the different segments.But nevertheless, let's say a solid plus 6% in the quarter, very strong sales especially for LNG related businesses and also for Marine Solutions and port and marine operations. We also see healthy growth in aerospace, also automotive are we kicking back and also we have some nice railway projects being delivered in the quarter somewhat weaker sales, which is I guess well known residential construction is down with fairly sizable figures, and so certain industrial segments, with less so down. But nevertheless, we continue to note that the sales that we have into kind of wholesaler distributor networks was weak for us in the quarter.Overall EBITDA improved on sales growth and we're keeping the very strong margin from last year, which was kind of record high margin a year ago, but we are happy to deliver a margin very well in line with this very strong quarter a year ago, and also satisfactory we can say that inflation, which is of course hitting us both in raw material even though raw material is flatting out, but we see this kind of labor inflation and general inflation, of course, still hurting the business, but we feel satisfied with the fact that we have been fully been able to compensate for this. So a very solid quarter for Industrial Solutions, happy with the performance and well managed in most aspects.Look at Sealing, also well managed but here the demand picture somewhat more mixed. Organic sales up about 1% but of course M&A kicking them with 16% up, which then is -- and then some currency on top of that which means there's a very strong growth of 23% in sales in the quarter in Swedish kronor, and sales growing in America's flat is in Europe and weaker in Asia, where we have a little bit slower sales development in China, especially for us where other markets is somewhat compensated – compensating, but China is the biggest market for us in Asia and we have had a fairly weak sales in China in the quarter.Also, overall in the business areas we will note the sales to aerospace and healthcare medical increased considerably we say, we are investing into these segments, which is also partly an explanation on the lower margin that we are kind of adding resources in order to create even better growth platforms and make sure that we create solid growth in this aerospace and healthcare medical and also in some other segments that we have deemed then to be our what we call the speed boats for Sealing Solutions. We are investing in this and we are not really focusing on this individual quarter we are very focused on creating a platform for the future.Sales automotive increased slightly, although there's some mixed performance there between OE and aftermarket where OE was strong while aftermarket a little bit surprisingly was a bit lower in the quarter but we see that bouncing back.Also, industrial demand is mixed, if you look at the different geographies and we look at the different segments. We note that some of the segments like the more construction related segments or more construction equipment related segments are a little bit lower while other industrial segments are better.Here, we are -- our view in it is that we also see some inventory reduction among some of our customers in these segments. And that is something of course, we're watching carefully, and where we are a little bit let's say flexible in the way we are to manage this.EBITDA improved in the quarter on the higher sales and the integration of M&A, while M&A -- the EBITDA margin was somewhat down well known that the initial lower margin that we get from this acquired growth here and we also -- also which I only comment and we are also investing. So we have some sizable number of new headcounts here in order to create better growth for the future.But overall moving forward in the right direction within Sealing Solutions, we are building a new platform, we are integrating Minnesota Rubber in a good way, and we are refocusing the business a little bit to make sure that we are creating a better long-term growth platform for Sealing Solutions.Turning then to Page 8, which is the sustainability KPI, we are improving as you see especially intensity, but we also note here that the incoming Minnesota is not as good as the rest of Trelleborg, and we see future improvement possibilities there, but nevertheless, overall, still an improvement in terms of CO2, and we are feeling more and more confident that we will be able to deliver on our long-term targets here, which relates to CO2 emissions and CO2 intensity.Moving then to Page 9, where we especially track to other areas sustainability and renewable energy, but also here you see even though it's a 1 percentage point up, but also here we note that Minnesota is coming up with almost 0 renewable energy, so if we exclude Minnesota, we have a better improvement here. I think we're going, if I remember it correctly from 46 up to 53, and now of course, we also start to work with Minnesota, and we do see great opportunities to improve on this, so we feel comfortable also in this aspect that we will continue to improve considerably in the next quarters.Also, tracking and also monitoring externally is our lost working cases. In this one, also we see, even though it's a small number in total, we are not overly concerned with it, but we'd notice satisfaction also here that this is kind of getting better and this is also an area we will continue to invest and we will continue to improve.Turning to Page 10 agenda financials and then leaving to Fredrik to guide you through starting at Page 11. Fredrik, please go ahead.

[Fredrik Nilsson, executive]

Thank you, Peter. Looking at the sales development. Organic sales increased by 3% in the quarter with organic growth in both business area. Reported net sales up 18% in the quarter, we have 9% impact from acquisitions and currency added another 6%.Moving on to Page 12, showing the historical organic growth. The second quarter was another quarter above our sales growth targets. And as you also can see in the graph, we have now 9 quarters in a row that has been above 8%.Moving on to Page 13, showing the quarterly sales of rolling 12 months for continuing operations, the SEK 8.696 billion in sales were the highest for our second quarter. And if we look at rolling 12 months, the sales reached SEK 33.1 billion.Moving on to Page 14. We have a record high EBITA for a quarter and it has reached 1.563 billion, and it was an increase with 14% compared to corresponding quarter with profit growth, as Peter mentioned for both Industrial Solutions and Sealing Solutions.In the result, there was also a positive FX translation impact of SEK 63 million in the quarter. The EBITA margin 17.9% in the quarter, which was initially impacted by acquisitions with lower margin.Moving on to Page 15, and looking at EBITA and EBITA margin on rolling 12 months, the positive trend on EBITA continued during the quarter, while the margin declined as earlier mentioned. Looking at rolling 12, the EBITA amounted to almost SEK 5.8 billion and with a margin of 17.4%.Moving on to Page 16, going into some further details in the profit and loss. We have items affecting comparability in the quarter of SEK 194 million, and we have taken some initiative to adjust our cost base that's the reason why you're seeing a higher amount during the second quarter compared to the first quarter, and I will come back with the guidance for the full year a little bit later.If you continue further down in the income statement, we have a financial net, which was positive in the quarter SEK 140 million as it was impacted by a non-recurring income of SEK 218 million before tax. This was related that we closed some interest rate hedges in connection with repayment of loan when we divested the wheel business.Looking at tax, tax rate was high in the quarter, 35% compared to 24% last year, but it was impacted by a non-recurring tax expense of 150 million in the quarter. This was due to that we made some changes in the Group's legal structure after the wheels divestments, so if we exclude for that one-off charge to the tax line, the underlying tax cost for the quarter was 25%.Net profit for discontinued operations includes the capital gain for the tire business and printing blanket business and the total capital gain amounts to 6.189 billion before tax and 6,052 billion after tax.Moving on to Page 17, earnings per share. If we look at items excluding affecting comparability up nicely with 30% to SEK 4.71, and if we're then looking at the total group, then of course, it was up quite significantly due to that we have the one-off gain linked to the wheels and the printing blanket business, and then it amounted to SEK 27.67 per share.Moving on to Page 18, looking at the cash flow, which was really strong in the quarter amounted to 1.585 billion compared to 798 million a year ago. Good EBITDA improvement, but even more encouraging a strong working capital improvement compared to last year. Then as early communicated CapEx slightly higher compared to last year.Moving on to cash conversion, and as Pete also mentioned, we have a good cash conversion, you can also see the trend is going in the right direction since a couple of quarters back.Moving on to Page 20, gearing and leverage development. And here I would like to highlight that we are now are in a net cash position, so all KPIs here will look negative, but that is due to that we are in a net cash position. So if you look at the reported debt ratio that becomes negative with minus 4% and net cash in relation to EBITDA is 0.1% in the quarter. We have also continued to buy back share -- own shares during the quarter and that's amounted to SEK 957 million during the second quarter.Moving on to Page 21, return on capital employed reached 13.9% in the quarter, and this was impacted by acquisitions, which initially has lower returns.I will finish off this section by the financial guidelines for the full year. Most of them are unchanged, but if we start with CapEx of SEK 1.5 billion for the full year unchanged. Restructuring costs, we have increased from SEK 250 million to SEK 400 million and that is due to that we are adjusted our cost base to the somewhat lower demand, and also that we are working with some of the acquisitions to realize some of the synergies.Amortization of intangibles unchanged of SEK 500 million and underlying tax rate for the full year remains unchanged at 26%.With that, I would like to hand back the microphone to you, Peter.

[Peter Nilsson, executive]

Thank you. And quickly moving on to Page 23, agenda, again, the summary and some finishing off and then comments on the outlook for the running quarter. Page 24, another strong quarter, strong sales increase of 18%, and split on organic sales M&A up almost 10%. Currency, of course, also benefit as we all know from the Swedish Krona's weakness, and EBITA up by 14% and to a margin of 17.9%, or 18.0% depending on how you calculate and this is then turning out to the highest quarterly EBITA to-date.Items affecting comparability somewhat higher on a higher level, with also Fredrik already commented on, linked to some ongoing measures to adjust in the areas where we are, let's say, hit with the lower demand, but also to make sure that we get the synergies out of the acquisition -- acquisitions kind of announced.Cash flow, very strong, almost doubling 2 year ago, which then turning into a very solid cash conversion. And of course, also, we noted satisfaction with all of you already know that we have, let's say, fully finalized now the disposals of the tire business and the printing blankets and that is also on the Capital Markets Day, which we held a few months ago. We also updated our financial and sustainability targets. Once again, you can read more about them in the press release from this event or in our quarterly report.Turning to Page 25. We are guiding for the running quarter to have a somewhat lower end of the second quarter. We are not really seeing yet, if I say the underlying demand deteriorating, but of course, we note with kind of some awareness that, let's say, the external macro data continues to go down. And we also see our customers in some areas becoming a little more careful with focusing in inventory and also with kind of the order backlog.We also see that one some of the customers being a little more careful. So all-in-all, we make the conclusion that it's going to continue to be a somewhat lower demand in Q3 compared to Q2. No drama in this, and this is a direction, which we feel is well in line with the kind of the ways, so all once again all the macro data is being reported and the guidance that we usually follow ISM or VDMA or whatever is of course pointing towards a slightly sour environment.But that is the kind of development, which actually we are quite okay with, as we are kind of working on integration of acquisitions, and we're working in creating a better platform for growth being forward, and also with the strong balance sheet we have and our ambition to continue to make M&A, which is also might be a development, which is actually good for us in these aspects, and that is something, of course, we're working actively with to try to utilize this uncertainty, which we see in certain parts of the market.And then, of course, we know the geopolitical situation as all of you know with Russia, Ukraine and other kind of discussions ongoing. There is, let's say, as we see it at a higher degree of uncertainty in these aspects that are normally and that is why we're making a special point on that as well.Turning to Page 26, agenda, Q&A, and then quickly turning to Page 27 and opening up for questions. So please go ahead, those of you interested in getting some more flavor on this report. So please go ahead.

[Operator]

[Operator Instructions] The next question comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

First one just on the outlook comment there. And if you feel that the somewhat lower demand you anticipate is due to mainly a change in kind of end market demand or if it's more related to the inventory adjustment among your customers?

[Peter Nilsson, executive]

It's a combination. We see in some markets. We say, let's say, construction related markets and indirectly, some construction equipment, maybe some agriculture in those areas, which is a kind of a strong consumer or different kind of hydraulic pneumatic power equipment, where we see a weakening. I mean, we see the order backlog, I don't know, why I did only briefly checked on the Volvo, but I saw they noted construction equipment and down by some 40%, if I'm correct.And, I mean, this is, of course, something we also see in this part of the markets, but also in other areas, here we also see this more focus on inventory and focus. I mean, as you say, that is a part of inventory reduction, but also, I think, an impact from -- and that is where it gets a little more difficult the impact from a reduction in lead times, because the capacity is increasing, and we see that delivery times getting shorter, and we see some of the customers order with kind of a little bit shorter cycles.So -- but overall, it's a mix of, let's say, inventory reduction for sure, also Karl, we see in certain areas, where we see it's a weakening. But also to balance that, of course, on strengthening -- continued strengthening automotive doing fine, and we see also aerospace and medical health care continuing. And we see also some other, let's say, end markets, which is still strong.But overall, we see in the big segment of Sealing Solutions with this kind of fluid power, which is related to construction equipment, different kind of tools and different kind of equipment, where there is a certain weakening for sure. I don't know whether that is enough for you.

[Karl Bokvist, analyst]

Yes. No, that's good. And then within Industrial Solutions, the EBITA margins are up clearly compared to the first quarter. Seasonality is one thing, but there seems to be other aspects here as well. So could you just explain if in case there are any particular aspects to keep in mind then also just going forward, how we should think about the profitability within industrial for the coming quarters really in case there is also a bit of a slower end market?

[Peter Nilsson, executive]

I mean, we see there's a mix. I mean, we have already commented. And I mean, that is a good, I mean, within Industrial Solutions, it's a mix of early cycle, light cyclical and the light late cyclical, which is more railway, marine construction, and maybe some LNG is kind of living its own life in a way, oil and gas.So there is a combination. And we -- this is some up, some down, but it's well managed. We are, let's say, quickly adjusting for the down segments, while trying to benefit from the up segments. So we don't really -- it's not a particular change from before. I mean, we -- I think, we guided on Capital Markets Day that we still aiming for a slight uptick in margin year-on-year, but it's not going to be any drama.And we feel that we're moving this business in a step-by-step improvement area, but I don't really want to give any more guideline exactly on the margin or what we're doing. This is a long-term efforts and that has been -- Industrial Solutions has been improving for a multiple of years step-by-step, and that is kind of the ambition going forward as well.

[Karl Bokvist, analyst]

And then just the final one on perhaps, let's call it, timing in between now when you are investing and adding costs related to medical and Minnesota, and when you first expect to start realizing synergies be it on revenue or cost?

[Peter Nilsson, executive]

Cost synergies is fairly okay. We'll call for Minnesota, I think, that has been well delivered. But of course, the sales synergies is we're aiming for it takes a bit longer time. And I mean, it's really -- we have guided that we're going to be back and we have no kind of margin impact from lower initial margin and [ MLP ] in 2, 3 years, and I think that is something that we need to adjust to. And of course, step-by-step, we're going to get closer to that overall margin within sealing. And at the same time, also start to get the benefits from -- we are already getting benefits in partly in aerospace and medical health care. And that is something that we also continue to invest. So, we are kind of ahead of the curve and maybe investing more than we get the benefits.If you simply focus on margin optimization, then probably we shouldn't invest in this, but we want to create a better long-term growth profile. And that's just kind of our target at the moment to build a better Trelleborg with a long-term focus, and to get and deliver on these targets that we have, that we're going to get to an EBITDA margin of 20% plus. And on top of that, also delivering solid growth here of some above 8% annually.And I mean, we feel that we are well aligned, well, let's say, geared up to achieve that. And that is kind of our target at the moment to create the foundation, which will deliver this financial KPIs over time.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

Klas at Citi. My first question was also on TSS. I want to come back to the margin here. To me, at the Capital Markets Day, I really liked the margin ambition, but I struggle a little bit with the moving parts of why we should get this 50 basis points per annum improvement to the margin. I'm trying to understand to what extent this quarter had any project deliveries end of the quarter with a good margin? And if that's the case, typically those deliveries used to have a negative margin impact on projects. And it looks like it's projects with positive impact, which is good to see. But if you could comment on that, Peter.

[Peter Nilsson, executive]

Are you talking about Industrial Solutions now, Klas, especially you are?

[Klas Bergelind, analyst]

Yes.

[Peter Nilsson, executive]

Yes. Yes. No. No. But I mean, really Industrial Solution is more project dependent, and it varies in between quarters. And that is why, okay, I know you're focusing on the quarter, but for us, it's more a rolling 12 development. And that's going to be some deviations between quarters. But we feel that not necessarily. I mean, okay, that was probably, let's say, more the old story of a bad margin when we had more oil and gas exposure and stuff like that. But the project is not necessarily having a worse margin. It varies a little bit. And of course, it comes on top.Contribution margin brings it comes on top of everything else. But that's the way it is. But I mean, in general, I don't feel that I say, the project business is kind of worse than anything else. It's more a little bit bumpy on the sales side. But from a margin perspective, it's really not any kind of drag in any way, as we see it.

[Fredrik Nilsson, executive]

If I may say, also, I think you're correct, Klas, in that the project businesses that we supply today does have better margins than a few years ago, if you will. And we have divested a lot of projects that did not help contribute towards our margin ambitions.Whereas today's LNG hoses and so forth tend to be a good project margin for us since a couple of years or a year back. If we do invoice for a project today, it does not hamper the margins.

[Peter Nilsson, executive]

It's bumpy and safe. It's going to be bumpy and safe, but not the margin.

[Klas Bergelind, analyst]

My second one is on the construction verticals. And Peter, can we talk through rough magnitude of the declines here and by regions? You're going to meet easy comparatives in the second half, at least in Europe. And I'm trying to understand the volume declines better. And also, if you could help us with how much construction Europe is for you at group level. And then finally, sorry, a lot of questions in 1, how much is new build versus replacement?

[Peter Nilsson, executive]

If you say the construction, I mean, we have some early cycle construction, some late cycle construction. If you say early cycle construction, which is more kind of window manufacturers and stuff like that, that's already been hitting us in Europe since, as you say, a year ago. But I mean, basically hitting us now in North America.And then we talk tens of percent in a downturn in that segment. And that is something we don't know exactly, honestly, how much is inventory for the window manufacturers, and how much is really underlying demand. I think it's a combination. And we do expect that, let's say, flatten out on a year-on-year comparison here by the end of the year, not necessarily in Q3, but probably going into Q4, it's going to be more flattish year-on-year and potentially slight uptick.So, there is kind of -- but that is mainly hurting Industrial Solutions, which is then in Industrial Solutions being compensated with other strong segments. So, that is something which we don't see as -- but that has been the dramatic downturn, if you may say.And then the other construction-related exposure we have is more in Sealing, which then comes into equipment for construction. And that's an area where I think we are entering that. This quarter was a bit lower in order intake. We see that, once again, I don't want to point out Volvo. They have to comment on their figures themselves. But we use that since that is kind of the flavor of the day, down by 40%. It means, of course, that they start to order a bit less from us. And that is something we note now and where we probably saw a little bit this quarter, where we saw probably we expected to escalate a little bit into go into Q3 in that segment. And that is more difficult to quantify at the moment, to be honest.But there we're not talking tens of percent. I mean, we're talking more potentially 10% for us. Because there is also we're supplying both the OE into the aftermarket. So, that is something which is more difficult. There's more of inventory build-up and stuff like that.And then when you talk about new construction renovation, I mean, windows is a lot of, if you may say, renovations. But nevertheless, it's kind of -- so, there we see new construction, new sky rises and stuff like that is still holding up fairly well. But that is driven not by Europe, and more driven by Asia and Middle East and all of that. So, that is still okay. But we cannot really see how much of these window manufacturers who goes into, if I may say, renovation and new construction. We don't know that.And then, I mean, we need to look. And it's not a major part of Trelleborg. We don't want the kind of -- as I said, I mean, the most dramatic downturn we have had is Industrial Solutions. But that is kind of more compensated -- well-compensated by other strong segments. So, that is kind of a mixed bag of business. So, I don't know whether that Klas give you some more flavor on the way we look at that.

[Klas Bergelind, analyst]

No, that's good. Very quick final one on the aftermarket and autos in Sealing Solutions. You said it was lower, but bouncing back. Are you seeing this already in July, or is it something you expect? And I agree --

[Peter Nilsson, executive]

That was a temporary downturn, which was kind of unexpected for us, to be honest, especially --

[Klas Bergelind, analyst]

Because you have the brake shims there with --

[Peter Nilsson, executive]

It's the brake business who was that one. And we are actually -- yes, that's bouncing back.

[Fredrik Nilsson, executive]

Maybe we can confirm it was already bouncing back here during June.

[Peter Nilsson, executive]

But it was a major impact. There's a few big customers in that one making brake pads and for whatever reason, which once again, difficult for us to really fully understand that they were kind of 2 of the bigger ones suddenly didn't want to buy anything for a month.

[Operator]

The next question comes from Hampus Engellau from Handelsbanken.

[Hampus Engellau, analyst]

I have 2 questions, if I may, maybe starting off on the organic sales growth during the quarter at 3% and between Industrial at 6% and the Sealing at 1%, if you strip up the price contribution, which I would assume would be quite high, given we've seen inflation rate trending, I would assume that we have negative volumes.And if that is the case, is that for each of the business areas in specific segments or is it broad based lower volumes? That's my first question.

[Fredrik Nilsson, executive]

Yes, I mean, if you're looking at the taken by BI, I mean, with the Industrial Solution with 6%, that implies there was a small volume growth, underlying volume growth. But of course, with Sealing Solution of 1%, that was negative from a volume point of view.

[Hampus Engellau, analyst]

And in Sealing, is that some specific end segments that you should think about, or is it kind of broad based?

[Fredrik Nilsson, executive]

I would say, it's more the general industry, so it's more overall than a specific segment.

[Peter Nilsson, executive]

It's a hydraulic pneumatic, which is a big one where we have a multiple of customers, multiple of end markets where you have this kind, of all kind of moving parts. We have that and that is probably the area which was kind of a little bit. But there is where we're reading in Hampus, that that was kind of inventory reduction on our customers in a multiple of kind -- the problem for us. If you sell into a vacant pump or something, then of course, we sell seals and they have some subassembly parts on vacant pumps and then they have finished vacant pumps. If they decide to kind of cut down on inventory, it's kind of hitting us in a few different steps. And that is what we've seen, especially in this, if I may say again, on this, what we call fluid power segment, which is a sizable segment within Sealing, even though getting smaller in the relative size as we grow aerospace and medical and some other sub-segments.

[Hampus Engellau, analyst]

Yes. Fair enough. And if we look at that, we could maybe add some more flavors on the order activity during the quarter and also a bit on the lead times. Are lead times shorter now in second quarter compared to first quarter or how would you think about that?

[Peter Nilsson, executive]

It is shorter lead times. Customers are ordering with shorter, expecting shorter lead times. And that is why it's also make the order book a little bit trickier to discuss. I mean, we have commented on it many times. The order book is shrinking, but it's shrinking. The majority of it is shrinking with kind of long term orders, which is, let's say, 3 months and beyond. And that is why it's difficult to really get the firm conclusion out of it, since they are -- let's say ordering with shorter cycles. We have been moving from more or less, if I may say, 100% orders going into a quarter and now maybe getting back to a normal scenario, let's say before this, let's say lead time challenges, where we had 75%, give or take, of the orders when we go into a quarter.And I mean, a few last quarters, we've been almost 100% or sometimes on top of 100%, because we know that some of the guys have been delaying the orders. So that is where, all honestly, it's a little bit difficult for us to really follow that because it's definitely changing the order pattern and changing the way customers expect us to deliver.But as a fact -- the order book, order intake was lower than sales in the quarter. But once again, I mean, we have difficulty to get to a very firm conclusion on what impact that will have on sales. We're following you, Hampus, not to be too complicated, but you're clever enough to understand.

[Hampus Engellau, analyst]

Maybe I can do 1 more question, just because if I remember correctly, in third quarter last year, we had a similar inventory reduction. I think SKF was very, very outspoken on that, but then we're more indicating that we had a weaker underlying demand and then we had demand is coming back. For you guys, do you have more visibility this time to say that it's not only inventory adjustments that customers that it is actually some slowing demand? Or if you would compare the third quarter last year?

[Peter Nilsson, executive]

We don't expect it, I mean, I don't recognize that comment from a year ago from us, because I mean, we have not seen this.

[Hampus Engellau, analyst]

No, no, I know that.

[Peter Nilsson, executive]

So we see this Q2, Q3, now coming into Q3, where we do expect some inventory reductions and we do expect also in Q3 some underlying softening. Once again, we talk about construction, construction equipment, agriculture, which is a big user, especially of these kind of fluid power equipment. And they are cutting inventory, they are maybe having less hydraulic cylinders on stock and they're having less. So that is going to happen. But I think there will be an over softening in a way in Q3 due to the fact that you have some softening and user demand, but on top of that, an inventory reduction.But really to split that is honestly challenging.We are trying to look at it, but we do see VDMA and all of that that is indicating kind of a lower expectations even though VDMA is difficult to read, because that is more based on expectations than really firm orders.

[Hampus Engellau, analyst]

All righty.

[Operator]

The next question comes from Agnieszka Vilela from Nordea.

[Agnieszka Vilela, analyst]

Perfect, thank you. Yes, my first question is on the pricing component of your growth. I guess that, there is some carryover from the price increases that you implemented quite some time ago. So I would like to ask, when was the last time you implemented price increases? And also, what are your expectations for pricing going forward?

[Fredrik Nilsson, executive]

It's, of course, some rollovers from earlier price increases, but I will say that is, of course, getting less and less by a quarter. And we are continuing to raising prices when it's possible. So I would say it's impossible to explain a thing when we last increased the prices.

[Peter Nilsson, executive]

That's part of also, I mean, we are continuously doing that. We are working on the prices every quarter. We've been doing it every quarter. But of course, it's not as dramatic as before. But for sure, we are still pushing in. We had another round of price increases here from 1st of July, and we're going to have more price increases kicking here from 1st of September. That's depending a little bit what kind of contracts you have with your suppliers. So price increases will continue. And I'll be clear on that. We do not see any kind of price decreases at the moment. We know that some of the raw materials are flattening out. But I mean, with the, if I may say, the new Trelleborg, we're going to be a lot less dependent on raw materials. And we are not really exposed to these kind of fluctuations that we saw more in kind of our wheel systems business before, where we were exposed more directly to raw materials.Our raw material content generally in our products is very limited. Of course, we have some pockets where this might be higher. But in general now, we have very, very low raw material exposure, to be honest. And so we are not really working on that. So more of the price increases is more, as Fredrik said, is more continuously addressing what can be increased pricing, where are we creating a lot of value, where do we have a position to kind of be able to further persuade the customers that we're creating value for them. That is a continuous effort. We are by far not the end of the price increase. The price increase is never going to end. It's always going to be an item on the agenda.

[Agnieszka Vilela, analyst]

Perfect. Thank you for the flavor. And then my second question probably to Fredrik, out of the SEK 150 million increase in your restructuring effort, how much is related to the integration of acquisitions and how much to the restructuring due to expected somewhat lower demand?

[Fredrik Nilsson, executive]

By far, the majority is related to the lower demand.

[Agnieszka Vilela, analyst]

And just when you budget for that, maybe first of all, you could give us a bit more information about what you're doing, what kind of restructuring efforts are you taking, and then also what kind of growth decline or volume decline are you preparing for when it comes to H2 or 2024?

[Fredrik Nilsson, executive]

I mean, that is already what we saw in Q1. So we are adopting and also what we saw towards the end of last year. So I mean, it has been a reduction of headcounts. We have closed 1 or 2, 3 new factories, some factories. So it's mainly those kind of costs. And then, of course, when we see a further decrease of demand, then we accelerate and do a little bit more. So it's not that it's a big thing at one site. It's more that we take a little bit here and there.

[Peter Nilsson, executive]

And we're doing that all the time. But we have internally here that we should go above SEK 30 million or SEK 40 million.

[Fredrik Nilsson, executive]

SEK 40 million.

[Peter Nilsson, executive]

SEK 40 million. So one priority should be above SEK 40 million in order to call it beyond --

[Agnieszka Vilela, analyst]

Okay.

[Peter Nilsson, executive]

So that is ongoing also in the underlying business where we continuously adjust.

[Peter Nilsson, executive]

So this is the larger one. And then, of course, with some closure of some sites, that's part of the plan.

[Agnieszka Vilela, analyst]

Yes. But it's not like you're preparing for a massive decline in demand. It's more slowdown.

[Peter Nilsson, executive]

Sometimes if you have a few areas, that sounds bad. Maybe you use this opportunity to create a more efficient structure and you need to push it through.It's a little bit easier when you have a downturn. And that is, of course, where we have always a long list of ideas. And sometimes you pull them out of the drawer and you use them. And sometimes you keep them in the drawer.

[Agnieszka Vilela, analyst]

Perfect. And then my last question is on China and Asia, but predominantly China. We get, I would say, quite mixed commentary from different industrials now in the reporting season. So some see some improvement in the industrial demand. Some see not that much rebound there. What are you seeing? What are your expectations?

[Peter Nilsson, executive]

Well, I mean, we did expect the rebound, but the rebound is not really coming as we see it. And we see that there is some kind of, which is kind of benefiting us long term, there's some localization ongoing that, I mean, people are getting a little bit concerned in China being dependent on imported material. So there is definitely some changes in the -- in terms of supply chain. But overall, I mean, we see a worsening. I mean, I don't think you're following as well. And I saw one study from you actually from Nordea this morning where it was kind of more focused on consumer confidence and savings rationale and all of that. So that is where we see these segments, which is more linked to consumer spending is kind of shrinking. We have the construction related segments. It is a mixed, but I still continue to invest a lot in railway. They invest in energy. Subway is still being, let's say, being built out and all of that.So it's a little bit dependent on what kind of segments you're exposed to. But I'm sure construction and consumer segments is a lot down. It varies also between the different kind of parts of China, like North is tough, Dalian and Yang. And then you have, of course, the government business more in Beijing, Tianjin area, which is still holding up and more industrial areas, which is Qingdao and Shandong Province and around let say Shanghai is still, let's say, a mixed message.And then you go down in the south, where we're still holding up the consumer related in, let's say, Hong Kong and Guangdong areas, of course, more impacted by the lower demand. So it is a little bit. That's all right. China is a big country and the different regions is a little bit moving in different directions. But for us, if I may say overall, it's a softening and it's related to construction and consumer related businesses. While the pure infrastructure related is still holding up and also the export business is a bit mixed. I mean, that is where we need to see that these kind of restrictions kicking in -- in a few areas. And that is a little bit dependent on what kind of customer exposure you have.So it's not an easy question to generalize about China, because you have to break it down in region and you have to break it down in the different sub-segments.

[Agnieszka Vilela, analyst]

Yes.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the telco back to the speakers for any closing comments.

[Peter Nilsson, executive]

Thanks. Thanks to all of you for joining us on this call. And as usual, we look forward to seeing you in different environments and meeting up with you to clarify any potential outstanding questions or if you want some more flavor on some topics, happy to support both Fredrik and myself, but especially Christopher of course, available here for any potential follow-up and then -- yes. Take care, and see you soon.